Ford Motor Company (F) Earnings Call Transcript & Summary

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. Thank you for standing by. Welcome to the Ford Motor Company conference call hosted by Wells Fargo. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Colin Langan. Please go ahead.

Well, thanks, operator, and thanks, everyone, for joining us today. I'm excited to host a post earnings conference call with Ford. On the call today, we have Ford CFO, John Lawler. John has been at Ford for 30 years in various roles. Prior to being appointed CFO last year, John had held various senior positions, including CEO of Ford Autonomous Vehicle, Vice President, Controller of Global Markets, Head of Ford Strategy and CEO of Ford China. John is joined by Kumar Galhotra, President of the Americas and International Markets Group. Previously, he was President of Ford North America, Group Vice President of Lincoln and Chief Marketing Officer. And lastly, we have Lynn Tyson, Executive Director of Investor Relations, who, I assume, most on this call know pretty well. I've already received many questions in advance from investors. But if you have questions throughout the call, please just shoot me an e-mail at [email protected], and I'll do my best to get them answered. Thanks, everyone, for joining the call today.

Why don't I just kick it off? There's been a lot of good and bad news on the earnings call last week. Can you start off by addressing what has been the top questions you've been getting from investors following earnings?

Yes, Colin. How are you? Good afternoon today, and good afternoon to everybody. It's John. I think all the conversations that we've been having so far have been really positive. And it's centered around the fact that it really does appear that the -- from both the buy side and the sell side, that the redesign and the refreshed portfolio that we've been undertaking is really starting to gain traction and take hold. And the earnings power, it really does appear that the earnings power and the ability from that to generate strong levels of free cash flow, it's becoming far more evident. I think as we've talked to folks, clarification around the guidance has centered around the fact that when you look at what we guided back in February. We had talked about potentially seeing 10% to 20% of our first half production being impacted by the chip issue. And then as we came into this earnings call, we wanted to be really forthright and transparent about what we were seeing relative to chips. And with that, the volume impact would pretty much triple from what we were talking about previously and seeing an impact of 10% to 20% or 200,000 to 400,000 units. And when you think about that, with the volume growing to over 1 million units, the impact on the profitability, when you take that much volume out, is substantial. And that what you're seeing is the good news from Q1, flow through of some of that good news, plus the additional work we're doing to find offsets has allowed us to maintain the net impact to the guidance at the high end of our previous range of $2.5 billion. So I think the issue we have is we were a little bit too subtle in saying that we're able to contain it within $2.5 billion net of offsets. Well, those offsets now are substantially higher than what they were in the first quarter to offset triple the volume impact. And so I think that clarification has been really important. And as we've talked about it, I think both on buy side and sell side, everybody's understanding what's happened there and that the run rate of the business is at that $8 billion to $9 billion that we had originally guided without the impact of the chips.

That's very helpful. And you kind of touched on this in that question, but you reported a record adjusted EBIT in Q1. Margins were almost 13% in North America, almost 5% in Europe, almost 9% in -- I'm sorry, international. Is this a glimpse of what Ford might look like once it gets through the restructuring? Or is there just too much volatility in Q1 because there were some one-offs like Rivian in the quarter?

Yes, there was some volatility in the quarter. And then, of course, with the volume reductions, there are things that happen with the marketing accruals that make it even more opaque. But I think the bottom line is that, yes, what you're seeing come out of the business is the strength of the business. And I think the best way we can frame it up is that, that underlying run rate for 2021 is really in that $8 billion to $9 billion EBIT range without the impact of chips. And it's really about, as I said earlier, the refreshed portfolio, when you look at us taking the average age of our vehicles down from 5 years to right around 3 years, which we're going to maintain the new products that we're coming out with the Mach-E, the Bronco Sport, what's yet to come with the Bronco and other products that Jim had alluded to on the call that are yet to come or yet to be announced. And then the redesign actions taking hold in Europe with the $1 billion improvement year-over-year and what we've done on cost, and you're starting to see some traction on warranty, that definitely, you're starting to see a much stronger business come through. And we feel that $8 billion to $9 billion is the right launching point as we go into next year. Now we haven't guided '22 yet, but thinking about the business is you should think about it coming off of $8 billion to $9 billion as we head into '22.

Got it. And obviously, the Q2 semi-related production cut was a very big surprise. Most investors seem to, unfortunately, believe that Ford is worse positioned than other automakers. Do you think that's true around this issue? And if competitors are able to bounce back faster, what can you do to kind of keep those customers that might have to wait to get a product?

Yes. There's a lot we're doing with customers in our sales process that we'll talk about here as we move through potentially or Kumar can jump on and talk about that here in North America. But what I would say about the chips is it's hard for me to comment on what -- what's happening with other OEMs. This has been a very opaque and difficult situation to get a read on. I think everybody is feeling that as we go through, partly because these chips are, for us in the auto industry, are down a couple of tiers, right, down into Tier 3, and really reaching down into the supply base to understand how those Tier 3s come up into 2s and Tier 1 s and what's going to happen with the modules has been a lot of work to get our hands around that. But I would say that when we came in, in February, we were one of the first to really talk about the fact that the chip impact could be significant in the first half as we were thinking it was a first half issue. And we said it could be between 10% to 20%, and it came in at 17%. And then I think what's happened since then is things have been impacted by the Renesas fire at the Naka plant in Japan, and 2/3 of their production at that facility is for auto. And that just exacerbated everything. And you saw that now come through as we see what the impact is going to be on Q2 for us in the total then the impact of the chip issue extending through the first half into the second half, although we do say we think that it's going to mitigate a bit and that the second half production will be impacted by about 10% for us. But I think what you're seeing there is that there are a lot of moving parts. It's pretty opaque. We're all doing what we can to work through that. But it's hard for me to say that others aren't impacted or that were impacted more than others. I think as we went through the first quarter, you saw others get impacted. If you look at the impact on inventories, we're all being impacted pretty significantly on inventories. And so I think as this runs through, there may be slight variations on different folks, but I can't say that we're going to be more impacted than anybody else.

This is Kumar here. Colin, can I add just a little bit of color to that, what John just described and why it is so difficult. So 2 key points. I think some of the facts are not completely understood on why this is playing out the way it is. The constraint is fundamentally in wafer suppliers who are generally Tier 3 or Tier 4. So the wafers supply to a chip maker, chip maker supplies to one of our Tier 1 s, who might be supplying a brake module or steering module or body module, and they supply to us. So if a particular wafer maker goes down like Renesas, it's very difficult to see how that wafer goes into which chip and into which module and how that would impact a particular OEM, because that could take 500 different pads. That's one really important point. The second important point is the concept of nesting. So for example, if we were already losing production for a particular module from supplier A and if supplier B runs into trouble also Tier 1, all of that new lost production could be nested in the first one. Since we were taking that out anyway, it doesn't affect us all that much. But it could be a completely different case for a different OEM. So we are managing this like day-by-day basis, week by week, and I'm sure our competitors are doing the same. That is because these couple of very important complexities, it's really difficult to say which plans for which OEM will be impacted when.

Got it. And I got some questions from our tech team. So I mean -- and on that front, though, of the semi supply chain, it sounds very complicated. I mean, do you have any visibility into inventory levels, considering a lot of it might be sitting at your suppliers? And are you seeing any issues around double ordering across the industry as people are just sort of scrambling to get from wherever they can?

I think -- you want to go, Kumar, or you want me to go?

No, no. Go ahead, please, John.

I think historically, we have not had much visibility into the semiconductor supply chain, as Kumar said, it was down into the system at Tier 3, Tier 4 in the process. And typically, that's been managed by our Tier 1 suppliers. But going forward, I think that we're going to need to change our processing and really start to think about some of these critical components differently. And one of the things that we've been doing is we've been doing a lot of benchmarking, particularly around the tech industry and how they manage some of these critical components and the supply of these critical components. And the best practices that they have relative to what we've been doing at Ford or what's been done in the auto industry and how far deep you'll reach into your supply chain to understand what the rate and flow is of those critical parts. So that's something that we'll be doing going forward. And I can tell you that Hau and the team have had a lot of learnings, a lot more visibility now around these key components and what these -- what the rate and flow will be and what's available. So I would say that historically, we have not, but we're changing, and we're learning from this, and we're benchmarking and getting to best practices. And we'll bring that across not only things like the semis, but across other critical components that we have that we're sourcing. So I think there's a lot of good learnings from this. And as far as if people are stockpiling, I think that most of the suppliers now are trying to make sure that there aren't buffers being built so that they can get commodities and components to everybody so that we can keep people running and keep people up. So I think most of us are trying to put a check on that to make sure that, that's not happening.

Got it. I mean, and the Q2 cut was significantly more worse than forecasters like IHS were expecting. Was the announcement made in the Q2 earnings -- Q1 earnings call, something that had already been signaled to the supply base? Or is this sort of a surprise to them as well?

I think the situation is so fluid, and everybody is managing week-to-week. As Kumar said, it's very complicated. And as you start to see components from our Tier 1s where they're saying that they can't be supplied, you have to go through the nesting process, and then we have to go through the optimization process so that we can try to reallocate to build the most profitable vehicles or the highest demand vehicles that we have throughout the system globally. And so that's just day to day, hour to hour is we're doing this to try to optimize. And so for those that are impacting us, they're clearly seeing the changes in the production and the changes of what's going to happen. But then as we work through that and we get the plant to plant, then we start to have the discussions with other suppliers on which plants are coming down and what that means. And so I think you're seeing this flow week to week as we're all trying to optimize with what we have, and we're all trying to understand what the rate and flow of different components are going to be and how we optimize through that. Kumar, anything you want to add on to that?

No, I think you covered it really well, John. Thanks.

I mean, what is the normal lead time that suppliers get? I mean, I guess, is it a couple of weeks? Or is it normally a couple of weeks? And now it's week to week?

When we do our releases, we typically do a production program, which would do the releases, and that's done on a monthly rolling basis. And so usually, that have a pretty good idea because in a steady state, the flow, there isn't a lot of change, production program to production program or release to release. But in a situation like this, there can be a lot of volatility on what's released and how that might impact our downstream suppliers. So I would say that it's a much more steady state in normal times, but right now, it's been very volatile. And so it hasn't been as easy for everybody to follow through or to have steady planning production schedules, et cetera, et cetera, for all the reasons I talked about earlier.

Okay. It sounds like, particularly from the call that you're trying to get some learnings out of this crisis. I think you've said you were rethinking the need for buffer stock from suppliers. It sounds like dealer inventories may actually never go back to prior levels? I mean, what do you think are the top 3 lessons that you've learned from the supply chain crisis?

Colin, I would -- this is Kumar. I would start with, obviously, we have to learn from this crisis. And we take a lot of pride in our purchasing and P&L teams who have been excellent at dealing with these kinds of Black Swan events. But this particular one, obviously, has exposed some vulnerabilities for the entire industry that were not that visible to all of us. So we're obviously taking the opportunity to reexamine that supply chain so that we can eliminate those vulnerabilities, where the -- where there is concentrated risk, how do we get visibility to it? How do we get rid of it? On the front end, I think the team in first quarter did a great job of managing revenue and mix, building the -- and it shows in our results, managing what to build, how to optimize. And there, we're learning how to operate in this extraordinary low stock, high demand environment. Our dealers are learning how to have really quick turnaround. So our vehicles, some of the newer ones, are selling in like 3 days, 4 days when they hit it the dealer lots. We will not go back to the day stock that we used to have. So moving forward, our inventory will be lower because we learned from this. And the transition to the lean inventory sales model will be obviously less capital intensive. We've lowered our incentives substantially, the entire industry has, but we've lowered more than the industry. So all of those processes, we're learning on how will we manage our mix and inventories going forward for better optimization. We're also coming up with other ideas where we make the experience of ordering vehicles more seamless for our customers. For example, we're contemplating a sophisticated reservation system. We're simply flying our complexity where we can both from our build perspective as well as customer ordering perspective, it is a lot easier for them. And then lastly, just an overall modernization of the sales process, where we'll go online, it will be always on. It will be intuitive. And all of that is coming as a -- as we deal with this crisis on 1 side, but take those lessons learned and build these new systems and processes to take advantage of those learnings.

Got it. So it sounds like more buffer inventory for the supply chain, lower inventory levels going forward and more online processes are sort of the 3 big changes coming out of this?

Right. And all the learnings that come from revenue management that we did in first quarter, we would apply those moving forward.

Got it. One of the big pieces of good news in Q1 was warranty costs, which have been very high for several years, and you showed very good progress, I think, down $400 million year-over-year. Is there anything unusual in Q1 driving that warranty performance? And what have you done to kind of get these under control? And how quickly can this continue to fall off from here?

Colin, it's John. Warranty is a complicated area in that there are specific accounting rules we need to follow as we book warranty expense. And so there is a lag between the time that you start to see improvements in what you can book. But what you're seeing come through the first quarter is the work that we've been doing and the progress we've been making on all of our warranty processes. We've been working to improve the robustness of our designs. And that's been a huge focus by the team. We've also been working very closely with manufacturing and quality controls and manufacturing process improvements. We've been working with the supply base around process improvements with them and responsiveness to issues. And recently, as we've had our connected vehicles in the market, we're starting to leverage that connected vehicle data to get out in front of quality issues and solve them much earlier in the process so that, one, it satisfies the customers much quicker, but less people are impacted, and therefore, the cost is much lower. But from a warranty standpoint and how that flows through your financials, there is a lag. So any process improvements that we have and any progress we make, it takes time to come through because we need to have the evidence that this is taking track and taking hold before we can change those accrued amounts in our financials. And so what you're starting to see is that progress show up in the physicals, and then that's starting to come through how we can accrue for the expense. So I think what I would say is all the hard work up to today is starting to take hold. And now you're starting to see the benefits of that come through the processes that we need to file to account for warranty expense and how that then flows through our books.

And there was nothing onetime in the quarter, like a true-up in the quarter? It's just sort of the...

No.

Okay. Got it.

No. Right. So as you know, I think that warranty is comprised of 3 key elements: Coverages or the normal day-to-day warranty run rate of customers getting their vehicles repaired for a warranty action; field service actions or recalls; and then customer satisfaction actions, which will operate more like a recall. And what you saw predominantly come through the first quarter was improvements on that coverages, which is, again, all the improvements that we put in place, the lag impact of that now starting to show up and you're starting to see that come through because the evidence is allowing us to slow the good news through on our accruals.

That's great. The Mach-E has given you pretty strong credibility in electric vehicles. What is the next part of your EV plan? Will you be leveraging the Mach-E platform for other models? Or are you developing a completely new next-gen EV platform?

So Colin, this is Kumar. The next part of the EV plan is to obviously launch E-Transit that we've already announced. That will be later this year. And then the F-150 battery electric comes in 2022. That's what we're going to be building at our iconic Rouge factory in Dearborn. So what we're doing is we're electrifying, we're really leaning into nameplates that are -- where we are very strong, like Mustang, like F-150, like Transit globally, they're best selling than in the world. And we have huge scale in those types of products. So without going into a specific number of platforms or which platforms, let me just share, broadly, you can expect dedicated ground up battery electric platforms, but using all of our experience that we have with vans and trucks and SUVs. And -- so think of it as platforms for vans like the Transit, F-150 and other trucks, and 2 and 3 road crossovers around the world.

Got it. And particularly on the last call, when you're talking about electric vehicles, you seem to talk a lot more about the need for vertical integration. It sounds like that was a big part of the rationale of Ford Ion Park. Why is vertical integration more important for electric vehicles versus internal combustion engine? And what parts, in general, would you still outsource to suppliers?

Yes. Colin, you mentioned the Ion Park announcement. So we are committed to high-volume battery manufacturing in U.S. and globally, starting in 2024. We have a collaborative learning lab that's coming next year to develop and manufacture both lithium-ion and solid-state battery cells and arrays. And we are going to continue to vertically integrate. And we're already in-sourcing. Our e-motors, for example, e-transaxles, we design and build battery packs, and we write our own battery management software. The reason all this is very important is because it is such an integral and important part of the vehicle, right? It's in our name, Ford Motor Company. The motor today is and used to be an internal combustion motor. Now it's going to be an electric motor. And the -- and from any perspective, you look at what an important part of the vehicle it is, how it impacts the driving capabilities of the vehicle, the range, the customer experience, so how they experience our vehicle. From a material cost perspective, it is one of the most expensive parts of the vehicles, both in the ICE world, the motor was, and then the BEV world the motor will be and the differentiation aspect, the quality aspect. So given all those key aspects that key influences this system has on the vehicle, we believe it's important to vertically integrate battery cells, batteries, e-motors, transaxles and our own software.

What about the batt -- the cells themselves? I mean, is that something that -- is that part of the Ion Park idea? Or is it really something that's more to commoditize and you just partner with battery companies?

It is very much is part of the Ion Park investment because the chemistry at the cell level is going to continue to change and evolve. It is going to impact cost substantially. It's going to impact weight. It will impact range because of the energy density you may get from that particular chemistry. So we will, of course, continue to collaborate with some great partnerships we have. But that is an area we definitely want to and are growing our expertise in.

Got it. And I did notice this morning, you announced an investment in Solid Power, I guess, for solid state. Any comments on that? Is that just another sort of opportunity to learn more about the new technology?

Yes. It's very much related to what we just discussed. We believe this is a great opportunity for us to invest directly in solid state because that technology, once it comes to fruition, can deliver better range, they can deliver improved value, even more safety for our customers. So we saw this opportunity. We obviously had an investment in this company already. So with this latest round, we saw an opportunity to invest more and continue to work with them on this very important technology called solid-state cells.

Okay. Maybe shifting to Argo AI. There's a lot of media reports that they're considering doing an IPO. I mean, would you consider selling your stake in some form? Any color on that? Would you participate in an IPO if they were ever to do something?

Colin, this is John. I think Argo has been a really important part of our feature in getting to a self-driving system. So we're committed to Argo as our long-term EV partner. And there's a lot of things about Argo that are really encouraging as they've developed over the last few years, from the time it was in inception to what they've come too so far as far as capabilities. But the things I really like about Argo is the team, the strength of that team. The team Bryan has built and the quality of that team is really impressive for what they've been able to do over the last couple of years. And their approach to building a scalable architecture, I think really is important as we think about a fully integrated AV system, which is another thing that we really liked about what we set up with Argo is that the Argo is the system is not only going to be a scalable architecture, but it's going to be fully integrated into our vehicles, and we'll be developing those together. And then I'd have to say that as Argo has done its development process and it's come together, the other thing I really like about Argo is their multicity testing approach. And that's helping build a much more mature and robust SDS system. So if you think about that, they're testing in 6 markets. So it's not -- they're not easy markets. You're talking about Austin. You're talking about Miami, which is very crowded. You're talking about Pittsburgh that has -- if you've been in Pittsburgh and you've driven in Pittsburgh, you know there's a lot of unique driving practices in Pittsburgh. You've got Palo Alto, you've got Detroit, you've got Washington, D.C. And I really think that the development simultaneously in testing across these 6 cities is going to be a competitive advantage for Argo because they're going to be able to scale much quicker once we get to market because they'll have all these learnings from these different markets where driving practices and driving behaviors are much different. And so I really do believe it's creating a much more robust system. And so we see Argo as our long-term partner, and we really like where they're at, where they're developing and the future for us when it comes to our autonomy plans.

Got it. Maybe switching to restructuring. You announced, I think, $7 billion, so far, of the $11 billion in expected restructuring, with about $2.5 billion expected by the end of this year. How quickly can you benefit from those actions? I mean, does it take -- can some of these be immediate, some of them take several years to come through? And any color that you could provide on what regions might need these additional actions that were coming

Yes. Yes. Let me take that, Colin, it's John. So when we started down the process of doing the redesign, and especially when Jim talked about the plan, when he took over as CEO in October, there were 3 key areas that we had identified that we were looking at from a standpoint of, historically, they've been an issue for us. And I think we said on the call that over the last 5 years, we've lost about $5 billion in our overseas markets. But the 3 key areas that needed to be addressed were South America, India and Europe. And so from a European standpoint, we're really starting to see the redesign actions take hold. We've reduced our cost there by over $1 billion. The team has done a fantastic job moving into more, more profitable vehicles, the SUVs and the commercial vehicles and growing our share in commercial and our mix of SUVs. And so you're seeing a lot of good traction in Europe. South America, we had our announcement at the beginning of the year. It's going very well. You're starting to see some improvements. You saw that in the quarter, where they continue to see progress, not only in their cost structure, but in profitability by taking out the less profitable vehicles and focusing on their strengths like Ranger. And we've also talked about the fact that for India, that we have some decisions to make there, and we're making -- we're working through the capital allocation plans and what we'll do with India. So that will come out in the second half of the year. We'll have to have a discussion about that, and we'll share what we plan on doing. But I would say that you're starting to see traction take place. You're starting to see the goodness come through as we were profitable in our overseas markets in the quarter, $1 billion better than last year. And some of the actions will take longer to see, but we're going to keep at it, and we're going to keep pushing on it. And I think you'll continue to see progress in those markets as we work on the redesigns and the turnarounds for them.

And you mentioned South America, obviously, huge actions there in Brazil. I mean, what is the time line and when you actually start seeing the savings there? Because obviously, there's not much left after you're completed.

Yes. So we've been seeing improvements quarter-over-quarter here over the last few quarters. And I think you'll only start to see that accelerate as we work through these last actions that we're taking as we move away from the manufacturing footprint and eliminate the less profitable vehicles and move into a smaller footprint and moving into our strengths of Ranger, which is a very strong product in the region. We're going to focus in on our transit vans and the commercial business that we have down there. And so I think as we go through the year, you should see continued improvement. And then as we work into next year, we're not guiding 2022, but you should start to see momentum gain, and you should see further improvements in South America.

And North America seemed particularly good in Q1. Is there any restructuring left to North America? Or is it really just about getting warranty costs under control and then continuing the launches? I guess you have the Bronco coming. What gets you to that 10% margin? And any potential to actually exceed 10%? You were close to 13% in the quarter.

Colin, it's Kumar. Lots of initiatives. At the highest level, our income statement for our business is primarily 2 big things, right? Contribution margins and structural cost. And contribution margins are heavily influenced by material cost. That is material cost is one of the biggest contribution costs that we have. So across the portfolio, the PD team, the purchasing team has been delivering great results on material cost reduction. So that's really helping us achieve the kind of numbers we're achieving. Lots of focus on new tools, lots of benchmarking to optimize our designs. Another big part of the contribution cost is warranty. As John shared with you earlier, we're making progress there. I think there's a lot of potential. We're just starting to see the very first benefits of it, of using connectivity to diagnose and fix potential warranty issues even before the products reach our customers. Sometimes we can fix them at our dealerships, if something does get to the customer and that it is something we can fix over the year. We quickly -- we quickly work on that. And there are examples of us having done that in Mustang Mach-E. So that is something we'll only grow over time and further reduce our contribution costs. We had a voluntary salaried separation program at the end of 2020. That will continue to provide those lower personnel costs going forward. And lastly, it's about -- but most importantly, it's all about products. And our knowledge of our customers, our in-depth understanding of how they use the vehicles, and the new vehicles that we are launching are really hitting the sweet spot with those customers, like the new, all new F-150, like the Mach-E Bronco were sold out for a very long time at the Michigan assembly where we're going to build it. You mentioned Q1, it was obviously strongly influenced by semiconductors, but the performance shows a lot of promise. And all this momentum of lower contribution costs, lower structural costs, lower warranty, that momentum offset the loss of production in Q1 and all the launch activity. So we're continuing to drive towards cost and portfolio optimization and that should deliver sustainable results.

And you started off with raw material costs, which were pretty minor in Q1, but it's pretty significant for the year. And you also highlighted that Q1 had very strong pricing. I mean, what are your assumptions in the second half? I mean, it sounds like you're being pretty conservative on what kind of pricing you expect in the second half and yet you have to also absorb those higher commodity costs. Any color on how you're thinking about how those 2 play out in the second half?

Yes. The commodity costs, as you mentioned, expected to be higher. On the revenue side, it's because of all the volatility we've discussed, Colin, literally, day-to-day, week-to-week kind of optimization of where we have constraints, where we have open supply, where we have open capacity. That situation is so volatile. It would really be difficult to give you a precise answer on what would revenue management deliver simply because it is so tied to which chips are available and which vehicles we can build.

Just 1 point to add on that. When you look at the first quarter, in the earnings, we talked about there being a $3 billion improvement year-over-year on pricing. I think as we think about the rest of the year from that standpoint, if you recall back to Q1 last year, that was before, in the U.S., at least, before the impact of COVID really took hold. And then as we went through the year and we relaunched coming out of the second quarter into the third quarter and fourth quarter, and demand was so long to supply, right? We had a shortage of supply because we were down, demand was still more robust than I think everybody thought. So you had really strong pricing in the third quarter and fourth quarter of last year. So on a year-over-year basis, the pricing opportunity is going to be less relative to the year-over-year basis in Q1. And I think that's an important point that people need to understand that we all need to understand is that there was really robust pricing last year in the second half.

Got it. No, that makes sense. What about Ford International? Any color on the relative profitability within ASEAN, Australia, Russia and India? And what are your plans? I think you mentioned, I guess, something will be decided in the second half given the Mahindra joint venture is not moving forward.

So like you said, India, capital allocation plans, second half of this year, we'll discuss those. You mentioned Russia. Russia is focusing exclusively on growing the commercial vehicle business. And in the rest of the international markets, all markets, except India, were profitable in Q1. So ASEAN and Australia, all of those markets were profitable. So international markets are making progress, and India was not profitable, and that's something we're working on that restructuring and how would we allocate capital there, and we would have that announcement, and we will discuss those in the second half of this year.

Got it. Pretty impressive margin considering India was a drag on that. Okay. And then moving on, to the extent you could talk about China, results have been kind of hovering around breakeven. But it does seem, I think, numbers of years ago, you have quite a bit of capacity there. Surprising you're even hovering at breakeven given that capacity. I mean, what are the long-term plans to sort of get the region back on track and getting the utilization to more reasonable levels at those facilities?

Yes. Colin, it's John. Let me take that one. I think when you look at China, the team has done a good job working with our JV partners to improve the overall fitness of the business and wind out much of the cost. Although the footprint remains, how do you utilize that footprint and minimize the floor space and the area that you're taking up and try to maximize what you can do with the plants that you have. And I think the team has done a good job, and you're seeing that come through the JV profitability, and you're seeing that show up in our equity income from a foreign standpoint. I think the other thing that we're focusing in on is a couple of things there is localization of our Lincoln products. That is a big improvement to the cost structure, not only for Lincoln, but also manufacturing those in the facilities there. It will be helpful with what you had talked about -- mentioned in your question around the capacity utilization. And so now we have, not only have we localized the Aviator, the Corsair, but now we just announced that we're localizing the Nautilus. And then, of course, we did the Explorer as well. So you're starting to get the localization, which is helping the Lincoln profitability, it's helping the footprint and the capacity utilization. And then the other thing is the team's focus on the product portfolio in China. You saw that we're bringing the Mach-E. It's going to be launched in Q3 of this year in China. And then we've talked about at the Auto Show, the Shanghai Auto Show, we talked about some of the new product that's coming, the new SUV, the Ford Evos. We talked about the Escape PHEV, which, as you know, electrification is very important in China. We talked about the all-new Ford Escort and the all-new Ford Equator that's going to be coming. And so part of that as well, like you saw with the plan that we have for the rest of the world, the product refresh and the product portfolio and designing products for China is really important. You're going to start to see that take hold even more than it has so far. The other thing I really like about the China plan and what they're doing is they're really approaching the business differently in ways and they're modernizing. And I think a good example of that is how they're managing the transition to electrification. We established a separate BEV division that's going to have dedicated, I guess, R&D and manufacturing and sales and very focused on user experience for the electric vehicles. And as I said earlier, electrification is probably going to be -- if not adopted, the quickest in the world, you have to have a debate between who is going to adopt electrification quicker, Europe or China potentially, but it's a very important part of the future in China. And the approach we're taking is working with the dealers, working with our existing dealer base, setting up this new approach with the direct sales network and also then providing charging. So I think it's a combination of getting our fitness in line, getting our cost structure in shape, focusing on localization of the Lincoln products and any products that were imported, like the Explorer, really leaning into a new portfolio and then thinking about modernizing and doing different things differently when it comes to electrification. And that's the plan we're developing, and we're putting in place to really bring the China business back to what we think it could be.

Got it. Maybe I'll switch to a couple of questions I got. Unfortunately, I'm following up on the semi issue here. But one, just to clarify, so when you talk about the numbers, I think it was like down 50% from your original plan in Q2. I mean, so when we add it up for the year, is it something like you were expecting $4.6 million to start the year, and now it's around $3.5 million? Is that sort of the right ballpark of what you're planning versus what's kind of going to come through based on sort of 10% down, 200,000 units in the second half, 50% in Q1 and 10% -- or sorry, 50% in Q2 and 10% in Q1?

Yes. So we saw a 17% reduction in Q1 off of what we had planned. In Q2, we're going to see a 50% reduction. And then we said the second half would be about the 10%, impact of the lingering issue from the original chip impact. So that -- those are the numbers that we had talked about on the call, yes.

Okay. So it's something like $3.5 million, it was original $4.6 million, now you're thinking around $3.5 million. Okay. And then, this might be a little tougher here, but what kind of measures have you taken to manage the supply shortage? I mean, have you done anything to maybe go to untraditional sources to get semi chips? I think, are there other -- can you buy them at sort of regular stores, if it's possible? I mean what are some of the greater things you've been able to do to sort of to find a solution to the shortage?

Yes. I'll start and then Kumar, you can jump in here and help me from a technical standpoint. When you look at that, we have looked at every opportunity we can to either find a different supply or can we substitute chips that we might have? Are there alternative sources of chips that we could put in? Can we develop -- quickly develop a different chip? And we've worked through all that. I think what we're finding is it's the optimization of the chips that we have and what can work in certain modules and using that with those modules to optimize the vehicles that we can build to our higher profit, faster moving, higher demand vehicles. And that's what we found to be the most impactful as we worked through the first quarter, and we'll work through the rest of this year. We're also -- we are looking at what we can do from a chip standpoint are the things that we could substitute. But that takes a while because this is automotive, and we need to be very careful about the quality and the safety and the reliability of those chips and as we put those in components, so there's testing that would need to be done. So we are doing everything we can. We're looking across all the opportunities or possibilities. We're looking at different chips that we could substitute. And we're trying to manage it, as we said earlier, day-to-day and week-to-week to optimize the production that we do put in place.

Yes. The only thing I would add, we're doing all of that and optimizing our production. But given these chips are so specific and the wafers are so specific, it is really difficult to find alternatives that can be simply plug and play. The pin locations can be different. The specs are different. And the other really ironic part is even if you find a solution, oftentimes, then you find out, well, that particular chip or wafer is also under a constraint. So the team have done just an incredible job of leaving no stone unturned. But like John said, we've had -- we've made more progress by optimizing what we are learning from and getting from our Tier 1s and Tier 2s.

Okay. Got it. Maybe just to wrap up the restructuring. I didn't talk about Europe. Are you done in restructuring there? I think IHS is forecasting maybe more actions in terms of plants? Is that -- do you think that's possible or needed at this point?

It's John, Colin. I would say we're largely done with our restructuring in Europe, but we'll always adjust based on the business and demand, and we'll take the actions that we need to take. I think that Stuart has been very decisive from that standpoint. And so I think we'll always be looking to find ways to improve the efficiency of our business. But I'd say we're largely done. I think where he's at now is he's in the second phase of this transformation and really moving into optimizing his commercial business, shifting into utilities, finding the path forward when it comes to electrification, you've seen a lot of announcements there, and moving into all-electric models by 2030 for passenger vehicles and 3/4 of commercial vehicles being now all electric by 2030. So I would say that it's largely done, but we'll continue to work on it. And Stuart is now in the second phase, where he's really starting to focus in on his growth areas and moving into electrification.

And you mentioned, obviously, Europe will be sort of the first to test EVs. How should we think about their profitability by the time you get to 2030? I mean, will they be comparable? I mean, especially when you're now focused on highly profitable commercial vehicles in that market and SUVs? Or is that going to be a bit of a drag by the time we get at that point because EVs today, I assume, are lower margin?

Yes. I think in looking at EVs, you have to think about it differently around the world. I think that in Europe, there is more of a transition across markets and so the demand is there. And therefore, I think the pricing is relatively robust when it comes to EVs. And I would say that, although they are more costly, there is a revenue premium at this point. And then, of course, we're working very diligently on our whole electrification plan, as Kumar had mentioned earlier around vertical integration, driving the cost down and moving towards a much lower cost pack in the products. And so I think like everybody else, we know we need to make progress on the cost of the batteries for electrification so that we can get to the point where our BEVs are similar in cost structure to what we have with an ICE vehicle today. But when you step back and you look at our EVs today that we have, Mach-E is profitable, and we fully expect the F-150 to be profitable. And I think as Kumar said earlier, one of our approaches in electrifying our strength areas and where we have significant scale is we can leverage the scale from those iconic nameplates to help us as we move across into our battery electric structure as well. And so I think it's a combination of needing to understand how the market is going to evolve, how much pricing premium will remain for battery electric vehicles compared with what the cost reduction process is going to be. You've seen significant costs come out of battery so far, and you've seen that curve where the cost per kilowatt hour is dropping, and we're going to continue to drive that down. And so I think it's a balancing act as we move forward. But make no mistake, electrification is here to stay and it's the future, and we're going to continue to invest in it. And all of us in the industry need to figure out how we're going to close that gap between an ICE cost structure and a BEV cost structure and maintain strong margins in the industry and in the business, and that's what we fully intend on doing.

Can you talk a little bit about your Level 2+ or Level 2 autonomous strategy? I believe in the second half, you'll be rolling out some updates across your, like, Mach-E vehicles and F-150s, how should we think about that?

Yes. You're right, Colin, it's Kumar. We are rolling out deployment of BlueCruise. That's our -- that's the Level 2 you're talking about in third quarter of this year, and we're going to do it over the air. So the vehicles were equipped with hardware and the sensor set, and then we will be able to enable the feature through a software update. This is a partnership in our in-house software -- between our in-house software capability and our Tier 1 suppliers, so that's just the first example. So continuously upgrading our features is the plan for the future. Our latest vehicles provide capability for over-the-air updates. And we're going to take full advantage of that to both understand performance in the field, add new features, fix quality issues. And all of these will be done in various ways. Some we will develop in-house, some are partner software with our suppliers. So yes, it's coming in the third quarter, and we're really looking forward to it. I've had the opportunity to drive them, it's quite an amazing system.

So I know our call is marketed some of the tech investors. And I know a lot of them do more tech investors look at some of the -- your competing EV start-ups. You are hosting a Capital Markets Day at the end of the month. Why should maybe tech investors take a look at what's coming at your Capital Markets Day? It sounds like you're going to be making some announcements, I assume, more on the future mobility themes. Any sort of color there that maybe a nontraditional investors should pay attention to?

Well, I would say that we're transforming the company. And a big part of where that transformation is taking place is, it's not only just about the vehicle these days, it's now about the technology in the connected vehicle and what we can do with that and providing services and experiences to our customers. And what you're starting to see in the industry is the intersection of hardware, software and services. And I think that is at the center of what tech is about, it's who can do that the best. Traditionally, in the automotive industry, I've talked about this recently. And if you would ask me, even 5 years ago, if you thought our business model could transform in the manner that it is, I would have kind of shrug my shoulders and that's interesting, but I don't know that we can transform that much. And now it's happening because we're no longer in like a transaction mode where you design, build and finance a vehicle, you're talking about a life cycle engagement with the customers and having an always-on relationship with them and providing them ever-increasing value over the life cycle of that vehicle by updates, and we're starting to do that with over-the-air update. So I think this is the perfect intersection of tech and what would be traditionally old school manufacturing industry. And I think that tech investors should be interested to see what we're planning to do, how we're going to do it. And the excitement that's coming with the transformation that we have and the opportunities that we have in front of us. And we have some great franchises and great brands that we can lean into. They give us some advantages. I mean, look at commercial vehicles for us around the world. We're #1 in Europe from a brand standpoint. We are the #1 in commercial vehicles in the United States. And we're electrifying those vehicles and those are our strengths. And we're connecting those vehicles. And we know how those customers operate, and we're close with those customers. So that's starting to bring that hardware that software and that customer service together. And I think that's incredibly fascinating and interesting, and I think that tech investors should want to understand that coming from a company like Ford.

No. Sounds great. We're actually a minute over. So I apologize, and thank you very much for taking the time to speak with us. And I guess we could, operator, close out the call. Thanks again, everyone, for joining us today.

Thanks Colin.

Thank you, Colin.

Thank you, Colin.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.