P3 Health Partners Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 26, 2022

There are 12 speakers on the call.

Operator

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. After the speakers' remarks, there will be a question and answer session. Please note This event is being recorded.

Operator

At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Speaker 1

Thanks, Gary. Welcome to Ford Motor Company's Q3 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 and A are Marion Harris, CEO of Ford Credit and Doug Field, Chief Advanced Product Development and Technology Officer for Ford Model E. Today's discussions include some non GAAP references.

Speaker 1

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 at at shareholder. Ford.com.

Speaker 1

Today's discussion also includes forward looking statements about our expectations. Actual results may differ from those stated. To 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.

Speaker 1

Looking at our IR calendar, we have 2 upcoming engagements. Tomorrow, Bank of America will host a fireside chat with John Waller and Lisa Drake, our VP of EV Industrialization and Manufacturing Engineering for Ford Model E. And on November 7, tech analyst Tony Saganaki will host a fireside chat with Doug Field at the AllianceBernstein's Electric Revolution Conference in London. Now, I'll turn the call over to Tim Farley.

Speaker 2

Thank you, Lynn. Hi, everyone. We really appreciate you being with us today. We introduced the Ford Plus plan for growth and value creation 2 years ago and the investment thesis had 3 drivers. Leveraging our iconic vehicles, our strengths both geographically and nameplates.

Speaker 2

Number 2, add to that integrated hardware, software and connectivity into those vehicles and then expand the total addressable market and unlocking value with conquest EVs, to 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 our autonomy strategy and our announcement and of course, recap the quarter. Our ambition to be the leader in EV is already taking shape. In our home market, Ford Model E has now had to incredible successful launch of 3 products. They're now in scaling F-one hundred and fifty Lightning, Mach E and E Transit and each are attracting for interesting for us almost all new customers.

Speaker 2

So this is growth. We're now the number 2 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.

Speaker 2

We have 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 and 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 $50,000,000,000 in liquidity, Even as we accelerate investments in connectivity and electrification and what is perhaps the biggest untold story at Ford, We've successfully recruited a roster of an incredible talent from some of the world's best technology companies who are here to ship product and they're supercharging our ability to design that software defined vehicle and of course the software and services that go into those vehicles for the future.

Speaker 2

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 on quality, on the 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.

Speaker 2

Now I'd like to share an important strategic shift in our autonomous vehicle strategy. 5 years ago, we committed to invest $1,000,000,000 in Argo AI to develop autonomous level 4 technology. In 2020, we completed the transaction that resulted in Ford and VW both owning the majority of Argo at equal levels. We still believe in level 4 autonomy that it will have a big impact on our business of moving people. We've learned though in our partnership with Argo and after our own internal investments that we will have a very long road.

Speaker 2

It's estimated that more than $100,000,000,000 has been invested in the promise of Level 4 autonomy, and yet no one has defined a profitable business model at scale. Based on the change in this outlook and our increasing promise and focus on level 2 plus and level 3 to Autonomy. We've decided to wind down the Argo business and impair the investment. We're working closely with Argo and VW on all the details. Here's what I want to focus on.

Speaker 2

Advancing level 2 hardware and software beyond what BlueCruise can do today and ultimately enabling our customers to travel in very large ODDs or operating domains with their eyes off the road We'll give them back the single most valuable commodity in our modern lives, time. This has become mission critical for us at Ford. Ford has deployed Blue Cruise on many vehicles across 100 of 1000 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, a brilliant collection of mines who've done a great job, who have done wonderful work in the L4 space, but their job and mission now is to help us create a differentiated Level 4 BlueCrew System.

Speaker 2

Yes, there are huge this is a huge addressable market and the potential for highly accretive new revenue streams tied to Level 3. 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 L4 autonomy, we don't expect there to be a sudden moment like we used to. To higher significant breakthroughs going forward in many areas. Reliable and low cost sensing, it's not the case today.

Speaker 2

Algorithms that can operate on limited compute resources without constraining the operating time and domain of an electric vehicle. Breakthroughs in 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 in broadly deploying a transformative Blue Cruise L3 system will ultimately be essential 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 that are not only fully software updatable and constantly improving, They will generate an 8% plus margin, an amazing array of software enabled services, not just Blue Cruise L3, but many others, video services for software, for safety and security.

Speaker 2

And we're already shipping a broad range of Ford Probe productivity tools and 100 percent uptime services for our 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 600,000 EVs by the end of next year And $2,000,000 by 2026. I'll say that close, carefully.

Speaker 2

There is no change to our target. We're adding shifts to the Mustang Mach E and F-one hundred and fifty Lightnings as we speak and we're scaling production of E Transit. In Europe, our all new EV manufacturing center, Cologne, will finish complete will be complete in turning our vehicles midway through next year. Our Ford AutoZone JV in Turkey is not only scaling the 2 ton e transit, but they're also going to be launching a brand new product, a 1 ton e transit custom electric, while breaking ground on a new battery plant that will supply those for those transits. In September, we're starting production we've already started to construction of Blue Oval City in Tennessee, where we will build a new generation EV truck and batteries.

Speaker 2

And at the same time, we've already broken ground as well on the new BlueOval SK battery plants, plural, in Kentucky. We're also further strengthening Model E's EV supply chain. Our team is making great progress in securing raw materials, to the processing of those raw materials and the battery capacity that we need. We expect the U. S.

Speaker 2

Inflation Reduction Act to have a wide range of positive impacts for both our customers and for Ford. What's not yet clear is the degree to which the IRA will drive customer demand versus offsetting our EV investments in growth. So let me touch on some of the potential benefits of the IRA. The first opportunity is our largest. To the battery production tax credit of about $45 per kilowatt hour.

Speaker 2

From $23 to $26 we estimate A combined available tax credit for Ford and our battery partners could total more than 7,000,000,000 with large step up in annual credits in 20 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.

Speaker 2

And our commercial customers can now claim next year $7,500 per EV vehicle they buy with no restrictions on battery sourcing or manufacturing. Our preliminary estimate is that between 50 40Vs and our PHEVs remain eligible for the $7,500 tax credit until guidance is issued at the end of this year. Next year, we believe we'll meet the $3,750 critical materials credit requirement on certain Mustang Mach E and F-one hundred and fifty Lightning models. In 2024, the rules will further restrict this critical to materials credit. So we believe it's up playing a fairly level playing field right now for all the OEMs as our supply chains of critical material extraction and course processing in the U.

Speaker 2

S. And FTA develops. The 4th benefit centers on the funding growth in our investments such as geothermal, energy credit critical for to Blue Oval 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 these capabilities and possibilities as you can imagine. Now as you know, we shared the new electric customer standards with all of our North America dealers last month at Vegas.

Speaker 2

That means a single, simple, e commerce platform, ultra low vehicle finished inventory, non negotiated pricing and fast charges at all of our dealerships. Now early response from our dealers has been very favorable. Many are poised to invest to meet these new standards for electric vehicle customers, while other dealers will opt to specialize for Blue for Pro and there's real rewards for going first. Turning to for Blue.

Speaker 3

To the Q1

Speaker 2

of 2019. We view this business for Blue as growth. Last month, we unveiled the 7th generation Mustang. We showed the all new amazing Super Duty and Churchill Downs in Kentucky and these are all very well to products with incredible technology and upgraded electrical architectures with advanced powertrains and they really set them apart from the competition. What you can't see is what we see.

Speaker 2

Our design studio is filled with new products and derivatives that will expand our hit franchises like F-one hundred and fifty and Bronco and Mustang in the new Maverick and the Explorer and the Ranger, all segments that were 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 Pro. In the U. S, customers trust us more than with more than 40% of the market for full size commercial trucks and vans.

Speaker 2

In Europe, we're also the number one commercial vehicle brand. That's for 7 years now, soon to be 8. Businesses of all sizes and types are using Ford Pro's vehicles as well as the suite of our services to lower the cost and improve their productivity. Now that includes multi make fleets and fleets that are a mix of ICE and EVs. Ford Pro has a real opportunity to grow service and parts sales by offering better experiences like mobile service.

Speaker 2

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 $10,000 per global per unit service unit per month. But the real game changer for us in the Pro business and parts and service growth is software, software centered on productivity, telematics, to Security and Predictive Failure of All Components. In the Q3, we saw our paid telematics for Pro to grow by over 40% sequentially for the 3rd straight quarter. Our suite of Ford Pro software solutions Keeps getting stronger and stronger as we launch new offerings like Ford Pro Fleet and the Pfizer field service management software. Before I hand it over to John, let me end with this.

Speaker 2

We have many challenges as a company and we're tackling them head on. That's clear from our Q3 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 of Ford talent and incredibly, incredible new talent across not just Model E, but Ford Blue and Ford Pro. We're strengthening our product portfolio across the board building on what we think is the strongest portfolio we've ever had, and we're tracking to scale to a global run rate of 2,000,000 EVs to a year by 2026, and we're investing in growth.

Speaker 2

Taken together, This work statement is nothing short of re founding 1 of the world's most iconic companies to compete and win in a brand new era. There's no holding back. There's no looking back. There's no slowing down. In fact, we're accelerating our transformation.

Speaker 2

John?

Speaker 4

Thanks, Jim. So when I look at the quarter and our performance year to date, I actually see some real positives. To our strategic actions to segment and stand up 3 distinct businesses, to Ford Model E, Ford Blue and Ford Pro, while not complete yet, is truly transformational It 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.

Speaker 4

The separation of these businesses is revealing to the entire organization to 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 and how we interact with each other and our suppliers. And so to me, this is really exciting. We understand the magnitude of opportunity and the leverage that this will provide across the entire business. Now we just need to deliver.

Speaker 4

2nd, our product portfolio has never been stronger. Starting with our top selling 1st generation EVs like the Mustang Mach E, F-one hundred and fifty Lightning and E Transit to our new models to both category leading vehicles like Mustang and Super Duty, as well as popular derivatives like Raptor and Tremor. These are all inspiring products Our automotive business is improving significantly even as we accelerate investments in electrification and connectivity. And this improvement reflects the 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.

Speaker 4

We delivered $1,800,000,000 in adjusted EBIT, above the $1,400,000,000 to $1,700,000,000 guidance range we provided last month. In Automotive, Wholesales were up 7% year over year. However, EBIT was weighed down by the rich mix of 40,000 The settlements offset costs incurred by our suppliers partially due to inflationary impacts on labor, freight and commodities as well as higher costs because of our inconsistent production schedule, which has been disruptive for our partners. So providing greater certainty and schedule stability to our to the operator. Supply base is just one example of the many opportunities we have in front of us as we transform our global supply chain.

Speaker 4

So we're very grateful for our suppliers' ongoing support and the collaborative approach they're taking to address production shortfalls, while also focusing on improving the quality of the parts they ship to us. In the quarter, we delivered $3,600,000,000 in free cash flow with strong cash generation by our automotive business despite the adverse effects of the 40,000 vehicles on wheels. We expect the negative working capital impact of those units to reverse in the 4th 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 $32,000,000,000 $49,000,000,000 respectively. And these numbers include our remaining stake in Rivian, which was valued at less than $1,000,000,000 at the end of the quarter.

Speaker 4

Now to touch on the performance of our business units. North America delivered $1,300,000,000 of EBIT and a margin of 5%. Both of those measures were driven down year over year by higher commodity costs, inflationary pressures and adverse mix reflecting the buildup of vehicles on wheels and inventory. Our brand strength in order banks remain very strong and we expect the North American margin to return to double digits in the 4th quarter. South America continues to benefit from our global redesign efforts, delivering strong margins in its 5th consecutive profitable quarter.

Speaker 4

In Europe, we posted a profit of $200,000,000 as 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. In China, we posted a loss of $200,000,000 driven by the investments we are 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.

Speaker 4

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 $600,000,000 that reflected a more normalized run rate for this business. The anticipated to 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 L4 autonomy at scale is going to take much longer than we previously expected. To LTE Plus and L3 Driver Assist Technologies have a larger addressable customer base, Which will allow it to scale more quickly and profitably.

Speaker 4

And that's going to provide accretive annuity like revenue streams. To So in the Q3, we made the strategic decision to shift our capital spending from the L4 technology being developed by Argo to internally developed L2 plus L3 technology. And as a result, in the Q3, we recorded a $2,700,000,000 non cash to pretax impairment as a special item. Now let me share with you our current outlook. For the year, We expect to earn about $11,500,000,000 in adjusted EBIT, up about 15% from 2021 with about a 10% increase in wholesales.

Speaker 4

We're now projecting to generate adjusted free cash flow of $9,500,000,000 to $10,000,000,000 Our year over year basis for our 'twenty two adjusted EBIT target assumes significantly higher earnings in North America, aggregate profitability in the rest of the world, Ford Credit EBT at about $2,700,000,000 was strong though lower auction values in the 4th quarter as the supply of new vehicles improves to higher borrowing costs, continued strong pent up demand in orders for Ford's newest products, continued strength in pricing, to higher commodity and broad based inflationary costs of about $9,000,000,000 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 teach in event early next year to help you prepare for this change to a radically new strategic organization ahead of our Q1 2023 reporting. So we have now fixed the date for March. At the teach in, we will share both 2021 2022 revised results to reflect our new segmentation, which we will start using for reporting purposes in Q1 of 2023.

Speaker 4

But because this is far more than an accounting exercise, who will also reiterate and illustrate the business rationale for the change along with the reporting mechanics and implications for our earnings disclosures and SEC filings, and we'll 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 Latanya's minds. Thank you. Operator, please open the line for questions.

Operator

We will now begin the question and answer Our first question today is from John Murphy with Bank of America. Please go ahead.

Speaker 3

Good evening, guys. Thanks for all the detail. There's a lot of questions. I'll try to keep it to one here. On the pivot from AV to ADAS or semi autonomous, Jim.

Speaker 3

There's a lot of moving pieces here, but there are some out there that believe they have a solution to this that'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 in their assumption that they actually have a 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 efforts that will generate profits much more quickly in the near term. And how much

Speaker 2

Thank you, John. The decision we've made to reallocate our capital is a strategic one. It's some combination of the margins we're starting to see on our software Like Ford Pro, that's really the 1st large shippable software. The Usage patterns we're seeing in BlueCruise, how much people use it and how passionate they are and that's before eyes off. The confidence we now have in delivering L2 Level 3, to the access to public markets for level 4 funding, to the opaqueness, as John said, of the view to return capital, The invested capital in level 4 and level 5, and it's some combination of that and a few other factors, but the biggest factor Our growing confidence in our talent, both the Argo talent and the team Ford that Doug is building.

Speaker 2

And I'm sure in the investment conference that will 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. We see it in BlueCruise now, we see it in Ford Pro We see other software that we're in the midst of.

Speaker 2

And the other key enabler is our growing confidence in landing a fully software updatable vehicle as we launch our 2nd cycle EVs. John, maybe it's best for you to talk about the reallocation of capital.

Speaker 4

Yes. So first off, we're not capital constrained. We're investing our $50,000,000,000 and we're investing on top of that in connectivity and So we ended the quarter with $32,000,000,000 of cash and $49,000,000,000 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 long arc, and that's the business decision behind it. So I think we need to be very clear about that.

Speaker 4

We're going to invest in L2 and L3 and some of the savings that we have will go into that.

Speaker 3

If I could just maybe just follow-up on that. I mean, there's got to be a high level of confidence that you're not going to be left behind as autonomy may develop over time. So I mean, A skeptic would say, you're thrown in the towel and you can't keep up. An optimist would say, you actually have confidence that

Speaker 2

you'll be able to keep up

Speaker 3

and maybe surpass the competition over time. I mean, how would you couch it in that range?

Speaker 2

Well, I think it's best, John, for us to hear from Doug. But before we do that, I want to emphasize that a winning L4 business is as much about the go to market investment of a consumer facing service. In all the depots, all the to HD mapping of all the ODs across this enormous geography, all the enormous fleet and because it's still weather constrained, you have to have a driven fleet to complement it. So aside from the tech not handicapping the technology, to 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 4, how you see it as a technologist on the technology portion.

Speaker 5

Sure, Jim. As you mentioned, this is going to be a really tough problem to solve. 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 and the kind of work that we're doing.

Speaker 5

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 we are deeply passionate about the L3 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 EVs. So this is the way we want to use that talent and we think it's the most meaningful way for them to impact to the world.

Speaker 3

Thank you very much, guys.

Operator

Next question is from Colin Langan with Wells Fargo. Please go ahead.

Speaker 6

Great. Thanks for taking my question. Just to follow-up on the Argo, just to be clear, I mean, Did you look for acquirers for the business? I mean, obviously, rather than taking a big impairment. And maybe to follow-up a little bit, what is your kind of timeline I mean, do you think this is 20 years out at this point?

Speaker 6

I mean, I guess you had to come up with some sort of assessment before you made the decision.

Speaker 2

Absolutely. As I mentioned, Collyn, we looked at many variables and one of them is 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 and 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?

Speaker 4

Yes. So Colin, when we looked at this, as Jim said, Not only does it require the technology breakthroughs and the capital invested in the technology, but then in all the services and fleets to scaling across the country that would be required to get to a profitable business unit. Business, we saw that 5 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 L2, L3 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 had with the team.

Speaker 6

Got it. And if I just have a quick follow-up. In terms of the guidance change, you lowered guidance at the midpoint by $500,000,000 But you did indicate raw materials look like about a $2,000,000,000 worse headwind, you lowered Ford Credit, volume guidance came down. So any color on the offset to the headwinds that you outlined in the release?

Speaker 4

Yes, I think it's really 2 things. It's the mix that we can see, to vehicle line mix coming out of the supply base and then Sterling. The exposure we have, as you know, we're the largest commercial vehicle player in Europe from a brand standpoint and we have a very strong presence in the UK. And so that currency change did hit us quite hard after the quarter closed. And so when we look at that, of the things that we've done, Collyn, that I've done is I spent a lot of time, the team has, the last couple of weeks doing deep dive on-site Reviews of the supply base.

Speaker 4

In fact, we're 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 it's not easing tremendously, it's easing slightly. We're starting to see that, but then we're seeing issues in non chip suppliers. To the tight labor market, but it also has to do we're finding with many of the suppliers during the COVID timeframe Had not invested in maintenance or in their facilities and tooling and so they're not able to ramp as we expected and that's hit us in the Q4 on mix versus what we had Expect it. And so it's really the mix in the currency that's getting to us and brought us down to the low end of our range.

Speaker 6

Okay. And the offset so to that $2,000,000,000 in results, is that pricing and positive vehicle mix? Sorry.

Speaker 4

Yes, pricing

Operator

The next question is from Ryan Brinkman with JPMorgan. Please go ahead.

Speaker 7

Hi. Thanks for taking my question. Are you able to dimension for us how much of the $1,000,000,000 of higher than expected supplier related inflation costs incurred in 3Q Actually relate to in period expenses incurred by suppliers versus how much might represent a catch up of prior period costs. To know that I think would help with understanding what portion of this headwind in 3Q that we should model as continuing into 2023 versus how much might be more one time in nature?

Speaker 4

Yes. So one of the things that we're doing is, you. As we're taking settlements with the supply base, we're looking to do that more in a lump sum fashion so that it's not baked into the piece price. And we'll share more about what that means on a go forward basis as we talk about 'twenty three in Q4. So what we've provided for the year is that $9,000,000,000 up from $7,000,000,000 last quarter when we reported.

Speaker 4

The amount of $1,000,000,000 in the third The confluence of factors that led to that. One of the things we are having better clarity around is schedule instability In combining that with labor shortages and our high complexity, that had a larger impact on the supply base's 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 and that included conversations all the way up with Jim with supplier CEOs. And our conclusion coming out of that It became evident that we needed to increase the settlement amount, support our supplier partners, and we made the call in the Q3, and then we Told all of you as soon as we made that call, so that we got out in front of it and you knew what we knew.

Speaker 7

Okay, very helpful. And lastly, I think at the time of the 2Q 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 in spot prices, are you more confident that commodities are likely to be a tailwind. And are you able to dimension at all that tailwind or maybe compare it directionally 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 you. Deflating similar to commodities.

Speaker 4

Yes. So we are seeing the commodity spot prices come off a bit, but quite honestly, it's not meaningful enough at this I think we're all trying to work through the macroeconomic environment, How far are things going to slow down? How quickly will that drive easing of commodity prices? Will that also drive you ease in the whole logistics chain. We know that logistic prices are up significantly.

Speaker 4

Ocean freight is up significantly. And so 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 and we'll be able to talk about more of that with our Q4 earnings at the beginning of next year.

Speaker 7

Okay. Thank you.

Operator

The next question is from Rod Lache with Wolfe Research. Please go ahead.

Speaker 8

Hi, everybody. Wanted to just ask about vehicle pricing. Jim, you've always had a pretty good read on seeing the market through the consumer's lens. And 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. Can you maybe just give us your thoughts about affordability and to this interplay between price and volume and inventory starts to normalize.

Speaker 8

It would be helpful if you had any thoughts on kind of the magnitude of price normalization that we might see over the next year or 2.

Speaker 2

Thank you, Rod. 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 change, if not an increase.

Speaker 2

And that includes commercial vehicles in Europe, which is interesting. Our order bank continues to grow. It's 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.

Speaker 2

S, What I see that's different from last quarter is slight uptick on 84 month to customer financing. And Marion, 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 Little more challenging for customers for higher payments. We're seeing the one that I watch the most is our turn rates for F-one hundred and fifty. It's our highest volume vehicle and we're starting to see some differences in turn rates between XLT and Lariat.

Speaker 2

It's small right now, but it's different. In the past, Larry, it's turned faster than XLT 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 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 The mix is of series and specifications within it profitable nameplate like Super Duty or F-one hundred and fifty or mix shifts obviously between models.

Speaker 2

Rod, 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?

Speaker 9

Yes. We're seeing some customers extending terms for vehicle affordability, trying to stay at the same payment level, but with higher transaction prices In higher interest rates, customers are going longer term. And 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. And it's in pockets around the country as well.

Speaker 9

So many areas are still very, very strong. In other areas, you hear about deals not going through because of changes in payment quality.

Speaker 8

Okay. Thanks for that. And maybe just switching gears, Marion, I'm trying to understand your implicit guidance for Ford Credit. You brought the full year down a little bit, at least it optically looks that way from around $3,000,000,000 to $2,700,000,000 And now Q4 looks like it's quite low. I was wondering if you might be able to give us some color on where you expect to end the year in terms of loss reserves.

Speaker 8

At one point you had I think post COVID taken the reserves up to 1.2% of managed receivables. Is that sort of something that you're It's implicit in these numbers or is there anything else in there that's driving that level of profitability?

Speaker 9

Yes, 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. 2nd, we're no longer releasing COVID related credit loss reserves. We're back at what we would consider normal reserve levels. 3rd, our lease depreciation tailwinds are mostly behind us and we have lower used car values as we look And 4th, our borrowing costs are higher, which we haven't been able to fully pass on to customers As rates have risen rapidly.

Speaker 9

That's something though that over time, we do expect the balance sheet to grow, and we would expect Some continued borrowing cost headwinds, but those will moderate and ease over time as portfolio turns.

Speaker 8

Okay. Thank you.

Operator

The next question is from Mark Delaney with Goldman Sachs. Please go ahead.

Speaker 10

Yes, good afternoon. Thank you very much for taking the questions. So maybe you could share more on the timing to bring L3 products to market. And is that something you think Ford will be developing in house perhaps with some benefit from Argo capabilities? I was just thinking something you perhaps to leverage from some of the suppliers and some of their potential input or maybe some combination?

Speaker 2

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 2nd cycle of EVs and a fully updatable software updatable vehicle. To kind of think of that 'twenty three to 'twenty five timeframe is Ford completely refreshing its EV lineup globally, introducing fully updatable electrical architectures and in house software development for controlling the vehicle, leveraging all of our experience of now we've done 5,000,000 OTAs and an enhanced Level 2 Plus and Level 3 system. Over to you, Doug.

Speaker 5

Thanks, Jim. We are not going to ignore the capabilities of suppliers that can provide value in our L3 solution. There are great manufacturers of components of systems such as imaging sensors and radar And we'll take advantage of that. But we will have a core team that can integrate a system, understand its performance at the system level and we will own the software. It is really important that we also own the connection to these vehicles.

Speaker 5

L3 is a connected technology. So the ability to have a pipeline that collects data and makes the system better and better, We must own 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 L4 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 L3 development.

Speaker 2

And we're really excited about the Argo team helping us with that internal effort. That's

Speaker 5

Yes, we have just incredible talent.

Speaker 10

Excuse me. That's quite helpful. Thank you. And one more on EVs, if I could, please. You mentioned the myriad of ways that the IRA could potentially benefit forward and you reiterated to the capacity ramp targets through 2026, I believe.

Speaker 10

But as you think over the longer term and perhaps out over the next 10 years or so. Does the IRA change the gross amount of investment you want to make into EVs and how quickly Ford may shift toward EVs, especially in the latter part of this decade? Thanks.

Speaker 2

It only accelerates what we're going to do for sure. And what's exciting for us is being a 40% player in the U. S. And the top brand in Europe of commercial vehicles in the U. S.

Speaker 2

I mean, 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 people who buy a police vehicle, The people who buy ambulances, the communities, the emergency responders, they've never had tax credits. They are going to have this is not just a $7,500 tax credit for consumers. This is for businesses including local municipalities.

Speaker 2

So, I think this will have a dramatic impact on the adoption of EV, which We're already 90% market share in the EVAN business. We think we'll really accelerate to the demand for these commercial EVs and that's only going to accelerate our speed to market and our scaling of those vehicles. We can't wait to show you the vehicles themselves because they're 2nd generation commercial EVs. You. This is going to accelerate.

Speaker 2

What's not clear yet, I said is, will the consumer Demand side of this legislation be the largest benefit to our customers in 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.

Operator

The next question is from Joseph Spak with RBC Capital Markets. Please go ahead.

Speaker 11

Thanks so much, Everyone, maybe Jim just picking up there on the IRS slide you mentioned that the $7,000,000,000 between Ford and the Partners. I believe that is Sort of that full $45 Can we just drill down a little bit because it would seem to me like you should at least be able to get you. The 10 for the pack, starting next year. And then where are you in sort of negotiating you. Maybe how much of that $35,000,000 you can get from some of your partners?

Speaker 11

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

Speaker 2

direction. Yes. Well, I wish we could go into the commercial with our battery partners, but not going to go into it now. But you can imagine there's lots of interesting discussions going on right now between because we're obviously in the middle I mean, some we've already inked the deal on our DAs, others are still in the mix. You.

Speaker 2

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 how that's going to benefit both of us. But you can imagine, I mean, I just think of it generally speaking as proportional to our investments. On the commercial EV, I have to say the demand for the move to electric on our commercial customers It is in many ways more robust than the retail side, even though we're completely sold out in both for the free products, the turn rates are just enormous order rates, but the profitability is different between a commercial EV and in a retail EV. And we're going to 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.

Speaker 2

So, but I will tell you this is a big help. This will really help the profitability of our commercial vehicle that are 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 who are going to wait until next year to order a Lightning Pro or a E Transit. But I think for sure this is just going to upset that equilibrium.

Speaker 2

We have to do by the way, we have this discussion inside the company every day. How many Lightning Pros do we want to make and how many Lightning Retail F-one hundred and fifty EVs that we want to make. So it's already quite spirited discussion. 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.

Speaker 2

I mean, Having almost 65% of our customers qualify, including local municipalities, it's a game changer for our demand. Yes. John, anything you want to divulge about the negotiation?

Speaker 4

No, not about the negotiation. Thanks, Tim. I have a pass on

Speaker 3

that. Okay.

Speaker 11

Maybe just, Jim, you've clearly shown since you since you've been CEO that you've been willing to adapt and change to new information and circumstances I think and the other example would be, I guess, the LFP strategy you talked about earlier this summer. But I guess that has even maybe Potentially changed a little bit again since, I guess, geopolitically, the U. S. Relationship with China might be might have turned south. So any update on that?

Speaker 11

And Is there a backup plan? Is there any risk to any of those timelines?

Speaker 2

That is a very good question. So obviously we have this unique profile as a commercial company in EV and we now have I mean literally all the commercial pickup truck business, that's EV and we're 90% plus on the van side. This is a very important question for us. And we also think for affordability, back to Rod's point, LFP is very important technology and all the IP is in China. So This is a really dynamic situation.

Speaker 2

I think what you'll see is that to the tariff rules of importing LFP batteries into the U. S. Is still very favorable. So And we have a really great contract with a particular LFP supplier to incorporate those batteries next year. So I think we're in really good shape.

Speaker 2

The real $1,000,000,000 question is, when do you localize production of LFP in North America? And is that in the U. S. Or Mexico and where do you build the cells versus the pack and whose name 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 reality of the tariff structure, we can import LFP from China economically now.

Speaker 2

Thanks for all that. Thanks.

Operator

This concludes the Ford Motor Company Third Quarter 20 22 Earnings Conference Call. Thank you for your participation. You may now disconnect.

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