Q1 2022 Ford Motor Co and Ford Motor Credit Company LLC Earnings Call
Good day, ladies and gentlemen, my name is Andrea and I will be your core.
Conference operator today.
At this time I would like to welcome.
So the Ford Motor Company first quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' prepared remarks, there will be a question and answer session.
I would like to ask a question. During this time you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two please.
Please note this event is being recorded.
At this time I would like to turn the call over to Lynn Antipas Tyson Executive director of Investor Relations. Please go ahead.
Thank you Andrea welcome to Ford Motor Company's first quarter 2022 earnings call with me today are Jim Farley, our president and CEO and John Lawler, Our Chief Financial Officer also joining us for Q&A is Marion Harris CEO of Ford Credit Hau, Thai Tang Chief Industrial platform Officer, and Doug <unk> Chief.
EV and digital systems officer, or the model E. Today's discussions include some non-GAAP references. These are reconciled to the most comparable U S. GAAP measures in the appendix of our earnings deck, you can find the DAC along with the rest of our earnings materials and other important content that's shareholder dot for Dot Com. There's discussions also include 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 page 28.
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 with that I'll turn the call over to Jim.
Hello, everyone. Thank you Lynn and thanks for joining our first quarter 2022 earnings call.
And yesterday I was with Bill Ford and our incredible team at the Rouge factory, where my grandfather worked to celebrate job one for the F 150 lightning.
We were also proud as a team for delivering a truly breakthrough electric truck.
And delivering it on time, it's a launch.
The excitement around the truck is like nothing I've ever seen in my career in fact, the power went out in the facility and we ran most of the presentation with F 150 pro power onboard.
While we have work ahead to fully scale production and still an extra ordinary order bank both for our retail lightning customers in Ford Pro make no mistake.
This is a very important moment for us at Ford.
We're accelerating our significant transformation.
We have the right plan called Ford plus we're putting in place the right organization.
As you know on March 2nd we announced our plan to form two distinct but interdependent business units called Ford model E and Ford Blue.
Together with Ford Pro these three automotive businesses allow us to clearly define and assigned priorities make the most of our existing strengths, but also build new strategic muscles and most importantly capabilities.
Ford model. He is responsible for delivering clean sheet breakthrough E V designs software advanced.
Electric.
Architectures.
Partial autonomy and Ford Blues mission is to deliver a more vibrant and profitable ice business a.
A business that's going to serve in the short term as our profit and cash engine for the entire enterprise.
So what do we learn since March 2nd.
And what are we working on at Ford.
In terms of model Lee first.
It's very clear to us the battery capacity is the key unlock to R. E V aspirations and propel our growth in the future. We're in good shape in the near term in.
In the medium and long term securing raw materials.
Assessing precursor and refinement and setting our battery production here in the U S and around the World is a big work statement for us.
Expect a lot of news from Ford in the future related to the vertical integration of our EV business.
Second.
We're getting we're getting after our talent gaps in key areas EV engineering software.
Tournaments, driving technology, we have a very good start already in.
And we will continually be very aggressive on recruiting talent.
Third we're now deep into discussions with our dealer partners around the globe, but especially in North America on brand new standards that are required to launch a completely different customer experience is leaner and better for our customers.
That we believe will not only be competitive but superior to <unk>.
<unk> direct model.
We're drafting standards as we speak implant planned to roll this out this year.
Finally.
We're crafting our EV future product pipeline.
And are focused on a small number of highly competitive compelling highly volume models in key segments, where we already lead.
I wanted to make this very clear.
Some companies seem to be pursuing a strategy of trying to match model wise volume with either nine top hats.
That's not a winning plan in our view.
We will focus on key volume nameplates.
<unk> capital.
Because we have it but really to leverage scale and efficiency to reach and eventually exceed our 8% EBIT target for Evs.
I wanted to be clear here that as we move forward, our EV designs will be progressive.
And we're gonna be aimed at bringing new customers to Ford and Lincoln.
It will not be electric versions of our existing lineup.
Now in terms of Ford Blue, we will accelerate our restructuring and address our uncompetitive cost structure.
We're going to attack complexity in areas such as powertrain.
We can't wait this work starts now.
We will continue to invest in our ice business, but in targeted ways to build our most popular and profitable vehicle lines.
If series Bronco Super duty.
And a few others.
Another focus is quality.
We made good progress on initial quality and launches however.
However, we continued to be hampered by recalls and customer satisfaction actions.
This has to change we must do more to aggressively address our engineering process and improve our robustness.
Now our Ford probe business is on track.
We see healthy growth.
In part sales mechanical repairs growth in subscriptions for both charging and telematics and CB financing.
Most importantly, we're making our customers' lives and businesses better they're using data theyre, improving their uptime and their bottom line.
Sure.
Supply chain constraints.
<unk> to impact our business.
Including some of our key profit pillars.
That said, we're making progress on launching and scaling new products as you can see with like.
That said.
Our major focus now is accelerating a more fundamental change in our supply chain management to improve visibility through our entire value chain.
And secure supply.
Especially in places like semis and batteries.
We're absolutely committed to unlocking value by improving our growth profile, our profitability and ability to generate sustained sustainable cash flows from our automotive related businesses. Our new targets include producing more than 2 million Evs in four short years by the end of 2026.
It's about 70 plus.
CAGR.
And we expect that by 2030, Evs will account for about 50% of our global sales. We have also reset our profit ambition. We are now targeting 10% company adjusted EBIT margins by 2026.
Now in terms of the first quarter.
I would describe our performance as mixed.
The appeal of our new products is really clear and customers demand is extremely strong beyond the supply constraint of our industry.
However, we are still grappling with persistent supply chain issues that prevent us from posting even stronger quarter.
We're working to break constraints whenever they exist to take full advantage of this incredibly hot product lineup product lineup.
Both new Evs like the F 150, lightning, but are iconic ice vehicles as well.
We remain committed to delivering our targets quarter after quarter year after year, earning your confidence along the way and now I'd like to turn it to John to take you through the quarter and our outlook this year.
Thank you Jim.
In face of ongoing industry wide supply chain disruption and unremitting pandemic hurdles, we continued to execute against our Ford plus plan, including strengthening our product portfolio investing in electrification and other new and exciting opportunities fundamental to growth and value creation.
In the first quarter, we generated $2 3 billion and adjusted EBIT, resulting in a margin of six 7% the.
The year over year decline in total company profit was driven by higher commodity prices and lower volume and mix, partially offset by higher net pricing as we take top line pricing, while remaining disciplined with our incentives spend.
<unk> our operations outside of North America were profitable.
Global Wholesales were down 9% consistent with our guidance and reflecting the continued supply chain issues. However, a run rate of vehicle production in North America improved significantly during the month of March and we ended the quarter with an extremely healthy order bank in fact in the U S alone.
Our order bank is primed to deliver about $17 billion in revenue.
Ford.
<unk> delivered another strong quarter.
<unk> was $900 million, reflecting strong lease residuals and credit loss performance.
Free cash flow was 600 million negative more than explained by unfavorable timing differences in working capital deterioration due to the higher inventory levels, which included about 53000 vehicles on wheels completed but awaiting installation of components affected by the semiconductor supply shortage.
<unk>.
We ended the quarter with strong cash and liquidity, nearly 29 billion and $45 billion respectively.
This includes our stake in <unk>, which was valued at $5 1 billion at the end of the quarter.
Our strong balance sheet provides a solid foundation to continue investing in our Ford plus priorities now.
Now, let me briefly touch on business unit performance for the quarter.
North America delivered $1 6 billion of EBIT with a margin of seven 1% now this is down year over year as net pricing improvements were more than offset by higher commodity costs higher warranty expense unfavorable mix and lower volume the volume and mix impact primarily reflects supply.
It's unique to full size pickups and large utilities.
South America continues to benefit from our global redesign efforts delivering its third consecutive profitable quarter and its highest quarterly EBIT margin in over 10 years. The region continues to focus on scaling its business for growth, especially pickup trucks and commercial vehicles.
In Europe , our operations delivered an EBIT margin of 3%. Despite a 9% decline in volumes the underlying trajectory of our business continues to improve however, the adverse impact of the near term supply chain disruption is dampening our overall results.
Importantly, we continue to be the number one commercial vehicle brand in Europe . The transit has an extremely healthy order bank and we recently launched the all electric E transit in Turkey.
Ford lives continues to grow helping our commercial customers improved vehicle uptime and ultimately their bottom line and finally Mustang Mach E is now being sold online in most major markets Europe is building momentum towards a fully electric future expecting to reach 600000 vehicles by the end of 2026.
In China, we posted a modest loss in the quarter. However, our cost performance improved on both a year over year and sequential basis Lincoln continues to be a bright spot and profit pillar for the region market share improved 20 basis points year over year and the all new Zephyr is off to a fast start.
In the first quarter, China also continued to make progress towards our electrification strategy. We opened 10 more customer experience centers now 35 in total and made other investments to modernize our direct to consumer network.
Our international markets group performed well in the first quarter continuing to be solidly profitable despite supply constraints and suspension of our joint venture operations in Russia. The upcoming launch of the next generation Ranger remains on track and in March we unveiled the next generation Ranger Raptor and Everest and finally in.
Mobility, we continue to make steady progress towards scaled commercialization of moving people and moving goods in the first quarter, we divested our investments in both trends look in spin further rationalizing our portfolio with a focus on autonomous development.
And now I'll share with you our current thinking about the remainder of 2022.
For the full year, our guidance is unchanged, we expect to earn between 11 5 billion and $12 5 billion and adjusted EBIT, which is up 15% to 25% from 2021 with adjusted free cash flow of $5 5 billion to $6 5 billion.
This reflects year over year growth in wholesales of 10% to 15% and assumes that semiconductor availability will approve will improve in the second half, including the constraints that adversely impacted our full size pickups.
Pickups, and large utilities in North America in Q1.
We also assumed in our guidance that disruptions in the supply chain and local vehicle manufacturing operations, resulting from the renewed COVID-19 related health concerns and Lockdowns in China do not further deteriorate our supply chain.
Now relative to adjusted EBIT.
On a year over year basis, a range assumes significantly higher profits in North America and collective profitability outside of North America. We also expect Ford credit EBT to be strong, but lower than 2021, and mobility and corporate other EBIT to be roughly flat.
Other assumptions factored into our guidance include first we have a very strong order bank as Jim mentioned for our new iconic products, such as Bronco Bronco sport Maverick, along with a robust EV lineup.
Dang Marquee E Transit F 150, Lightning now and now in production as well.
Pent up demand beyond our order bank, a continued strong pricing environment, including the benefit of pricing actions taken in the first quarter and improved mix.
The interplay, though between volume and pricing will remain dynamic.
And third we expect commodity headwinds of about $4 billion, which we expect to offset by improvements in net pricing and mix.
Fourth we anticipate other inflationary pressures to continue impacting a broad range of costs. We are aggressively looking at all opportunities to offset this reality, including aggressively ramping up our efforts on additional cost reductions.
And fifth at Ford credit, we expect auction values to remain strong as supply constraints persists. However, as I mentioned, we anticipate strong, but lower EBT, reflecting primarily the non recurrence of reserve release fewer returned off lease vehicles and more normalized credit losses.
Our results in the quarter, our balance of year outlook and commitment to our medium term targets demonstrating the power of our <unk> plus plan as we continue to invest aggressively to drive growth and value creation.
This includes devoting resources customer facing technology connectivity, our always on relationships with customers and electrification we.
We are confident the long term payback from these investments will be substantial.
So that wraps up our prepared remarks, we'll use the balance of the time to hear you hear your questions and address what's on your mind. So thank you operator, please open the line for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Rod Vishay of Wolfe Research. Please go ahead.
Hi, everybody. Thanks for taking my question.
First I wanted to ask you about inflation.
Price versus cost is obviously, a pretty big drag here.
And I assume that that you would expect inflation to stick around for a while I was hoping you might talk a little bit about how that's influencing your decision, making your internal messaging.
What is in your view going to be the interplay between price and volume as volume and inventory starts to normalize is there still pricing power.
After everything that you've achieved over the past couple of years and does this affect your your margin targets.
Hi, Rod. Thank you for your question, obviously, we're seeing on the commodity side, you know steel aluminum copper lithium nickel.
On the logistics side, a lot of premium freight.
We are seeing pressures on inflation from suppliers. So it's really across the board.
I'll, let John answer the pricing question, but I would say.
We really have quite a bit of pricing. We've recently put in the market it's stuck.
And in addition, we feel like we have a lot of cost upside as well in the company I know that's not your question, but that's an opportunity John .
So hi, Rod.
From a pricing standpoint.
So far we have seen pricing just about offset the inflationary pressures that we've seen.
And so we've been aggressive with topline we've been balanced with the incentives.
We do expect the commodity inflation as Jim said to continue through the year. So the pricing that we've taken reflects that and so I would say that we've been aggressive so far starting last year from a pricing standpoint.
I would also say that the.
The dynamic between the volumes and the pricing has got us so remain in flux and as we go through the rest of this year and volumes improve.
We have assumed that in the second half you would see it.
Increased pressure on your incentives and that's assumed in our guidance I would also say Rob that right now many of the dealers are transacting near or above MSRP across the industry.
So that has to be a compression thats going to happen first on the pricing front and we're watching that very closely.
We've also taken actions, where we can improve our pricing by work we've done with our dealers. So one of the things we did in the quarter is we adjusted our floor plan adjustment to the dealers.
In the past, we had paid down more than 5% of MSRP to cover the floor plan. The carrying costs, we have adjust that to about 75 days of the actual cost the actual cost up to 75 days, so that's better benefit thats flowing through our pricing as well.
So we see it is dynamic.
We do agree that as volumes increase it will be dynamic relative to incentives were not pollyanna ish about that we've reflected what we think's appropriate in the second half relative to incentives.
<unk> <unk>.
Adjusted for the volume that we see coming in but we'll also be aggressive on pricing of commodity keep commodities keep going up.
We'll be aggressive as we can so they are going to be a dynamic play as we go through the rest of the year I would say, though that when we step back and we looked at the pricing relative to 2020 model year, what we've taken since 2020 model year, we'd have to increase incentives considerably to offset that pricing.
On a run rate basis, they would have to move from I think we're in single digits today low single digits led us to move up into like 16.
16% to offset that pricing so.
And that's back at a time when we had extremely high inventories and we had a very pushed through process and we're not going to go back to that we're going to be very disciplined with our inventory. So for a center revenue as a percent of revenue and so we're.
We're working costs, we're working all the angles.
Okay, Thanks for that and any color.
Color on the outlook for Europe for the rest of this year, just given all of the macro pressures there it looks like.
Thank you you've been posting pretty solid results there recently.
Yes, we expect those results to continue.
We were in Europe tampered by the suppliers.
Chain reductions, but you know.
It was nice to see that even though.
We were hit by that Europe did posted a.
Better than expected quarter for us so we're continuing to do well in commercial vehicles, we launched E transit, which has been very well received.
Mustang Mach E has been very well received as well. So we do expect the business in Europe to continue to improve in the second half as the rate of flow of supply improves for them as well.
Okay. Thank you.
The next question comes from John Murphy of Bank of America Merrill Lynch. Please go ahead.
Good evening everybody.
I wanted to ask a question sort of on the gross side. Jim you mean, you have 150 lighting orders. It sounds like they are mostly incremental buyers folks that haven't been Ford F 150 buyers before I'm. Just curious if you think that is just sort of a surge year at the launch of the truck or is this sort of 15% to 20%.
You sort of incremental orders relative to the base F 150, something you think will stick around because obviously, that's very powerful potentially to your earnings do you expect the profitability of this truck over time to have a variable margin that would be similar to the F 150.
Being even a little bit more of a <unk> do you expect the same kind of thing with the $2 $53 50, Lightning, which launched in two or three years.
[laughter], Oh, I didn't know we announced that but.
Well. Thank you very much for your question.
I'd like to maybe ask Doug to come in here and talk about the levers we have on the profit side, but so far.
It's very clear to us that the lightning customers are incremental and as you said, it's early days, we capacity wise in the end of the day. The facility that we were in it's about 80000 units almost double that by the end of next year.
And I would say at this point the customer profile is dramatically younger.
It's in states like California, and New York that we normally don't sell full sized trucks, we do have some lots of orders and in in Texas.
It's it's a higher education that we see and what they are interested in is different about the truck.
So I think it's very clearly so far incremental now when we get into volume production of 150000 units that may change.
And we will see that with the order as we order open the order bank again for the next model year. This summer.
Doug do you want to highlight the opportunities you see.
Maybe.
On F 150, lightning, but more generically on on our next product.
Sure.
Let's start with <unk>.
What about what would help us important strengths.
Our cost basis.
Drew over in terms of future products, but when we talk about <unk> specifically.
The first thing we have to do is really control the battery materials and the chemistry. They are the single largest don't materials opportunity of course.
The next is really obsessing over how we use those materials and Chemistries energy efficiency is a religion.
The team is really stepping up to this every single water consumption is now being tracked and optimized and on the new programs changes in aerodynamics and drive unit optimization, we're seeing.
Thousands of miles of improvement.
In range that hundreds in some cases thousands of dollars of battery that we can take out.
Finally, I think really going after a true ground up.
<unk> two how rebuild Tvs they are different in internal combustion vehicles, and you could take advantage of that and really change the number.
Alright.
And way the vehicle comes together in our next F series <unk> factory.
The stations that we use today to build a lightning.
So I'm very optimistic.
With this journey.
We have some some really good ground to make up on margin.
Sounds exciting Johnson one far.
Oh go ahead go ahead, John keep got Jim Sorry, I had a follow up on something else I just wanted to say on the Super duty, obviously, that's a quarter of profitability as a company globally.
And you know when we look at the customer usage, we just don't feel at this point that electric solution.
It's going to be ideal for most of those customers. So our vehicles plural, we'll be really focused on light duty in the lower end of Super duty for sure, but not $2 $53 $54 50, that's a that's a whole different ball of wax.
They required a lot of payload heavy batteries that doesn't make sense.
Got it and I am sorry, a follow up on the 53000 units that are in inventory on <unk>.
Is that what we're seeing in this 21% increase in inventory on the balance sheet from the fourth quarter to the first quarter and.
<unk> cost has not been accounted for at all here and we'll see those vehicles flush out to the system in the second or third quarter. When the chips become available I am just trying to understand John Lawlor.
The economics and what the profitability boost maybe from these vehicles flowing out.
Could you just kind of explain sort of how youre accounting for this and what the benefit might be in the second and third or fourth quarter. When they actually are finished.
Yeah, So John that's exactly right.
That's what's hitting us from a cash standpoint, and the inventory increases is for the most part the vehicles on wheels to 53000 units.
We have the cost for those in our results, but we have no revenue for them and as they.
Build out.
We complete them in this quarter and into the third quarter, we'll start to get the results of that to the bottom line and they were primarily our more profitable vehicles and it was primarily F series and explore.
There is definitely an opportunity there that we will start to roll through to the bottom line. Once we start shipping those out.
Im sorry, John .
One of the reasons why.
One of the reasons why we built those John because the modifications we need to make we are very confident we can do that without compromising quality, but production is fully subscribed. So we would have lost these units if we hadn't built them and set them aside until the chips are available.
So im sorry, John the costs are recognized in the first quarter results, but obviously the revenue was not.
I'm just trying to understand this because it sounds like it might have a big impact in sort of people's understanding of the cadence of earnings through the course of the year.
The profits are recognized in the quarter right, but the costs, we backed out the labor et cetera, that's been all backed out that's in inventory.
Okay got it okay got it okay. Thank you very much.
The next question comes from Colin Langan of Wells Fargo. Please go ahead.
Oh, great. Thanks for taking my questions.
Yeah as you mentioned the EV battery costs have really dramatically increased.
Has that changed your EV strategy at all do you think youre going to need to maybe raise the pricing of the like being in the market.
And what can you do about it and maybe switch to different chemistries.
A lot more hybrids.
How can you address that if raw materials stay at these very high levels for that those battery materials.
Thank you for your question.
Well first of all.
The demand for Evs right now is extremely robust at Ford. So we have the opportunity we believe for for pricing, we're not going to get into those details now but.
Doug said, something very important collyn I want to emphasize which is battery chemistry, we believe very strongly at Ford. The chemistry, we are really key part.
Of our protection against commodity price increases and frankly, the benefits the customer Doug do you want to add anything.
Now for a number of years ago started ironbark without too much experts really focusing on chemistry.
Lithium ion phosphates of course, and we know from the industry is something that takes you away from the nickel, but it will be a part of our team.
And we're also looking at other Chemistries that.
Give us an opportunity to be less dependent on <unk>.
Materials that everyone seems to be fighting over it in the market.
And so in the short term switch.
<unk> Street sensor.
Go go ahead with your question sorry Collyn.
No I was just going to say you mentioned youre able to do all off pain. That's been the plan I mean, how quickly can you switch because nichols like now I mean, I'm just kind of wondering how flexible and how quick you can adapt to that.
2 million talking about trying to transact.
Yeah, we've been working on LLP for quite some time, so let's just leave it at that.
What I mean by that is engineering <unk> solutions, and our first generation of products something that.
We see as a big opportunity.
And to move quickly.
Got it and just second question you mentioned in your comments.
And our warranty costs and that was going to be a big driver of margins. It does look like it was up year over year.
Is that just sort of a temporary blip in the quarter or.
Or a structural issue that we're going to see some higher elevated warranty through the rest of the year.
No.
Yes, Colin Thanks for the question when we had our capital markets day event.
We signaled that we were targeting $1 billion to $2 billion and warranty opportunity by the mid decade in 'twenty one.
We delivered $1 $4 billion of that.
So roughly 70% of that total opportunity.
When you look at the Q1 of this year, we had a deterioration in some of that was just a non repeat of items that we recognized in 'twenty, one that didn't didn't flow through.
This is still a huge opportunity for us it's the number one priority for us as.
From my team as a skilled team is really focusing on improving.
Quality.
Warranty as well as recall performance not only because of the drag on the business, but more importantly, because of the impact on our customers.
So this is something that we're really focused on and as Jim and others highlighted earlier, it's a huge opportunity for us to eliminate waste within the company and offset some of those commodity and headwind costs that we discussed earlier.
Got it thanks for taking my questions.
The next question comes from Adam Jonas of Morgan Stanley . Please go ahead.
Hey, everybody.
And Lisa Drake on the call.
No.
No.
Doug's year to.
Okay I'll pass it onto her.
We've got great people on the call we're good.
I noted the lilac solutions.
Partnership that's a really really good call here and a lot of really really great thing so great job there.
If you can imagine that the entire metal and mining industry. We're listening to this call right now and they should really really should be.
What would your message.
Right now Jim.
The message would be.
We we need to work together and find good deals.
That's what the message would be that.
We know what we're looking for we're focused on lithium and nickel.
Those two.
Those two.
We wanted to do smart deals that work for them and for us.
And number two we want to move some of the processing in North America.
And we're willing to invest capital to move the processing precursor work from overseas to North America.
For a variety of reasons Doug.
Doug would you edit that list.
No I think thats the right list.
Okay.
If the right list.
My follow up.
Ford credit side.
Guys are massive.
Extraordinarily well managed portfolio in a market that at least historically.
Can react to oil shocks and economic pressures of course overtime, and we're seeing some pretty pretty crazy changes in the market.
Just for the record any sign of pressure in.
In the portfolio in terms of delinquency.
Loan losses based on the strength of the consumer that you saw very credibly and powerful we can comment on that.
They have an economic indicator for this audience.
<unk>.
Hey, Adam is Marion Marion Harris here.
Short answer is no.
We're seeing strength in delinquencies theyre up marginally versus last year, but still well below anything we've seen.
And a lot of that from the back of strong used car values, which we expect to remain strong for some period of time.
And you're even getting into the gas price piece of this one of the things we've been looking at is whether or not there is a change in auction values by segment and we're not seeing.
Any differences in prices or price movements for large suvs versus smaller sedans.
So the trends continue and we still feel very good about the credit business.
Thanks, Matt.
The next question comes from Dan Levy of Credit Suisse. Please go ahead.
Hi, Good evening, Thank you for taking the question.
First question is just on the guidance. So I know you are maintaining the guide.
11 and 12.
And a half billion, but.
You've also said you're guiding to now two to two $5 billion of higher raw mat.
Europe is a choppy environment, China, the choppy environment.
And then there is also other inflationary pressures that arent in that raw mat God.
<unk>.
I just wanted to understand and what does the full set of offset to that you've talked about price, but maybe you could just talk.
<unk> you know how that compares to maybe other cost offsets that will allow you to maintain your guide despite the incremental headwinds.
Yeah. Thanks, so prices the main offset there for the full year.
Pricing offsetting the inflationary pressures that we're seeing.
Our being very aggressive in ramping up additional cost efforts because we know that this is not going to we don't believe that the pressure on costs due to inflationary pressures is going to ease anytime soon so we need to find more efficiencies we need to improve productivity.
And Jim and the team and we are working very hard on that and that's a priority for us.
The other thing that we have is in the second half of the year, we do have volumes improving based on the better availability of summarize as we see that through the system. So that's another big driver for us in the year.
And you'll see that in the second half over the first half as that comes online. So how do you want to talk a little bit about how you see that in what we've been doing to manage that.
Yeah. Thanks, John So as John mentioned in his remarks in March we had the highest production run rate that we've seen frankly in the last couple of quarters. That's the result of a lot of hard work with all of our suppliers at every level of the value chain to break constraints.
Ensure that we're getting a fair allocation as well as expediting free.
To pull ahead some of the available supply in parallel to design actions that we've taken over the past year to design our way out of some of these constraints are coming online.
And if you guys reflect on last year many of our <unk>.
Wafer and chip supplier started implementing <unk>.
Capacity action and those are also coming on in the back end of the year. So.
That's what's giving us the increased confidence around the guidance that Jon highlighted.
And the other thing I would add is that the demand as Jim said earlier is very strong for our new products.
And that's encouraging for us, we just can't build enough of them and we see that demand continuing.
And the mix assumption within that.
The mix assumptions that will revert back to a normal run rate mix that we would expect to see we were disproportionately hit in the first quarter by a commodity module and how can talk more about that he is better to talk about it than.
With me than I can.
And the team has worked through that so we believe we have that resolved. So we should see a more normal run rate of our mix as we move forward.
How do you want to comment on that specific comedy because commodity because I think it is really material. Yeah. So we had a wiper module that was deployed on our most profitable vehicle lines as John mentioned, our large pickup trucks and utilities in North America. So we had limited ability to do any mixed man.
<unk> and flex with other lower profit vehicle lines that issue has been resolved we design our way out of it.
And again, we have a line of sight to two.
Not only support the back half of the year production, but also address some of the vehicle on wheels without commodity.
Yes.
And then.
My second question is.
Just as we think about the costs that are coming online I think you've discussed in the past that really.
In your re org.
That blue is going to be what funds modestly so in a good market, it's very easy to see how incremental profits from our core combustion business.
Funding your EV growth, but now that we have more costs that are coming into the system.
Maybe you can give us a sense.
How youre looking at your growth investments I E V I assume youre going to invest in that regardless of what the underlying market environment, but maybe you can give us a sense of.
Are there other growth investments that are maybe more discretionary that you can.
If you need to pull back on or delay how do you think about other growth investments.
Our opportunity is really around our cost and our blue business.
How we look at it in terms of investing we need to invest in a fully networked advanced electric architecture, we need to advance our we need to invest in level two level three autonomy, we need to invest in a new portfolio in changing our industrial system over to these electric digital products, we need to invest in our OS software.
Where that supports all of that.
And we need we believe very strongly we need to invest in level four autonomy. So at this point in time.
I don't personally see any discretionary or Ford plus plan is so specific about where to invest.
That at this point in time, you know a real work that we need to do is to get after these inefficiencies and improved the productivity of our base business.
Really where we're focused and of course.
It is implied that as a management team we need to make these investments as efficiently as we can for all this new technology and growth.
I hope that makes sense to you.
That's helpful. Thank you.
The next question comes from Mark Delaney of Goldman Sachs. Please go ahead.
Yes, good afternoon, and thank you very much for taking the questions.
First is on the new structure, it's been about two months announcements Ford announced the split into the different segments, including Ford Bluey modestly I'm, hoping to better understand how employee reception has been in for Doug field, perhaps specifically maybe you can talk about what is your ability to get the right engineering talent and are there any anecdotes or data points you can share.
So the reception has been terrific. We worked hard on this and we were prepared we know we knew kind of what we needed to communicate to the employees and why this is necessary and why it makes sense. So I think the reception has been good the proof in the pudding is going to be how this executes.
And that's why I wanted to give an update actually in my comments on what we've done since March 2nd and it's a lot has changed Doug over to you.
Yes, we did think a lot about that and I had a great partner and how to figure out how we were going to take best advantage of fords deep capabilities that I haven't had access to an ending of my and my prior roles. So.
The organization is setup, where Ford model.
Captain doesn't build cars by themselves we rely on an industrial platform that does great work.
Yes.
A number of different.
And for modeling.
Okay.
Back to port.
Product entered dependency there that.
That really helps came work I think as far as attracting talent I've been really.
Delight delighted and surprised by the kind of talent that we can attract from tech I think there is.
A certain amount of fatigue in the tech world.
A lot of mature products out there the opportunity to work on high technology, but do it in a brand that is so iconic in the United States and in something that is so.
Such a rich product like a vehicle.
It is really attracting some great people.
Finally, I think from a top perspective.
<unk> model is also helping us really dig into the internal team and find great people, who can step up to take on different kinds of roles.
B Clinton positions of authority and really help drive.
Drive the scourge there are there are great people here.
That's really helpful. My second question was on the volume outlook for 10% to 15% wholesale growth, which the company has maintained even though we've had unfortunately the war and also the new Covid restrictions pop up in China, So I'm, hoping to better understand how forward is still managing to that 10% to 15% growth and to what extent has the company taken.
The incremental actions to find different suppliers.
Perhaps you had been expecting to have to do in.
Is it more that youre doing those sorts of things to still do 10% to 15% growth or is it perhaps more about forward suppliers not being overly impacted by these recent events. Thank you.
Thank you it really comes down to.
The commodities semiconductor related commodities have been hamstring us. We obviously are spending a lot of money on premium freight and other things to work around.
Covid escalations in China, but but really the second half of the year's production increase relates to those so how I don't know if you want to add anything specifically, yes, mark. So the two hotspots that you highlighted Ukraine, Russia, I think we've done a really good job of managing that and minimizing any.
Large significant production risk, mostly because of our global sourcing patterns and we were able to get parts from other areas of the world.
In terms of China.
We're scanning the Shanghai area, we have about 50 tier one suppliers there our focus is on op profit pillar.
Vehicles, and as Jim mentioned really leveraging expedited freight we've secured.
Yes.
Maritime shipment as well as air lift capacity to protect our suppliers and then theyre just starting to have a white list process to allow suppliers to resume production. So we're working with our teams on the ground in China to help those suppliers get partially operational.
So.
Those actions, we think will really help us and as Jim mentioned, what's going to be gaining us is semiconductors. A lot of these constraints are nested within that so it comes down to the work that we're doing on the semiconductor supply.
The next question comes from Ryan Brinkman of Jpmorgan. Please go ahead.
Hi, Thanks for taking my question as we near the I think 180 day lockup expiry on your investment in <unk>. How are you thinking about the options available to you in terms of this investment going forward are you may be more inclined to retain some or all of the stake given the recent decline in rig and shares and if you were to me.
<unk> how are you thinking about the use of any potential proceeds could you maybe use them to accelerate your own electrification efforts or are you maybe already devoting all the resources necessary there and so what perhaps look to prioritize other opportunities I don't know maybe shareholder friendly actions. How are you thinking about these options.
Unfortunately at this point, we're not going to comment on review.
Okay, Great. Let me try one on Argo, then I recall, you, saying on an earlier call that you are supportive of Argo AI as potential tapping of public equity is there any update you can provide there in terms of where argo might be with that process or just what is the latest youre thinking about in terms of their overall strategy and trajectory what has been maybe the early.
A result of some of your trials of Robo taxis on the Lyft network or in various cities beyond Miami.
Thank you well first of all Argo and Brian continue to make great progress technically on the STS.
A level four autonomy, we're very happy with with the technical progress number two we really see maybe different than others level two level three and level four as two distinct products.
Yes, Argo could help us with our semi autonomous capability, but we feel like that would be a big distraction for them, which we do not want them distracted at all.
And number three.
It's taking time.
And this is expensive stuff and so from our standpoint getting access to the capital markets is very critical to give us the flexibility to continue to fund this for many years to come.
One thing I would say.
Is we're very focused on partners that are that would be aligned strategically with Argo use cases that would be very material in the deployment of Argos technology.
And we're getting more and more interested as a company.
Maybe a bit of a strategic shift.
On goods movement.
It's aligned with our commercial vehicle business.
And our customers feel they are getting more and more interested in middle mile specifically.
I think thats a material update for Argonne, and hopefully that helps you yes very helpful. Thank you.
The next question comes from Joseph Spak of RBC capital markets. Please go ahead.
Thanks, So much couple of questions on on cash.
<unk> Capex is now 7 billion was I think it was seven to eight before our free cash flow at the same EBIT still the same so is the delta to maintain the free cash flow.
Working capital and then while we're on cash it looks like redesign cash is now.
Billion lower this year versus prior and I think even the total amount you expect to spend on that is lower now. So can you just talk about what's going on there.
Sure on the redesign there's efficiencies that we're seeing as we work through.
The redesign.
Across each of the markets that we've restructured and so youre starting to see that there's also some timing differences in there as well.
Where.
The work, we're doing is as let's say, taking a bit longer to get to a solution or a final position with some of the counterparties we are working with.
And we also announced the fact that we will be selling our cry over.
Facility to Autozone, and that's going to allow us to bring cash in to that restructuring that we have there as well.
Our global redesign so.
That's the short of it from from that standpoint.
The other point I think the.
A question was around them.
The lower capex versus prior.
Yes, the lower capex risk higher but okay.
Yeah, so the lower Capex.
That reflects no change in our intended investment in electrification or are fully networked architecture et cetera, It's just timing differences and this year relative to what we saw at the beginning of the year.
So you can still expect us to continually invest we have the capital to do that with balance sheet strong.
No.
It doesn't reflect anything on where we see the business heading it's just timing differences for the most part.
Okay, and then just the thought that the free cash flow remains the same as a little bit more of a working capital drag on.
Yeah, it's more of a working capital Okay, yes, absolutely.
Okay and then.
I think I think you sort of made it quite clear that.
The primary driver here of covering some of the higher cost as is.
Alright advantageous pricing.
Can you just parse some of the Ford credit commentary, a little bit because I think before you said it was about 1 billion and a half or lower and now there's some language so strong but lower so is some of that also coming from some of that.
Makeup if you will also coming from Ford credit.
Yes, Joe It's Mary I'll, just cover the guidance piece on Ford credit, we said that the profits will be strong, but lower and that's reflecting the fact that we had large larger reserve releases. In 2021, then we would expect in 2022. In addition to that we had a lot more.
Supplemental depreciation releases in 2021, then we would in 2022 related to the lease portfolio.
Okay did did your expectation changed versus what you communicated three months ago. There for this year no no no.
Okay.
Thank you.
The next question comes from Emmanuel Rosner of Deutsche Bank. Please go ahead.
Alright, Thank you very much.
So John last quarter, you provided a very helpful walk towards a 2022 adjusted EBIT with some of the largest puts and takes and so was hoping you could maybe update some of the buckets here. So obviously commodities was expected to be $1 52 billion drag notes 4 billion what is now.
The market factors versus the 6 billion from last time.
It's credited what's going to be a billion and half dollar strike.
I seem to understand from the last question that this hasnt changed any other changes besides market factors and can you just quantify it.
Yes, So I think what you see there is exactly that Theres no change to Ford credit we are seeing higher inflationary pressures, we are seeing higher topline pricing thats coming through but we're also working on cost offsets as well.
So I think it largely remains what we had talked about last time, you're just seeing higher inflationary pressures and higher pricing flow through.
Okay, so versus the five five to $6 $5 billion in.
Volume mix price benefits from last time, we could basically at two to $2 5 billion through that which is the year and pricing offset.
The cost offset.
No I don't think that it's as high as $2 5 billion Emmanuel it's.
There is growth in there, but it's not as high as that.
Yes, I think that when you look at the walk.
Relative to what we had provided last time.
Most of the inflationary pressures that.
We're seeing.
Are being offset by a combination of additional cost reductions.
Pricing and mix thats flowing through but it's not as large as that is what you had just indicated.
Okay.
On the cost piece of it.
<unk>.
Are you dialing back or sort of like prioritizing some of the modernization investments or is that.
Largely left is for this year.
No I mean, our our offer to absolutely not tried to make that I'll I'll say it twice.
We we are really excited.
Our growth opportunity in Evs, we have electric architectures to invest in software OS.
We have partial autonomy to invest in full autonomy invest in that's all part of our <unk> plus plan is essential to our move to always on we obviously have lots of investments in building out our service portfolio from Ford Pro.
We're not holding back on any of that the cost drivers that we see are things like obviously manufacturing as we simplify our ice lining up in and.
As Doug said really completely redesign or manufacturing process for EV, we have opportunities sales and marketing and sales opportunity in engineering and see simple fire lineup and of course warranty and other areas. So I think we're we know exactly what we need to do.
Understood. Thank you.
Our last question comes from Tim Mchugh Li of Citi. Please go ahead.
Great. Thanks, Good evening, everybody just two quick ones from me and thanks for squeezing me in first you didn't talk about the cadence of earnings before but just hoping we could revisit it in terms of kind of how to think about the adjusted EBIT for the rest of the year and whether there is any bias at this point towards the low and high end of your full year guidance range and a second more housekeeping question is whether you.
You can provide what you anticipate to Ford motor credit dividends to be back up to the parent.
Yeah.
I mean, we're not going to parse out.
The guidance is 11, five to 12 and a half it's a dynamic environment.
We're working to offset all the headwinds and <unk>.
And maintain the guidance, but as far as parsing out where where we sit within the guidance of 11 five to 12 of them.
Okay, and then on the dividend the dividends are a function of overall profits and balance sheet size and leverage and in this case.
You heard the guidance on profits and then to the balance sheet. We don't expect much growth. This year just given.
Where we werent vehicle constraint so.
The majority of profits, we don't have a specific number.
Just make it really clear on the overall company's automotive performance financial performance second half is very critical for us.
It's just a very critical time for the company, we have the opportunity to build in volumes, we haven't for a while and.
And we.
We have a lot of great fresh products, a lot of cost coming in the business, but second half is really critical for the company.
That's all very helpful. Thank you.
This concludes the Ford Motor Company first quarter 2022 earnings Conference call.
You for your participation you may now disconnect.