福特汽車 (F) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Ford Motor Company Fixed Income conference call.

My name is Rachel, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of today’s conference.

If at any time during the call you do require assistance please press star, followed by zero, and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

And I would now like to hand the presentation over to your host for today’s call, Mr. Dan Gardetto, Manager of Fixed Income Investor Relations.

Please proceed, sir.

Good morning, and thank you for joining us.

Before I hand the call over to Mac MacDonald, Ford Vice President and Treasurer, I’d like to cover a couple of quick items.

First, you can get copies of the slides we’ll be using this morning at the Ford Motor Company Investor web site.

I’d also like to point out that the financial results presented here are all on a GAAP basis.

Any non-GAAP financial measures discussed on this call are reconciled to their GAAP equivalent as part of the appendix in the slide deck.

Finally, I need to remind everyone that today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance.

Actual results could differ materially from those suggested by our comments here.

Additional information about the factors that could affect future results is summarized at the end of the presentation.

These risk factors are detailed in our SEC filings, including our Forms 10-K, 10-Q, and 8-Ks.

With that, I’d like to turn the call over to Mac.

Thank you, Dan.

Good morning, everybody.

Speaking with me today are [Paul Lewis] [ph], Executive Director of Corporate Finance, who is standing in for Jim Guoin, David Cosper, Vice Chairman and CFO of Ford Credit.

And also with us are Patricia Little, our Accounting Director, and [Ann Marie Petak] [ph], who is with me here in London, and [Neil Schloss] [ph], our two Assistant Treasurers.

With that, let me start it off by turning it over to Paul.

Thanks, Mac.

And good morning, everyone.

I’ll give you a brief overview of our results, and then Dave will do a deeper dive into Ford Credit, and Mac will talk about our capital plans.

For those of you who didn’t have an opportunity to listen to Don Leclair earlier this morning, let me go through a brief summary.

On the first slide we have our standard financial metrics for the second quarter and the first half.

As shown at the top, earnings were 57 cents per share, up 35 cents from a year ago.

For the first half earnings per share were $1.51, up 84 cents compared with 2003.

Net income was $1.2b, up $748m from the second quarter in ’03.

Income from continuing operations was $1.3b, up $827m.

Automotive was $83m of this increase, and the automotive improvement reflects improved mix in North America, higher unit volume in Ford Europe, and favorable net pricing, unfavorable foreign exchange, and net interest were a partial offset.

Our sales and revenue were $42.8b, up five percent in the quarter.

For the automotive sector sales were $36.7b, up $2.6b or seven percent.

Vehicle unit sales were up two percent at 1.75m units in the quarter.

We ended the quarter with gross cash of $26.8b and net cash of $13.1b.

Operating cash flow was $100m in the quarter, year-to-date it’s been $2.4b.

Let’s turn now to the next slide where we’ll talk about where we are on our planning assumptions and operation metrics.

For the first half and the full year you can see on this page, starting at the top, U.S. industry was running at a 16.9m annual rate in the first half.

That’s up about three percent from a year ago.

The full year last year was 17m, and so if the trend continues 17m for this year should be okay.

In Europe with the first half right at 17.3m units we’re now projecting the full year at 17.2m units.

With respect to our operational metrics we’re on track to improve quality in all regions.

In terms of market share we had mixed results.

Shares improved in Europe and declined in the U.S.

We do expect U.S. results to improve in the fourth quarter as we introduce a slew of new products including the Ford 500, [Freestyle] [ph], Super Duty Pickup, GT, and the all new mustang, as well as the Mercury Montego and Mariner.

We continue to expect to achieve 800m in cost performance for the full year, slightly ahead of our target that we set at the beginning of the year.

We also expect to come in slightly below our capital spending milestone of 7b.

Finally, we are on track to achieve our cash flow target of 1.2b positive operating cash flow for the year.

Let me now talk about each of our operations briefly.

On the automotive side our present expectation is that North America and Europe will meet or slightly exceed their full year milestones.

Compared with our prior outlook North America is slightly worse, and Europe is slightly better.

South America and Asia-Pacific remain on track to meet their full year milestones, that’s unchanged from our prior outlook.

For PAG we’re at risk to be in the milestone, as we indicated previously.

Based on this quarter’s results we do not expect PAG will meet its full year milestone of 500m to 600m profit.

PAG will do well this year to breakeven.

Overall, we expect automotive operations to achieve its targeted profit for 2004 in the range of 900m to 1.1b.

We now expect financial services will exceed their profit milestone by more than we indicated previously.

This accounts for the increase in our full year earnings guidance to $1.80 to $1.90 a share.

Now, I’ll turn it over to David Cosper, who will cover the results for Ford Credit.

Thanks, Paul.

Turning to slide four, this is our standard slide for Ford Credit.

It shows our operating results and key metrics for the second quarter.

Shown in the left box, our second quarter pretax profit was a record 1.4b, up 760m from second quarter 2003.

And you can see up there on the left-hand side the factors that explain that increase, and I’ll talk about those in some detail in a few moments.

But in general terms it reflects improved credit loss performance, higher used vehicle prices which helps our lease business and our credit losses, and favorable impact of a continued low interest rate environment.

You can see on the right-hand box our June 30, 2004 managed receivables were 175b, down 14b from a year ago, and down 7b from yearend 2003, which isn’t shown.

The decrease reflects lower retail and lease placement volumes.

Credit losses for on balance sheet receivables were $332m, down $119m from the second quarter of a year ago.

And the decline reflects both lower repossessions and improved severities in the U.S.

Managed losses were up 446m, down 177m from a year ago.

At June 30 the credit loss reserve for on balance sheet receivables was 2.7b, or 2.05 percent of receivables.

We did pay $1b dividend to the parent in the quarter and ended second quarter with managed leverage of 12.7 to 1, down slightly from the first quarter.

Turning to slide five, this slide shows the trend of credit losses and loss to receivables ratios, as reflected on our balance sheet and on a managed basis.

And our performance has improved dramatically.

The top left box shows worldwide loss through receivables ratios in the second quarter of 2004 of both the on balance sheet and managed ratios decreased, reflecting substantial improvements in losses in all areas of the world and across all products.

The top right box shows loss to receivables ratios for our Ford Credit U.S. retail and lease business, again, the ratios are down.

The on balance sheet ratio was 1.21 percent, down from 1.96 percent a year ago.

In the second quarter managed losses were 446m, down 177m or 28 percent from a year ago.

If you turn to slide six, this shows our primary driver of our credit losses, both repossessions and loss severities.

Repossessions in the second quarter were down from the first quarter and a year ago.

Loss severity improved 300 per unit from the first quarter to $66,450, down more than $1,000 from one year ago.

And it’s the lowest level since the second quarter of 2001.

So as you can see, there’s many signs of improved performance, including the new bankruptcy filings which are down more than 20 percent from a year ago.

And importantly, over 60-day delinquencies continue to show improvement, and were down to 1.5 percent in the second quarter.

On slide seven, we talk a little bit about the lease business.

As you can see on this slide, auction values in the second quarter were up from a year ago and from first quarter, and return rates continue to be favorable, the lowest levels we’ve seen in a long time.

As I’ve told you in the past, our U.S. lease termination volumes continued to decline.

It’s not shown on the slide but terminations for this year will be down about 180,000 units or 35 percent from last year.

This lower volume plus other actions that we, in Ford Motor Company, have taken have helped strengthen our used car values.

Our worldwide lease assets also continued to decline and reached 21.6b at June 30, down 5b or 19 percent from a year ago.

The inherent risk of our business and balance sheet have been reduced.

Our portfolio quality has improved and credit losses are down.

We’ve managed down the size of our lease business and have improved performance in that business substantially.

With that, I’ll turn it over to Mac to talk about our funding.

Thank you, David.

Slide eight covers credit ratings.

During the second quarter Fixed revised its outlook on Ford from stable to negative, and our long and short-term debt ratings were reaffirmed by all of the agencies.

I should also point out that our securitizations continue to perform well.

In June S&P upgraded 22 of our subordinated traunches in 12 trusts issued between 2000 and 2002.

In total, about $1.6b of these notes and certificates were upgraded.

On slide nine we cover the shutdown working capital financing that Don Leclair mentioned during the earnings call, and so I thought it’s worth coming back to cover this.

As I think most of you know, we shut our manufacturing system in the United States and Canada down in the summer for a vacation period and at yearend for holidays.

During this time when we are not assembling vehicles, clearly, we do not generate any revenue.

But we do continue to pay the bills for vehicles that we built six to seven weeks earlier.

As a consequence, we draw-down our cash almost on a linear basis during this period.

And historically, we have funded this draw-down out of our cash reserves.

We’ve arranged an alternative source of cost effective funding for the summer vacation shutdown.

Last week we received bids of 3.6b in an auction with the Ford and Ford Credit Bank Group.

And we elected to draw-down $2.3b of the bids received, funding that we will repay in early September.

The end game here is that with this financing in place, and we were very pleased with the magnitude of the bids because we probably could have given this process a little longer, and I think we might have had more people interested.

We think we can deploy our cash reserves into other longer term liabilities, and as the slide says, that really is both pension and healthcare funding, our [VIVAs] [ph], and the retirement of long-term debt.

So let me move now to slide 10 and talk about capital improvement actions.

This slide shows the actions we’re taking to strengthen the automotive balance sheet.

By yearend 2004 we plan to take actions which in total will have reduced our obligations by over $10b.

They include pre-funding our healthcare and pension obligations, and reducing our long-term automotive debt.

In 2003 these actions totaled 4.8b and included contributions to our U.S. and non-U.S. pension funds, and the creation of a long-term VIVA which we're using to pre-fund a portion of our healthcare obligation.

So far this year we’ve taken actions totaling 3.4b, including contributions of 1.5b to our non-U.S. pension funds and 1.9b reduction in our long-term debt.

In January you may recall that we redeemed our $700m Ford Motor Company capital trust subordinated debit issue, and in the first half we’ve repurchased about $1b of senior debt in the open market.

The majority of those purchases have been the Ford’s large issues which have maturities between 2028 and 2032.

Given the success of the shutdown working capital financing plan we plan to use about $2b in the second half on additional balance sheet improvements.

Later this week we plan to make a further 1.5b contribution to the long-term VIVA.

And additional actions will be similar to those done in the past for pension, healthcare, and open market debt repurchase.

And I might just add that another reduction in our liabilities will occur next year in June when we pay the final installment of about $1b for the acquisition of Land Rover, although that obligation is denominated in Euro dollars it was hedged at the time into, from Euros into dollars.

Slide 11, now, turning our attention back to Ford Credit, this slide shows the trend in funding of our managed receivables base.

At June 30th our managed receivables were 175b, down 7b from the end of 2003.

Our forecast for managed receivables at the end of 2004 is about 170b, at the lower end of the range we provided last quarter which was 170b to 175b.

At this time our plans assume a Ford Credit cash balance of $8b to $10b at yearend 2004.

That’s shown at the bottom of the right-hand box.

We believe that this cash level gives us great flexibility in the execution of both our 2004 and our 2005 financing plans.

Slide 12 shows our public term funding plans for Ford Credit.

As in the past, it does not include our short-term funding programs, our use of asset backed CP conduits, or whole loan sales.

Our 2004 full year forecast of public term funding excluding the use of cash is in the range of $13b to $19b.

This is down slightly from the forecast we gave last quarter reflecting a smaller balance sheet.

We’ve increased the use of unsecured and secured CP as we’ve seen increased investor demand for both.

We continue to have great flexibility between the public and the private securitization markets.

As we’ve done in the past, Ford Credit will consider opportunistically repurchasing debt during the remainder of 2004.

We were able to contemplate debt repurchases at Credit as a result of the significant availability of liquidity and the somewhat smaller balance sheet.

Clearly between now and yearend the funding plan could be impacted depending on our strategy for pre-funding debt.

Moving to slide 13, talking about credit facilities, our global credit facilities are projected to be 32.3b at the end of this year, down 800m from yearend 2003.

About 1b in [F car] [ph] lines will roll off before yearend, and we’re projecting total asset backed commercial paper backup facilities to be 17.9b at the end of the year.

Our credit lines continue to be high quality, with no rating triggers, material adverse change clauses, or financial covenants, and the majority of our commitments are five-year facilities.

Our bank sponsored conduit capacity is $11.8b, $8.1b of which is unused.

These conduits are incremental to the credit facilities shown in the bar chart on this page and are committed facilities available to us on two days’ notice.

Slide 14 shows our liquidity in short-term funding programs including the 32.3b in backup facilities that we discussed on the previous slide.

Including our 8.8b cash balance these bank lines and liquidity programs totaled $49.2b and support $25.3b in short-term funding outstanding at the end of June.

We recently increased the level of F car commercial paper to $12.3b, and we continue to have additional capacity in this program.

We’ve included slide 15 for the last several quarters to illustrate the point that Ford Credit’s balance sheet continues to be inherently very liquid because of the short-term nature of the assets.

For the United States, Europe, and Canada, which comprised the great majority of our receivables and obligations, you can see that assets that are projected to mature in the next three months, that’s the left-hand series of boxes there, exceed debt coming due in the same period by $38b, $62b compared with $24b.

And the same distinction holds true for each of the extended time periods we show in the slide.

Slide 16, if I can, let me just summarize what I hope we have said.

For Ford Motor Company earnings per share of 61 cents from continuing operations excluding special items, and net income of 57 cents per share for the quarter.

Continued strong automotive liquidity and the successful completion of our shutdown period financing for the summer of 2004.

For Ford Motor Credit Company record earnings, credit loss is down, the lease business improving, leverage at 12.7 to 1, a little below our target which is the 13 to 14 to 1 range.

And, again, strong liquidity with ample access to both unsecured and asset backed funding sources.

With that, let me turn it back to Dan and we’ll start to take your questions.

Thanks, Mac.

Rachel, we’re ready to take questions now.

[Caller instructions.]

Your first question comes from the line of Chet Louie of Barclays.

Please proceed, sir.

Hi, good morning, gents.

Good morning.

Just two quick ones here.

Looking at the operating related cash flows for the quarter on the auto side, it seems like working capital changes accounted for a majority of this difference versus last year.

How should we look at working capital changes for the year?

It’s currently negative 1b for the first half.

Should we assume roughly the same rate for the remaining half?

I’d say that for the full year we’re not looking for any substantial change in working capital, and so yeah, you could plan that in your process.

A second question is can we expect continued decline?

This would be for Dave.

Do you see a decline in the allowance for credit losses over the remainder of the year?

And is this incorporated in your earnings guidance?

Yeah, I talked about that a little bit in the first call.

We’ve declined from 3b to 2.7b at June 30, the 3b was at yearend, Chet.

And, you know, we’ll continue to monitor the portfolio and the losses going forward.

I’m not projecting a huge decline in the reserves over the balance of the year, but there could be some further reduction, especially as the – we continue to shrink the business and we see the continued improvement.

But we’ll have to see how credit losses go.

Okay, great.

Thank you.

Next question.

Thank you.

Your next question comes from the line of Stuart Oshanski.

Please proceed, sir.

One moment, sir.

Okay.

I guess we’re having a technical difficulty.

I’d say also, Operator, we’re hearing some background noise there, so.

Yes, sir.

It’ll be just a moment.

Maybe we can move to the next caller.

It does sound like a line is open.

Hello.

Hello.

Yes, hello.

This is Stuart Oshanski.

Stuart, are you in a noisy location?

No, I’m actually in my office.

And there’s no noise around me.

So I’m not sure where all of that is coming from.

It must be on the trading floor, I think.

And if that’s not …

I don’t know if there’s another line that’s open.

Well, let’s go ahead and try your question.

Okay, great.

I appreciate it.

I had a couple for you.

One is just to help me to understand the working capital financing that you completed and that you’re doing for the summer shutdown?

You said you’d be borrowing about 2.3b and you’d be deploying your cash reserve elsewhere.

It strikes me that that is simply a very short-term cash management move you’re making.

So if you could maybe help us understand what and why you’re doing it, and what your thought process was for that?

Yeah.

Let me take that one.

I said on the earnings call that fundamentally, historically, we have deployed our cash at both the summer and the winter shutdowns to cover the short-term outflows necessitated by a cutoff in production.

But the rest of the period that cash has sat in our short-term portfolios generating historically relatively low revenues.

We have concluded it makes more sense, cash longer term, and deploying it into either pensions and retirement, and funding the two very predictable outflow periods, our banking sources.

And the strength of the first indications from the option we completed last week I think have made us very comfortable with this program.

And what would be your weighted average cost on that funding?

As a matter of, we say, competitive advantage we choose not to release that.

Okay.

Second question is on the following slide, slide 10.

Did I hear you right, and maybe I misheard you, that for the full year you were expecting somewhere in the order of $10b in balance sheet improvements?

No, we said $10b for over two years.

Ah!

Okay.

Great.

All right.

And then finally, on slide 12, or I guess kind of in general when you were talking about how you’re going to look at debt repurchases and your borrowing is going to be lower, can you discuss with us a little bit what your desired level of cash and equivalents are?

What you expect to have at the end of the year?

You know, if you’re going to be having negative free cash flow in the second half it looks as though you’re going to be having lower cash balances at the end of the year.

Well, at the – you’ve got to go back here, I think, to distinguish between Motor Company and Credit Company.

Let me just talk a little bit about the Credit Company.

On slide 11 we’re forecast $8b to $10b of cash and cash equivalents at the end of 2004.

That represents clearly some pre-funding of maturities in the first half of 2004.

I’m very comfortable with the concept of pre-funding because we get situations where debt maturities are bunched together, and we much prefer to be in a position where we are basically looking forward and being opportunistic in our funding.

We are basically looking forward and being opportunistic in our funding.

In a perfect world, because you have to invest this cash and you may be investing it at marginally less than your cost of borrowing, you don't want to run a large over-borrowing portfolio, but I think it is conservative and intelligent to run prefunding when you’ve got bunching of maturities.

So would it be fair to say that at the end of the year, you're going to have -- what you're focusing more on is net debt and you're going to be having lower cash balances?

Well, that's -- we're talking here the difference between Motor and Credit.

At the Motor Company, yes, we focus both on gross cash, but at -- on net cash also.

Clearly, with the size of our Motor Company cash balances, as we show on Slide 17 of the earnings presentation, we had almost $27 billion of gross cash at the end of the second quarter, and that compares with $13 billion or so in debt.

So we have strong net cash.

Again, we like to have very ample liquidity because our business calls for us to be spending on new products well in advance of getting any revenue from them.

Right.

Okay.

And then one final, just a clarification from Chet's question on the working capital.

Do I understand right that you expect no change in working capital from 2003, or you would expect full-year 2004 working capital to be about a negative 1 billion?

Well, you know, I don't really want to get into that because as Don LaClaire (phonetic) said, we have not announced our fourth quarter production program at this point in time.

And to a great extent, working capital -- and I would focus specifically on inventories and payables -- are a function of our production programs.

So it -- I'm -- I really don't want to get into forecasting.

Believe me, even inside, forecasting working capital six months out is very difficult, and I don't really think I want to get to doing it in a public forum.

Okay.

Great.

Thank you very much.

Thank you.

That was Stuart Oshanski of VanGuard.

Your next question comes from the line of Sasha Campbell of Principal Global Investments.

Please proceed.

Hi, Mac.

I don't want to beat on this issue about the new banking facility and the contribution to VEBA, but I guess there was one question that came to mind that --

Sure.

-- at Ford Motor Company, there's a significant cash balance available.

It seems to me that one alternative, rather than going and getting a short-term financing facility for working capital timing issues, would have been to just use the cash balance available at Ford Motor Credit to make the contributions with the VEBA and other long-term plans.

Can you explain why you decided to go ahead and get the short-term financing facility in lieu of just using the cash available?

Well, I think you meant cash available at the Motor Company, not at the Credit Company.

I did, thank you.

Okay.

Yeah.

I think the answer is that your point is very well taken and of course, last December, when we contributed $2 billion to the VEBA, that's exactly what we did, and this year with the contributions we've already made to the global pension funds, the same thing.

We drew down our cash balances.

So what you are seeing from -- is a more balanced approach.

We are drawing down the cash balances.

Fortunately, our performance and the dividends David Cosper sends us periodically are rebuilding the cash balances.

But we are deploying both the cash resources that we've got and this new cash resource, which we consider an improvement in the way we manage our liquidity to reduce the long-term liabilities.

Okay.

So this wasn't something that -- a decision that was perhaps tax-driven or other structural considerations.

This was basically just you feel that the cash balances you have at Ford Motor Credit now, you'd like to preserve some of that at this point?

It -- cash is very important.

We always want to have very adequate liquidity in both the parent company and the Credit Company.

Okay.

Thank you.

And then one last question.

I think on a prior call, when asked about July sales, the number was thrown out looking around 16-9?

Was that a heavy or light number?

I'm going to defer to Paul Lewis on that one, as --

Oh, that was total industry including heavy trucks.

Okay.

With heavy trucks?

Yes.

Yes.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Brian Zinger of Merrill Lynch.

Please proceed, sir.

A couple of questions.

Just to go back to a slide that was referencing the long-term balance sheet improvements that you're going to make from the working capital facility?

Yes?

It looks like -- I guess right now you’ve earmarked about $2 billion; 1.5 goes into the VEBA, which then leaves about 500 million.

Should we assume that that's kind of substantially what's being set aside for further debt reduction at the Motor Co?

No.

I think what we're saying is we can -- we could end up using it for debt reduction, for pension fund contributions, either domestically or internationally, or a further contribution to the VEBA.

We simply have not made any definitive plans for the extra half billion at this point.

Okay.

But it -- I guess it seems like you've hit your target for debt repurchases at the Motor Co level, at least the target that you had set out for yourselves earlier in the year?

Yeah.

But it is, and to be very fair, it's a moving target.

We want to be opportunistic in repurchasing debt.

If debt is available to us at prices we consider attractive, we will buy it back.

Equally, as we've said, if we see some opportunities to repurchase Ford Credit debt, we will buy it if it suits our books.

Okay.

Now is that a change in terms of now thinking about Ford Motor Credit debt repurchases?

No.

We've repurchased Credit Company debt in the past.

And any sense in terms of what magnitude we should think about there on an annual basis?

Yeah.

I mean, the answer is relative either to the size of the balance sheet or the size of our annual maturities.

The debt repurchases are going to be small.

Okay.

Let me just see, I'm just trying to go through what's left on my question list because a lot of them got taken out.

But I guess can you give us any more clarity with respect to what's going on with Jaguar?

It seems like obviously, you were alluding to the fact that something else is forthcoming there.

Can you help us with -- in terms of expectations, what we should be expecting, magnitude or composition of any type of restructuring, cash versus non-cash charges, magnitude, anything that can kind of frame that issue for us?

I think Don LeClaire responded to that by saying we're really not ready to do that yet.

At the appropriate time, we will say what our plans are for Jaguar.

Okay.

And then just lastly, I guess just to kind of pick up your discussion relative to the liquidity.

Yes?

Do you have any targets that you're working with in terms of gross liquidity, net liquidity that you (inaudible) for us that, you know--

No, because to some extent -- if anything, it's a moving target; it has to be because it's a function of what our maturities are and what the obligations we face are.

And for me to announce an objective level of the liquidity, you know, I probably would outdate it within a few days as things change.

So it's just something -- it's a little like that famous answer to, you know, how many horsepower?

Enough.

We want more than adequate liquidity in both the Credit Company and the Automotive Company, and we strive to achieve that.

And I think -- frankly, I think we've done a pretty good job.

Thank you.

Your next question comes from the line of Danny Leang (sp) of American Century.

Please proceed, sir.

Hi, good morning.

Let's see.

I wanted to know more about -- I'm referring to the Ford Motor Co's 10K here actually, but the language in there talking about how Ford is one year away from introducing products at the right costs and two years from introduce -- having those products in significant volume.

And if I'm not mistaken then, the right costs really refers to one, effectual manufacturing being installed and two, you know, common components and platforms.

I'd like you to just -- for you to talk about that in greater detail as to, you know, like maybe where, how much, what the percentage of Ford North American plants are, in fact, capable of effectual manufacturing are doing so, and where do you see that percentage moving over the next two years?

And also on the common components and platforms, you know, say, assuming, you know, that 100 percent is the full potential, you know, what percentage are you at today and how do you see that tracking over the next two years?

You know, I hate to say it, but this may actually be the wrong call to ask that question.

Well, I wasn't able to get in the queue.

So, yeah, maybe I will try it with the --

Maybe taking it up with the IR function.

I don't know whether Paul wants to make any brief comments, but that would be my thoughts.

No, it's probably appropriate, Mac.

We did talk about our plans in this area in a fair amount of detail in the May investor meeting and I might refer you back to that as opposed to me trying to do it from memory.

Okay.

Second question would be, this debention liability.

Like where does it stand now, like with Ford, the Motor Co owes Credit, and then how does that compare to where we were at year end '03?

Presently, it is 3.8 billion.

It’s down from -- I think it was 4.1 or something like that.

So it's dropped a little bit.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Carl DeYoung of Deutsche Bank.

Please proceed.

Thank you.

My first question pertains to lease residual performance, which obviously was a big positive for you in the quarter.

What I'm trying to understand is just how sustainable that is in the second half.

I know that, of course, fewer off-lease vehicles and fewer vehicles returning from fleet is helping.

But with incentives potentially heading higher, that could obviously have a negative impact on used-car prices.

I'm just trying to understand how those drivers will balance out in the second half, and how you see lease residual performance shaking out?

Yeah.

The performance we've seen to date has been outstanding, of course, versus last year, 800 to $1,000 in improvement in the second quarter from the first.

Now how sustainable is it?

I mean, that's a good call.

Our volume of returning leased vehicles and our credit losses, the fact that we have fewer repos, is really helping with the options, combined with the reduction in the daily rentals that the Motor Company is doing.

But where is it headed?

I don't know.

I can tell you in our forecast that we're projecting auction values to be flat to slightly declining, so we're not banking on improvement there.

And the return rates we've seen have been 58, 59 percent.

Um-hum.

We're projecting that the tickup in the second half.

If it doesn’t, it will be further opportunity to our forecast.

Okay.

Thanks.

And just one quick follow-up on the net interest margin or financing margin, obviously, still a positive despite the fact that -- and interest rates have started to rise and I suspect that if -- unless we do have a sharp increase in interest rates, that may continue to be the case.

But when would you expect net interest margin to become a drag year-over-year as opposed to a favorable?

How much does interest rates have to rise and over what window of time, you know, would that start to play out?

Yeah.

As we've indicated previously, we do manage the interest rate risk of Ford Credit very closely.

And the standard metric that we quote is for a 100 basis point shift in the yield curve simultaneous across all maturities.

And we indicate that our profits would move, I don't know, 150, 160 million negative for an instantaneous rise of 100 basis points.

You know, on a base of -- you know, we're going to be somewhere in the neighborhood of 3 to 4 billion in profits for the year.

That's not the biggest number that I see in terms of risk.

Right.

That's very manageable.

We are projecting interest rates to rise through the balance of the year, so that will start to put a drag on earnings, especially if we -- you know, competitive pressures require us to hold back our pricing.

But I don't see it as a material drag through the balance of '04.

Are assets repricing faster?

I mean, I know, of course, you still have -- there's zero percent financing in the mix, but average asset yields, are they increasing at a faster clip than your funding, your liabilities?

Well, we haven't done a lot of pricing.

I mean, a lot of the banks are pricing now, given the 25 basis point shift or increase in rates by the Fed and we're going to have some pricing as well.

You know, that liquidity profile chart that Mac showed you, showed the duration of our assets and the liabilities as well.

Okay.

We do tend to have a lot of very short term liquid assets and our portfolio turns relatively quickly.

Great.

Thanks a lot.

Thank you.

Your next question comes from the line of David Andrews of Pimco.

Please proceed, sir.

Yes.

Good morning, gentlemen.

Good morning, David.

I'm sorry, ladies as well.

A question first for you, Mac, on -- following up on Sasha's question.

I'm still trying to scratch my head here and understand the cash implications for the end of the third quarter for the -- it sounds like this borrowing for -- is really a short-term inter-quarter type of activity.

Absolutely.

And that -- and when we should expect to see -- typically, the third quarter would have a seasonal cash use, so cash would probably go down at the Motor Company anyway, and then you'll probably see an additional billion and a half, plus or minus, because of the long term VEBA contribution in the third quarter.

Am I reading that correctly?

Yes.

Okay.

Yeah.

I mean, the way to think about it, David, is that when we shut the plants down for two weeks, it takes about 45 days or so before that impacts on the payments to suppliers.

So our revenue goes down long before our disbursements go down, okay?

After 45 days, you've really normalized things because you've then not paid for the materials that you didn't use during the shutdown period.

All we've done is fund that period where the revenue and the expenditures are unbalanced.

Right, understood.

And it just seemed to me that you had such a huge cash balance, that even if you didn't have that extra couple billion, you'd probably be fine anyway.

Well, one of the things -- yeah.

I mean, clearly, when you're talking a $26.8 billion, that's true, but what we're doing with the shutdown financing is we're looking at this over a period of time.

As we get more comfortable with continued availability from this source, we may ramp up how much we draw down because the revenue loss, if you think about it as two weeks lost revenue, is clearly more than the $2.3 billion that we've drawn down.

But we're starting this slowly and as we go forward and have more experience and hopefully success with the program, we will probably ramp up both our draw and our use of funds.

All right.

This may be also applicable then to the December shutdown as well as the July shutdown?

I think it -- yeah.

I think it will be applicable to the December shutdown.

The point to remember there is generally the December shutdown is shorter, depending on the particular way the holidays fall.

And then the other thing that we haven't totally grappled with yet, and we need to spend more time talking to our banking friends, is if we were to draw prior to the cash run-down, we would be drawing over quarter-end.

So it may well be that we will draw in early January and once again preserve shutdown financing as an intra-quarter vehicle.

That would also mean that year-to-year comparisons wouldn't get affected by a short-term draw at the end of December.

Got it.

That’s very helpful.

The second question I had for Mr. Cosper is that it looks like you're getting pretty close to your 170 billion target on a managed basis in terms of assets, and I know the original plan was reduce used-car financing and non-Ford financing.

And my question is, at 170 billion, have you pretty much taken care of those two buckets?

And at that point, you're probably going to come into a more sustainable type of -- or stable type of asset position, or other areas that you see that would allow you to continue to shrink the balance sheet?

David, I think that’s our expectation, that 170 is a pretty good number for us.

Our wholesale volume is where we want it.

Our share with our automotive partners has been very strong and that’s where we want it.

Used is falling off -- had been falling off a little quicker than we like and we’re putting some renewed effort on that.

And the lease business has started to slow down in its decline and we’re making slight improvements there.

Now may actually be a good time to stabilize that lease business, given the factors that we’re seeing, but 170 is a good size for us and we’re comfortable at that level.

Okay, great.

I don’t want to get Mac too ahead of himself, but it sounds like then we’re probably at a low point this year in terms of new issuance on the funding plan.

Yeah.

I mean, David, I think clearly, as we show on the page, we don’t have a lot.

We are assuming we will do some prefunding in the fourth quarter to build up in anticipation of the higher maturities we’ve got in the first quarter.

But as always, we want to keep a fair amount of flexibility, so depending on the way markets are behaving, we can either slow down or speed up our funding plan.

I understand.

I meant more in terms of not so much low point this year, but really looking out over the next couple of years, we’re probably at a low point at --

Yeah.

I think that’s probably -- David, would you agree with that?

I don’t think we’re seeing major changes coming in any other aspects of the balance sheet.

No.

I think that’s right, Mac.

Great.

Thank you both.

Your next question comes from the line of Brian Jacoby of Morgan Stanley.

You got to most of my questions, but maybe just one last one on this working capital line.

Have you guys, Mac, ever done this at all in the distant past?

I mean, you’ve been there for a while.

I mean, have you guys used such a financing vehicle like this before?

No, sir.

We did not.

You haven’t?

Nope.

Okay.

Now, is there specific guidelines that’s, you know, strictly only for working capital, or can you use this line for other things?

Well, they should be, in terms of the arrangements, it is nominally a working capital line, but it is not restricted.

You know, cash loans that goes into the bank account is spongeable (phonetic), but clearly, it has a very short-term maturity.

And the banks understand -- I think, hopefully, as you do at this point in time -- the nature of this seasonal decline in our cash.

Right now, revenue cuts off and it takes six to seven weeks for disbursements to catch up.

Okay.

And then on another note, you know, you’ve said in the past, obviously, that you can take out pretty much all of the earnings of Ford Motor Credit to dividend up to the parent.

I assume that’s still the case, so it sounds like given what you’ve done this year, you have a lot more room there to dividend up to the parent.

Well, we have a little more room.

Clearly, when our leverage is running at 12-7, than as tends to be the case, we’re planning the dividend ahead of knowing the actual numbers.

And at the moment, we want to be very much at the low end of our 13 to 14 to 1 leverage target and, you know, given our cash balances, I don’t think there’s any need to be aggressive on our dividend planning.

Okay.

But what we see today is probably close to where the number might be at the end of the year?

Yeah.

I -- for what it’s worth, if I had to make a forecast, I would probably assume no change in leverage or certainly, you know, it’s in this range of 12-7 to 1 to 13 to 1.

Don’t credit us with too much ability to be very accurate on forecasting at the last minute.

You know, if we get a lot of paper coming in in the last couple of days of the month, that can change things around.

I mean, one thing that’s enabled us to pay fairly significant dividends -- I mean, the earnings are obvious, but we shrunk the balance --

Right.

-- the balance sheet.

The assets have fallen.

That’s freeing up capital.

And that, as David said, there’s not a lot more room there if we’re going to hold in the $170 billion balance-sheet size.

Okay.

Thanks.

Rachel, why don’t we take one more question?

Okay.

Then your final question comes from the line of Vivic Pottie (phonetic) of BNT Partners.

I have a quick question on your level of retained assets that have increased from 13 billion to 16 billion.

Is there a reason for this, given that securitization levels have fallen?

And the second part to the question is, what proportion of this basically reflects subordinated assets?

I think the growth in retained earnings is essentially the maturity of wholesale in the public transaction, that the assets are back into the trust.

Are we talking about retained interest?

Retained interest.

Yes, retained interest and sole receivables.

Right.

So the basic growth of 3 billion is almost entirely attributable to the maturity of a wholesale transaction.

That’s correct.

Okay.

So what proportion of the 16 billion figure reflects subordinated assets, please?

I can give you the makeup of that 16 billion.

Of wholesale receivables, it’s roughly 13 billion.

Subordinated retained securities, which I think is the number you're after, is about 1.3 billion.

All right.

And just sort of, you know, the second part of the question, which is, I’m just trying to tie in your forecast at a pretax level for the full year 2004 with your sort of actuals that you’ve reported so far.

And just to recap, your pretax forecast for the auto division is about a billion dollars, give or take, for the full year 2004.

Right.

You’ve already sort of made 1.9 billion and for the -- you know, in the first call, you basically said that the prospects for the fourth quarter are likely to improve as your market shares improve.

So I know the environment is challenging in the third quarter and possibly looking into the fourth quarter, but are things that difficult?

Well, I think you have to take into account in the second quarter that -- especially in the second half -- that especially during the third quarter, we have shut down around the world, at least in most of our operations.

So our production volumes seasonally fall off, and then you put on top of that, we do have significant model changeovers.

So it’s similar to the pattern we saw last year.

Earnings do decline appreciably in the third quarter.

So that’s the major factor affecting the calendarization of our profits within the year.

You know, I think the important thing is that we’re going to go from earning about 100 million in automotive last year to earning about a billion this year, and continue to make progress as we have over the last three or four years.

Right.

But there’s a very substantial deficit here which I’m sort of just trying to grapple with.

That’s why.

Well, I’ve tried to give you a clue as to the major determinant of that.

Again, it is a function of the pattern of our production versus our sales.

I think you saw that pattern last year --

Yeah.

-- if you look at our results.

Um-hum.

Okay.

Thank you.

On that, we’ll conclude today’s call.

I’d like to remind everyone that if you have additional questions, that you please contact Fixed Income, Investor Relations.

And thank you for calling in today.

Ladies and gentleman, thank you for your participation in today’s presentation.

This does conclude your conference call.

You may now disconnect.

Have a great day.