福特汽車 (F) 2011 Q3 法說會逐字稿

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

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

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

We will facilitate a question-and-answer session towards the end of the presentation.

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

I would now like to turn the presentation over to your host for today's call, Mr.

K.R.

Kent, Executive Director of Investor Relations.

Please proceed.

Thank you, Katina, 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, and 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 websites for your reference.

The financial results discussed herein are presented on a preliminary basis and 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 the 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 like to now 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 third-quarter business performance and the progress we continue to make in delivering our plan.

Overall, we had a solid third quarter, in line with our plan, despite a business environment that has become more challenging.

Let's start by turning to slide 3.

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

Both volume and revenue were higher than a year ago.

We earned a pretax operating profit of $1.9 billion, with our Automotive and Financial Services sectors each profitable.

Net income totaled $1.6 billion, and Automotive-related cash flow was a positive $400 million.

We continued to strengthen our balance sheet, reducing Automotive debt by $1.3 billion in the quarter.

Market share was higher in North America, Europe, and Asia Pacific and Africa compared with a year ago.

Overall, and we had a solid third quarter and the first nine months.

We also concluded an agreement with the UAW for a four-year contract which was recently ratified and improves our competitiveness in the US.

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

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

These actions also are driving higher volumes and stronger transaction prices.

In summary, 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.

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

Vehicle wholesales were 1.3 million units, up 93,000 units or 7% from 2010.

Revenue was about $33 billion, an increase of about $4 billion or 14%.

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

Pretax operating profit, excluding special items, was $1.9 billion or $0.46 per share.

This is $111 million lower than a year ago.

The pretax operating profit was reduced by about $350 million for unrealized mark-to-market adjustments on commodity hedging for future periods.

These adjustments occurred because of the significant decline in commodity prices near the end of September.

This is a non-cash charge that will either reverse, should commodity prices increase, or be offset by the benefit of lower commodity prices in the future.

Net income attributable to Ford, including unfavorable pretax special items of $98 million, was $1.6 billion or $0.41 per share.

This is down slightly from a year-ago.

Automotive operating-related cash flow was $400 million positive.

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

First nine months' pretax operating profit excluding special items was $7.7 billion, a $652 million improvement.

And net income attributable to Ford was $6.6 billion, a $227 million improvement.

Operating-related cash flow was $4.9 billion.

We ended the quarter with $20.8 billion of Automotive gross cash, and with Automotive gross cash exceeding debt by $8.1 billion.

This is a net cash improvement of $10.7 billion compared with a year ago and $100 million higher than the second quarter.

Slide 5 details our key product and sales highlights for the third quarter.

We continue to demonstrate strength in mature markets, including increasing year-over-year total market share in the US from 15.9% to 16.3%; growing market share in Europe to 8.5%, up 1/10 of a percentage point from a year ago; and Ford remains the best-selling brand in the United States, with sales up 14% from a year ago.

In emerging markets, our momentum continued to build with sales growth in Russia and our Asia Pacific and Africa regions.

Our market share for Asia Pacific and Africa at 2.8% was up 3/10 of a percentage point from a year ago.

Our commitment to fuel economy continued with the launch of the 2.0-liter EcoBoost in North America in the Explorer and Edge vehicles.

We received important third-party recognition in the most recent J.D.

Power APEAL survey.

Eight Ford vehicles, including Fiesta, Explorer, and F-150, ranked in the top three in their respective segments, the most of any automaker.

We launched production of the new global Ranger in Thailand, the new Focus in Russia, and the new Fiesta in India.

Turning to slide 6, I will now review our business highlights from the third quarter.

As mentioned earlier, we concluded a new four-year agreement with the UAW that improves our competitiveness in the United States.

We are pleased with the recent credit rating upgrades.

Two of the rating agencies now rate the Company at just 1 notch below investment grade.

We made several significant announcements as we continue to boost our commitment to growth.

These included a $1 billion expansion of our operations in India to build an integrated vehicle and engine manufacturing facility.

The start of construction in Chongqing with our joint venture partners for our first transmission plant in China.

Initiation of our 50-50 joint venture with Sollers in Russia, which will help us to continue growing the Ford brand in this expanding market.

Next, a Memorandum of Understanding with Toyota to collaborate on developing a new advanced hybrid system for light trucks and SUVs and next-generation in-car telematics.

And finally, a two-year alliance with Zipcar that establishes Ford as the largest automotive source for Zipcar's university program.

Now I would like to turn it over to Lewis who will provide more details on our third-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 $1.9 billion, and net income attributable to Ford was $1.6 billion.

Special items and taxes were $98 million and $194 million unfavorable, respectively, both better than a year ago.

Special item details are provided in Appendix 3.

We expect the majority of our valuation allowance on net deferred tax assets to reverse in the fourth quarter.

This will lead to a more normalized operating tax rate.

At that point we will revise the operating EPS for the preceding quarters of 2011 as well as for the full year, to reflect an operating tax approaching 35%, which we would expect to be our ongoing operating tax rate.

As we have said previously, 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 third-quarter pretax operating profit of $1.9 billion includes $1.3 billion for the Automotive sector and $605 million for the Financial Services sector.

As shown in the memo, total Company pretax operating profit decreased by $111 million compared with a year ago, although Automotive profits improved by $45 million.

Compared with second-quarter 2011, total Company pretax operating profit decreased by $934 million, more than explained by Automotive results, reflecting seasonal plant shutdowns and higher commodity costs.

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

Wholesales and revenues both improved compared with a year ago, and pretax operating profit at $1.3 billion increased by $45 million.

Operating margin as defined in the footnote on the slide was 4.8%, down 1.4 percentage points from a year ago.

This margin decline can be more than explained by higher commodity costs.

In the first nine months, wholesale volume, revenue, and pretax operating profit were higher than the year-ago period.

But operating margin at 6.5% was down 8/10 of a percentage point.

This can be more than explained by higher commodity costs.

Slide 11 summarizes the change in Automotive pretax operating profit compared with 2010 by causal factor.

Overall, third-quarter results were essentially unchanged.

Our performance includes higher net pricing at each of our Automotive operations, favorable volume and mix in North and South America, and lower net interest expense.

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

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

About two-thirds of the increase is due to commodities.

In addition to higher commodity costs compared with a year ago, we recognized the unfavorable mark-to-market adjustments of about $350 million on commodity hedges, driven by a sharp decline in commodity prices, mainly the latter part of September.

We use hedging to provide cash flow protection against commodity price volatility; and mark-to-market refers to the accounting practice of reflecting commodity hedges at their current market value.

As commodity prices go up, the market value of our commodity hedges increases.

And as commodity prices go down, the market value of the hedges decreases.

These changes in market value do not have an immediate cash impact, although the change in value is reflected in current earnings.

As mentioned earlier, this charge will either reverse, should commodity prices increase, or be offset by the benefit of lower commodity prices in the future.

Material costs excluding commodities also increased as a result of added content, technology, and features for our new products.

A partial offset is material cost reductions from our suppliers.

Slide 12 summarizes the $1 billion decrease in third-quarter total Automotive pretax operating profit compared with second-quarter 2011 by causal factor.

The change is explained primarily by normal seasonal reductions in volume due to summer plant shutdowns in North America and Europe, as well as higher contribution costs due to commodities.

Lower structural costs are a partial offset.

Slide 13 shows pretax operating results for each of our Automotive operations as well as Other Automotive.

Total Automotive pretax operating profit of $1.3 billion was led by our North American operation, with a profit also reported for South America.

Europe and Asia Pacific and Africa each incurred a loss.

The loss in Other Automotive of $138 million reflects net interest expense and unfavorable fair market value adjustments associated primarily with our investment in Mazda.

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

Wholesales and revenue improved 8% and 11%, respectively, compared with a year ago.

Pretax operating profit of $1.6 billion was essentially unchanged, and operating margins at 8.6% was 1.2 percentage points lower.

Absent commodity hedging adjustments recognized in the quarter, North America's operating margin would have improved compared with last year's 9.8%.

US industry SAAR at 12.7 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 nine months, wholesale volume, revenue, and pretax profit were higher than in 2010.

But our pricing margin at 9.6% was down 4/10 of a percentage point.

Similar to the third quarter, North America's operating margin for the first nine months would have improved compared with the year-ago period absent the commodity hedging adjustments recognized in the quarter.

Slide 15 shows third-quarter North American pretax operating results compared with 2010 by causal factor.

Market factors, volume and mix and net pricing, continued to improve.

Volume and mix was $200 million favorable, more than explained by higher US industry and improved market share, offset partially by adverse mix.

Net pricing was $700 million higher, reflecting the strength of our brand, our outstanding products, a disciplined approach to incentive spending, and our ongoing practice to match production to customer demand.

Contribution costs increased by $1.1 billion, reflecting primarily higher commodity costs, including about $300 million of hedging adjustments.

It also includes higher material costs excluding commodities, mainly costs associated with our new products.

As shown in the memo, pretax operating profit decreased by $300 million compared with the second-quarter 2011, more than explained by seasonal volume reduction due to the summer plant shutdowns and commodity hedging adjustments.

Looking ahead to the fourth quarter for North America, we will record the full expense associated with the UAW ratification bonus and the 2011 UAW operational performance bonus, which together total about $280 million.

Slide 16 shows our third-quarter US market share.

US total market share in the third quarter at 16.3% was up 4/10 of a percentage point compared with the same period last year due to higher share in both the fleet and retail segments.

Our US total market share was down 1 percentage point compared with the second quarter, explained primarily by lower Ford share of the daily rental business and by industry fleet mix, which is typically lower in the third quarter.

Our retail share of the US retail industry, estimated at 14.1%, was up 1/10 of a point from a year ago.

The increase is more than explained by share gains from Explorer and Escape.

In the quarter, our supply of small cars continued to be constrained and limited our year-over-year share gains.

Our retail share of retail industry was unchanged from the second quarter.

Turning now to South America on slide 17.

Results continued to be strong.

Wholesale volume and revenue improved 15% and 20%, respectively, from a year ago.

Pretax operating profit at $276 million was up $35 million.

Operating margin at 9.3% declined 3/10 of a percentage point from a year ago, more than explained by higher commodity costs.

South America industry SAAR at 5.4 million units was higher than a year ago, and our market share at 9.3% was down 2/10 from a year ago, reflecting lower share in Brazil.

In the first nine months wholesale volume, revenue, and pretax operating profit increased compared with a year ago.

Operating margin at 9.2% was down 1.1 percentage points, which can be more than explained by higher commodity costs.

Slide 18 shows the $35 million increase in third-quarter South America pretax operating results compared with 2010 by causal factor.

The higher profit is explained primarily by favorable market factors and other profits, offset partially by higher structural costs driven by local inflation and higher commodity costs.

As shown in the memo, pretax operating profit increased by $9 million compared to the second quarter 2011.

Fourth-quarter pretax profit in South America could be lower than the third quarter of 2011 or fourth-quarter 2010, depending on commodity prices and whether local currencies maintain their recently weaker values versus the US dollar.

Slide 19 covers Ford of Europe.

Wholesale volume was 17,000 units higher than a year ago, while revenue increased by $1.6 billion or 26%, reflecting primarily exchange and favorable volume and mix.

Pretax operating loss was $306 million, a $110 million decline from a year ago.

Operating margin at a negative 3.9% deteriorated 7/10 of a percentage point from a year ago.

This can be more than explained by higher commodity costs.

Industry SAAR at 15 million units was 500,000 units higher than a year ago.

The third-quarter market share at 8.5% was up 1/10 of a percentage point compared with a year ago.

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

The operating margin decrease can be more than explained by higher commodity costs.

Slide 20 shows the $110 million decline in third-quarter Europe pretax operating results compared with 2010 by causal factor.

Despite the deteriorating and uncertain economic environment in Europe, market factors were about unchanged in total compared with a year ago and structural costs improved.

The profit decline is more than explained by higher commodity costs and hedging adjustments as well as unfavorable exchange.

As shown in the memo, third-quarter pretax results were $482 million worse than the second quarter.

This reflects unfavorable volume and mix, mainly because of a seasonal reduction in volume due to summer plant shutdowns; higher commodities costs; lower net pricing due to increased incentives; and unfavorable exchange.

We expect Ford of Europe to be profitable for full-year 2011 despite the deteriorating economic environment.

We will continue to benefit from the efficiencies of the One Ford plan while reviewing all elements of our European business including costs.

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

Wholesale volume and revenue increased by 4% and 28%, respectively.

Pretax operating loss was $43 million, $73 million decline from a year ago.

Operating margin at a negative 1.8% decreased by 3.5 percentage points, more than explained by unfavorable product line and market mix and higher structural costs.

Asia Pacific and Africa industry SAAR at 30.2 million units was lower than a year ago, reflecting the continued impact of the events in Japan as well as slowing growth in China in response to fiscal and monetary policies to drive growth rates to a more sustainable level.

Our market share at 2.8% was up 3/10 of a percentage point, reflecting success of Fiesta in ASEAN markets and growth in China.

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

This is more than explained by unfavorable product line and market mix and higher structural costs related to our investments for growth.

Slide 22 shows the $73 million decrease in the third-quarter Asia Pacific and Africa pretax operating results compared with 2010 by causal factor.

We expect Asia Pacific and Africa to be a major contributor to total Automotive profitability by the mid-decade, as we realize the benefits of our aggressive investments to expand our product portfolio and capacity.

In the interim transition period, we also expect Asia Pacific and Africa to be profitable on an annual basis; but results will be affected by the large upfront investments to support our growth plans, as well as a progressive shift from our traditional markets and products to higher volume markets dominated by smaller vehicles and, in the case of China, joint venture business arrangements.

The third-quarter decline in Asia Pacific and Africa results reflect higher costs, unfavorable volume and mix -- primarily mix -- and unfavorable exchange, offset partially by higher net pricing.

Net pricing includes the freshened Territory in Australia with enhanced content and features.

As shown in the memo, Asia Pacific and Africa's pretax profit decreased by $44 million compared with second quarter, explained primarily by unfavorable exchange.

Slide 23 covers third- and fourth-quarter production.

Third-quarter 2011 total Company production was over 1.3 million units, up 78,000 units from a year ago and 14,000 units lower than our most recent.

The decrease is more than explained by Asia Pacific and Africa and South America.

We expect total Company fourth-quarter production to be about 1.4 million units, up 22,000 units from a year ago.

The decline in Asia Pacific and Africa is more than explained by expected production losses due to the flooding in Thailand.

Although our vehicle assembly plant is not affected, a number of our suppliers are affected, forcing us to shut down production.

To date we have lost about 17,000 units, and we expect to lose a total of about 30,000 units before production resumes.

We are working closely with our affected suppliers to return to production as quickly as possible.

We also are monitoring the potential impact on our other regional operations outside of Asia Pacific and Africa, and are responding to minimize any impact.

Compared with the third quarter, total Company fourth-quarter production will be up 34,000 units.

This forecast reflects our best projection at this time with the impact of the events in Thailand.

Should our outlook change materially, we will update our forecast accordingly.

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

We ended the quarter with $20.8 billion in Automotive gross cash, a decrease of $1.2 billion from the end of the second quarter.

Automotive operating-related cash flow was $400 million, which reflects the flow-through of our pretax Automotive operating profit of $1.3 billion, offset partially by unfavorable working capital changes and higher net capital spending.

In addition, we received $600 million of distributions from the Financial Services sector and realized unfavorable other cash changes of $700 million, explained primarily by the adverse impact of exchange on our non-US cash balances.

Our cash flow before changes in debt and pension contributions was $200 million.

Net debt payments in the quarter totaled $1.2 billion.

We also made payments of $200 million to non-US funded pension plans.

In the first nine months, our Automotive operating-related cash flow was $4.9 billion.

Cash flow before changes in debt and pension contributions totaled $7.4 billion.

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

Automotive debt was $12.7 billion, a reduction of $1.3 billion from June 30.

This reflects payments of the remaining $1.8 billion balance of the term loan debt, offset partially by an increase in low-cost loans to support advanced technology.

It also includes a favorable exchange transaction impact of $100 million.

Our net cash as of September 30 was $8.1 billion, and Automotive liquidity was $31 billion.

Turning now to Ford Credit, slide 26 shows the $185 million decrease in third-quarter pretax results compared with a year ago by causal factor.

In line with our expectations, the results are more than explained by fewer leases being terminated, which resulted in fewer vehicles sold at gain, and lower credit loss reserve reductions.

As shown in the memo, Ford Credit's pretax profit decreased by $23 million compared with the second quarter, more than explained by the same lease factors, offset partially by changes in market valuation adjustments to derivatives included in Other.

For full-year 2011 we continue to expect to be solidly profitable, but at a lower level than 2010, reflecting the lease and credit loss reserve factors.

The profit contribution related to these items is about $165 million in the third quarter and is expected to be around $80 million in the fourth quarter.

These factors are not expected to be significant in 2012.

Slide 27 covers Ford Credit's liquidity and funding.

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

Ford Credit's available liquidity was about $18 billion.

As shown in the right box, Ford Credit has completed $27 billion of funding and it's on track to achieve its full-year funding plan in total.

Our funding strategy remains focused on diversification.

We plan to continue accessing a variety of markets, channels, and investors.

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.

At the end of the third quarter, Ford Credit's managed leverage was 8-to-1 and equity was $8.7 billion.

I will now pass you back to Alan.

Thank you very much, Lewis.

Slide 29 provides an overview of the business environment.

Overall we expect global growth to continue at a moderate pace for the remainder of the year.

The situation in Europe presents the most significant challenge, as the deepening sovereign debt crisis and fiscal austerity measures slow growth in the region.

Economic conditions in periphery Europe are very weak, and downside risks to growth across the rest of Europe are rising.

In the US, a modest recovery is expected to continue.

Emerging markets should deliver sustainable but still robust rates of growth.

We are seeing some benefit from lower oil and commodity prices and the diminishing impact of the Japan events.

We continue to monitor the economic environment and, as always, we will match our production to the consumer demand.

We are well positioned to respond decisively to changes in the external environment and, if required, to take the actions necessary to remain solidly profitable as we execute our One Ford plan.

Slide 20 (sic - see slide 30) summarizes the first nine months results and our planning assumptions and key operational metrics for full-year 2011.

Our latest outlook on industry volumes is 13 million units for the US and 15.2 million units for Europe.

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

We're on track to achieve 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 $8.3 billion earned in 2010.

Based on our latest assessment we expect the increase in structural cost compared with 2010 to be about $1.6 billion.

As a result of the recent hedging adjustments we expect the increase in commodity costs to be about $2.2 billion compared with 2010.

We now expect our operating margin to be about 5.7%, lower than the 6.1% that we achieved in 2010.

This is due primarily to the impact of our commodity hedging adjustments.

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

Capital expenditures were $3.1 billion in the first nine months.

We now expect full-year spending to be about $4.6 billion as we continue to realize efficiencies from our global product development processes.

Our product plans remain on track.

Our first nine months performance was solid, and we expect to continue to deliver solid results in the fourth quarter, with each of our operations profitable for the full year.

Turning to slide 31, in summary, we had a solid third quarter and we are on track to achieve 2010's total Company pretax operating profit and Automotive-related operating cash flow.

The third quarter marked our ninth consecutive quarterly pretax profit, and we are continuing to invest for future growth in a stronger product lineup around the world.

The core of our operations remains strong and we are just beginning to realize the benefits of our One Ford plan.

Looking ahead, we remain on track with the mid-decade outlook that we laid out in June, including growth in volumes and margins.

Slide 32 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 changing 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.

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.

2011 is an important step in this journey.

And I am pleased to report that we remain well on track thanks to solid performance in the first nine months of this year.

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 about 40 minutes 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 our time frame, please keep your questions brief.

Katina, can we have the first question please?

(Operator Instructions) John Murphy, Bank of America Merrill Lynch.

Good morning, everybody.

First question, a very simple question.

As we look at slide 4, the change in net debt to positive $10.7 billion to the net cash position of $8.1 billion.

That $10.7 billion swing that we see year-over-year, is that generated completely by internal funds?

Or was there any external financing that drove that number higher?

I just want to -- it is a simple way to look at free cash flow; but I just want to make sure I have that straight.

It was all internal funds including distributions from Ford Credit.

And that is on an LTM basis, right?

Trailing four quarter?

Yes.

Okay.

Then the second question, Lewis, on the net cash position.

I think you had indicated in the past that $10 billion of net cash was where you wanted to get to before you paid a dividend.

Is that still the case?

Or would you be comfortable paying a dividend with net cash less than $10 billion?

No, John; actually that is not how we described it.

We said that by the mid-decade we will be comfortable with about $10 billion of debt on our balance sheet.

We'd previously said that we would like to get to investment grade before we paid a dividend.

Over the last -- as our business has improved, as our credit ratings have improved, we now believe that it is not something we have to get to before we start paying a dividend.

So we may decide to start a dividend before the rating agencies get us to investment grade.

We don't have anything to announce today; but we are on record as saying we would like to be paying a dividend sooner rather than later.

We just continue to improve our balance sheet until then.

And that $10 billion number was a gross debt number, not a net cash number?

It was a gross debt number, yes.

Okay.

Then just on the CapEx, skinning it back from the range of $5 billion to $5.5 billion down to $4.6 billion, are there any product delays going on there?

Is that just you getting constantly more efficient over time as far as product and investment spend?

John, it's the latter.

Because clearly our One Ford plan has allowed us to develop more of the vehicles that people want, using fewer basic platforms.

So it really is continuing to increase our efficiency.

But all of our product plans are in place.

Okay.

Then lastly, just on slide 14, Lewis, you went through the numbers for North America and talked about the pretax margin potentially being above last year's year to date.

So that would be above 10%, ex- the increase in or the hedging from commodity costs.

Is that a number that you think North America can achieve on an annual basis, north of 10% or in that 10% range going forward?

You're running at that rate -- you are running above that rate already.

No, our mid-decade outline was between 8% and 10%.

So I think as you have heard us say, I think North America is really motoring along at the moment.

It is a real engine of the business and allowing us to continue to invest in the growth around the world.

So I think 8% to 10% is a more realistic expectation longer-term.

Okay.

Thank you very much.

Brian Johnson, Barclays Capital.

Good morning.

Just want to dive in on this commodity hedging issue, both what it is and then how it is going to play out going forward.

It's kind of two sets of questions.

One, can you remind us, Lewis, about FAS 133, when it kicked in?

I recall one of your competitors had some issues for years trying to get their accounting right for it.

And what it means about the lumpiness of commodity recovery.

Then question number two is -- as we go forward into fourth quarter and early next year, what is the cadence of reversing these losses?

When does that come back?

And is that part of what is leading fourth quarter to be perhaps a bit cautious around fourth quarter?

Or is it more around conditions in Europe and macro uncertainty in the Thailand floods?

Let me answer the simplest one first.

In terms of the fourth quarter, we are not being particularly cautious because of our commodity hedging or anything like that.

Obviously, we have some reservations about the economic climate in Europe and we have described the issues that we are seeing in Thailand.

In terms of -- Brian, I don't know just when FAS 133 came in.

I am sure I have got someone here -- oh, 2001.

I knew we would have someone in the room that knew.

Let me try and separate out.

We do hedging on both currencies and commodities.

On currencies we can designate them because we are actually transacting in currencies.

On commodities, we actually don't buy commodities direct.

We buy them as they come in with our component supplies from our suppliers.

So we can't designate our commodity hedging.

So when you have a sudden price drop as we did in the last two weeks of September -- and by sudden, I think copper went down 24% or 25%; aluminum went down 12% to 14%.

So a very sudden drop.

You have to mark-to-market those hedges for the unrealized loss on those hedges.

It's non-cash, and then as you go forward -- first of all it depends on what happens to the commodity prices.

But if commodity prices was to stay at the same level as at the end of the third quarter, we have written off the profit effect of the hedges; and we will see the benefits of the lower commodity costs coming in through suppliers over the next 12 to 18 months, depending on the -- well, over the next 12 to 18 months.

I hope that's clear.

And please don't ask me about the details of FAS 133.

Okay, so the benefits come back over 12 months, not just in one or two quarters?

Well, 12 to 18 months depending on the life of the hedge.

And have -- if you were to mark those to market before the call would this have improved at all?

A little bit.

But -- I mean, there has been a bit up and down.

I think if I had done it last week it would have been a bit; and this week they've come down a little bit, but that is still above the end of September.

But we are not going to get into trying to update them every week.

Was there any significant benefit as we compare year-over-year or sequentially in prior quarters from these hedges before base metals started turning down?

I think nothing material.

Like maybe 20 or 30 in the third quarter of last year, good news.

Okay.

Thanks.

Colin Langan, UBS.

Good morning.

Can you provide any color what things we should look for in terms of when you would consider paying a dividend?

Are there any financial markers that would trigger your decision to actually do a dividend?

Because obviously from a cash flow perspective, things look pretty solid.

Colin, we are not going to give out precise, hard metrics because that hasn't served us well in the past.

I think we just want to see a little bit of continued improvement in our business.

We're I think now pretty clear that we'd like to do it sooner rather than later.

Okay.

In terms of your structural cost guidance, it implies that in Q4 there is about a $500 million year-over-year headwind still.

But I do remember last year there were actually quite a few launches in the fourth quarter.

So is that more in emerging markets?

Or should we see that not be a big headwind in North America?

Because I do remember actually quite a big impact last fourth quarter.

Yes, we are going to see -- I think we will see some in North America just because it is such a big part of our business.

But we will also see some in Asia Pacific and Africa.

I think more benign in the other two regions.

Okay.

Any color on how -- it seems like there is some caution in Europe.

Will you be able to get that back to profitability in the fourth quarter?

Will that business taper off for the full year?

We are comfortable that it is going to be profitable for the full year.

I think you can understand us being a little cautious on Europe because the economic outlook is a little cloudy at the moment.

It's interesting that despite all the pressures on the consumer we are not actually seeing the total industry demand dropping.

What we are seeing is pressure on margins as people try to support their volume projections.

And we are seeing both increased incentive activity; we're also seeing a bit of a shift from retail to fleet, which is of course lower margin.

So the pressure is on margins in Europe, rather than absolute volume.

Colin, as we noted also, the wholesales, production will be up in the fourth quarter too, because this is their lowest month due to the seasonal effects and introducing the new products.

So that will help us also.

Okay.

Just one last one, just on the hedging, the commodity hedges.

If commodity prices recover again in the fourth quarter, will then there be a complete markup, so that could actually be a benefit if the commodities reverse or that somehow changed?

If commodities go up from the price levels at the end of the third quarter, we will have a mark-to-market upward revision, yes.

The commodities that we should focus on are copper and aluminum?

Are they the main ones?

Well, precious metals lead.

I think we need to separate out the accounting treatment.

And the real benefit of having lower commodity prices, while those lower commodity prices exist, that is a benefit to all of us.

Okay.

Thank you very much.

Adam Jonas, Morgan Stanley.

Hi, good morning, Alan, Lewis, and team.

What is Lincoln's advertising spend on a per-unit basis?

Well, Adam, I don't have that in front of me; and actually I am not sure it is something we would share even if I did have it.

How about this?

Does the ad spend for Lincoln, how does that compare to say Blue Oval as a percentage of ATP, directionally or magnitudinally?

I'm not seeking a specific --

Directionally, I think we are spending more per unit on Lincoln than we are on Ford.

We obviously have great economies and efficiencies of scale with Ford and Lincoln, we are in the process of rebuilding the business.

Okay, one question on the slight reduction of the structural cost forecast for the year to $1.6 billion from around $2 billion.

Does that reflect an evasive maneuver by Ford shorter-term?

Or was that just again a product of your efficiencies?

That's just a constant, relentless push on keeping our costs as tight as we can.

Great.

So (multiple speakers).

So nothing cut?

Again, in the spirit of the question on CapEx.

No, there is nothing sinister in it.

It is just every day we squeeze a little bit harder and every day, people's pockets (multiple speakers).

That's great.

One last question for Mike Seneski.

How have credit losses been evolving versus your expectations?

Could you comment on the most recent data that you would have seen in your business on the performance of the portfolio in light of some of the deteriorating consumer confidence numbers?

Thanks.

Yes, Adam, it's Mike.

Our credit losses continue to perform extraordinarily well.

We're at historic lows, and that has continued quarter-over-quarter not just in North America, but around the world.

Wonderful.

Thanks very much.

Chris Ceraso, Credit Suisse.

Thank you.

Good morning.

A couple items here.

First, it looked like the contribution in North America was a little bit weak, if I look at about 50,000 incremental wholesales from third quarter last year to third quarter this year, but only about a $200 million improvement from volume and mix.

Is there something going on there, or is my math off?

That seems a little bit weak to me.

I haven't really looked at it like that, because I thought North America, if you take -- if you wash out the hedging losses, their margins would have been up year-over-year.

So I thought they had a pretty good result.

There has been some adverse series mix.

I think you know that we were struggling with some specific high-end components, principally navigation units as a result of the tsunami, that we are now out of.

But I think during the third quarter, we were still struggling on some of our bigger vehicles in the high-end, so we had constraints on the high series mix of some of our high-end products.

Okay.

But solid performance.

But I think if you wash out the hedging losses, I think North America had a fantastic quarter.

On slide 11, you show a $300 million favorable fair market value adjustment.

What was that?

There's a couple of things; hold on.

I am just turning to slide 11.

There's a couple things going on in 11.

It's fair market value and other.

I think there was a bit of a FCSD profit improvement.

There was also some compensation accrual true-ups that were going on in the quarter.

What was the first thing you said?

Sorry, our Parts & Service business profits.

Okay.

Continue to perform well.

Okay.

Then just the last one, a housekeeping item.

On the 660,000 production for Q4, can you give us a breakdown between cars and trucks?

No; we can probably get a bit more detail off-line, but I don't have it in front of me.

Okay.

Thank you.

Rod Lache, Deutsche Bank.

Good morning, everybody.

I am not going to ask you about the timing of the dividend.

You've said already that it's going to be sooner rather than later.

Can you just give us a sense of how you are thinking about an appropriate level for dividend payments going forward?

You're generating -- I think including dividends from Ford Credit, you probably generated $8 billion of free cash flow so far this year.

Some pretty impressive numbers, considering the level of the industry right now.

But how should we be thinking about the way you would approach that, just weighing the structural cost reductions and some of the risks that you see on the horizon in Europe and elsewhere?

I think you can expect us to -- when we do start, to start relatively cautiously.

Because we don't want to start and then be in a position that we don't want -- that we can't sustain the level we start at.

So in our view, once we start it is key to our shareholders that we can maintain a sustainable level of dividends.

So I would -- I think that would indicate we may be a little bit cautious when we start.

Okay.

But would it be fair to say there would be more than a token dividend?

It would be some meaningful amount of cash distribution even at the start?

I think -- I don't want to get into semantics, Rod, because I think our definition of token and your definition of token may vary.

But I mean once you start a dividend, it will be for our shareholders, and I don't think we are thinking of token.

But I am not quite sure what you'd define as token, and I don't want to get into specifics, obviously.

Okay.

And, Rod, as you know, it has been and will continue to be a very high priority for us to have that be part of the plan.

So clearly that is what is guiding us.

I was, maybe switching gears a little bit, talking about the operating margin outlook.

Year to date you have had a, I believe, 6.5% operating margin.

The third quarter was 4.8%.

The full year guidance implies that your operating margin in Auto would be about 3.2% maybe, just in that ballpark.

Could you just talk to just the North American part of this, how we should be thinking about maybe the bridge of a couple items?

You gave us the $280 million UAW impact which is going to be there in the fourth quarter.

Are there some other significant elements, just structural cost changes and things like that, that we should be taking into consideration in the fourth quarter?

Is commodities a plus or a minus, excluding the hedging?

I think that the primary things that are going to drive your view of the fourth quarter are the seasonal factors that we talked about a lot last year, as our inventories run down at the end of the year.

The other thing is, we are in the -- we will be starting the launch of the next-generation Escape.

So the things that affected the margin a year ago, those seasonal factors, are going to be similar factors to this year -- similar factors in this year.

I think you can also think that -- I can't predict what may happen on mark-to-market on hedging, but I think we would expect to see commodities still elevated compared to a year ago.

Okay.

But your production levels are higher in the fourth quarter, even than they were in the third quarter, so I guess there are some seasonal issues that affect the numbers.

Yes.

And you know, I would say if you -- I think last year would be a good indication of the sorts of seasonal factors that we had.

I just can't -- I think it was Rod's question or maybe-- sorry, it was Chris's question.

I can answer the mix of the 660,000 was one-third cars and two-thirds trucks, almost exactly.

Okay.

Then just lastly, how are you thinking about the outlooks for South America and Europe at this point?

In South America, does the Brazil import tax make you feel any better about potentially the pricing outlook there?

And in Europe, what are the range of potential outcomes that you would consider as reasonable?

I know it's very difficult to put a specific target on these things.

Yes.

I don't think I can give you a specific view of Europe.

I think as we said, Europe is going to continue to get the benefit of the way we are now running the business and sharing costs around the world.

But we will continue to look at Europe.

If the environment results in what could be a very slow growth period, we will look at all elements of the business.

In South America, I think you know that the import tax has been delayed for 90 days, so that is probably not going to have the effect on the fourth quarter that we previously expected.

I think in South America, the key thing in Brazil is what is happening on the exchange rate.

It has weakened substantially, which would have an impact on the fourth quarter if it stays weak.

Obviously, as it weakens the natural benefits of being a local, well-established, profitable manufacturer in the region will serve in our favor.

Patrick Archambault, Goldman Sachs.

Yes, hi, good morning.

I actually just wanted to follow up on the fourth-quarter margin question.

Indeed it seems like you are pointing to margins that are a little bit lower, if my math is correct, than last year.

Just so I understand it, I get it you have the $280 million UAW piece in there.

But it does sound like the hedging true-ups, all things equal, if we don't change from here shouldn't be an issue going into the fourth quarter.

I understand there is the Escape launch.

But last year I remember when we were talking about the fourth quarter, it seemed like the product refresh burden was just a lot larger; right?

You had all the new powertrains for the F-Series and so on.

So what exactly is making it so that there isn't an improvement there year-on-year in margin?

I am just trying to track your data.

Corporately, we are expecting margin to be slightly better year-over-year, slightly.

North America, I am not -- I don't have the data in front of me; I am just scrambling to have a look at it.

It's going to be directionally similar.

I think the big change for us last year that you haven't mentioned is the continued impact of higher commodity prices.

Okay, so ex-hedging, that headwind trumps the diminished launches that you would have?

Yes, there is a lot going on.

As you called out we have got the $280 million UAW ratification bonus.

We will have another true-up of compensation factors, I suspect.

We talked about launch.

I haven't done an exact comparison of launch year-over-year.

You're right, we had a big launch year last year.

But we're in the middle of some pretty substantial actions in terms of having plants down this year as well.

So, let me just think about this a little bit more.

We can probably talk a bit off-line.

Okay, sure.

Just one housekeeping one.

On the bonuses, is all of the -- are all of the bonuses --?

Or let me rephrase it differently.

Are any of the bonuses going to be called out as one-timers, like the signing bonuses?

Or are they all -- is that $280 million going to be sort of normal-course expense including all of that?

Let me be explicit on the ratification bonus.

It is treated as a normal cost and it is accounted for in the quarter that we pay it.

Okay.

Got you.

Then one final one, not to dwell on Europe, but I think you are at $163 million in profitability so far year to date.

So you would have to stick at flat or -- sorry, breakeven; you would clearly have to not lose $163 million, which still would be a marked improvement from where you are for this quarter.

How much of that is just seasonality?

Then what other things do you have going on that make you think that you can stem some of those losses going from Q3 to Q4?

Well, the most significant factor is the seasonality.

As you know, Europe has relatively long shutdowns, all within the third quarter.

We don't have that shutdown activity in the fourth quarter.

We do have a Christmas break; but it is much, much shorter.

So it is really all volume.

Okay, great.

Thank you very much.

Himanshu Patel, JPMorgan.

Hi, good morning, Lewis.

Just two questions.

I wanted to clarify on slide 15 on the Other line, the $300 million favorable year-over-year -- or I think a $200 million sequential favorable.

Maybe this is what -- to Chris's question earlier.

But what was that related to on the North American walk?

There are two principal elements of that.

One is improvements in our FCSD, our Parts & Service business profits.

And the second is some true-ups on compensation accruals.

Okay.

Then used prices have started to soften up a little bit.

I am just curious, two items.

One, how are you guys feeling on residual value assumptions at FMC?

And then number two, what are your prospective expectations on North American pricing given what is happening in the used market?

Okay.

On the first one, we are seeing what we had projected as normal seasonal declines, obviously from a very high point.

But we think they are normal seasonal declines.

We are still seeing Mannheim up I think about 4% versus a year ago.

In terms of pricing, because it is sort of normal seasonal declines, we are expecting still to have an orderly pricing environment in the fourth quarter.

And what we see from our competitors would indicate that is likely to hold, disciplined actions.

Obviously we have got currency at a more fairly valued level now, so there is pressure on everybody to make some profit.

Ladies and gentlemen, at this time we would like to welcome questions from the media community.

(Operator Instructions) Dee-Ann Durbin, The Associated Press.

Morning.

Thanks for taking the call.

Alan, I just wanted to hear your comment on Consumer Reports' announcement yesterday.

Oh, sure.

Clearly it reflects the situation that we identified nearly a year ago.

So there is no new news there; it is just the cycle in which Consumer Reports releases their assessment.

But remember that our quality operating system identified some really good improvements from the consumer point of view on SYNC and MyFord and the way it operated, and also the way that -- suggestions for improvement on the way our new 6-speed fuel-efficient transmissions were working.

So we take all of that input really seriously, and we have identified -- most of it was associated with software, as you know.

We have identified the fixes.

We are incorporating that into the existing products and the new products going forward.

So I think we will be clearly moving back up and delivering on our brand promise on quality going forward.

Thanks.

Robert Schoenberger, The Plain Dealer.

Hi, looking at the lease numbers, the fewer people turning in their cars at the end of the leases, is that the proper way to interpret that in the report?

That fewer people are turning in their cars at the end of the lease?

This is Mike Seneski.

There's really a couple of things going on.

The number of terminations is declining because in 2008 and 2009 the entire industry started to lease at a lower rate.

And obviously those leases are going to come back 24, 36 months later; so we're going to have a lower number of terminations.

Also the other thing that is going on is we are seeing, with the stronger used residual values, some people are holding on to their cars a little bit more than what we have seen in the past.

Can you quantify that in any way, how many people are holding on to their leases longer?

Yes, the return rate in the quarter was about 48% for Ford and Lincoln vehicles.

How does that compare to historically?

Historically it's been about 70%.

So in times of higher used car values you are going to see a lower return rate; and lower used car values, a higher return rate.

Great.

Thank you.

Keith Naughton, Bloomberg.

Hi, fellas.

Hey, I wanted to ask about the US retail market share goal of 14.1% for this year, which you said you are on track with.

You are 13.9% for the first nine months of the year, which suggests you have to overperform in the fourth quarter to get to the 14.1%.

I'm wondering what specific models you are expecting to see retail gains in, in the fourth quarter, that will get you there.

We are just turning to your page.

Year to date, it is 14%.

Is that what you are looking at?

No, the US retail market share year-to-date of 13.9%, on slide 30.

Slide 30?

Oh, we were looking at slide 36.

Okay.

Slide 30.

On the year to date?

The first nine months.

Okay, and Keith, what is your question?

So your goal is to equal or improve the 14.1% that you had last year.

I am just wondering what particular models in the fourth quarter you think will outperform, that will get you up to that 14.1%.

Let's see.

Okay, let's -- we've got -- Mark is here.

Let's let Mark give you the perspective on that.

Yes, hi, Keith.

We have 13.9%; and that is correct, although we get every week an update from our registration system.

We are actually -- the update we got this morning has us at 14%.

So net-net is versus last year we are even on a retail basis.

And as we look at the fourth quarter obviously we have much better availability of Focus, which is going to be a key driver for us.

We have good availability of vehicles like Explorer.

And we continue to expect our trucks to perform well.

All right.

Thank you.

(Operator Instructions) Greg Gardner, Detroit Free Press.

Good morning.

If I remember correctly, you were somewhat profitable in the second quarter for Asia Pacific and Africa.

Is this the trajectory that you had planned?

I mean obviously you have to spend money to make money.

Is it in line with your expectations?

And just what -- how significant is the impact of the slowdown in growth, especially in China?

Greg, we were somewhat profitable.

I think we were breakeven, $1 million.

I think the issue we are seeing in Asia Pacific is -- it is a bit up and down, depending on our structural cost as we grow.

We are expecting to be profitable each year in the next few years as we transition into growth.

But we do expect to see some variability by quarter.

So in this quarter, for example, we had a bit of some mix shifts between less vehicles sold in Australia, which are high-margin vehicles -- the Falcon, the Territory -- and more vehicles sold in China and India and Thailand.

So it is a bit noise, not a signal.

Thank you.

Jim Treece, Automotive News.

Morning.

I would like to look at slide 23 on the production volumes.

I understand this is the first time you have given us forecasts for fourth quarter by region, and I would like to know how the numbers particularly for Europe and the total compare to what your forecast had been, say at the end of the second quarter?

Jim, we wouldn't go into that amount of detail.

I think the key thing to recognize about what we are doing is we are keeping our production matched to demand.

So every month we look at our production program and our sales forecast and make sure that we adjust production accordingly.

So those numbers change every month.

But you know, our total industry outlook for Europe has not changed markedly for most of this year.

We started I think at a range of 14.5 to 15.5; we are now at 15.1 or 15.2 we are projecting.

And our market share has always been equal to or improved, so that hasn't changed much.

All right.

Thank you.

Bernie Woodall, Reuters.

Hello.

Thank you.

I was wondering about -- regarding China; there is some moderating growth in 2011.

Is this a 2011 phenomenon?

Do you think this moderate growth will continue in 2012 in China?

Thank you.

Bernie, this is Alan.

We are going to give you a complete update at the end of the year on our anticipated growth rates worldwide.

But clearly this is I think a very positive development, because as they manage inflation and economic growth, rates of growth are clearly a lot more sustainable going forward.

The neat thing is that we have the products to support that customer demand that goes with that.

So I think this is a development.

Thank you.

Katina, we have time for one more question please.

Alisa Priddle, Detroit News.

Good morning.

I just wanted to check; I think you said that you mix for the third-quarter was two-third trucks.

I know that you have had a huge emphasis in gains on the car side.

I am just wondering how you see the year ending up just in terms of cars and trucks, and where you see your emphasis and your profits coming from, between them.

Alisa, I apologize if I wasn't explicit enough.

The mix I gave was for fourth-quarter production.

The 660,000 that we showed for North America was fourth quarter.

Oh, okay.

But will be two-thirds truck?

Two-thirds truck, correct.

Okay.

Then again just sort of the similar question then.

Is that just demand driving that?

Is that something that you want to see because those are often your more profitable vehicles?

No.

First of all, let me just clarify for everybody that when I talk about trucks I mean both pickups and utilities.

But no, it is demand driven, not our liking.

We will produce what the customers want.

And we are seeing truck segmentation improve a little bit, particularly pickup segmentation improve a little bit.

Okay.

I imagine it's a bit to your liking because they still are profitable vehicles.

That's true.

But I think you just have to remember there is a big shift in North America compared to three or four years ago, as we now have a full range of fully competitive vehicles -- cars, utilities, and trucks of all sizes.

Whereas three or four years ago, we were very -- we could be held hostage by the segmentation shift.

Now we have vehicles in all those segments fully competitive.

But yes, it is a bit more profitable and we will take it when we can get it.

Okay, thank you.

Thank you.

That concludes today's presentation.

We thank all of you for joining us today.

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

This concludes the presentation.

You may now disconnect.

Good day.