Q1 2021 Ford Motor Co Earnings Call
Good day, ladies and gentlemen, my name is Holly and I'll be your conference operator today at the.
This time I'd like to welcome you to today's Ford Motor Company first quarter 2021 earnings Conference call.
After the Speakers' remarks, there will be a question and answer session.
You'd like to ask a question. Please press Star then one on your telephone.
Reminder, today's call is being recorded at this time I'd like to turn the call over to director of Investor Relations Lynn Antipas Tyson Lynn.
Thank you Holly welcome everyone to Ford Motor Company's first quarter of 2021 earnings call presenting today are Jim Farley of President and CEO and John Lawler, Our Chief Financial Officer also joining us for Q&A is Marion Harris CEO of Ford credit and Jim will make some opening comments John will talk about our first quarter results and guide.
And then we'll turn to Q&A. Today's discussion will include some non-GAAP references. These are reconciled to the most comparable U S. GAAP measures in the appendix of our earnings deck, which can be found along with the rest of our earnings materials at shareholder Ford Dot com.
Today's discussion includes forward looking statements about our expectations actual results may differ from those stated the most significant factors that could cause actual results to differ are included on slide 24.
Unless otherwise noted all comparisons are year over year company, EBIT EPS and free cash flow are on an adjusted basis and product mix as volume weighted the.
A quick update on our upcoming IR events I am very pleased to announce that we will hold our capital markets day on Wednesday may 26 the.
The webcast will open at 915, a M and we will start promptly at 930.
Eastern and end roughly at noon, we will share more information about the meeting later on this call and invitations will be sent out shortly.
On Monday May 3rd Wells Fargo, a host of Fireside chat with John Lawlor and Kumar of <unk>, President of Americas, and International market group and on.
On June 17th Deutsche Bank will host the virtual fireside chat with Jim Farley now I will turn the call over to Jim.
Thanks, Lynn Hello, everyone. Thanks, so much for joining US today, you know our first quarter of the year really defies and easy explanation or of pithy soundbite, but if I had the summer up one way it would be this.
We're executing on our plan and.
And I'm excited to say Ford is becoming a stronger more resilient company that can deliver under pressure.
Manage risks and seize opportunities all while generating consistent returns for our stakeholders.
In the quarter, we earned $4 8 billion in adjusted EBIT is our best quarterly adjusted EBIT ever.
And we achieved the results in the midst of of persistent global pandemic and an unprecedented supply shock tied to the global semiconductor shortage.
We mobilized the global team.
As we always do in these times of crisis, and we rapidly adjusted to the realities that we received.
Our team very skillfully navigated the supply constraints through sharp yield management and a relentless focus on turning around our automotive operations.
That means improving our launch of performance improving our quality.
Enhancing our brand strengthening our customer relationships and improving our go to market execution.
And Ford credit, which in our view is the best automotive finance captive in the industry also delivered an outstanding quarter.
Aided by higher prices.
Our results benefited from the industry wide imbalance of supply and demand given the semiconductor shortage has.
However.
We also delivered improvements that will persist over time.
Including our global redesign in our overseas operations, which contributed to the largest swing in year over year profitability for those operations that we've seen.
The benefit of our incredibly fresh portfolio refresh.
Which lowers the average showroom age now in the U S to just three years and of course, we made progress on cost across the business.
As we shared with you today.
There are more whitewater's moments ahead for us that we have to navigate.
The semiconductor shortage and the impact of production will get worse before it gets better in fact, we believe our second quarter will be the trough for this year.
We have work to do to get our industry footprint back to firing on all cylinders or maybe should I say fully charged.
Overall, though I'm proud of the progress we made as the team.
As our underlying strength of Ford improves enhances our cash flow access to capital gives us financial flexibility to modernize and disrupt our business while investing in growth.
We are very intentional about this because these are the catalyst factors that will transform ford into a form of vibrant company that will deliver not only our iconic must have products, but also and I would argue more importantly.
And always on ever improving customer experience for both the retail and commercial customers.
So let me share of few milestones from the quarter.
Turning around auto.
Over the past four years, our overseas markets lost the total of 5.8 billion and EBIT.
This quarter the regions delivered roughly $500 million of EBIT.
That's a $1 billion improvement year over year.
Let's look at those must have services and products will it starts with the new F 150, which gained share and also gain share of revenue.
And it had new innovations like pro power on board.
Which showed again.
We understand Ford customers at Ford the.
These truck customers better than anyone.
And the Bronco sport is off to a fast start, bringing 60% new customers to our brand.
The new Mustang Mach E is proving to be of hit with customers. Just a few days on lot with very strong demand in North America, now in Europe, and coming to China and.
And it's also bringing new customers to the brand almost 70%.
And we still have the big Bronco, the two and the four door with the incredible order bank. The F 150 electric and the E Transit.
And we have some surprises for you as well.
Stay tuned.
Just as we are on that really stages of our electric vehicle plans. We are only scratching the surface of our customers benefitting from our fully connected vehicles.
We have successfully deployed our first major over there update software updates the hundreds of thousands of customers for marquee and F 150.
This pace will only accelerate in the next several years, making our vehicles better over time.
Later this year for example, we will offer our very first tested.
Fully tested.
Ford Blue cruise hands free driving technology, which will be delivered over the air.
The Mustang E and F 150 customers.
And by 2028.
We expect to have more than $33 million over their updated capable vehicles on the road.
Now this installed base gives ford of significant opportunity to develop products and.
And for Us very exciting new services that will transform the way, we deliver products to our customers.
They'll make significant improvements to our customers' experience.
And drive quality of our vehicles.
And we're on track to lead the electric Revolution and areas of Ford strength for example.
We announced we're investing 1 billion in the new electric vehicle manufacturing center in Germany, whereby 2023, just a few years from now we'll be assembling our very first high volume all electric passenger car for Europe.
A year later in 'twenty 'twenty four all Ford Europe commercial vehicles will be zero emissions capable and by 2030, all Ford European passenger cars will be all electric.
Now these investments are part just part of our $22 billion commitment to lead the electric Revolution and the areas that were strong.
And yesterday, we announced the very important new development, we have formed a new global battery centre of excellence called Ford I on Park.
Which will accelerate our research and development of battery as well as battery cell technology, including future battery manufacturing.
This only starts to hint at our electric vehicle ambitions. There is so much more to come now.
Now before I turn it over to John let me share a bit more about where we in the industry are on semiconductors.
When we initially gave guidance in February we expected that the semiconductor supply chains would remain constrained through the second quarter.
And.
We have an opportunity to begin recovering lost volumes in the second half is kind of played out similar to that with one big exception the.
The industry faced another setback on March 19th when Renesys of leading semiconductor supplier who manufacturers about.
Two thirds of all chips in the auto industry experienced a significant fire.
At the knock on three facility.
Multiple tier ones, who supply global Oems sourced their chips from this facility, including nine tier ones of supply us at Ford.
No Renesys expects it will return to full capacity in July and they're making great progress on most of the chips for our modules for the facility are definitely dual sourced.
Ford and others are facing additional constraints.
And we've yet to see significant new chip capacity come on line for our industry.
Estimates project the full recovery of the auto chip supply will stretch into.
The fourth quarter of this year, and possibly even into 2022, making industry volume recovery in the second half of this year, even more challenging.
As you can imagine we are working this issue 24, seven and engaging with key political leaders and decision makers globally as well as of course sorts of supply chain.
Ford relationship with the new buying administration rests on our distinctive profile.
That we assemble more vehicles and have more U S older jobs than any other competitor.
It's also well recognize that Ford sided with California on greenhouse gas regulations when that wasn't the easy choice to make.
So from COVID-19 PPE to the current semiconductor crisis the batteries for Evs. This past year has digitally spotlighted the importance of improving domestic supply chain for both of our industry and our country.
Now we found the white house, and the new cabinet engaging accessible and responsive.
We look forward to continued close working relationship as the country formulates policies.
The facilitate the transformation from ice to Bev and finally address infrastructure deficits.
As you would expect we're committed to learn from this crisis to be a much stronger company.
We're taking this opportunity to revamp our supply chain to eliminate vulnerabilities down the road.
This is especially relevant as we consider not only semiconductors, but also battery cells and other commodities critical to our modernization and transformation.
We're also learning as we operating this extraordinary low stock high demand environment in the U S and around the world.
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We will see a leaner more efficient company in the future.
We're getting more fit.
And with that I'd like to turn it over to John.
Thank you Jim.
So heading into 2021, the run rate of our business was on track to deliver eight to 9 billion and adjusted EBIT and that's up about 33% versus 2019.
Of course, as all before the impact of global semiconductor shortage.
So our confidence in the stronger run rate, it's built on the durable changes that we've made to the.
To improve our returns improve our cash flow.
And of course provides us the financial flexibility to invest in growth of these improvements were embedded in our original 2021 outlook.
So for example.
After shifting an overwhelming majority of our capital to our franchise strength like trucks and utilities, we refreshed our product portfolio.
Lowered our average showroom age and shifted our mix to our higher margin vehicles and as a result relative to 2019 the increase in our average transaction prices in the U S was $1900 more per unit than the industry average.
Now also the tough choices, we made to redesign of our overseas businesses started to turn the tide rationalizing manufacturing footprints strengthening of the product portfolios focusing relentlessly on costs and investing in areas of growth and strength are now producing results.
Another item. We've also talked to you about is warranty.
Over the last three years, our warranty expense has increased by more than $2 billion that we've addressed this issue through changes in design, how we inspect vehicles, how we work with suppliers on quality and know how we are using connected data to identify issues early in the process and drive quality.
<unk>.
Of this quarter, we delivered a $400 million improvement in warranty expense year over year and were intent on accelerating the positive progress.
So these are just a few three of the many examples of how the trajectory of our business is changing and what gave us the confidence when we set our original targets for 2021.
So now let me turn to this quarter.
Wholesales declined 6% and in most cases, that's due to the chip constraints now despite.
The declines of wholesales revenue grew 6% aided by higher net pricing and favorable mix, we delivered $4 8 billion and adjusted EBIT and adjusted EBIT margin of 13, 3% and.
And as expected adjusted EBIT, including an investment gain of $900 million from a revision funding round that they had in January. So that was included as well and then adjusted free cash flow was negative $400 million.
The global semiconductor shortage reduced our planned Q1 volume by about 17% or 200000 units and that's consistent with the 10% to 20% range of expected losses that we shared with you in February.
In Q1, we fully offset the EBIT impact of the loss volume.
So we reduced incentives as part of the industry wide response to tight dealer inventories and that's especially in North America.
We optimize the mix of our production to build our higher margin higher demand vehicles.
We also reduced our structural costs in areas, including manufacturing and advertising.
We improved results in our FCS the parts business and in our joint ventures, and we benefited from strong used vehicle prices and Ford credit as customers and dealers drove up demand for used vehicles is new vehicle supply of FL.
So some of these improvements like the lower manufacturing costs on the robust pricing improvement, we do expect those to moderate as the industry returns to full production and dealer inventories rebound.
Now our adjusted free cash flow in the quarter of negative 400 million was significantly lower than our $4 8 billion of adjusted EBIT now there's three main factors that contribute contributed to this gap.
First our gain on revision was noncash.
Second in the quarter, we grew inventory by $2 $2 billion now.
Now this includes parts for vehicles, we could not build due to the lack of chips, but it also included approximately 22000 vehicles. Most of primarily in North America that are awaiting installation of chip related components.
And so some of this inventory impact, though was offset by a growth in payables.
And third is timing differences now this primarily relates to the reserves for customer allowances for incentives and warranty. This reserve that reserve fell by $1 6 billion in the quarter. The vehicle incentive portion is based on the number of vehicles awaiting sale in dealer inventory and the expected incentive per unit.
And both of those fell on the quarter due to the supply disruption.
Now, we do expect the working capital and the timing differences to normalize as the semiconductor supply is restored.
The dealer stocks rebound and incentives returned to more normal levels and we believe this process will take several quarters and will most likely extend into 2022.
Our strong balance sheet provides considerable flexibility to navigate times of stress such as this chip shortage. While also investing in growth. So we ended the quarter with over 31 billion of cash and $47 billion of liquidity, which includes our recent $2 3 billion convertible issuance we will continue.
To be very proactive in managing our capital structure.
Overall, our business units to the fantastic job prioritizing newly launched products, making sure that we processed customer orders and high margin vehicles quickly and that was all of the supply constrained environment and the strong customer response to marquee affirms our choice to shift more capital to beds, including investments too.
In source key elements of the.
Of the value chain necessary for competitive and sustainable profitability.
So let me share a few of the highlights from the quarter.
In North America, Wholesales declined 14%, while revenue increased 5% of revenue was aided by strong net pricing and favorable mix robust customer demand for our new product portfolio tight industry wide inventories and favorable cost performance on a year over year basis and that included warranty all of that helped us deliver $2 9 billion.
Dollars of EBIT and a margin of 12, 8%, which was north America's highest margin of five years and.
In South America, Wholesales, and revenue declined, 70% and 40% respectively of that reflects the exit of unprofitable products.
The renewed focus on our strengths like Ranger transit and key imports drove our best quarterly EBIT since 2013, and our sixth consecutive quarter of year over year improvement.
In Europe wholesale declined 4% as revenue grew 13% aided by improved product mix led by our commercial vehicles and net pricing. These actions together with our continued focus on cost delivered $341 million of EBIT with a margin of four 8%.
In China, China delivered strong growth in both wholesale and revenue EBIT was about breakeven, which mark the fourth consecutive quarter of improvement supported by strength in Lincoln Ford near premium utilities and commercial vehicles. The fact of Lincoln now produces 90% of its products locally was profitable.
Posting its best ever Q1 retail sales nearly doubling its share on a year over year basis. The commercial vehicle sales were also strong and now comprised 48% of affords total China sales.
The IMG group of Wholesales revenue.
Grew both wholesales and revenue as they focused on their franchise strength of Ranger and Everest the <unk>.
<unk> achieved its best quarterly EBIT, reflecting strong cost performance net pricing and favorable exchange all markets in the IMG were profitable except for India.
<unk> also committed to invest $1 billion to expand Ranger capacity on our South Africa export hub to meet customer demand of more than 100 global markets and mobility, Our Asia business continues to invest in refining its go to market strategy. It added a new 140000 square foot Command center in Miami, and along with Argo AI.
Is stimulating ride hail and delivery across six cities.
And I'd be remiss not to highlight the continued strength of our Ford credit business, which delivered $1 billion and EBT in the quarter.
Now turning to guidance.
As we entered 2021, we were among the first to identify the potential for of 10% to 20% adverse impact on volume in the first half of the year due to the growing chip constraints.
We said at that time, but this risk has the potential to reduce our full year adjusted EBIT by one to $2 5 billion.
That would take of take us off our original target of eight to 9 billion and adjusted EBIT.
So we've updated on our outlook to include the expanded impact of the global chip shortage and that's largely driven by the Renaissance fire. While the situation is the significant headwind we have definitive actions to address the full range of potential outcomes. So.
So we now expect to lose about 50% of our planned Q2 production an increase from the 17% loss in Q1, making Q2 the trough.
For our performance this year.
Now, while we expect the flow of chips from Renaissance to be restored in July we and many in the industry now believe the global shortage may not be fully resolved until 2022.
So our outlook now assumes we lose roughly 10% of planned second half production.
In total we believe the shortage for the year will drive the loss of about $1 1 billion wholesale units, which translates to about $2 5 billion EBIT.
That headwind and that headwind of EBIT is net of recovery actions for the year.
Now this EBIT impact was the high end of the range. We gave in February and brings our full year adjusted EBIT guidance range to between $5 5 billion and $6 5 billion.
And it's very important to highlight the even though our expected volume loans for the year has more than doubled.
We have worked to contain the EBIT and back to the high end of our original range.
So we now also expect full year adjusted free cash flow of $500 million to $1 5 billion and this includes the $3 billion adverse impact from semiconductors.
The semiconductor impact on cash is 500 million worse on the impact on EBIT due to timing differences in working capital impacts that will recover once of run rate of production is fully restored dealer stocks returned to more normal levels and incentives rebound.
Our Q2 free cash flow will be significantly negative and that's despite additional Ford credit distributions driven by our adoption of the updated tax accounting standard, which reduces our tax allocation of Ford credit and supports additional Ford credit distributions.
However, we expect our cash liquidity to remain healthy throughout the year, providing us with considerable flexibility to manage the present situation.
And the supports our growing confidence in the resilience of our business and our ability to effectively navigate the challenge just as we navigated the COVID-19 related production disruptions last year.
So now I'd like to turn it back to Jim for a few comments about the capital markets day.
Thanks, John.
Before we turn it over to questions I want to reiterate how proud I am of this 14 for its commitment to deliver on our plan to fix automotive to modernize the company and to find ways to disrupt our business.
And the traditional auto industry to create value.
That will be rewarded.
That will reward our stakeholders.
On May 26, we will hold of virtual presentation from the investment community, where we planned to deep dive into our plan as Lynn said, we're going to cover.
How we're going to lead the electric vehicle Revolution in areas that were strong at Ford.
Number two we're going to build out our industry, leading commercial vehicle business with products, but.
As well services that lead to growth and new revenue streams.
And we're going to leverage our connected vehicles to transform the customer experience and truly shift Ford from a more traditional OEM due to a company where the manufacture and sale of the vehicle is just the very first step and then ever improving always on in pharma.
Rewarding customer experience.
I. So look forward to speaking to all of you soon as we continue our effort to create a ford that can compete in especially when in this exciting new era of our industry. So with that let's start the Q&A.
Alright, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad.
And our first question is going to come from the line of Rod Lache with Wolfe research.
Hi, everybody can you hear me.
Hello, Yes, we can hear you okay.
Look I wanted to just maybe get a little bit more clarification on the guidance.
I think everybody understands that the.
The underlying guidance ex the semiconductor shortage impact isn't really changing and I don't think anyone would react to that at all.
It wasn't for how surprisingly strong Q1 was.
You almost <unk> 5 billion of.
The EBIT, including the gain and 4 billion excluding itself the.
The numbers, obviously are going to be pretty low for the rest of the year.
I guess my questions on the Saar.
Was there the first of all on unusual gain on incentives for inventory at dealers in Q1.
Could Q2 actually be as low as Q2 of last year and then even more importantly, I was hoping you could talk a little bit about whether we can extrapolate anything from.
These kinds of numbers you did the double digit margin in North America, 5% Europe. It looks like some pretty good warranty improvement so when when the dust settles.
What do you think we can pull out of this as we think about 2022.
Yes, hi, Rob Thanks.
A lot there let me see if I can unpack that.
Do justice to the question.
So as you said the run rates of the business is $8 billion to $9 billion and without chips, we clearly believe thats, where we would be.
And I think youre seeing come through the quarter of combination of things as I said in my remarks, Youre seeing the strength of the underlying business is improving and youre seeing that come through you saw that in the redesign of our overseas operations you saw that in warranty expense improving right. Those are two things that we said we needed to improve in our business.
As we move forward through the redesign and you're seeing that come through.
Youre also seeing the strength of our new products now a little opaque I think for people to say well you also saw considerable pricing opportunity because of supply demand imbalances that is true, but so if we go back and we look at what's happened with the pricing for our products. Since we started the redesigned the refresh and that's where we come back to <unk>.
2019, if you look at our price increases our average transaction price increase compared to what's happened in the industry. Our transaction prices have increased $1900 more than the industry. So that strength is flowing through now we had additional pricing opportunity in Q1 due to the supply demand.
The supply and demand imbalance and so that hit the quarter as well. We also saw very strong mix in the quarter as well.
We had lower production, so we optimize the production to our higher.
Margin and a higher mix of vehicles. So we saw that flow through as well, so you're seeing that combination happen and impact of us in Q1 now remember for the year as we go through the year. We're also going to see a significant headwind from commodities, we saw very little commodity impact in Q1, that's because we still had our contracts.
From last year in place and we had our hedging and so as we go through the year, we expect as contracts roll off and we've seen the commodity prices increase primarily for <unk>.
Aluminum steel.
In precious metals, we expect to see about a $2 $5 billion increase in commodities Q through Q2 through Q4, so that's going to hit US as we go through the rest of the year. We also won't have the non recurrence of the $900 million ravine game.
And we also expect that as we go through the quarter and we get to more normalized levels of production, albeit we said, 10% lowering in the second half we should start to see more and a gradual enormous normalization of those incentives that we experienced in the first quarter of the the benefit of that and then at Ford credit We did benefit again in the first quarter.
From the strong residual values and we do expect those to moderate as we go through the rest of the year. So we've taken all of that into account as we've gone through and I'd have to say that whats encouraging to me and what the team has been able to do is we've been able to maintain the impact of the semiconductor chips to that high end of our range. The two.
$2 5 billion, despite the volume impact of growing significantly.
Yeah.
Thanks for that line could you maybe just just to ask this a different way.
The $8 billion to $9 billion.
Guidance, excluding the semiconductor impact that includes things like the.
The inflation from commodities and so forth of it does include <unk> as well, but maybe.
Maybe you could just speak to at a high level can we think about that $8 billion to $9 billion is kind of a launching point. If we wanted to think about bridging. The next year is that sort of of the run rate of profitability for the business and there's obviously adjustments and warranty.
The South American restructuring, new product and things, maybe you could just speak to that and how we should be thinking about the run rate of profitability.
Absolutely that is that as the run rate leading into next year.
And we still have new products of Bronco coming this year, the 2% and four door. We have some surprises Jim talked about we have the F 150 electric we have the transit electric so we have more products coming next year, we're going to continue to be aggressive on our cost structure of pushing back on the other thing that we're learning coming out of this situation.
That we're in is how do you operate in the lean environment and we've learned some credit quite of few good good things about operating with leaner inventories and I think theres opportunities there as well as we head into 'twenty two so absolutely the eight to nine as a launching pad, we see that as a launching pad into 'twenty two okay, and just lastly, it sounds like Theres some perm.
<unk> C to this transition to the the lean inventory sales model could you speak to what kind of.
What kind of of changes you're expecting here to distribution.
So we've been doing quite a bit of course, the to get customers' vehicles to move people to more on the order process, we've made changes to our.
Processes to lower the gap between the time on the order goes into the time, we can deliver the order and we're also seeing that as we look at making these types of changes to modernizing or improving our processes and the lower inventory environment, you get benefits across the patch right.
Would allow us to have lower capital required at Ford credit, we have to finance less dealer inventory for our dealers that could free up some capital to invest in other growth areas.
We would see better quality, because we'd have fresher vehicles and vehicles wouldn't be sitting on lots of loans, we'd have improved dealer profitability because they wouldn't be financing net floorplan and we'd have lower incentives. We believe we'd have lower incentives because we'd have quicker turning vehicles and we'd have higher orders. So as we're working through this lower inventory and the these.
Opportunities that we're seeing today, we're working on how we make them on normal part of our business as we go forward.
Okay alright, thank you.
And our next question is going to come from the line of John Murphy with Bank of America.
Good afternoon, everybody I just wanted to follow up on that line of reasoning I mean, you guys of ours.
Our kind of apologizing.
Some ways for the the good environment and what is kind of force you into in the lean inventory situation on.
Obviously, that's forget out in the second third and fourth quarter, because they're going to be disrupted by the chip shortage, but youre seeing in your thoughts on the third quarter of last year. These incredible margins, particularly in North America, and then with the internationally international and second but that's being positive.
Youre kind of.
You know rolling off this list of things that have happened and that you may be able to maintain why wouldnt you maintain them and maintain the supply demand balance or imbalance as you call. It but really some people might say it's of great balance and really focus on the higher mix of vehicles.
And drive similar performance I mean, we've just seen it happen.
Third quarter fourth quarter, there was some loss cost, but you saw what happened in the third quarter, you sort of happened in the first quarter.
Why would it why would you let it reverse.
You see the some industry dynamics that are other people on the other companies are in the same situation, but by you yourselves are controlling this.
Can't control of this going forward on on your on your product mix. It in what you do with your own production and it's produced wonderful results I mean, why would you let it reverse.
We won't.
Hi, it's <unk>.
Jim.
I want to make it really clear John that's not our intention we're smart team, we're running our business responsibly and there's real goodness here.
This is personally 10 years ago I saw this industry go from the 30 day supply all the way back up the 100 <unk>.
And 10 years, and we're not going to let that happen.
This is a better way to run our business, it's even more important now why we get to move online.
We get to use the reservation system with customers from most customers when products are lean.
We can simplify our incentives we of the most complicated go to markets.
Our system I think on planet Earth, we could simplify all of that with tighter inventories and it's it's it's better for the fitness. It also requires the our industrial system to be more responsive.
So no.
I want to make it extremely clear to everyone. We're going to run our business with the lower day supply and we have had in recent past because that's good for our company and.
And good for customers.
Okay, and investors too which is important.
And.
I guess as you think about the experiment or not the experiment of what Youre executing in South America of backing away and putting just a few vehicles supply of new vehicles of that market. It seems like Europe, and China are kind of heading in that same direction. I mean are you learning I mean, I know, it's early days in South America.
From that.
The business plan and I mean are we looking at Europe, it'll be centered more around commercial vehicles with maybe just a few EV passenger vehicles in China, which will be mostly Lincoln and maybe some commercial vehicles and then <unk>, which is the transit in the Ranger and that's it and we will see some stability.
And these international regions that hopefully will be profitable, but we won't always kind of be running around freaking out of out about whack, a mole and one of the regions blowing up on on us.
It seems like Youre getting a handle on South America, you're getting a handle on these other regions. I mean is the slimmed down product offering and maybe smaller size with more stability and better profitability.
Really the direction that youre heading in the international regions.
Yes, we had $1 billion swing year over year.
We've been at this for a long time in Europe, we're entering a new phase in Europe.
So John absolutely the focus in Europe is in commercial vehicles and passion specialty.
On passenger cars.
In international markets as the Ranger.
And derivatives of the Ranger.
And in China.
The China like North America will have a <unk>.
More diverse product range and the other markets, but let's be really clear we are doubling down on our iconic nameplates and building out of family of products. We just localized exploring in China, it's doing great.
The Lincoln is profitable.
The growth rate of Lincoln in China, and the profitability improvement as we localize the 90% as John said, it's been very encouraging to us So in China, and North America will focus on these really passion segments.
Where we think we naturally do well.
But the big change is not just improving the profitability by simplifying where we compete the big change in the company is going to be investing to an always on relationship with the customer.
That is the real change at Ford.
The change of simplifying our lineup in focusing on markets, where we can be profitable is necessary.
It's the important foundation.
But what's the sufficiency for us is to evolve into a different model with the relation with the customer and you'll hear more about that in capital markets day.
Great and just quickly on FMC.
Obviously, the receipts are probably going to stay stronger. This year I think you are probably being a little bit conservative there on your expectations, but if you also once again think about this.
Focus on on mix and price and not all of a producing the net beneficiary also as FMC.
You mentioned the balance sheet being potentially a little bit smaller in the future as you can do more with less.
Maybe everywhere.
What is the FMC kind of look like I mean, I think we traditionally kind of think about $100 billion balance sheet, but it sounds like it might be somewhat smaller and have better returns than maybe more stability on it.
One of the net benefits of the FMC overtime as the strategy emerges.
Hey, John It's Maryann I think you covered a lot of it.
We do see used vehicle prices being stronger throughout this the.
Supply shock and so theyre going to remain strong through for quite some time, just as John said earlier.
And I think that's going to provide a lot of support from new vehicle pricing as well the the $100 million and you mentioned is about the size of the U S balance sheet with the Ford credit and totals bearing that it's $130 billion or so so we're down quite a bit.
But it's all dealer floor plan and so that's affecting that the that.
The downside to our profitability, but on the other side of it is the strong used car prices.
Okay, but could that be somewhat structural going forward or are you really can guess as transitory through the course of this year.
At this stage I'd say its transitory.
Okay, Alright, thank you very much.
And our next question will come from the line of Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my question I just wanted to step back if we look at the semi issue or do you think you are more impacted than the industry I'm just trying to understand if you lose $1 1 million do you think youre able to recoup those on 2022 or are other competitors, maybe kind of sweep on.
And take some of them because they have maybe a better supply chain just trying to understand of maybe you could kind of recoup that loss volume into the next year.
Great question. Thank you Colin I would say, it's difficult to make that judgment.
If you look at the change of inventory, which is I think of great predictor of wholesale back in the quarter competitively.
The most of the major brands were impacted almost equally so.
A lot of different news releases of lot of different opaque data coming out I can understand why you asked the question.
We don't know yet.
This will play out competitively.
But we do know the first quarter actually played out a lot more evenly than maybe even we thought.
As it goes on in the second half on the and into 2022, we're starting to grow in confidence.
That we can support our recovery volume, we think it's prudent.
Two.
The 10%.
In our planning.
But we are going to work very hard to make sure that doesn't happen.
It's just too early to tell the Renesys impact US we think is going to be largely finished by the second quarter, if they execute and theyre just in the middle of that right now.
And so that kind of leaves us back with the Taiwanese.
Foundries and how long how persistent that is going to be.
And the right now I just think it's a little too early to declare what that is going to look like.
But what we do know is the first quarter kind of turned out that most major players except for some of the companies who.
Who had buffer stock.
And saw this coming.
They they weren't affected but I think renesys now swept up most everyone in the industry just hard to tell co.
The lumpy that's going to be across different brands.
No. Thank you that's very helpful color.
Just more strategically you made the announcement on eye on park yesterday.
How should we be viewing this I mean is this an effort to make your own batteries or is this trying to build that expertise in house. So you could provide that two year battery partners there.
The chart I'm not sure if we should read into that announcement.
Thank you so much for asking this question.
The answer is this is a very important announcements from Ford strategically.
In the first inning, we could buy off the shelf and Cherry pick the technology of the energy density and in the cost we've totally entered the different zone now with our volumes planned volumes going up so much. So we've already made the decision of vertically integrating the company. We're now building on motors.
E E axles now we've been writing our own battery management software for quite some time.
And now it's time for us to.
Lock in on the latest technology in <unk> and to have a secure cell production relationship.
There's no news to make today.
The the reason why the eye on park.
Some of it's so important is because it's a place where we will learn.
We will learn about with our partners how to transition.
To the very best in technology energy density on the <unk>.
<unk> all of the supply chain for batteries and cells, but also the manufacture ability and ultimately I think to be competitive in this industry.
Asia brand like Ford will have to vertically integrate all the way through the system.
It's just too early to make a bunch of announcements, but this is our dream team who will be.
Who will be developing that capability in the company.
Okay. Thanks for taking my questions.
And our next question will come from the line of Joseph Spak with RBC capital markets.
Thank you good afternoon, everyone.
Actually I wanted to go back to <unk>.
Rob brought up earlier I know you mentioned 700000 units out in the second quarter of course, we don't know what you were originally planning so is it likely the second quarter looks similar to the second quarter of last year and somewhat related.
To your point shy on like the $2 $5 billion headwind for the year is really just the high end of your of your prior range, but is the gross number higher and thats been offset by other factors such as stronger pricing and maybe Ford credit that bring it back down to the high end.
Yes.
Thanks, Great question. So it is similar to what we saw last year, we're going to lose about 700000 units, which said was 50%.
Roughly 50% of the play of production, we had a look at the second quarter of last year and it was very similar to that and I would say, we as we got into this through.
Through the quarter, we havent seen the team identify opportunities to offset more of the impact that we had originally thought that's why we're able to contain.
On much higher Miss on the volumes within that original guidance.
So the teams have been working extremely hard to bring the goodness that we're seeing in the core run rate of the business through and then to find other opportunities so absolutely on both of those.
Okay.
The second question glad to hear the discussion about.
Trying to keep dealer inventories more balance.
I guess, the other lesson that could be learned here and I'm curious Jay.
M a R.
On the whether you have any preliminary thoughts as do you just need to change we've gone through a couple of these crisis do you need to change how you think about.
Assuring supply and of key.
Key components, including chips and or that sort of keeping more inventory historically, maybe it's.
More direct buy and not relying on on tier ones.
And if so.
Maybe again at a high level, how should we think about that practically working like where in the value chain, while that inventory the support and is that maybe a cost youre willing to incur.
The greater stability in the future.
Thank you.
The answer is yes.
<unk>.
We have learned a lot through this crisis that can be applied to many critical components that will be the essence of R.
Our new business.
Our modernized Ford.
And it goes far beyond semi chips. There there are other components that are really key enablers.
It was very interesting for me personally as the CEO to talk to many of our colleagues in other industries and to find out how common buffer stocks are and how common direct buys are for the with.
With the foundries, even if the company still buys the components with the chips on them from the from a supplier they still negotiated the direct deal.
These are all on the table of Ford right now as you can imagine we're also thinking about what this means for the world of batteries and silicon and all sorts of other.
The other.
Components that are really mission critical for our company and our capability.
When I look at the company and what we need to vertically integrate.
Each of the these are the areas. These are the areas, we're going to bet on moving inside the company from a core competency and as we do that the supply chain becomes even more critical but we also know more about it.
So thank.
Thank you for the question and you can imagine everything is on the table like you mentioned from buffer stocks to the direct deals of the foundries.
Thank you.
And our next question will come from the line of Ryan Brinkman with J P. Morgan.
Hi, Thanks for taking my questions. Obviously, the standout performance in North America, despite downtime and costs associated with the F 150 launch in the semiconductor shortage and a lot of moving pieces with regard to the guide and the rest of the year with the change in impact from the chip issue and now the Renaissance fire et cetera. So I thought maybe it would be great to just sort of.
Zero in on your performance in the first quarter itself and get your thoughts on what of 12, 3% North America margin <unk> might imply for margin potential in a normalized environment kind of looking at the historical cadence of North American margin over the past five years. The five years ended in 2019, it seems like <unk> margin averages just.
About 40 bps higher than the full year amount and so maybe you're already operating on <unk> almost of 12% kind of annual run rate and Thats amidst an F 150, launching before any contribution from the Bronco. So how would you rate the underlying performance in North America and does that performance of <unk> suggests once all of the supply chain.
All of our stronger than targeted 10% regional margin.
Yes.
Yes.
Right. So I think we have to go back and just ground ourselves again in that run rate of the business of $8 billion to $9 billion and I don't want to get too far out ahead of ourselves on North America, what this quarter might mean for the run rate going forward.
Given as you said Theres just a lot of moving parts within this quarter I think the team's done a great job of managing through it.
We really saw the $8 billion to $9 billion as the run rate heading into 'twenty. Two we're going to do everything we can to continue to drive margin improvement both here and overseas.
The team's focused and jim's pushing us really hard to continue to modernize and improve the business and every place that we can but.
As far as.
Trying to predict what's coming out of this quarter, what that means for the margin in North America.
Putting a number on the table I'm not going to do that right now.
Okay. Thanks, and then.
Just just Jim quickly I'll be really quick.
I've been in this business work for different brands I can't remember a time in my life and my career two of have had so many hot products in <unk>.
One market like North America is Ford does right now I mean.
The marquee sold out Bronco sport sold out F series sold out Super duty sold out.
We are of very.
Our fresh new lineup as the only fresh but it seems to be hitting the mark of the.
Zeitgeist of the cuts.
<unk> right now and.
Yes, I don't know, where that's going to take US yes, a really good question I don't know where thats going to take us, but I do know.
I do know it feels like we're going to be chasing.
Demand for quite some time.
That's helpful color.
Let me ask just lastly around the commodity inflation youre seeing in your ability to price for it you've called out the $2 5 billion headwind for the year you didn't take the 3 billion of price in the <unk>, Although I'm cognizant, there's a lot that goes into that calculation, including relative to new launches et cetera, I think price in this historically positive on the launch models, particularly as you mentioned you of a lot of those this year, but it tends to be negative.
For carryover models.
And back to like 2011, 2012 kind of coming out of the financial crisis <unk> <unk> after a lot of.
The final assembly capacity had been taken out I recall, you and others reporting on the relative anomaly of positive pricing on even carryover model. So I'm just curious if we could see something similar now say, if the commodity headwind where it to grow worse, if the supply demand dynamic puts.
Puts the industry and positioned to pass.
Early on.
All of the incremental cost on to the consumer or how do you see maybe the the share of the burden taking place.
And maybe the higher commodity as being the cost of it being shared between yourselves versus the consumer versus suppliers dealer margin I don't know what you think.
Yes.
I would say, we're definitely feeling the commodity headwind as John said inflation it feels like we're seeing inflation.
The.
In variety of parts of our industry kind of in ways, we haven't seen for many years on the other hand, it feels like it's all due to a lot of one timers as the economy comes out of Lockdown. So I think it's a bit too early to declare.
Of the run rate.
Where it's going to be.
It's just too hard to too hard to tell from my standpoint.
I will I will note, though based on your question. The many of the vehicles that are supposedly aging at Ford or normally would be aging are still relatively new super duty is relatively new explorer as well in totally new.
Yeah escape, we have all of the Lincoln lineup is brand new so nor.
Normally we wouldn't have so much new at the same time and even the vehicles that are one or two years old are still relatively new.
In the segments.
Very helpful. Thank you.
Our last question for the day will come from the line of Emmanuel Rosner with Deutsche Bank.
Question.
So I'm still trying to better understand the.
$8 billion to $9 billion.
Run rates, which is unchanged from your view earlier in the year.
Let me try and ask it.
This way the.
The first quarter earnings the results play out as the.
You had expected at the <unk>.
Beginning of the year.
It's laid out better.
What are some of the expected offsets which on non semi related.
That would prompt you to keep the same basis as the underlying profitability.
So no the quarter did not play out as we originally expected right.
It came in much better we did not expect that we would be able to more than offset all of the impact of the the chips in the quarter, which was 17% of about 200000 units.
So we saw you know.
Incredible opportunity there from the the.
Industry wide supply and demand in balance so we saw pricing.
The increased significantly.
It also then because of the <unk>.
Supply in balance we've really pushed hard on mix. So those were things that allowed us to improve the quarter. We did not expect used vehicle prices to increase 14% in the quarter and they did and that helped and that was part of whats happened with Ford credit and the performance of Ford credit.
And then as we go through the year of Emmanuel one of the things that did not hit us in the first quarter, that's going to hit us through the rest of the year is the commodity.
Cost increases that come in quite significantly through Q2 to Q4. So those are some of the things that are coming back.
We are going to come through the second half of the year and then the other thing is as production normalizes a bit in supply and demand comes on balance we do expect that we should see some of this pricing that we saw on the first quarter moderate a bit.
And we should see some of that happen through the second quarter through the second half of the year.
He is the commodity impact larger much larger than you had touch of original.
When we had the first looked at it we thought it was going to be significant somewhere between 1 billion of half the $2 billion. So it's slightly higher than what we had thought coming into the year.
Okay, and then follow up question.
I found very impressive some of the improve.
The improvement.
You are showing in the first quarter in terms of net pricing and cost and some of the <unk>.
The international markets and showing some good traction with the the fitness initiatives.
I was hoping you could comment.
Directly on the.
Europe.
In particular around and South America around the sustainability of some of these performance, that's where you're seeing how much you think is sort of market driven versus some of your on action. Both on the net pricing side and on so obviously on the cost side of the sustainability of those.
Yes, so in Europe. This is the second.
Quarter of that Ford of Europe, as the printed for us and I think what Youre seeing there is the redesign.
Flowing through and showing up significantly again in this quarter and of course the mark.
It was aided a bit by what we're seeing the dynamics in this quarter, but the fundamental underlying strength of the business in Europe has improved we took over $1 billion of structural cost out as we looked at the footprint.
We've moved into commercial vehicles and improved our share there we are of higher mix of utilities all of that is providing and what's stronger business for us in Europe, and you've seen that two quarters in a row. Now then when you look at South America.
We reduced our volumes significantly and we improved our profitability and that just comes back to the point that we need.
The structure of the market and we are and now we're going to focus on our higher margin vehicles of the smaller footprint of a smaller business down there leaning into the Ranger and transit, which are good vehicles in the market and their strong vehicles for us as the company and so you're starting to see that redesign really take hold.
Good day here, Thank you very much.
Thank you and with that we must conclude today's Ford Motor Company first quarter 2021 earnings Conference call. We do appreciate your participation and ask that you. Please disconnect. Thank you.
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On.
Sure.
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Okay.
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