Q3 2022 Ford Motor Co Earnings Call
Okay.
[music].
Good day, ladies and gentlemen, my name is Gary and I will be your conference operator today.
At this time I would like to welcome you to the Ford Motor Company third quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session. If you would like to ask a question. During this time you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
At this time I would like to turn the call over to Lynn Antipas, Tyson Executive director of Investor Relations.
Thanks, Gary welcome to Ford Motor Company's third quarter 2022 earnings call with me today are Jim Farley, our president and CEO and John Waller, Our Chief Financial Officer also joining us for Q&A are Marion Harris CEO of Ford credit and Duck field keep advanced product development and technology officer.
Afford Natalie.
Today's discussions include some non-GAAP references these are reconciled to the most comparable U S. GAAP measures in the appendix of our earnings deck, you can find the deck along with the rest of our earnings materials and other important content its shareholder dot for Dot Com todays discussion also includes forward looking statements about our expectations actual results may differ from those stated.
The most significant factors that could cause actual results to differ are included on page 23.
Unless otherwise noted all comparisons are year over year company, EBIT EPS and free cash flow are on an adjusted basis and product mix and volume weighted.
Looking at our IR calendar, we have two upcoming engagements tomorrow of Bank of America will host a fireside chat with John Lawlor and Lisa Drake Our V. P of EV industrialization and manufacturing engineering support my late November 7th check analysts, Tony Saganaki will host a fireside chat with Doug field at the Alliance Bernstein Electric Revolution.
In London.
Now I'll turn the call over to Jim Farley.
Thank you Lynn Hi, everyone. We really appreciate you being with us today.
We introduced support plus plan for growth and value creation, two years ago and the investment thesis had three drivers.
Leveraging our iconic vehicles, our strengths, both geographically and nameplates.
Number two add to that.
Integrated hardware software and connectivity.
Into those vehicles, and then expand the total addressable market and unlucky value.
With.
Conquest Tvs.
New commercial vehicles connected services and physical services as well as mobility. So today I'd like to share a progress report on Ford's transformation of course update you on autonomy strategy and our announcements and of course recap the quarter.
Our ambition to be the leader in EV is already taking shape and our.
The whole market.
Ford model he is now.
Now had incredible successful launch of three products, there now and scaling F 150 Lightning marquee E transit and each are attracting for interesting for us almost all new customers. So this is growth. We're now the number two electric brand in the U S.
And we're just beginning with our scaling.
Our decision to create blue for both ice and hybrid vehicles has focused and energized our team.
To leverage what we do best at Ford.
We haven't launched a string of hits that our products our customers not only love, but have lined up to buy.
And we have so many more exciting products to come.
We have made tough capital allocation restructuring decisions like the one today.
Particularly in South America, and our international market groups like India.
And our results and cash flow you could see in our results have improved dramatically.
Our balance sheet remains strong we ended the quarter with nearly $50 billion in liquidity.
Even as we accelerate investments in connectivity and electrification.
And what is perhaps the biggest untold story at Ford.
We successfully recruited a roster of incredible talent from some of the world's best technology companies, who are here to ship product.
And there are supercharging, our ability to design that software defined vehicle.
And of course, the software and services that go into those vehicles for the future.
At the same token.
And at the same time.
We have still so much work ahead.
Clearly.
We need to continue to improve our competitiveness not just in quality.
On a cost and supply chain management.
And our performance in China, and Europe is not nearly as healthy as we'd like it to be.
I can't overstate the sense of urgency we have to address these critical operating areas.
I look forward to updating you on future calls.
Now, we'd like to share an important strategic shift and autonomous vehicle strategy.
Five years ago, we committed to invest $1 billion in Argo AI.
To develop autonomous level four technology.
In 2020, we completed a transaction that resulted in Ford and VW, both owning the majority of Argo at equal levels.
We still believe in level four autonomy.
That it will have a big impact on our business of moving people.
We've learned though in a partnership with Argo.
And after one internal investments that.
That we will have a very long road.
It's estimated that more than 100 billion has been invested in the promise of level four autonomy.
And yet no one has defined a.
Our profitable business model at scale.
Based on the change in the outlook.
<unk>, increasing promise and focus on level, two plus and level three autonomy, we've decided to wind down the Argo business and appeared in the investment.
We're working closely with Argo and VW on all the details.
But here's what I want to focus on.
Advancing level to hardware and software beyond what <unk> can do today and ultimately, enabling our customers to travel in very large odd's or operating domains with their eyes.
Off the road.
We'll give them back the single most valuable commodity in our modern lives.
<unk>.
This has become mission critical for us at Ford.
Ford is deployed blue crews many vehicles across hundreds of thousands of Blue zone miles.
We have strong technology partners working alongside us.
And now we're going to bring in several hundred people from Argo.
Really collection of mines, you've done a great job.
Who have done wonderful work in the Air Force base.
But their job and mission now is to help us create a differentiated level for Blue Cross system.
Yes, there are huge this is a huge addressable market and the potential for highly accretive new revenue streams tied to level III.
But at the end of the day.
This is about giving millions of people back time, and eliminating the monotony of highway miles and stop and go traffic.
And as for the future of true L for autonomy.
We don't expect there to be a sudden aha moment like we used to do.
The pooling L Ford broadly.
Haps your toughest technical problem of our time with.
Require significant breakthroughs going forward in many areas.
Reliable low cost sensing that's not the case today.
Algorithms that can upgrade unlimited compute resources without constraining.
The operating time.
And domain of an electric vehicle.
Breakthroughs of neural networks that can learn to operate a car more safely than a human.
Even in very complex urban environments.
The muscles.
We have built with our new talent.
And broadly deploying a transformative new crews L. Three system will ultimately be a central to the future of accessible driverless vehicles in everyday life.
What's so exciting for me.
We are on the cusp of a transformational moment for Ford.
We will introduce a lineup of not first but second cycle evs than the not only fully software up data and.
And constantly improving.
They will generate an 8% plus margin.
An amazing array of software enabled services, not just glucose L III, but many others.
Video services for software for safety and security.
We're already shipping a broad range of Ford probe productivity tools, and 100% uptime services for commercial customers.
That is a transformation for us.
Let me now switch to the quarter.
With Ford model E. We're on track to reach our annual production rate of 600000 Evs by the end of next year and 2 million by 2026.
I'll say that close carefully there is no change to our target.
We're adding shifts to the Mustang Mach E and F 150, lightens as we speak and we're scaling production of V transit in Europe .
Our all new EV manufacturing Center, Cologne finished complete will be complete and turning out vehicles midway through next year.
Our Ford Auto Sun JV in Turkey is.
He is not only scaling the two ton transit.
But they're also going to be launching a brand new product a one ton E transit custom electric.
While breaking ground on a new battery plant that will supply those for those transits.
And in September we started production we've already started.
Construction of Louisville City in Tennessee, where we will build a new generation EV truck and batteries and at the same time, we've already broken ground as well on the new rule will F. K battery plants plural in Kentucky.
We're also further strengthening model east EV supply chain.
Our team is making great progress in securing raw materials importantly, the processing those raw materials and the battery capacity that we need.
We expect U S inflation reduction act to have a wide range of positive impacts for both our customers and for Ford.
What's not yet clears the degree to which that I array will drive customer demand versus offsetting our investments in growth.
So let me touch on some of the potential benefits of the IRA.
The first opportunities our largest.
The battery production tax credits of about $45 per kilowatt hour.
From 23 to 26, we estimate a combined deal with tax credit for Ford Inner battery partners could total more than $7 billion.
With large step up in annual credits and 27 as our JV battery plants ramp up to full production.
The second benefit is often overlooked I haven't actually read anyone in the media covering this.
But it's super important for Ford and that's the commercial EV credit.
You know that Ford is the number one commercial vehicle brand in the U S.
In our commercial customers can now claim next year $7500 per EV vehicle they buy.
With no restrictions.
On battery sourcing or manufacturing.
Our preliminary estimate is that between 55 and 65%.
Of all of our commercial vehicle customers will qualify.
The third opportunity is retail.
<unk> 40 vs and RP Atvs remain eligible for the $7500 tax credit until guidance is issued at the end of this year.
Next year, we believe we will meet the 3700 $50 critical materials credit requirement on certain.
Mustang Mach E and F 150 lightning models.
In 24, the rules will further restrict this critical materials credit. So we believe its up playing a fairly level playing field right now for all of the Oems as our supply chains are critical material extraction and of course processing in the U S and FTA develops.
The fourth benefit centers on the funding growth and our investments such as geothermal energy credit critical for global City.
The department of energy loans grants to convert our domestic facilities to produce electric vehicles battery plants and other EV components.
We're exploring all of these capabilities and possibilities you can imagine.
Now as you know.
We shared the new electric customer standards with all of our North America dealers last month in Vegas.
That means a single.
Simple e-commerce platform.
All true low vehicle finished inventory.
Non negotiated pricing and.
And fast charges at all of our dealerships.
Now early response from our dealers has been very favorable mineral poised to invest to meet these new standards for electric vehicle customers or other dealers opt to specialize for blue for pro.
And there's real rewards for going first.
Turning to for Blue.
We view this business for bluish growth.
Last month, we unveiled the seventh generation Mustang, we showed the all new amazing Super duty and Churchill Downs in Kentucky.
And there are these are all very well executed products with incredible technology upgraded electrical architectures with advanced powertrains and they really set them apart from the competition.
What you can't see.
It's what we see.
Our design studio deals with new products and derivatives that will expand our hit franchises like F 150, and Bronco and Mustang and the new Maverick in the explorer and the range you're all segments that we're a leader among the leaders and I can't wait to show you These new derivatives.
Based on ice and hybrid powertrains.
Finally, let's talk about trop.
In the U S customers trust us more than with more than 40% of the market for full size commercial trucks and vans in Europe . We're also the number one commercial vehicle brand that's for seven years now soon to be eight.
Businesses of all sizes and types are using Ford pros vehicle.
Vehicles as well as the suite of our services to lower their cost and improve their productivity now that includes multi make fleets.
And fleets that are a mix of ice in evs.
<unk> Pro has a real opportunity to grow service and parts sales by offering better experiences like mobile service.
We expect to have more than 1200 mobile service units in operation globally by the end of this year.
And they're driving significant dealer parts and service revenue.
Actually more than $10000 per global per unit service unit.
For months.
But the real game changer for us in the pro business.
In parts and service growth is software sulfur centered on productivity telematics security.
And predictive failure bulk components.
In the third quarter, we saw our paid telematics foot pro grew by over 40% sequentially.
For the third straight quarter.
Our suite of Ford Pro software solutions keeps getting stronger and stronger as we launched new offerings like Ford Pro fleet and the Pfizer Field service management software.
But before I hand, it over to John Let me end with this.
We have many challenges as a company and we're tackling them head on.
That's clear from our third quarter results.
At the same time I'm, so excited about the future, we're creating with Ford plus.
We're building completely new businesses.
With the best afford Carolyn incredibly incredible new talent across not just model E.
But for Blue and Ford Pro.
We're strengthening our product portfolio across the board building on what we think is strongest portfolio we've ever had.
And we're tracking to scale to a global runway to 2 million Evs a year by 2026, and we're investing in growth.
Taken together.
This work statement is nothing short of Refounding, one of the world's most iconic companies to compete and win in a brand new era.
There is no holding back is no looking back.
There's no slowing down in fact, we're accelerating our transformation John .
Thanks, Jim So when I look at the quarter and our performance year to date I actually see some real positives first our.
Our strategic action actions the segment and standup three distinct businesses.
Gordon model E Ford Blue important role.
We're not complete yet is truly transformational and is already changing how we manage the business.
So it's about more than just accelerating profitable growth. It's also about how we are going to do that.
By orienting everything around our different types of customers.
The separation of these businesses is revealing to the entire organization how deeply rooted complexity is in our legacy business and how this disadvantages us in quality innovation customer satisfaction, and ultimately cost and efficiency and we see it everywhere from design.
To engineering to manufacturing, how we interact with each other and our suppliers.
And so to me. This is really exciting we understand the magnitude of opportunity and leverage that this will provide across the business.
Now, we just need to deliver.
Second our product portfolio has never been stronger starting with our top selling first generation Evs like the Mustang Mach E. F 150, Lightning and E transit to our new models of category, leading vehicles like Mustang and Super duty as well as popular derivatives like Raptor in tremor.
These are all inspiring products that our customers love.
And finally, our capital allocation choices are really paying off.
Our sustainable free cash flow generation from our automotive business is improving significantly even as we accelerate investment in electrification and connectivity.
This improvement reflects with tough choices that we have made to focus on our strengths.
Hone our footprint and our product portfolio.
Especially outside of North America.
So with that as a backdrop, let me turn to our financial results for the quarter we.
We delivered $1 8 billion in adjusted EBIT above the one four to $1 7 billion guidance range, we provided last month.
Automotive wholesales were up 7% year over year. However.
EBIT was weighed down by the rich mix of 40000 vehicles on wheels, we had in inventory at the end of the quarter and about $1 billion in lump sum supplier settlement.
The settlements of it costs incurred by our suppliers, partially due to inflationary impacts on labor.
Breaking commodities as well as higher costs because of our inconsistent production schedule, which has been disruptive for our partners, so providing greater certainty and scheduled stability to our supply base is just one example of the many opportunities we have in front of us as we transform our global supply chain.
So we're very grateful for our suppliers ongoing support and the collaborative approach. They are taking to address production shortfalls, while also focusing on improving the quality of the park space ship to us.
In the quarter, we delivered $3 6 billion in free cash flow with strong cash generation by our automotive business. Despite the adverse effects of the 40000 vehicles on wheels, we expect a negative working capital impact of those units to reverse in the fourth quarter. When the vehicles are completed and shipped to dealers.
Our balance sheet continues to be very healthy and we ended the quarter with strong cash and liquidity of 32 billion and 49 billion respectively.
And these numbers include our remaining stake in <unk>, which was valued at less than $1 billion at the end of the quarter.
Now I'll touch on the performance of our business units.
North America delivered $1 3 billion of EBIT and a margin of 5%.
Both of those measures were driven down year over year by higher commodity costs inflationary pressures and had burst mix, reflecting the buildup of vehicles and we are in inventory.
Our brand strength and order banks remain very strong and we expect the north American margin to return to double digits in the fourth quarter.
North America continues to benefit from our global redesign efforts delivering strong margins and its fifth consecutive profitable quarter.
In Europe , we posted a profit of 200 million of supply chain constraints began to ease resulting in sequential wholesale growth of 23%.
Our commercial vehicle business continues to fortify its leadership position ending the quarter with a 15, 2% share year to date.
And in China, we posted a loss of $200 million driven by the investments, we're making in electric vehicles Lincoln continues to be a bright spot for the region with share improving again sequentially.
Our international markets group continues to be solidly profitable EBIT margins were over 8% driven by the launch of our exciting all new Ranger.
And then finally Ford credit delivered another strong quarter with EBT of 600 million that reflected a more normalized run rate for this business. The anticipated sequential profit decline was driven by the nonoperating release of credit loss reserves and higher borrowing costs.
Let me now walk through our impairment of Argo.
As Jim highlighted it's become clear that the technology required to achieve profitable commercialization of al or autonomy at scale is going to take much longer than we previously expected.
L T plus an L. Three driver assist technologies have a larger addressable customer base.
Which will allow it to scale more quickly and profitability and profitably and.
And that's going to provide accretive annuity like revenue streams.
In the third quarter, we made the strategic decision to shift our capital spending from the al four technology being developed by Argo.
Internally develop L T plus L. Three technology and as a result in the third quarter, we recorded a $2 7 billion noncash pre tax impairment as a special item.
Well, let me share with you our current outlook for the year, we expect to earn about 11 5 billion and adjusted EBIT up about 15% from 2021 with about a 10% increase in wholesale.
We're now projecting to generate adjusted free cash flow of $9 $5 billion to $10 billion.
Our year over year basis for our 22 adjusted EBIT target assumes significantly higher earnings in North America aggregate profitability in the rest of the world.
Ford credit EBT at about $2 7 billion.
With strong, though lower auction values in the fourth quarter as the supply of new vehicles improved and higher borrowing costs continued strong pent up demand and orders for Ford's newest products continued strength in pricing higher.
Higher commodity and broad based inflationary costs of about $9 billion.
No further deterioration in supply chain and continuation of a strong dollar.
So finally before getting to your questions. Let me provide a quick update on our new financial reporting.
Last quarter, we mentioned our plan to host a teacher event early next year to help you prepare for this change to a radically new strategic organization of head of our first quarter 2023 reporting. So we've now fixed the date for March at.
At the kitchen, we will share both 2021 and 2022 revised results to reflect our new segmentation, which we will start using for reporting purposes in Q1 of 2023.
But because this is far more than an accounting exercise will also reiterate and illustrate the business rationale for the change along with the reporting mechanics implications for earnings disclosures and FCC filings and will furnish you with a full toolkit to help you transition your models.
So that wraps up our prepared remarks, we'll use the balance of the time to address what's on your minds. Thank you operator, please open the line for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Please limit yourselves to one question.
Our first question today is from John Murphy with Bank of America. Please go ahead.
Good evening guys. Thanks for all the detail there's a lot of questions I'll try to keep it to one here.
The pivot from EV.
228 ads or semi autonomous Jim.
A lot of moving pieces here, but there are some out there that believe they have a solution to this it's close to working and I think some of us thought that argo might be not that far behind so I'm curious.
What changed and if you think those folks may be misguided and their assumption that they actually have.
Solution and sort of the corollary to that is are you going to take this capital and it sounds like you are going to accelerate your EV and your connectivity.
It will generate profits much more quickly in the near term how much profit opportunity.
Are there or is there.
These connected vehicles that youre seeing with pro that might spillover into the consumer side.
Thank you John .
The decision we made.
To reallocate our capital.
<unk> is a strategic one it's some combination.
The margins, we're starting to see on our software.
Like Ford Pro.
Really the first large Sip shippable software.
The usage patterns, we're seeing in blue crews, how we're how much people use it and how passionate they are and that's before is off.
The confidence we now have.
In <unk>.
Delivering L to level three.
The.
Access to public markets for level four funding.
Oh picnics.
As John said of the view to return capital the invested capital and level four and level five.
And it's some combination of that and few other factors, but the biggest factor.
Is our growing confidence in our talent.
Both the Argo talent.
And the team at Ford that Doug is building.
And I'm sure in the investment conference that'll be a big focus of his comments.
It's that combination.
More than are we behind or we had.
That informed us of this decision.
And I think it's one of the bigger moments for us as a leadership team.
And we are so excited about the software we can ship to our vehicles you see it in Blue crews now we see an afford pro and we see other software that we're in the midst of.
And the other key enabler is our growing confidence in landing a fully software update of both vehicles as we launch our second cycle eds.
John maybe best for you to talk about the reallocation of capital Yeah. So first off we're not capital constrained.
We're investing our $50 billion.
We are investing on top of that and connectivity and software.
So we ended the quarter with $32 billion of cash and $49 billion of liquidity. So.
It's taking that investment and putting it towards a business, where we think we will have a sizable return.
In the near term relative to one that's going to have a low mark.
The business decision behind it.
So I.
I think we need to be very clear about that we're doing.
And can invest in <unk>, three and some of the savings that we have will go into that.
Okay.
If I could just maybe just follow up on that I mean, there's got to be a high level of confidence that youre not going to be left behind as autonomy may develop over time, So I mean, a skeptic would say.
You're throwing in the towel and you can't keep up and optics would say.
You actually have confidence that you'll be able to keep up and maybe surpass competition over time.
How would you how would you couch it.
And in that range.
I think it's I think it's best John for Us to hear from Doug.
But before I before we do that I want to emphasize that our winning L for business.
Is as much about the go to market investment of a consumer facing service and all the depots all the <unk>.
HD mapping of all the Ods.
Ross, we see enormous geography, all the enormous fleet and because its still weather constrained you have to have a driven fleet to complement it.
So aside from the tech not handicapping that technology the enormous investment.
That will have to be made in the non technology pieces.
Is a big factor in our thinking.
And Doug maybe you could talk about how we're because we're still very excited about level for how you see it as a technologist on the technology portion.
Sure Jim.
As you mentioned this is going to be a really tough problem to solve it's it's the toughest problem of our generation and.
I don't think about it as capital constraints nearly as much as talent constraints.
In the kind of projects that we are diving into it for it in the kind of work that we're doing.
The constraint really becomes how many of the world's best people can you get working on a problem.
And that's really the decision in many ways that is driving what we're doing here at Argo is weird deeply passionate about the L. Three mission, we have ideas of how it can work and how customers can interact with it that are really exciting, particularly when you add them to our next generation <unk>.
This is the way we want to use that talent and we think it's the most meaningful way for them to impact the world.
Okay. Thank you very much guys.
Next question is acute Colin Langan with Wells Fargo. Please go ahead.
Okay, great. Thanks for talking my question.
Just to follow up on the Argos just to be clear I mean did you look for acquirers for the business I mean, I would say rather than taking a bet and paramount.
And maybe a follow up a little bit.
What is your kind of timeline for level four that youre looking at I mean, do you think that says 20 years out at this point I mean, I guess you had a comp with some sort of assessment before you made that decision.
Absolutely.
You know as I mentioned, Colin we looked at many variables and one of them is the access to public markets. We were very clear that the Argo journey would include access to public markets over the last year.
And we feel like that's a lot more challenged.
So yes, we looked at possible partnerships in funding, but it was one of maybe 10 factors that we looked at in making this decision.
John maybe why don't you share your our discussion as a leadership team on the timeframe, yes, so collin well when we looked at this as Jim said not only does it require the technology breakthroughs in the capital invested in the technology, but then in all the services and fleets.
Scaling across the country that would be required to get to a profitable business unit.
We saw that you know five years plus.
The horizon being that far out before you could actually get to something that started to generate a meaningful business.
And we see a much greater opportunity to impact more customers immediately with the L. Two or three technology and impact our business in a positive way in the more near term timeframe. So that was part of the business discussion that we have with the team.
Got it.
A quick follow up in terms of the guidance change you lowered guidance at the midpoint by 500 million, but you did indicate raw materials looks like about a 2 billion worse headwind lowered Ford credit.
Guidance came down so any color on the offset to the headwinds that you outlined in the release.
Yes, I think it's really two things it's.
No. It's the the mix that we can see.
Vehicle line mix coming out of their supply base and then Sterling.
Uh huh.
The exposure we have as you know, we're we're the largest commercial vehicle.
Player in Europe from a brand standpoint, and we have a very strong presence in the U K and so that currency change did hit us quite hard.
After the quarter closed.
And so when we look at that one other things that we've done collyn. What I've done is I've spent a lot of time the team has Alaska.
The last couple of weeks doing deep dive on site reviews of the supply base in fact were approaching.
A deep review of almost 300 of those suppliers and what we're finding is that there's a number of non chip suppliers that are struggling to ramp production as the chip crisis eases.
And you know, it's not easy tremendously it's easing slightly we're starting to see that but then we are seeing issues in non chip suppliers. It has to do with the tight labor market, but it also has to do we are finding with many of the suppliers. During the Covid time frame had not invested in maintenance or in their facilities and tooling and so theyre not able to ramp as we expected.
That's hit us in the fourth quarter on mix versus what we had expected and so it's really the mix and the currency thats getting to us and brought us down to the low end of our range.
Okay, and the offset to that.
That 2 billion and a result of that pricing and positive vehicle mix I'm, sorry, yeah pricing that pricing continues to remain strong exactly pricing continues to remain strong.
Okay Alright, thank you very much for taking my question.
The next question is from Ryan Brinkman with J P. Morgan. Please go ahead hi.
Thanks for taking my question.
Are you able to dimension for us how much of the $1 billion of higher than expected supplier related inflation costs incurred in <unk> actually relate to in period expenses incurred by suppliers versus how much might represent a catch up of prior period cost to know that I think would help with understanding what.
Portion of this headwind in <unk> that we should model is continuing into 2023 versus how much might be more onetime in nature.
Yeah. So one of the things that we're doing is as we're taking settlements with the supply base. We're looking to do that more in a lump sum fashion. So that's not baked into the peace price.
And we will share more about what that means on a go forward basis.
As we talked about 23 in Q4, so what we provided for the year is that $9 billion up from 7 billion last quarter, while our reported.
The amount of $1 billion in the third quarter was part of the third quarter, but it was also settlements for the first half as well.
<unk>.
Largely reflects a lot of ways.
A confluence of factors that led to that.
One of the things, we are having better clarity around his schedule instability and combining that with labor shortages and our high complexity.
That had a larger impact on the supply basis ability to deliver cost efficiencies this year.
And much higher than we expected and quite frankly higher than we were initially willing to accept and so we spent a lot of time with our supplier partners.
And we came to the conclusion that included conversations all the way up with Jim with supplier Ceos and our conclusion coming out of that was that it became evident that we needed to increase the settlement amount supported support our supplier partners and we made the call in the third quarter and then we told all of you as soon as we made that call. So.
We got out in front of it a new window.
Okay very helpful and lastly, I think at the time of the <unk> call you considered it a bit too early to say whether commodity costs are likely to be a tailwind or a headwind next year, but with the subsequent decline now and spot prices are you more confident that commodities are likely to be a tailwind are you able to dimension it all of that tailwind or maybe compare it.
Secondly in magnitude to the headwinds that you're likely to face when it comes to non commodity supply chain costs, which do not seem to be deflating similar to commodities.
Yeah. So we are seeing the commodity spot prices come off a bit but quite honestly, it's not meaningful enough at this point to make a significant impact.
I think you know.
We're all trying to work through the macroeconomic environment.
How far things going to slowdown how quickly will that drive easing of commodity prices will that also drive.
He's in the whole logistics chain, we know that logistic prices are up significantly.
Ocean freight is up significantly and so in our <unk>.
Right now trying to make that call on 2023 with a quarter left to go is a really difficult thing to do so we're going to hold off on doing any of that today.
<unk> be able to talk about more of that with our Q4 earnings at the beginning of next year.
Okay. Thank you.
The next question is from Rod Lache with Wolfe Research. Please go ahead.
Hi, everybody.
Wanted to just ask about vehicle pricing.
Jim you've always had a pretty good read on the market through their consumers lengths.
Obviously average transaction prices are up a lot and now rates are.
Going up and trade in values are starting to come off the peak.
Maybe just give us your thoughts about affordability in this interplay between price and volume that inventory starts to normalize be helpful. If you had any thoughts on kind of the magnitude of price normalization that we might see over the next year or two.
Thank you Roger the early signs are coming in.
It's interesting it's lumpy.
The commercial vehicle and EV demand is through the roof, we've seen literally no.
No change.
If not an increase and that includes commercial vehicles in Europe , which is interesting our order bank continues to grow its multi multi month, we continue to have to close out order windows for our commercial vehicles because of the demand.
Same for Evs.
As we've taken prices up.
On the retail side in the U S.
What I see that's different from last quarter.
Is slight uptick on 84 months.
Paint a customer financing.
Marion if you if you want to go into that that's fine we're seeing obviously, an easing of used cars, which makes trade ins.
And those transactions that include trade ins, a little more challenging for customers for higher payments, we're seeing the one that I watched the most is our turn rates for F 150, it's our highest volume vehicle.
And we're starting to see some differences in term rates between X OPM lariat.
It's small right now.
But it's different in.
In the past Larry it's turned faster than the next L T and that's reversed.
Compared to the quarter, it's really subtle right now.
So what I would expect on pricing.
And you see some of our competitors come in with higher spending.
Spending now on incentives.
So we've already accounted for some of that as John has said in the past.
What I would be looking for and what I think is important to watch for is the mix changes the mixes of series and specifications within it within it profitable nameplate like Super duty F 150.
Or mix shifts obviously between models are.
<unk>.
Brought our lineup is so fresh right now it's very opaque for us. So the only mix shift we're seeing is within spec Marion do you want to mention anything about payments, yes, we're seeing some customers.
Extending terms for vehicle affordability trying to stay in the same payment level book with higher transaction prices and higher interest rates customers are going longer term.
We've seen vehicle payment, even with that move out quite a bit this year and it's.
That's starting to have.
A bit of an effect in it.
It's in pockets around the country as well some so many areas are still very very strong in other areas you hear about deals not going through because of.
<unk>.
And payment quality.
Okay. Thanks for that.
And maybe just switching gears maryann I'm trying to understand your implicit guidance for Ford credit.
You brought the full year down a little bit at least optically it looks that way from around 3 billion to $2 seven and now Q4. It looks like it's quite low was wondering if you might be able to give us some color on.
Were you you expect to end the year in terms of loss reserves.
At one point you had a.
I think post COVID-19 taken the reserves up to one 2% of managed receivables. This is that sort of something that you're there.
Thats implicit in these these numbers or is there anything else in there that's driving that level of profitability.
Yeah, Let me let me just give you the key takeaways here first of all our balance sheet is significantly smaller than it was a few years ago right off the top.
We're no longer releasing COVID-19 related credit loss reserves were back at what we would consider normal reserve levels third.
Our lease depreciation tailwind are mostly behind us and we have a lower used car values as we look forward in.
And fourth our borrowing costs were higher which we haven't been able to fully pass on to customers as rates have risen rapidly that's something though that over time.
We do expect the balance sheet to grow and we would expect some continued borrowing costs headwinds, but those will moderate and ease over time as the portfolio returns.
Okay. Thank you.
The next question.
<unk> is from Mark Delaney with Goldman Sachs. Please go ahead.
Yes, good afternoon, and thank you very much for taking the questions. So I mean, you could share more on the timing to bring our three products to market and is that something you think forward, we will be developing in house, perhaps with some benefit from argo capabilities sort of thing.
I mean, you, perhaps leverage from some of the suppliers and some of their potential input or maybe some combination.
Thank you Mark I think Doug is best suited to answer this.
All I would say is that we're timing the arrival.
In line with our second cycle of Evs, and <unk> and a fully updated <unk> software update <unk> vehicle kind of think of that 23 to 25 timeframe is for completely refreshing its E V lineup globally.
Introducing fully updated will electrical architectures.
And in House software development.
For controlling the vehicle.
Leveraging all of our experience of now we've done five known Otas.
And an enhanced level, two plus and level three system over to you Doug.
Thanks, Jim.
We are not going to ignore the capabilities of suppliers that can provide value and R and R. L. Three solution.
There are they are great manufacturers of components of systems, such as imaging sensors and radar and more and we will take advantage of that but we will have a core team that can integrate our system understand its performance at the system level and we will on the software.
It is really important that we also own the connection to these vehicles.
Three is a connected technology, so the ability to.
Have a pipeline that collects data and make the system better and better we must on that.
Finally, the customer experience how.
The customer moves in and out of autonomous operation, that's a problem that actually doesn't exist in all four.
And is a huge opportunity for us to create.
A ford experience that's really unique.
So those are the areas that we will absolutely develop great capability in house.
And focus on in the L. Three development.
And we're really excited about the Argo team, helping us with what that internal effort.
That said, yes, we have just incredible talent.
Excuse me.
That's quite helpful. Thank you and one more on <unk>. If I could please you mentioned in a myriad of ways that the IRA could potentially benefit for it and you reiterated.
The capacity ramp targets through 2026, I believe but as you think over the longer term and perhaps out over the next 10 years or so does the I R. A change the gross amount of investment you want to make into Evs and how quickly forward may shift toward evs, especially in the latter part of this decade. Thanks.
It only accelerates what we're going to do for sure.
<unk>.
And what's exciting for us as.
As being a 40% player in the U S and the top brand in Europe of commercial vehicles in.
In the U S.
We've never had this before.
To give you a sense of the EV tax credit for commercial how evocative that is for Ford.
The the the people who buy a police vehicles, the people who buy ambulances for communities the.
Emergency responders, they've never had tax credits they.
They were going to have this is not just a $7500 tax credit for consumers. This is for businesses, including local municipalities. So I think this will have a dramatic impact on the adoption of EV, which which were already 90% market share in the EV and <unk>.
Business.
We think it will really accelerate the.
Demand for these commercial Evs, and that's only going to accelerate our speed to market and are scaling up of those vehicles. We can't wait to show you the vehicles themselves because they are second generation commercial evs. So.
This is going to accelerate what what's not clear yet.
I said is will the consumer demand side of this leg.
<unk> legislation.
B, the largest benefit to our customers and the company will it be more like the industrialization of vehicles, that's something to play out in the marketplace and it's hard to handicap that honestly.
Thank you.
Your next question is from Joseph Spak with RBC capital markets. Please go ahead.
Thanks, So much everyone, maybe Jim just just picking up there.
The RF side, you mentioned that the $7 billion between Ford and the partners I believe that is sort of that for that fall of $45.
Can we just drill down a little bit because it would seem to me like you should at least be able to get the 10 for the pack.
Starting next year, and then where are you in sort of negotiating.
Maybe how much of that 35, you can get from.
Some of your partners and then just on the commercial side.
Like should we really think how should we think about I guess the mix of Evs next year between commercial and retail because it seems like it's.
To your point pretty skewed in one direction.
Yeah.
Well I wish we could go into the commercial negotiation with our battery partners, but I can think of one didn't know, but you can imagine there's lots of interesting discussions going on right now.
Between because we're we're obviously in middle I mean, some of them we've already inked the deal on our on a D. As others are still in the mix. So.
Yeah, I wish I could cover that with you right now, but I don't think that'd be fair to our battery partners to go public with with how how that's going to benefit both of us, but you can imagine I mean, I just think of it generally speaking is proportional to our investments.
On the on the commercial EV.
The demand for the move to electric on our commercial customers is in many ways more robust.
Then the retail side, even though we're completely sold out in both for the three products. The turn rates are just enormous to order rates, but the profitability is different.
Between the commercial EV.
And.
And our retail EV and we're gonna be breaking out our EV business and profitability. Soon so this is going to be quite interesting for all of you and for us as we do that so.
But I will tell you this is a big help.
Will really help the profitability of our commercial vehicle.
That our EV.
And I think it will really stimulate the demand the tricky part for US is operationally what do we do between now and the end of the year.
That's the tricky part for US operationally as we have a lot of customers are going to wait until next year to order.
Our lightning pro or.
A E transit.
But I think for sure. This is just going to upset that equilibrium we have to do by the way we have to we have this discussion inside the company every day, how many lightened pros do we want to make and how many lightening retail.
F 150, Evs that we want to make.
It's already quite spirited discussion.
But I think this will help our profitability quite a bit even next year, which you will see and.
We're really excited about this change I mean, having almost 65% of our customers qualify including local municipalities is a game changer for our demand.
Yeah, John anything you want to.
He wanted Diebold, you better negotiated until around about the negotiation, thanks, Tim I heard passion okay.
Maybe just you know Jim you've clearly shown since.
Sure you've since you've been CEO that you've been willing to adapt and change to new information and circumstances. They argue announcement today I think and the other example would be I guess, the LSP strategy you talked about earlier summer, but I guess that has even maybe potentially changed a little bit again since I guess.
We are politically the U S relationship in China might be might have turned south so any update on that and.
Is there a backup plan is there any risk to any of those timelines.
That is a very good question.
So you know.
Obviously, we have this unique profile has a commercial.
Company in EV, and we now have I mean literally all of the commercial pickup truck business that T V.
And we're 90% plus in the van side. So it's a very important question for US and we also think for affordability back to rods point L. P. As very important technology and all the IP is in China. So this is this is a really dynamic situation I think what you'll see.
Is that you know.
The tariff rules of the importing L. A few batteries into the U S is still very favorable so and we have a really great contract.
With a particular LLP supplier to incorporate those batteries next year. So I think we're really good shape. The reel 1 billion. Our question is when do you localized production of LP in North America and is that in the U S and Mexico and.
Where do you build cells versus pack and whose.
AME is on the front of the building and all that and we're not going to go into that but I will tell you that just given the.
The reality of the tariff structure, we can import LLP from China economically.
Okay.
Thanks for all that.
This concludes the Ford Motor Company third quarter 2022 earnings Conference call. Thank you for your participation you may now disconnect.
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