Earnings Call Transcript - F Q1 2022

Operator, Operator

Good day ladies and gentlemen. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer session. Please note this event is being recorded. At this time I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please, go ahead.

Lynn Antipas Tyson, Executive Director of Investor Relations

Thank you, Andrea. Welcome to Ford Motor Company's first quarter 2022 earnings call. With me today are Jim Farley, our President and CEO; and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit; Hau Thai-Tang, Chief Industrial Platform Officer; and Doug Field, Chief EV and Digital Systems Officer, Ford Model e. Today's discussions include some non-GAAP references. These are reconciled to the most comparable US 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.ford.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 28. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis and product mix is volume weighted. With that, I'll turn the call over to Jim.

Jim Farley, President and CEO

Hello, everyone. Thank you, Lynn, and thanks for joining our first quarter 2022 earnings call. Yesterday, I was with Bill Ford and our incredible team at the Rouge factory, where my grandfather worked, to celebrate Job One for the F-150 Lightning. We were also proud as a team for delivering a truly breakthrough electric truck and delivering it on time as a launch. The excitement around the truck is like nothing I've ever seen in my career. In fact, the power went out in the facility, and we ran most of the presentation with F-150 Pro Power Onboard. While we have work ahead to fully scale production and fill an extraordinary order bank, both for our retail Lightning customers and Ford Pro, make no mistake, this is a very important moment for us at Ford. We're accelerating our significant transformation. We have the right plan called Ford+. We are putting in place the right organization. As you know, on March 2, we announced our plan to form two distinct, but interdependent business units called Ford Model e and Ford Blue. Together with Ford Pro, these three automotive businesses allow us to clearly define and assign priorities, make the most of our existing strengths, but also build new strategic muscles and, most importantly, capabilities. Ford Model e is responsible for delivering clean sheet breakthrough EV designs, software advanced electric architectures, partial autonomy. And Ford Blue's mission is to deliver a more vibrant and profitable ICE business, a business that's going to serve in the short term as our profit and cash engine for the entire enterprise. So what have we learned since March 2? And what are we working on at Ford? In terms of Model e, first, it's very clear to us that battery capacity is the key unlock to our EV aspirations and propel our growth in the future. We're in good shape in the near term. In the medium and long term, securing raw materials, processing, precursor and refinement, and setting up battery production here in the US and around the world is a big work statement for us. Expect a lot of news from Ford in the future related to the vertical integration of our EV business. Second, we're getting after our talent gap in key areas, EV engineering, software, and autonomous driving technology. We have a very good start already, and we will continually be very aggressive on recruiting talent. Third, we're now deep into discussions with our dealer partners around the globe, but especially in North America on brand new standards that are required to launch a completely different customer experience that is leaner and better for our customers that we believe will not only be competitive, but superior to a solely direct model. We're drafting standards as we speak and plan to roll this out this year. Finally, we're crafting our EV future product pipeline and are focused on a small number of highly compelling, highly volume models in key segments where we already lead. I want to make this very clear. Some companies seem to be pursuing a strategy of trying to match model-wise volume with eight or nine top hats. That's not a winning plan in our view. We will focus on key volume nameplates, constrained capital, because we have it, but really to leverage scale and efficiency to reach and eventually exceed our 8% EBIT target for EVs. I want to be clear here that as we move forward, our EV designs will be progressive and they are going to be aimed at bringing new customers to Ford and Lincoln. They will not be electric versions of our existing lineup. Now in terms of Ford Blue, we will accelerate our restructuring and address our uncompetitive cost structure. We're going to attack complexity in areas such as powertrain. We can't wait. This work starts now. We will continue to invest in our ICE business, but in targeted ways to build our most popular and profitable vehicle lines, F-Series, Bronco, Super Duty, and a few others. Another focus is quality. We made good progress on initial quality and launches. However, we continue to be hampered by recalls and customer satisfaction actions. This has to change. We must do more to aggressively address our engineering process and improve our robustness. Now, our Ford Pro business is on track. We see healthy growth in parts sales, mechanic repairs, growth in subscriptions for both charging and telematics and CV financing. Most importantly, we're making our customers' lives and businesses better. They're using data. They're improving their uptime and their bottom line. Supply chain constraints continue to impact our business, including some of our key profit pillars. That said, we're making progress on launching and scaling new products as you can see with Lightning. That said, our major focus now is accelerating a more fundamental change in our supply chain management to improve visibility throughout our entire value chain and secure supply, especially in places like semis and batteries. We're absolutely committed to unlocking value by improving our growth profile, our profitability, and ability to generate sustainable cash flows from our automotive-related businesses. Our new targets include producing more than 2 million EVs in four short years by the end of 2026. That's about 70-plus CAGR. And we expect that by 2030 EVs will account for about 50% of our global sales. We have also reset our profit ambition. We are now targeting a 10% company-adjusted EBIT margin by 2026. Now in terms of the first quarter, I would describe our performance as mixed. The appeal of our new products is really clear and customer demand is extremely strong, beyond the supply constraint of our industry. However, we are still grappling with persistent supply chain issues that prevent us from posting even stronger quarters. We're working to break constraints, whenever they exist, to take full advantage of this incredibly hot product lineup. Both new EVs like the F-150 Lightning, but our iconic ICE vehicles as well. We remain committed to delivering our targets quarter-after-quarter, year-after-year, earning your confidence along the way. And now, I'd like to turn it to John to take you through the quarter and our outlook this year.

John Lawler, Chief Financial Officer

Thank you, Jim. In the face of ongoing industry-wide supply chain disruption, and unremitting pandemic hurdles, we continued to execute against our Ford+ plan, including strengthening our product portfolio, investing in electrification, and other new and exciting opportunities fundamental to growth and value creation. In the first quarter, we generated $2.3 billion in adjusted EBIT, resulting in a margin of 6.7%. The year-over-year decline in total company profits was driven by higher commodity prices and lower volume and mix, partially offset by higher net pricing as we take top line pricing, while remaining disciplined with our incentive spend. Importantly, our operations outside of North America were profitable. Global wholesales were down 9%, consistent with our guidance and reflecting the continued supply chain issues. However, our run rate of vehicle production in North America improved significantly during the month of March, and we ended the quarter with an extremely healthy order bank. In fact, in the US alone, our order bank is primed to deliver about $17 billion in revenue. Ford Credit delivered another strong quarter. EBT was $900 million, reflecting strong lease residuals and credit loss performance. Free cash flow was $600 million negative, more than explained by unfavorable timing differences and working capital deterioration due to the higher inventory levels, which included about 53,000 vehicles on wheels completed, but awaiting installation of components affected by the semiconductor supply shortage. We ended the quarter with strong cash and liquidity nearly $29 billion and $45 billion respectively. This includes our stake in Rivian, which was valued at $5.1 billion at the end of the quarter. Our strong balance sheet provides a solid foundation to continue investing in our Ford+ priorities. Now let me briefly touch on business unit performance for the quarter. North America delivered $1.6 billion of EBIT with a margin of 7.1%. Now this is down year-over-year as net pricing improvements were more than offset by higher commodity costs, higher warranty expense, unfavorable mix, and lower volume. The volume and mix impact primarily reflects supply constraints unique to full-size pickups and large utilities. South America continues to benefit from our global redesign efforts, delivering its third consecutive profitable quarter and its highest quarterly EBIT margin in over 10 years. The region continues to focus on scaling its business for growth, especially pickup trucks and commercial vehicles. In Europe, our operations delivered an EBIT margin of 3% despite a 9% decline in volumes. The underlying trajectory of our business continues to improve. However, the adverse impact of the near-term supply chain disruption is dampening our overall results. Importantly, we continue to be the number one commercial vehicle brand in Europe. The Transit has an extremely healthy order bank, and we recently launched the all-electric E-Transit in Turkey. FORD Live continues to grow, helping our commercial customers improve vehicle uptime and ultimately their bottom line. And finally, Mustang Mach-E is now being sold online in most major markets. Europe is building momentum towards a fully electric future, expecting to reach 600,000 vehicles by the end of 2026. In China, we posted a moderate loss in the quarter. However, our cost performance improved on both a year-over-year and sequential basis. Lincoln continues to be a bright spot and profit pillar for the region. Market share improved 20 basis points year-over-year and the all-new Zephyr is off to a fast start. In the first quarter, China also continued to make progress towards our electrification strategy. We opened 10 more customer experience centers, now 35 in total, and made other investments to modernize our direct-to-consumer network. Our International Markets Group performed well in the first quarter, continuing to be solidly profitable despite supply constraints and suspension of our joint venture operations in Russia. The upcoming launch of the next-generation Ranger remains on track. In March, we unveiled the next-generation Ranger Raptor and Everest. And finally, in Mobility, we continue to make steady progress towards scale commercialization of moving people and moving goods. In the first quarter, we divested our investments in both TransLoc and Spin, further rationalizing our portfolio with a focus on autonomous development. And now I'll share with you our current thinking about the remainder of 2022. For the full year, our guidance is unchanged. We expect to earn between $11.5 billion and $12.5 billion in adjusted EBIT, which is up 15% to 25% from 2021, with adjusted free cash flow of $5.5 billion to $6.5 billion. This reflects year-over-year growth in wholesales of 10% to 15% and assumes that semiconductor availability will improve in the second half, including the constraints that adversely impacted our full-size pickups and large utilities in North America in Q1. We also assumed in our guidance that disruptions in the supply chain and local vehicle manufacturing operations resulting from the renewed COVID-related health concerns and lockdowns in China do not further deteriorate our supply chains. Now relative to adjusted EBIT. On a year-over-year basis, our range assumes significantly higher profits in North America and collective profitability outside of North America. We also expect Ford Credit EBT to be strong, but lower than 2021 and mobility and corporate other EBIT to be roughly flat. Other assumptions factored into our guidance include; first, we have a very strong order bank, as Jim mentioned, for our new iconic products such as Bronco, Bronco Sport, Maverick, along with a robust EV lineup Mustang Mach-E, E-Transit, F-150 Lightning now in production as well; second, pent-up demand beyond our order bank, a continued strong pricing environment including the benefit of pricing actions taken in the first quarter and improved mix. The interplay role between volume and pricing will remain dynamic. And third, we expect commodity headwinds of about $4 billion, which we expect to offset by improvements in net pricing and mix. Fourth, we anticipate other inflationary pressures to continue impacting a broad range of costs. We are aggressively looking at all opportunities to offset this reality, including aggressively ramping up our efforts on additional cost reductions. And fifth, at Ford Credit, we expect auction values to remain strong as supply constraints persist. However, as I mentioned, we anticipate strong but lower EBT reflecting primarily the non-recurrence of reserve release, fewer return off-lease vehicles, and more normalized credit losses. Our results in the quarter, our balance-of-year outlook, and commitment to our medium-term targets demonstrate the power of our Ford+ plan as we continue to invest aggressively to drive growth and value creation. This includes devoting resources to customer-facing technology, connectivity, our always-on relationships with customers, and electrification. We are confident the long-term payback from these investments will be substantial. So that wraps up our prepared remarks. We'll use the balance of the time to hear your questions and address what's on your mind. And so thank you.

Operator, Operator

We’ll now begin the question-and-answer session. Please note, the first question will come from Rod Lache of Wolfe Research. Please go ahead.

Rod Lache, Analyst

Hi everybody. Thanks for taking my question. First, I wanted to ask you about inflation. Price versus cost is, obviously, a pretty big drag here, and I assume that you would expect inflation to stick around for a while. I was hoping you might talk a little bit about how that's influencing your decision-making, your internal messaging. What is in your view going to be the interplay between price and volume as volume and inventory starts to normalize? Is there still pricing power after everything you've achieved over the past couple of years? And does this affect your margin targets?

Jim Farley, President and CEO

Hi, Rod, thank you for your question. Obviously we're seeing on the commodity side, steel, aluminum, copper, lithium, nickel. On the logistics side, a lot of premium freight. We're seeing pressures on inflation from suppliers, so it's really across the board. I'll let John answer the pricing question, but I would say we really have quite a bit of pricing we've recently put in the market. It's stable. And in addition, we feel like we have a lot of cost upside as well in the company. I know that's not your question, but that's an opportunity. John?

John Lawler, Chief Financial Officer

Hello, Rod. From a pricing perspective, we have found that our pricing strategy has largely countered the inflationary pressures we've been experiencing. We have been proactive about our top line and have managed our incentives carefully. Jim mentioned that we expect commodity inflation to persist throughout the year, and our pricing reflects that. Since last year, we have taken an aggressive stance on pricing. The interplay between volumes and pricing will be fluid as we move through the year. We anticipate that as volumes rise in the second half, there will be greater pressure on incentives, which we've incorporated into our guidance. Currently, many dealers are transacting at or above MSRP across the industry, indicating potential compression in pricing that we need to monitor closely. We have also made adjustments to enhance our pricing through collaboration with our dealers. In this quarter, we updated our floor plan adjustments for dealers, shifting from a previous 1.5% of MSRP to approximately 75 days of actual carrying costs, benefiting our pricing structure. We acknowledge that as volumes increase, the relationship with incentives will continue to evolve, but we remain cautious. We've considered what we believe is reasonable regarding incentives for the second half, factoring in anticipated volume increases, while maintaining an aggressive approach to pricing. If commodity prices continue to rise, we will respond accordingly. As we review pricing since the 2020 model year, significant increases in incentives would be required to balance out our pricing strategy. Currently, we're at low single-digits for incentives but would need to elevate that to around 15% or 16% to match the prior pricing levels when we had much higher inventories and a more aggressive push-through approach, which we do not intend to repeat. We will maintain a disciplined approach to our inventory management.

Rod Lache, Analyst

Thanks for that. And any color on the outlook for Europe for the rest of this year, just given all of the macro pressures there? It looks like you've been posting pretty solid results there recently.

John Lawler, Chief Financial Officer

Yeah. We expect those results to continue. We were in Europe hampered by the supply chain reductions. But it was nice to see that even though we were hit by that, Europe did post a better than expected quarter for us. So, we're continuing to do well in commercial vehicles. We launched the E-Transit, which has been very well received. Mustang Mach-E has been very well received as well. So, we do expect the business in Europe to continue to improve in the second half as the rate and flow of supply improves for them as well.

Rod Lache, Analyst

Thank you.

John Murphy, Analyst

Good evening, everybody. I just wanted to ask a question sort of on the growth side, Jim. I mean the F-150 Lightning orders it sounds like they're mostly incremental buyers, folks that haven't been Ford or F-150 buyers before. I'm just curious if you think that is just sort of a surge here at the launch of the truck or is this sort of 15% to 20% sort of incremental orders relative to the base F-150 something you think will stick around? I mean because obviously that's very powerful potentially to your earnings. And do you expect the profitability of this truck over time to have a variable margin that would be similar to the F-150? I think sort of being even a little bit more verbose do you expect the same kind of thing with the 250 350 which you'll launch in two or three years?

Jim Farley, President and CEO

Well, I didn't know we announced that, but thank you very much for your question. I'd like to maybe ask Doug to come in here and talk about the levers we have on the profit side. But so far, it's very clear to us that the Lightning customers are incremental. And as you said it's early days. We capacitized in the end of the day, the facility that we were in is about 80,000 units. We'll almost double that by the end of next year. And I would say at this point the customer profile is dramatically younger. It's in states like California and New York that we normally don't sell full-size trucks. We do have some – lots of orders in Texas. It's a higher education that we see. And what they're interested in is different about the truck. So I think it's very clearly so far incremental. Now when we get into volume production 150,000 units that may change. And we'll see that with the order as we order – open the order bank again for the next model year this summer. Doug, do you want to highlight the opportunities you see maybe on F-150 Lightning but more generically on our next product?

Doug Field, Chief EV and Digital Systems Officer

Sure. To start with, I'm really excited about what we're building off of in Ford's strength. These are cost bases that I'm drooling over in terms of the future products. But when we talk about EV specifically, the first thing we have to do is really control the battery materials and the chemistry there, the single largest build materials opportunity of course, but the next is really obsessing over how we use those materials and chemistries. Energy efficiency is a priority, and the team is really stepping up to this. Every single watt of consumption is now being tracked and optimized. And on the new programs, changes in aerodynamics and drive unit optimization, we're seeing dozens of miles of improvement in range. That's hundreds and even in some cases thousands of dollars of battery that we can take out. Finally, I think really going after a true ground-up approach to how we build EVs. They're different from internal combustion vehicles. And you could take advantage of that and really change the number of – in our next F-Series EV factory we're going to have on the main line half the stations that we use today to build a Lightning. So I'm very optimistic with this journey that we have some really good ground to make up on margin.

Jim Farley, President and CEO

John...

John Murphy, Analyst

Actually, can I just ask one follow...

Jim Farley, President and CEO

Go ahead. Go ahead, John.

John Murphy, Analyst

No. Keep going, Jim. Sorry I had a follow-up on...

Jim Farley, President and CEO

I just want to say on the Super Duty obviously that's a quarter of profitability as a company globally. And when we look at the customer usage, we just don't feel at this point that an electric solution is going to be ideal for most of those customers. So our vehicles will be really focused on light duty and the lower end of Super Duty for sure, but not 250s, 350s, 450s. That's a whole different ball of wax. They require a lot of specific demands, and heavy batteries that doesn't make sense.

John Murphy, Analyst

Got it. And I'm sorry, a follow-up on the 53,000 units that are in inventory on wheels. Is that what we're seeing in this 21% increase in inventory on the balance sheet from the fourth quarter to the first quarter? And presumably, the cost has not been accounted for at all here and we'll see those vehicles flush out to the system in the second or third quarter when the chips become available. I'm just trying to understand John Lawler, the economics and what profitability boost may be from these vehicles flowing out. Could you just kind of explain sort of how you're accounting for this and what the benefit might be in the second and third or fourth quarter when they actually are finished?

John Lawler, Chief Financial Officer

Yes, John, you're correct. This is affecting our cash position. Currently, we have 53,000 vehicles in inventory that are not generating revenue yet. As we complete these vehicles in this quarter and the next, we will start to see positive impacts on our financial results. The more profitable models, mainly the F-Series and Explorer, present a significant opportunity that will reflect positively on our bottom line once they begin shipping. We decided to produce these vehicles because we are confident that we can implement the necessary modifications without sacrificing quality. Our production capacity is fully utilized, so if we hadn't built these units, we would have lost them until the chips become available.

John Murphy, Analyst

I'm sorry John, the costs are recognized in the first quarter results, but obviously the revenue is not? I'm just trying to understand this because, it sounds like it might have a big impact in sort of people's understanding of the cadence of earnings through the course of the year.

John Lawler, Chief Financial Officer

No. The profits aren't recognized in the quarter, right? But the costs, we backed out like for labor, et cetera that's been all backed out. That's an inventory.

John Murphy, Analyst

Okay. Got it. Okay. Thank you very much.

Colin Langan, Analyst

Great. Thanks for taking my question. As you mentioned, the EV battery costs have really dramatically increased. Has that changed your EV strategy at all? Do you think you're going to need to maybe raise the pricing of the Lightning and the Mach-E? And what can you do about it or maybe switch to different chemistries, all out more hybrids? How can you address it if raw materials stay at these very high levels for those battery materials?

Jim Farley, President and CEO

Thank you for your question. Well, first of all, the demand for EVs right now is extremely robust at Ford. So, we have the opportunity we believe for pricing. We're not going to get into those details now. But Doug said something very important, Colin, I want to emphasize, which is battery chemistry. We believe very strongly at Ford. The chemistry we have is really a key part of our protection against commodity price increases, and frankly, the benefits to the customer. Doug, do you want to add anything?

Doug Field, Chief EV and Digital Systems Officer

No. Ford, a number of years ago started Ion Park, which is a team of experts really focusing on chemistry. Lithium-ion phosphate, of course, we know from the industry is something that takes you away from the dependence on nickel. That will be a part of our battery, and we're also looking at chemistries that give us an opportunity to be less dependent on the specific materials that everyone seems to be fighting over in the market.

Jim Farley, President and CEO

So in the short-term, we...

Colin Langan, Analyst

Can you which two tells us please?

Jim Farley, President and CEO

Go ahead with your question. Sorry, Colin.

Colin Langan, Analyst

Yes. I was just going to say you mentioned you're able to do LFP or that's in the plan. I mean, how quickly can you switch because nickel has spiked now? I mean, I'm just kind of wondering how flexible and how quickly you could adapt to that $2 million target by 2025?

Jim Farley, President and CEO

Yes. We've been working on LFP for quite some time, so let's just leave it at that. What I mean by that is, engineering LFP solutions in our first generation of products is something that we see as a big opportunity and to move quickly.

Colin Langan, Analyst

Got it. And just second question, you mentioned in your comments about warranty costs and that was going to be a big driver of margins. It does look like it was up year-over-year. Is that just sort of a temporary blip in the quarter, or is there a structural issue that we're going to see some higher elevated warranty through the rest of the year? Hello.

John Lawler, Chief Financial Officer

Yes. Colin, thanks for the question. When we had our Capital Markets Day event, we signaled that we were targeting $1 billion to $2 billion of warranty opportunity by the mid-decade. In 2021, we delivered $1.4 billion of that, so roughly 70% of that total opportunity. When you look at Q1 of this year, we had a deterioration. Some of that was just a non-repeat of items that we recognized in 2021 that didn't flow through. This is still a huge opportunity for us. It's the number one priority for us, as my team really focuses on improving quality warranty as well as recall performance not only because of the drag on the business, but more importantly, because of the impact on our customers. So this is something that we're really focused on. And as Jim and others highlighted earlier, it's a huge opportunity for us to eliminate waste within the company and offset some of those commodity and headwind costs that we discussed earlier.

Colin Langan, Analyst

Got it. Thanks for taking my question.

Adam Jonas, Analyst

Hey, everybody. Is Lisa Drake on the call?

Jim Farley, President and CEO

No. No. But Doug is here. Okay. I'll pass it on to her.

Adam Jonas, Analyst

We've got great people on the call. We're good. First, I noted the Lilac Solutions partnership that's a really, really good call here and a lot of really great things. So we had great job there. If you could imagine that the entire metal and mining industry were listening to this call right now, and they really should be. What would your message right now, Jim?

Jim Farley, President and CEO

The message would be we need to work together and find good deals. That's what the message would be that we know what we're looking for. We're focused on lithium and nickel, those two. We want to do smart deals that work for them and for us. And number two, we want to move some of the processing in North America. And we're willing to invest capital to move the processing precursor work from overseas to North America for a variety of reasons. Doug, would you edit that list?

Doug Field, Chief EV and Digital Systems Officer

No. I think that's the right list.

Adam Jonas, Analyst

And just my follow-up Ford Credit side. You guys are massive, extraordinarily well-managed portfolio in a market that at least historically can react to oil shocks and economic pressures of course over time. And we're seeing some pretty crazy changes in the market. Just for the record, any sign of pressure in the portfolio in terms of delinquencies, loan losses basically the strength in the consumer that you so very credibly and powerfully can comment on as an economic indicator for this audience? Thanks.

Marion Harris, CEO of Ford Credit

Hi, Adam. It's Marion Harris here. The short answer is, no. We're seeing strength in delinquencies. They're up marginally versus last year but still well below anything we've seen. And a lot of that's on the back of strong used car values which we expect to remain strong for some period of time. And you're even getting into the gas price piece of this. One of the things we've been looking at is whether or not there is a change in auction values by segment. And we're not seeing any differences in prices or price movements for large SUVs versus smaller sedans. So the trends continue and we still feel very good about the Credit business.

Adam Jonas, Analyst

Thanks, Marion.

Dan Levy, Analyst

Hi. Good evening. Thank you for taking the question. First question is just on the guidance. So we know you're maintaining the guide of $12.5 billion, but you've also said you're guiding to now $2 billion to $2.5 billion of higher raw materials. Europe is a choppier environment. China is a choppier environment. And then there are also other inflationary pressures that aren't in that raw materials guide. So I just want to understand what is the full set of offset to that. You've talked about price but maybe you could just talk how that compares to maybe other cost offsets that will allow you to maintain your guide despite those incremental headwinds.

John Lawler, Chief Financial Officer

Yes, Dan, thank you. Pricing is the main factor helping us throughout the year, as it mitigates the inflationary pressures we are experiencing. We are actively pursuing additional cost-saving measures because we believe the impact of inflation on costs will remain challenging for some time. Therefore, we need to enhance our efficiencies and productivity. Jim and the team are putting in substantial effort to address this, and it remains a key priority for us. Additionally, in the second half of the year, we expect to see improvements in volumes due to better availability of certain parts, which will significantly contribute to our performance. We anticipate these improvements will be evident in the second half compared to the first half. Hau, would you like to share your insights on this and what actions we are taking to manage the situation?

Hau Thai-Tang, Chief Industrial Platform Officer

Yeah. Thanks John. So as John mentioned in his remarks in March, we had the highest production run rate that we've seen frankly in the last couple of quarters. That's the result of a lot of hard work, with all of our suppliers at every level of the value chain to break constraints, ensure that we're getting our fair allocation, as well as expediting freight to pull ahead some of the available supply. In parallel, the design actions that we've taken over the past year to design our way out of some of these constraints are coming online. And if you guys reflect on last year, many of our wafer and chip suppliers started implementing capacity actions, and those are also coming on in the back end of the year. So that's what's giving us the increased confidence around the guidance that John highlighted.

John Lawler, Chief Financial Officer

And the other thing I would add is that the demand, as Jim said earlier, is very strong for our new products and that's encouraging for us. We just can't build enough of them and we see that demand continuing.

Dan Levy, Analyst

And the mix assumption within this?

John Lawler, Chief Financial Officer

The mix assumption is that, we'll revert back to a normal run rate mix that we would expect to see. We were disproportionately hit in the first quarter by a commodity module and Hau can talk more about that. He's better to talk about it than I – than me than I can. And his team has worked through that. So we believe we have that resolved. So we should see a more normal run rate of our mix as we move forward.

Jim Farley, President and CEO

Hau, do you want to comment on that specific comment because I – commodity, because I think it is really material.

Hau Thai-Tang, Chief Industrial Platform Officer

Yeah. So we had a wiper module that was deployed on our most profitable vehicle lines as John mentioned, our large pickup trucks and utilities in North America. So we had limited ability to do any mix management and flex, with other lower-profit vehicle lines. That issue has been resolved. We've designed our way out of it. And again, we have a line of sight to not only support the back half of the year production but also address some of the vehicle on wheels with that commodity.

Dan Levy, Analyst

Great. And then my second question is just as we think about the costs that are coming online, I think you've discussed in the past that really in your reorg that Blue is going to be what funds Model E. So in a good market, it's very easy to see how incremental profits from the core combustion business are funding your EV growth. But now that we have more costs that are coming into the system, maybe you can give us a sense of how you're looking at your growth investments. EV, I assume you're going to invest in that regardless of what the underlying market environment is, but maybe you can give us a sense of are there other growth investments that are maybe more discretionary that you can – if you need to pull back on or delay. How do you think about other growth investments?

Jim Farley, President and CEO

Our opportunity lies primarily in the costs associated with our Blue business. That's our perspective. Regarding investments, we must develop a fully networked advanced electric architecture. This requires investments in Level 2 and Level 3 autonomy, as well as in a new portfolio and transforming our industrial system to accommodate these electric digital products. We must also invest in our operating system software that underpins all of this. Additionally, we are firm in our belief that we need to invest in Level 4 autonomy. At this moment, I do not see any discretionary opportunities. Our Ford+ plan clearly outlines our investment priorities. Therefore, our main focus should be on addressing inefficiencies and enhancing the productivity of our core business. This is where our attention is directed, and it's understood that as a management team, we need to ensure these investments are made as efficiently as possible to support new technology and growth. I hope this clarifies our position.

Dan Levy, Analyst

That’s helpful. Thanks.

Mark Delaney, Analyst

Yes. And good afternoon and thank you very much for taking the question. The first is on the new structure Jim, about two months now since Ford announced the split into the different segments including Ford Blue and Model E. I'm hoping to better understand how employee reception has been. And for Doug Field perhaps specifically maybe you can talk about what it means for your ability to get the right engineering talent. And are there any anecdotes or data points you can share?

Jim Farley, President and CEO

I think the reception has been excellent. We put in a lot of effort and were well-prepared. We understood what we needed to communicate to the employees, why it was necessary, and why it made sense. So, overall, the reception has been positive. The real test will be in the execution. That’s why I wanted to provide an update on what we’ve accomplished since March 2, as a lot has changed. Doug, over to you.

Doug Field, Chief EV and Digital Systems Officer

Thanks. Yes. We did think a lot about this and I had a great partner in Hau to figure out how we were going to take best advantage of Ford's deep capabilities that I have not-access to in my prior roles. So, the organization is set up, where Ford Model E can't and doesn't build cars by themselves. We rely on an industrial platform that does great work and Ford Model E contribute software systems back to Ford Blue. So, there's an interdependency that really helps the team work, I think. As far as attracting talent, I've been really delighted and surprised by the kind of talent that we can attract from tech. I think there's a certain amount of fatigue in the tech world and a lot of mature products out there. The opportunity to work on high technology, but do it in a brand that is so iconic in the United States and something that is such a rich product like a vehicle is really attracting some great people. Finally, I think from a talent perspective, Ford Model E is also helping us really dig into the internal team and find great people who can step up take on different kinds of roles, be put in positions of authority and really help drive us forward. There are great people here.

Mark Delaney, Analyst

That's really helpful. My second question was on the volume outlook for 10% to 15% wholesale growth which the company has maintained even though we've had unfortunately the war and also the new COVID restrictions pop up in China. I'm hoping to better understand how Ford is still managing to that 10% to 15% growth? And to what extent is the company taking incremental actions to find different suppliers that perhaps you hadn't been expecting to have to do? And is it more that you're doing those sorts of things to still do 10% to 15% growth or is it perhaps more about Ford's suppliers not being overly impacted by these recent events? Thank you.

Jim Farley, President and CEO

Thank you. The main issue we're facing is related to semiconductor-related commodities that have been holding us back. We are investing heavily in premium freight and other solutions to navigate the COVID disruptions in China. However, the increase in production for the second half of the year is connected to these challenges. Hau, do you have anything additional to share on this?

Hau Thai-Tang, Chief Industrial Platform Officer

Yeah. Mark, so the two hotspots that you highlighted, Ukraine and Russia, I think we've done a really good job of managing that and minimizing any large significant production risk mostly because of our global sourcing patterns and we were able to get parts from other areas of the world. In terms of China, we're scaling the Shanghai area. We have about 50 Tier 1 suppliers there. Our focus is on our profit pillar vehicles, and as Jim mentioned really leveraging expedited freight. We've secured fast maritime shipment as well as airlift capacity to protect our suppliers. And then they're just starting to have a whitelist process to allow suppliers to resume production. So we're working with our teams on the ground in China to help those suppliers get partially operational. So those actions we think will really help us. And as Jim mentioned what's going to be gating us is semiconductors. A lot of these constraints are nested within that. So it comes down to the work that we're doing on the semiconductor supply.

Operator, Operator

The next question comes from Ryan Brinkman of JPMorgan. Please go ahead.

Ryan Brinkman, Analyst

Hi. Thank you for taking my question. As we approach the 180-day lockup expiration on your investment in Rivian, what are your thoughts on the options available regarding this investment moving forward? Are you considering retaining some or all of your stake in light of the recent drop in Rivian shares? If you decide to monetize it, how do you plan to use any potential proceeds? Would you consider using them to speed up your own electrification efforts, or are you already allocating all necessary resources to that area? Would you perhaps prioritize other opportunities, maybe shareholder-friendly actions? What are your thoughts on these options?

Jim Farley, President and CEO

Yeah. Unfortunately, at this point, we're not going to comment on Rivian.

Ryan Brinkman, Analyst

Okay, great. Let me try one on Argo then. I recall you saying on an earlier call that your supportive of Argo AI's potential tapping of public equity. Is there any update you can provide there in terms of where Argo may be with that process, or just what is the latest you're thinking about in terms of their overall strategy and trajectory what has been maybe the early results of some of your trials of robo taxis on the Lyft network or in various cities beyond Miami?

Jim Farley, President and CEO

Thank you. Well, first of all, Argo, and Ryan continue to make great progress technically on the SDS for Level 4 autonomy. We're very happy with the technical progress. Number two, we really see maybe different than others Level 2, Level 3 and Level 4 as two distinct products. Yes, Argo could help us with our semi-autonomous capability, but we feel like that would be a big distraction for them, which we do not want them distracted at all. And number three it's taking time. And this is expensive stuff. And so from our standpoint getting access to the capital markets is very critical to give us the flexibility to continue to fund this for many years to come. One thing I would say is we're very focused on partners that would be aligned strategically with Argo, use cases that would be very material in the deployment of Argo's technology. And we're getting more and more interested as a company, maybe a bit of a strategic shift on goods movement. It's aligned with our commercial vehicle business, and our customers feel they're getting more and more interested in middle-mile specifically. I think that's a material update for Argo and hopefully that helps you.

Ryan Brinkman, Analyst

Yes, very helpful. Thank you.

Joseph Spak, Analyst

Thank you very much. I have a few questions regarding cash. I noticed that capital expenditures are now at $7 billion, which I believe was previously estimated to be between $7 billion and $8 billion. Free cash flow remains unchanged, and EBIT is still the same. So, is the change in maintaining free cash flow dependent on working capital? Additionally, it seems that the redesign cash is now projected to be $1 billion less this year compared to previous estimates, and it appears that the total expected spending on that has decreased as well. Could you please explain what is happening in that regard?

John Lawler, Chief Financial Officer

Sure. With the redesign, we are noticing efficiencies as we progress through the changes in each of the markets we've restructured, and this is beginning to become apparent. There are also some timing issues involved, where some of the work is taking longer to reach a solution or finalize agreements with our partners. Additionally, we announced that we will be selling our facility to AutoZone, which will provide cash that supports our restructuring efforts and global redesign. That's a brief overview from my side. What was the other point you wanted to ask about?

Joseph Spak, Analyst

The lower CapEx versus prior.

John Lawler, Chief Financial Officer

Yes, I understand. The lower capital expenditure compared to previous periods.

Joseph Spak, Analyst

Lower CapEx compared to prior periods.

John Lawler, Chief Financial Officer

Yes. So, the lower CapEx reflects no change in our intended investment in electrification or our fully networked architecture et cetera. It's just timing differences in this year relative to what we saw at the beginning of the year. So, you can still expect us to continually invest. We have the capital to do that. The balance sheet's strong. So, it doesn't reflect anything on where we see the business heading. It's just timing differences for the most part.

Joseph Spak, Analyst

Got it. And then just the follow-up the free cash flow remains the same is a little bit more of a working capital drag then?

John Lawler, Chief Financial Officer

Yes, it's more of working capital. Yes. Absolutely.

Joseph Spak, Analyst

Okay. I think you clearly indicated that the main factor in managing some of the higher costs is more favorable pricing. Can you clarify some of the commentary regarding Ford Credit? Previously, you mentioned it would be about $1.5 billion lower, but now it seems strong yet lower, suggesting some of that decrease may also involve Ford Credit.

Marion Harris, CEO of Ford Credit

Yes, Joe, it's Marion. Let me cover the guidance for Ford Credit. We mentioned that profits will be strong but lower. This is due to the fact that we had larger reserve releases in 2021 than we expect for 2022. Additionally, we had significantly more supplemental depreciation releases in 2021 compared to what we anticipate for 2022 related to the lease portfolio.

Joseph Spak, Analyst

Did your expectations change versus what you communicated three months ago there, or this year?

Marion Harris, CEO of Ford Credit

No, no. No.

Joseph Spak, Analyst

Okay. Thank you.

Emmanuel Rosner, Analyst

Thank you very much. So John, last quarter you provided a very helpful walk towards the 2022 adjusted EBIT with some of the largest puts and takes. And so, I was hoping you could maybe update some of the buckets here. So, obviously, commodities was expected to be a $1.5 billion to $2 billion drag. Now it's $4 billion. What is now the market factors versus the $6 billion from last time? Ford Credit was going to be a $1.5 billion balance drag. I seem to understand from the last question that this hasn't changed. Any other changes besides market factors? And can you just quantify that?

John Lawler, Chief Financial Officer

Yes. So I think what you see there is exactly that. There's no change to Ford Credit. We are seeing higher inflationary pressures. We are seeing higher top line pricing that's coming through, but we're also working on cost offsets as well. So I think it largely remains what we had talked about last time. We're just seeing higher inflationary pressures and higher pricing flow through.

Emmanuel Rosner, Analyst

Compared to the previous estimate of $5.5 billion to $6.5 billion in volume mix price benefits, we can now add an additional $2 billion to $2.5 billion, which accounts for the pricing offset and the cost offset.

John Lawler, Chief Financial Officer

No, I don't believe it's as high as $2.5 billion, Emmanuel. There's growth, but it's not that high. When you compare it to what we provided last time, most of the inflationary pressures we are experiencing are being balanced out by a combination of additional cost reductions, pricing, and a favorable mix, but it's just not as significant as you indicated.

Emmanuel Rosner, Analyst

Okay. On the cost piece of it, are you dialing back or sort of like prioritizing some of the modernization investments, or is that largely left as is for this year?

Jim Farley, President and CEO

No, absolutely not. I want to emphasize that we are truly excited about our growth opportunity in electric vehicles. We have electric architectures to invest in, we are developing operating systems, and we are investing in both partial and full autonomy. This is all part of our Ford+ plan and is crucial to our transition to a connected future. We are making significant investments in expanding our service portfolio for Ford Pro, and we are fully committed to that. The cost drivers we are facing include manufacturing as we streamline our internal combustion engine lineup and completely redesign our manufacturing process for electric vehicles. Additionally, we have opportunities in sales, marketing, and engineering as we simplify our product lineup, along with warranty and other areas. We understand precisely what we need to do.

Emmanuel Rosner, Analyst

Understood. Thank you.

Itay Michaeli, Analyst

Hi, great. Thanks. Good evening, everybody. Just two quick ones for me and thanks for squeezing me in. First, you did talk about the cadence of earnings before but just hoping we can revisit it in terms of kind of how to think about the adjusted EBIT for the rest of the year and whether there is any bias at this point towards the low end or high end of your full year guidance range. And second, more housekeeping question is whether you can provide what you anticipate the Ford Motor Credit dividends to be back up to the parent?

Jim Farley, President and CEO

Yes. I mean, we're not going to parse out the guidance. It's 11.5 to 12.5. It's a dynamic environment. We're working to offset all the headwinds and maintain the guidance. But as far as passing out where we sit within the guidance of 11.5 to 12.5.

John Lawler, Chief Financial Officer

And then on the dividends the dividends are a function of overall profits and balance sheet size and leverage. And in this case, you heard the guidance on profits and into the balance sheet. We don't expect much growth this year just given where we are in the vehicle constraints. So the majority of profits – we don't have a specific number.

Jim Farley, President and CEO

And I'll just make it really clear on the overall company's automotive financial performance. The second half is very critical for us. It's just a very critical time for the company. We have the opportunity to build in volumes we haven't for a while. And we have a lot of great fresh products, a lot of costs coming in the business but the second half is really critical for the company.

Itay Michaeli, Analyst

That’s all very helpful.

Operator, Operator

This concludes the Ford Motor Company First Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect.