Ford Motor Co

NYSE:F

Earnings Call Transcript 2021-Q3

[Operator]

Good day, ladies and gentlemen. My name is Erica and I will be your conference operator today. At this time. I would like to welcome you to Ford Motor Company's third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

[Lynn Antipas Tyson, Executive Director of Investor Relations]

Thank you, Erica. And welcome to Ford Motor Company's Third Quarter 2021 Earnings Call. With me today are Jim Farley, our President and CEO, and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit. 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 at shareholders.ford.com, including some updated videos and proof points around our Ford Plus Plan for growth.

Today's 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 EBITDA, EPS, and free cash flow or on an adjusted basis, product mix is volume weighted.

A quick update on our IR events for the balance of the year. We have five on Monday to first, November 1st willful hosted fireside chat John Lawler and how titanic, our chief product platform and Operations Officer. On the 18th of November, Barclays will host a virtual fireside chat with Ted Cannis, our CEO of Ford Pro.

In December on the third, Goldman Sachs will host a virtual fireside chat with Lisa Drake, our Chief Operating Officer for North America. On the third, Credit Suisse will host Fireside Chat with Hau Thai-Tang. And finally, on the 9th, Deutsche Bank will host a virtual Fireside Chat with Alex Purdy, our Director of Business Operations, Enterprise Connectivity. Now, I will turn the call over to Jim Farley.

[Jim Farley, President and Chief Executive Officer]

Thank you, Lynn. Hello, everyone, and thanks for joining us today. Well, this month marks one year since we'd began executing our Ford Plus Plan. It creates growth, value, and it allows us to win in emerging area of electric and connected vehicles. We built a strong team that combines top leaders from Ford with world-class talent recruited from outside of our Company.

Specific talents, specific people that are largely outside of our industry. This leadership team is committed to this plan and we're accelerating our progress. Ford Plus is not a tagline. It's not advertising. It's a larger, more ambitious way to think about our business and how we bringing value to our customers.

We're creating iconic and distinctive products that only four can do. Increasingly, always on relationships with our customers and ever improving user experiences, all why creating value for our shareholders. We're fully invested in this future. And we're taking big swings. Key to the plan is harnessing the power of connectivity.

We're designing a new generation of fully networked vehicles not delegated to our supply chain, but done inside the Company to revolutionize the experience of owning and operating Ford vehicle. That's embedded technology to unleash unlimited innovation. We're scaling the number of vehicles capable of over-the-air updates will be moving from 1 million vehicles today to 33 million by 2028.

That scale. At the same time, we're moving aggressively to lead the electric vehicle revolution, substantially expanding our battery production as we speak today in the U.S. Infact, we already announced plans that will give us enough battery production to meet our mid-decade goal of a 141 gigawatts, which is enough to build more than 1 million battery electric vehicles a year and I think we'll need more.

R7 billion investments in Blue Oval city in Tennessee in the BlueOvalSK park in Kentucky sets a new standard for scale sustainability, advanced manufacturing, and training the next-generation of technology leaders. At the same time, the billion dollars of investment in our electrified center in Cologne, Germany will allow us to go all electric soon. That center will be all electric by 2023.

We're making final preparations to launch the F-150 Lightning. That defining 0 mission version of an America's best-selling vehicle for the past 40 plus years. Our all electric Mustang Mach-E is a hit with customers, not just in the U.S., but around the world, bringing a stunning number of new customers to the Ford brand.

Over 90% of the Mach-E owners say they would recommend a Mach-E to other customers. Critical as a new-generation of battery electric customers make new brand choices. Our challenge now is to break production constraints and increase availability to meet this incredible demand both in North America and in Europe, and also in China, the biggest EV market in the world. where we are just starting production and Mach-E.

We believe the global demand just for Mustang Mach-E could approach about 200,000 vehicles a year. We've created new organization, Ford Pro to change and power the future of work with compelling commercial vehicles, distribution, and services. While growing revenues to Ford. In a few weeks, we will start production of the new E-Transit, an electric version in the world's best-selling commercial van.

And in the third quarter alone, FORDLiive, Europe 's new connected uptime center, which I wish you could all see for our commercial customers, helps customers in the UK secure additional up time, preventing about $8 million of lost revenue and associated costs for our valuable customers.

We're reinventing icons like Bronco and creating new ones like Maverick. In fact, the all-new Maverick, 42 miles per gallon I might add, is the first standard hybrid pickup in the U.S. It's also America 's most fuel-efficient hybrid pickup. This is the strongest, most compelling lineup I'd ever seen from any mass market brand in my career.

And we are creating a spring loaded future as we emerge from the cheap shortages and COVID constraints. And we continue to make important strides in the technology and go-to-market strategy for autonomous vehicles. In the Second Quarter, we told you about a new partnership with Argo AI and Lyft. And then the Third Quarter, we announced a new partnership with Argo AI and Walmart.

This is Walmart's first ever multi-city autonomous delivery service. And it will be anchored in cities where we already have operations. Not the easiest miles in one city, but multiple cities and hard miles. In addition to making real progress on autonomy vehicles, operating domains, SDS, we fully support Argo AI 's aspiration to access public capital. To build this future, and generate the margins and cash flow.

We need to fund Ford Plus; we had a turn around our automotive operations, and improve our competitiveness. Our results in the third quarter show we are making significant progress. In fact, Company-wide, we achieved an 8.4% EBIT margin, including 10.1% in North America. Those margins, I will remind you are in line with our targets for 2023.

More importantly, our operations outside of North America are likely to post the best performance in 4 years. Please note the performance in South America, largely driven by our success of our global redesign. We've been able to achieve this while thoughtfully managing our supply chain for short-term sustainable improvements including semiconductors, and prioritizing high demand and high profit vehicles.

And before I turn it over to John, a few thoughts. I believe we have the right plan to drive growth and unlock unprecedented value. You are already seeing favorable change in the slope of our earnings and cash flow. There's more to come. Given the strength of our business this year, we are increasing our full-year adjusted EBITDA guidance to between 10.5 and 11.5 billion.

As we plan in earnest for next year, we're excited and energized about the opportunity in front of us and clear that we have so much more work to do to deliver on fourth potential. The word I would leave you with is focus.

That competitive environment has never been more interesting and tough. And we intend to live up to our promise to compete like a challenger focusing on our top priorities to unlock Ford Plus growth with customers at the very center of everything we do. Now I will turn it over to John, who'll take you through our results for the quarter, our outlook for the full year, our capital allocation priorities, and our expectations heading into next year. John?

[John Lawler, Chief Financial Officer]

Thank you, Jim. Now in the face of continued industry-wide semiconductor constraints, we stayed focused on our plan, strengthening our portfolio, and investing in opportunities fundamental to growth and value creation. We delivered a solid quarter with 3 billion in adjusted Company EBITDA, and a margin of 8.4%.

Free cash flow of 7.7 billion was as we expected up sharply on a sequential basis, driven by the positive working capital effects, from higher wholesales in EBITDA. We ended the quarter with strong cash and liquidity at over 31 billion and 47 billion respectively. Now across our automotive business, our playbook remained consistent as we optimize production for customer orders, new launches, and our most profitable vehicles.

And as expected on a sequential basis, our wholesales improved dramatically its chip supply for Ford improved. We also remained disciplined with incentive spending and mix management, which on a year-over-year basis, more than offset chip-related declines in volume. Ford Credit delivered another solid quarter with 1.1 billion in EBT as auction values continue to remain strong, and credit losses continue at near record lows.

For the fourth Quarter, we're assuming a sequential increase in wholesale. We also expect continued healthy mix and net pricing and solid results from Ford Credit, although not as strong as the Third Quarter. Headwinds include inflationary impacts on commodities and freight, and we also expect plan sequential increases in our Ford Plus modernization investments, including customer experience and IT.

So let me share with you some highlights from the quarter before I turn to guidance, capital allocation, in our preliminary view of 2022. With improved chips supply, North America wholesales increased sequentially by 67% as the team prioritized launches, customer orders, and high-margin units while reducing the number of vehicles built, but waiting for chips.

Demand remains strong for our exciting vehicles. The order bank we are building paid off in the third quarter, representing 28% of our retail sales in the third quarter, and reaching a high of 31% in September. And our overall customer orders increased over 50% from the Second Quarter to more than a 100,000 orders, excluding Bronco.

With the 10.1% EBITDA margin in the quarter, North America is now at a 9% margin year-to-date, just 100 basis points shy of our 2023 target of 10%. South America, marked its eighth consecutive quarter of year-over-year improvement in EBITDA, and the business run rate is now approaching break even.

The region also launched its new commercial vehicle organization with the introduction of the new transit, which is manufactured in Uruguay. This transit is the first light commercial van to market in Brazil that includes connectivity as a standard feature. In Europe, the underlying trajectory of our business continues to strengthen though the adverse impact from chips has masked this improvement.

In the Third Quarter, the business lost about 50,000 units, which would have had a substantial favorable impact on EBITDA. Our leadership, as the number one commercial vehicle brand continued in the quarter along with an extremely robust quarter bank. In China, Lincoln continues to perform well, extending its success in the most profitable segment, luxury, with retail sales up 24% year-over-year.

In fact, Lincoln has doubled its share of the China luxury market over the past 18 months. Our newly created BEV organization to open its first 13 direct-to-consumer Ford -select city stores, with a total of 25 expected to open by year-end. In IMG, our leadership team in India made the difficult decision to end manufacturing; following accumulated operating losses of more than 2 billion over the past 10 years.

Going forward, we will focus on importing iconic vehicles, including EVs. And overall, IMG had a solid quarter, capitalizing on our strengths, including ranger. Now as Jim highlighted, the underlying strength of our business supports increasing our adjusted EBITDA guidance for 2021 to between $10.5 and $11.5 billion. And that's despite a lower than anticipated improvement in cheap availability in the second half of the year.

Consistent with our adjusted EBITDA guidance three this year, our updated guidance for 2021 includes the $900 million non-cash gain on our investment in Rivian in our First Quarter adjusted results. So let me spend a minute on Rivian. Now, in the event that Rivian completes its IPO, we will record any gain on our investment in any subsequent adjustments of special items.

Accordingly, we will recast the 900 million non-cash gain from adjusted EBITDA in the first quarter to a special [Indiscernible] As Rivian completes their IPO in the fourth quarter, we will make this change when we report our fourth quarter earnings on February 3, 2022. Our guidance for 2021 adjusted free cash flow is unchanged at 4 to 5 billion, reflecting the higher EBITDA, but less favorable improvement in working capital and timing differences.

Now this is due to lower than anticipated volumes than previously assumed in the back half of the quarter, and that's as a result of chip constraints. We do expect free cash flow to increase with higher production, and the associated improvement in supplier payables and other timing differences. Now let me turn to capital allocation, which again is the foundation of our value creation framework.

Our capital allocation discipline is driving a strong core business and Balance Sheet that provides the flexibility to invest in new growth opportunities as we deliver our Ford Plus plan. Ultimately, and ensures we returned value to our shareholders, both in the form of a higher share price and dividends. Today, we announced the reinstatement of our dividend.

Our board has approved restarting of regular quarterly dividend of $0.10 per share in the fourth quarter of 2021. Importantly, the dividend reflects our confidence in the improving run rate of the business and our ability to fund all of our calls on capital, including the growing investment in electrification and the trajectory of our Ford Plus plan.

The dividend was also sized to ensure we maintain appropriate optionality to manage continued uncertainties in the external environment. To give you a better sense of our calls on capital between 2020 and 2025, we expect total capital expenditures of about 40-45 billion or run rate of roughly $7 billion per year.

Over the same time, we expect to invest over $30 billion in BEV. And above the investment in BEV that’s about 50% is CAPEX, 25% is expense, and 25% is direct investments. And these numbers, they'll be dynamic, and we are confident we have ample financial flexibility to increase our investments even if BEV adoption further accelerates.

And I'll let me share with you our early thinking about 2022, a year which like this one is likely to experience some industry crosswinds that could drive a range of outcomes that we typically don't talk about the upcoming year this soon. And we're not yet prepared to give financial guidance, but we do want to share how we're thinking about next year, given the dynamic operating environment.

Ford's underlying strengths give me great confidence we can build on our results in 2021. First, our portfolio of products and services is exceptional. And we have a significant amount of new product coming to market spanning our iconic high-volume nameplate. Second, our industrial base gives us significant optionality as the adoption of electric vehicles accelerates.

Third, driven by the chip shortage of roughly 4 million in wholesales, we are likely to deliver this year fall significantly below our capacity. And based on our current assessment, we believe our wholesales to be up about 10% in 2022, but that number is very dynamic and changes almost weekly. And fourth, the effects of our global redesign, which is largely completed, are now evident and substantial.

We have drastically de -risked and rationalized our global footprint and product lineup, vastly improving our earnings and cash generation power in the process. Now for headwinds next year, it's difficult to predict the interplay between semiconductor-related constraints, volume and pricing and this will continue to remain dynamic.

For 2021, we expect commodities to be up 3 to 3.5 billion and they could be up another 1.5 billion in 2022, largely driven by steel and aluminum similar to this year. There will also likely be other inflationary costs, but it's too early to size that right now. Ford Credit is likely to be lower as strong auction values will be moderated by a smaller inventory of vehicles and lower lease end return rates.

And lastly, we're obviously going to continue to invest in our Ford Plus Plan for growth and value creation. And this includes in customer-facing technology, connectivity, and our always on relationships with customers, and electrification. And, of course, we believe long-term payback from those investments will be substantial.

Now that wraps up our prepared remarks. And if you perceive that the upfront portion of these calls is becoming more efficient, well, you're right. And that's a function of us being very specific with you and our team about what's truly important, and our confidence in executing effectively against those things and reporting accordingly will use the balance of the time here and address what's on your mind. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of John Murphy with Bank of America.

[John Murphy, Bank of America]

Good evening, everybody. Thanks for making the call efficient. I think it's going to be tough to limit to one question, but I will. If you think about the 10% increase you are talking about in 2022 wholesales, and if we could focus on North America and just assume you're going to do about 2 million units this year in '21, give or take. We're only talking about 200,000 units of increase next year.

There's just an assumption that the price and mix will deteriorate an incremental units are produced semi shortage is relieved. But given that that's still gonna be a relatively low -- a very low level of production, do you believe that the price mix are really going to actually come under pressure next year and aren't we really going to stay in a very tight environment that you are selling through and not even building inventory if that's true, which means that pricing mix might stay very strong next year and we will still get the benefit.

Thanks John. You're right. It's going to remain dynamic and that's what the interplay is going to be volume increases for the industry. They're higher, we'll probably see more pressure on price if they remain as they are today. And we see a moderate increase; I think you're going to continue to see strong pricing and mix continue through next year.

So that's where we have to stay disciplined and we have to stay very focused on managing that well so that we can have, as you said, the play-through next year relative to what happens from an overall volume standpoint, and we're focused on that. So I agree with you. That's going to be one of the key dynamic elements for next year.

And just to follow-up on that. I think right now, based on wards, you have about 213,000 units in dealer inventory. Pre-COVID travel rate was about 650,000 units. You think about ultimately getting into a time where you can rebuild or restock that inventory, where do you think that runs, and how much opportunity is there to try to maintain some of this mix and price discipline to offset any cost inflation, and also invest in the future?

[John Lawler, Chief Financial Officer]

Yeah, so if you look at where we ended in September, we ended at about 20 days’ supply in the U.S. and we're watching it very closely from a day supply standpoint. In -- as we talked about last quarter, in our historical base supply was somewhere around 75 days. We're not going back there.

As Jim said, we're going to be very disciplined and we expect to be in the 50 days’ supply when we're fully at full capacity and we're running and producing everything that we can, so that's gonna be the key. The other thing I would say, John, is that the move as we talked about in our remarks to having more of our sales come through orders, unlike orders in the order bank.

That's really important for us to manage our day supply. So it's a less of a scrounge stock push through and its customer demand pull-through based on the orders and we had over a 100,000 orders at the end of the quarter and that's grown since then in our order bank and that play well for us in the third quarter.

[Jim Farley, President and Chief Executive Officer]

$139,454 order.

[John Lawler, Chief Financial Officer]

As of -- as of today.

[Jim Farley, President and Chief Executive Officer]

As of today.

[John Murphy, Bank of America]

To be exact that's it sounds like you are on that and maybe if I could sneak one in just on cap allocation real quick on the dividend. I mean why now? And I'll hop back in the queue.

[Jim Farley, President and Chief Executive Officer]

Yeah. It's the underlying strength of the business, John. And we're not capital constrained. We're able to fund our initiatives for growth. We know that there are going to be other opportunities that surface. We're confident that we can fund those. And we're focused on total shareholder returns. Not only stock appreciation, but also the dividend. And so given the strength of the business, the Board elected that we would restart the dividend this quarter.

[John Murphy, Bank of America]

Great. Thank you very much.

[Operator]

Your next question comes from the line of Dan Levy with Credit Suisse.

[Dan Levy, Credit Suisse]

Hey, good evening. Thank you for taking the question. I would like to just like to ask a question on the shape of recovery in volumes A, is this magnesium shortage going to cause any term -- any sort of near-term supply disruption for you?

I mean, we heard some during the comments that I could just outright stop European production and just maybe you can give us a sense broadly how you anticipate the shape of recovery in terms of volumes -- at what point do we get or is your baseline expectation that the chip shortages fully mitigated that you can be back at full run rate production?

[John Lawler, Chief Financial Officer]

Yeah. So from the magnesium standpoint, when we look at that, we are seeing price pressure on aluminum broadly, we saw that all year and probably see a little bit more price pressure due to the magnesium issue, but our sheet metal suppliers -- our sheet aluminum suppliers don't purchase magnesium from China for North American production. So we don't see that having any significant impact or any impact on us.

We do see the chip issue continuing to run through 22, as we said, it's very dynamic. Right now, if you ask us what we think the sequential increase in supply will be year-over-year, we think we will have about 10% more, but that's changing weekly.

And we're doing everything we can to get our hands on as many chips as we can. But we do see that running through 2022, it could extend into 2023, although we do anticipate the scope and severity of that to reduce as we move through 22 into 23.

[Dan Levy, Credit Suisse]

Great. Thank you. Second question. I'd like to be now, just a bit more strategic. Think if we just look at the pace of progress at Ford, just both financially and in terms of EV all things digital and just overseeing today is far greater than what you we saw 12 or 18 months ago, which is actually pretty impressive given the large organizations, it takes time to really affect change.

I just want to I'm trying understand how much of what we're seeing today was something that was always there and it's just always starting to come to the surface now, there's sort of getting the fruits of prior initiatives or has something fundamentally changed in the past 12, 18 months? What does this tell us about the pace of change at Ford has an extra period, maybe just to be a bit more specific, as I know, you can take that a number of ways. Maybe you can answer that specifically to what we're seeing on product and planning on the business trends with that transition EBITDA

[Jim Farley, President and Chief Executive Officer]

Thank you for your question. A lot of the product we've been working on for several years, we made the tough choices. I would say the answer is we have a plan; it's not an advertising peer taglines. It's our plan, everyone in the Company knows what we have to do. We are out of time. And we have focused. We need to get an 8% margin like we did this quarter as a Company, regularly because we have to fund a high-growth BEV and digital business.

It's not to make more money -- yes, it is that. But it's motivated in the mission of transforming Ford through these digital products. So running the ICE business for cash, getting serious about our cost, our quality, our launches, our 8% return. It's all a mission, and the team knows the plan and I think the culture is starting to change to be quicker, more accountability, less bureaucracy and that mission permeates through the Company.

I'm probably the worst person to ask whether something's changed, because it sure has changed for me, and my leadership team. But to me the proof is in the putting like our third quarter. And whether we really changed this Company will be proven out in our numbers over time, like to have the last year.

[Dan Levy, Credit Suisse]

And then just to be more specific on the product front, because I think we're seeing a much faster pace of products. Is the time of developments, products, like how much have you accelerated that meaning typically in the past we would hear of 3.5 to 4 years of drawing boards that product and showroom. Is there a new normal for what that is?

[Jim Farley, President and Chief Executive Officer]

If we make up our mind, and we come together as a team like we did on Maverick, it could be just 2 years. We did -- we knocked 20 months off the Maverick development, but it required the leadership team to not have the hand-wringing on the studio for 6 months, like we normally did. I think that's an improve point. But the question I ask myself is a little different.

When we see a technology change like this, like BEV, it's not just the speed of your product creation. It's can you be flexible and agile in your industrial system, like in manufacturing. We have 3 complete hits on our hands; a Mach-E with 200,000 units of demand, that's we have the Lightning with over a 160,000 orders and the transits completely sold out.

So how I like to think about it, it's not just a product creation speeding up the total Company. And we have to do our job to break constraints now, so that we can deliver hundreds of thousands of battery electric next year. That to me is the proof of our change, not just our faster product creation process works.

[Dan Levy, Credit Suisse]

Great. Thank you very much, very helpful.

[Operator]

Your next question comes from the line of Ryan Brinkman with JPMorgan.

[Ryan Brinkman, JPMorgan]

Hi, thanks for taking my question. I thought to ask a few on the order bank, just given the commentary that it grew 50% sequentially in 3Q, excluding the Bronco. So can you talk about the benefits of the order bank? How it helps to optimize your operations? And what kind of pricing or other trends you might be seeing with regard to the order bank?

And then how much of the increase in orders do you think may stem from the currently very strong new product cadence or from the currently low inventory environment? And what avenues are there available to drive orders as industry conditions eventually normalize?

[Jim Farley, President and Chief Executive Officer]

Thank you so much for your question. I'll ask John to comment. From my view, the order bank model that we're going to in North America that we're in right now, has benefits across the patch. We are an incredibly complicated Company. And so, having an order bank allows us to push simplification into the order that the customer facing options, which we need to do. And a reduces costs and improves our quality.

Number 2, it eliminates the need for expensive conquest, fixed marketing. Number 3, it's incredibly helpful for industrial system. You cannot imagine Ryan how much money we waste by guessing what our launch mix is for new product. When you have an order bank special for new models. You could capacitize the high series mixes that are very profitable, right in line with customer demand.

So it's incredibly cost-effective. And it allows you to address the long tail revenues that we've lost in the past because of our undrawn ground stock model. And the last one is its lower cost. There is less parts hanging around. We can manage our industrial system and our manufacturing and a leaner way.

The question really is how we maintain it as you said, is the market improves and the way we are looking at that. Is not just having a day supply target in the past that we've managed, but actually putting in the infrastructure to maintain, or prefer an order-based system. That means we train our system to put in orders.

We reward people for putting in orders. We dynamically price for customers so that they are incentivized to keep ordering versus buying off the lot. So it's going to be a journey. It's been a very rewarding one so far. And we're just beginning. This is the model we have to go through as most of our business are -- majority of our business goes battery electric and digital. It's the right loyalty model.

[Ryan Brinkman, JPMorgan]

Okay, great, thanks. And then just as a quick follow-up to that, it seems as was discussed earlier, that product development times are speeding up, maybe particularly with regard to EV is the Lightning, for example, seem to together very fast.

Another trend seems to be that automakers are revealing their EV's for a longer period of time before the actual start of production, maybe because there's so eager to show them consumers are so clamoring for them. Does that mean that you think that order banks and ordering in advance might be even more popular with electric vehicles? What are you seeing with regard to that?

[Jim Farley, President and Chief Executive Officer]

The move to a digital product means we have to go to a 100% loyalty model. So the reason why you're seeing us launch battery electrics early is very simple. It's our Super Bollard. Our new Super Bollard, or new Detroit Motor Show is our reveal. because there's starts the clock on reservations and you have to do it early enough so you are industrial system gets informed by the results of your reservation. That's the closed loop that has to happen.

We need to open it early enough so that our industrial system can react to the orders and we don't waste money and take advantage of long tail revenue. And it's a more controlled environment than a broadcast media advertising on the Super Bowl.

[Ryan Brinkman, JPMorgan]

Very helpful. Thank you.

[Operator]

Your next question comes from the line of Rod Lache with Wolfe Research.

[Rod Lache, Wolfe Research]

Hi everybody. I have just 2 questions. So first you've got a lot of growth that you're targeting and in BEv's and digital businesses. So it's not surprising that we would see some structural cost inflation. What we're seeing right now is actually really benign.

It's 200 million and in the quarter, considering what you've got going on, but maybe can you talk a little bit about, how we should think about the feathering in of those additional structural costs, which presumably come in ahead of the revenue. So how should we think about that as we look out to the next year or 2?

[John Lawler, Chief Financial Officer]

Yeah, Rod. We'll start to see those come in as we get into 22 and then they'll feather in to 23 as we continue to ramp our investments in our plan, our priorities. Not only in the products, the BEv's, but also as we're building out our customer facing technologies, our connectivity, etc. So yeah, you will see that start to come in on a year-over-year basis next year and it will continue into 23.

[Rod Lache, Wolfe Research]

Can you just give us any sort of brackets around what I mean you did mention that 25% of the EBITDA spending will be expense, but any sort of thoughts on the magnitude of what that headwind is?

[John Lawler, Chief Financial Officer]

Not -- I'm not ready to do that today for '22 and going in through '23. We're completely targeted on getting to that 8% in 2023, so we'll manage it within that. But today, I'm not ready to talk in that level of detail about.

[Rod Lache, Wolfe Research]

Okay. And I was a little surprised about the comment about just 10% volume growth for next year. It seems to me like the Renesas fire in Texas storms alone might have not 200,000 units off of your production in Q2, and it wasn't too long ago you guys were routinely doing over 700,000 units a quarter.

So do you have any thoughts that you might be able to share about when -- would you be able to get back up to that kind of a level of production, and if so, when should we expect that to happen?

[John Lawler, Chief Financial Officer]

Right. I think what you'll find is that as you look through 2022, the first half will have less supply than through the second half. And as I said earlier, we see this mitigating over time. It may extend into 2023. But I would say that we should be back up and running based on what we're seeing today, our run rate, the end of next year into '23. And then in 2023, we'd start to rebuild our inventories.

But it's dynamic, Rod, and it's hard to make a pinpoint call at this point in time. But we wanted to share with you what we're seeing is that -- we're seeing about 10% for next year, and we see that the chip constraints is going to still...[Indiscernible] going to still be at [Indiscernible]. So we have to keep managing as we are this year.

[Rod Lache, Wolfe Research]

Got it. Thank you.

[Operator]

Our next question comes from the line of Brian Johnson with Barclays.

[Brian Johnson, Barclays]

2 questions. First, a quick quite housekeeping, but definitely Balance Sheet question. As you stated the dividend at the level, just could you maybe talk us through the investment grade rating implications and timeline to get there that you are and the board considered when setting that.

[Jim Farley, President and Chief Executive Officer]

So we're gonna continue to work and focus on improving our business, right? Our target is to have an investment-grade Balance Sheet, but that's going to come by improving the business, and you're seeing the strength of that come through. And so, that's what we're focused on. What the rating agencies to -- decide to do with our rating, they'll manage that.

That's up to them. What we're laser-focused on is improving the run rate of the business, improving our performance, improving our overall metrics, and eventually, the rating agencies and the ratings will take care of themselves.

[Brian Johnson, Barclays]

Okay. Second question. As you think about that 10% volume increase rough guidance. A couple of things One, where do you see fleet sales coming back as you kind of bring that up and second, are you going to take a different attitude towards fleet sales than in Ford of the past? I remember Don Leclair saying he had 2 factories making Tauruses and when took our companies, we're about the only buyer so that several.

But there are also really rental cars, but maybe some of the government business that's not pleased with not quite the same and related to that as you think about prioritizing production or their models where you're more comfortable, you'll get good price retention. And other models, and I'm gonna pick on like the escape maybe, that have a lot of competition in their segment. And as capacity comes back, less likely to hold price, say compared to our Bronco.

[John Lawler, Chief Financial Officer]

So it's interesting because I remember those days when Don probably made that comment about rental fleets and that they were low margin, etc. I think what you're finding is business models are changing and the fleet business is evolving just like everything else in our industry. And we see that there could potentially be a positive fleet business where there could make good money.

And so we're not going to shy away from that if we see that its right for our brand and we think is right for the bottom line. And so we're going to continue to look at fleets differently and we're going to continue to think about vehicles as-a-service and what that potential holds for us is that business model changes and we'll see where that takes us. But we're not going to go back to the times where we're putting in capacity; we're pumping out unit, selling them at little to no margin for rental cars. That's not going to happen again.

[Brian Johnson, Barclays]

I'm sorry.

[John Lawler, Chief Financial Officer]

It's okay, I was just going to see our fleet business now. Now that we've rationalized the Company, our fleet business is very strategic for us. It's also very profitable. It certainly varies in Europe, and North America, and China. Different fleet segments have different profitability. The one thing I would ask you to think about is that most of fleet that matters at Ford is commercial vehicles.

And the most important commercial vehicles for us are small, medium-sized businesses. And those are very profitable business for us, for transit, for super duty. That's where Ford excels in the fleet business. And it's smaller fleets, it's not big fleet sales. So the texture of this is that we're revenue managing the Company very carefully.

We know the margins by geography, even within the country and we know by distribution channel. So this is a very thoughtful approach for us, but strategically, especially because of the Pro business and its profitability, we want to make sure we have where reliable partner with fleet customers.

They do business with companies that are reliable, that don't come in and out of the market, they do business with companies that have a full range of products, a full range of services. That's why Marion is investing in Ford Pro, and why we're vertically integrating our services.

[Jim Farley, President and Chief Executive Officer]

So I think we have a really good, profitable fleet business around the world. We look at the margins very carefully, but it's strategically very important for the Company to be a reliable partner.

[Brian Johnson, Barclays]

Okay. And then in terms of price retention and how that's going to vary, caution product line?

[Jim Farley, President and Chief Executive Officer]

Well, John, I think you should you should answer that one in terms of how we revenue manage in a constrained environment.

[John Lawler, Chief Financial Officer]

Yeah. So as you would expect, we're very conscientious about the dynamic of the supply and demand and the impact that has on the pricing and we look at this on a daily basis managing our incentives, looking at if we should be taking top-line pricing given the inflationary pressures we're seeing.

As we talked about, we're not going to go back to the old habits of loading of the dealers with stock and then looking through the push through for sales, were going to focus more on orders coming through online. Specific orders to customers being satisfied, understanding what their demands are, simplifying the system.

And with all of that, we expect to retain quite a bit of a price. Now will it mitigate as we go through next year as supply and demand comes more in Bell and in '23? Yes. But our job is going to be to manage that and retain as much pricing as we can. And while providing customers good value for those products. So it's something that we look at very closely on a daily basis.

[Brian Johnson, Barclays]

Thank you.

[Jim Farley, President and Chief Executive Officer]

In the Escape business, we now have another player called Bronco Sport, in a segment. It's incredibly profitable and people really appreciate the product. We're know in the business of commodity products in that segment anymore, we changed, we made investments several years ago.

[Brian Johnson, Barclays]

Right.

[Operator]

Your next question comes from the line of Colin Langan with Wells Fargo.

[Colin Langan, Wells Fargo]

Great. Thanks for taking my questions. I just want to clarify, as part of your original guidance was that the first -- the second half was supposed to be up in volume 30%. I mean, I'm not sure if I'm misreading it, it sounds like Q3 maybe up a bit from Q4. So is that 30% still not accurate? Obviously, it's important when you think about the 10% to 2022 web-based are going off.

[John Lawler, Chief Financial Officer]

Yeah, Colin, that's a great question. Thank you. Now, we did say last quarter that we expected the second half to be up about 30% looks like it's going to be up somewhere around 15%. And so what you're seeing flow-through is the strength we had in the quarter relative to the top line and other actions that we took relative to cost, etc.

So when you look at that walk, that bridge between Q3 to Q4, we expect market factors to be positive. We also said, we think volume is going to be up sequentially about 10% and also see a little bit stronger, stronger mix continuing, and then of course you'll have some product-related costs, production-related costs associated with that.

But net -- net market factors, net of those costs to produce the increased volumes is going to be positive. We're seeing from a headwind standpoint, if you look at Q3 to Q4 our commodities, we expect that on a quarter-over-quarter basis, they are going to be up about $700 million. And if you look at that so far, year-to-date, we've seen about $1.6 billion of commodities hit us. When you get to the Fourth Quarter.

You can get the Cumulus factor that on a year-over-year basis, commodities are going to be up about another billion five in the Fourth Quarter. Year-over-year up a billion five sequentially, up $700 million.

And then we are going to see some higher warranty costs on a sequential basis in the Fourth Quarter for things that we have to take care of around extended warranties and a little bit higher coverages. But again, on a year-over-year basis, our warranty will improve in the fourth quarter. In full-year, on a year-over-year basis, our warranty, we expect to be good by about a billion for.

[Colin Langan, Wells Fargo]

Got it. Right. That's very helpful.

[John Lawler, Chief Financial Officer]

So does that help you with the bridge?

[Colin Langan, Wells Fargo]

Yes -- no, that's great. I just -- secondly, in terms of the redesign plan that's been out for a while, is India the last major step? I mean, is this going to sort of -- is this it, or next quarter may be the last time we see these slides? Just kind of curious. Or is there more still coming?

[Jim Farley, President and Chief Executive Officer]

Well, I think we're in good shape for now. Obviously the acceleration of the BEV business, and our ICE assets will be, I think the next big transition for the whole industry, not just Ford. But Ford specifically, India's really the principal region country where we have struggled over time.

And it's really great to see the progress the team is making in India and the very vibrant position will now have with the new lineup. And I'd just like to highlight the progress in North America for this quarter. John when's last time we were profitable in South America?

[John Lawler, Chief Financial Officer]

I believe it was 2013.

[Jim Farley, President and Chief Executive Officer]

So let -- let's hang that in the air for 2013.

[Operator]

Your next question comes from the line of Joseph Spak with RBC.

[Joseph Spak, RBC]

Thank you. Maybe just one quick one on the free cash guidance or so. I think you maintained despite the EBITDA guidance went higher. So is there something going on with working capital because you're, you're saying you're releasing more vehicles, so I wouldn't think that would actually be positive factor in the fourth quarter as well as from curious what the offset is.

[John Lawler, Chief Financial Officer]

Yeah. So what we're seeing there is that we've got the EBITDA coming in, right that improvement, but the less favorable improvement in working capital and timing differences hitting us in the quarter. Because we have lower than anticipated volume in the back half of the quarter due to the chip constraints, and so we get with that working capital at the end of the year. So that's what's happening to us on the free cash flow, so it's a timing issue.

[Joseph Spak, RBC]

Okay, and then I want to go back to some of the announcements you've made over the past couple of months and you talked again about the spend today. And end up spending more than 30 billion. And I appreciate the breakdown you gave us, sort of how you're spending that.

Maybe this is just me but I actually find it still fairly difficult to track what exactly you're spending over the coming year because I believe some of that has already been spent. So is it possible to maybe just say like olive that 30 billion, what's being spent, like starting next year through the middle of the decade?

[John Lawler, Chief Financial Officer]

So of the 30 billion, when you look at the cap, very little. We said about half of that was cap. Very little of that has been spent through 2021 relative to the 13 to 15 billion, about half of it. Of course, you're going to see the expense front-loaded because that's primarily be engineering that we have in developing the battery electric vehicles.

And then the direct investment, which is about 25% of it bats with things like the virtual go integration of J.D. and those types of things. And you saw those announcements this quarter with our plan in BlueOvalSK, the battery plans. That's how we're going to unfold that bad spending over time.

[Joseph Spak, RBC]

That's helpful. I appreciate it.

[Operator]

Your next question comes from the line of Itay Michaeli with Citi.

[Itay Michaeli, Citi]

Great. Thanks. Good evening, everybody. Two quick ones from me. First, is there any update on the BlueCruise deployment, including through OTA, maybe some initial customer feedback?

[Jim Farley, President and Chief Executive Officer]

Great. Thank you. We're shipping with marquee F-Series now BlueCruise as they leave the factory and we're going to be OTA in BlueCruise in the first quarter. We wanted to improve the customer experience, so we've pushed it back in terms of an OTA because we wanted to be much simpler for the customer than was originally planned and that takes a little planning to consolidate. Often these level 2 systems require multiple updates in the car.

We wanted to be very simple that took a little bit more work on our team's part, and so it's available. as we ship products now and as in OTA, it'll be in the first quarter and it will be a lot simpler to use. And get that OTA and update for the customer than it was originally planned. Does that answer your question?

[Itay Michaeli, Citi]

Yeah. That's very helpful. And then maybe just does super quick follow-ups, just a point of clarification. Thank you for 2022 initial indications. And at least you mentioned you expect to build on the strong performance in 2021. I am just curious if that if we should interpret that as you expect to grow EBITDA adjusted year-over-year in 2022.

[John Lawler, Chief Financial Officer]

Yeah so we're not going to give a number at this point and say, but what we're saying is that the strength of our new product lineup, our high-volume nameplates like in the strength of what we're seeing Rod Lache, as Jim said, we think there's about demand for 200,000 units. We've got the Bronco, Maverick, E-Transit, and F-150 Lightning is coming.

It's the best lineup that we had, and so that's going to be a tailwind for us for sure as we go into next year. You're seeing that come through this year, and we're going to build on that. But we're also going to have to manage the headwinds that we've talked about.

And the other puts and takes but what we can tell you is we are laser-focused on getting to the 8% target in 2023. And so we will manage into next year. These are the types of things we're seeing from a puts and takes standpoint strength, the tailwinds and headwinds. And we will manage that next year and will be on the path next year towards our 8% target in 2020.

[Itay Michaeli, Citi]

Great, that's super helpful. Thank you.

[Operator]

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.

[Emmanuel Rosner, Deutsche Bank]

Thank you very much and good evening. 2 questions please.

[John Lawler, Chief Financial Officer]

Good evening.

[Emmanuel Rosner, Deutsche Bank]

Hi, two questions. The first one very pleased to see beyond target and for this 8% margins by 2023, big focus of the Company and clearly showing some progress there. How should we think about the impact on this from the margins on your electric vehicles? Obviously, the scale takes some time to build up, but Europe going through that right now, and probably has some level of visibility.

What are what's really leader thinking around trajectory for margins on some of your EVs, and to what extent you will, or will not impact overall Company margins, and potentially, how do we think about it beyond 2023?

[Jim Farley, President and Chief Executive Officer]

Thanks, such an important question for the Company. I'd like John to comment on the margins. Right now, we have 3 high-volume. Very well accepted battery electric vehicles on our hands. Mach-E, E-Transit and the F - F-150 Lightning. So the way we look at it is we want to grow this business really fast. Just the Mach-E demand itself we think is 200 thousand units that do not include the Lightning or the E-Transit.

Our first job is course post-job one customer experience improvement. Post-job one simplification and improvement of the cost vehicle and post-job one quality improvements using the data off the vehicles. Perhaps our biggest job in my opinion, is to break the constraints we have in manufacturing and our supply chain, so we can get these products out to these customers.

That post-job one orientation is quite different than how we historically looked at the ice business where we wait to a minor change or something later to make those changes. The constraint for Mach-E right now as batteries, we think we can break some of those constraints by working creatively with our China team and get our batteries from China. So stay tuned and I'll ask John to comment on the margins.

[John Lawler, Chief Financial Officer]

As we talked about last quarter Mach-E is EBITDA profitable today, but we also know that the margins are not as strong as our ICE margins. And so we're working on that. Overtime we expect as we scale, as you said and as the technology costs come down, we will grow those margins and ultimately, we do expect with these connected vehicles is connected bands that the profit margins will be better than what we're seeing on ICE today but that's over time.

[Emmanuel Rosner, Deutsche Bank]

Thank you. And then my second question was on Argo. So [Indiscernible] you see that you would like to encourage them as supportive of accessing the public markets. How do you envisage the future relationship between Ford and our book to be how important and is that going to be as part of your overall business model?

[Jim Farley, President and Chief Executive Officer]

Mission critical for us to truly disrupt personal ownership. We have to democratize shared mobility. And the self-driving and mobility in the driven world are absolutely mission-critical for the Company and disruptive itself. I am really proud of the team's progress. It's different than our competitors in the space. We've gone to the most difficult miles in 4 or 5 different cities.

Our mapping, our SDS deployment, and the algorithms are built to be scaled for production deployment. So we're not going to a small market area and easy miles like others. We're taking on the toughest problems now and building our capability for scaling quickly. And I think that's always been our approach.

The relationship with Argo and us and Volkswagen is very close, but we do see us moving into more of a production mode now. And we're really ready for that. And we think this will take capital and little more time. and we think the access to public capital is really mission-critical for our journey.

[Emmanuel Rosner, Deutsche Bank]

Thank you.

[Operator]

Final question comes from the line of Adam Jonas with Morgan Stanley.

[Adam Jonas, Morgan Stanley]

I think explained as [Indiscernible] all this on in the [Indiscernible] the way you have. Right. So you get curious for that. You're saying some of the competitors, critical investments in the downstream to make up for that customer experience, Volkswagen buying your car, and some stocks including ones that you know pretty well.

Kind of part of it. Was there any gap in your strategy [Indiscernible] really [Indiscernible] is vertically integrate [Indiscernible] franchises [Indiscernible] suspicion given the change in [Indiscernible] tax.

[Jim Farley, President and Chief Executive Officer]

Great question. Our philosophy is different. We think partnerships on the demand layer for our autonomy and Priya autonomy is making critical for our always on strategy. Are there pieces missing that we're working really hard on [Indiscernible]? We're not going to talk about it today though.

[Adam Jonas, Morgan Stanley]

Alright [Indiscernible] that might be [Indiscernible] because [Indiscernible] with [Indiscernible] starting to see Candle GPU [Indiscernible]. We're big chunk of the price of got a question. Do you think there's [Indiscernible] that you can capture [Indiscernible] the consumer?

[Jim Farley, President and Chief Executive Officer]

Well, this is also really important. First of all, I would say the heart and soul of Ford strategy is our commercial business. And that business where vehicles are highly utilized. Our dealer network is one of our most important advantages versus the new competitors. I will give you some statistics.

We have 650 dedicated commercial, mostly service centers in the U.S. in 850 transit centers across Europe. So that will take a lot of time and a lot of money for someone to recreate. Every one of those dealers has multiple bodybuilders that can call design for those trades. And those vacation locations for our Ford vehicles.

So the dealer body is not only important for the after sales experience and making sure those vehicles can be serviced but it's also mission-critical for the outfit of those products. The dealer network is absolutely strategically critical for our leadership and maintaining that as we go to digital connected vehicles for our commercial customers.

There's no doubt that many customers want us 3 or 4 clicks very easy service experience on the retail side. We're working really carefully on that, including a simple e-commerce platform. And actually in China, our BEV business already has 25 direct stores by the end of this year. So we're starting to experiment.

I think our dealers and served us really well. I'm very proud of them. I'm especially proud of our commercial dealer and we're, we're very vigilant. You can imagine I get lots of e-mails every day about transaction prices from customers on our hottest products. And we all feel obligated to represent the brand professionally for our customers.

[Adam Jonas, Morgan Stanley]

Thanks, Jim.

[Operator]

This concludes the Ford Motor Company's Third Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect.