福特汽車 (F) 2011 Q2 法說會逐字稿

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

My name is Crystal and I will be your operator for today.

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

Later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

K.R.

Kent, Director of Investor Relations.

Please proceed.

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

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

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

With me here today are Alan Mulally, President and CEO of Ford Motor Company; Lewis Booth, Chief Financial Officer; also in attendance are Bob Shanks, Vice President and Controller; Neil Schloss, Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit's CFO.

Before we begin I would like to cover a few items.

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

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

Final data will be included in our Form 10-Q.

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 the US 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 made here.

The most significant factors that could affect future results are summarized at the end of the presentation.

These risk factors and other key information are detailed in our SEC filings including our annual, quarterly, and current reports.

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

Alan Mulally.

Thank you, K.R., and good morning to everyone.

We are pleased to have the opportunity today to review our second-quarter business performance and the progress we continue to make in delivering our plan.

Overall, we had a very good second quarter, in line with our plan, despite a challenging business environment.

Let's start by turning to slide 3.

Our second-quarter business performance was marked by Automotive growth, solid profitability, and strong positive Automotive operating-related cash flow.

Both volume and revenue were higher than a year ago.

We earned a pretax operating profit for the eighth consecutive quarter and, in addition, each of our Automotive operations as well as Financial Services was profitable.

Net income totaled $2.4 billion and Automotive operating-related cash flow was a positive $2.3 billion dollars.

We continued to strengthen our balance sheet, reducing Automotive debt by $2.6 billion in the quarter.

Market share was higher at three of our Automotive operations compared with a year ago, with share in South America unchanged.

Overall, we had a very good second quarter and first half, and we are well on track to deliver our guidance of improved total Company pretax operating profit and Automotive operating-related cash flow for the full year compared with 2010.

We accomplished these results while continuing to invest for future growth, focused on developing outstanding products with segment-leading quality, fuel efficiency, safety, and technology.

While this is increasing costs in the short term, it is in line with our plan.

These actions are also driving higher volume, richer mix, and stronger transaction prices.

Slide 4 summarizes our second-quarter business results compared with a year ago.

Vehicle wholesales were 1.5 million units, up 101,000 units or 7% from 2010.

Revenue was about $36 billion, an increase of about $4 billion or 13%.

For comparison purposes we excluded Volvo wholesales and revenue from 2010.

Pretax operating profit, excluding special items, was $2.9 billion or $0.65 per share.

This is $64 million lower than a year ago, with gains in the Automotive sector offset by the anticipated reduction in Financial Services.

Net income attributable to Ford including unfavorable pretax special items of $272 million was $2.4 billion or $0.59 per share.

This reflects a $201 million decrease from a year ago.

In the first half, vehicle wholesales increased by 9% compared with the same period a year ago, and revenue improved 15%.

First-half pretax operating profit excluding special items was $5.7 billion, a $763 million improvement; and income attributable to Ford was $4.9 billion, a $265 million improvement.

We ended the quarter with $22 billion of Automotive gross cash and with Automotive gross cash exceeding debt by $8 billion, a net cash improvement of over $13 billion compared with a year ago, and $3.3 billion higher than the first quarter.

Slide 5 details our key product and sales highlights from the second quarter.

We continued to demonstrate strength in mature markets, including increasing total market share in the US from 16.9% to 17.3%; growing market share in Europe from 7.9% to 8.3%; remaining number one in Canada, including posting our best June result in 22 years.

In the emerging markets our momentum is accelerating, with our second-quarter performance boosted by solid growth in Turkey, Russia, China, and ASEAN.

Our safety commitment continued to gain recognition as the 2012 Focus, the F-150, and the Lincoln MKX were awarded Top Safety Pick ratings from the Insurance Institute for Highway Safety.

In addition, the Focus also won a Euro NCAP maximum five-star rating.

Our commitment to customers was also on display as Lincoln was named the top brand in the 2011 AutoPacific Vehicle Satisfaction Awards.

At the New York Auto Show in April we previewed a freshened 2013 Taurus with significant advances in fuel efficiency, technology, and design.

And in pursuit of world-class efficiency and performance, we announced a plan to offer a new 1-liter 3-cylinder EcoBoost engine and an all-new 8-speed transmission.

Turning to slide 6, we now review our business highlights from the second quarter.

We made significant announcements during the quarter as we continued to boost our commitment to growth.

These included a $350 million investment with our joint venture partners in China to build our first transmission plant in the country, with an initial capacity of 400,000 fuel-efficient 6-speed transmissions.

Also in China we plan to double our dealer body over the next four years from 340 today to 680, and we announced our plan to build our next-generation small SUV in China.

In India, we are supporting our growth presence with a $72 million investment to increase production capacity at the Chennai Engine Plant.

In South Africa, we began production of the all-new Duratorq diesel engine and announced our plan to export the new Ranger pickup to 148 markets from our plant in that country.

In Europe, we realigned our production plans for Spain, Germany, Romania, and Turkey, moves that will increase manufacturing productivity and improve flexibility as we launch at least 20 all-new or significantly freshened vehicles in the next three years.

During the quarter, we also signed an agreement with Sollers establishing a 50-50 joint venture aimed at increasing our participation in the Russian market.

And finally, we announced our plan to triple production capacity of electrified vehicles in the US to more than 100,000 units by 2013.

Now, I would like to turn it over to Lewis, who will provide more details on our second-quarter financial results.

Thanks, Alan.

Let's start with slide 8, which summarizes our financial results compared with a year ago.

As Alan mentioned, pretax operating profit was $2.9 billion, and net income attributable to Ford was $2.4 billion.

Net income declined more than pretax operating profit due primarily to special items.

Special items were $272 million unfavorable, $177 million more than a year ago.

The special items included personnel reduction actions, Mercury and other dealer-related actions in North America, and pension settlements in Belgium.

Details are provided in appendix 3.

Provision for income taxes was lower in the second quarter this year, providing a partial offset to the unfavorable special items.

Presently we believe the majority of our valuation allowance on net deferred tax assets will reverse as early as the fourth quarter of this year.

This will lead to a more normalized operating tax rate that will approach 35% for this year.

At that point we would revise the operating EPS for the preceding quarters of 2011 as well as for the full year to reflect an operating tax rate approaching 35%.

Importantly, as we have said, the reversal of the valuation allowance will not affect our cash tax payments, which should remain low for a number of years.

Slide 9 summarizes our pretax operating results by sector.

The total Company second-quarter pretax operating profit, $2.9 billion, includes $2.3 billion for the Automotive sector and $602 million for the Financial Services sector.

As shown in the memo, total Company pretax operating profit decreased by $64 million compared with a year ago, although Automotive results improved by about 10%.

Compared with the first quarter of 2011, total Company pretax operating profit increased by $41 million, driven by improved Automotive results; and lower Financial Services results were a partial offset.

Slide 10 highlights the key market factors and financial metrics for our total Automotive business.

Wholesales and revenue both improved compared with a year ago.

Pretax operating profit at $2.3 billion increased by about $200 million.

Operating margin, which we define as Automotive pretax operating results excluding Other Automotive, divided by Automotive revenue, was 7% -- down 2.1 percentage points from a year ago.

Most of the margin decline can be explained by higher commodities cost.

The margin impact of cost increases in other areas -- that is, costs associated with new products recently launched or to be launched later this year, higher volumes compared with last year, and investments we are now making for future products and growth -- is more than offset by higher net pricing and volume effects.

In the first half, wholesale volume revenue and pretax operating profits were higher than the year ago period.

But our operating margin at 7.3% was down 0.5 percentage point.

Slide 11 shows pretax operating results for each of our Automotive operations as well as for Other Automotive.

Total Automotive pretax operating profits of $2.3 billion was led by our North American operation, with our remaining Automotive operations also profitable.

The loss in Other Automotive of $76 million is more than explained by net interest expense of $88 million, comprised of $202 million of interest expense offset partially by interest income.

As shown in the memo, Automotive pretax profit was higher than the second-quarter 2010, more than explained by Other Automotive.

When compared to the first-quarter 2011, Automotive pretax profit improved due to Other Automotive, North America, and to South America.

Slide 12 summarizes the $200 million increase in Automotive pretax operating profit compared to 2010 by causal factor.

The improvement is driven by higher net pricing at each of our Automotive operations, favorable volume and mix in North America, and lower net interest expense.

Net interest expense improved due primarily to debt repayments made since the beginning of the second-quarter 2010.

Contribution costs, which include material costs, warranty expense, and freight and duty costs, increased.

About half of the increase is due to commodities cost.

Material excluding commodities also increased, reflecting added content, technology, and features for our new products, offset partially by material cost reductions from our suppliers.

Other costs increased by $600 million, primarily explained by structural costs.

About three-quarters of the increase reflected manufacturing, engineering, and advertising and sales promotion costs to support our higher volumes, product launches, future growth, and brand-building initiatives.

Slide 13 summarizes the $200 million increase in second-quarter total Automotive pretax operating profit compared to the first-quarter 2011 by causal factor.

The change is explained primarily by favorable volume and mix in North and South America, favorable fair market value adjustments, and lower net interest expense, and higher net pricing at each of our Automotive operations.

Cost increases, both contribution costs and other costs, are a partial offset.

The higher contribution costs are explained by commodities costs.

Other costs reflect mainly the impact of higher volumes and investments for future growth.

Turning to our Automotive business in North America, slide 14 highlights the key market factors and financial metrics.

Wholesale and revenue improved 12% and 15%, respectively, compared with a year ago.

Pretax operating profit of $1.9 billion is essentially unchanged.

Operating margin at 9.8% was 1.4 percentage points lower.

The lower margin is more than explained by higher commodities cost.

US industry SAAR at 12.4 million units was higher than a year ago, and our US total market share increased by 4/10 of a percentage point.

In the first half, wholesale volume, revenue, and pretax profits were higher than in 2010; but operating margin was lower.

Slide 15 shows the change in second-quarter North America pretax operating results compared with 2010 by causal factor.

Overall second-quarter results were unchanged.

Volume and mix was $400 million favorable, more than explained by higher US industry volume, favorable dealer stock changes, and higher US market share.

Dealer stocks, detailed in appendix 6, increased during the second quarter in line with the higher sales volume.

This compares to unchanged stocks in second-quarter 2010.

Net pricing was $900 million higher, reflecting the strength of our brand, our outstanding products, a disciplined approach to incentive spending, our continuing practice to match production to customer demand, and a generally supply-constrained environment.

Contribution costs increased by $800 million reflecting material and excluding commodities, mainly new costs associated with our new products, and higher commodity costs.

Other costs increased by $400 million, primarily structural costs associated with higher volumes, pension and other benefit costs, and investments in future products.

As shown in the memo, pretax operating profit increased by $100 million compared to the first-quarter 2011, explained mainly by favorable market factors and exchange, offset partially by higher other costs, primarily structural costs.

On slide 16, shows our second-quarter US market share.

US total market share in the second quarter at 17.3% was up 4/10 of a percentage point compared with the same period last year.

This is explained by higher share in both retail and fleet sales.

Our US total market share was up 1.3 percentage points compared with the first quarter, driven mainly by our share performance in cars.

Our retail share of the US retail industry, estimated at 14.3%, was up 2/10 of a point from a year ago.

This reflects 7/10 of a point of positive share performance, mainly utilities and trucks, offset partially by 5/10 of a point of segmentation changes.

Our retail share of the US retail industry, at 14.3%, was up 8/10 of a point for the first quarter, reflecting 1 point of share performance, offset partially by 2/10 of a point of segmentation changes.

The share performance was driven by utilities and trucks.

Turning now to South America on slide 17.

Results for South America continue to be strong with the second quarter marking the 30th consecutive quarter of profitability by our operations in South America.

Wholesale volume and revenue improved 4% and 12%, respectively, from a year ago.

The pretax operating profit at $267 million was down $18 million.

Operating margin at 9.1% declined 1.9 percentage points, more than explained by higher commodities costs.

South America industry SAAR at 5.4 million units was higher than a year ago, and our market share at 9.5% was unchanged.

In the first half, wholesale volume and revenue increased compared with a year ago while pretax profit was down.

Operating margin at 9.1% was down 1.5 points.

Slide 18 shows the $18 million decrease in the second-quarter South America pretax operating results compared with 2010 by causal factor.

Net pricing was higher, more than offset by higher commodities costs and increased structural costs driven by local inflation.

As shown in the memo, pretax operating profit improved $57 million compared with the first-quarter 2011, explained primarily by favorable volume and mix, exchange, and net pricing, with higher costs a partial offset.

Slide 19 covers Ford of Europe.

Wholesale volume was about the same as a year ago, while revenue increased by $1.5 billion or 20%, reflecting primarily exchange and favorable vehicle line mix.

Pretax operating profit, at $176 million, was $146 million lower than the year ago.

Operating margin at 2% decreased by 2.3 percentage points.

This reflects primarily the higher commodities and other costs, including investment in our brand and future products.

Industry SAAR at 14.9 million units was equal to a year ago.

Second-quarter market share at 8.3% was up 4/10 of a percentage point, reflecting favorable market reception to our new Focus and C-MAX products.

In the first half, wholesale volume revenue and pretax profits improved compared with a year ago while operating margin declined.

Slide 20 shows the $146 million decrease in second-quarter Europe pretax operating results compared with 2010 by causal factor.

Volume and mix was $15 million unfavorable, more than explained by unfavorable stock changes.

During second-quarter 2010, dealer stocks increased as we replenished inventories following the end of scrappage programs.

This year's stocks declined during the quarter.

Higher net pricing of $102 million reflects mainly the new Focus and C-MAX products.

Higher costs reflect increased commodity costs and other costs, more than explained by structural costs.

As shown in the memo, pretax profits decreased by $117 million compared with the first quarter of 2011, more than explained by unfavorable volume and mix and other changes, primarily lower profit at our parts and service operations and lower subsidiary results.

Slide 21 summarizes the key market factors and financial metrics for Asia Pacific and Africa.

Wholesale volume and revenue increased by 8% and 17%, respectively.

Pretax operating profit at $1 million declined from the $113 million that we made a year ago.

Lower operating margin reflects primarily higher structural costs as we invest for future growth as well as unfavorable product line and market mix.

Asia Pacific and Africa's industry SAAR of 27.8 million units was lower than a year ago, reflecting the impact of Japan events.

Our market share at 2.9% was up 5/10 of a percentage point, reflecting growth in China and the success of Fiesta in the ASEAN markets.

In the first half, wholesale volume and revenue increased, but pretax profit and operating margin declined.

This is due to the higher structural costs related to our investments for growth as well as unfavorable product line and market mix.

On slide 22 shows the $112 million decrease in second-quarter Asia Pacific and Africa pretax operating results compared with a year ago.

The lower profit primarily reflects higher costs, which include investments we are making to grow across the markets in the region as well as unfavorable product line and market mix.

As shown in the memo, Asia Pacific and Africa's pretax profit decreased by $32 million compared with the first quarter, more than explained by higher other costs, primarily structural costs.

Slide 23 covers the second-quarter actual production and our plans for the third quarter.

Second-quarter 2011 total Company production was 1.5 million units, up 56,000 units from a year ago and about 40,000 units higher than our most recent guidance.

The improvement is primarily in Asia Pacific and Africa, where we were able to manage successfully through the events in Japan and avoid some of the production losses that we had anticipated.

We expect total Company third-quarter production to be about 1.4 million units, up 92,000 units from a year ago, reflecting continued strong customer demand for our products.

When compared with the second quarter, our third-quarter production will be down 149,000 units.

The decrease reflects our normally scheduled vacation shutdowns during the third quarter that are also generally used to prepare for new models.

Turning now to slide 24 and a review of Automotive gross cash and operating-related cash flow.

We ended the quarter with $22 billion in Automotive gross cash, an increase of $700 million from the end of the first quarter.

This reflects positive Automotive operating-related cash flow of $2.3 billion, mainly the flow-through of our pretax operating -- sorry, our pretax operating Automotive operating profits of $2.3 billion.

In addition we received $1 billion of distributions from Ford Credit.

Our cash flow before changes in tax and pension contributions was $3.6 billion.

Net debt repayments in the quarter totaled $2.6 billion.

We also made payments of $500 million to non-US funded pension plans.

In the first half our cash flow before changes in debt and pension contributions totaled $7.2 billion.

Slide 25 summarizes our Automotive sector cash and debt position at the end of the second quarter.

Automotive debt was $14 billion, a reduction of $2.6 billion from March 31.

This includes $2.3 billion of payments on our term loans and full repayment of the outstanding balance of $800 million on our revolving credit line.

These actions were offset partially by an increase in low-cost loans to support advanced technology.

Our net cash as of June 30 was $8 billion, and Automotive liquidity was $32.2 billion.

Turning now to Ford Credit, slide 26 shows the $284 million decrease in the second-quarter pretax results compared with a year ago by causal factor.

In line with our expectations, the results reflect primarily lower credit loss reserve reductions and the non-recurrence of lower lease depreciation expense of the same magnitude as 2010.

As shown in the memo, Ford Credit's pretax profit decreased by $109 million compared to the first quarter, reflecting primarily lower credit loss reserve reductions and a number of smaller items included in Other, such as higher storm losses in our insurance business.

Slide 27 covers Ford Credit's liquidity and funding.

The left box shows committed liquidity programs, cash, and the utilization of Ford Credits' liquidity sources at the end of the second quarter.

Ford Credit's available liquidity was about $17 billion.

As shown in the right box, Ford Credit had completed $19 billion of funding and is on track to achieve its full-year funding plan.

Our liquidity remains strong, and we will continue to maintain cash balances, funding programs, and committed capacity to ensure we have strong liquidity to meet our business and funding requirements.

Our funding strategy remains focused on ensuring we have access to a variety of markets, channels, and investors.

At the end of the second quarter Ford Credit's managed leverage was 7.5-to-1, and equity was $9.7 billion.

Let me now pass you back to Alan Mulally.

Thank you, Lewis.

Slide 29 provides an overview of the business environment.

In the second quarter, global growth was affected by several developments.

Supply disruptions due to the events in Japan slowed GDP growth in many markets.

Global automotive industry production was impacted adversely by 2.5 million units in the second quarter.

Several emerging markets including China, India, and Brazil tightened monetary policy through interest rate increases and other measures to slow down inflation.

This policy in turn slowed economic growth in these countries to more sustainable rates than in 2010.

The European debt crisis and the US budget issues are generating a high level of uncertainty in the financial market.

For 2011 we continue to expect global economic growth in the 3% to 3.5% range.

The impacts from the events in Japan are receding; fuel prices are moderating; and growth in emerging markets such as China and Brazil, albeit moderated, remain at very robust levels.

On balance, incoming economic indicators are consistent with continued economic expansion of the global economy for the remainder of this year.

Slide 30 summarizes first-half results and our planning assumptions and key operational metrics for full-year 2011.

We maintain our industry outlook for the US.

In Europe, however, after a strong first half we are seeing some sign of weaknesses, leading us to update our full-year guidance to 14.8 million to 15.3 million units.

On operational metrics, as discussed previously, quality remains mixed due to some near-term issues in North America which we are addressing.

We are pleased with the progress we have made to date on these near-term issues, and we are on track to achieve our quality improvements in our international operations.

We expect US and Europe market shares to equal or improve from last year's results.

We expect total Company pretax operating profit to improve compared with the $8.3 billion earned in 2010.

We continue to expect commodities and structural costs to each increase by about $2 billion compared with 2010.

The increase in structural cost is consistent with supporting higher volumes in the short term as well as our plan to grow our business, strengthen our brand, and improve our products through our business planning period.

Although not shown, we expect our structural cost as a percent of net revenue to improve compared with 2010.

For the full year, we expect Automotive operating margin to be equal to or improved compared with the 6.1% of 2010 despite higher commodity costs.

We expect Automotive operating-related cash flow to improve from 2010's $4.4 billion.

Capital expenditures remain in line with our most recent guidance.

Our first-half performance was very good.

While we remain on track to deliver continued improvement for full-year pretax operating profit and Automotive operating-related cash flow compared to 2010, we expect second-half results to be lower than the first half.

In our Automotive sector this reflects increasing commodities and structural costs as well as seasonal factors that tend to favor the first half.

At Ford Credit we expect lower profit in the second half in line with the factors that we have highlighted previously.

Slide 31 summarizes our plan.

We remain focused on delivering our ONE FORD plan, which is unchanged; aggressively restructure to operate profitably at the current demand and the changing in model mix; accelerate development of new products our customers want and value; finance our plan and improve our balance sheet; and work together effectively as one team leveraging our global assets.

While there are growing concerns in several areas, as previously noted, we expect the global economic recovery to continue.

We will continue to monitor our external environment closely and take appropriate and decisive action in response to whatever challenges and opportunities may arise.

We continue to progress our plan to deliver profitable growth for all.

Under our ONE FORD plan we will continue to invest in profitably growing our business around the world, while maintaining an unrelenting focus on improving the competitiveness of all of our operations.

In 2011, 2011 is an important step in this journey; and we are pleased to report that we are right on track with a strong first-half performance.

Now we would be pleased to take your questions.

Thank you, Alan.

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

We have a little less than an hour for the question-and-answer period.

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 this time frame, please keep your questions brief.

Crystal, can we have the first question please?

(Operator Instructions) Brian Johnson, Barclays Capital.

A couple questions.

A housekeeping one on the valuation allowance and then want to talk about the mix between the pricing and then the content costs on slide 15.

The housekeeping question is pretty simple.

Do you have any update on your valuation allowance and its impact on GAAP -- and I should point out not cash EPS?

No updates, Brian.

It's -- I think the only thing we are being a bit more explicit about is the fourth quarter.

Okay.

Second question.

On slide 15, how should we think about where the trend you have talked about -- with, for example, the Fiesta and the Focus -- of customers moving towards the upper end of the model line, which improves pricing and/or incentives?

I assume it is not improving mix.

Versus the cost of putting in those touchscreens, leather seats, and so forth.

Can you just walk us through where those costs would be?

And then how much is really then, if you will, a hedonic price increase, to use your economist terms, versus pricing to cover the content costs?

I don't think we are seeing much real pricing in the market.

I mean I think most of the pricing we are seeing is associated with the equipment we are putting in our vehicles.

You are seeing some mix effect.

Within the mix we see some series mix improvements in North America on our smaller cars as we improve series mix, which move us towards more profitable entities within the vehicle line.

But we are not -- but truly most of our pricing is because of the improved equipment of the vehicles.

Brian, I might just add to your question that we are seeing generally an appreciation by the consumers in the content, no matter what the size of the vehicle is.

Whether it's an F-150, down to your point, whether it is a Fiesta or Focus, people are making a lifestyle choice on the vehicle that works for them whether it is a car, utility, a truck, or a small or medium or large vehicle.

But what they really want is the very finest quality, fuel efficiency, safety and features and of course the best value.

And of course that is the Ford plan, and that is what we are seeing reflected in the numbers both on the revenue side as well as the content that we are adding.

So just mechanically, would that option mix play out in increased $400 million in pricing but offset somewhat within that $400 million of material excluding commodity line?

Yes.

That was why it was phrased that way.

This pricing and to a certain extent share improvement doesn't come for free.

It is because we are improving our products that we are getting better pricing for them and getting some share gains.

Okay, thanks.

Chris Ceraso, Credit Suisse.

Thanks, good morning.

Just a couple of items.

First, on the guidance for the $2 billion in material cost.

I notice that steel, for example, which is a big input for you, prices are down maybe 15% or 20% from the peak around April.

If that is right, is there any room for you to do a little bit better than that $2 billion number that you have guided to for the full year?

No, we don't anticipate a significant amount.

About or more than 50% of all our commodity costs are locked into our contracts.

For steel it's like 70% or 80%.

So I think you will still see us in the next couple of quarters showing commodity costs increase.

And we are still guiding it about $2 billion.

Okay.

So maybe slightly better but probably close because you're mostly locked in?

Yes.

Then just one bigger picture question about your investment and your growth in Asia, which -- per your mid-decade guidance -- looks like it will explain a lot of the growth.

Can you give us an idea of how big that will be and when?

Can this be a $1 billion contribution business by 2015, 2020?

What is your outlook there for Asia -- China in particular?

Well, a couple of things.

One, it will be a significant contributor to our business, but it will be in the latter part of the planning period.

I think you have to remember in China our business is done in joint ventures; so we only see the equity share of the profits from the China business.

So China won't be quite as big a number as you would like to see because it is going to be an equity share rather than a wholly owned subsidiary-type share.

Okay.

I appreciate it.

Thank you.

And, you know, I think you can understand I am not going to give you specific guidance on absolute profits.

Right.

But, Chris, as we pointed out in the mid-decade guidance, the market is going to be increasing overall worldwide from 74 today to nearly 97.

And China alone, to your question, is going to be nearly 28% of the total market.

Clearly with the performance to date and where we are going with the more extended product line, serving nearly 70% of all the market segments in China, we anticipate our presence to increase dramatically.

Just a little bit more context to what Lewis said.

Okay, thank you.

Adam Jonas, Morgan Stanley.

Hey, Alan.

Hey, Lewis.

Just a couple questions.

First, on the FinCo.

If we hold you to the guidance, the previous guidance of around a $1.9 billion full-year target, given the headwinds that you would anticipate on the credit losses and the residuals, that would imply that you are going to be seeing your run rate of profit fall about half from what you did -- the $600 million you did in the second quarter.

Does that make any sense, or does that need to be revised a bit?

That is my first question.

I am just trying to follow your math.

We're not expecting the run rate to drop that significantly.

But our guidance on the profit effect has not changed, but I am not sure we guided to $1.9 billion.

We guided to $1.1 billion.

What we had said was the impact of the credit loss reserves and the lower depreciation expense, those two items would be about $1.1 billion.

Obviously, there's other factors in the business, like our financing margin and volume as well.

So we had said about $1.1 billion for those factors; and then other factors will change it accordingly.

So I think you are getting to probably too low a number in the second half.

Fine.

Thanks for clarifying that.

Second, just on your full-year US target for the SAAR of 13 million to 13.5 million.

I think many on this call would have felt it could have been very reasonable if you bias the low end of that range, or even went below 13 million, given some of the disruptions and the lack and the supply constraints that you alluded in your call.

So what is it that gives you that confidence to kind of keep reiterating the 13 million, 13.5 million?

Because that would imply approaching a 14 million run rate towards the end of the year.

Just -- if you had to isolate the one or two key things that you would hammer home that really give you that confidence.

Yes, two factors.

One, the underlying demand is still growing, albeit slower than any of us hoped as we recover from the recession.

But about on track with where we expected.

So that is the first thing.

We still see some modest underlying growth.

I think the second thing is as demand -- demand is there.

And as supply becomes available, following on from the Japanese disaster, we expect to see some pop-up in the third and fourth quarter with that supply coming onstream.

So we told you at the end of the first quarter that we felt towards the bottom end of the range is more likely now, whereas perhaps in the middle of the first quarter we were thinking that the top end was more likely.

So I think we have indicated we think the bottom end of the range is more likely.

The other encouraging thing is we have seen fuel prices moderate somewhat in the last couple of months, and that is also helping customers feel a little bit more confident about buying.

Thanks, Lewis.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys.

First question on cash flow.

You guys are guiding to an improvement in free cash flow from the $4.5 billion that you saw last year on the Automotive ops.

And you have been running -- you have run at $4.5 billion through the first half of the year.

I was just curious as we look at the second half, if there's any items other than a slowdown in the pretax income that you are guiding to -- like working capital or CapEx really increasing -- that would drive slower cash flow in the second half of the year.

Because you are managing the inventory level real Steady Eddie, so it doesn't seem like working capital would swing around that much.

Just trying to understand what the -- if you're really talking about just flat cash flow in the second half of the year, or zero cash flow.

John, we are saying we continue to expect to have positive cash flow in the second half.

But you are right, profits will be low.

We guided that for the normal seasonal reasons we expect profits to be a bit lower.

The second thing is in our CapEx guidance is $5 billion to $5.5 billion, it is back-loaded.

We went through $2 billion of CapEx in the first half.

So I think you can see both those factors will make the second half not quite as productive from a cash flow point of view as the first half.

You know we have an extremely strong focus on cash.

That has enabled us to make these extraordinary improvements in our balance sheet, and that focus hasn't changed.

Okay.

Second question, just on the pricing and incentives.

As you look at slide 12, which is the walk for the total Automotive business, and we look at that for this quarter and last quarter, it looks like pricing incentives are a positive $2 billion.

I am just trying to understand.

Is that the kind of thing that you think you can keep going, going forward?

Is that purely because of the content and the products that you are introducing?

Are there some market factors that are helping drive that $2 billion-plus in incentives and pricing through the first half of the year?

Well, it is primarily driven by great products.

Actually the whole underlying business is driven by continuing to launch great products.

I think we could conclude in the second quarter that in the supply-constrained environment there were some very variable market factors.

But we expect that to not prevail in the second half as supply becomes more readily available.

Then just a last question.

You are running at 10% pretax margin North America in a first half for this year.

That was the higher end of your guidance range at the Analysts Day.

Is there any reason to think that maybe in the near term you might not be able to exceed that if the industry recovers next year?

I think we will talk about next year when we get a bit closer to seeing the industry recover.

Our guidance for this year for both total Automotive and for North America is to equal or improve versus last year; and I think we will just stick with that for now.

Then just lastly, appendix 18, Ford Credit managed receivables have been inching up since the end of the year.

Is there a move to finance more and more vehicles as your cost of funds goes down?

Or is that just a seasonal blip from the end of the year?

Because it seems to have crept up in the first quarter and the second quarter.

A couple of things.

One, there is a little bit of currency in there.

So excluding currency it is probably about flat.

So I think we are at the bottom of the nadir of the way we've been reducing our receivables.

Primarily because of the rolloff of the premium brands -- Jaguar, Land Rover, Volvo, and Mazda -- and they're now only about, I think from memory, 3% of the managed receivables.

So we would expect as that rolloff finishes and as the business starts -- the industry starts improving and you have seen our volumes improve, that managed receivables will start going up towards the back end of this year, and then continue up as we described in our mid-decade outlook.

Our buying policies with our customers haven't changed.

If you want to buy a Ford car, come into a Ford showroom and the Ford Credit team is ready to finance it.

Our risk profile hasn't changed.

The way we are managing our business hasn't changed.

Great.

Thank you very much.

Seth Weber, RBC Capital Markets.

Hey, thanks.

Good morning, everybody.

Back on slide 15 I am just looking at the mix/other contribution of the $0.2 billion negative.

I thought I heard you talking about a favorable mix.

Can you just maybe clarify what is going on, on there?

Maybe is higher fleet sales weighing on that?

Or can you give any color there?

No; we are really talking about -- we're not talking business mix there.

We are talking about product line and series mix.

There's a couple of -- several things going on there.

First of all in North America, we are seeing that shift towards car as our cars are increasingly competitive, and that is adverse product-line mix.

But within our cars we are seeing positive series mix.

We are also seeing a little bit of negative mix around some of the adoption of our high fuel economy vehicles we are working on.

Then there is a negative effect in Europe on series mix as the Fiesta ages a little bit and the high series mix has just weakened a little bit.

Offset in Europe by strong positive product-line mix on the new Focus and the new C-MAX.

So there is a miscellany of things.

If you go to the individual business unit slides you will see that in some business units mix is negative, and in some business units mix is positive.

It is a combination of all those factors.

Okay.

I mean it seemed like it --

Focus, in our product-line mix numbers, Focus dominates.

Obviously it is great news in Europe, because we are moving mix as we said we would do towards C class away from B class.

Because our C class cars are now brand-new and very, very competitive with Focus and C-MAX.

And in North America, it is negative product-line mix because we are selling more cars, which is what we wanted to do, but cars that have a negative margin effect compared to trucks -- negative profit effect compared to trucks.

Okay, it seemed like it ticked down from the first quarter, so that just -- in North America.

That just seemed a little unusual, but is that the mix shift is just --?

Again, it is really -- in North America it's Focus because we didn't start releasing Focuses till very close to the end of the first quarter.

We had essentially shipped most of the old Focus by very early in the first quarter.

So we were light on Focuses in the first quarter, and the car has got off to a great start in the second quarter.

That is why you see the slight drop-down as you come commented on.

Okay.

That's actually very helpful.

Thank you.

Then if I could ask a follow-up, just the gains in market share in North America.

It is kind of a tough question, but is there any way to handicap how much you think -- how much of those gains you think are attributed to the Japan supply issue and where you think share might end up for the year?

Well, I certainly repeat the guidance on share; we expect to equal or improve compared to last year.

It is really hard.

I think it depends on whether you are buying or selling on just how much was the effect of the Japanese.

We honestly couldn't follow up the increased demand for small cars during the second quarter because we are flat out on Fiesta and we are flat out on Focus.

So there is a lot of what-ifs, if we had had a bit more supply available.

But --

But clearly led by the strength of the product line.

Yes.

Sure.

Okay.

Thank you very much, guys.

Itay Michaeli, Citi.

Great.

Thanks.

Good morning.

I wanted to go back to the materials ex-commodity line item.

I think it has been about a $700 million drag year to date.

I know you have called that out as a drag on the full year.

But Lewis, I was hoping you can help us frame how to think about that line item, say, in the next couple of years.

Is that going to continue to be a drag on earnings on an annual basis?

Or might that reverse back to being a neutral or even a source of earnings?

For start off, I realize as the category it is fair to describe it as a drag.

But actually it is the underlying thesis of the business.

Have great products, you get great revenues, and you have customers coming to showrooms to buy the cars rather than selling them on price.

That's -- the underlying thesis of the recovery of Ford is to have great products in all segments.

So it's -- but as I said earlier on, this stuff doesn't come for free.

The only way you can have great products is to have some additional costs associated with improved feature levels, improved equipment levels.

But we are getting rewarded for that by improved market share and improved price position.

I think over time we will continue to -- we're in, I feel like, an expensive period because we are moving to global products and to big upgrades, particularly in North America, and you have seen those big upgrades.

Last generation of Focus to this generation of Focus, a substantial change in our positioning of the vehicle and the price positioning of the vehicle.

Over time I think that may moderate a little bit.

But you will not see us backing away from world-class products getting world-class revenues.

Because we have tried doing it the other way, and it doesn't work.

Yes, absolutely.

I think that's right.

I would agree.

Just two quick follow-ups on balance sheet.

One, any update, Lewis, on your plans to repay the term loan B?

I don't know if you also have an update on the pension performance year-to-date.

Yes, we don't typically comment on the pension performance during the year, so I don't have an update for that.

No specific comments about repayment of the term loan.

We still -- we told you that mid-decade we would like to have about $10 billion of debt on the balance sheet.

We have been paying close attention to the balance sheet in the last six quarters.

I think you can expect us to continue to look for opportunities to improve the business.

Great.

Thank you so much.

Patrick Archambault, Goldman Sachs.

Good morning.

Thank you.

My first question was also on slide 15.

It looks like for the last couple of quarters you have done a very good job of offsetting these material costs and what you call contribution costs with pricing, despite the significant headwinds there.

This quarter it does look, however, like the leverage that you would have gotten from the volume piece was offset by increases in fixed costs.

Clearly based on your guidance that you have outlined to us, there is quite a bit of growth ahead.

Can you talk a little bit about what is going to allow you to outgrow your fixed costs in subsequent periods?

Is it some of these investments that you are making paying off?

Is it just the leverage piece coming back in greater orders of magnitude as the volume recovers?

That was my first question.

Yes, I think it is really continuing to get the benefit of investments we are making in new products.

So that's, I think, what you were seeing.

Within the other costs, within manufacturing and engineering it is roughly half-and-half volume-related costs in manufacturing and increased engineering for future products.

So, we are just going to keep -- as I said earlier, keep working on our new products and expect to get the benefits of it.

Because as we described in the mid-decade outlook, within all our cost elements, particularly our structural cost elements, you hear us talking a lot about growth.

But the other thing that we are doing inside the Company is working on functional excellence.

We expect to continue to see benefits of functional excellence for a couple of reasons.

One is, as we get better at working ONE FORD, our skill teams are getting better at generating efficiencies.

And the further we get down the line on global products, the more we are going to see the benefit of scale.

I think that scale is what gives us confidence in the improvements we are going to see in North America, the improvements we are going to see in Europe, and then it's the fundamental basis for going into Asia.

Okay, great.

That's helpful.

I have a similar question actually for Europe, referring more specifically to slide 20.

I guess there you had a more flattish volume, and the trade-off between pricing and contribution cost was positive, but also a very big increase in fixed.

Can you tell us a little bit more about how you would expect that segment specifically to trend year on year?

Are some of those fixed costs there again temporary investments that should abate?

Or is your product that is going to come back in terms of the portfolio you have?

Because I remember in your outlook meeting you did have pretty big increases in profit expectations for that segment.

Yes, a couple of things.

I think we need to keep the volume change in perspective.

In 2010, remember at the end of the first quarter we had seen continued stronger than normal demand in Europe because of the scrappage programs.

We got to a pretty low dealer stock level, and we had a big dealer stock build in Europe in the second quarter of last year.

As we continue to manage our stocks in Europe to make sure that we keep them in line with demand, we have seen a small stock decrease this year.

So there is a big year-over-year dealer stock change.

You can see that called out in the first callout box at $184 million.

The second thing in Europe is I think you are going to see the benefit of new products.

One of the reasons you see a pickup in advertising and sales promotion is that we still have a revenue gap against the best of our competitors in Europe.

I think as our products continue to improve -- and we have got a very fresh product lineup.

And you know we have told you that we are going to have I think 20 new products between 2011 and 2013.

So I think we are expecting to achieve what we have achieved in the US.

The story is very similar.

Great products, well-positioned in the market, well-communicated with some of the creative work that Jim Farley's team has done and is now spreading around the world, enabling us to close the transaction price gap in Europe against the best of our competitors.

So I see it as a similar story to the one that you are seeing unfolding in the US.

We are not backing off the intensity of product renewal in Europe.

It is enabled by the fact that Europe is no longer sitting out there trying to do it all on their own with nobody else sharing it, the way they used to be, because effectively all the European products are global products now.

Peter Nesvold, Jefferies.

Good morning.

I guess a question for Bob.

Bob, think there is some perspective in the investment community that in mid-June you had talked down expectations for 2Q.

Really all you said was 2Q numbers would be in line or below 1Q.

And not to split hairs, but numbers were a little bit better than 1Q.

So point one is just to ask -- was there something that might have changed in the back half of June?

The reason I even raise this, because there's only a few pennies, I am trying to think about your comments about the second half being lower than the first half.

Yes, there was actually -- at the time that I spoke in Chicago, there was a wide range of projections by the analysts.

Some were quite high.

What we wanted to do was just reiterate the guidance that we had provided at the Investor Day and that we had actually said in the first-quarter call, which is that the first quarter potentially would be the best of the year.

We just -- what I actually said in the Q&A session to the group is that the second quarter would come in very close to the first quarter, potentially a bit lower -- which is actually what it looked like internally at the time.

So we did have a pretty good close; but all it did is it just closed a little bit of a gap.

That ended up with a result that is sitting effectively right on top of the first quarter.

So I think we feel very comfortable with the guidance that we gave and I felt like we were signaling to the investment community where we expected our outcome to be.

Okay.

So the question there -- so the reason I raise that, so you did about $5.7 billion pretax in the first half of the year; and you have talked about 2H being maybe a little bit lower than first half.

When I look at one of the big deltas, $400 million of structural and materials costs higher in the second half versus the first half, it would seem like the SAAR being higher in the second half versus the first half might offset that.

I am just hoping that maybe you could walk through -- what are the major levers or contingencies that could inflect the second-half earnings trajectory?

I guess I am trying to get a sense for -- are you basically going to be pretty similar second half versus first half?

Or should I start to anticipate like a 5% or 10% type downtick in the second half of the year?

Okay, let me try and answer that.

This is Lewis.

A couple of things.

One, we will incur, as we guided, increased structural costs and increased commodity costs in the second half.

I think you can expect to see some increased material costs as well as we continue to invest in our products.

So that guidance is unchanged.

$2 billion for the full year; around $2 billion for commodities and around $2 billion for structural costs increase.

Second factor affecting the second half versus the first half is Ford Credit.

As we have guided, the benefits of the very good credit climate and the lease depreciation expense is reducing during the year, and that will continue in the second half compared to the first half.

The third factor is this is a seasonal business.

Although the SAAR rates will be going up, the production and wholesale rates will not be as high in the second half as they are in the first half, for good reasons.

Planned vacation shutdowns, the Christmas shutdown, and -- there is one other thing I was going to mention; it is gone.

But you know, the SAAR rates won't reflect that because they are adjusted.

But wholesales we would expect to see lower in the second half compared to the first half.

Or maybe the same with the SAAR rates higher.

I think it is also important to keep it in the context of the reiteration of the guidance for the full year, taking into account the seasonal factors we talked about and the investment in the future products in the second half.

We also are reiterating our guidance for a total Company pretax operating profit and Automotive operating-related cash flow of exceeding and improving over the 2010 performance year-over-year.

Okay, great.

Thank you.

Colin Langan, UBS.

Good morning.

Thanks for taking my question.

Could you comment on -- was there any impact in the quarter from the Japan earthquake disruption?

Did that negatively impact the results at all?

Or was that immaterial in the quarter?

I think there were a couple of impacts that we can point to.

One is on the supply side; we saw some lost units in Asia Pacific, about 14,000 lost units in Asia Pacific.

Better than we had expected when we talked to you in the end of the first quarter.

We have seen some increased costs.

The product development community has had to work hard to revalidate or validate some new parts as replacement parts.

We have had some premium freight; we have had parts in the air rather than on the sea to make up pipeline shortages.

And those sorts of things may be not hugely material, but real nevertheless.

And we have seen some series mix weakness on some of our vehicles in North America where we've been short of some high series navigation units, where we have had to restrict high series supply a little bit.

But I just want to go back to the overall guidance for the year.

It was a good second quarter and we feel on track to beat last year's $8.3 billion pretax profit.

So to me the significant thing about second quarter was it wasn't an easy quarter -- economic uncertainty, working our way through the Japanese tsunami issues.

And we delivered good results.

That is because I think you know our process now.

Decisive actions.

When we know we have got issues, whether they are internal or external, we respond to them and keep driving the business.

I think for me that is the pleasing thing about the second quarter.

This is continued implementation of the ONE FORD plan, whatever the circumstances.

I mean are we talking a couple hundred million dollar impact, or is it smaller than that?

Or any sort of range of the actual dollar impact?

It is less than that.

Okay.

In slide 13 you talk about -- you highlight there is a $700 million sequential increase in structural costs.

Is that normal?

It seems surprisingly high given the Focus was launching in Q1.

I would have actually thought structural costs actually could have even eased sequentially.

Or is that just the normal seasonal impact?

No, it isn't seasonal.

There's one normal thing and I think there is one thing that is relatively new for Ford.

The normal thing is our volumes were up and our volume-related costs in manufacturing went up as a result of that.

I think the other thing you are seeing that we have been talking about -- we haven't done for some years and we have now started to do, is investing for the future, investing in growth.

You are seeing us do that in engineering.

You are seeing us doing that in advertising and sales promotion.

You're actually seeing when you look at Asia Pacific that their profitability is impacted by the investments we are making for the future.

That is the new thing for Ford, that we are investing in the future.

While we have this strong business now, we are investing for the future where we need to develop the opportunities in the growing markets.

But does that mean most of the sequential is going to be in emerging markets going forward?

Or it -- because I would think most of that growth would be outside of North America.

Well, I think you are going to see it -- I think it is going to depend on the areas.

As North American volumes go up you are going to see continued increase in the structural costs for North America.

We are continuing to work on ensuring that our product freshness is amongst the best in the industry, and that is going to be true in North America and Europe as well as Asia Pacific and South America.

So I think you are going to see structural costs spread around.

I think on the cost base of Asia Pacific, it is going to look a bigger percentage increase; but in terms of incurring structural cost increases, I think you are going to see it spread across the business units.

Just one last one.

On when Sollers -- I don't know if that is final or not, but I assume it is not final yet.

Will that impact your European segment reporting as you lose maybe half of the profit coming out of Russia?

Yes, we are not ready to talk exactly how that is going to reflect our reporting until we have closed the deal.

I think we will be ready to talk to you about that maybe at the next call.

Dee-Ann Durbin, Associated Press.

Thanks for taking the call.

Just a quick one for Lewis.

I heard you say that the pricing gain was primarily due to strong products, but I just wanted to clarify.

Do you expect that to moderate somewhat in the second half in the US as supplies return to normal?

And second, for Alan, I see that the quality outlook is mixed for the rest of the year.

I am wondering if, knowing what you know now about your quality ranking, do you think MyFord Touch was released prematurely?

And how are you going to get a fresh start with consumers on that technology?

Sure.

We will start with Lewis.

Okay, on product pricing, the pricing power, we expect to see continued positive pricing in the second half.

I think where you may see some changes versus the second quarter is on incentives, because as the supply comes towards more normal there may be increased incentive activity.

But I think it is too soon for us to forecast that for sure.

On your second question, as we pointed out in the first quarter, we were watching the consumer trends very closely.

We clearly saw some areas that were potential for improvement.

I think what we really learned out of that is that we are more -- we believe even more in MyFord Touch and SYNC and voice-activated and hands on the wheel and eyes on the road than ever before.

We are absolutely committed to that.

We are also committed to using the feedback that we gain from the customers.

The two issues that we really had was -- one was just the computational capacity of the system.

It was not as great as we needed it.

But the other one was we were giving them very good choice between the test screen, the controllers, and voice activated.

So we have taken that input.

We have most of the improvements identified.

We are incorporating those improvements now.

And we are very pleased with the acceptance by the consumers of the fixes also.

So those were the big lessons learned.

The other one of course was on the 5- and 6-speed transmissions as we dramatically used them to improve our fuel-efficiency.

We were getting some good feedback on just the shifting sequence and the way it felt from the customers, and we are incorporating those improvements in the system too.

So I think we will be moving back up where we were before pretty soon.

Thank you.

Greg Gardner, Detroit Free Press.

Morning and thank you.

Help me understand what contingency plan you have if there is no resolution in Washington over the debt ceiling.

Well, clearly, we are intending to watch the situation very closely and we will take appropriate action.

I think that we are all very encouraged, as hard as this conversation has been, is the conversation is taking place.

And it is not just on one thing; it is on the things that affect the total US economy.

That is not only the debt ceiling but also the budget deficits and also the trade deficit.

So I think this realization that the economic growth and expansion in the United States is really, really important to all of us -- so I am very confident we are going to get this -- we're going to get to some solutions and get us going again.

(Operator Instructions) Chris Woodyard, USA Today.

Following up on Dee-Ann's question, so Alan, quality problems.

You say they are limited to two areas, the transmission smoothness and MyFord Touch?

Yes.

And you feel that -- how bad do you think these problems were?

And how long do you think it will be before they are completely resolved?

Well, I think it is -- when you introduce new technology like this that is so connected to the way that the consumers operate the vehicles, we were expecting to get really good feedback on what can make it better.

Just like the consumer electronics industry, our plan is to listen really carefully and incorporate that feedback in a very timely manner to continue to improve the system.

As I pointed out, Chris, we believe more than ever in both those sets of technology as far as the usefulness and the reason to buy Ford products.

The vast majority of the consumers -- over 60%, 70% -- absolutely are pleased.

It is a reason to buy.

So we are going to continue to incorporate the feedback in a very timely manner.

And people absolutely love the direction that we're going in fuel efficiency and really smart design and removing and reducing driver distraction.

So a very important part of the plan; that is why we moved so aggressively earlier in the year, before a lot of the other surveys came out.

Alan, Lewis alluded to what sounded like shortages of your most fuel-efficient cars last quarter.

But you feel like you have got that under control too?

Well, clearly -- yes.

But clearly we are coming back from an unprecedented recession.

In the whole supply base we are bringing back up.

We have dealt very decisively with the Japanese disaster.

So we are making progress.

We are doing that very thoughtfully, very carefully as we increase production and match the production to real demand.

In some of our vehicles, especially with the rapid increase in fuel efficiency, we don't have as many of them as the demand.

But we are going to continue to work on it and continue to match the production of all the vehicles to the real demand.

But we are coming back and we are coming back in a very thoughtful, planned, careful way.

Thank you.

Jennifer Keiper, FOX News Radio.

Thanks, gentlemen.

Question for you about the union negotiations, how you feel going into these, and how do you think these numbers might play into them?

Well, I think it's a very -- to answer your specific question, these numbers are very positive for our negotiations because they really demonstrate what we have done together.

All of our employees, all the stakeholders, our Ford store owners, our suppliers, our employees, the UAW.

Because what we have done -- and these results are a result of this, of all the stakeholders working together on every element of competitiveness of the Ford business plan.

And the fact that we are now transformed the Company, we are profitably growing based on the strength of this great product line and strong business results, that gives us the opportunity now to continue to invest in the business and grow it further, and provide great jobs and great careers in addition to great products at Ford.

So the conversations we continue to have are -- what can we do together to continue to improve the competitiveness of every element of the Ford plan?

The fact that we have now announced that we are going to be hiring 7,000 new employees over the next two years, the fact that we are converting truck plants to car plants to provide this full family of best-in-class vehicles -- so that is what the conversation is really about.

It is, what more can we do going forward to improve every element of competitiveness?

Because that is what everybody, everybody is most concerned about and most excited about.

So I think it is a -- they're going to be a very positive set of negotiations just like they have been recently.

Mr.

Mulally, they can't -- if it gets to this point, which I am sure both sides hope it doesn't, but if there is a strike, they can strike at Ford; they can't do it at GM and Chrysler.

How do you feel that puts you at an unfair advantage here?

Well, I think it is really premature to talk about a strike.

Nobody wants a strike.

I mean the most important thing we do is continue to improve the competitiveness of the business, and that is what we are absolutely focused on.

Thank you very much.

Jamie LaReau, Automotive News.

My question was similar to Greg's regarding Washington talks and the debt.

I know you don't want to go into too much specifics.

But do you have a war plan, a backup plan?

I mean, can you give us any indication of what you are thinking in terms of how you would address it?

No, we can't, Jamie.

The most important thing is we look at all the elements of the business and what it would mean, but I am just absolutely confident that these issues are really important and we are going to get to a resolution that continues to move the United States forward.

But we will monitor it carefully.

We look at all parts of the business and we will move decisively, depending on what happens, just like we have on everything else that we have faced over the last five years, as you well know.

Is that we just monitor the situation so carefully and then we'll move decisively.

Okay, thank you.

We are switching back to analysts now.

Himanshu Patel, JPMorgan.

Hi, good morning, guys.

There has just been this huge amount of increase in antitrust investigations with many suppliers across the globe.

I am curious, A, are you guys at all surprised by this?

And B, I am wondering if you have any views on whether these investigations could result in any material change in Ford's procurement costs prospectively?

Himanshu, I don't think that is something we would comment on.

Okay.

I wanted to go back to the question on slide 30.

You reiterated the $2 billion structural cost increased number for this year; and it looks like half of that has been done for the first half.

I am wondering, Lewis, was there anything in the structural cost that went into this year's budget that you would deem as -- I don't want to say one-time or nonrecurring, but that truly stood out to you as some sort of catch-up investment that would not necessarily repeat itself next year?

No, I don't think so.

One of the things we didn't do was stop investing as we went through the worst of times.

I think what you are seeing is us continuing on that path and increased engineering for more products, keeping our product pipeline fresh, because we know that is how important this is.

The volume-related costs tend to go with whatever the volume is going to be.

And advertising and sales promotion, you can say in general it is specific to the number of launches you have in any one year; but we are doing more to communicate our brand as our products get more and more across-the-board competitive.

So I don't see any particular one-offs.

Okay.

Lastly, I am wondering if you could comment.

You touched a little bit on pricing in the second half and I think you mentioned that incentives could creep up as the supply situation eases.

I am curious what you think will happen to just overall pricing in non-North American regions as the Japanese production come back online?

Or I guess said differently, do you feel like in places like Europe, Latin America, Asia, that a material portion of the pricing strength you are seeing in those regions right now is due to the events in Japan, and therefore maybe some of that tailwind fades in the second half?

No.

I think the pricing is around two factors.

One is our product strength and second is we are continuing to think -- and you can see it in these data -- that we are managing our production to say in line with our demand.

In truth, the impact of the Japanese supply constraints is not huge in Europe, not huge in South America.

In the markets where it was most impactful, in Asia Pacific, are probably the markets that we participate in the least.

I am thinking particularly of the Japanese market itself.

In China we have seen our business continue to grow.

I think the pricing pressures in China are more to do with the market than specifically to do with Japan.

India, the Japanese aren't particularly a huge force in India.

So I think the biggest impact was in the US market because that's -- other than obviously Japan itself.

But for us, Japan is almost nonmaterial.

Okay, great.

Thank you.

Crystal, we have time for one more question today.

Rod Lache, Deutsche Bank.

Hi, everybody.

A couple things.

One is, I appreciate the comment on maintaining $10 billion of gross debt around the middle of the decade.

But if you include the dividends from Ford Credit, you guys generated over $7 billion of free cash flow in the first half alone.

So it looks like you can get to these debt targets relatively quickly.

Just hoping that you can maybe communicate some broad financial target for what you want to maintain in terms of gross cash in the same time frame, just so that investors can think about what part of the Company's cash might be available to them longer-term.

I think that is a fair question.

I think we are not quite ready to answer that yet.

Obviously, I think we are all very sensitive to how important liquidity is, and I think that is going to continue to play heavily in our thinking, particularly while the economic environment seems a little unsettled.

But we are not ready to talk about it.

I think we will -- I think it is a fair question for us to answer.

Okay.

On slide 24 --?

I am looking forward -- Rod, you know, I am looking forward to being able to have that debate, because I think our progress from our very debt-laden balance sheet to where we are now has been dramatic.

So I think that conversation is getting closer, and that will be a delight.

Yes, we're looking forward to that, too.

On slide 24, just a quick clarification.

Just below the operating cash flow line and just below the receipts from Ford Credit you show $400 million of Other.

Can you just remind us what that was?

What you put into that category?

It is below the operating cash flow.

Yes, yes.

It's foreign currency translation and --

Okay.

It really is Other.

I am sorry.

All right.

Then just lastly I was hoping you could comment on just the outlook for Europe in the back half, and whether you are expecting it to remain profitable.

Then in North America, if there is a bonus paid to UAW members as part of the new contract, do you typically expense that in the quarter that that happens?

Or do you amortize that over the course of the contract?

Is that something that you have incorporated in terms of your thinking when you provide that broad margin and earnings guidance?

I think compensation is typically amortized or accrued during the year by quarter.

I wouldn't give any guidance on how much precisely.

I am sorry.

On the European guidance, I think all we are prepared to say at the moment is we expect to be profitable in the full year in Europe.

I think there is a lot still to watch closely in Europe.

We are encouraged by the European team.

I think we had a good launch of Focus, a very good launch of C-MAX.

We are working as we have told you before not to chase marginal deals, and I think you could see that in the underlying performance of Europe.

But -- and you know the third quarter is always a bit of a sweat in Europe because of the long vacation shutdown period.

But we expect to be profitable for the full year.

Great, thank you.

Thank you.

That concludes today's presentation.

We thank all of you for joining us.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for your participation.

You may now disconnect and have a great day.