福特汽車 (F) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Ford Motor Company second-quarter earnings conference call.

My name is Rachel and I'll be your coordinator today.

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

We will be conducting a question-and-answer session following today's prepared remarks. (OPERATOR INSTRUCTIONS).

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

I would now like to hand the presentation over to Barbara Gasper, Vice President of Investor Relations.

Thank you, Rachel.

Good morning to everyone and thank you for joining us.

On the conference call this morning are Don Leclair, Ford's Chief Financial Officer;

Jim Gouin, Vice President and Controller and Ann Marie Petach, our Vice President and Treasurer.

Additionally, here in the room are Dave Cosper, Ford Credit's CFO and Patricia Little, our Director of Accounting.

Before we begin, I'd like to review a couple of quick items.

First, copies of this morning's earnings release and the slide deck that we will be using here today have been posted on the Ford Motor Company investor and media websites for your reference.

I would also point out that the financial results presented here are on a GAAP basis and in some cases on a non-GAAP basis.

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

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

Now with that, I'd like to turn the call over to Don Leclair.

Thanks, Barbara and good morning to everyone.

In the second quarter our earnings per share were $0.47 from continuing operations.

That's an improvement of $0.12 a share on the high end of our guidance.

That improvement primarily reflects improvements in our automotive operations in a number of areas, including cost, interest, and exchange.

North America automotive reported a substantial loss which was disappointing.

All of our other automotive operations were profitable in the second quarter, including PAG which improved by over 350 million from last year

Ford Credit earned a pretax profit of 1.2 billion and we continue to have strong liquidity with nearly 22 billion in cash.

On the slide 2, it shows a standard financial metrics and summarizes our results, quarter in the first half.

We will cover a lot of this later on but I just want to point out a couple of items.

Second quarter revenue was 44.5 billion and automotive sales of 38.7 were both up from 2004.

Unit sales were down 33,000 units, or 2%.

Changes in exchange rates increased automotive revenue by about 2%.

The remainder of the increase reflected the improved mix.

Second quarter tax rate on continuing operations excluding special items was 3.3% and the rate for the first six months was 14.4%.

The rate for the first six months is the rate we expect to see for the balance of the year and it is consistent with our full-year guidance.

Slide 3 shows the impact of special items and discontinued operations on both our second-quarter and first-half earnings.

It should say the North America charge, as you can see there in the third column from the left; 63 million excludes the recently announced 5% reduction in North America.

The charge for that will be in the second half.

Also the PAG charge includes a portion of the Browns Lane closing and the balance of that will be in the second half.

Income (ph) from continuing operations, excluding special items, was $0.47 a share in the second quarter.

In total, the special items had no impact on earnings per share. (indiscernible) unrelated charges, which will be discussed later in personnel reduction programs, reduced earnings by about $0.18.

This was fully offset by non-recurring adjustments that in total significantly reduced our tax accrual during the quarter.

These adjustments primarily reflect prior year federal and state tax settlements.

Discontinued operations had a minimal effect.

Net income therefore was $0.47 a share in the quarter.

Onto Visteon.

When we reviewed the Visteon transaction with you on our May 25 conference call, we were in the early stages of working out the accounting as we mentioned.

And while there are still a few details to work out, we plan to account for the transaction as a troubled debt restructuring.

Full year impact of Ford is estimated at a loss of 400 to 600 million, slightly lower than our estimate at our May 25 conference call.

This reflects an estimated value of the assets received about 700 million to 900 million, including inventories, more than offset by valuation allowances for and forgiveness of employee-related receivables of 450 million, cash payments for inventories - 300 million, and cash for Visteon restructuring - $550 million.

Second-quarter special items related to the transaction -- 318 million, primarily reflecting the valuation allowance for collection of employee-related receivables.

Separately, we expect to incur about 100 million for hourly buyouts in the fourth quarter.

Lifetime buyout costs estimated at 300 to 500 million, consistent with our estimate in May.

Ending the fourth quarter, as the plants were transferred to a new business and a need to be controlled by Ford, we estimate operating loss results to be a loss of 125 to 150 million, primarily reflecting losses at these operations.

Slide 5 shows pretax results by sector.

Total company pretax earnings were 1 billion in the second quarter including a loss of 245 for automotive and profits and financial services of nearly 1.3 billion and in total, second quarter profits were 573 million worse than a year ago.

Now onto the automotive sector.

Slide 6 shows the impact of the most significant operating factors on our second-quarter automotive earnings when comparing with a year ago.

I mentioned on the previous slide, the automotive pretax loss was 245 million in the second quarter.

That's about 300 million lower than last year.

Volume and mix was about 200 million unfavorable, primarily reflecting lower marketshare in North America offset partly by a stronger North American industry and mix improvements in PAG and Ford of Europe.

Pricing was favorable by 300 million more than accounted for by improvements in Land Rover and South America.

Cost performance was unfavorable by 1.1 billion for the quarter and we will discuss that on the next slide.

Foreign exchange was unfavorable by about 100 million reflecting primarily the impact of a weaker US dollar.

In all, other improved by 800 million and this reflected primarily favorable interest of nearly 700 million.

This primarily reflected tax-related interest on refund claims we discussed back in May as well as improvements in ongoing interest income and adjustments to tax-related interest reserves.

On slide 7, our cost performance for the first six months of 2005 was 1.4 billion unfavorable.

It was worse than our original plan for the year but consistent with our June 21 full-year earnings guidance update.

Quality-related expenses in the first half were unfavorable by 300 million.

Second-quarter result was more than explained by worse than expected performance of some of our prior model vehicles.

We expect that third-quarter results also will show some deterioration based on the latest trend of repairs and cost.

We have however identified solutions to those problems and are taking actions to satisfy our customers.

Manufacturing and engineering costs were 400 million favorable in the first half (indiscernible) the ongoing improvements in our plants and processes.

Net product costs for the first half were $1 billion higher compared with a year ago and included an increase of 700 million in the second quarter.

That increase includes the impact of higher commodity prices as we discussed previously and the non-recurrence of the favorable impact last year of the discontinuation of our supplier chairing program.

And again, this is consistent with our expectation at the time we updated our full-year earnings guidance.

Depreciation and amortization increased by about 100 million in the first six months.

Pension and retiree healthcare expenses were about 400 million higher in the first half reflecting primarily the effect of lower discount rates.

Increases at about these levels will continue for the remainder of the year; consistent with our original plan.

We saw cost performance.

We expect cost performance to continue to be unfavorable in the third quarter although by an amount less than what we saw in the second quarter.

We also expect cost to improve in the fourth quarter.

Second half, in total, we expect cost performance to be slightly favorable.

This reflects acceleration of our cost reduction efforts throughout the company, including our recently announced actions to reduce salary cost.

Slide 8 shows the pretax results for each of our operating automotive segments and other automotive.

Second quarter, the Americas had pretax losses of 819 million, down 1.3 from a year ago.

Europe and PAG had a profit of 83 million.

That's a 219 million improvement.

Asia-Pacific and Africa had a 93 million profit; 38 million better than a year ago.

In other automotive, reported a profit of 398 million primarily reflecting the interest improvements I mentioned earlier.

Next couple of sides will cover the automotive side of the business by operation.

First on North America, vehicle unit sales were down by 57,000 units to 862,000 and volume was lower primarily because of lower marketshare in the US.

Second quarter US share was 16.7%, down 1.4 points.

The decline was almost entirely explained by lower truck share.

During June, our sales improved but our share was impacted adversely by GM's Employee Pricing program.

Our share was down 2.7 points from a year ago.

Within this, our car share declined half a point and truck share declined 2.2 points.

We have responded with our Ford Family program and July is shaping up to be a very strong sales month.

Revenue was 19.9 billion, down 600 million from the year ago, more than explained by the decline in volumes.

Net pricing in the US was 2/10 of a point favorable.

Pretax losses were 907 million in the quarter and that is 1.4 billion worse than a year ago.

This range reflected primarily higher material costs, (indiscernible) warranty costs, pension and OPEB costs, as I mentioned earlier, as well as lower volume.

Now in South America, we continue to be very pleased with our results there.

Second-quarter sales were 85,000 units.

That's up 17,000 from a year ago reflecting primarily higher industry volumes and the improvement in the Brazilian marketshare.

Revenue was one billion compared with 700 million a year ago reflecting higher volumes, pricing and a stronger Brazilian real.

South America posted a pretax profit of 88 million; an improvement of 66 from a year ago and higher volumes in pricing in excess of higher commodity costs is a primary driver of the improvement.

And we're on track to beat the profit milestone in South America this year.

Ford of Europe in the second quarter, vehicle unit sales were 454,000, down 1000 units.

Second quarter marketshare was 8.5%, a decline of 1/10 of a point from a year ago.

Revenue was 7.9 billion, an increase of 1.2 reflecting primarily stronger European currencies, favorable product mix.

Net pricing was 7/10 of a point negative for the quarter reflecting the higher competitive European market.

The second-quarter pretax profit was 66 million, a decrease of 145 million from the same period last year.

The decrease was explained by higher material costs, lower net pricing, lower production volumes and higher pension costs as well as lower profits from operations in Turkey.

These were offset partly by internal cost reductions and mix improvement.

For the first-half in Ford Europe, we earned $125 million.

We still expect full-year results to be comparable to the full year of 2004.

Now turning to PAG, second-quarter unit sales were 200 in 2000, just up a little from 2004.

Second-quarter marketshare was down in the US and in Europe primarily at Jaguar where we had dropped some lower series models, lifted our focus to higher- margin vehicles.

Second-quarter revenue was 7.9 billion, a 1 billion increase compared with the second quarter of 2004.

That reflected primarily a richer mix in improved net revenue especially at Land Rover as well as the impact of stronger European currency.

Second-quarter results were a profit of 17 million compared with a loss of 347 a year ago.

That improvement is explained by the impact of new product resulting in a richer mix of improved net revenue primarily at Land Rover.

Unfavorable currency exchange was a partial offset.

We expect PAG to continue to improve each quarter on a year-over-year basis for the balance of the year.

We also expect PAG to achieve the low-end of the profit range we set out at the start of the year and this would be about a 1 billion improvement compared with last year.

Asia-Pacific, Africa and Mazda reported a profit of 93 million in the second quarter.

We'll discuss Asia-Pacific and Africa more on the next slide.

We earned 57 million from our investment in Mazda, down slightly from a year ago and overall, we expect Asia-Pacific, Africa and Mazda to exceed its profit milestone for the year.

On slide 14, you can see that Asia-Pacific's vehicle unit sales increased by 7000 as the revenue increased by 100 million reflecting primarily stronger industry volumes in their region.

Pretax profit was 36 million for the quarter.

That's 41 million higher than a year ago.

Improvements primarily explained by favorable exchange, higher volumes and improved mix.

Those were offset partly by higher development costs for future products and lower pricing.

Slide 15 shows automotive second-quarter cash and cash flow.

We ended the quarter with gross cash of 21.8 billion, including 2.6 billion of short-term VEBA assets and that is down 1.1 billion compared with March 31.

Our operating related cash flow is 200 million negative for the quarter.

Within that, net spending was 200 million unfavorable, working capital was 700 million negative and all other, which reflects primarily payment and expense timing difference, 900 million favorable.

We expect operating cash flow full year to be about break-even and that is down from our prior guidance and the change reflects the revised profit outlook on the automotive side.

During the quarter, we contributed 900 million to our pension plans and 200 million to our long-term VEBA.

Included in divestitures and acquisitions is a final 1 billion payment for the Land Rover acquisition.

This is offset partly by the proceeds from the sale of Triad, a Ford Credit subsidiary.

Slide 16 shows the pretax results for the segments within financial services.

Earnings at Ford Credit were almost 1.2 billion in the second quarter; 229 million lower than 2004.

Pretax profits at Hertz were 153 million in the second quarter, up 9.

These improvements reflect primarily higher car and equipment rental volumes offset in part by lower prices.

In other financial services we reported a loss of 18 million in the second quarter and that is down 11 from a year ago.

Slight 17 explains the change in Ford Credit's pretax profits for the second quarter compared with 2004.

As I mentioned earlier, the second-quarter pretax profit was 1.2 billion, down 229 and volume and financing margins were both down a little from a year ago.

That was offset partly by improving some credit losses.

Slight 18 shows production volumes.

Third-quarter production in North America is projected at 730,000 units, down 17,000 and equal to our previously announced level.

Ford Europe's production is projected at 370,000.

That is down 10,000 from last year reflecting primarily lower projected industry volumes.

PAG production is projected at 160,000.

That's up 11 from last year, consistent with the new product plans.

Slight 19 shows the first-half results and our full-year outlook compared with our 2005 planning assumptions and operational metrics.

We now expect total industry sales to be 17.3 million in the US and 17.2 million in Europe.

On the operational metrics, our quality performance is essentially flat so far this year based on published metrics.

Marketshare performance has been disappointing in the first half particularly in North America.

Full-year share outlook will be mixed at best with declines in North America more than offsetting improvements in other areas.

In fact, our cost performance for the second half to be slightly favorable, this will not offset the deterioration we experienced in the first half of the year.

So we're going to miss our target there.

Capital expenditures were 3.3 billion in the first half and we expect the full year to be in line with our target.

In terms of operating related cash flow, the first half was 600 million favorable and we now expect full-year operating cash flow to be about breakeven as I mentioned.

This slide shows a full-year outlook by operation compared with our financial milestone.

North America will be significantly worse than its milestone because of lower volumes, higher costs and lower pricing.

South America is on track to beat its milestone.

We expect both Europe and PAG to achieve the low-end of the milestone ranges they are in.

Asia-Pacific, and Africa and Mazda are on track to deliver their profits of over 200 million, exceeding their milestone.

Overall, we expect our automotive operations to report a loss for the year and be well short of the milestone.

We continue to expect results from financial services to be better than the milestone.

The total company full-year guidance is unchanged at $1 to $1.25 per share from continuing operations excluding special items.

We are no longer going to be giving quarterly earnings guidance because of the high volatility in many elements of the business which makes it increasingly difficult to provide accurate long-term forecast.

Before we get into the Q&A, I want to summarize the progress we have made on our plans to improve our business since we spoke to you in April.

In May, we announced a memorandum of understanding with Visteon and we continue to work toward closing the transaction before the end of September.

This will lead over time to a steady flow of more competitively priced high-quality parts, systems and components for our vehicles.

We have a lot of work to do but we are making progress.

Early June, we filed an S1.

That's the first step towards monetizing Hertz.

But nothing new to report at this time.

Late in June, we announced a series of salary-related actions in North America aimed at reducing our cost structure.

Continuing our efforts to right size capacity and optimize our global footprint, just this month we ceased final assembly operations at Browns Lane, Jaguar and are transitioning those operations to our Castle Bromwich Plant.

US, the consolidation of our Ohio assembly operations will occur late this year.

We realize we have excess capacity and we will update you on our plans on that area later this year.

We continue to work on all elements of our cost structure and as we said in April, nothing is off the table.

There is a new product introduction.

We're on track to introduce our new Ford Fusion, Mercury Milan and Lincoln Zephyr later this fall along with the updated Explorer and Mountaineer in North America.

PAG, we launched the Range Rover Sport and we have new diesel-powered cars for Jaguar and Volvo.

These are particularly important in the European market and the high-performance Ford Focus ST will go on sale later this year in Europe.

As I mentioned earlier, the Ford family plan in North America is off to a very good start.

We expect to see our dealer inventory position for 2005 models improve which should help our 2006 models get off to a very fast start.

We remain committed to improving our business and we plan to continue to share additional components of our improvement plans with you as we move through the balance of the year.

Now, I'll turn it back over to Barbara to begin our Q&A session.

At this time, we are ready to begin the question-and-answer session.

We will begin with questions from the investment community and then take questions from the media who are also on the call.

In order to allow as many participant questions as possible within our time frame, we ask that you keep your questions brief so that we don't have to move callers along after a couple of minutes.

Operator, can we now have the first question please?

+++ q-and-a.

(OPERATOR INSTRUCTIONS).

Chris Ceraso with Credit Suisse First Boston.

I guess a couple of items.

First if we can start in North America.

You mentioned the family plan, sales are looking better.

The cost related to that will show up in Q3, correct?

If that's true, should we expect the pretax loss per unit in North America to worsen from Q2 to Q3?

Well Chris, the cost for that program, as you might well imagine, are included both in the second quarter and in the third quarter.

As we mentioned earlier, we're not going to be giving quarterly guidance but I think it's safe to say that the cost of that was not a million miles out of line with the previous programs that we had been running.

So I wouldn't look for a big change there.

But the cost will be in the second quarter and in the third quarter.

On the interest income on tax-free funds, should we expect more of that in coming quarters?

Just to make sure that I'm clear on what that represents.

These are -- you had been back and forth on taxes.

Eventually it turns out you are owed a refund and this is sort of catch-up interest.

Am I thinking about that correctly?

Yes.

We had plans, back in January, when we laid out our plan for the year, we said that we would be able to contain any of the operating effects of the Visteon transaction.

The way we had anticipated that was we had an idea that there might be some of these actual (ph) related interest items in this year as a result.

We thought they would come later in the year.

They ended up coming in the second quarter and it ended up a little more than we had anticipated.

I would not expect any more of those this year and I think for your planning purposes, you could return to the net interest as being in the range of a couple hundred million for the quarter going forward.

One last quick one.

On the slide about the Visteon deal, was it 700 to 900 million of assets?

Is the net operating loss at Visteon included in there and if not, what happens to that?

Who gets that?

The net operating loss at Visteon is Visteon's for these businesses until closing.

We anticipate an October 1 closing.

Eventually, we expect the operating losses for those businesses transfer to a Ford controlled entity to be in the Range of 125 to 150 million for the fourth quarter.

I'm sorry.

I meant the NOL carryforward.

The ability to offset future taxable income that you might include as a deferred tax asset.

Is that part of the estimated assets you're receiving on prior losses generated in those businesses?

No, it's not.

Himanshu Patel with J.P. Morgan.

Two questions.

First any thoughts on how mix would evolve sort of later in the year with the Fusion and the Milan on coming out in North America given that those are incremental products rather than replacement products?

I think we have indicated all along that we thought as we got back in more solidly into the car business that the mix, which had been heavily weighted in the past or trucks and SUV would be more balanced, and that was part of our plan, the less reliant on trucks.

So I think the mix over time will become more balanced.

We have some updates to the Explorer and Mountaineer coming that should help on the SUV side and we have got the midsize cars coming and that will help there.

On the premium side, we are seeing big mix improvements with the new products from Land Rover.

So it's mixed.

And then, Don, any initial thoughts on what to do with any potential proceeds from Hertz?

What I would think of it as what we are doing is we are seeking to realize the proceeds of a very good business and to invest those proceeds in our business internally.

So would that mean that those proceeds would go primarily into the automotive business or would a chunk of that potentially remain within financial services balance sheet as well?

I think we'll have to see as we go forward.

I would think that the bulk of it would be on the automotive side.

But we're still looking at the Ford Credit side as well.

Last question on Ford Credit.

We are running at about 200 million a quarter on reversal of credit losses.

Is that sort of what we should think for the next foreseeable few quarters as well or are we coming to the end of that?

Dave, why don't you comment on that?

Yes, the reserve is 1.55 right now with the latest reduction that we have seen.

That compares with our ten-year history of 1.5.

We are getting back in line with history.

Now if we continue to see the kinds of improvement that we have seen in credit losses, I think there is some further room but it's sort of wait and see.

Is this Dave?

It is.

Dave, hi.

What about on residuals?

That has been flat for the last two quarters as well.

Is that kind of --

It has been flat.

The second quarter was actually down a little bit from the first quarter principally in truck but still up from a year ago.

So it is within our expectations and actually pretty good.

Rod Lache with Deutsche Bank.

Could you talk a little bit about the change in marketing strategy?

It seems like the shift away from the traditional incentives towards the EDLP or employee discounts, family discounts having a pretty big impact.

What is your sense of the affect that this has in the longer-term?

Is it a sustainable change?

Is this something that is tapping into kind of incremental demand for the industry?

I don't think it's incremental demand for the industry.

I think it's a very good program that is very easy to communicate, simple for our customers to understand and it appears to be working very well.

For now, I think we're looking at it as a very effective program for reducing 2005 model inventories and we'll have to see where we go going forward.

So is it sort of the Ford planning given that you're not expecting -- it's creating (technical difficulty) payback (technical difficulty) inventory clearance.

It's kind of hard to hear your question but I think what you're asking is do we expect payback and I just say in the past, when we have seen big programs that are very successful, we have seen payback so I would expect that.

But we will have to wait and see.

Did you say what the North American pricing is in the quarter?

It looks like revenue per unit fell quite a bit.

Net pricing was 2/10 of a point favorable.

So just about even.

And you didn't comment on the outlook?

I didn't.

I'd just say it continues to be a very tough market out there and we are going to stay competitive.

Last two things.

Did you say that -- did you clarify how you're accounting for the Visteon business?

Is there going to be a separate (technical difficulty) of the company (indiscernible) identified (indiscernible) discontinued off and also the outlook for commodities.

It looks like commodities were a pretty big hit in the quarter.

Still prices are falling, is there some optimism in the outlook for (indiscernible)?

It's very hard to hear your call.

As far the Visteon accounting, I have mentioned we are going to account for the transaction as a troubled debt restructuring.

It will not be a discontinued operation.

It will be consolidated within Ford for as long as the operations are with us.

As far as steel goes, you're right.

Steel prices are declining now, particularly scrap prices, and we are working our way through that with our suppliers as we go.

Is there anything I missed there?

Rob Hinchliffe with UBS.

Thinking through this, the employee pricing and thinking the Fusion launch.

We're seeing the 500 priced at less than 20,000.

What do you think of pricing for the Fusion and Milan and Zephyrs?

Is that at risk now with the bigger vehicles relatively inexpensive?

No, no, I don't think so.

As I mentioned, this is -- the Ford Family plan right now and the 2005 model program and we haven't announced the pricing for the Fusion and Milan and Zephyr.

I'm sorry.

I thought you had.

No.

So you don't think this is a new low or a steady pricing for these vehicles.

It's simply just to clear out the '05s.

That's what it is right now.

Through August 1, it's '05 model program.

Any implication, Don, for residual values or anything to read into Ford Credit from this -- from the pricing?

I don't know about what will happen with residual values.

I have to wait and see.

As far as Ford Credit goes, it's too early to tell really.

We're just a of couple months or a couple of weeks into the program.

Sales are encouraging I'll tell you that and it's really across the board; cars, trucks and SUVs.

I wouldn't want to hazard a guess on the effect on residual values.

I guess earlier in the year you had said your fleet penetration would taper as the year went on.

It's been pretty high in the first half.

Given where inventories are likely to go down to, what do you think retail fleet marketshare will look like in the second half?

Our fleet penetration has been high.

Our fleet deliveries were high on daily rental in the first half in part because we delivered more of them earlier.

So there will be fewer deliveries particularly in the third quarter.

I think our fleet share of the total will be down a little bit in the third quarter.

That will be offset of course by a good retail performance on the '05 models that we are experiencing now in July.

John Casesa with Merrill Lynch.

Don, it seems to me like the cost problem, or if you like, the margin problem is intensifying.

I think the Company has executed most of the elements of the revitalization plan.

So doesn't this suggest that there is another -- there has got to be another plan here coming and where do you think the greatest areas of opportunity, if you agree with that assertion that your cost problem does seem to be worsening.

John, we mentioned in April that we were going to be announcing several things throughout the year.

We have announced a couple of them.

We have more to do.

We have too much capacity.

We realize that.

Commodity prices have had a significant effect on us and I think on the business in total particularly steel and petrochemical-based resins.

And our supply base is very fragile right now and all those things have combined to make it difficult to achieve the kinds of productivity improvements in the supply base and therefore passing those along that we might have thought.

In addition, the long interest rates are down so the discount rate is lower than it had been at the time we developed the revitalization plan three years ago.

That causes our legacy costs to be higher.

So there are a number of things going on there and I think the solution to each of those in turn are obvious.

We haven't announced our plans yet.

We will in the course of time.

In the final analysis, this is a product business.

When we have good products, we have lots and lots of new products and we've got some great ones coming in the fall that will improve our ability to improve our marketshare, our mix and our pricing power.

We're seeing that right now in Land Rover with the new products we have there.

I think those are the elements -- the main elements of what we will be talking about going forward as we improve the business.

The things that we've talked about so far with -- for example Visteon, (technical difficulty) way to address the supply base are important elements, addressing our fixed cost at Browns Lane, the consolidation of assembly operations in northern Ohio and so on.

Those kinds of things are steps along the way.

We have more to announce.

Then can I just ask on steel?

Of course steel prices are in the spot market are down quite a bit now.

How soon can that favorably impact you?

Can you give us any sense on how the negotiations go, when they begin, how your purchase process works?

I think, John, for competitive reasons, I'd rather not go into that.

We do negotiate with our suppliers who provide steel, base parts as well as the mill if it provides the steel for us.

On a staggered basis, we don't have all the contracts come up at any one time.

So it's kind of a rolling thing and it will take a little while for any changes to move through.

So it would not be an '05 benefit presumably?

I didn't say that but I'm saying it won't be an instant on off switch one way or the other.

Michael Bruynesteyn with Prudential.

Could you explain on the pricing, the 300 million favorable shown on slide 6, if North America is only 2/10 favorable and Europe is 7/10 negative, how do we get to that 300 for the whole company?

Well, it's really in a couple of areas.

Mike, it's in South America where the pricing has been pretty good as the commodity prices, particularly steel, rose in South America, there was some pricing there to offset that.

In PAG, particularly in land Rover, were the two main areas.

The interest on the tax refund seems to be much more than the tax refund itself.

Is there some kind of partial payment going on here or something or how should we understand that?

I wouldn't think of it as a partial payment.

It's just, frankly, it gets very complicated and it's just the way it worked out.

It's just intuitively it's hard to understand how you generate 700 million of interest on a $300 million refund.

Well some of these are old, very old tax returns we're settling up with the IRS now.

Okay.

The 900 million favorable expensive and payment timing differences on the cash flow on slide 15, does that imply better terms with suppliers and how do we reconcile that with more favorable terms given to Visteon?

Well, it doesn't imply anything about supplier terms.

In fact, the supplier terms are unchanged and have been for the most part.

Any change in supplier terms would be on the line above that.

Changes in receivables, inventories and trade payables, that's where that would be.

There haven't been any material changes in payment terms other than the ones we have announced.

Then finally, what are your expectations based on preliminary research that you have done with the new Explorer, which we saw pictures in Automotive News the other day.

It looks pretty similar to the current one.

What are you expecting there?

I guess that's a matter of opinion that it looks similar to the current one.

We think it looks terrific frankly.

It's a great new front-end and rear-end appearance.

It's an all-new interior and a new powertrain and (indiscernible) vehicle dynamics.

The reports that we have had from the drives have been really spectacular.

So we are looking for a very good result from the new Explorer and the Mercury Mountaineer.

And that segment being under pressure, this can overcome that?

Do you think?

I don't know about overcoming that but we expect the Explorer and the Mountaineer to be very formidable competitors in that segment.

Rob Barry with Goldman Sachs.

I just wanted to clarify a few things.

One, this benefit you're getting this year from the tax-related interest, is that going to be in the results next year?

We are not really going to comment now on our plans in any outlook for 2006 or any of the forward years.

But it will account for about half of your guidance for earnings this year.

Does that mean next year if operationally everything is exactly the same, you'll only earn about $0.50 next year?

Am I understanding it right?

No, I think you have got that wrong.

I don't think it's anywhere near half of our guidance for this year.

Maybe we could take that question off line and call you later.

I think your calculation is wrong.

Well, maybe it's not half but whatever impact it's having this year, it is pretty significant.

It's not a small number but it's nowhere near half.

Well whatever it is, is it going to be there next year?

We're not going to go into that now.

It looks like on the pension and OPEB, headwind has been tracking I guess it was 400 million headwind year to date.

Can we annualize that and expect an 800 million headwind for the year?

That's about right.

That's what we said in January and this is something that doesn't change.

It's defined at the start of the year by the accounting assumptions and pretty much goes in early evenly throughout the year.

So you can plan on that.

Jon Rogers with Smith Barney.

Most of my questions have been answered but Don, I just wanted to follow up on Mike's question and dive into the net price a bit.

Can you break the .7% negative net price in Europe between PAG and Ford Europe?

Sure.

The .7 is Ford Europe.

Then what was the positive for PAG?

The positive for PAG, we don't really break that out because we sell the PAG's products in four different brands and we sell them in every market in the world.

So it gets very complicated.

I will mention that the biggest contributor on the positive side within the PAG portfolio was the new Land Rover.

They are affecting marketshare, mix as well as pricing.

Is that a pretty good number for Ford Europe, the .7% or does a change in exchange rates help you at all here?

That's a pure number calculated at constant exchange.

That's a very good number.

Jonathan Steinmetz with Morgan Stanley.

I was hoping to get a little bit more information on the net product costs on slide 7, the $700 million unfavorable.

You mentioned a couple of items, raw materials, nonrecurrence of the discontinuation of supplier sharing.

Are you able to quantify the impact of any of these factors?

Well, the nonrecurrence of the discontinuation I would say is about a fourth of the number there, and the balance of it is a whole range of things, including commodities and the effect of the difficulties that some of our suppliers have had, as well as the net cost ups-and-downs of the new products and the design cost reductions.

It's a whole variety of things; in other words, each and every brand and operation.

So it's really hard to try and dissect that, but it includes importantly from the standpoint of variance from our original plan a commodity issue.

So if you added content on something and airbags were standard versus -- some type of air bag was standard versus optional is something that would fall into that?

That would be in there, but for something like that that was something we knew about at the start the year, so that would've been in our original plan.

Okay, sure.

And the other question, I think I may have missed it; did you get the fleet versus retail percentage?

No, I didn't, and let me get back to you with that.

Great, thank you very much.

(indiscernible) fingertips now, but I'll get that if we can during the meeting and I'll call it out.

If not, we will call you later and get that.

Operator, let's switch over now and take some questions from the media, please.

Yes ma'am. (OPERATOR INSTRUCTIONS).

Don Weltz (ph) of St. Paul Pioneer Press.

Specifically to the Ranger pickup domestic sales and kind of ongoing slide in that area, is there anything the Company is doing or expects to happen with the sales, and is that your entry in the compact market for the long-term?

Well, you know, we have been selling the Ranger for many years, and we continue to keep it reasonably fresh in the marketplace.

We have had, I think -- I honestly can't remember when we upgraded the powertrains.

I think it was a couple of years ago.

We've updated the appearance, and it is certainly an important part of our product portfolio.

We don't normally as a rule comment on our future product plans.

Right.

And can you tell me anything ongoing in talks with government officials here in St. Paul and state officials with regard to the future of the St. Paul plant?

I don't think that's something we'd normally comment on in this venue.

Joann Muller with Forbes Magazine.

I had a couple of quick questions.

Don, you talked about the nature of the supply chain being very fragile, and I wondered if you could elaborate on that a little bit; specifically what Ford is doing to prop up some suppliers and financially what that means to the Company, and also what kinds of potential risky things lie ahead for you, given how fragile the supply chain is?

Well, you know, we work with all of our suppliers on a regular basis.

It's no secret what we have done in the last couple of years with Visteon.

They are our largest supplier.

From time to time, we've worked with several others of our suppliers, and we continue to do that.

It's very important for us to have a continued flow of parts and components, and we are aware of the financial condition of our suppliers as are all the OEMs.

Other than Visteon, can you put some sort of dollar figure on what it is costing you to make sure that the supply chain does not collapse?

It may be a strong word, but you know what I'm getting at.

We don't quantify those kinds of things, because it's very hard to decide what is and what isn't.

I just leave you with this, that price increases on commodities and the effect of volumes, lower production volumes, have made it tough on the supply base.

We're working through with all of our suppliers on that, and we don't disclose in this forum here the individual instances that may or may not arise.

The other topic I wanted to ask you about was quality.

And I apologize, I joined the call a little bit late, but I believe you said that warranty costs were higher and there were some higher quality expenses.

Could you elaborate on that, please?

As I said, actually we had a couple of one-off situations where we had an issue with some of our vehicles.

They're prior model vehicles, those that aren't in production now but are still under warranty, and we have worked our way through that.

We have got fixes identified and we are taking actions to satisfy our customers.

The costs for that have been recorded in the second quarter, and that's what I was referring to.

Bill Koenig with Bloomberg News.

Kind of just to doublecheck the final figures mentioned.

So on these tax settlements, there was like roughly 300 million in the settlements, and is the 700 million in interest the correct figure?

I heard it mentioned earlier on the call.

Hang on a second.

You're talking about --?

These are the onetime, the Pac (ph) settlements, federal and state I think that was -- that added --.

Why don't you, Bill, tell me which slide you're looking at and that will help us get oriented here?

Well, I don't remember which slide it was.

I'm sorry.

On slide 6, on the year-over-year basis, the second quarter this year compared with second quarter last year, we show 800 million.

Right, under other.

That includes 600 million of interest. (indiscernible) to that is parts profit and compensation changes and things.

Interest of nearly 700 million, sorry.

Okay.

Because there's a couple of analyst notes that kind of question -- well, this is my question.

So the interest then was part of operations, essentially, the 600 million in interest -- 700 million in interest?

It's not part of operations the way we reported.

If you look on slide 8, you see that we were favorable 398 million there.

This is an area where we normally -- where we report our interest expense, net interest expense.

And we report interest income and interest expense, and that is usually in the range of 200 to 250 million of net expense per quarter.

So instead of being say 250 million negative, it is 398 positive.

So that's 600 to 700 million.

It's that difference there.

So it's not part of the operations that's spelled out clearly in what we call our other automotive segment where we track are net interest in the financing cost of the business because each of the operations on there own don't decide how we finance the business.

We do that centrally.

So we report that all centrally.

One other quick question.

The salaried early retirements and buyouts that began in April concluded at the end of June.

What was the final number of job cuts?

I know they were shooting for 1000.

I didn't know if there was a final figure.

It was about 500 or 600 people.

500 or 600.

Yes.

So in other words, it fell short a bit of the target?

No, because the thousand included -- it gets very complicated like a lot of things around here.

The thousand included Ford Credit and it included attrition.

The 500 to 600, it was actually closer to 600 than 500, was just on the auto side and it was base personnel.

There was about another 500 at Ford Credit.

So we actually just in fact overachieved 1000.

Just a little bit.

One final question on the additional job cuts that were announced on June 21st, you have done a series of buyouts over the past few years.

Will those job cuts be done through buyouts or are you looking at in voluntary separation?

We are still working our way through that and that will happen progressively in the next couple of months and the costs for that will be in the second half as I mentioned.

Parnima Rutko (ph) with Reuters.

I just wanted to ask you on your restructuring, do you -- are you working on a new plan or is it the same plan that will continue through the year and next?

Think of it in this way that it is effectively the same plan to improve the results of an auto company.

What we need to do is to do more of it.

One way to think of it is an acceleration or an extension of the plan that we had before.

So it's really the same plan.

There's nothing fundamentally different.

We just need to do more and do it faster.

We're working on it.

Danny Hakim with The New York Times.

Just -- I'm sorry to keep coming back to the tax issue.

I'm just trying to wrap my brain around it.

The chief benefit from the tax settlement was the interest accrued from the settlement and not the settlement itself?

Is that right?

On the interest area, that is exactly right.

And how did you make so much interest off -- what was the sum of the settlement itself?

I'm not going to go into that.

These are very old tax returns that we settled with the IRS.

It has been a long time.

There's a lot of interest.

It's the biggest portion of that almost $700 million number I mentioned is just that.

And this is interest accrued because it's been sitting somewhere or you have been investing it or how does that work?

There's a rate that we get from the government when they have owed us money just as when we owe them money the other way around.

There is interest going the other way.

It's standard rates.

I see.

Amy Wilson with Automotive News.

I wanted to ask about the overcapacity issue.

You acknowledged that you have too much North American capacity and you do have to take care of that.

I imagine that the marketshare side only accentuates that need.

I'm just wondering if you can talk a little bit about the sense of urgency surrounding that.

How soon can you actually start to take some actions there especially in light of the CAW and UAW contracts?

Well, Amy, we're not going to talk about that now.

We mentioned that we will continue to explain the elements of the plan throughout the balance of the year going forward and we are not ready to do that now.

The analogy was that we do know where we are in the business.

We are working on our plans and we will let you know in due course.

Can you even talk from a general standpoint about how urgent the need is to kind of correct the capacity issue?

I would rather not.

Let me just add one other thing.

We had a question earlier about fleet as a percent of the total and the second quarter was 33%.

Jamie Butters with The Detroit Free Press.

Just a follow-up on that capacity question.

I'm wondering if you feel like the industry, because it has gotten more competitive, that the breakeven point of capacity utilization has moved maybe from 80% to 90% or something like that?

I think that those kinds of things vary by each individual manufacturer.

It's a whole host of things that enter into a calculation like that.

But just sort of the rule of thumb you don't feel like has necessarily changed?

I wouldn't think so.

Clearly, if there is more capacity than demand, in the short run, what you tend to see its classic economics is margin pressure and we're seeing that now.

That's the excess capacity in the industry in part at the root of the downward pressure on prices.

Each individual manufacturer has to respond as they see fit.

If you'll forgive an accounting type question, you mentioned the Visteon restructuring being treated as a troubled debt restructuring as opposed to discontinued operations.

For regular people or someone like that, for regular people what does that mean and how do we explain that?

I would say it's not as opposed to a discontinued operations.

It is as opposed to purchase accounting.

There are two accounting theories you could use to take care of a transaction like this.

We went through it this way.

At the end of the day, I think we end up in the same place.

I just think of it that way.

Can you say for the quality issues, which prior year models are causing the increase in warranty costs?

Is it the previous version of the F series or are we looking at T-Birds?

Can you point us toward any models?

No, I would rather not, Jamie.

Thanks.

Last question.

Is Ford Credit past its peak?

There has been talk about a peak in credit earnings, financial earnings and then maybe it didn't come right away.

Are we now passed the peak for Ford Credit?

I think our results were down a little and I would say we probably are.

I think we've got many more really really solid quarters of profitability ahead of us for Ford Credit.

But I think and we have been saying it for a couple of years now that we couldn't sustain those kinds of returns.

I think we're seeing that now for a combination of reasons which we discussed.

Ronald Tadross with Banc of America Securities.

I guess I'm looking at the 700 million in interest on the tax refund and then the fact that your loan loss provisions at Ford Credit look at least 300, probably 400 million below what is trend and I'm looking at it and I'm saying well there's no pretax profit here if I X those two things out.

So I'm asking what am I missing there and on an operational basis, what do you do different than the competition to improve your margins if you didn't have any earnings this quarter?

Well, as we mentioned, we are working on a plan and we will take you guys through it when we are ready to.

There are lots of ups and downs in a business like this.

We anticipated that we would have these interest income in the start of the year and we also had some things in Visteon.

So they are actually in our results from the funding agreement we had in March.

They are in our results.

They are kind of one off things as well.

So I think you're overgeneralizing with your analysis, picking out two big things and then saying all the rest of it is zero.

There are some other things going the other way.

There are other negatives in there?

We have a plan to fix up our business and we will take you through that when we are ready later in the year.

All right.

On the troubled debt restructuring, I guess the way you're treating Visteon, what does that mean?

Do you write off the Visteon losses or do you treat it as non-continuing?

What does the accounting method mean?

What it means is that we will take the assets for the Visteon operations that we will transfer to the Ford controlled entity and we will put them on our books at fair value.

Basically what it means.

So you'll basically write off the -- you'll write down the value to where you think it's fair value.

So it doesn't mean anything from an income statement standpoint except that it will change the D&A?

Is that right?

It will change the D&A from what it would have been as it stated in Visteon with different conditions.

It doesn't change it at all compared to what it is for us because that is all it is.

It won't change it.

It just sets it to fair value in our mind.

You are still consolidating the results of Visteon starting in the fourth quarter?

We will consolidate the results of that part of Visteon, this transfer, it's the other part that isn't.

Stewart Hosansky (ph) with Vanguard.

I was wondering if you could go over a couple of things.

One is can you possibly just quantify what the second-half impact will be for Visteon.

I know you gave some summaries but trying to understand and walk through it was a little difficult.

So I'm wondering if you could possibly walk through what the second half impact of Visteon will be.

Let me try in two steps.

First on the special items, we said that we would have 500 to 700 million of special items for the year, of which about 318 was in the second quarter.

There was a little in the first quarter.

So there will be about 2 to 400 million in the second half related to special items.

There will be 125 to 150 million of operating losses in the fourth quarter related to the operating losses of the businesses.

The cost issues that you are having as you were talking about in slide 6, does any of that relate to higher-than-expected healthcare legacy and can you quantify that?

Well, certainly the healthcare and pension costs are there.

They are not higher than our original plan though because we knew what they would be at the start of the year because they are just a function of the appropriate accounting items that we concluded at the start of the year.

So they are in our cost performance but they are not different from our original plan.

You had also mentioned that you are having some higher-than-expected costs from the supply base.

You mentioned supply base as fragile.

Does that imply that you're having difficulty getting additional cost reductions through from the supply base that you are having to absorb some of the costs or that your cost reductions from the supply base are less than anticipated?

They are less than anticipated because the suppliers are unable to achieve the kinds of productivity improvements in the environment that we are in with the high commodity costs and the lower production volumes.

So hence it is more difficult for them to pass through those savings to us as we work together jointly to find cost improvements.

Operator, I think we have time for one more question.

Thank you, ma'am.

Our final question today comes from Brett Hoselton with Keybanc Capital Markets.

All right.

Thank you very much for taking my questions.

My question is simply Don, when you look at the interest income, the 600 million that we keep talking about here.

Why would you not consider that to be a special item?

Well, because we had interest income and interest expense related to tax reserves as we go.

I think we have --.

I'd think you'd have to acknowledge that 600 million is kind of an unusually high number.

Wouldn't you agree?

It's a little higher than we thought but it's a number that we had in last year, slightly smaller amount.

The timing was different.

It was in the second half of last year and we had them in actually each of the last two prior years going back to the last four years.

So it's very conceivable that you could have something of a similar magnitude in the next two or three years and I know you're not guiding to that but I'm simply saying it is conceivable.

I think it's implausible.

The other question I have here was the inventory.

It sounded like you are saying that you did not mark your entire inventory to market as of the end of the second quarter given the new family -- the Ford Family plan.

So we should expect some additional inventory adjustments here in the third quarter.

Is that a fair statement?

I think it's more like we accrue more (ph) marketing costs as we go and the bulk of the marketing expense, the discount expense for the Ford Family Plan was in the second quarter.

There will be some that will be in the third quarter but the vast majority of it was in the second quarter.

That's very good.

Finally, on Ford Motor Credit, the financing margin is simply down because the interest -- rise in interest rates and borrowing cost?

Yes.

The financing margin is down because our assets are down a little bit and our interest rates are up a little bit.

Ladies and gentlemen, thank you again for joining us this morning.

If you have any additional questions on our results please feel free to call either your investor relations or public affairs contact.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude your presentation and you may now disconnect.

Have a wonderful day.