Ford Motor Company (F) Earnings Call Transcript & Summary

[Audio Gap] This is a company that's clearly trying to take the lead in electrification, is one of the first movers, in my view, to really lead the organizational and cultural revolution that's likely required among all legacy OEMs. Ford is -- you're certainly not shying away from that. As of next year, completely resegmenting its financials, breaking out its ICE, EV and commercial-facing Ford Pro businesses. There's an enormous cost savings opportunity for Ford Blue over the coming years, which we'll cover at length. And also major changes on the horizon in the company's go-to-market strategy and recurring revenue stream opportunities through software. So we have all those pieces of the puzzle to cover as well as Ford's strong second quarter earnings from last night, a very strong print and reaffirm guidance, which we'll get into to kick things off here. So John, Kumar, thank you guys for the time. This is much appreciated. And you guys might be on mute. John, I think you're on mute. Okay, hopefully, you guys could unmute.

Okay. Good. So first question on this year's guidance. What's embedded in the second half walk? The full year adjusted EBIT guide calls for $12 billion at the midpoint. Ford delivered almost exactly half of that through the first two quarters. What are the major drivers to the first half to second half walk? Last night, it was confirmed there's an additional $1 billion in inflationary pressure now hitting. Did any of that get captured in the second quarter?

[Technical Difficulty]

John, we can't hear you. Apologies for the technical difficulty here. I'm told we lost the connection to their room. So I'm sure folks are trying to connect them back.

Team, their system dropped. So they are trying to reengage right now.

All right. Thank you. Apologies, folks. [Audio Gap] That was Ford. They are actively trying to reconnect. It looks like John might be back on. [Audio Gap] John, can you hear us?

This is Kumar. I just joined over the phone. Can you guys hear us?

Yes.

Okay. We're trying to connect John and Lynn as well. We may not be -- at least I can't get in the video because of -- because I'm phoning in on a phone.

Okay. Well, we could spend the full hour talking about Ford Blue, too. So not a problem.

Let's see if we can connect John quickly enough. The IT team's on it. I'm not sure what happened. While we wait for them...

Yes, let's -- should we get started?

Yes. We can talk Ford Blue and when John joins, we can get back to John's questions.

Okay. Yes, let's do a one-off on warranty savings because I know that's something you're deeply involved in. So what inning are we in, in realizing the full $1 billion to $2 billion in warranty savings? I think just last night, Ford confirmed, last year benefited to the tune of about $1.4 billion and you might be giving back $300 million or $400 million this year in terms of additional warranty costs, but you'd still be net $1 billion in savings. Just how are you thinking about the key drivers here? And how much of a factor does Blue Oval intelligence, the next-gen architectures and the OTA capability play into this warranty savings opportunity?

Yes. Well, first, let me start with the fact that fixing quality is our #1 priority as a company. It's my #1 priority, my team's #1 priority, Jim's #1 priority. As you mentioned, we've made progress in warranty spending. We are also seeing improvement in IQS, that's the J.D. Power Initial Quality Study. Our launches have improved substantially. Maverick was -- Maverick launch went really well. Lightning went well. But the one area that continues to hamper us is recalls and other customer satisfaction actions that we're taking. We're adding more talent. For example, Josh Halliburton now heads quality for the company. Josh, very experienced executive from J.D. Power, originally from Ford. With Josh's leadership, all the functional leadership of product development, manufacturing, supplier assistance, technical assistance, we're focused on two or three very key things. First and foremost, prevention, right? These issues simply shouldn't happen. What that means is a much more robust engineering sign-off procedures. Documents like failure mode avoidance, better DV testing. So a lot of focus by all the engineering directors on those disciplines that produce more robust design. Secondly, a much more frequent alignment with the supply base so that whatever design changes we're making or developing, they're completely in step with us. The second part we're doing is quicker identification of the issue, and we're applying a lot of new tools here. Better audits within our factories. We continuously monitor social media now for all our vehicles so that if the customers are complaining about something, we can get to it before they even come to our dealership. We continuously monitor our call centers, dealer feedback. Our connected vehicles now can alert us on several, what I would say, detection items so that we can get a kind of a head start on if we're starting to see something. And then lastly, [ over the arc of ] capability, as that is growing, that really helps us actually fix a lot of the issues over in the year without having to bring the customers in. So I would say there's a lot more work to do in this space. So we're not satisfied by any means. But we've seen progress and much more disciplined on this #1 priority for our company.

Understood. John, do we have you?

Yes. I'm back. Sorry about that.

We're sorry. Okay. Great. So first question was just going to be on this year's guidance, right? The second quarter came in well above expectations. What's embedded in the second half walk? The full year adjusted EBIT guidance calls for $12 billion at the midpoint. Ford delivered almost exactly half that through the first 2 quarters. And what are the major drivers of the first half to second half walk?

Right. And so when you look at the second half, we have talked about volumes improving second half versus first half as the constraints from a commodity standpoint, primarily chips ease a bit as we run through the second half. So it reflects stronger second half volumes. And we said 10% to 15% for the year, and so that means the second half would be up in the low 20% range versus the first half. We do see stronger pricing continuing as we move through the second half. But we also said that as volumes come up, we would see a partial offset with higher incentives, so a partial offset to this pricing strength we had. So although pricing will improve because of the top line pricing we took already comes through the second half of the year, you would see potentially an increase in incentives as volumes start to come back. So overall, we said that when you look at volume, mix and pricing would be a tailwind. And then you start to look at looking at the cost structure. And so we do expect commodities, and we've seen this a little bit in the market so far, that they're coming off of some of the peaks. So we should see commodities ease a bit in the second half. And so that will be a bit of a tailwind as well. But we're also seeing continued increases in inflation, other inflationary costs, material costs, freight and labor as well. And so that's going to be a bit of a headwind, along with exchange. The dollar is strengthening. And as it's strengthening, we are more exposed on the revenue side than the cost side. And therefore, then we're seeing a bit of a headwind from exchange through the second half of the year. Of course, Ford Credit profits will be lower in the second half relative to the first half. And we guided last night, overall, we had stated that we think Ford Credit will be somewhere around $3 billion for the year. So those are the big puts and takes, let's say, as we move through the second half. And then one that I failed to mention that I want to put out there is that we will continue to invest in our modernization, right? And so we're building out our EV plan. We're building out our connectivity. And so we will continue to invest there. So it'll be on a half-over-half basis. There will be some additional costs from that standpoint.

Got it. Super helpful. And just on the additional $1 billion in inflationary pressure, right? This is separate from the $4 billion commodities impact. Was any of the $1 billion -- the additional $1 billion -- now it's $3 billion total for the year, right? Was any of that $1 billion captured in the second quarter? Or is that all kind of a second half headwind?

That $1 billion is $1 billion half-over-half increase.

Okay. Understood. On the very important and contentious topic on pricing, you mentioned incentive spend. But there's a notion that net pricing has to come down off all-time highs. And I think there's a good amount of folks out there that anticipate this to be more of a cliff jump than a glide. How resilient can consumer demand prove to be? And what are you seeing in current delinquency rates within Ford Credit? Can you talk about the various levers to manage net pricing with respect to the incentive spend that you mentioned for the second half?

Right. And so we are seeing demand remains strong for our products. And even in the increasing pricing environment and the increasing interest rate environment, so far, demand is still above what we can supply due to the supply chain constraints. So -- and that's continued. Vehicles are moving quickly. They're moving off almost instantaneously off the dealer lots once they get there. So we're still seeing strong demand for our products. We are, at Ford Credit, starting to see an uptick in delinquencies, but it's just getting back to what you would have seen maybe like from a 10-year running average of delinquencies. But we're not seeing increased losses because residual values are high. There's equity there. So I would say that it's reverting back to a normal run rate, but we haven't seen it go beyond that. So those are two things that we're watching very closely. Now we do appreciate that in rising rate environment, the larger macroeconomic environment that's shaping up, that we have to be very thoughtful about affordability. So we're watching that as well. And we understand that there's only so far we can go and the consumer can handle only so much from a price increase. So we're very thoughtful about that as well. So we have planned in the second half, as volumes come back, that we should see a slight uptick in incentives as that volume comes back. And we've been consistent for the last, I don't know, two or three quarters that we do really believe that volume and pricing will remain dynamic as that volume comes back. But again, it's all going to come down to how disciplined we are relative to stocks and relative to the past practices in the industry of pushing volume through the system. And we're not going to go there. We're going to stay disciplined on our stocks. We're not going to get back to the point where we have to push the volumes through. We're going to stay, remain balanced. The other thing I would say is that if you look at the pricing that we've taken and where we're sitting on incentives, we're sitting in the low single digits from an incentive standpoint. And if you were to give back the entirety of the top line pricing that we've taken, your incentives would have to increase beyond 16%, 17% of revenue. So that's a significant increase, the incentive spend to give back that -- all of that top line pricing. And so that's how we think about it, and that's how we frame it up. And I guess the last point I would put on that is, remember, dealers are selling at or above or close to MSRP. And as Jim said last night, our dealers are selling close to MSRP, but there are others that are selling above that, above MSRP with other brands and other manufacturers. And that's worth, on average across the industry, about $1,700 a unit, $1,500 unit. So I think that would be the first place that you would see pricing come off as volume and demand came into equilibrium and/or as demand came off from what we're seeing today.

So yes, I mean, what would it take? I mean, is there any point in history to point to just how quickly and aggressively incentive spend can run higher, right? I mean, we're talking over 10 points, I think, of net -- of incentive spend to run higher, for your net pricing to turn negative. How quickly -- what's the quickest, tightest window that this could take place in?

Yes. I think looking at that, you have to think about the situation we were in, in the industry when these types of things happen. So the way we think about it is, if you go back and look at where were the companies sitting from a standpoint of health, let's say, at the part of the economic cycle where we were heading into a potential downturn. And typically, what happened there was we were way overstocked, demand was coming off, there were too many [ unit dealers ] dealers, demand was coming off, and so what lever did the OEMs pull? They pulled the price lever, and they pulled it really quickly. And they drew down price to try to move the vehicles through the dealer lots so that they can maintain production. We're in a completely different situation now at Ford. We don't have an overstock situation. We won't have to pull that pricing lever just to move the stock that's on the ground. And we'll be more balanced as we move forward. So it can move very quickly, and that's what's happened in the past. But we're in a completely different situation right now. From a stock standpoint, low stocks. From an incentive standpoint, we're already at low levels. So there is some room that you can manage, if you do start to see volume come off, especially if we're in a downturn scenario because we should also see costs start to reduce as well, some of the inflationary pressure costs, the commodity costs. So I think we're in a much better situation to balance the inputs and the outputs of the puts and takes if it were to happen. So I don't really believe that what's happened in the past is the right proxy to use for how we can manage through the situation if we do cross over into a downturn.

Yes. And just on the inventory side of things, I think your U.S. dealer inventory levels are reported at something around 290,000, 295,000 units. What percentage or portion of those are in transit, right? Because I think the -- if you just do the math, the days' supply would look much higher than what the reality of days' supply actually is.

It does. And so yes, let's talk days' supply. So I think that's an easier way to frame it up and how we usually talk about it. So I think it was about 50 days supply is what the inventory would say we had. However, the important point is only 14 days of that was in dealer inventory. The rest was in transit. So Kumar and the team did an incredible job. That's, of course, here in North America. Incredible job. As we got the rate and flow of chips, getting the vehicles that we had parked on wheels, getting those through, keeping the production going, getting the vehicles out, getting them in transit, and that's what you see. So 14 days at the dealers, 50 days total. And what I can tell you, and Kumar may want to comment on this, is that once those vehicles are showing up at the dealers, they're still turning very quickly.

John, you covered it perfectly. The days to turns are very, very low. And the inventory is, as you mentioned, extremely low at the dealerships.

Shifting to commodities. And if we just look at what the average impact has been going back the last 8 years, pick your number, but before 2021, right? Materials and freight averaged something close to a $700 million per year headwind. And last year and this year combined, they're on track to well over $7.5 billion, likely over $8 billion, depending on where that additional $1 billion in inflation that you talked about earlier, where that sits. But how are you thinking about the commodities backdrop within the current spot price environment? There's definitely a P&L lag which you could hit on. But spot prices are coming off peak. What would be needed in terms of the unwind for Ford to hit its 8% margin target for next year, it's 10% margin target by 2026? How much of a factor is this unwind of this massive commodities and freight headwind?

Yes. So when we look at it, when we think about the walk into 2023 on the way to 2026, we're looking at it differently when you talk about EVs versus non-EV commodities. From an EV standpoint, we're planning conservatively in that we don't see that commodity prices for batteries would come off much over the next few years. It really does seem that demand for those commodities is going to be higher than what the supply, right? I think out there, the conventional wisdom for the industry, I can't remember which report it was, was -- an analyst did a look at it and said that there's only about 50% of the raw materials available to meet the demand that everybody is talking about. That's why we were so aggressive and we've been so aggressive to lock in those commodities to allow us to produce to 300,000 units at the end of 2023 and then going on to 600,000 units the end of 2023 onto 2 million units at the end of 2026. So we locked that in for the 600,000 units, and we have 70% of the commodities locked in on the 2 million. So that's key for us. So we don't see those commodities coming off, and we're not planning for that. I think when it comes to, overall, the non-EV commodities, the way we're thinking about it is it will unwind slowly, and it will unwind quicker if we do tip over into some form of downturn. But again, there's going to be a lag effect. Just like there is a lag effect on the way up, there's going to be a lag effect on the way down because of the contracts that are written. Especially this year, we wouldn't see much flow through other than what we talked about in the walk, a slight improvement on the half over half. But next year, we'll build that in. That could be a bit of a tailwind, but we're not going to count on commodities to continue to drive the business forward. We're going to have to look at other areas to drive efficiencies, et cetera. And so that's the way we're thinking about it. That's the way we're looking at it. We'll learn more as we walk through the second half of this year on how we think commodities might move. But it could be a bit of a tailwind next year.

Got it. That makes sense. Dealer margins have been exceptional, if you haven't noticed, John. Yes, you've talked about something to the tune of $1,700 in excess dealer margin per vehicle. Can you maybe just break down for all of us how Ford intends to go after this profit pool? Is there anything contractual that could prevent the company from addressing the full $1,700 over time? And I know the first lever has been that reconfigured Floorplan financing scheme. How's the progress been thus far in that regard?

Yes. So as you know this, is that the dealer set the sales price, we can't dictate the sales price. We have the suggested retail price, but the dealer gets to decide what that is. And the Floorplan change was not just us looking to reduce price or take some of that pricing back, it was really around the change in the business in that we're going to run with less inventory. We're going to run with lower stocks at the dealer for less time, right? So they're not going to be sitting on the dealer's lot and so we won't have to finance them. And that's why we made the change working with our dealers. Now there's nothing contractually that I'm aware of that would say, no, we couldn't change part of the dealer structure, the margin structure for the dealers. We could do that. But then as demand -- as supply increases, let's talk about it that way. Let's not talk about demand dropping. Let's talk about supply increasing. As supply increases, then we'd be in the reverse situation with the dealers. So we're trying to work with them, trying to put the customer first, making sure that we're thinking about the customer. There's other actions that we can take if we see dealers behaving in a way that we really dislike relative to the pricing. But I think it's a partnership with them that we need to work through. And there's a flip side to everything we could do today that could come back to us as the environment changes. So we're trying to be very thoughtful in working with the dealer body on that. So when we make changes, we'll make changes because structurally, it's beneficial for both us and the dealers to make those changes like the Floorplan.

Is there anything as specific as this, the Floorplan financing? Are there other specifics that you can maybe share as potential levers that you're going after?

No, nothing that we would share right now. Anything we'd be working on, we'd be working on with our dealer partners. And until we're ready to talk about that externally, we will put it on the table. But overall, we'll continue to look at this. We're continuing to work very closely with our dealers to develop how we're going to approach the go-to-market for battery electric vehicles. And so there's a lot of work being done overall with our dealer partners at this point in time.

Okay. Understood. And then there's been a recent news focus on potential head count reductions at Ford. But I mean, I would say the broader strategic initiative seems to be consistently laser-focused on the complexity reduction side in design, engineering, manufacturing. And I think this will naturally include optimized labor. But what are the savings that could be achieved from the manufacturing efficiency gains, that reduction in complexity? What are direct spend takeouts versus just better volume leverage and scaled leverage? Can you kind of just help us think about how to quantify what that savings potential could be over time or how we could kind of frame that ourselves?

Go ahead, John.

Go ahead, Kumar. You start, I'll come in.

I thought you dropped off because somebody dropped off. Can BNP...

But can you guys still hear us?

Yes. Yes.

Great. Okay. I'm really glad the way you framed the question because that's what it is. It is a very fundamental reshaping of the company, reshaping of how we work, how we simplify everything, every aspect of our business. We are taking a very systemic ground level approach to how we assemble vehicles, how we structurally integrate our parts. If we reduce complexity -- and we are not talking about biting around the edges and minor changes in complexity. We're talking radical change in complexity. It will result in a reduction in engineering expense, reduction in testing because you have to test fewer variations of our designs. You have to tool up fewer parts. So the CapEx that goes into tooling those parts would be lower. We can launch our vehicles faster. So it obviously helps substantially in all of those areas. It helps our suppliers. It helps in the logistics, fewer designs of racks, faster logistics. In manufacturing, as you know, a lot of our commodities are sequenced to the line because there's not enough line space to put all the parts right along the line. So some of the commodities are built in sequence at our supplier, then loaded in sequence, then unloaded in sequence, then move to the line in sequence. If we have fewer of those commodities that need to be sequenced, that removes waste. In some of our plants, we have sequencing centers. Like we get the parts from suppliers, and we sequence them right outside the plant. We can reduce those. And most importantly, quality. If there are fewer variations of the system, there are fewer things to go wrong. There's more robust designs. So savings for all that is going to come in sort of two forms, right? It will be savings for the present vehicles that we're building because working on reducing that complexity as well. And then there will be step function changes when new vehicles come in, like our BEV vehicles or our next-gen ICE vehicles, where the complexity reduction has been designed in from the very beginning. So all of this will be part of the $3 billion that we've talked about. That's what fills that bucket and will be part of driving the Model e business to 8% margins. I can -- we've been doing so much of this, I could talk about it for a long time, but I'm going to let John in for a second.

That covers it, Kumar. I think that covers it.

Okay. Well, Kumar, you just mentioned the 8% Model e target. How should investors think about the dilution from your EV business? There seems to be a critical concern by some -- by many or some out there that EVs, you're going to start reporting your Model e segment starting next year. What gives you the confidence? And you're going to have this Model e business out in an island, right? You made it clear that it's going to be losing money to start. What gives you the confidence that you could achieve that 8% EV margin target? And is 2026 still the right time frame for that?

Yes. So let me start, Kumar, and then come on in. So I think what people are missing in this at times is that we basically have a battery electric vehicle start-up buried inside Ford. And that's why when we move to the segment reporting next year, it will be very clear how that EV business is developing, how the ICE business is developing over time and what's happening with our commercial business with Ford Pro. And so yes, the EV business in the first generation of products as a start-up, let's say, is not profitable. We've been clear on that, and we'll be transparent on that when that comes along next year. But the great thing about it is we're working on the second generation right now, and we have the talent and people that have -- and know how to and have designed and launched profitable EVs. And I have to tell you, I've been around here for over 30 years, spent a lot of time in the product development system and the approach that the team is taking and the focus that the team has on how they're going about developing that second generation and applying as much of that to the current models that we have is very impressive. And we're building out the road map to the 8%. And we're looking at it holistically. And we've talked about this as we've gone along, in different areas around what we're doing to get there. And the announcement we had last week is a big part of that. Battery chemistries is really important and having the flexibility on the battery chemistries. And Jim mentioned it last night. The LFP chemistry, it's a much lower cost chemistry from the standpoint of what's going into the battery from nickel and et cetera. So the battery chemistries are important, and we're doing an incredible amount of work there. The team is obsessed over energy efficiency. And it's all about reducing the number of gigawatts that are required in the battery to move the vehicle. And we've put out there the optimization of, if you look at it, if you optimize the arrow on the Lightning, you could get 70 more -- 5 more miles of range, that would be worth about $3,000 in battery costs. So it's the chemistries, it's obsessing about energy efficiency. It's a different approach on the design and simplification of the design of the vehicles. It's a clean sheet approach to the second-generation vehicles, making them much simpler, not having the proliferation of product lineup that we've seen in the past that's been a stable in the ICE business. And as you do that and you simplify that design, it leads to less labor cost. As we've talked about on the second-generation of pickup trucks for F-Series, we're going to reduce the number of workstations by about half. And so that's a significantly lower amount of labor. And then, of course, Jim talked about last night, the distribution model and the opportunities that we have there. So I think there's a lot of opportunity for us to reduce the cost and to focus in on that second generation with a clean sheet of paper. And then on top of that, we have the opportunity as we build these out with a fully networked architecture, really driving the reoccurring revenue and profits from software. So that's -- those are the big buckets of the road map and how we get there. But I think we first need to appreciate that we have that EV start-up embedded within Ford. Next year, we're going to start breaking it out. We'll have the transparency across the business. And then we'll lay out in more detail exactly how we're going to walk that up to the 8%.

That's super helpful. Just one add-on to that. There has been a very clear run-up in battery input costs. And I think that's something that folks are latching on to in terms of it taking longer. And certainly, LFP, right? You could press LFP, right? I think that there's 10% to 15% associated savings without the LFP battery. How are you thinking about the run-up in battery input costs and how that could affect the trajectory and the progress?

Yes. So they're up as much as 50% over the last several quarters. So as I said earlier, I'm not sure that we will see them come down quickly anytime soon, and we shouldn't plan on that. So then it comes back to the other levers that I talked about that we're going to need to pull to maximize, to optimize. And we're not backing off the 8% target. We're still working to get there. And that's part of what we do and that's part of what we face is that there will be things that are headwinds and there should be some tailwinds that come, and we've got to manage those. But we need to drive towards that 8% because we think that's the right level to target for in the second generation of product.

Yes. And there is some level of confidence conveyed by the organization to put the EV segment on its own starting next year. That's -- you guys thought that through, I have to imagine, right? We all should assume that. Just lastly...

It's in there today. So the -- James, the results we have today and our guidance for the year includes that. It includes the EV business as it's performing today as a start-up. So yes, we thought about it, we understand that, and we think it's the right thing to do. Absolutely.

Yes. Tied to last week's slew of battery supply chain partnership announcements, how did these deals come together so quickly? Or maybe they didn't come together quickly at all, but you obviously announced them all at once. It did seem that they all came together quickly. And if you had to characterize it yourself, what distinguishes Ford as a preferred OEM partner that upstream suppliers want to align with?

Yes. What I would say is what you're seeing from the Ford team is how we're changing our culture and our approach. We're working in smaller agile teams that are making decisions quickly. We're very clear on what our strategy is, what we need to do to deliver that strategy. And now we're all executing it. So you're seeing, I think, a different approach by the team, and we're being aggressive. And you saw that yesterday. We didn't start -- we've been working on these for a while, but it is a very, very different clock speed than what you've seen in the past from Ford. And I would say that from a standpoint as a partner, we're -- the brand Ford is well respected globally. They understand what our strategy is and where we're headed, that we're serious about leading the transition into battery electric vehicles. And as we've developed those companies, potential partners we talked about on what our needs are, where we're headed. And we align around the principles that we believe in when it comes to ESG, et cetera. It turns out that there's a lot of alignment in where we want to head and what we want to do. And so we've been able to forge these partnerships, move quickly, make the decisions, and you're seeing the results of that.

Yes. And maybe for Kumar, these upstream announcements, I think, really drive home the Ford emphasis on speed to market, speed to decision-making. What could be applied to Ford Blue in this regard? How could this emphasis on speed play into the $3 billion in gross savings targeted for the ICE business?

Yes. Blue is -- I mean this approach that John described of agility, small teams, quick decision-making is throughout the company, not just exclusive to Model e, of course, it's in Ford Blue, it's in Ford Pro, at Lincoln. Quick decisions, a structure for teams with clear objectives. I can just describe a few. As you know, we're constantly dealing with chip constraints every day these days. And that team is incredibly agile. It has to be to get the right semiconductors, to get them in the right plants to decide which shifts to run, which ones to pause. Small team, very agile team doing great work. As we move forward, our product portfolio derivatives are becoming a very important part of it. They already were, but they're even more important. Derivatives like Raptor R, derivatives like Bronco Raptor, like Bronco Everglades, all of those teams are again small, agile, quick decision-making. Maverick. Maverick is a new offering. It shows that we can compete at the entry-level space, attract new customers. But what was really unique about Maverick wasn't just the vehicle that was the output of all that great work by our teams, it was how that very small team worked together. In my career, it was the fastest we've ever gone from concept to having the vehicle in our customers' hands. And it was small things. Again, cultural change. That team didn't have to come to big management meetings, bring papers, go through PowerPoint presentations. We had the team in one big room. We had PD, manufacturing, supply chain, [ testing ] all in the same room. And folks like myself and Hau Thai-Tang would go into that room every Friday and help the team with whatever decisions they needed and just get on with developing the vehicle and getting it in our customers' hands. So yes, absolutely. Very similar approach throughout the company, and it's starting to show results.

Yes. Back to Model e. Can you talk about the hiring progress and Model e's overall strategy to attract software talent? Ford seems pretty keen to bring in talent from outside automotive. Doug Field has, I think, shared his view that many in Silicon Valley are looking for something fresh, a new challenge. Is the talent pool deep enough for Ford to attract the employees it needs? And there's that other element of share-based compensation. To get the best talent, does Model e need to be separately listed in some fashion so that there's that very high ceiling tied to share-based comp? What are your thoughts there?

Yes. So well, I would say that you've seen the progress we've made in bringing in somebody like Doug Field. And the one thing I would say is a talent attracts talent. And we're seeing that. And we're making good progress. A recent hire that is top of mind because of the work we did last week is Annie Liu, who's come to the company. Annie joined us a few months ago. She worked at Microsoft and Tesla, and now she's leading all the sourcing for Model e components and the embedded systems for us globally. So we are attracting those types of folks with just incredible, incredible history and background in the tech world. And we're going to be competitive, right? And the mission that we have is very compelling. And it's compelling because it's about changing the world, changing the industry and moving us forward. And we think that, that message is resonating really well. And so we're looking for talent in EV engineering, in software, being able to develop the fully networked car and user experience is an opportunity that has a really -- it is really appealing to many of the folks out there because the platform is used by people every day, and it's an incredible opportunity to change a very important experience that most people have every day. And then you've got all the technologies like autonomous driving, assisted driving technologies, et cetera. So there's just a lot of opportunity, a lot of interesting things to do, and the talent is responding very positively to that. And what I would say is from a stock-based compensation standpoint that you mentioned, so far, we're finding that there's a lot of confidence in what we can do and how we can change Ford and where we can bring Ford. That the Ford shares are attractive because they know that, historically, where we've been and where we think we can take the company and they believe in the mission, and they believe in the plan. And so I don't believe you need to spin out Model e and create a stock that is required. We haven't needed to do that yet, and we've had some impressive hires, and we're going to continue to do that. So I definitely believe that we have the ability to bring the talent in, and I do believe the talent pool is deep enough and we're seeing that happen.

Yes. Makes sense. This is a question for Kumar, actually. Ford's global EV mix target is to reach 1/3 of total production by 2026, representing upwards of 2 million EV units would include the China JVs. This would -- and naturally, this is going to entail a transformation to the Ford Blue portfolio. And so focusing on that, what percentage of Ford's current ICE portfolio, the model lineup would... [Audio Gap]

Half of our global sales to BEVs by 2030. I think Europe is way ahead of the U.S. So we're expecting planning for 100% of our passenger vehicles to BEVs by 2030. So clearly, a very clear path to zero emissions future. It's the right thing to do for the business, for the planet, and we're putting all the investment, necessary investment behind it. But I want to be very clear on this that we're also going to grow and invest in our ICE lineup. But those investments will be very targeted. This -- the creation of Blue and Model e, it's really allowed us to focus on really exciting ICE and hybrid vehicles that we have are in our portfolio. These are passion products people love. The word iconic unfortunately gets thrown around too easily, but we truly have iconic products in our company that are part of the fabric of our country, F-Series, Mustang, Bronco. So those products are not going to go away anytime soon. Not all customers are going to want an EV immediately. So we're investing. We're investing in our portfolio. We're really excited about it. We recently revealed really, really exciting products like the Bronco Raptor, the Bronco Everglades, F-150, Raptor R. Everybody I've talked to, they can't wipe the smile off their face after they've driven that vehicle for days. This quarter, all-new Mustang comes, I mean talk about an icon. We're investing in an all-new Mustang. Super Duty, we dominate that segment. We're -- all-new Super Duties coming later this year. So there's a lot more to come. And every time John and Jim and I go to our studios to talk to those teams and look at products, we just leave thrilled with everything that's happening in the future for Ford Blue. If anything, we have right now small teams. Talking about small, agile teams working, we've got small, agile teams working on breaking constraints; breaking constraints for Bronco, breaking constraints for the Maverick, breaking constraints for the Transit. Sometimes, we're thinking about changing shift patterns. Sometimes we're thinking about adding and increasing in just one job per hour if we can squeeze out a few more thousand vehicles. So we're really excited about Blue. Great products, and a lot more to come.

Yes. If I can maybe just try to unpack it maybe one layer. You guys in the past have shared full-size trucks and your SUV mix, right? It's a large portion of your North America revenue and they have mid-teens type margin levels, right? So I think the implication, right, or the natural thought process is there is a percentage of your -- even your North America -- within your North America business, right, there's a percentage of your ICE portfolio that's unprofitable, right, losing money. So on the topic of the EV transition, EVs will come on unprofitably to start. In an Excel sheet, this is really easy to play out. Just hoping you could talk about how it might play out in practice. But in theory, right, you could replace unprofitable ICE production with your initially unprofitable EV volumes. How realistic is that idea and how practical might it be?

Yes, what a great question. We can look at our recent history when we have made that type of decision first, where we exited the low margin or unprofitable sedan business. And that turned out to be the right decision because the benefit we've seen from that decision were great. We use that capital, both human capital engineers, et cetera, and dollars to repurpose and put them into products like the Bronco with much higher returns and Maverick, which has been a great success. So we are constantly assessing our portfolio for the best returns. And we will take actions like as we -- like I said, as we have in the past when appropriate, and we see a better way to serve our customers and better returns. I can't go into specifically which vehicles first. But I think our record speaks for itself that we will take those actions when necessary. Along with that, I want to emphasize once again the icons... [Audio Gap]

Model e hiring. For the Ford Blue organization, how do you kind of manage disenfranchised morale, right, from the standpoint of the restructuring efforts that are in front of the ICE business? How do you keep, retain and attract the talent that you need? And there's probably going to be this us and them ICE and EV type of dynamic, even if the intention is for both sides to be purely collaborative and work together. But will there be performance targets that are shared where Ford Blue is evaluated or benefited by Model e's success? How are you kind of managing the human aspect of this reorganization?

Yes, again, if we didn't have this awesome portfolio with really, truly iconic products, I'd be concerned. I'm obviously an automotive geek. So when I joined the company, the coolest team to join was the Mustang team. I imagine being an engineer and getting to work on and I kind of like the Mustang or the Super Duty. I mean our truck team knows our customers really, really well. And they take a ton of pride in meeting their needs, the needs that the truck customers know, they have. And sometimes we come up with ideas that customers don't even know they had that need. The Maverick, that team has been incredibly, incredibly successful in developing that vehicle. Bronco. Imagine working on the Bronco team. You have a product that's completely sold out, and you are constantly trying to break constraints to build even more and coming up with more derivatives that the customers find really exciting. So given that kind of really cool product portfolio, the team is really motivated and really thrilled to be working on them. As far as targets go, Ford Blue has its own targets. Next year, we'll obviously share more as we move to reporting differently. And the Blue team will be assessed on those targets and compensated for meeting those targets.

Okay. Yes. But there will be shared resources, right, between Ford Blue and Model e. Just wondering, I mean does it -- the devil is probably in the details in terms of leveraging the proficiencies in both units, right, and how that -- how the performance of each segment might get sacrificed or shared because there will be natural collaboration, right?

Sure. Absolutely. So -- and that was the whole premise behind the way we set this up. For example, we have great sheet metal engineers. There was no point in splitting that core team up completely and saying, we'll have a sheet metal team in Blue and a sheet metal team in Pro and sheet metal team in Model e. Now individual programs will have dedicated teams, but the core teams in several areas will be serving both Blue and Pro and Model e. On the flip side, Model e will be serving all the Blue vehicles for the next-gen electrical architecture. There was no point in developing two different electrical architectures because the Blue vehicles also need the next-gen fully networked electrical architecture. So they will be serving all business units with that. Our FCSD team, that team is got a very sophisticated ecosystem of buying parts, designing parts, shipping parts to our dealers, servicing the vehicles. There was -- there would be no efficiency in replicating that ecosystem for both Model e and for Blue. So you're absolutely right. There will be collaboration. There will be places where Blue will be serving Model e, and Model e will be serving Blue and other business units as well.

Got it. Back to Ford pricing and the direct-to-consumer opportunity. And maybe this idea is a little off the beaten path, but to what extent could Ford leverage the Ford Blue Advantage, the online platform, to sell used vehicles as its entry-level offering, right? Because this would kind of support the notion that Ford's ATPs and mix can sustain at these elevated near-record levels if you really maximize the opportunity to keep that second owner -- that secondary vehicle market in-house, so to speak. Yes, just your thoughts on that idea and the opportunity potentially.

Yes. Speaking of small, agile team, this was a small team that took on that idea and has been really growing it for the last two to three years. And actually, Ford Blue Advantage is serving that purpose that you just mentioned. It is a entry-level product that our dealers sell to our customers who are looking for a price point that is lower than a new vehicle. And the customers get many of the benefits of the new car ownership experience. We do have very thorough inspection. They get warranty coverage. They get roadside assistance. They get a free trial of SiriusXM, just like we provide for our new car customers. And we also give them a 14-day 1,000-mile money back guarantee. So you buy a used vehicle from this platform that comes with that guarantee. A lot of peace of mind for customers. So dealers are really leveraging that brand, the Ford Blue Advantage, to bring in new customers into their showrooms, and these customers are buying these certified products. And that brings with it some loyalty. So when they are ready for a new vehicle, they come back to that dealership, to our network. It's growing. It's -- our certified used car sales were up 14% this year. And that's an increase of -- that's on top of a 26% increase last year. So that platform, I think this year, our projections are over 250,000, over 0.25 million vehicles will go through it. So low-cost vehicles are going to be -- continue to be important to us. And of course, in the new vehicle space, the Maverick has been tremendously successful there as well.

Yes. Maybe for John, relative to Ford Europe's 6% margin target, which it was outlined for next year, but that was well before Russia's invasion of Ukraine. So how should we be thinking about the magnitude and timing of this year's major events in Europe? And what could be the extent of Ford's exposure and the associated financial impact if just, for example, right, 20% of gas and energy use is curtailed across Europe? And how much of the Europe inflationary utility pressure is captured in the $1 billion additional inflation in the guidance?

Yes. So let me take the first part of that. We have very little exposure, direct sourcing in Ukraine or Russia. And so, so far, we've seen very little impact to our European business due to the conflict, the war in Ukraine. We have had some suppliers that were impacted down into the supply chain. But we've worked with them. And so far, we have been able to move the tools and find alternative locations outside of Ukraine to make sure that we have the supply. And so far, that's gone really well. What's mostly happening in the impact in Europe right now this year has been, of course, the supply constraints on semiconductor chips. So that has impacted the production. And we do see that and improving as we go through the second half and improving in this quarter as well. So I think that, that's the first part of the question is not much of an impact due to the conflict in Ukraine. Now that could get worse, of course, as you said, with energy and if something were to happen on the supply of gas as we move forward. So what we're doing is we learned a lot from the shutdowns this quarter, in the second quarter in China, in Shanghai, about the supply base, the impact globally and how to manage through that. And what we've done is we've gone off and we've looked at all the suppliers that we have in Europe, those that would be in high-risk areas. How many of those would potentially export to North America, right? So we have, I think, 500 or 550 suppliers, manufacturing sites. We have about 130 that would have exposure to North America or other regions. So we're working with them to increase buffer stocks, understanding if there's other areas where we could produce those components, et cetera, if we do see an impact due to the shutdown of gas or energy restrictions throughout Europe. And so we're planning for if that day would come. It could have an impact on our facilities within the high-risk countries. And so we're managing that. We're working with our partners. We're working with the governments there to get contingency plans in place, and we'll manage through that as best as we can.

And just one follow-on to that. The $1 billion in additional inflation for the second half in the guidance, should that be annualized for the first half of next year? Are these sticky costs that are supplier related? Or is some of it tied to onetime spot freight contracts that could be addressed entering next year?

It's a combination. Part of it is the increase in contracts to get the freight. Especially coming out of Asia with the shutdowns, alternate freight, fast boats, air freight, that's part of the inflation that we've seen. We're also seeing cost -- inflationary costs across the board on material. Working with our suppliers. Because they're seeing their input costs go up, so we're working with them as well. So some of it is onetime. Some of it will be more sticky. Labor increases, think about as being more sticky or they would continue through. So it's a combination of both.

Got it. Well, we've run out of time. Thank you, guys. Thank you, John and Kumar, so much. This has been great and appreciate everybody's patience early on with the technical difficulties.

Thank you. It was a pleasure. And sorry about the tech problem.

Thanks for having us.

Thank you, guys. Thanks, everybody. Take care.

Bye.