Ford Motor Company

Good day, ladies and gentlemen. My name is Holly, and I'll be your conference operator today. At this time, I'd like to welcome you to today's Ford Motor Company first quarter 2021 earnings conference call. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question, please press star, then one on your telephone. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Director of Investor Relations, Lynn Antipas Tyson.

Lynn? Thank you, Holly. Welcome, everyone, to Ford Motor Company's first quarter 2021 earnings call. Presenting 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. Jim will make some opening comments. John will talk about our first quarter results and guidance, and then we'll turn to Q&A. Today's discussion will include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck, which can be found, along with the rest of our earnings materials, at shareholder.ford.com. Today's discussion includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on slide 24. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis, and product mix is volume-weighted. A quick update on our upcoming IR events. I am very pleased to announce that we will hold our Capital Markets Day on Wednesday, May 26. The webcast will open at 9.15 a.m., and we will start promptly at 9.30 Eastern and end roughly at noon. We will share more information about the meeting Later on this call, an invitation will be sent out shortly. On Monday, May 3rd, Wells Fargo will host a fireside chat with John Lawler and Kumar Gauhotra, President of America's International Market Group. And on June 17th, Deutsche Bank will host a virtual fireside chat with Jim Farley. Now I'll turn the call over to Jim. Thanks, Lynn.

Hello, everyone. Thanks so much for joining us today. You know, our first quarter of the year really defies an easy explanation or a pithy soundbite. But if I had to sum it up one way, it would be this. We're executing on our plan, and I'm excited to say Ford is becoming a stronger, more resilient company that can deliver under pressure, manage risks, and seize opportunities all while generating consistent returns for our stakeholders. In the quarter, we earned $4.8 billion in adjusted EBIT. It's our best quarterly adjusted EBIT ever. And we achieved these results in the midst of a persistent global pandemic and an unprecedented supply shock tied to the global semiconductor shortage. We mobilized a global team, as we always do in these times of crisis, and we rapidly adjusted to the realities that we were seeing. Our team very skillfully navigated the supply constraints through sharp yield management and a relentless focus on turning around our automotive operations. That means improving our launching performance, improving our quality, enhancing our brand, strengthening our customer relationships, and improving our go-to-market execution. And Ford Credit, which in our view is the best automotive finance captive in the industry, also delivered an outstanding quarter. Aided by higher prices, Our results benefited from the industry-wide imbalance of supply and demand given the semiconductor shortage. However, we also delivered improvements that will persist over time, including our global redesign in our overseas operations, which contribute to the largest swing in year-over-year profitability for those operations that we've seen. The benefit of our incredibly fresh portfolio refresh which lowers the average showroom age now in the U.S. to just three years. And, of course, we made progress on cost across the business. As we shared with you today, there are more whitewater moments ahead for us that we have to navigate. The semiconductor shortage and the impact to production will get worse before it gets better. In fact, we believe our second quarter will be the trough for this year. We have work to do to get our industry footprint back to firing on all cylinders, or maybe should I say fully charged. Overall, though, I'm proud of the progress we made as a team. As our underlying strength of Ford improves, enhances our cash flow, access to capital, gives us financial flexibility to modernize and disrupt our business while investing in growth. We are very intentional about this because these are the catalyst factors that will transform Ford into a far more vibrant company that will deliver not only our iconic must-have products, but also, and I would argue more importantly, an always-on, ever-improving customer experience for both our retail and commercial customers. So let me share a few milestones from the quarter. Turning around auto. Over the past four years, our overseas markets lost a total of $5.8 billion in EBIT. This quarter, the regions delivered roughly $500 million of EBIT. That's a $1 billion improvement year-over-year. Let's look at those must-have services and products. Well, it starts with the new F-150, which gained share and also gained share of revenue. And it had new innovations like Pro Power Onboard, which showed again that we understand Ford customers at Ford, these truck customers, better than anyone. And the Bronco Sport is off to a fast start, bringing 60% new customers to our brand. The new Mustang Mach-E is proving to be a hit with customers just a few days on lot with very strong demand in North America, now in Europe, and coming to China. And it's also bringing in new customers to the brand, almost 70%. And we still have the big Bronco, the two in the four-door, with an incredible order bank, the F-150 Electric, and the E-Transit. And we have some surprises for you as well. Stay tuned. Just as we are in the early stages of our electric vehicle plans, we are only scratching the surface of our customers benefiting from our fully connected vehicles. We have successfully deployed our first major over there software updates to hundreds of thousands of customers for Mach-E and F-150. And this pace will only accelerate in the next several years, making our vehicles better over time. Later this year, for example, we will offer our very first tested, fully tested, Ford Blue Cruise hands-free driving technology, which will be delivered over the air to Mustang E and F-150 customers. And by 2028, we expect to have more than 33 million over-the-air updated capable vehicles on the road. Now, this install base gives Ford a significant opportunity to develop products, And for us, very exciting new services that will transform the way we deliver products to our customers. They'll make significant improvements to our customers' experience and drive quality of our vehicles. And we're on track to lead the electric revolution in areas of Ford's strength. For example, we announced we're investing $1 billion in the new electric vehicle manufacturing center in Germany, where by 2023, just a few years from now, we'll be assembling our very first high volume, all electric passenger car for Europe. A year later in 2024, all Ford Europe commercial vehicles will be zero emissions capable. And by 2030, all Ford European passenger cars will be all electric. Now these investments are part, just part of our $22 billion commitment to lead the electric revolution in areas that were strong, And yesterday, we announced a very important new development. We have formed a new global battery center of excellence called Ford Ion Park, which will accelerate our research and development of battery as well as battery cell technology, including future battery manufacturing. This only starts to hint at our electric vehicle ambitions. There is so much more to come. Now, before I turn it over to John, let me share a bit more about where we in the industry are in semiconductors. When we initially gave guidance in February, we expected that the semiconductor supply chains would remain constrained through the second quarter. And we have an opportunity to begin recovering lost volumes in the second half. It's kind of played out similar to that with one big exception. The industry faced another setback on March 19th. when Renesas, a leading semiconductor supplier who manufactures about two-thirds of all chips in the auto industry, experienced a significant fire at their NACA 3 facility. Multiple Tier 1s who supply global OEMs sourced their chips from this facility, including nine Tier 1s that supply us at Ford. Now, Renesas expects it will return to full capacity in July, and they're making great progress. While most of the chips for our modules for this facility are definitely dual-sourced, Ford and others are facing additional constraints, and we've yet to see significant new chip capacity come online for our industry. Estimates project the full recovery of the auto chip supply will stretch into July. fourth quarter of this year and possibly even into 2022, making industry volume recovery in the second half of this year even more challenging. As you can imagine, we are working this issue 24-7 and engaging with key political leaders and decision makers globally, as well as, of course, our supply chain. Our relationship with the new Biden administration rests on our distinctive profile, that we assemble more vehicles and have more U.S. auto jobs than than any other competitor. It's also well recognized that Ford sided with California on greenhouse gas regulations when that wasn't the easy choice to make. So from COVID PPE to the current semiconductor crisis to batteries for EVs, this past year has vividly spotlighted the importance of improving domestic supply chain for both our industry and our country. Now we found the White House and the new cabinet engaging, accessible, and responsive. We look forward to continued close working relationship as the country formulates policies to facilitate the transformation from ICE to BEV and finally address infrastructure deficits. As you would expect, we're committed to learn from this crisis to be a much stronger company. We're taking this opportunity to revamp our supply chain to eliminate vulnerabilities down the road. This is especially relevant as we consider not only semiconductors, but also battery cells and other commodities critical to our modernization and transformation. We're also learning, as we operate in this extraordinary low stock, high demand environment in the U.S. and around the world, that we will see a leaner, more efficient company in the future. We're getting more fit. And with that, I'd like to turn it over to John.

Thank you, Jim. So heading into 2021, the run rate of our business was on track to deliver $8 to $9 billion in adjusted EBIT. And that's up about 33% versus 2019. And that, of course, is all before the impact of the global semiconductor shortage. So our confidence in the stronger run rate, it's built on the durable changes that we've made to improve our returns, improve our cash flow, and of course, provide us the financial flexibility to invest in growth. And these improvements were embedded in our original 2021 outlook. So, for example, after shifting an overwhelming majority of our capital to our franchise strengths like trucks and utilities, we refreshed our product portfolio, we lowered our average showroom age, and shifted our mix to our higher margin vehicles. And as a result, Relative to 2019, the increase in our average transaction prices in the U.S. was $1,900 more per unit than the industry average. Now, also, the tough choices we made to redesign our overseas businesses started to turn the tide. Rationalizing manufacturing footprints, strengthening the product portfolios, focusing relentlessly on cost, and investing in areas of growth and strength are now producing results. Another item we've also talked to you about is warranty. Over the last three years, our warranty expense has increased by more than $2 billion. Now, we've addressed this issue through changes in design, how we inspect vehicles, how we work with suppliers on quality, and now how we're using connected data to identify issues early in the process and drive quality improvements. Now this quarter, we delivered a $400 million improvement in warranty expense year over year, and we're intent on accelerating this positive progress. So these are just a few, three of the many examples of how the trajectory of our business is changing and what gave us the confidence when we set our original targets for 2021. So now let me turn to this quarter. Wholesale declined 6 percent and in most cases that's due to the chip constraints. Now despite the declines in wholesales revenue grew 6 percent aided by higher net pricing and favorable mix. We delivered 4.8 billion in adjusted EBIT and an adjusted EBIT margin of 13.3 percent. And as expected adjusted EBIT including an investment gain of 900 million from a Rivian funding round that they had in January So that was included as well. And then adjusted free cash flow was negative 400 million. The global semiconductor shortage reduced our planned Q1 volume by about 17% or 200,000 units. And that's consistent with the 10 to 20% range of expected losses that we shared with you in February. In Q1, we fully offset the EBIT impact of the loss volume. So we reduced incentives as part of the industry-wide response to tight dealer inventories, and that's especially in North America. We optimized the mix of our production to build our higher margin, higher demand vehicles. We also reduced our structural costs in areas including manufacturing and advertising. We improved results in our FCSD parts business and in our joint ventures. And we benefited from strong used vehicle prices in Ford credits, as customers and dealers drove up demand for used vehicles as new vehicle supply fell. So some of these improvements, like the lower manufacturing costs and the robust pricing improvement, we do expect those to moderate as the industry returns to full production and dealer inventories rebound. Now, our adjusted free cash flow in the quarter of negative $400 million was significantly lower than our $4.8 billion of adjusted EBIT. Now there's three main factors that contributed to this gap. First, our gain on Rivian was non-cash. Second, in the quarter, we grew inventory by $2.2 billion. Now this includes parts for vehicles we could not build due to the lack of chips, but it also included approximately 22,000 vehicles, and those are primarily in North America, that are awaiting installation of chip-related components. And so some of this inventory impact, though, was offset by a growth in payables. And third is timing differences. Now, this primarily relates to the reserves for customer allowances for incentives and warranty. This reserve, that reserve fell by $1.6 billion in the quarter. The vehicle incentive portion is based on the number of vehicles awaiting sale in dealer inventory and the expected incentive per unit. And both of those fell in the quarter due to the supply disruption. Now, we do expect the working capital and the timing differences to normalize as the semiconductor supply is restored, as dealer stocks rebound, and incentives return to more normal levels. And we believe this process will take several quarters and will most likely extend into 2022. Our strong balance sheet provides considerable flexibility to navigate times of stress, such as this chip shortage, while also investing in growth. So we ended the quarter with over $31 billion of cash and $47 billion of liquidity, which includes our recent $2.3 billion convertible issuance. We will continue to be very proactive in managing our capital structure. Overall, our business units did a fantastic job prioritizing newly launched products, making sure that we processed customer orders and high margin vehicles quickly. and that was all in a supply-constrained environment. And the strong customer response to Mach-E affirms our choice to shift more capital to BEVs, including investments to insource key elements of the value chain necessary for competitive and sustainable profitability. So let me share a few of the highlights from the quarter. In North America, wholesales declined 14%, while revenue increased 5%. Now, revenue was aided by strong net pricing and favorable mix, robust customer demand for our new product portfolio, tight industry-wide inventories, and favorable cost performance on a year-over-year basis, and that included warranty. All of that helped us deliver $2.9 billion in EBIT and a margin of 12.8 percent, which was North America's highest margin in five years. In South America, wholesales and revenue declined 70 and 40 percent, respectively, and that reflects the exit of unprofitable products. The renewed focus on strengths like ranger, transit, and key imports drove our best quarterly EBIT since 2013 and our sixth consecutive quarter of year-over-year improvement. In Europe, wholesale declined 4% as revenue grew 13%, aided by improved product mix, led by our commercial vehicles, and net pricing. These actions, together with our continued focus on cost, delivered $341 million in EBIT with a margin of 4.8%. In China, China delivered strong growth in both wholesale and revenue. EBIT was about break even, which marked the fourth consecutive quarter of improvement supported by strength in Lincoln, Ford near premium utilities, and commercial vehicles. In fact, Lincoln now produces 90% of its products locally, was profitable, posting its best ever Q1 retail sales, nearly doubling its share on a year-over-year basis. And commercial vehicle sales were also strong and now comprise 48% of Ford's total China sales. And IMG grew both wholesales and revenue as they focused on their franchise strengths of Ranger and Everest. And IMG achieved its best quarterly EBIT reflecting strong cost performance, net pricing, and favorable exchange. All markets in IMG were profitable except for India. And IMG also committed to invest $1 billion to expand Ranger Capacity and our South Africa export hub to meet customer demand in more than 100 global markets. In mobility, our AV business continues to invest in refining its go-to-market strategy. It added a new 140,000-square-foot command center in Miami, and along with Argo AI, is simulating ride hail and delivery across six cities. And I'd be remiss not to highlight the continued strength of our Ford credit business, which delivered 1 billion in EBT in the quarter. Now turning to guidance. As we entered 2021, we were among the first to identify the potential for a 10 to 20% adverse impact in volume in the first half of the year due to the growing chip constraints. We said at that time that this risk had the potential to reduce our full year adjusted EBIT by $1 to $2.5 billion. That would take us off our original target of $8 to $9 billion in adjusted EBIT. So we've updated our outlook to include the expanded impact of the global chip shortage. And that's largely driven by the Renaissance Fire. While the situation is a significant headwind, we have definitive actions to address a full range of potential outcomes. So we now expect to lose about 50% of our planned Q2 production and increase from the 17% loss in Q1, making Q2 the trough for our performance this year. Now, while we expect the flow of chips from Lenasas to be restored in July, we and many in the industry now believe the global shortage may not be fully resolved until 2022. So our outlook now assumes we lose roughly 10% of planned second half production. In total, we believe the shortage for the year will drive a loss of about 1.1 million wholesale units, which translates to about 2.5 billion EBIT. And that headwind in EBIT is net of recovery actions for the year. Now, this EBIT impact was the high end of the range we gave in February, and brings our full year adjusted EBIT guidance range to between 5.5 billion and 6.5 billion. And it's very important to highlight that even though our expected volume loss for the year has more than doubled, we have worked to contain the EBIT impact to the high end of our original range. So we now also expect full year adjusted free cash flow of 500 million to 1.5 billion, and this includes a 3 billion adverse impact from semiconductors. The semiconductor impact on cash is $500 million worse than the impact on EBIT due to timing differences and working capital impacts that will recover once our run rate of production is fully restored, dealer stocks return to more normal levels, and incentives rebound. Our Q2 free cash flow will be significantly negative, and that's despite additional forward credit distributions driven by our adoption of the updated tax accounting standard, which reduces our tax allocation of forward credit and supports additional forward credit distributions. However, we expect our cash and liquidity to remain healthy throughout the year, providing us with considerable flexibility to manage the present situation. And this supports our growing confidence in the resilience of our business and our ability to effectively navigate the challenge just as we navigated the COVID-related production disruptions last year. So now I'd like to turn it back to Jim for a few comments about Capital Markets Day.

Thanks, John. Before we turn over to questions, I want to reiterate how proud I am of this Ford team for its commitment to deliver on our plan to fix automotive, to modernize the company, and to find ways to disrupt our business and the traditional auto industry to create value that will be rewarded, that will reward our stakeholders. On May 26, we will hold a virtual presentation for an investment community where we plan to deep dive into our plan. As Lynn said, we're going to cover how we're going to lead the electric vehicle revolution in areas that were strong at Ford. Number two, we're going to build out our industry leading commercial vehicle business with products, but as well, services that lead to growth and new revenue streams. And we're going to leverage our connected vehicles to transform the customer experience and truly shift forward from a more traditional OEM to a company where the manufacturer and sale of the vehicle is just the very first step in an ever-improving, always-on, and far more rewarding customer experience. I so look forward to speaking to all of you soon as we continue our effort to create a Ford that can compete and especially win in this exciting new era of our industry. So with that, let's start the Q&A.

All right. Ladies and gentlemen, if you would like to ask a question, please press star, then one on your telephone keypad. And our first question is going to come from the line of Rod Lash with Wolf Research.

Hi, everybody. Can you hear me? Hello?

Yes, we can hear you.

Okay. Look, I wanted to just maybe get a little bit more clarification on the guidance. I think everybody understands that the underlying guidance, excess semiconductor shortage impact, isn't really changing, and I don't think anyone would react to that at all if it wasn't for how surprisingly strong Q1 was. You almost did $5 billion of EBIT, including the gain, and $4 billion excluding it, so The numbers obviously are going to be pretty low for the rest of the year. I guess my questions on this are, was there, first of all, an unusual gain on incentives for inventory at dealers in Q1? Could Q2 actually be as low as Q2 of last year? And then even more importantly, I was hoping you could talk a little bit about whether we can extrapolate anything from these kinds of numbers. You did a double-digit margin in North America, 5% in Europe. Looks like some pretty good warranty improvement. So when the dust settles, what do you think we can pull out of this as we think out about 2022? Yeah.

Hi, Rod. Thanks. That's a lot there. Let me see if I can unpack that and do justice to the question. So as you said, the run rate to the business is $8 to $9 billion. And without chips, we clearly believe that's where we would be. And I think you're seeing come through the quarter a combination of things. As I said in my remarks, you're seeing the strength of the underlying businesses improving, and you're seeing that come through. You saw that in the redesign of our overseas operations. You saw that in warranty expense improving. Those are two things that we said we needed to improve in our business as we move forward through the redesign. And you're seeing that come through. you're also seeing the strength of our new products. Now, it's a little opaque, I think, for people to say, well, you also saw a considerable pricing opportunity because of supply and demand imbalances. That is true. But so we go back and we look at what's happened with the pricing for our products since we started the redesign, the refresh. And that's where we come back to. Since 2019, if you look at our price increases, our average transaction price increase compared to what's happened in the industry, our transaction prices have increased $1,900 more than the industry. So that strength is flowing through. Now we had additional pricing opportunity in Q1 due to the supply and demand imbalance. And so that hit the quarter as well. We also saw a very strong mix in the quarter as, you know, we had lower production, so we optimized the production to a higher margin and a higher mixed vehicle. So we saw that flow through as well. So you're seeing that combination. happen and impact us in Q1. Now, remember, for the year, as we go through the year, we're also going to see a significant headwind from commodities. We saw very little commodity impact in Q1. That's because we still had our contracts from last year in place and we had our hedging. And so as we go through the year, we expect as contracts roll off and we've seen the commodity prices increase primarily for aluminum, steel, and precious metals, we expect to see about a $2.5 billion increase in commodities Q2 through Q4. So that's going to hit us as we go through the rest of the year. We also won't have the non-recurrence of the $900 million Rivian gain. And we also expect that as we go through the quarter and we get to more normalized levels of production, albeit we said 10% lower in the second half, we should start to see more in a gradual normalization of those incentives, that we experienced in the first quarter or the benefit of that. And then at Ford Credit, we did benefit again in the first quarter from the strong residual values, and we do expect those to moderate as we go through the rest of the year. So we've taken all that into account as we've gone through. And I have to say that what's encouraging to me and what the team has been able to do is we've been able to maintain the impact of the semiconductor chips to that high end of our range, the 2.5 billion, despite the volume impact growing significantly.

CHAIR POWELL. Yeah. Thanks for that. Could you maybe just-just to ask this a different way, the $8 to $9 billion guidance excluding the semiconductor impact, that includes things like the inflation from commodities and so forth. It does include Rivian as well. But maybe-maybe you could just speak to, at a high level, Can we think about that $8 to $9 billion as kind of a launching point if we wanted to think about bridging to next year? Is that sort of the run rate of profitability for the business? And, you know, there's obviously adjustments in warranty and South America restructuring new product and things. Maybe you could just speak to that and how we should be thinking about the run rate of profitability.

Absolutely. That is the run rate leading into next year. And we still have new products, Bronco coming this year, the two and four door. We have some surprises Jim talked about. We have the F-150 electric. We have the transit electric. So we have more product coming next year. We're going to continue to be aggressive on our cost structure, pushing that. And the other thing that we're learning coming out of this situation that we're in is how do you operate in a lean environment? And we've learned quite a few good things. good things about operating with leaner inventories. And I think there's opportunities there as well as we head into 22. So absolutely, the 8 to 9 is a launching pad. We see that as a launching pad into 22.

Okay. And just lastly, it sounds like there's some permanency to this transition to the lean inventory sales model. Could you speak to what kind of changes you're expecting here to distribution?

So we've been doing quite a bit, of course, to get customers' vehicles to move people to an order process. We've made changes to our processes to lower the gap between the time an order goes in to the time we can deliver the order. And we're also seeing that as we look at making these types of changes to modernizing or improving our processes in a lower inventory environment, You get benefits across the patch, right? It would allow us to have lower capital required at Ford Credit if we have to finance less dealer inventory for our dealers. That could free up some capital to invest in other growth areas. We would see better quality because we'd have fresher vehicles and vehicles wouldn't be sitting on lots as long. We'd have improved dealer profitability because they wouldn't be financing that floor plan. And we'd have lower incentives. We believe we'd have lower incentives because we'd have quicker turning vehicles and we'd have higher orders. So as we're working through this lower inventory and these opportunities that we're seeing today, we're working on how we make them a normal part of our business as we go forward. Okay. All right. Thank you.

And our next question is going to come from the line of John Murphy with Bank of America.

Good afternoon, everybody. I just wanted to follow up on that line of reasoning. I mean, you guys are kind of apologizing in some ways for the good environment and what it's kind of forced you into in this lean inventory situation. Obviously, let's forget about the second, third, and fourth quarter because they're going to be disrupted by the chip shortage. But, I mean, you're seeing, and you saw this in the third quarter of last year, these incredible margins, particularly in North America, and then again, international and second, but that's being positive. I mean, you're kind of rolling off this list of things that have happened and that you may be able to maintain, why wouldn't you maintain them and maintain this supply-demand balance or imbalance, as you call it, but really some people might say it's a great balance, and really focus on the higher-mixed vehicles and drive similar performance? I mean, you've just seen it happen. Third quarter, fourth quarter, there was some launch costs, but you saw it happen in the third quarter. You saw it happen in the first quarter. I mean, why would you let it reverse? I mean, and obviously there's some industry dynamics that are, you know, other people are in this, you know, other companies are in the same situation, but you yourselves are controlling this, you know, can control this going forward on your product mix and what you do with your own production. And it's produced wonderful results. I mean, why would you let it reverse?

We won't. Hi, it's Jim. I want to make it really clear, John, that's not our intention. We're a smart team. We're running our business responsibly, and there's real goodness here. This is personally 10 years ago. I saw this industry go from 30-day supply all the way back up to 100 in 10 years. We're not going to let that happen. This is a better way to run our business. It's even more important now. Why? We get to move online. We get to use a reservation system with customers for most customers when products are leased. We can simplify our incentives. We have the most complicated go-to-market system, I think, on planet Earth. We can simplify all that with tighter inventories. And it's better for the fitness. It also requires our industrial system to be more responsive. So, no, I want to make it extremely clear to everyone. We are going to run our business with a lower day supply than we have had in recent pasts. because that's good for our company and good for customers.

Okay, and investors too, which is important. And I guess as you think about the experiment, or not the experiment, of what you're executing in South America of backing away and putting just a few vehicles, supplying a few vehicles into that market, it seems like Europe and China are kind of heading in that same direction. I mean, are you learning? I mean, I know it's early days in South America from that business plan. I mean, are we looking at Europe that will be centered more around commercial vehicles with maybe just a few EV passenger vehicles, and then China, which will be mostly Lincoln, and maybe some commercial vehicles, then IMG, which is the transit and the Ranger, and that's it. And we'll see some stability in these international markets that hopefully will be profitable, but we won't always kind of be, you know, running around, you know, freaking out about whack-a-mole in one of the regions, you know, blowing up on us. It just seems like you're getting a handle on South America. You're getting a handle on these other regions. I mean, is this slimmed-down product offering and maybe smaller size with more stability and better profitability, you know, really the direction that you're headed in these international regions?

Yeah, we had a billion-dollar swing year over year. We've been at this for a long time in Europe. We're entering a new phase in Europe. So, John, absolutely. The focus in Europe is in commercial vehicles and passion specialty passenger cars. In international markets, it's the Ranger and derivatives of the Ranger. And in China, there's a China like North America will have a more diverse product range than the other markets. But let's be really clear. We're doubling down on our iconic nameplates and building out a family of products. We just localized Explorer in China. It's doing great. Lincoln is profitable in China. I mean, the growth rate of Lincoln in China and the profitability improvement as we localized to 90%, as John said, it's been very encouraging to us. So in China and North America, we'll focus on these really passion segments where we think we naturally do well. But the big change is not just improving the profitability by simplifying where we compete. The big change in the company is going to be investing to an always-on relationship with the customer. That is the real change at Forbes. The change of simplifying our lineup and focusing on markets where we can be profitable is necessary. It's the important foundation. But what's sufficiency for us is to evolve into a different model with the customer. And you'll hear more about that in capital markets today.

That's incredible. And just quickly on FMCC, obviously, reserves are probably going to stay stronger this year. I think you're probably being a little bit conservative there. on your expectations. Um, but if you also, once again, think about this, you know, focus on, on mix, uh, and price and, and, and not overproducing, you know, the net beneficiary also is, is FMCC. Um, you mentioned the balance sheet being potentially a little bit smaller in the future as, as you know, you can do more with less, um, you know, maybe everywhere. Um, you know, what is FMCC going to look like? I mean, I think we traditionally kind of think about a hundred billion dollar balance sheet, but it sounds like it might be somewhat smaller and have better returns and maybe more stability in it. You know, what are the net benefits of FMCC over time as the strategy emerges?

Hey, John, it's Mary, and I think you covered a lot of it. We do see used vehicle prices being stronger throughout this supply shock, and so they're going to remain strong for quite some time, just as John said earlier. And I think that's going to provide a lot of support for new vehicle pricing as well. The $100 billion you mentioned is about the size of the U.S. balance sheet. The Ford credit in total is bigger than that. It's $130 billion, I'm sure. So we're down quite a bit, but it's all dealer floor plan, and so that's affecting – that's a downside to our profitability. But on the other side of it is the strong used car prices.

Okay, but could that be somewhat structural going forward, or do you really think this is transitory through the course of this year?

At this stage, I'd say it's transitory.

Okay.

All right. Thank you very much.

And our next question will come from the line of Colin Langan with Wells Fargo.

Oh, great. Thanks for taking my question. I just wanted to step back. If we look at the semi-issue, do you think you're more impacted than the industry? We're just trying to understand if you lose 1.1 million, do you think you're able to recoup those in 2022? Or are other competitors maybe going to sweep in and take some of them because they have maybe a better supply chain? Just trying to understand if maybe you could kind of recoup that lost volume into next year.

Great question. Thank you, Colin. I would say it's difficult to make that judgment. If you look in the change of inventories, which is, I think, a great predictor of wholesale back in the quarter competitively. I think most of the major brands were impacted almost equally. So a lot of different news releases, a lot of different opaque data coming out. I can understand why you asked the question. We don't know yet how this will play out competitively, but we do know the first quarter actually played out a lot more evenly than last. maybe even we thought. As it goes on in the second half and into 2022, you know, we're starting to grow in confidence that we can support our recovery volume. We think it's prudent to have the 10% in our planning, but we are going to work very hard to make sure that doesn't happen. It's just too early to tell. The Renesas impact is, we think, is going to be largely finished by the second quarter if they execute. And they're just in the middle of that right now. And so that kind of leaves us back with the Taiwanese foundries and how persistent that's going to be. And right now, I just think it's a little too early to declare what that's going to look like. But what we do know is the first quarter kind of turned out that most major players, except for some of the companies who, um, who had buffer stock, um, and, and saw this coming, um, they, they weren't affected, but I think Renesas now swept up most everyone in the industry. Just hard to tell how lumpy that's going to be across different brands.

No, thank you. That's a very helpful caller. Um, Just more strategically, you made the announcement on Ion Park yesterday. I mean, how should we be viewing this? I mean, is this an effort to make your own batteries, or is this trying to build that expertise in-house so you could provide that to your battery partners? I'm not sure if we should read more into that announcement.

Thank you so much for asking this question. The answer is this is a very important announcement from Ford strategically. In the first inning, we could buy off the shelf and cherry-pick the technology and energy density and the cost. We've totally entered a different zone now with our planned volumes going up so much. So we've already made the decision to vertically integrate in the company. We're now building motors, e-axles now. We've been writing our own battery management software for quite some time. And now it's time for us to lock in on the latest technology and to have a secure cell production relationship. There's no news to make today, but the reason why that Ion Park announcement is so important is because it's our place where we will learn. We will learn with our partners how to transition to the very best in technology, energy density, the minerals, all the supply chain for batteries and cells, but also the manufacturability. And ultimately, I think to be competitive in this industry, a major brand like Ford will have to vertically integrate all the way through the system. It's just too early to make a bunch of announcements, but this is our dream team who will be developing that capability in the company.

Okay, thanks for taking my questions.

And our next question will come from the line of Joseph Speck with RBC Capital Markets.

Thank you. Good afternoon, everyone. I actually wanted to go back to something Rod brought up earlier. I know you mentioned, you know, 700,000 units out in the second quarter. Of course, we don't know what you were originally planning. So is it likely the second quarter looks similar to the second quarter of last year and somewhat related to To your point, John, like the $2.5 billion headwind for the year is really just the high end of your prior range. But is the gross number higher, and that's been offset by other factors such as stronger pricing and maybe forward credit that bring it back down to that high end?

Yeah, thanks. Great question. So it is similar to what we saw last year. We were going to lose about 700,000 yen, so we said it was 50%. roughly 50% of the planned production we had. And you look at second quarter of last year, and it was very similar to that. And I would say, as we got into this through the quarter, we have seen the team identify opportunities to offset more of the impact than we had originally thought. That's why we're able to contain a much higher miss on the volumes within that original guidance. And so the teams have been working extremely hard to bring the goodness that we're seeing in the core run rate of the business through and then to find other opportunities. So absolutely on both of those.

Okay. And then second question, you know, glad to hear the discussion about, you know, trying to keep dealer inventories more balanced. I guess the other lesson that could be learned here, and I'm curious, you know, Jim or anyone, whether we have any preliminary thoughts is, Do you just need to, you know, we've gone through a couple of these crises. Do you need to change how you think about, you know, assuring supply of key components, including chips, or that sort of keeping more inventory historically? Maybe it's, you know, more direct buy and not relying on tier ones. And if so, you know, maybe, again, at a high level, how should we think about that practically working? Like where... in the value chain, will that inventory be stored? And is that, you know, maybe a cost you're willing to incur for greater stability in the future?

Thank you. The answer is yes. We have learned a lot through this crisis that can be applied to many critical components that will be the essence of our new business, our modernized Ford. And it goes far beyond semi-chips. There are other components that are really key enablers. You know, it was very interesting for me personally as the CEO to talk to many of our colleagues in other industries and to find out how common buffer stocks are and how common direct buys are with the foundries, even if the company still buys the components with the chips on them from a supplier. They still negotiated a direct deal. These are all on the table at Ford right now, as you can imagine. We're also thinking about what this means for the world of batteries and silicon and all sorts of other components that are really mission critical for our company and our capability. When I look at the company and what we need to vertically integrate, these are the areas. These are the areas we're going to bet on moving inside the company for core competency. And as we do that, the supply chain becomes even more critical. But we also know more about it. So thank you for the question. And you can imagine everything is on the table, like you mentioned, from buffer stocks to direct deals with the foundries. Thank you.

And our next question will come from the line of Ryan Brinkman with JP Morgan.

Hi. Thanks for taking my questions. a standout performance in North America despite downtime and costs associated with the F-150 launch and the semiconductor shortage. And a lot of moving pieces with regard to the guide and the rest of the year with the change in impact from the chip issue and now the Renesas fire, et cetera. So I thought maybe it would be great to just sort of, you know, zero in on your performance in the first quarter itself and get your thoughts on what a 12.3% North America margin in one cube might imply for margin potential in a normalized environment, you know, kind of Looking at the historical cadence of North America margin over the past five years, or the five years ended in 2019, it seems like 1Q margin averages just about 40 bps higher than the full year amount. And so, you know, maybe you're already operating 1Q at almost a 12% kind of annual run rate, and that's amidst an F-150 launch and before any contribution from the Bronco. So how would you rate the underlying performance in North America? And does that performance in 1Q suggest, you know, once all the supply chain dust settles, you know, a stronger than targeted 10% regional margin?

Thanks, Ryan. So I think we have to go back and just ground ourselves again in that run rate of the business of $8 to $9 billion. And I don't want to get too far out ahead of ourselves on North America and what this quarter might mean for the run rate going forward. Given, as you said, there's just a lot of moving parts within this quarter. I think the team's done a great job of managing through it. You know, we really saw the 8 to 9 billion as the run rate heading into 22. We're going to do everything we can to continue to drive margin improvement, both here and overseas. And, you know, the team's focused and, you know, Jim's pushing us really hard to continue to modernize and improve the business in every place that we can. But as far as, you know, trying to predict what's coming out of this quarter, what that means for the margin in North America, you know, and putting a number on the table, I'm not going to do that right now. Okay.

Thanks. Yep. Just, just it's Jim quickly. I'll be really quick. You know, I've been in this business, worked for different brands. I can't remember a time in my life, in my career, to have had so many hot products in one market like North America, as Ford does right now. I mean, Amaki, sold out. Bronco Sport, sold out. F-Series, sold out. Super Duty, sold out. We have a very, our fresh new lineup is not only fresh, but it seems to be hitting the mark of the, zeitgeist of the customer right now. And I don't know where that's going to take us. That's a really good question. I don't know where that's going to take us. But I do know it feels like we're going to be chasing demand for quite some time.

That's helpful, Culler. Let me ask just lastly around the commodity inflation you're seeing and your ability to price for it. You've called out the $2.5 billion headwind for the year. You did take $3 billion of price in one queue, although I'm cognizant there's a lot that goes into that calculation, you know, including relative to new launches, et cetera. I think pricing is historically positive on launch models. Thankfully, as you mentioned, you have a lot of those this year. But it tends to be negative, you know, for carryover models. And, you know, I'm just thinking back to, like, 2011, 2012, you know, kind of coming out of the financial crisis in 08, 09 after a lot of, you know, final assembly capacity had been taken out. I recall you and others – reporting on the relative anomaly of positive pricing on even carryover models. So I'm just curious if we could see something similar now, say, if the commodities headwind were to grow worse, if the supply-demand dynamic puts the industry in a position to pass really all the incremental costs on to the consumer, or... You know, how do you see maybe the share of the burden taking place? You know, maybe the higher commodities being, you know, the cost of it being shared between yourselves versus the consumer versus suppliers, dealer margin. I don't know what you think.

You know, I would say we're definitely feeling the commodity headwind, as John said. And inflation, it feels like, you know, we're seeing inflation in variety parts of our industry kind of, in ways we haven't seen for many years. On the other hand, it feels like it's all due to a lot of one-timers as the economy comes out of lockdown. So I think it's a bit too early to declare, you know, the run rate, where it's going to be. It's just too hard to tell from my standpoint. I will note, though, based on your question, that many of the vehicles that are supposedly aging at Ford or normally would be aging are still relatively new. Super Duty is relatively new. Explorer is relatively new. Yeah, Escape, we have all the Lincoln lineup is brand new. So, you know, normally we wouldn't have so much new at the same time. And even the vehicles that are one or two years old are still relatively new in their segments.

Very helpful. Thank you.

Our last question for the day will come from the line of Emmanuel Rosner with Deutsche Bank.

Questions. So I'm still trying to better understand the $8 to $9 billion run rate, which is unchanged from your view earlier in the year. So let me try and ask it this way. Did the first quarter earnings or results play out as you had expected? Yes. at the beginning of the year? And if it played out better, what are some of the expected offsets, which are non-semi-related, that would prompt you to keep the same basis as the underlying profitability?

So, no, the quarter did not play out as we originally expected, right? It came in much better. We did not expect that we would be able to more than offset all of the impact of the chips in the quarter, which was 17% or about 200,000 units. So we saw, you know, incredible opportunity there from the industry-wide supply and demand imbalance. So we saw pricing, you know, increase significantly. We also then, because of the... SUPPLY AND BALANCE WE REALLY PUSHED HARD ON MIX SO THOSE WERE THINGS THAT ALLOWED US TO IMPROVE THE QUARTER WE DID NOT EXPECT USE VEHICLE PRICES TO INCREASE 14 PERCENT IN THE QUARTER AND THEY DID AND THAT HELPED AND THAT WAS PART OF WHAT HAPPENED WITH FORD CREDIT AND THE PERFORMANCE OF FORD CREDIT AND THEN AS WE GO THROUGH THE YEAR EMANUEL ONE OF THE THINGS THAT YOU KNOW DID NOT HIT US IN THE FIRST QUARTER THAT'S GOING TO HIT US THROUGH THE REST OF THE YEAR IS THE COMMODITY COST INCREASES THAT THAT COME IN QUITE SIGNIFICANTLY THROUGH Q2 TO Q4 So those are some of the things that are coming back and are going to come through the second half of the year. And then the other thing is, as production normalizes a bit and supply and demand comes more in balance, we do expect that we should see some of this pricing that we saw in the first quarter moderate a bit. And we should see some of that happen through the second quarter, through the second half of the year.

Is the commodities impact larger, much larger than you had thought originally?

When we had first looked at it, we thought it was going to be significant somewhere between a billion and a half to two billion. So it's slightly higher than what we had thought coming into the year. Okay.

And then follow-up question. I found very impressive, you know, some of the improvement that you're showing in the first quarter in terms of net pricing and cost in some of the international markets and showing some good traction with the fitness initiatives. I was hoping you could comment directly on Europe in particular and South America around the sustainability of some of these performance that we're seeing. How much do you think is sort of market-driven versus some of your own action, both on the net pricing side and also obviously on the cost side, the sustainability of those?

Yeah, so in Europe, this is the second strong quarter that Florida of Europe is, you know, printed for us. And I think what you're seeing there is the redesign, you know, flowing through and showing up significantly again in this quarter. And of course, the market was aided a bit by what we're seeing the dynamics in this quarter. But the fundamental underlying strength of the business in Europe has improved. You know, we took over a billion dollars of structural costs out as we re-looked at the footprint. We've moved into commercial vehicles and improved our share there. We have a higher mix of utilities. All of that is providing a much stronger business for us in Europe, and you've seen that two quarters in a row now. Then when you look at South America, we reduced our volumes significantly, and we improved our profitability. And that just comes back to the point that we need to structure the market, and we are. And now we're going to focus on our higher margin vehicles, a smaller footprint, a smaller business down there, leaning into Ranger and Transit, which are good vehicles in the market, and they're strong vehicles for us as a company. And so you're starting to see that redesign really take hold.

Good to hear. Thank you very much.

Thank you. And with that, we must conclude today's Ford Motor Company First Quarter 2021 Earnings Conference Call. We do appreciate your participation. and ask that you please disconnect. Thank you.