Q2 2022 Ford Motor Co Earnings Call
Yeah.
Good day, ladies and gentlemen, my name is Chad and I'll be your conference operator today at this time I would like to welcome you to the Ford Motor Company's second quarter 2022 earnings Conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press Star then one to join the question queue should you need to remove your question from the queue. Please press Star then two please.
Please also note today's 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.
Thanks, Chad welcome to Ford Motor Company's second 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.
These 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 deck along with the rest of our earnings materials and other important content at shareholder Dot for Dot Com. Today'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 22.
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.
Looking at our IR calendar, we have two upcoming engagements tomorrow P&C pair of basketball host Fireside chat with John Lawlor and Kumar Gupta President to afford blue.
<unk> tends at their auto conference in New York, Jpmorgan will host a fireside chat with Ted Kennedy CEO of Ford Prep now I'll turn the call over to Jim Farley.
Thanks, Lynn and Hello, everyone.
The Ford team delivered a very solid second quarter in a challenging environment.
Where we saw supply chain disruptions.
New economic headwinds and uncertainty as a whole.
Importantly, we achieved these results as we advance a Ford plus plan.
Which is the biggest opportunity to create value at Ford since we scaled the model T.
The core of Ford plus three fundamental promises to our customers.
Sting different breakthrough products and experiences and always on relationship with Ford every day every hour every minute.
And ever improving post purchase user experiences powered by software.
Today, I'll give you an update and afford plus and the early results of our decisions to reorganize the company into three distinct segments model E Ford Blue and Ford probe.
Now, let me start with the progress, we're making to lead the electric vehicle and digital Revolution.
Which launched in the industry's arm race of claims regarding capital invested the number of top hats, we all have the promises of future leadership.
Is one fundamental question.
Who is and will be the best position to design truly distinctive and appealing products the people actually loves.
That's the question.
Now we've been overwhelmed with the demand for our first generation <unk> Mustang Mach E. The lightening in the transit.
These products are in the market now and.
And we have strong multiyear order banks, we're selling them as fast as we can make them.
And you can't say that about many of the evs coming to market now.
We believe that these great new products will enable us to grab an outsized share of the rapidly growing EV market combined with our healthy and vibrant shares of our ice and growing hybrid markets.
This month, we expect to produce 14000 evs globally that's.
That's significantly higher than just a few months ago, and we have a clear path to reach a run rate of 60000 Evs by the end of next year.
And that will lead to a foundation to 2 million.
By late 2026.
In fact, our anticipated growth rate in Evs through 2026 is more than twice, what we expect for the global EV industry in total.
The security of the raw materials to produce batteries at scale is critical to our plan.
It's estimated that at best 50%, all raw materials required to meet the combined announced targets for all EV Oems is actually available 50%.
And this is why speed to securing supply is so critical and strategic.
So it was diversifying our battery chemistries to increase our flexibility supply and profit and to support different customer use cases.
Last week, we announced a series of Mou's and agreements to fulfill our ambition ambitious needs that I covered and we are working to complete definitive agreements where necessary Armando lead team moved quickly to capture these opportunities to summarize we've added battery chemistries and secure contra.
<unk> delivering 60 gigawatt hours of annual battery capacity, which will help us support fully the 600000 units of that 2023 run rate of capacity. We now have lithium ion phosphate or L. P battery packs coming for the marquee sold in North America next year.
Year for Lightning in early 2020 for creating more capacity for these high demand products, we've secured 70% of the battery capacity needed to support 2 million units by the end of 2026, and we struck a new deal with CA T. L on strategic cooperation for global battery supplies as well.
As deals for direct sourcing of critical battery raw materials in the U S, Australia, Indonesia, and more locations and we have a plan to localize 40 gigawatt hours per year L. P capacity in North America by 2026.
These deals are a strong start as we fortify our EV supply chain, that's aligned with our sustainability and human rights principles.
Now, let's talk about the progress we're making in building out an always on relationship with customers and then ever improving user experience enabled by software after the customer buys the vehicle.
Along with product execution. These are really the relevant sustainable advantages, we see to create in today's hyper competitive market a difference where the real competition is not legacy Oems the pure play <unk> companies, including emerging Chinese players.
For example, more than 55004 customers have already driven nearly 10 million miles with blue crews are hands free L. Two system. That's just one year. After the capacity was launched and we started Otas. This tour vehicles.
We're using the data we get through Blue crews to continue to improve the customer experience and as it happens you can imagine as significant a das revenue profit stream being created by giving customers the ability to work watch a film or even take a nap during a long trip and their Ford while the financial benefits.
As of eight as are clear as is our Ford Pro services stack.
They're relatively small now, but we are rapidly increasing the number of digital vehicles on the road as well as the attach rates of the enabling services and over time much of the SaaS revenue will be deferred on our balance sheet, providing an annuity like revenue stream that is highly accretive something this company and this industry has never seen.
Now before I turn to Ford Blue, Let me talk briefly about our connected EV dealer model in the U S.
Changes in the market have compelled Ford and our dealers to revisit how customers shop buy and own and how they will do this going forward.
We're moving fast as the transition to these digital EV platforms allows us to help our dealers provide better customer ownership experience post purchase and in turn enables them to expand the revenue and profit pools, expanding and improving the returns.
We're working with our dealers to create a retail model better than whats offered by any traditional OEM and better than the startups, who are now scrambling to develop sales and service networks to support customers in an attempt to sustain and grow share in <unk>.
In the U S alone.
If we can help our dealers increased service loyalty.
20 points, that's $2 $4 billion incremental revenue for them.
Every year.
Now since March we've conducted more than 30 workshops in the U S and Canada.
Reaching hundreds of our dealers I have personally been involved in many of these meetings what is clear to me, but not yet visible to the market is that our dealers are embracing this change they know the competitive threat is real and they want Ford and their dealership to lead and win and.
And we have more share as this develops the attorney for Blue. The team is motivated by this sharpening focus on our ice and hybrid products.
We've added new talent and leadership to drive performance and focus in our trucks are great family lineup and are enthusiastic vehicles. We're so proud of we've revealed new vehicles like the Bronco Raptor.
The Bronco Everglades. The F 150, Raptor are which my kids think sounds great.
In the third quarter, one veal unveil an all new seventh generation Mustang at the North America International Auto show in Detroit.
It is a stunning car and I'm, so excited to share with the world.
And also this fall we will be introducing an all new super duty pickup the workforce at Ford and has set the standard in our industry.
There's much more to come our design center is filled with new products and derivatives that will further strengthen our hit vehicles in the ice and hybrid franchises like F 150, and Bronco and Maverick the brand New Global Ranger This launching in Thailand, and our new Everest in short our hottest and freshest lineup.
In recent history is getting even better.
Now with commercial vehicle market <unk> pro our industry, leading global business is leading the change into an electric software driven world.
The Oems are talking about large numbers of future electric orders.
We're actually taking orders for manufacturing and selling commercial vehicles now.
Through the second quarter.
We've sold more than 3000 E transit in the U S.
That's a market share of 95% in the full size electric van market.
95% in fact, our next two competitors combined sold just 159 vehicles.
Beyond the vehicles, we're also rolling out our Ford Pro charging commercial solutions, and the very exciting and fast growing E Telematics software solutions.
And boy are they paying loss.
Yes.
And in Europe .
Where we continue to be the leading commercial vehicle brand. We're already received 8000 orders for our two ton transit and our new one ton E. Trans Accustom goes on sale next year.
Now our forward pro software business is growing quickly.
Paid telematics subscriptions globally have grown over 40% sequentially for the last two quarters.
Turning to quality we have.
Made solid progress in initial quality as you've seen in the recent J D. Power's IQ S study and our launches of improved however, we continued to be hampered by recalls and customer satisfaction actions. Yes. This affects our costs, but more importantly, it falls short on our most fundamental commitment to our customers.
Quality is our number one priority in fact, we recently brought on Josh Halliburton from J D powers to head quality now the team is focused on three critical areas prevention detection and remediation.
We've instituted more robust engineering sign off processes for the vehicles that are in the product development factory as we speak we're driving much more frequent alignment with our supply base on quality.
And when he identified issues, we take actions quickly to resolve them to protect our customer experience, including by making much more frequent use of over their updates.
Has that worked for us.
We have more work to do in this space and we will keep you updated.
Overall.
We're pleased with the progress this year.
But we are not nearly satisfied.
We remain clear eyed and determined to move with speed and determination on a Ford plus transformation the underlying strength of our business supports our 2022 adjusted EBIT guidance range of $11 5 billion to $12 5 billion unchanged from April .
Before I turn it over to John I want to end with this.
There is content context, that's critical how.
How we think about implementing a four plus plan to.
Traditionally the auto industry has cut costs often indiscriminately.
As an effect of course.
From lower auto demands through economic softness and shifts for customer preferences.
We are undertaking Ford is totally different than that.
We're reshaping virtually every aspect of the way we've done business for a century.
And we're doing that for a new industry.
Based on new technology, new skills, and new promise for customer value.
And yet cost reduction will happen in our ice business because thats, primarily what is made up before today.
But we're modernizing to take out unnecessary costs redesigning work is strategically investing across all of our auto businesses ice and hybrid then Evs and then <unk> pro while at the same time transforming every function that supports them.
Sweeping strategic change generates interest and speculation in the media, which.
Which we understand however.
We're going to comment on Ford plus actions we're.
We're taking.
And how.
How theyre going to strengthen our company on our own schedule John .
Thanks, Jim.
So in the quarter on an adjusted basis, we delivered EBIT of $3 7 billion and EBIT margin of nine 3% and free cash flow of $3 6 billion.
Our cash conversion in the quarter was very strong and lifting our first half to 50%.
With the target range of 50% to 60% that we set out at capital markets day.
We ended the quarter with strong cash and liquidity of $29 billion and 45 billion respectively.
Now these numbers include our stake in <unk>, which was valued at $2 billion at the end of the quarter. In Q2. We also successfully renewed our $17 2 billion sustainability linked global credit facilities, which include a new 175 billion 364 day revolver, which provides.
For additional working capital flexibility, our strong balance sheet as a solid foundation for continuing to invest in our Ford plus priorities.
Our results this quarter reflect the improved earnings and cash flow potential of our business along with leverage created from disciplined capital allocation and are much more focused business model.
Including our industrial footprint.
The tough choices, we made during the global redesign to Derisk, our business and exit unprofitable markets and products is paying off.
From 2018 to 2021, our markets outside North America consume nearly $9 billion of free cash flow.
This year. These markets are collectively expected to be free cash flow positive.
We are confident in the underlying strength of our business and our ability to fund all of the calls of capital all the calls that we have on capital, especially those fundamental to growth and value creation.
Can achieve this while maintaining the financial flexibility to navigate external uncertainties and as a result, we're increasing our regular quarterly dividend to <unk> 15, a share beginning this quarter. This returns us to the pre pandemic dividend levels.
Now, let me touch on the performance of our business units.
North America delivered $3 3 billion of EBIT and a margin of 11, 3%.
Both of those measures were up year over year, as an 89% increase in wholesales and strong net pricing and mix more than offset higher commodity cost and inflationary pressures.
South America continues to benefit from our global redesign efforts delivering its fourth consecutive profitable quarter in Europe , we posted a modest profit as a large increase in wholesales helped us reached just above breakeven EBIT the.
The underlying trajectory.
Of the region.
<unk> continues to improve however, the adverse effects of the near term supply chain disruption or dampening its overall results in.
In China, we posted a loss as the local economy and auto industry were significantly disrupted by pandemic related restrictions and Lockdown now Lincoln continues to be a profit pillar for the region gaining share in the quarter along with commercial vehicles.
Our international markets group continues to be sustainably profitable as a result of its restructuring efforts in mobility. We are progressing our end market pilots for moving goods and moving people and remain committed to autonomous driving.
And finally Ford credit delivered another strong quarter with EBIT of $900 million, reflecting strong lease residuals and credit loss performance.
Now, let me share with you our current thinking for the remainder of 2022.
For the full year, our guidance is unchanged, we expect to earn between 11, five and $12 5 billion in adjusted EBIT, which is up 15% to 25% from 2021. This reflects 10% to 15% year over year growth in wholesales and assumes that semiconductor availability continues to.
True.
In addition, we're.
We're projecting to generate adjusted free cash flow of $5 5 billion to $6 5 billion with a significant portion of that coming from automotive operations.
Relative to adjusted EBIT on a year over year basis, our range assumes significantly higher profits in North America.
Collective profitability in the rest of the world strong, but lower Ford Credit's EBT there'll be in the $3 billion range and modest improvements in mobility and corporate other.
Other key assumptions include strong order wings, and pent up demand for our new and iconic products continued strength in pricing, which includes the benefits of pricing actions taken during the year.
Commodity headwinds of about $4 billion, which we expect to offset with improvements in net pricing and mix.
A continuation of other broad based inflationary pressures and we now expect the full effect to be about $3 billion, which is up 1 billion from our estimate last quarter and of course, we're aggressively working on offsets to these increases.
And finally at Ford credit auction values will remain strong but decline in the second half as the supply of new vehicles improves.
DVT will be strong, but lower reflecting primarily lower credit loss reserve release fewer return of off lease vehicles and more normalized credit losses.
Our results in the quarter full year outlook and commitment to medium term targets together demonstrate the power of Ford plus as we invest aggressively to drive growth and value creation.
But before we turn it to Q&A, let me provide a quick update on our new financial reporting.
As we shared in March starting in the first quarter of 2023, we will have three new business segments for the model Lee Board Blue and Ford CRO and will no longer report combined automotive segment with Ford next which was formerly mobility and Ford credit. This will bring our total reportable operating segments to.
Five.
Now this change will not be a simple pro forma exercise it's much more fundamental these are true segments with both operating and financial accountability, giving you added transparency on our business.
So to help you prepare for this change we plan to hold a teach in early next year prior to releasing our 2022 results.
We'll use our revised 2021 results as a template.
To reflect the new segments as part of the <unk>. We also plan to cover business rationale mechanics of the new reporting structure and how our earnings disclosure in our SEC filings will change.
When we report our fourth quarter and our full year results for 2022, they will be based on our existing reportable segments and we are targeting to also share at the same time 2022 results that our revised to reflect the new segments.
And so if you have any questions about this please don't hesitate to reach out to land in the rest of the IR team.
So that wraps up our prepared remarks, we'll use the balance of the time to address what's on your minds. Thank you operator, please open it up.
For questions. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre 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 the first question will come from John Murphy from Bank of America. Please go ahead.
Good evening guys.
I wanted to ask somewhat mundane question first on on.
On the outlook and then get into some pricing secondarily.
But first John when you look at the seasonality of Ford's earnings traditionally has a higher in the first half lower in the second half.
There's timing of cost and volume that usually drive that what do you think it's going to be different this year.
Maybe one of the big things that might be developing as we get later in this year into early next year is it raw mats and seem like they may be easing fading, but the price mix opportunity. It seems like it'll be pretty strong so that might help late this year and early next year, but just curious if you can comment based on that change in seasonal pattern. So we can be comfortable with our estimates in the second half.
Or your outlook in the second half.
Yeah, So Jonathan.
It is it is different right ever since we've had COVID-19 and coming out of Covid.
The patterns just haven't held when you look at the second half versus the first half I think that would be the best way to help kind of frame. This up yes, we do see continued volume mix and pricing being strong on a half over half basis.
And of course, we do expect to see commodities improve a bit as well in the second half on a half over half basis.
And so.
Volume pricing and mix, let's say in the $3 billion range.
<unk> could be as much as half a billion, but the.
The inflation that we're seeing that's going to continue to run through and we're seeing that across the board from material cost up rate fuel costs et cetera. So we see that continuing and that's up as I said in my remarks versus what we had talked about at the end of the last quarter and then of course.
<unk> is going to be down slightly half over half, let's say.
<unk> two 1 billion as they approach 3 billion for the year. We're also seeing headwinds in the second half John from.
Currency and dollar strengthening and we have more revenue exposure overseas than we do costs. So we're going to see some of that happen as well.
And then we're going to continue to invest in our growth and that'll be in areas.
Engineering, we will also see increasing investments in connectivity and spending.
And then I guess the last thing I would talk about just to make the half over half complete we did have some one time.
Items come to us in the second quarter.
Roughly an insurance claim.
Contract, we renegotiated, which roughly would be maybe three tenths four tenths of.
Our headwinds so that's basically how we frame up the half over half and basically what we're saying is that.
There'll be some headwinds and some tailwind, but we're confident in our guidance of 11 five to 12 five.
That's very helpful and then Jim just on these.
Higher trim levels are pseudo special editions I mean, it's Ford Raptor F. One F 150, Raptor are pretty great look in trucks get put in the slide deck here looking forward to driving that hopefully sometime soon but it seems like there's a real opportunity for blue, but there might be an model Li for these high trim level special <unk>.
<unk> additions.
What opportunity is there on mix go forward, maybe in both divisions and how do you think about.
And after that because that seems like that's something you can do a lot more sustainable than it may be just the supply demand imbalance. We have right now that is helping price.
Thank you John we've always been really good on the truck side for those derivatives.
But now our chances to expand that.
Capability across all of our lineup.
Range is a good example of launching in Thailand, We just launched a raptor tremor, there's a lot we can do.
Of course.
Thanks coming out Maverick is our most affordable vehicle you can only imagine the kind of things that we're cooking up in our design studio with Maverick.
And then of course.
On what we really do well Broncos you can imagine high end versions all sorts of things Everglade came out it's very popular.
And we do agree our east side, you know, we don't have to change the body to refresh.
Marquee for example, we are actually completely redoing in a good way our H M. I in OTT that to all of our Evs, but you can imagine with Mustang Mach E. All the cool things we can do so.
And it is a sustainable advantage and we're good at it.
The tension point for us though is complexity.
Ford is way too complex. So as we do this we have to bring our complexity down to get our bill of materials kind of in line with competition. It's great that we have all this pricing powered Ford we do have a fresh lineup, we have lots of cool ideas.
But we're not satisfied with with that because we cannot just continue to build this complexity in our business. So as we add those derivatives, we're going to have to we are planning much less complexity in our blue business and that is a theme that will run through blue for years to come.
And Jim maybe if I could just follow up real quick on the model E side to create a performance version of like the Mustang Mach E might theoretically cost a lot less but you might still be able to charge as much as you might on the delta on a on a blue vehicle.
Is that correct and could we see sort of these dis specials or trim levels potentially garner even higher variable margin as we move into the modeling world.
Is that a fair statement, we look at yes. Good question the way we look at this John .
Is the days are kind of over where you have to change the upper body to build a super car or to build an off road car like.
Either over like we don't have to do that anymore with these digital products with with EV propulsion with the motors the software.
We can.
We can really take our vehicles in and make very different kind of vehicles offer the same body engineering and that that is a complete game changer for us in terms of capital intensity I E lower.
Okay. Thank you very much.
And I'm really glad you brought that up because.
I tried to emphasize this like we have to be really careful in our industry and I'm constantly we're constantly talking about this as a leadership team we cannot have the complexity of top hats that we do on our ice business.
We have an opportunity as we go digital with these evs to simplify our body engineering and put the engineer with customers really care.
And it's not a different vendor.
It's software.
Digital display technology, it's a self driving system and the <unk> Tec and of course, it's going to be some cases more powerful motors.
That's very helpful. Thank you Jeff.
Thank you and the next question is from Adam Jonas from Morgan Stanley . Please go ahead.
Jim Bronco Raptor co badass.
If I put in an order and now I will get it by the end of the decade, but maybe I'll try.
Jim This is one of the most positive Ford calls I can remember in a long long time.
As Ford have too many people.
You know.
As I said in my in my comments, Adam we absolutely have too many people in certain places no doubt about it and we have skills that don't work anymore, and we have jobs that need to change and we have lots of new work statements that we've never had before.
We are literally virtually.
We are reshaping our company like every part of our company and you know in the ice business, we want to simplify it we want to make sure. The skills. We have in the work statements. We have you know.
At are as lean as possible, we know our costs are not competitive with Ford.
That's what I mean by we are not satisfied.
But I I just want to emphasize that in the past at least in my career for 40 years, we've kind of often indiscriminately.
Just taking the cost out that's not what's happening afford now this is a different kind of change we are reshaping the company.
Reshaping skills investing in new technologies, and simplifying investments and others I E spending less.
Do we have to me is kind of the old adage.
Yes, I think every company probably has too many.
People are just we have to go do the workflows and decide how this works now from going going forward appreciate that Jim just one follow up on the dealers Theyre, having an amazing time their new gross margins have more than tripled.
And theyre, making dealer grocers that are many.
Many cases higher than what you're making on selling the product, they're making more money selling.
The year.
And then margin youre, making on actually making the product and all they're doing is just Washington things come off a truck and they are pre sold.
I know you guys spent a huge amount of time on pricing. It forward is there anything you can do to help even the score a bit on price because I ask the dealers why aren't why isn't forward raising or your peers raising some of the invoice more even they don't have a reason why we don't know why they're not doing it and then they often say things that I don't believe which is that you.
You can't or you're not moving fast enough or the systems aren't there. So what are we missing.
Sure.
So bottom line is we've taken a lot of pricing you could see that in our numbers.
And and actually we all watch it very carefully afford what is the dealers retain margin versus MSRP and I have to tell you that ours ours is one of the best in the industry I E. Our pricing and retain margin the MSRP or are as close at Ford versus any other brand.
There are others that are are in different places.
I think your question is actually bigger than that which is we have ups and downs in our industry and how is this going to how is our retailers going to shaped as we change this company.
And.
So and again on the electric vehicles.
Dynamic pricing.
You know is very important for us because we went to an ordering system.
And with an ordering system the certainty of orders, but you have to also be responsive on price I'm not going to get into the details, but we think we have a way out of that tension point or conundrum.
On an overall, how I see dealer margins as we talk to our dealers and roll up our sleeves is we need because I said are our competitors or peer play evs and the Chinese that are absolutely coming and that means we have to get this $2000 out of our distribution costs to be competitive.
Live with them.
And we think a third of it is going to a low inventory model not not I'm, not saying like 30 day supply or 50, I don't mean that kind of like the customer orders. The vehicle and then we shipped the vehicle to the customer that's what I mean by low inventory model.
We have to go to that we think that's about worth maybe six $700 in our system. Another one is all the selling SG&A and advertising costs were three tiers of marketing, we think thats another $600 a vehicle.
Going to simplify that and we're going to just shift where.
Where the e-commerce platform that we don't have today.
All of our customers have a very predictable experience, whether they are in the dealership or or in their bunny slippers.
And they'll have a very simple transparent very easy purchase process and we're going to invest our marketing model is going to be post purchase that will be our differentiator and that's where we will invest.
And I think that's a different play than the pure EV companies. So IC dealer margins still being very competitive but they are going to shift. The makeup of those margins going to change.
That makes sense, Adam makes a lot of sense.
Thanks, Jim.
The next question will come from Rod Lache with Wolfe Research. Please go ahead.
Hi, Jim and John .
So pricing has been a massive tailwind and it looks like mix is becoming pretty powerful now too can.
Can you just talk to us a little bit about the interplay between them.
<unk> ability.
And volume.
Especially in the environment that we're in right now and we still have a lot of inflation on the horizon do you think demand can return that this level of price and are you willing to forego volume.
Due to sustained contribution margins.
Yes, thanks, Rob.
So we have seen strength in volume pricing.
Due to the.
The volume that we can produce as an industry at.
At forward relative to the demand that we're seeing out there. So that has been a tailwind in the quarter, we did see quite a bit of a tailwind from mix as well.
Affordability is something that we keep in front of us all the time where with.
With the credit company.
We're very thoughtful about where it's headed from the standpoint of the consumer what's affordable et cetera, but we have not seen demand come off at this point.
But we have as we increased volumes through the second half of the year.
As some of the chip constraints ease and we see a better rate and flow.
We do have provisions in our second half.
<unk>.
Incentives, increasing as volumes come back and we've always said that the relationship between volume and pricing is going to remain dynamic.
And so I think what Youll see is as volume comes back you will see some pricing give back and we will see prices coming down. Some question for all of US is how are we going to manage stocks. How are we going to move to the build to order process.
Or are we going to change the dynamics and not have as much of a push.
System and have more of a natural demand system.
And fulfilling that demand on a timely basis. So I think that's the question for all of us and we need to maintain discipline as we had into.
An environment, where we could potentially see demand come off and or we start to have higher.
Start to have higher supply and therefore prices will come off we remember.
Following up on what Adam just said in the dealer margins, we still have.
Across the industry dealer margins that need to come down first from a pricing standpoint.
We did as we've talked about in the past, we took an action which reduced floor plan.
For the dealers, which was a form of pricing for us.
But overall, it's still inflated and I would estimate somewhere between 13% to 17 $100 of dealer margin compression needs to come off first from a pricing standpoint.
Yes that makes sense.
And then just secondly can you just provide any color you can on whats happening from a supply chain perspective.
Any thoughts on.
Whether this Europe natural gas situation is something that.
That is a major concern for you and then lastly, any detail on the $3 billion of cost inflation in North America. It looked like a large number.
Was there anything unusual in that number.
No there wasn't anything unusual rod I'll start with that.
It's across the board it's in the areas, we would expect material cost going up were seeing increases in freight.
It's just across the board and it's driven by by the inflationary pressures, we're seeing across the board in the economy, but nothing unusual.
And on the supply chain out to characterize it I mean chips.
Chips are still an issue transparency is still an issue.
In the second quarter, specifically, you know we had quite an issue in China with the Shanghai shut down and that affects that could have affected on North America manufacturing system.
The team did a great job, we had a daily call. We worked every issue we built a digital model of all the supply chain down the supply chain in.
And it was really helpful and we got through it.
Like like.
Rosanna Rosanna Dan is that if it's not one thing it's another.
It feels like.
What's next as far as we're planning everything we know could happen. The next possibility as the energy crisis in Europe . We played this out already we've done our homework. We have about 550 active suppliers in what I would call the high risk countries like Czech Germany Hungary.
Austria and Slovakia.
We think that the risk is between now and mid 'twenty three when they can manage through the energy issues, we have about 130.
Hi.
Suppliers for our North America vehicle production.
In that 550 list and we now have a 30 day buffer stock. So we are doing everything we can with the things we know.
On the supply chain outside as you know we have labor shortages in.
All sorts of things.
The suppliers <unk> been working nonstop during Covid, so machine maintenance and lot of other things, we see the output of distress in the supply chain and obviously their costs have gone up too.
And we're working through all that with our suppliers. So I think we're well prepared for the things we can predict but it's always a new day.
Alright, thanks, guys.
The next question will be from Emmanuel Rosner from Deutsche Bank. Please go ahead.
Thank you so much.
My first question I was hoping to ask you about.
The topic of EV profitability, so Jim during the quarter at an Investor conference. Thank you essentially give some pretty good color on where Ford is standing right now and I think you spoke about.
The cost of the Mack <unk> being a disadvantage of 25 to $27000 versus.
Similarly content edge.
So I guess my question would be.
How do you plan on offsetting this over time I guess, what is the strategy going forward and should we worry about large losses from evs in the near term over the next few years.
The EP volumes increase materially over the next few years.
Well, thank you Emmanuel I will say.
There is not going to be a lot of guesswork at forward, because we will financially report.
Our businesses independently of each other so it will be all out there for everyone to see I don't know about others, but afford it will be extremely transparent.
I'm not going to get into specifics because I think this is such a material topic, we need to spend time on it we can't rush to this.
I will tell you that in the quarter.
Our announcement for LLP, bringing that to North America is a big deal from a profit standpoint that is very important chemistry on our roadmap for profitability.
We're going to be installing 60.
40 gigawatt hours in North America, that's a lot and we are not going to wait until that installed capacities here, we're going to be bringing those batteries to our highest volume vehicles like next year. So that's one but there's distribution. There is the size of your battery your your engineering for lower low <unk>.
<unk> content and I, just don't think we're going to do justice such as serious and important topic in the earnings call, but you can expect a lot of engagement with forward on this and this is an incredibly important focus. This is why one of the reasons why we created motto Lee.
To be laser focused unprofitable electric vehicles and again Youll see at all John you want to make comments on the smelting mutation reporting.
Segmentation reporting you'll see exactly where we're at between the five.
Businesses and Emmanuel we know how important that is so when we have our capital markets day early next year, we'll unpack that in more detail.
As Jim said, where we can spend some time on it and go through it.
And give it the justice.
Okay, that's fair.
We ask you.
Separate topics then so.
I think one of the hardest things for investors here.
Try to.
No formal sensitivity for a downturn scenario as consumer.
It comes under more pressure than the risk of recession increased what could that do for not so much volume because obviously, we've been auto system operating at low volume, so while supply driven but pricing.
Any thoughts you can share with us either based on history or indifferent in the current context, how would you go about flexing down new vehicle pricing in a downturn scenario.
The ASO Emmanuel we've we spent a lot of time on this as you would expect us to be doing.
Modeling.
Scenarios.
Looking at what that means for the business looking at what we should be doing today to get out in front of any these types of issues if the recession were to come.
But the way we're thinking about it is if you step back and look at where we're at today.
Relative to where we've been as a company.
Heading into any what could be a potential downturn right.
We're in much better shape, you mentioned that from a demand standpoint, we have three years of pent up demand and we have a very strong product lineup.
And so that's a positive we're also at a point right now where incentives are low right. There in the single digits versus what normally at this point in the cycle, we probably be in high teens.
And so of course is volume or demand comes off there will be some pricing that will need to be given back.
And that's a bit of a release valve if you will but it's really important for us to be thoughtful about that not only forward, but as an industry.
And then the only thing I would say and I mentioned in my remarks, our business is very different than what it was in the past our ice product clearly, it's more our lineups more profitable as we've exited unprofitable vehicles, but we derisk. The overall business, we've restructured our markets overseas.
And I think a great proof point for that is the fact that between 18 and 21, we burn through $9 billion of free cash flow overseas, we're not in that position now.
And we do expect this year, we're projecting that our overseas markets will be free cash flow positive. So we're just in a completely different position we're modeling it we're looking at it.
We're getting out in front of things as Jim said that we can today, but it's a new day everyday but that's how we're thinking about it we're clear eyed we understand what were facing one understand what could potentially be in front of us and now we need to work it.
Great I appreciate the input.
Thank you and the next question will be from Colin Langan from Wells Fargo. Please go ahead.
Oh, great. Thanks for taking my question.
I just wanted to circle back.
Question.
First half second half.
The outlook for that plant is about flat and highlighted enjoyment.
And volume thanks.
Commodities is one of our plants.
I wanted to highlight in about a $1 billion.
Or credit.
So that's about 3 billion good man.
You didn't really quantify the Batman.
At current say it doesn't seem like something that would be that material.
Any sort of planning at this stage in fact, fulfilling an inflationary costs predominantly in the second half effectiveness.
So kind of let me, let me clarify it's really hard to hear you quite staticky, but.
Yes.
Ford credit will be about $3 billion in total profits for the year, so that'll be down half over half so.
So that's a headwind and the inflationary costs on a half over half are a headwind.
So when you walk through it yes, there will be some volume we've said that.
Volumes in the second half will be up roughly in the low 20 percentage range versus the first half and so you've got some mix improvement as well so.
Volume and pricing and mix are the tailwind little bit of a tailwind on commodities, but the headwinds are.
<unk> profits.
They'll be down we've got the inflationary pressures, we talked about will be in it.
The increase in the second half we also have.
Exchange, that's hitting us in the second half relative to the first half so that's a headwind as well.
And then we had some one timers in the second quarter that arent going to repeat and of course, we're going to continue to invest in the business. So theres going to be spending related cost is going to be connectivity costs.
That will be increasing as well as we invest so.
Those are the puts and takes those are the tailwind from the headwinds as you look at it from a half over half basis, I hope that helps clarify things.
Okay.
And as a follow up I know you.
Clearly are going to give more detail on the EBITDA perspective, and how you're going to test things, but.
We're talking a pretty dramatic increase.
Raw material costs I think even in your comments you indicated that only about 50% of the materials are going to be available to produce profit targets.
Which kind of imply that prices up in product sales to remain high.
Should you be thinking about pulling back on some of the EDM.
If the economics.
Clear.
No.
No we don't plan on pulling back.
If anything the first generation of products has inspired us to go faster I.
I would just emphasize that how we look at.
This change in our industry.
It's not a change of propulsion.
It's much bigger than that it's a change too.
Our vehicle, whose differentiation will increasingly be software the ship to the vehicle we now have.
Real experience on the first ship will software to these cars. The first is a das for sure and the second one for us as Ford CRO, we're shipping telematics to the customer.
<unk> coaching.
Energy management, our attach rate for charging now on R. R E transits, where we're 95% share is like 30 plus percent. So there are a lot of services connected these vehicles because of the software and that's a that's a really big revenue opportunity for us.
When you talk about the base.
Walk to 8%, we're not going to as John said, we're not going to go through that here, but I will tell you that <unk> has a dramatically different exposure to raw materials and CMS.
Cell like Theres no nickel in it.
So.
The chemistry strategy for the company and diversifying that is very key part of our <unk>.
Profitability work, but I think the most important thing to think about is not that we're investing or not in electric cars, we're investing in digital products.
And we.
We can keep them longer because we don't have to upgrade the upper bodies because they are software enabled vehicles. There is so much we can do to change the profit profile of these vehicles. The biggest thing we have to solve for and all of that is the battery cost and we can't wait to take you through all of that.
Okay, all right. Thanks for taking my question.
And the next question will come from Joseph Spak from RBC capital markets. Please go ahead.
Hi, Thank you Hi, Jim and I appreciate the old school lesson I'll reference to then get can get by May.
Hey.
I just wanted to Jonathan can we just go over so 3 billion of other inflationary cost that's 2 billion higher than before.
Are you I know you said, you're working to offset it are you assuming you offset that delta and the guide and and maybe you can just let us know how much of that was already incurred in the first half.
So we have it's $1 billion higher than what we had talked about previously Joe.
So we're looking at about $3 billion for the year.
And.
That's part of what we're doing we're working to offset those inflationary costs.
And.
That's something that we need to continue to work through we're not all the way there of course, but we're.
We're working on it and we do have.
The rest of the year ago and it is a significant focus of our team as we've talked about but the cost efforts are a significant focus of the team as we remake.
The company and Ford plus so that's a really important part of what we're doing.
So it's $3 billion for the year we.
We had said $2 billion, we've seen about another $1 billion come through and it's across the board.
Okay.
The second question is just on Ford credit.
And so youre pointing to lower second half, which if you annualize that would get you to.
Something in the low twos is that is that a good base to think about.
Next year and go forward because if we look at the pre tax ROE in this business, it's been well above average.
I think we understand why there has been some unusual circumstances, but is.
Is that the right way to Youre thinking about it that the return to start with sort of more normal or historical returns or is there anything structural underneath at Ford credit that's changed the profitability profile.
Hey, Joe This is Marion Harris. Thanks for the question you were thinking about it correctly. So if you go back to pre Covid and balance sheet was quite a quite a bit larger.
We were at about $145 billion at that time.
We were at a run rate of about $2 five $2 6 billion of the EBT and so that was that was normal level, our balance sheet somewhat smaller now and so I think what youre seeing is.
More normalized level of profits.
We're back at our pre Covid reserve level, we're not leasing reserves and as it relates to lease residuals and that's pretty much worked its way through his books, so youre seeing that more normal performance.
Okay. Thanks very much.
And our final question today.
<unk> will come from James Picariello from Exane Pnp per Bob. Please go ahead.
Hey, guys.
Just for commodities.
At current spot rates, just as a theoretical exercise right. If we take into account the lagging effect to your P&L.
Just think about maybe directionally, what commodities with the commodities impact will look like for next year.
Current spot rates.
Yes, I think we do see it coming off some part of what complicates the commodity situation is.
As we go through in a year, we locked into contracts and they roll that protects us on the upfront when prices are increasing some but it also has a lag effect when prices are coming down some.
And so we'll have to deal with that as we run through the year as well.
So.
I think really it's going to depend on what happens with the overall macroeconomic environment. If we do see us tripping into more of a recessionary period, we should see those fall quicker like we have in the past.
If not I think that they.
They'll come down more moderately so we're planning and looking at both of those scenarios from a spot standpoint.
It is good news as we roll through next year, but you can't just take that spot good news and roll it through everything because we do have contracts that were locked into on a rolling basis through the year.
Okay understood and then just.
With respect to the cadence for the second half I mean, how should we be thinking about the quarterly volume the volume ramp in the back half and can you provide color on <unk> progress and shipping yarn mills inventory I think totaled 53000.
During the quarter.
Yes, so 53000 entering the quarter the team did a good job on the drawdown.
We're down to 18000 at the end of the quarter.
<unk> work to get those out over the second half of the year.
As we can free up the chipset.
That impacted us.
When you look at the volumes.
In the second quarter, we saw an.
An increase in volumes in North America, which helped drive.
The strong performance for North America, when you look at the second half.
As we said volumes would be up in the low 20% range compared with the first half.
But.
That volume growth Theres greater volume growth in the overseas markets in the second half than in North America.
We have the Ranger launching an IMG, we have volume in the second half growing at a quicker rate in Europe , and then of course, China was significantly depressed from a volume standpoint in the second quarter due to the shutdown.
So.
That's what will be happening from a standpoint, but when you look at the volumes for.
For Q3, there'll be lower than they will be in Q4, because in Q4, we should see the rate and follow the chips improve as we go through the.
Third quarter into the fourth quarter. So that's how the volume is framing up in the second half relative to the first half and then the walk from Q2 into Q3, so volume and mix in Q3 Q3 is going to be less in Q2, right. It's not going to be as strong as Q2, we have a couple of things hitting us.
In Q3.
Volume and mix most of the volume growth in Q3 relative to Q2 is going to be in Europe and China.
And then.
We still have commodity costs hitting us we're investing in connectivity in our spending.
In the third quarter.
Ford credit of course is the second half is lower than the first half you see that come through in third quarter and then we have the non repeat of the one timers I talked about in the second quarter, So third quarter will be down compared to the second quarter.
Volume increases will be overseas and then as we get to the fourth quarter volume in the fourth quarter on a sequential basis will be better than the third quarter.
Very helpful. Thank you.
Ladies and gentlemen, this concludes the Ford Motor Company's second quarter 2022 earnings Conference call. We thank you for your participation you may now disconnect take care.