福特汽車 (F) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you very much for your patience, and welcome to the Ford Motor Company second quarter earnings conference call.

My name is Bill and I will be your conference coordinator for today.

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

However we will be having a question-and-answer session toward the end of today's conference.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's presentation, this is Lillian, [Exkorn] Director of Investor Relations.

Please proceed, ma'am.

Thank you, Bill, and good morning ladies and gentlemen.

Welcome to all of you who are joining us either by phone or by webcast.

On behalf of the entire Ford management team I would like to thank you for spending time with us this morning.

With me this morning are Alan Mulally, President and CEO; Don Leclair, Chief Financial Officer.

Also in the room are Peter Daniel, Senior Vice President and Controller; Neil Schloss, Vice President and Treasurer; Mark Kosman, Director of Accounting and K.R.

Kent, Ford Credit CFO.

Before we begin I would like to review a couple of quick items.

A copy of this morning's earnings release and the slides that we will be using today have been posted on Ford's investor and media websites for your reference.

The financial results discussed herein are presented on a preliminary basis.

Final data will be included on our form 10-Q for the second quarter.

Additionally the financial results presented here are on a GAAP basis and in some cases on a non-GAAP basis.

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

Finally, 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 are summarized at the end of the presentation.

These risk factors are also detailed in our SEC filings, including our annual, quarterly and current reports to the SEC.

With that I would like to turn the presentation over to Alan Mulally, Ford's President and CEO.

Thanks, Lillian, and good morning to everyone.

We will begin by reviewing the key financial results for the second quarter.

Don will then take us through even more detail.

Then I will come back and wrap it up before we take your questions.

Overall our plan is working and is showing clear signs of progress.

Despite the improved results in the second quarter, however, we have a long way to go.

The challenges ahead remain formidable, and we expect the second half to be difficult.

As shown at the top of the slide, vehicle wholesales last quarter were nearly 1.8 million units, down 33,000 from last year.

Total Company revenue of $44 billion was up about 6% from a year ago.

The increase primarily reflects exchange, mix and net pricing improvements partially offset by the lower volume.

Profit before tax from continuing operations was $483 million, up $774 million from last year.

This includes a $1.1 billion improvement in Automotive operating profits partially offset by lower profits at Financial Services.

Our second quarter net income was $750 million, including $443 million of favorable pretax special items.

And we ended the quarter with $37.4 billion in cash, an increase of more than $2.2 billion since the first quarter.

I would like to point out that the net results include about $180 million pretax improvement related to hedges at Jaguar and Land Rover.

Now regarding Jaguar and Land Rover we said in the past that we are assessing our strategic options and that we have retained financial advisers to help.

We also indicate that we had been in contact with a number of interested parties.

We are now exploring in greater detail the potential sale of Jaguar and Land Rover with selected parties who have expressed interest.

While no decisions have been made at this time, we have concluded that it is probable that these operations will be sold, and therefore the appropriate accounting is to recognize previously deferred hedging gains.

And because I know you're interested I will also mention that we are presently conducting a strategic review of Volvo.

We expect to finish our study by year end.

The second slide, slide 3, summarizes the results of our operations which are significantly better than last year.

Ford North America's results were more than $500 million better than last year, although it posted a loss of $279 million.

The rest of the automotive business units performed solidly in the quarter; each was profitable and posted significant gains over 2006.

Ford Credit continues to be profitable, although Ford Credit's results were lower than last year the business performed in line with our expectations.

Now if you turn to the next slide we will cover some of the progress we have made in the second quarter.

We continue to focus on the four priorities of our plan, restructuring the Company, accelerating product development, funding our plan and working even more effectively as one team.

We are taking the necessary steps to implement our turnaround plan and remain committed to our goal of achieving profitability no later than 2009.

Overall, our business improved significantly in the second quarter.

We achieved $600 million in cost savings with about $400 million in North America.

Which, on a cumulative basis has now achieved $2.3 billion of its $5 billion target by 2008.

Contributing importantly to this is the progress we made with the Union on competitive offering agreements, but we still have a long way to go to achieve our goal of being fully competitive.

We reduced North America personnel by 6400 during the quarter while continuing to improve quality and productivity.

We continued reducing North America in capacity to meet demand with the idling of three facilities, Wixom, Norfolk and Windsor Casting.

We also announced the idling of the Cleveland casting plant in 2009 and we completed the sale of APCO and Aston Martin.

Overall we are on plan.

And as I previously mentioned, we are in the process of exploring strategic options for Jaguar and Land Rover.

In addition, we initiated the exchange offer for our trust preferred securities in early July, a part of our strategy to improve our balance sheet going forward.

Turning to slide 5, as we've been saying to create a growing and profitable company we need to produce high-quality vehicles that our customers really want and value.

And during the second quarter we got some very credible third party endorsements that indicate that we are on the right track.

We had five winners in J.D.

Power's Initial Quality Survey, the most for any manufacturer.

The five winners represented four of the brands in our portfolio, Ford Mustang, Mercury Milan, Lincoln MKZ and Mark LT and the Mazda MX-5 Miata.

And the J.D.

Power Automotive Performance, Execution and Layout, the APEAL survey, which measures how well new owners like their vehicles, the recently launched Ford Edge not only won its segment, but was the highest ranked among all the new vehicles in the entire study.

In addition, the Edge was the best-selling midsize crossover in the United States, and Lincoln sales have increased for nine straight months now.

In South America Ford sales were up 20% in the first half of 2007.

In Europe Ford sales were up 5% through the first half of the year.

We have had a successful market launch and received strong media acclaim for the all-new Mondeo and the redesigned Ford C-MAX.

In addition, Land Rover sales were up 8% in the first half of 2007, a record for the period.

Further, we are continuing our expansion in Eastern Europe.

We announced our intention to increase the capacity of our St.

Petersburg Assembly Plant from 72,000 to 125,000 units by 2009.

And we are pursuing vehicle manufacturing in Romania.

In Asia we continue to see growth in China, and we are on track to launch our new assembly plant in Nanjing later this year.

We announced cessation of the engine production in Australia in 2010 and we plan to commence local production of the Ford Focus in 2011.

In summary, when you look at our second quarter performance there is no doubt that we are making progress.

But we still have a long way to go.

Now I would like to hand it over to Don to take you through a more detailed review of our results.

Thanks, Alan.

And on to slide 7.

This slide provides a few details of the profits that Alan just described.

Starting at the bottom of the slide, for the second quarter earned net income was $750 million.

This included a $32 million profit from discontinued operations, which reflected primarily the gain on the sale of APCO.

Our net income from continuing operations of $718 million included taxes in areas outside the US where we are profitable, as well as minority interests in profitable affiliates.

Adjusting for these items, leaves a second quarter pretax profit of $926 million from continuing operations.

The results include favorable, pretax, special items of $443 million which we will cover on the next slide.

Excluding these special items, our results were a pretax, operating profit of $483 million, which we will spend most of our time on this morning.

Slide 8 covers our special items which improved pretax profits by $443 million.

This included a $55 million reduction in costs associated with separation programs in North America.

This was more than explained by the decision of a net number of 1100 hourly workers who withdrew their prior decision to accept a buyout.

In addition, there was a profit of $148 million for OPEB curtailment related to the separations.

We also recorded a profit of $206 million related to the sale of Aston Martin.

And as Alan mentioned earlier, due to the probability of selling Jaguar and Land Rover we can no longer defer certain gains associated with the hedging of foreign currency and commodity risks, so we've recognized $182 million of previously deferred gains.

Additional charges during the second quarter were about $150 million mainly at Ford of Europe and PAG for personnel reductions and other restructuring actions, including the closure of the Leamington Casting Plant.

Slide 9 breaks down our pretax profit of $483 million by sector, including $378 million for Automotive and $105 million for Financial Services.

Now let's turn to the automotive sector.

And slide 10 explains the change in profits compared with last year.

For the second quarter Automotive results were $1.1 billion better than a year ago and compared with 2006 volume and mix was $100 million unfavorable with unfavorable volume in North America partly offset by mix improvements in North America and higher volumes in Europe and PAG.

Net pricing was $900 million favorable, primarily reflecting favorable performance in North America, Europe and PAG.

Costs were about $600 million favorable, and we'll cover that more on the next slide and the continuing impact of the weakening of the US dollar against key European currencies reduced profits by about $300 million.

Slide 11 explains our cost performance, which was $1.1 billion in the first half and about $600 million of this occurred during the second quarter.

Warranty expense was about $700 million favorable in the first half.

This primarily reflected favorable results in North America, largely related to reserve adjustments due to favorable trends in field service actions, and basic warranty coverages, as well as a nonrecurrence of unfavorable 2006 adjustments to Jaguar and Land Rover warranty reserves.

Manufacturing and engineering costs were about $500 million favorable, mainly reflecting our restructuring in North America.

Net product costs were $1.3 billion higher, largely reflecting increased costs related to diesel engine emission requirements, higher commodity costs and added product features.

Spending related costs improved by $300 million.

Pension and retiree healthcare expenses were $800 million lower primarily reflecting last year's retiree healthcare agreement with the UAW, as well as ongoing improvements related to curtailments, and higher pension plan asset returns, and advertising and sales promotion expense was up $100 million.

Slide 12 shows Automotive pretax results for each of our operations and Other Automotive, which consists of net interest and financing related costs.

Before the interest and financing related costs our Automotive Operations made profits of $485 million during the quarter, an improvement of $1.1 billion with all operations improving sharply.

We will focus here on Other Automotive and then cover the operations in detail.

In the second quarter Other Automotive was a loss of $107 million, that is $22 million worse than a year ago.

That is more than explained by higher interest expense related to last year's financing.

This is partly offset by higher interest income.

While we will continue to have some volatility in this area, we expect the near-term trends of Other Automotive costs to be a loss of about $200 million per quarter.

This improvement compared with our previous guidance reflects higher cash balances and anticipated lower interest expense related to the exchange of Trust Preferred securities.

Now onto slide 13, we'll start going through the operations first with North America.

Wholesales were down 100,000 units in the second quarter to 807,000.

This decline reflects lower market share, lower dealer inventories and lower industry volumes.

We will discuss market share later.

At the end of June 30 US dealer inventories were down 30% to 239,000 units from a year ago, resulting in a June 30 dealer stock of 62 day supply.

Revenue for the second quarter was $18.8 billion, and that is down $300 million due to lower volumes offset partly by favorable mix and net pricing.

And the loss of $279 million this quarter was $510 million better than a year ago, and we cover that on the next slide.

On slide 14 provides the explanation of that improvement.

Volume and mix is $300 million unfavorable reflecting lower unit volume, partly offset by favorable mix.

Net pricing improved by $600 million primarily reflecting pricing for new equipment being added to our vehicles, lower daily rental mix and lower incentives.

In addition, cost reductions were $400 million favorable, mainly lower manufacturing and pension and OPEB costs partly offset by higher net product costs.

The increase in product cost included higher regulatory and commodity costs and added product features that were recovered by higher pricing.

The exchange was about $100 million unfavorable primarily reflecting the weakening of the US dollar.

On slide 15 shows US market share for Ford and Lincoln Mercury.

For the second quarter market share was 15.6%, including 5.4% for fleet and 10.2% for retail.

As previously indicated, in line with our plan, we continue to reduce our sales to daily rental companies and therefore our fleet share will continue to decline.

Our retail share was 10.2% for the second quarter, up a little from the first quarter.

In the second quarter for example the Ford Edge was the number one selling midsize crossover, and the Lincoln MKX was among the leaders in the premium crossover segment.

This reduction from last year primarily reflects lower full size pickup truck sales, and this reflects in part the weak housing market, higher gas prices and the competitive environment.

Overall we believe we are making progress in stabilizing our retail market share.

Slide 16 tracks our progress in achieving our employment reduction goals, and we changed our reporting for salaried personnel to show full-time Ford employees only.

And this is instead of reporting salaried equivalents, which included agency and purchased services.

And we made this change because full-time employees are a lot easier to track on a quarterly basis, and it gives a very similar result and very similar percentage reduction.

And as of the second quarter we've reduced our salaried positions to 24,200.

That is a reduction of about 10,300 since the end of 2005, and very close now to our target.

Our June 30 hourly employment excluding ACH was 64,900, a reduction of 20,700 from year end '05, including 4,300 in the second quarter.

And at ACH there were 7,500 hourly employees at the end of the second quarter, a reduction of 6,400 since year end '05.

The vast majority of these employees will be redeployed or separated by the end of next year.

Overall, we are on plan in these areas.

Slide 17 shows our capacity plans for our assembly plants in North America.

And since year end 2005 we reduced our max installed capacity by one million units from 4.8 million to 3.8 million, and our straight time manned capacity to 3 million units.

In the second quarter we idled Wixom and Norfolk, eliminated shifts at St.

Thomas and Michigan Truck and added a third crew at Dearborn Truck.

By the end of '08 our max installed capacity should be 3.6 million with all plants assumed to operate on two shifts.

And our straight time manned capacity by year end '08 is planned to be 3 million units.

Reducing our manned capacity in this manner allows us to achieve major cost savings while allowing plant idlings to be coordinated with product changes, which is the best economic approach and overall our capacity actions remain on plan.

Slide 18 covers our progress on cost reductions, our defined goal is $5 billion of annual operating cost reductions by year end '08 compared with '05.

And during the second quarter we achieved about $400 million, increasing the cumulative reduction since '05 to $2.3 billion.

We don't expect to see the same level of improvement in the second half in part because of increasing regulatory compliance and commodity costs, but we remain committed to achieving our plan by the end of 2008.

And as we said previously, we will not be stopping our cost reductions after 2008.

We will continue to reduce costs beyond then, although the makeup of the reductions will likely change over time with more cost reductions coming from our purchased material costs as opposed to our own internal cost.

This shift will be the result of our efforts in product development to leverage the global scale in Ford.

Now onto South America on slide 15.

Second quarter sales were 110,000 units, up 21,000 from a year ago.

And despite the unit volume increase, our market share declined by a couple of tenths because the strong industry demand outstripped our ability to keep up.

Revenue was $1.8 billion, $500 million higher than the year ago, reflecting higher volume, favorable pricing and a stronger Brazilian currency.

South America posted a profit of $255 million in the second quarter, an increase of $156 million from a year ago, primarily reflecting favorable net pricing and higher volume.

Slide 20 covers Ford Europe.

In the second quarter wholesales were 509,000, up 43,000 from a year ago and that primarily reflects a non repeat of dealer inventory reductions in 2006, as well as higher sales in Russia.

Second quarter market share was 8.3% in the 19 markets we track, about equal to last year.

Revenue was $9.2 billion, $1.7 billion higher than a year ago primarily reflecting favorable volume and mix and currency exchange.

Second quarter profits were $262 million, an improvement of $77 million compared with a year ago, and that is more than explained by favorable net pricing and higher volumes offset partly by higher manufacturing costs, primarily to support the increased volumes.

Slide 21 covers PAG where our results improved for all brands.

Second quarter wholesales were 203,000 units, up 8,000 from a year ago, primarily reflecting higher sales at Land Rover and Volvo, partly offset by a reduction in Jaguar.

US market share was 1% equal to a year ago and Europe market share was 2.2%, up 1/10 from last year, primarily at Land Rover reflecting sales of the new Freelander/LR2.

Revenue was $8.4 billion, up more than $600 million from a year ago, primarily driven by favorable exchange, volume and net pricing with mix being a partial offset.

The second quarter pretax profits were $140 million, an improvement of $302 million from 2006.

That is more than explained by favorable cost performance across all brands, and that included a nonrecurrence of unfavorable adjustments to our warranty reserves in 2006.

Favorable net pricing was more than offset by the effect of continued weakening of the US dollar against key European currencies.

Slide 22 covers Asia-Pacific, Africa and Mazda.

Mazda continues to perform well.

We earned $81 million from our investment in Mazda, up $49 million from a year ago.

Now onto slide 23.

Asia-Pacific, where wholesale volumes increased by 2,000 units compared with 2006 and the volume increase primarily reflects increases in China partly offset by declines in Australia and Taiwan.

Revenue was $1.7 billion, down $100 million, more than explained by the reduction in volumes outside of China.

And Asia-Pacific and Africa reported a profit of $26 million in the second quarter, $22 million better than a year ago and that reflected strong cost performance, including restructuring savings in Australia and Taiwan, and improved results in China; lower volume and adverse mix more than explained by Australia and Taiwan and unfavorable exchange with partial offset.

In response to growing customer demand for smaller vehicles in Australia, Alan mentioned Ford will cease local car engine production in 2010, and we plan to commence local production of the Focus in 2011.

Slide 24 shows automotive cash and cash flow, and we ended the second quarter with cash of $37.4 billion, that is an increase of $2.2 billion compared with March 31, and an increase of $3.5 billion compared with December 31, 2006.

Our operating cash flow was $1.8 billion positive in the quarter.

That included pretax profits of $400 million, favorable net spending of $500 million and expense and payment timing differences amounting to about $1 billion, and that is typical for the second quarter.

We accrue significant expenses in the second quarter mainly for marketing incentives for which the cash payments are made later in the year, mainly in the third quarter.

And pension and OPEB timing and expense versus cash differences also were included in this area.

Separation programs resulted in an outflow of $400 million for the quarter.

We contributed $400 million to our pension plans and the impact of our VEBA strategy resulted in a net $400 million inflow.

Finally, the completion of the Aston Martin and APCO sales in the second quarter resulted in net proceeds of about $900 million.

The positive cash flow in the first half was somewhat better than planned, primarily in profits, capital spending and separation programs.

We expect, however, that the second half cash flow will be substantially negative because of seasonally lower volumes, higher capital spending and seasonal effects on timing differences.

As a result, the cash outflow this year should be less than previously expected, although still negative.

Also, we project that the 2007 to 2009 cash outflow for operating losses and restructuring will be slightly less than the $17 billion we had previously projected.

You should note that the third quarter is our toughest for profits and cash flow, and we expect a large cash outflow this period as we have had for the last couple of third quarters.

Onto slide 25, as Allen mentioned, one of our four priorities is funding our plan.

We completed the funding last year, as you know, and now our priority is to begin to strengthen our balance sheet.

And earlier this month we initiated an exchange offer for our trust referred securities.

This offer which ends on July 31 provides holders the opportunity to exchange the trust preferred securities into common stock and realize a premium.

The impact will be to reduce debt and its associated interest while increasing book equity.

While this offer will have a favorable impact on our balance sheet, it will result in a onetime charge equal to the premium paid on securities exchange; assuming that about half of the securities are exchanged, that charge will be about $700 million.

We also are taking another action to strengthen our balance sheet and reduce risk and that involves changing our investment strategy for our US pension plan.

Previously we had target asset allocation of 70% equity and 30% fixed income.

To reduce risk we've decided to reduce our equity investments and increase our allocations to fixed income and our new targets for the end of this year are 45% fixed income and 55% for equity and other investments.

And both of these actions are consistent with our strategy to improve our balance sheet.

Now we will turn to financial services on slide 26.

And earnings were $105 million in the second quarter, $320 million lower than last year.

Now on slide 27 it explains the change in Ford Credit's profits for the second quarter.

In earnings, were $112 million, $323 million lower than a year ago, and the decrease in earnings primarily reflected higher borrowing costs, lower credit loss reserve reductions, higher depreciation expense for lease vehicles and higher net losses related to market valuation adjustments from derivatives.

Lower expenses, primarily improved operating costs, were a partial offset.

Overall, excluding the impact of gains and losses related to market valuation adjustments from derivatives, we expect Ford Credit to earn on a pretax basis about $1.3 to $1.4 billion this year.

This is up from our previous estimate of $1.2 billion, and that improvement reflects higher average receivables for the year, lower operating costs and continued good performance in credit losses compared with our prior estimates.

And we are working to resume the use of designated hedge accounting for derivatives at Ford Credit, and that will reduce our ongoing earnings volatility.

On slide 28, shows where we are on our planning assumptions and operational metrics.

Total industry sales during the first half were equal to a SAAR of 16.7 million units in the US and 17.9 in the 19 markets we track in Europe.

And that is generally consistent with our full-year assumptions.

On the operational metrics, as Alan mentioned, during the second quarter we placed first in five segments in J.D.

Power's IQS survey, and that is more than any other automaker.

Marketshare was down in the US, but up in Europe.

Capacity constraints however have limited our share in South America and China.

Automotive costs were reduced by $1.1 billion during the first half consistent with our plan.

Operating related cash flow was $2.9 billion positive, and as mentioned earlier we still expect the full-year cash flow to be negative but improved compared with our previous expectation.

Capital expenditures were $2.6 billion, and we now expect our full-year expenditures should be equal to or less than $6.5 billion, and that is with no changes or consequence to our product plans.

Now we will go through our production plants for the third quarter.

In production this quarter is usually the lowest in the year reflecting vacation shutdowns at most of our plants.

North American production schedule is 640,000 units; that is 2000 units lower than a year ago, equal to the level we advised on June 1.

This reflects the continuation of our efforts to maintain dealer inventories at appropriate levels.

Ford Europe we expect third quarter production of 410,000 units, and that is down 14,000 from last year.

And for PAG we are planning on third quarter production of 168,000 units.

That is up 32,000 from 2006, and that increase reflects higher production at Volvo mainly with a new V70 and XC70, as well as increases at Land Rover for the new Freelander/LR2.

Slide 30 shows how we expect to perform in 2007 versus our plan.

As you can see in the far right column, we are ahead of or equal to our plan in all areas.

The improvement in the outlook for our automotive operations reflects our first-half results.

Looking forward to the second half, we remain concerned about the housing market and its effect on the construction industry and pickup truck sales, as well as commodity prices and the weakness of the US dollar, mainly as it affects our operations outside the US.

We now expect the automotive improvements year-over-year will offset the decline in financial services profits.

As a result, pretax profits excluding special items should be better than last year.

This is an improvement from our prior guidance.

Overall, we are performing better than our expectation this year.

Though the third and the fourth quarters will be difficult ones, we expect to continue to improve our results with a year ago, in line with our plan to return to profitability in 2009.

Now I will turn it back to Alan.

Very good.

Thank you, Don.

I'd now like to turn to slide 31 and turn to the forward-looking outlook and share with you our assessment of where we stand on achieving our key business and financial goals over the next few years.

We remain committed to our plan.

And as Don said, the improvements we are seeing this year will help us meet our 2009 profitability target.

We are on track to meet our North American cost reduction target of about $5 billion by 2008, and we are also making products people want and value, and that they are performing well in the marketplace, and we are making progress towards stabilizing our retail marketshare.

The improvements we've seen in our cash flow this year should allow us to use less than the $17 billion we previously projected to fund operating losses and the restructuring of our business during the 2007 to 2009 timeframe.

Slide 32.

In summary, as you have seen, our second-quarter results are very encouraging, and they indicate that our plan is taking hold and producing results.

But we have a long way to go.

Let me leave you with a few additional thoughts on our progress.

We expect our automotive operations to show continuing improvements from 2006 levels.

We are addressing our capacity issues.

We are deploying our capital wisely, and we are working as a global team to meet our goals.

We have completed the financing part of our plan, and we are moving forward to strengthen the balance sheet and reduce our risk profile.

We have a solid leadership team in place that is working even better together to deliver bottom-line results.

These accomplishments are something to be proud of, but we are not ready to claim victory.

We will incur substantial losses in both the third and the fourth quarters, primarily in North America, but continuing to make progress.

The entire team is encouraged by the progress we have seen.

We recognize the challenges ahead, and we remain absolutely committed and focused on achieving our plan of continuously improving our competitiveness and our business performance.

With that, Don and I would be pleased to take your questions.

Thank you Alan.

Ladies and gentlemen, we are going to start the Q&A session now.

We have about an hour for Q&A.

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 questions as possible within our timeframe, I ask that you keep your questions brief.

So with that, Bill, can we please have the first question?

Jonathan Steinmetz, Morgan Stanley.

Good morning, everyone.

A few questions.

First, you talked about the net product cost versus the pricing.

Don, you mentioned the impact of the diesel engines.

Are you more than recouping that particular increase in terms of pricing, or is there still some margin degradation out of that?

Well, I'd answer the question this way, that our total product adds, including the regulatory for the diesel, is about offset by pricing, without going into any details about one aspect or another.

In total, we are recovering it, with some ups and some downs.

Okay, you took your CapEx number down for the year at a time when for example, GM is increasing theirs.

Can you talk a little bit more about what caused that and do you think that is something that is sustainable as we move out into '08 or '09, this type of a level?

Well, I think Alan mentioned, and we've been talking about it, trying to work more together and leverage our global assets.

And we said we would be at or around $7 billion for the next couple of years.

That's the level we have been running at.

We've actually been running a little bit below it as we've been trying to make efficiencies.

Our plants, we are in fact in the process of closing plants.

So we are -- we have not changed our product plans at all, and we are doing a little better in the nonproduct spending in being more efficient in delivering products for less investment.

So I wouldn't be concerned about it, except that we are doing better at delivering the same for less, which has been our goal.

And lastly on the cost reduction side, you've talked about '08, '09 and beyond some of the material costs and product development type of stuff flowing through.

It seems like there is a little bridge between now and then; if you think about the next two or three quarters where do you think you can see the most incremental cost reduction?

I think we're going to see most of the cost reductions on our own internal costs as we continue to restructure our operations, particularly in North America.

In the manufacturing, product engineering and our general staff and overhead areas.

On the material costs or product cost side we are seeing a lot of cost increases on commodities, and we are adding content to make our vehicles even more desirable in the marketplace, and we are realizing the pricing on that, as you can see from our results.

I'll stop there and get back in the queue.

Thanks.

(OPERATOR INSTRUCTIONS) Chris Ceraso, Credit Suisse.

Good morning.

Can you give us a little bit more of a breakdown on how much of the $600 million in increased product costs you would assign to materials versus how much is some of these regulatory component adds and how much for some of the other features?

I think last quarter you highlighted it was upwards of $500 or $600 million just on the material side.

Is that about right, and is it still tracking at that level?

Yes, that about right, still right about $500 million.

So almost all of it was raw materials.

Now within that we had product cost increases, as well as design cost and supplier initiated cost reductions.

And then on the other side of the favorable $600 that you said was from pricing, how much of that is tied to lower incentives versus how much from mix, or is mix in the other category?

So for example launch of the Super Duty carries a higher price, did that show up under price?

And if so how much of that of the $600 was related to that?

I assume you're talking about North America now.

Yes, exactly.

It was about one-third of it is pricing, and about one-third of it is lower incentives.

And the rest is improved business mix and the effect of improvements in Canada and Mexico.

I noticed in the finance company it looks like losses as a percent of receivables ticked up versus a year ago but it still looks like the provisions are coming down.

Can you give us an idea as to why those trends are still going that way?

We are very pleased with how our portfolio is performing right now, and we have our credit loss provisions right at the right level.

Our reserves are good, and it is flat.

I don't think it is going to get any better than this.

But it is really performing well, and it is a credit to the team and what they've done over the last couple years to improve our internal performance.

And you are not seeing anything other than seasonal ups and downs in the actual credit loss performance?

No.

Okay.

We're very happy with how our portfolio is performing.

And last real quick another question about the North America year-to-year walk of the pension/OPEB $400, how much was for each?

Let me get back to you on that.

Thank you very much.

UAW healthcare piece of it was about $160 million.

And so then there is some pension asset return effect and some pension, or some OPEB curtailment in there, as well.

But I will try and get that and include that in an answer later on in the call.

Okay.

Thanks, Don.

Rod Lache, Deutsche Bank.

Good morning.

Can you just, if you take a step back and talk about the operating environment, do you think that something is changing here that would support a more favorable pricing environment that is sustainable?

Is there an improving supply/demanded dynamic occurring, or is this something that you would expect to be kind of volatile going forward?

That is hard to say.

I think what we are seeing now is a strong acceptance of our product, and that is fundamentally what drives the pricing.

And then we are always in the environment that we are in.

And right now we have seen a lot of raw material cost increases.

Everybody has seen those and we will just have to see how it goes going forward.

But really the key for us is having good products that people value and want to buy.

And can we talk about the new cash burn projection for this year?

How much of that would you say is from operations, and how much of that is from restructuring?

I would say it is mostly from the operating side.

Do you have an estimate for the restructuring part of it?

We're going to be little bit lower than what we had anticipated before on that, and we will be a little better on the operating side.

So the $17, maybe it will be $15, $16, something like that.

And I would say about one-third of the improvement will be from restructuring.

But with the balance or most of it from operating results.

Okay, and my last question is just generally if you can talk about, I know you don't want to get into the details of negotiations, but obviously there is still a lot of talk about restructuring, restructuring legacy obligations, that kind of thing.

Aside from proceeds from asset sales, could you just talk a little bit about your strategy on funding?

You are obviously taking actions to improve your balance sheet.

Would you think about using equity as a means of funding any kind of restructuring initiative in that regard?

Let me talk just a little bit about that, and then I will turn it over to Alan to talk about the bigger issue, which is how we are doing on Union.

But our plans are to put ourselves in a position to improve our balance sheet and to improve our operating results.

And if we do things right, both of those get improved in tandem.

And we are not really going to go into details about how we might or might not do something.

The important thing is that we are striving to be competitive.

Let me just add to that, it starts with our competitiveness and I am very encouraged by not only the dialog now associated with this contract and negotiation, but also the work that we have done with the UAW on our cooperative operating agreements over the last few years that has significantly improved our competitiveness in all of our operations.

And so I think the most important thing is that we deal with all the elements of competitiveness.

And as Don pointed out with what we've done on the financing so far and the timing of it, we are in a real good position now going forward to be able to fund the restructuring and the product development and continuing to improve our competitiveness.

But you are not willing to talk a little bit about the future funding mechanism for that.

Would you use equity if that were an opportunity, or would you be looking to reduce cash or relever the balance sheet?

That is clearly an option for us that we have under consideration.

Okay.

Thank you.

John Murphy, Merrill Lynch.

Good morning.

On net pricing it seems like it was a pretty big positive in the quarter, and I hate to ask this question again, but when we looked at the Financial Services the depreciation on leases or the expense went up.

Which would indicate that there is lower residual values being priced into your used vehicles.

So there seems like there is a disconnect on what is going on with new vehicle pricing on net pricing and what is going on with your used vehicle pricing or residuals.

It just seems like that the net pricing is going to be tough to keep as a positive going forward, and I just wonder if you could comment on the connection between the two of those.

Yes, I don't think there is any great connection between the two of those, John.

What we are seeing is residual values and overall they are improving a little.

What we are seeing here is that maybe not as much as we thought and the change is mainly in the pickup trucks and large SUV's, which is no surprise, I think.

And so what we are seeing is a lower auction price than we planned for vehicles that were coming off lease from two, three, four years ago.

And that is fairly much distinct from the second quarter net pricing, which reflected the good mix, getting out of the daily rental stuff that will help our residual values in those vehicles going forward.

I wouldn't really connect those.

Might add, John, too, that our plan was to significantly reduce the rentals and we are essentially ahead of that plan now and by October we will have achieved our 30% reduction in the rental share over 2006.

So I think we are getting a little bit of help by being a little bit ahead of plan.

So it sounds like the pricing in the used vehicle market is still lagging your efforts and ultimately the residuals should be improving there?

Because I mean there is some connection here in the residuals and the used versus the new pricing.

Well, there is, except that I think, as I was saying, most of the change in the residual values that you see in the credit company side is on the large pickup trucks and the large SUVs.

And those are not the ones generally that are in the daily rental fleet.

So we will see an improvement in residual values.

We are starting to see that now, that is mainly in the passenger car side, the smaller SUVs.

And we expect to see more going forward.

At the same time we would expect to see maybe some improved pricing even in the daily rental side of things.

Second question on the level of integration with Volvo.

It sounds like Ford of Europe has actually moved pretty far along and integrating platforms with Volvo, particularly the S60 and S80.

Would that be a concern going forward or how do you think about that when you're going through the strategic review?

The way we are thinking about it is that we have so many relationships with so many other partners and suppliers, that as we complete our strategic review that I would anticipate that we would have a continuing relationship with whoever we agree to operate with going forward.

And it wouldn't be a problem because we've been able to operate very successfully with our relationships to date.

But clearly it would be important part of the plan.

And Don, one last one on the pension and OPEB.

Are you guys remeasuring that every quarter to adjust your expenses because typically wasn't that done on an annual basis?

Or is it done on an annual basis?

We are doing it certainly more often now, and you're right, it used to be once a year, and now with the major changes in employment we are doing it more frequently.

And on that point, you had a question earlier about the $400 million improvement in pension and OPEB.

And the UAW plan, as I mentioned, is about $160.

So let's say $200 million on a rounded basis.

The pension asset returns improved, that is about $100 million and the ongoing impact of pension curtailment is about $100 million.

So those benefits or changes are rolling into the income statement faster than they would have traditionally?

At this point?

Yes.

Okay.

Thank you very much.

That's correct.

Himanshu Patel, JPMorgan.

Two questions.

First, when you look at the sequential North American profit, I think you went from a loss of about $600 to slightly under $300.

Is there any way, Don, to give a little more color on what happened there, particularly I am thinking how much was the better availability of the Super Duty?

How much of that was really the main driver there sequentially?

Well, we can.

I think the main driver of the improvement was volume.

And actually that brings up another good point.

I think your Q2 production that you reported of 811,000 units, isn't higher than what you originally had planned by about 40,000 units or so?

We are checking here;

That doesn't sound right that we would be that far off.

Let us get back to you on that.

We will get that later in the call.

Two other questions.

If you exclude PAG, it looks the international profits are about 90% higher than I think where they were Q2 of year ago.

Any color on the sustainability of the margins that you are seeing in some of these regions, particularly Latin America seems like it is doing double-digit margins now.

Certainly we're doing very well in South America where we our capacity constrained and our product acceptance is really high.

Exchange rates, almost everything is going in our favor there right now.

In Asia-Pacific we are in the midst of some restructuring, and the guys have really gotten on top of the costs there now.

And so we are doing better there.

I would expect to continue to improve in Asia-Pacific.

And Ford of Europe is just now entering a period where we are going to be reaping the benefits of the larger car investments we made.

We've got some new, smaller cars coming in the next couple years.

So I think we will be seeing upside on the operating margins in Ford of Europe, as well.

Okay, and then maybe a question for Alan.

The decision to put Volvo under strategic review, how much of that would you say was driven by desire to strengthen liquidity?

Versus just a desire to maybe streamline the portfolio and eliminate or let's say distractions from the North American turnaround?

I think I would characterize it as considering those factors and even more.

Because clearly the real opportunity going forward is to integrate and leverage our Ford assets around the world.

And we have made significant investment, as you know, in all of the PAG brands there.

They are on positive profitable growth plans.

And it just was clear to us that this is a good time to review our portfolio and decide the best thing for all of our brands going forward.

And of course as you pointed out, it is also very important for us as we're leveraging the Company to work on improving the balance sheet going forward too.

So it is all related but it is really driven by what is the best thing we can do for long-term value creation, starting with the Ford brand and integrating it, and doing the best thing for everybody associated with the other brands.

And maybe one last question for Don.

Can you give us how much of the -- how much collateral is pledged behind the PAG assets?

No, we're not going to go in and say how much there is, just that you mentioned proceeds from the sale of Volvo and liquidity.

I would ask you to think about it more in the sense of proceeds from potential sale of Volvo and strengthening the balance sheet, essentially delevering.

I don't want to go into the exact collateral.

But I will go back and answer your question about the production.

In April we defined -- we indicated Q2 production would be 810.

It came in at 811.

But our prior guidance had been 770, so you're right, it was up 40,000.

And what we indicated at the time was that we were a little short of inventory on a few selected vehicles, and we were pulling production ahead from the third quarter to the second quarter.

And so that didn't really affect our overall sales outlook for the year, just our desire to make sure that we had sufficient inventory on a few select vehicles for the summertime.

Rob Hinchcliffe, UBS.

Thanks, good morning.

Don, you said year-to-date so far things that have gone a little better than planned; you said one of them obviously is profitability.

And is there a particular area so far where you are running a bit better than you would have expected six months ago?

Is it pricing?

Is there something you could call out?

I think there are a couple of them, and in the order of where they are greatest is PAG and South America, Ford of Europe and Asia-Pacific.

So they are all doing a little better than we planned.

Things are also going well in the Credit Company, and because of that our cash balances are higher and so our interest income is higher so our net interest is lower.

And then we are also doing better in North America.

Now within North America we are doing I would say better relatively better outside of the US than within the US.

But doing better even within the US and that would mainly be on the cost side, we are a little bit ahead of schedule in getting some of the people out because in part because of the competitive operating agreements and getting the plants idled on schedule or a little ahead.

And then on the pricing side we are doing a little better than we thought on pricing.

The mix has been stronger.

The mix of the Edge has been higher on the high series.

So just a whole range of things have been favorable for us.

Pretty much across the board, I guess.

Yes, and you could really summarize it as productivity and our quality.

On the productivity and these cooperative operating agreements, is there a way to put a dollar figure on how much they are contributing to the cost saving so far?

I think we have quoted a figure before that when fully implemented and the competitive operating agreements have largely been agreed, and they are being implemented now but they are not fully implemented, but I would say it is somewhere in the $500 million range.

On an annualized basis when they are fully implemented, which they aren't quite yet.

And on the pricing side, things certainly look like they are getting more competitive, heating up a bit.

What are your thoughts there?

How sustainable going forward is Ford's ability to maintain pricing?

And then obviously incentive accruals play a large role quarter to quarter.

What are the assumptions right now for the back half of the year or I should say for the third quarter, I guess?

Starting on the net pricing side, on the revenue side we are very encouraged with the response we are getting from our new product lineup especially on the Focus, the Fusion, the new Taurus and then the crossover is the Escape and the Hybrid and the Edge and continuing strength of the larger SUVs.

And with the content and the continued fuel economy improvement I think going forward our fundamental assumption is that we will be competitive, and we are being recognized for those improvements.

Do you want to mention something about the our residuals?

Yes, I was going to say that I think going forward we usually see the prices in a sense lowest at the end of the model year, so we will be selling down the old models.

And selling up the dealerships with '08 models.

So that is an important factor on the pricing side.

And then if you just referring to slide 29, sequentially from second quarter to third quarter our volumes are down significantly as you would expect because of the vacation shutdowns.

From 811 in North America to 640, 512 to 410 in Europe and 193 to 168.

That is a large reduction in volume, and that is really what we were referring to earlier when we said that there was a big causal factor for the sequential improvement from first to second, similarly second to third is going to be down.

That is why the profits will be tough in the third quarter and why the cash flow will be, that plus the timing difference item I mentioned on the marketing accruals.

Peter Nesvold, Bear Stearns.

Hi, Ryan Brinkman for Peter Nesvold.

Given that public financing is unavailable for Allison and Chrysler auto, how confident are you that financing is available for Jaguar, Land Rover sale?

Does it appear there is likely to be committed financing in place?

Well, that is hard to say.

Clearly the market is a little tougher than it was just a month ago or so.

But we are still in the early days of going through that.

And those are terrific brands, and we expect to be able to, as we said, it is probable that we will be able to complete the sale, and that is why we took the decision that we did.

And we really can't -- it is very hard to speculate on what the markets will be.

And we completed our financing, and we did a fair amount of unsecured financing at Ford Credit earlier this year so we don't really have any direct financing needs right now.

I appreciate that.

Also on slide 11 you said that improved warranty expense was $700 million of the $1.1 billion year-over-year improvement.

That is a discretionary item.

Is the improvement sustainable, would you say at these levels?

Well that is not a discretionary item.

We have a pretty strict and rigorous accounting process that we use that reflects what we actually are paying to our dealers for our warranty expenses as we reimburse them for customer claims.

And we do that on a conservative basis and in arrears of the actual experience.

So it is not discretionary.

Now there are some items that are nonrepeatable because they reflect reserve changes.

But the ongoing trends in the quality are, they are favorable, it is improving, we expect to see improvements going forward, perhaps not at that level.

Robert Barry, Goldman Sachs.

Hi guys, good morning.

I also had a question in the context of this meltdown we are seeing in the high yield market.

Assuming that continues and you are able to negotiate some sort of settlement with the Union on OPEB, are you comfortable funding that out of cash?

And/or equity?

We are comfortable that we have a plan to make the Ford Motor Company competitive.

It involves a lot of moving parts, as Alan was saying earlier, about the Union discussions, but we are comfortable that we have a plan to -- our goal is to make the Company competitive, and we don't really want to go into any details.

Okay.

How about your outlook on the luxury market and what is your strategy going after the luxury market if all the PAG brands are gone?

We clearly will have our Ford Lincoln Mercury lineup, and one of the things that we've been thinking about as we review our portfolio is our strategy going forward with respect to the entire product line.

I think it's interesting to note that most of the automobile manufacturers are really focusing on different elements of the segment, and that is an important part of our consideration going forward.

I think it would involve a lot of additional investment in Lincoln?

I think it is too early to say that.

We would continue to invest in the Lincoln Mercury lineup, and we have a very strong lineup today as recognized by the quality and the productivity and the safety recognition.

And so we are not disadvantaged at the present time.

I think the real question is how we build on that success going forward.

And finally, just a housekeeping item.

Can you tell me what the gross automotive debt was at the end of 2Q?

Approximately $30 billion.

Okay.

Thank you.

Ronald Tadross, Banc of America Securities.

Good morning, everyone.

Two quick questions here.

First on slide 14, you mentioned that the mix had offset some of the negative volume effect.

So maybe if we just assume, I don't know, you correct me if I'm wrong, but maybe mix is in the plus $100 to $200 million range.

Where is that coming from?

And what is the outlook on mix?

The mix is actually a little more than that, the volume is a larger reduction and the mix is more favorable than you were quoting.

And the outlook for the mix is right now it looks good.

We had been going through the last couple of quarters a period where we were getting back into the car business, as it were, and we had the Fusion, Milan and the Zephyr and our unit revenues in North America were going down.

That is in the base now, and now we are getting back and improving our per unit revenues.

Don, is it over $300 million?

It's about $400 million.

And is it coming from daily rent at all, or is it all just product mix like retail product mix?

It's a whole series of things, including importantly the discontinuation of the Taurus and the Freestar, which were heavy into the daily rental.

Higher volumes for the F-Series, particularly the new Super Duty, the Edge, both the newness of the product and the lower discounts, as well as the high mix, high series mix there.

And several other factors.

So are we at all concerned about gas prices here on mix?

Could that put a damper on this going forward?

Well, we are concerned about fuel prices, and we have seen a decline in F-Series sales volume.

So the F-Series sales volume decline, which at least in part reflects higher gas prices as well as housing, and the construction sector and the fact the emission laws changed at the end of last year.

So we think some truck sales were pulled ahead at the end of last year but the mix of what we are selling is richer.

And one thing on cash flow.

I know you said that the restructuring spend will be a bit lower, but if we just stick to your original numbers for a second I think you said about $5 billion in '07 and $2 billion in '08 will be spent on mostly I guess reducing heads.

It looks like you only spent about $1.6 billion so far.

Maybe just see if those numbers are accurate, but also where does this bell curve come here in the spending on restructuring?

I think we said we would have about 4, not 5, so was about 4 this year; and we are going to be a little less than that.

And that is a combination of things that the mix of people that are leaving on the hourly side is slightly different in terms of which package they are going out on.

And again on the salary side a lot of the people, a higher proportion of them were not on retirement packages than we initially estimated and those people went out and a lot of that cost is funded actually through the pension plans.

So there are a couple of reasons why it will be lower but the important thing is if people that we said were going to go and the numbers and the plant closings, we are on or ahead of schedule.

It is just costing us a little less to effect that.

We will now start taking questions from members of the media on the call.

Micki Maynard, New York Times.

Good morning, everybody.

I have a question for you about this quarter in general because from what Mr.

Mulally said about the third and fourth quarters, it sounds like this might be more of an anomaly than a trend.

And I wonder if you could talk about that.

Second quarters are traditionally when car companies do well, and I think you earned something like $1.7 billion back in '94 or something like that.

So is this kind of a onetime occurrence, and we are going to have some maybe three bad quarters and another good second quarter?

How do you see it shaping up ahead?

No, I don't think so.

The way I think about it is that we will continue to improve.

And as we pointed out, the third quarter is traditionally lower because of the lower volume.

But overall, as you noted, we improved the guidance for the year end '07 also.

So I think it reflects more to the tradition of the third quarter, but overall for the fundamental automotive operations our plan is to continue to improve and get the profitability in 2009.

I'm sorry but you did say significant losses in the third and fourth quarters earlier.

Did you only mean the third quarter?

I think that when we say the losses, clearly for the year we are going to lose mainly because of North America.

So we haven't changed that; overall for the year we think the losses are going to be less than what we had in our plans.

We are a little bit ahead of plan.

In fact clearly we are still fighting our way back to profitability in North America.

The last thing I wanted to ask you is over the last couple of months there has been sort of this whispering campaign that if Ford has another couple of bad quarters that you could end up considering Chapter 11.

Can you first of all have you heard that yourself?

And second of all, given this quarter, should we stop talking about that possibility?

Well, that certainly is not in our plan, and when we put this plan together over the last year in addition to aggressively restructuring to operate profitably, that is just the absolute cornerstone of the plan.

Accelerating the development of the new products to stabilize the market share and then start to profitably grow again.

And of course the third piece of the plan was to secure financing for both the restructuring and for the bringing in new products online.

And we are really pleased with going to market and when we did and the response we got from everybody.

So we are in great financial shape and liquidity.

And now our plan is and what you are seeing here in the second quarter is to keep improving the fundamentals of the business and bringing out the new products and get back to profitability and then profitably grow the Company.

So I'd -- we aren't talking about that, but I can understand from the history why some people would, but clearly we are very, very encouraged with the progress we are making on this plan.

Tom Krisher, Associated Press.

Hello, gentlemen.

There are rumors swirling around over in India about the Jag sale being to Tata; one of the automakers over there.

And that it may come as soon as this week.

Will it happen that fast and is there any truth to that?

Ask me the question again.

You cut out on part of it.

There are rumors floating around over in India that the Jag Land Rover sale would be to Tata and that it could take place as soon as this week.

Is there any truth to that?

Did you say this week?

Correct.

Oh, I think that's a bad rumor.

No.

Clearly that would not be the case.

The way we would characterize it is that with the response we are getting, which we are very encouraged about, we are now moving to a next stage of more detailed discussions with all of the people that have shared an interest.

Okay.

And we have no comment on the people that are interested at this point.

Very good.

The other question I had was there are a lot of people are saying it is bad timing to have a good quarter, and going into the contract talks.

Do you think this will have any impact, your positive results here will have any impact on talking with the UAW?

Absolutely not.

The neatest thing about the working closely with the UAW and with everybody over the last few months, is that everybody really does understand the situation we are in.

And just like we pointed out, we still lost $279 million in North American operations, and we have a lot of work to do to get back to profitability.

And the way we are approaching this is that long-term we need to work on every element of our competitiveness so that we can compete with the best in the world.

And we all know that and all the participants know that and that is our focus and we are making great progress on that.

With respect to -- I think it is never a bad time do have a good quarter, and again, we are very pleased and we are very encouraged that our, that we are making such great progress on the plan.

Thank you.

I'll sneak one last one in here.

Can you say -- give an estimate on the cash burn at all?

You said slightly less than the $17 billion that you had said previously.

Yes, we said earlier 15 or 16 might be better number now, the way it looks.

Okay.

Thank you.

Peter Woodman, Press Association News.

This is Pete Woodman from the Press Association in London.

I would just like to ask Mr.

Mulally what assurances he can hold out for the staff in the UK working at Land Rover and Jaguar if the companies are to be sold as far as the plant, retaining the plants is concerned and also about jobs.

I think the most important thing that we talk about is, are these two great brands.

And the fact that we have continued to invest in these brands, and they have got great products and they have got even more exciting products coming online.

They've been working their productivity, increasing their competitiveness.

So no matter what we decide going forward, I see a very bright, a very exciting future for Jaguar and Land Rover, and they are continuing to create their future with all of the actions they are taking today on their quality and productivity.

They are going to be great.

And could I just ask what sort of timescale we are looking at?

You said with some amusement that it would not be this week, but what sort of timescale are we looking at for a possible sale?

We haven't put a specific timeframe on it, but what we are doing now is moving to the next step of more detailed conversations with the people that are interested, and we are very encouraged by the response that we are getting.

And we will keep you informed as we go.

Thanks very much.

Bill Koenig, Bloomberg News.

Good morning.

I'll take one more stab at Jaguar Land Rover.

Given that as you said earlier in the call, that you're recognizing the hedges on Jaguar and Land Rover, what is the likelihood that it would be sold to whoever?

In other words are looking at like an 80/90% thing, 50/50?

Bill, I'm really sorry, but you are cutting out, and we cannot hear you.

Sorry about that.

I have got a new headset here.

Is that better?

A little bit.

What I was asking is what is the likelihood that Jaguar and Land Rover will be sold to whoever?

Not asking about any specific buyer but in other words are we looking at like an 80/90% likelihood, a 50/50%?

I was just wondering if you can provide any color along those lines.

I think greater than 50.

Okay, all right.

Thank you.

John Stoll, Dow Jones Newswires.

Don, you said during your comments earlier that there were some capacity restraints in I believe South America, Brazil and in China.

What -- you may have outlined this a little bit, I may have gotten a little sidetracked covering the specifics of your conversation earlier, but have you outlined what you will do about those capacity concerns?

Are they near term, or is this something that you've got to take a harder look at over the long-term?

Well, we are opening a new assembly plant in China later this year, and we are going to production of our Ford vehicles in that plant I think early next year, and that will be a significant increase in our capacity in China.

And we are working through a series of options to economically expand our available capacity for the South American market.

So we expect to address both of those in the reasonably near-term.

And can you discuss any of the options in South America?

No, John, I think we would rather not.

It is a series of things that we are going through to evaluate what is the most economical way to provide capacity for the South American market.

And I guess just to clarify because there has been a lot of questions about the UAW and how you're going to finance a supposed VEBA deal or something of that nature, restructure the way that the liabilities are on the balance sheet right now.

Are you confirming that is something you are looking at, that a VEBA or something equivalent to unloading some of these liabilities is an option for you guys at this point?

If so, A, have you discussed this with the Union yet?

And B, have you discussed this with GM and Chrysler as something that all three of you could do together?

We are looking at every element of our competitiveness going forward, and the financing plan that we have in place will provide us the capability to consider those options.

Okay.

Thanks, gentlemen.

Tom Walsh, Detroit Free Press.

Hello.

In that vein I was going to ask specifically about your healthcare spend.

What was your healthcare spend in 2006 total?

What will be it be in 2007?

And what change in that healthcare spend do you anticipate out of labor negotiations?

We are processing.

Are you talking about the total, or just the hourly retiree or what, what piece of it?

The hourly retiree is what I'm most interested in, but however you have it and can get at it.

Well, last year I think we are spending -- our expense is about $2 billion a year.

That's what it was last year.

It will be less than that this year because of the changes that we made.

Right.

GM said their's went down by about $0.5 billion, largely due to the changes already negotiated.

Can I have a number on your change?

We've said before our agreement that we negotiated, and it was approved by the courts last year, saved I think $640 million on an annualized basis.

Okay.

And given the closeness of the vote to get that deal, the 51%, how much more do you think you can realistically get going forward as you launch into contract negotiations?

As we've said a couple of times before, we are really not going to comment on that today.

We are having -- we have a history of a really good relationship with the Union, and we don't discuss it publicly.

Okay.

Thanks.

David Kiley, BusinessWeek.

Hi, gentlemen.

I wanted to ask, you talked about CapEx earlier, I have some questions, and how it is sort of stable about $7 billion.

Have you started to dial down future investment in the brands that you're planning to sell yet, and do you expect -- I mean if the likelihood is that you're going to get rid of Volvo, Jaguar and Land Rover, how will that affect CapEx in the next couple of years?

Will you channel that money into the remaining brands, or do you expect CapEx would go down?

With respect to your first question, David, we have not scaled back our plans, we've focused them even more on product development across all the brands.

And the improvement that we are seeing is part of our strategy to improve the efficiency of our product development going forward.

And I think we will continue to see that improve as we simplify the product line, simplify the offerings and reduce the complexity of the vehicles.

And as that flows through the entire value stream, I think we will see continuous improvement in the productivity of our investment in new products.

And with respect to your second question, maybe share a little bit more about what you're thinking there.

I just wondered if without those brands to fund, if you expected to keep the level where it is and channel that into more products for Ford Lincoln and Mercury?

Or would you expect in terms of lowering your overall costs going forward would you expect CapEx to go down proportionately to what you are spending on those PAG brands?

I see.

I understand now.

I think, I thought about that, it clearly is the competitiveness of our product line, and we are really encouraged with the Ford Lincoln Mercury brand with the progress that we are making and the customer acceptance, especially with the improvements that we are making in initial quality and long-term quality and the appeal of the vehicles and the recognition for the safety enhancements.

And that productline with the Focus and the Fusion and the new Taurus and the crossovers with the Escape and the Hybrids and the Edge along with the bigger SUVs and the trucks, it seems to us that we have a very competitive product line that we just want to keep a real consistency of purpose on that product line and to continuously improve each of those models year after year.

And that is what we have reflected in our capital spend.

And so I don't see much change to our plan going forward.

And just kind of a quick part two, on Jaguar and Land Rover I've seen estimates from Wall Street firms on what you would net out from a sale of that, and there is kind of a broad range.

I've seen as low as 1.5 billion, and I've seen as high as 6.5 billion for the two and I just wondered from your perspective which of those you thought was closer to it.

We have no comment on that at this point, David.

Okay.

Thank you.

The neat thing is that clearly we have continued to invest over the years in these great brands, and they are terrific brands and they are in great shape.

And it is a good time to review the best thing for everybody going forward.

Thank you.

We have time for one more question.

Bryce Hoffman, Detroit News.

Congratulations, gentlemen.

I just wanted to ask you, Alan, talking this week with Ron at the UAW, he has made it clear that he wants any concessions with the UAW makes in the upcoming talks to be tied to what he calls shared sacrifice on the part of Ford management.

Is that something that you are prepared to do?

I think as we go forward it is going to be all about competitiveness, and with respect to all of the skills that we have, we want world-class talent and the market drives, actually drives the procurement and the keeping of world-class talent.

But the most important thing is that we have, that we are competitive in every position throughout our entire team.

Thanks a lot.

With that, that concludes today's presentation.

Thank you for joining us.

Thank you very much, ma'am, and thank you, ladies and gentlemen, for your participation in today's conference call.

This concludes your presentation, and you may now disconnect.

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