福特汽車 (F) 2012 Q2 法說會逐字稿

Great day, ladies and gentlemen.

Welcome to the second-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. George Sharp, 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 by webcast.

On behalf of the entire Ford management team I would like to thank you for spending time with us this morning so we can provide you with additional details of our second-quarter financial results.

Presenting today are Alan Mulally, President and CEO of Ford Motor Company, and Bob Shanks, Chief Financial Officer.

Also in attendance are Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO.

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

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

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

Final data will be included in our Form 10-Q that will be filed next month.

The financial results presented 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 in the slide deck.

Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance.

Of course actual results could differ materially from those suggested by today's comments.

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 will now like to turn the presentation over to Ford's President and CEO, Alan Mulally.

Thanks, George.

Good morning to everyone.

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

Let's start by turning to slide 3 please.

In the second quarter, we delivered our 12th consecutive quarterly pretax operating profit, generated positive Automotive operating related cash flow and ended the period with strong liquidity.

Wholesale volume and revenue were lower than a year ago.

Operating results featured an excellent pretax profit and operating margin in North America and another solid performance once again at Ford Credit.

Results for South America were slightly better than break even while Europe and Asia-Pacific and Africa incurred losses.

We continue to project strong total Company full-year pretax profit but now expect it to be lower than 2011, reflecting Automotive pretax profit about equal to or lower than 2011 due to the challenges in Europe and South America and lower profit at Ford Credit but in line with our existing guidance.

We are continuing to implement our ONE Ford plan.

This includes aggressively restructuring to operate profitably at current demand and changing model mix as well as accelerating the development of new products that our customers want and value.

The ONE Ford plan has been our roadmap through the successful restructuring of our North American business, the path we followed to the recent recession, the foundation of the dramatic improvement in our Automotive balance sheet, and the basis of our growth strategy for Asia-Pacific and Africa.

It remains our guide as we address new challenges we face today.

Let's look more closely now at the financial highlights of the quarter.

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

Wholesale volume was 1.4 million units, down 72,000 units or 5%.

Revenue was $33 billion, a decline of $2.2 billion or 6%.

Pretax operating profit excluding special items was $1.8 billion, about $1 billion lower than a year ago.

Earnings were $0.30 per share, $0.19 lower than last year's earnings per share adjusted for the tax valuation allowance release.

Net income attributable to Ford included unfavorable pretax special items of $234 million was about $1 billion, a $1.4 billion decrease.

Earnings were $0.26 per share.

The decrease in net income is explained primarily by lower operating results and higher tax expense related to the valuation allowance release in the fourth quarter of 2011.

Automotive operating-related cash flow was $800 million, the ninth consecutive quarter of positive performance.

We ended the quarter with $23.7 billion of Automotive gross cash, exceeding debt by $9.5 billion.

This is a net cash improvement of $1.5 billion compared with a year ago.

In the first half, both vehicle wholesales and revenue decreased by 4% compared with the same period a year ago.

First-half pretax operating profit excluding special items was $4.1 billion or $1.6 billion decrease.

Net income was $2.4 billion, a $2.5 billion decrease.

Shown here on slide 5 are the other highlights for the quarter.

First, Fitch and Moody's upgraded our credit rating to investment grade, triggering the release of collateral securing our revolving credit facility including the Blue Oval.

We started selling the all-new Escape in North America and began producing the all-new B-MAX in Romania.

In the US, we added third production crews at our Chicago and Michigan assembly plants and we added a second shift at our Kansas City F-Series facility.

We also completed the sale of component businesses in Saline, Michigan and Sandusky, Ohio, leaving us with only one remaining ACH operation.

We won the 2012 International Engine of the Year award for the all-new 1 liter EcoBoost initially launched in Focus in Europe and coming to the US in the near future.

In China, we launched the new Focus in our second Chongqing facility with availability of SYNC in Chinese.

We also announced a new $760 million assembly plant in Hangzhou that will support our plan to double production capacity of our CFMA joint venture to 1.2 million units by 2015.

In Thailand, we opened the Ford Thailand manufacturing facility in Rayong, increasing our annual capacity in that market to 425,000 units.

Now I would like to turn it over to Bob, who will take us through more details of our financial results.

Bob?

Thanks, Alan, and good morning to everybody.

Let's start with slide 7, which walks our pretax operating results and net income.

As Alan mentioned, pretax operating profit was about $1.8 billion.

Pretax special items were a negative $234 million including losses on the sale of the two ACH businesses mentioned earlier as well as personnel and dealer actions.

Additional detail is provided in Appendix 3.

The provision for income taxes was $557 million and net income attributable to Ford was about $1 billion.

Consistent with prior guidance, we expect our full-year operating effective tax rate to be similar to 2011.

Let's now turn on slide 8 to our pretax results by sector.

Total Company second-quarter pretax profit of $1.8 billion consists of $1.4 billion for the Automotive sector and $447 million for Financial Services.

As shown in the memo, Total Company pretax operating profit was about $1 billion lower than last year with both sectors contributing to the decline.

Compared with the first quarter, 2012, Total Company pretax profit decreased by about $500 million explained primarily by lower Automotive results.

Slide 9 highlights the key market factors and financial metrics for our Total Automotive business.

In the second quarter, wholesale volume and revenue were lower than a year ago, explained primarily by Europe.

Pretax operating profit and operating margin were lower as well, more than explained by lower results in Europe, South America, and Asia-Pacific Africa.

As shown in the memo below the chart, Total Automotive first-half pretax profit was $3.2 billion with an operating margin of 5.6%, both lower than a year ago.

Volume and revenue also were lower than 2011.

Slide 10 summarizes the $900 million decrease in the second-quarter Total Automotive pretax profit from 2011 by causal factor.

The profit decline is explained mainly by higher costs related primarily to product and capacity launches this year; investment for future growth and higher commodity costs including hedging effects.

Market factors, including reduction in stocks and exchange, were also unfavorable.

As shown in the memo, pretax profit decreased by $400 million compared with the first quarter, more than explained by higher costs.

More details on the quarter-to-quarter change are included in Appendix 6.

Slide 11 shows second-quarter pretax results for each of our Automotive operations as well as Other Automotive.

Automotive sector profit of $1.4 billion is more than explained by North America.

The combined loss for our other operations was $465 million, which was somewhat better than our recent guidance.

The loss in Other Automotive mainly reflects net interest expense and an unfavorable fair market value adjustment primarily on our investment in Mazda.

We expect full-year net interest expense to be between $500 million and $550 million.

Let's turn now to slide 12 to our Automotive business in North America.

Second-quarter wholesale volume and revenue were roughly the same as a year ago and pretax operating profit at $2 billion was higher than a year ago with operating margin at 10.2% also higher.

This is the second consecutive quarter with profit exceeding $2 billion and operating margin exceeding 10%.

US industry SAAR increased from 12.4 million to 14.4 million units while our US total market share was 15.6%, 1.7 percentage points lower than a year ago.

As shown in the memo below the chart, North America's first-half pretax profit was $4.1 billion with an operating margin of 10.8%, both higher than a year ago.

Volume and revenue also were higher in 2011.

Slide 13 shows the $100 million increase in second-quarter North America pretax results compared with 2011 by causal factor.

Profits were $100 million higher than the strong results of last year.

Higher net pricing, improved contribution costs, and other factors were offset partially by higher structural costs for growth and unfavorable volume and mix including an adverse change in our US dealer stocks.

As shown in the memo, pretax profit decreased by $100 million compared with first quarter, more than explained by higher costs.

Higher volume was a partial offset.

Our outlook for North America is unchanged.

We expect significantly higher full-year pretax profit and operating margin compared with 2011 as consumers continue to respond to our strong product lineup, including the recently launched all-new Escape.

Next up is the all-new Fusion, which launches later in the year.

In addition to exciting products, we remain committed to maintaining our competitive cost structure as we grow our business.

Slide 14 shows our US market share.

Our total market share in the second quarter at 15.6% was down 1.7 percentage points from the same period last year.

This is explained by lower share in both retail and fleet segments.

The lower total share primarily reflects the impact of discontinued products such as Ranger and Crown Victoria, new competitive entrants in the small car segment, and Japanese competitors rebuilding inventories after the tsunami impact in the second quarter of last year.

Our retail share of the US retail industry at 13% was down 0.8 percentage points from the first quarter, reflecting 0.5 percentage points of share performance and 0.3 percentage points of segmentation changes.

The share performance was driven by small cars and Ranger, while the segmentation change was mainly in full-size pickups.

During the quarter, we continued the disciplined approach we've been using in recent years, maximizing the profitability of our sales and our revenue per unit while forgoing marginal business that will leave us without adequate supply.

As a result, we ended the second quarter with our inventory in great shape and an overall adequate days supply.

We've also been focused on adding capacity this year in several facilities to support the growing industry volumes and our new product launches.

Specifically we're adding 400,000 units of annual incremental capacity by the end of this year with most of the actions launching in the second and third quarters positioning us well going into 2013.

Let's turn now to South America on slide 15.

Second-quarter wholesale volume and revenue decreased by 12% and 21% respectively.

In addition to the lower volume, unfavorable exchange was a factor affecting the net revenue decline.

Pretax profit and operating margin while slightly positive, declined substantially.

South America industry SAAR and our market share were down slightly and as shown in the memo below the chart, South America first-half pretax profit was $59 million, substantially lower than a year ago.

Volume and revenue also were lower than last year.

Slide 16 shows the $262 million decrease in second-quarter South America pretax results compared with 2011 by causal factor.

The lower profit is explained by lower volume, higher costs, and unfavorable exchange and although net pricing was higher, it was constrained compared with recent periods by the more intense competitive environment.

As shown in the memo, pretax profit decreased by $49 million compared with first quarter, more than explained by higher costs, mainly structural costs related to developing and launching new products in the region.

Although we continue to expect South America to be profitable for the full year, we now expect the level to be substantially lower than 2011.

This reflects increased competitive pressures, weakening currencies, and changes in government policies affecting areas such as trade and access to foreign currency.

We are continuing to work out actions to strengthen our competitiveness in this changing environment, looking at all areas of the business to improve our operating results.

These actions include fully leveraging our ONE Ford plan including the introduction of an all-new lineup of global product over the next two years starting with the launch of Ranger, EcoSport, and Fusion in the second half of this year.

Slide 17 covers Ford Europe.

Second-quarter wholesale volume and revenue declined 15% and 21% respectively, reflecting primarily lower industry volumes and market share, along with production adjustments to maintain dealer stocks at appropriate levels.

Exchange was also a contributing factor adversely affecting net revenue.

Pretax results and operating margin swung from a profit and positive margin in 2011 to a loss and negative margin this year.

Industry SAAR for the 19 markets that we track in Europe decreased from 14.9 million to 14.3 million units.

Our market share at 7.7% was down 0.6 percentage points, reflecting primarily lower passenger car share and an environment of increased competitor pricing activity and a relatively higher price position.

As shown in the memo below the chart, the first-half Europe loss of $553 million compared with a profit a year-ago.

Volume and revenue declined compared with last year.

Slide 18 shows the $580 million decline in second-quarter pretax results for Europe compared with 2011 by causal factor.

Most of the change reflects unfavorable market factors.

Volume was unfavorable due to lower industry, share and associated stock changes.

Net pricing was lower as the industry responded to excess capacity with higher incentives.

Higher contribution costs also contributed to the profit decline.

As shown in the memo, pretax profit decreased by $255 million compared with first quarter, explained by unfavorable market factors and higher costs.

Given the deteriorating external environment in Europe, we now expect our full-year loss in Europe to exceed $1 billion.

The magnitude of the loss will be affected by a variety of factors including the overall economic environment, competitive actions, and our response to these developments.

We fully understand the seriousness of the situation in Europe and we view the challenges the industry faces as more structural than cyclical in nature.

While we are affected significantly because of our strong presence in the region, we fully understand what it takes to be profitable and to generate an appropriate return on our investments.

We have faced very challenging situations in other parts of our business before and addressed them successfully through our ONE Ford plan.

We will do the same now in Europe, which is an important and valued part of our plan.

We are reviewing all areas of our business in Europe to address the near-term challenges while ensuring we are building a strong foundation for the future.

It is premature to discuss details of what our plans may be in response to the situation in Europe but we will continue to communicate our plans at the appropriate times with all of our stakeholders.

Now let's turn to Asia-Pacific Africa on slide 19.

Second-quarter wholesale volume and revenue improved 11% and 10% respectively compared with a year ago.

Pretax results and operating margin on the other hand were lower.

Industry SAAR increased from 27.6 million to 33.7 million units and our share at 2.6% declined 0.3 percentage points, reflecting Japan industry recovery, deterioration of the commercial vehicle industry in China, and lower small car market share in both China and India.

As shown in the memo below the chart, the first-half Asia-Pacific Africa loss was $161 million compared with a profit a year ago.

Volume was about equal to 2011 while revenue was higher.

Slide 20 shows the $67 million decrease in second-quarter Asia-Pacific Africa pretax results compared with 2011 by causal factor.

Market factors were strongly positive but they were more than offset by higher costs associated with new products and investments to support higher volumes and future growth as well as other factors.

As shown in the memo, Asia-Pacific Africa's pretax results improved compared with first quarter, more than explained by higher volume.

Although we incurred a first-half loss in Asia-Pacific Africa, we do expect the results to improve in the second half, due mainly to favorable volume and mix as we benefit from added capacity in China and Thailand and the new Focus and our all-new Ranger.

Slide 21 covers 2012 second- and third-quarter production.

In the second quarter, Total Company production was about 1.5 million units, 49,000 units lower than a year ago.

This is 25,000 units lower than the prior estimate, reflecting lower production in South America and Asia-Pacific Africa.

We expect third quarter Total Company production to be about 1.4 million units, up 69,000 units from a year ago, more than explained by higher volumes in North America and Asia-Pacific Africa.

Although third-quarter production in South America is expected to be about the same as last year, this includes substantial production reductions in Venezuela in response to restricted availability of foreign currency.

Compared with the second quarter, third-quarter production is down 45,000 units, reflecting seasonal summer shutdowns in both North America and Europe.

Turning now to slide 22, our Automotive gross cash and operating-related cash flow, you can see that we ended the quarter with $23.7 billion in Automotive gross cash, an increase of $700 million from the end of first quarter.

Automotive operating-related cash flow was $800 million and our cash flow before financing-related changes and dividends was $1.3 billion.

Net debt inflows in the quarter of $400 million includes drawdown of low-cost loans for development of advanced technologies.

We also made payments of $800 million to our worldwide funded pension plans in line with our previously disclosed long-term strategies to derisk our funded pension plan.

Of this, $0.5 billion reflects discretionary payments to our US funded plans.

Dividends paid in the quarter totaled nearly $200 million.

In the first half, our operating-related cash flow totaled $1.7 billion and gross cash improved $800 million.

Slide 23 summarizes our Automotive sector cash and debt position at the end of the second quarter.

Automotive debt was $14.2 billion compared with $13.7 billion at the end of first quarter, reflecting additional drawdowns of low-cost loans for advanced technologies.

We will make our last draw on these loans by August with repayment beginning in September.

We ended the quarter with net cash of $9.5 billion and Automotive liquidity of $33.9 billion, both increased when compared with first quarter.

Turning now to Ford Credit, slide 24 shows the $166 million decrease in second-quarter pretax results compared with a year ago by causal factor.

The results are more than explained by fewer lease terminations, which resulted in fewer vehicles sold at a gain and a lower financing margin.

The decline in financing margin is explained primarily by the runoff of higher-yielding assets originated in earlier years.

As shown in the memo, Ford Credit's pretax profit decreased by $14 million compared to first quarter.

Ford Credit remains a strategic asset for Ford, delivering high levels of quality and customer satisfaction with operating efficiencies that are among the best.

For full year 2012, Ford Credit expects to project full-year pretax profit of about $1.5 billion and total distributions to its parent of between $0.5 billion and $1 billion.

Ford Credit now projects managed receivables at year-end to be in the range of $85 billion to $90 billion and managed leverage of 8 to 9 to 1 for the foreseeable future.

This is decrease from the prior target of 10 or 11 to 1 and is consistent with the goal of achieving and maintaining a strong investment grade balance sheet.

With that, I would like to turn it back to Alan, who will cover business environment and our 2012 planning assumptions.

Thank you, Bob.

Summarized on slide 26 is our view of the business environment.

Overall we expect 2012 global GDP growth to continue in the range of 2% to 3%.

Global industry sales are projected to be around 80 million units, up about 5% from 2011.

US economic growth is expected to range from 2% to 2.5% this year with industry sales supported by increasing replacement demand given the older age of the vehicles on the road.

Brazil economic growth is projected to range from 2% to 3%.

This is supported by fiscal and monetary policy easing to stimulate the economy.

In Europe, we expect weaknesses to continue with several European markets undergoing fiscal austerity programs to achieve debt restructuring.

China and India have experienced broad-based weakness in growth rates, which has prompted some policy easing including interest rate cuts and increased government spending.

We expect more policy actions are likely to stabilize economic growth in these countries.

Slide 27 summarizes our first-half results and our planning assumptions and key operational metrics for 2012.

Industry volumes are unchanged from prior guidance although US industry volume based on recent results could be at the lower end of our forecast range.

We expect US and Europe full-year market share to be lower compared with 2011 and continue to expect quality to be mixed.

We maintain our guidance in the following areas -- for Ford Credit, a pretax profit of about $1.5 billion; for Automotive structural costs, an increase of less than $2 billion compared with 2011 and positive full-year Automotive operating related cash flow.

Given business conditions primarily in Europe and South America, we now expect Automotive pretax operating profit and Automotive operating margin to be about equal to or lower than 2011 and Total Company pretax operating profit to be strong but lower than last year.

We also now expect capital spending to be lower at about $5 billion, reflecting mainly efficiencies.

Finally on slide 28, we summarize our ONE Ford plan, which is unchanged.

We will continue to aggressively restructure the business to operate profitably at current demand and the changing model mix; accelerate development of new products our customers want and value; finance our plan and continue to improve our balance sheet; work together effectively as one team leveraging our global assets.

Total Company first-half profit was strong, driven by our business in North America and by Ford Credit.

We have challenges in South America as a result of changes in government policies that are having an adverse impact on our business combined with the more competitive environment.

Europe is a significant challenge due to a very tough external environment, a situation we expect to continue for the foreseeable future.

And in Asia-Pacific, we are continuing to execute our aggressive growth plan as we implement our plan to serve customers everywhere with a full family of best in class vehicles.

We've made tremendous progress in recent years by executing the fundamentals of our ONE Ford plan and we are working towards our mid-decade guidance.

Looking ahead, our plan will continue to guide us as we work to sustain our strong North American operation and grow our important Ford Credit business while addressing the diverse challenges and opportunities we have in other parts of the world.

We are still in the early stages of reaping the benefits of our ONE Ford plan, our roadmap to deliver great products, a strong business, and a better world.

We remain confident in our ONE Ford plan and our ability to deliver profitable growth for all.

With that, we would be pleased to take your questions.

Thanks, Alan.

Now we will open the lines for about a 45 minute Q&A session.

We'll begin with questions from the investment community and then take questions from the media.

In order to allow as many questions as possible within this timeframe, please keep your questions brief.

Katina, can we have the first question please?

(Operator Instructions).

Adam Jonas, Morgan Stanley.

Thanks, everybody.

Bob, first question for you.

Peugeot just reported first-half numbers today and they made comments saying that pricing in Europe was no longer deteriorating as bad as it was earlier this year.

I just wanted to see if in real time whether you share that sentiment on European pricing.

We have seen through the course of the year pressure on margins from increasing incentive levels.

Also we are seeing a lot of activity in terms of short cycle sales.

We have tried to find sort of a sweet spot between sort of share and volume and contribution margin.

In fact that is one of the reasons why you saw -- in fact, it's a major reason why you saw a share drop for us in the second quarter, because we were trying to make sure that we kind of don't fully play in the increased incentives that we are seeing around us.

I don't think our experience is that we are seeing the falloff in incentive activity.

In fact if anything, I think that we are seeing it increase as we go through the year.

But with the great products that we have got, we have already launched a number of new things in the first half including the 1 liter EcoBoost.

We've got the B-MAX coming.

We've got the new one-ton Transit coming.

Ranger is starting to hit the market.

Kuga at the end of the year.

We feel we are going to have a lot in our arsenal to be able to compete effectively in what is a very, very difficult environment, but pricing is difficult.

Okay, thanks for clarifying that.

A question for Mike Seneski.

You guys have given the full-year target for Ford Credit $1.5 billion.

You did $0.9 billion in the first half so that implies a second-half run rate maybe a third lower than you were doing in the first half.

Is that really an intentional thing?

Am I reading the $1.5 billion a little too literally or do we really expect that Ford Credit profit in real time really does just fall off a cliff in the second half?

Because that's what's implied by your guidance at least.

Adam, in the second quarter, we had an 8 basis point loss ratio compared to the previous quarters including a reserve impact.

This is worth at least $50 million good news that really we weren't expecting.

I don't really know where credit losses are heading but if they look a lot like last year for the second half, we are comfortable with the about $1.5 billion.

Obviously if credit losses are lower than that all else equal we should beat the $1.5 billion.

Thanks for clarifying that.

Finally, Alan, a question for you.

Your stock is sitting at $9 here.

It's a price level we haven't seen since December of 2009, which was a year where I think Ford made like $0.01 of EPS sitting on $9 billion of net Auto debt.

I'm not asking to be a sell side analyst here but as an industrialist and a business leader, what do you read into that?

What do you think the market is missing about Ford here?

That's my final question, thanks.

Sure, Adam, I think it's in the context of a very tough business environment worldwide and I think people are starting to appreciate that we have a tremendous presence and operation in Europe.

We have made money there for six out of the last eight years but are seeing this very significant deterioration in the economy and the industry, so I think that is weighing on people's mind and also the changes in South America.

I think it's more the volatility of the world.

Having said that, Adam, I think people really do appreciate the value creation potential of Ford going forward by supporting the customers all around the world and even during the toughest of times, we continue to restructure our operations to operate profitably at the lower demand, the current demand, and also we are accelerating the investment in these new products around the world.

So I think both things are in play but I think the best thing we can do for value creation is to continue to implement the Ford plan of delivering a viable, exciting, profitably growing Company.

I think that will be appreciated over time.

I agree with that.

Thanks.

Brian Johnson, Barclays Capital.

Good morning.

I just want to continue building on what Alan said with the economic worries around Europe.

So you think pricing isn't getting much better.

Where do your inventories stand?

Where do you think the competitor inventories stand?

Is there any possibility to get through sort of pricing trough at any point this year?

Let me maybe get started and then let's get some perspective from Bob.

The most important thing about our plan and it has been and it will continue to be is for us to match our production to the real demand that has served us well, our dealers well, the customers well, the residual values.

So with respect to Europe itself, as you see, we are going to continue to decrease our production to match that real demand and then continue to work the cost structure in addition to the new products.

And we are very, very pleased with the dealer stocks we have today because we have been following that fundamental tenet of the plan.

Bob, would you like to add little a bit more on the pricing?

Yes, I just would add that going back to a comment that I made to Adam in his question, one of the things I think that gives us a bit more pricing power as we go into the second half is the new products because we clearly can price with new products.

And so in addition to the B-MAX, which is an all-new entry, we have got as I mentioned the C-MAX coming in with 1 liter Fox engine.

We've got the Kuga coming, the Transit coming.

In Russia, we've got new products.

We've got SYNC coming across the board.

So I think we feel much, much better about pricing as we go into the second half.

And as Alan said, we have maintained days supply in very, very good shape really across the world.

We've got a bit of an issue in China that we need to address which we will do so in the third quarter.

But stocks are in great shape in Europe and the team there has done an excellent job of staying ahead of what's happening around them in terms of our horrible stock situation.

Just quickly on the cost side, I recognize what you are saying about structural costs and not wanting to communicate before you go deal with the stakeholders.

I guess two things.

One, when can we expect anything around maybe these things you talk about with the stakeholders?

And then second, are there costs actions outside of labor and capacity around commodities, material, other structural costs that we could expect sooner progress on and what would the pace of that be?

Well, we will not be providing any indications about specifics of what our plans might be or timing, but as I mentioned to someone earlier today, we are clearly looking at the situation in Europe with a great sense of urgency and we are kind of all over the issues that we've got and working hard at the plans to put the business on a firmer foundation going ahead.

The only thing I would like to just sort of maybe add to what you just said, as we are doing that and as we are thinking about the application of the ONE Ford plan to the challenges that we have there, it isn't just a cost story here.

It is -- there's tremendous opportunities for us on the revenue side in addition to the cost side, working on product, working on brand.

Clearly cost is something that we are going to have to address because our outlook is that the industry going forward is not going to recover to where it had been in the previous five years or so.

So clearly we have to address that.

But this is going to be a holistic response to a serious business situation and if I were you guys, I would go back and look at what we did in North America which was a comprehensive plan that addressed really what were Ford issues more so than external issues.

Here it's a bit of us but it's a lot of external issues that we're going to have to respond to and we will do so with our ONE Ford plan.

Thanks.

Matt Stover, Guggenheim.

Thanks very much.

Two questions.

I believe, Bob, in your comments you described North American profits as being significantly higher in the second half as you bring on the new capacity and the product launches.

I can see the improvement from margin versus 2H last year.

But how would you describe the margin progression versus the first half of this year as you launch those facilities and new products?

That's a good question, Matt.

What we've talked about in terms of North America is that we will have significantly better results for the full year compared with last year.

We've not provided any specific commentary on the second half with regard to North America.

I think the way I would think about North America is it's running on all cylinders.

Clearly as you just noted the first and second quarter, those were records in terms of profits and operating margin is the best that we can tell.

So running extremely strongly all elements of the business are contributing.

And as we think about the second half of the year, we have got the Escape that we have literally just launched, so that's going to help us out in the second half of the year.

We've also got the Fusion coming on stream, which we have very high hopes for.

When you think about Fusion and Escape, those are two of the biggest segments in the industry here.

So we are very excited about the twosome there pushing the business forward.

And we've got MKZ coming for Lincoln and the added capacity.

So we feel very, very good about the second half of the year, in fact the whole year.

I think you will see strong results from that part of the business throughout the year and margins as well.

Would it be too much of a stretch to think that margins could stay flat in the second half?

I think the margins -- all I would say is you are going to see strong margins from North America throughout the year.

Okay, and the last question is in Europe, you took a $190 million incentive adjustment.

How much of that was associated with inventory?

Very little is inventory.

This is simply us, again going back to my earlier comment, recognizing that the pricing environment has slid as the year has progressed and trying to get sort of that balance and that sweet spot between volume, share, and net pricing.

But in particular, we are seeing that to be a very difficult situation in sort of the Southern European markets.

Okay, thanks very much.

Patrick Archambault, Goldman Sachs.

Good morning.

I actually just wanted to piggyback a little bit there on Matt's question.

Maybe on the aggregate level, it looks like at the high end of your guidance if profitability on the Automotive side were to be fairly even with last year, again at the high end of your guidance, that would imply a pretty meaningful increase in margins year on year in the back half if I am correct.

And I just don't know if you want to take this question either sort of in aggregate volume price cost or if it's easier to take it by region but I am just trying to get a better sense of what would be driving that year on year improvement?

Patrick, that's a very good observation.

If you go back and look at the last couple of years, we clearly saw our profits and our margins sort of decline as the year progressed, second half in particular and I think it was pretty much sequential, if I remember correctly.

But when we look at this year and I think we might have touched on this a bit in the first-quarter call, we think that we're going to see a different situation this year.

We've got the added capacity coming on stream in North America.

We've got more capacity that we've just launched in China and Thailand and the weight of our product launches this year and the impacts of those launches is really a second-half phenomenon compared with a first-half phenomenon.

Last year we also were hit by commodities.

In the second half of the year that just became a bigger headwind as the year progressed.

This year it's much more benign so I think we feel much more comfortable about the favorable impact all those factors will have on our second half relative to what we saw last year.

So your observation is correct.

We do expect compared to last year to see the business hold up better in the second half.

Okay, that's helpful.

Then one, I think you mentioned in the update on the quality that the outlook was still mixed.

Can you just maybe just bring us up to speed how the efforts are progressing there, what kind of cost implications are there if any material ones to think about?

Yes, the thing that is kind of interesting about that is on the TGW side, which is what -- things gone wrong -- which is what that metric is really about, we are seeing really strong improvement in South America and Europe and in Asia Pacific Africa.

We are going to be probably about flat in North America and that is because of the fact that the issues that we have had on MyFord Touch and MyLincoln Touch along with some of the powertrain issues associated with the dual clutch transmission that's in the Fiesta and the Focus, we put software upgrades and fixes in on those, which really didn't have much effect until we got into the latter part of the model year.

We are seeing very positive results particularly from the software upgrades on the entertainment and connectivity systems that I just referenced.

We are seeing big improvement in customer satisfaction and the consumers are telling us that they really appreciate the changes that we have given them.

The interesting thing is when you go to the cost side, however, this isn't translating into cost, whether cost per unit or warranty spend.

We're actually seeing good news on costs so while the TGW is going to be about flat in North America for the total business on the cost side including North America, we expect to see good news on warranty.

And then by next year these fixes that you have put in place you would expect to see a pretty good improvement there, I take it?

Yes.

All right, great.

Thank you very much.

Rod Lache, Deutsche Bank.

Good morning, everyone.

I guess just first question is just on this plan for fixing Europe, like you alluded to, unlike North America, you can't really count on a significant improving external environment.

Do you think that there is an opportunity to reduce your European cost structure by $1 billion over time to get to break even kind of on your own accord?

It seems like that would be a pretty big drop.

You've got about 35,000 hourly people, maybe $2 billion of hourly cost and $1.2 billion of D&A.

It would be a pretty big percentage versus that.

Or do you really have to say that only part of this can be accommodated through costs and really you have to count on improving pricing and volume from the new products?

It's a good question.

It goes back a little bit to what we were talking about earlier.

I think when you look at any significant restructuring that you have to do in the automotive business, you generally if you are facing that type of challenge, you are going to have to hit all parts of the business in order to set it right and give it a firmer foundation for profitable growth in the years ahead.

That is what we are going to have to do in the case of Europe.

Will we have to improve the break even from the cost side of the business?

Yes, of course we are going to have to do that because our expectations in terms of what the industry is likely to generate in terms of overall volume is not as robust as what we might have thought a year or two ago.

We also are seeing much more competition coming into Europe in terms of what the Koreans are able to do now because of the free-trade agreements, so that aspect of the external environment has brought in a new element of competition as well.

So we are going to have to be leaner in terms of our costs but we really strongly believe and we have got the experience of this in North America.

If we had just gone after costs in North America, we would not have been talking about $2 billion of profits in the second quarter.

It has got to be a revenue story, which is not only brand but also product, and it's going to have to be a cost story.

We intend to work both aspects of the business to put the business right going forward.

Rod, I would just like to add a little bit to what Bob said on the product side too, because clearly with our ONE Ford plan and our complete family now of vehicles especially in the B, the C, the CD size, the compact pickup and the commercial vans that we have a lineup that we have never had before and this is going to allow us to dramatically improve our market coverage in Europe also.

And as we have talked about also the quality of the brand continues to improve not only with the products but also with the success of building the strong business that Ford is having.

So clearly we are going to work the cost structure just like we did -- we have around the world, but I think the other part of it is that we would want to continue to work -- we see great opportunity to use our ONE Ford plan to work the revenue side also.

And even on the cost side, Rod, like we talked about, the fact that we are moving to our global platforms and the efficiency that we get for developing them and plus the B, the C, the CD size, the compact pickup and the commercial vans, that's going to be accounting for nearly 80% of our volume worldwide all made -- assembly in different locations around the world so we are going to get an efficiency as we continue to implement that plan also.

Okay, can you comment on the -- there seemed to have been a pretty big variance between production and wholesales in North America in the first half.

Is that something that reverses?

Are you sitting on an inordinately higher level of inventory kind of within the Company?

And then just some comments on commodity, inflation and structural costs.

Earlier in the year you talked about flat commodities.

It looks like it's up so far but a lot of spot prices are down.

And on structural costs, the inflation rate of only $600 million, it looks like it's running quite a bit below that $2 billion or less than $2 billion number that you've thrown out there.

Any additional color on those items?

Make sure I don't forget so remind if I do.

I think you've got three questions there and they're all good.

In terms of the first question as you all know, production versus wholesales are always sort of flip flopping back and forth between each other as you go from quarter to quarter.

I think it was affected in the second quarter because of the launches that we had in North America, so that's what I believe to be the biggest factor there.

There is nothing funny about sort of stock levels.

We did have a little bit higher levels of inventory as we were working through the launch and you saw that in our working capital effect but that was just sort of a one-time factor that we're already through so I think that's probably what's happening there.

In terms of commodity costs, we're up I think through the first half.

Our expectation is as we go forward because as you know commodity prices have been declining as the year has progressed so a good portion of this increase you are seeing in the first half is actually hedging effects.

And what we think is going to happen in the second half is we will start to benefit more fully from the lower commodity costs on the portion of our buy that isn't hedged.

And if you remember, we had the big hit in commodity hedging last year in the second half which will shield us as we look at the second half of this year on a year-over-year basis.

So we still think for the full year it's not going to have a material impact on our business including the hedging effects.

And in terms of -- were you asking about structural costs is the third question, I think?

In terms of structural costs as we look at the full year, we still feel comfortable with our guidance of below $2 billion.

We do think that there will be an increase in structural costs as we move into the second half of the year because of the product launches and the capacity increases, the impact that has on both manufacturing and advertising and sales promotion.

So we think we will see more coming on stream as the year progresses but pretty much in line with that $2 billion or less number.

Chris Ceraso, Credit Suisse.

Thank you, good morning.

A couple of things, maybe first a big picture question.

We have heard from some of the industrial and consumer-related companies that we talk to that they are already starting to see some tentativeness or paralysis on behalf of their customers because of the election or the fiscal cliff.

Are you seeing any of that currently?

Do you think that's a risk in second half maybe even just from your commercial fleet customers?

Can you talk about that?

Sure, I think that from our perspective and we try to point that out with our guidance that we clearly are going to be higher than what we thought for the US based on the continuing expansion of the GDP but at that lower end of the 14.5 million because we are seeing a little bit of softness.

But overall, even though it's a slower recovery than we've had from past recessions, we are seeing that expansion of around 2% to 2.5%.

Also, Chris, the age of the vehicles is really playing into this.

I think the average age is over 10 now maybe even close to 11 years old.

And the vehicles we have now you can make an economic argument to economically replace your older vehicles with the value that you get from the increase in fuel economy and reliability and less maintenance.

So we are starting to -- that continues to play in there that we are seeing more and more of the consumers want to move up to the new vehicles.

And from the fleet customers, good, consistent, steady demand and again, we probably have the best product line now for them also, so good, steady demand there also.

Okay, any update on the pension situation on the buyouts, the take rates, what you're expecting there?

Have you considered maybe offering an annuity option like some other pension sponsors have?

Yes, actually not too much more to say on our lump-sum initiative.

We have just sent out the initial offers or the individual information to the first group of employees or retirees, rather, that are eligible for the lump-sum, so we don't know yet what their reaction is going to be.

Just kicking that off and we will probably have more to say as we get into the latter part of the year.

In terms of annuitization, it is something that we had looked at as we were developing all of the strategies around our pension de-risking.

It isn't something that we thought at the time that we wanted to pursue.

Still not something that is part of our plan, but I would not necessarily take it off the table.

But not something that we are -- that is currently in our thinking.

Okay, and then just last quick one on the bridge that you provided for North America, slide 13, you showed that volume and mix was a negative.

Your production was up about 27,000 units year over year, about equal between cars and trucks, so that should be a plus.

Is it a minus because of the difference wholesales and production, which you mentioned briefly on the call, or was it a function of mix within the mix?

In other words a year ago maybe you had particularly strong cars and trucks and you couldn't match that this year?

It was the production versus wholesales.

As you know, our profits are based on wholesale.

Right, thank you.

Itay Michaeli, Citigroup.

Thank you, good morning.

Just two quick questions on Europe.

One, can you talk, Bob, about the cadence of the results throughout the quarter?

What was June like proportionally with the other two months?

Then why was the contribution cost $182 million negative in the quarter, I thought that maybe would have come in a bit better just given the volume in the quarter.

Yes, I don't think there was anything of note in the month.

Good Lord, our quarters have so much volatility when you look at a month by month, my head hurts.

So I don't think there's anything that I would have read from looking at the individual month.

When you look at the contribution costs, they were up $180 million or so and it was kind of split into three relatively equal segments.

We had about $60 million of commodities including hedging and kind of talked about that already.

We had $40 million or so from material excluding commodities and a majority of that was related to product including some Stage 5 emissions cost increases on our commercial vehicles.

So that will be -- you have to kind of think about that also in relationship to what we will see coming down the stream in terms of product pricing to the extent that we can recover any of that type of increase.

Then finally, we had about $80 million of increase which was largely in warranty and that was the non-repeat of a good news item that we had a year ago on some warranty accrual adjustments.

That's helpful.

Just lastly, I think you mentioned that the tax rate for 2012 -- I may have missed it earlier -- so can you share that?

Also do you expect Asia Pac to be profitable in the second half of the year?

Yes, we think the operating effective tax rate will be for the full year about the same as it was last year and that was about 31% or so if I remember correctly.

31%, 32% -- 32%.

So that's what we are seeing at the moment for the full year.

In terms of the second half for Asia-Pacific Africa, we think it will be better, substantially better than it was in the first half, but we are not making any characterizations about any absolutes.

Great, thanks so much, guys.

Ryan Brinkman, JPMorgan.

Good morning, thanks for taking my question.

In regards to North America, where you guided to 8% to 10% margins over the long run, I'm just wondering if you think that could be potentially conservative given the margins you've been able to achieve since establishing that guidance range?

In particular, the margins you have been able to achieve just in the last two quarters and at this point in the cycle.

I'm thinking as we ramp from maybe 14 million SAAR to a more normal perhaps 16 million, that ought to provide you with some ability to leverage fixed costs, higher Tier 2 wage workers, et cetera.

Am I thinking about that wrong?

First of all, welcome.

I don't think I have had a chance to talk to you before, so welcome to the group here.

I think in terms of margins the way I think about it, step back from us or North America but if you look at any of the guys that are kind of generating the best in the business on margins, sort of 8%, 9%, 10%, that's the level that you seem to be able to achieve on a sustainable basis.

You will see quarters where you can do maybe a little bit better but that seems to be a level that is just really, really good.

It's very strong.

We have demonstrated the ability so far this year to do that through the first half.

I think the full year will look very, very strong and within the range that you are talking about certainly.

As we go forward, what you have to think about is what's going to happen as we go up to 16 million units or more.

You're going to see more costs come in because we are going to have to put more capacity in.

We are continuing to invest in the business so that will affect other parts of our cost structure as well.

You will undoubtedly see competitive activity that will affect our ability to go above and beyond sort of levels that you're talking about.

I think that's sort of some of the natural breaks, if you will, that affect a company once it starts to reach that level of performance.

We are not capping it ourselves.

Trust me, we're going to go for as much as we can get but I think that's going to be a factor.

And then for us as well in North America, as you know, our expectation is that full-sized pickups will be smaller as a percent of the total industry going forward and that is a very profitable segment of the industry, so we will probably have a bit of a drag on our business in terms of sort of segmentation mix.

But if we can go for more, Ryan, we are going.

Good.

Good luck to you.

On the lower CapEx guidance, does this relate to Asia-Pacific?

Is it more global in nature?

And will you characterize it as scaling back of investment or simply a matter of doing more with less?

The latter.

We have not -- when we've -- we obviously understand what is behind the factors that are giving us the ability to do more with less.

It's not because we have cut anything or delayed anything.

It's because we generated more efficiencies as we try to do more with less and that's what we are seeing so far this year.

Okay, last question, we talked about the fact that the issues you are facing in Europe are largely structural.

How would you characterize the issues that you're facing in South America in terms of structural versus cyclical?

Do you think over time you can return to the type of profitability in that market which you enjoyed even just a year ago?

I think South America is a completely different story and it's not one single thing.

When we look at the business and the pressures that we are under there, it's probably four different things.

One is -- and we talked about this in the first quarter -- it is a region.

It's a protected region and if you are inside the walls of that region you are able to in general in years past anyway make a really good return and a good profit and so we are seeing more and more players want to participate in that.

So many of them have announced plans to come into the marketplace to add capacity and players inside the walls of South America have also indicated plans to increase capacity.

So there is more pressure coming from added capacity and added competition.

The second thing that has happened is the governments have -- it's not one government.

The governments have thrown a few curveballs over the last six months or so generally in the areas of trade policy and access to foreign currency.

We have kind of set up our business such that we could take advantage of free trade agreements that were in place primarily between Argentina and Brazil and Argentina and Brazil and Mexico and those trade agreements have been challenged and to some extent at least temporarily suspended.

That has obviously had an adverse effect on our ability to compete along the lines that we had expected in terms of where we build vehicles and to supply those vehicles to the markets in which we were planning to sell them?

So that's not something we can respond to overnight, as you can imagine, because of the footprint that we have put down.

And then the third area is in currencies, we have seen weakening currencies in Brazil in particular and that has had a pretty dramatic impact on the business and given us some headwinds in terms of competing there.

Ryan, I might just add a little to your comment about the product development and the capital investment.

When we all put together the ONE Ford plan nearly six years ago, we knew the foundation would be based on continuously improving our cost structure and operating profitably at the changing model mix and different volumes around the world.

But the other main piece was to accelerate the development of the new products that people really do want and value and we made a brand promise and a commitment to our customers that with Ford you could be able to get a full family of best in class vehicles and we have even dimensioned that to them also.

So for the last six years, we have absolutely fully funded our product development plan to deliver that brand promise and even during the worst of times, we have never backed off on the investment in the future, which is a lifeline in this business.

And the piece that you see there by us cutting down a little bit on the capital investment for this year is another manifestation of our increasing the efficiency of developing and introducing these vehicles worldwide.

But just as a main tenet in our plan, you will never see us back off on the investment in the future.

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

(Operator Instructions).

Dee-Ann Durbin, the Associated Press.

Good morning.

Thanks for taking the call.

If you could just briefly talk about the Escape launch.

You had two recalls in two weeks and in some quarters that might be seen as a quality stumble.

I am just wondering how you view that launch within Ford?

Clearly it is a really important vehicle and a very important launch and the response first of all has been fantastic to the vehicle.

People absolutely love it, the functionality, the quality, the fuel efficiency, the safety features, and of course, the value.

So we are very pleased with the response it is getting.

On the recalls, as you know, when we found out that we had a defective part in the fuel line, we moved very, very decisively to take care of our customers and as you know, we are picking up the vehicles.

We are giving them loaners.

We're going to take care of fixing it and we're are going to do it very, very fast.

And we were very disappointed to find that defective part but clearly we are going to make it okay really, really quickly.

On the other issue associated with the pedal size, that was something we also found that we wanted to improve just to follow our standards.

So again, we have a fix in place and we are implementing that very aggressively, too.

But again, very important launch for us going forward.

And kind of a neat thing, too, about it is the fact that we are attracting new customers with that vehicle, because it is such a tremendous improvement and we are going to be -- turning them in around five days, too.

So I wouldn't characterize it at all as a more fundamental issue in the quality but we are absolutely going to keep moving decisively to make it great for the customers.

Okay, thank you very much.

Karl Henkel, Detroit News.

Good morning.

Bob, you had mentioned earlier about the European situation continuing for the foreseeable future.

But can you really make a long-term decision with the complete uncertainty and variety of variables right now surrounding the external environment economically?

Or do things kind of have to settle down before something that long-term can be made?

That's a good point.

We always have to have a base assumption.

There's always volatility in our business.

In fact there's a lot of volatility in our business, so we have to make a call in terms of sort of a baseline assumption and then as we develop our plans and we've done this for example in North America, you've got to build in enough of a cushion, if you will, in terms of the overall structure of the business that you establish revenue and cost and so forth that you are satisfied that you are able to be profitable even in an environment that may be less robust as your baseline assumption.

And that is certainly what we are going to do in the case of Europe.

So it is a good point but you've got to assume something and we will do that and we will make sure that we can have a good business even on the downside in terms of external assumptions.

Keith Naughton, Bloomberg.

Good morning.

Alan, do you need to close a plant in Europe?

As we discussed this morning, we think it really is a structural issue and not cyclical and so we are going to bring to bear all of the elements of the ONE Ford plan, the revenue side and the cost side.

So we have nothing to announce more today, but as we further develop the plan to return to profitable growth, we will include all the stakeholders.

Thank you.

Matthias Ruch, Financial Times.

Good morning.

Thanks for taking my question.

I also want to ask for the plants in Europe.

There are two plants in Germany and others in other countries.

Can you rule out that you think about closing a plant in Germany or is every option on the table?

I think that we need to -- we're going to have a very robust plan to return to serve the customers, our customers in Europe and have a strong business, too.

As we've talked about today, our ONE Ford plan is very proven in that respect because it includes both the revenue side by having the products people really do want and value but also having a cost structure that allows us to produce those vehicles with a reasonable return.

So we are going to work all those elements of the plan just like we have with Ford all around the world.

And our ONE Ford plan really gives us some competitive advantage because of our global products, our common designs, and our common manufacturing processes and being able to make the vehicles in different locations simultaneously.

So we will have more later as we develop the details of that plan with all the stakeholders.

As far as I know, you are just using like 65% of your capacities, production capacities in Europe right now.

Do you think this will go on like that for next years or is it just let's say for a year or so and you are keeping the plants open because you think that you will use a higher percentage of your capacities pretty soon?

Well I think, first of all, you can calculate utilization in lots of different ways but to your point, absolutely we have overcapacity now.

And I think that the other thing to your point is that we are assuming that this is a structural issue, not a cyclical issue.

It's not going to come back fast and we are going to be saved by volume because we think it really is a structural issue so it needs to be addressed.

I think you are seeing the same viewpoint from most of the automotive companies and so as we go forward, as we pointed out, we will continue to match our production to the real demand, which means we're bringing the production down because the demand is not there, keep the dealer stocks in line, protect the value of the brand and the residual values.

And then again use the revenue potential of the ONE Ford plan with our global products to bring more market segments with terrific vehicles.

And also we will continue to work our fundamental cost structure, as we pointed out.

And as we develop the details of that, we are going to share with everybody just like we did in North America.

Okay, thank very much.

Nathan Bomey, Detroit Free Press.

Alan, I just was wondering -- we hear a lot from the unions in Europe.

They don't really seem to be willing to move too quickly and I'm just wondering do you think you need to join the chorus of people who are kind of putting more pressure on the unions and labor councils in Europe?

Sergio is out there putting a lot of pressure on them.

Do you need to kind of join that chorus and do you plan to I guess?

Well, I think that part of the ONE Ford plan that has worked so well for us is that we include all the stakeholders, including the unions.

And as you know, watching the transformation of North America, what everybody really cares about is creating a viable, exciting, profitably growing company because that is the only way that we can continue to provide growth and great jobs and great careers.

And the worst thing that any business can do is to continue to lose money and go out of business.

So what we have found is if we include everybody, we share what the realities are, we develop a plan together to deal with the current reality, but also with an eye for creating a long-term viably growing company, that is the best for everybody.

And we have gotten a tremendous response from all the stakeholders involved when we approach it that way.

So we are going to do the very same thing, we will continue to do the very same thing in Europe and include everybody in the solution.

Mike Ramsey, The Wall Street Journal.

Good morning.

So I had two questions.

One, Alan, you mentioned this and you've talked about it a lot with leveraging the ONE Ford plan and the ability to build on common platforms.

After these new vehicles launch, the Fusion and the Escape, which now are integrated with Europe, can you now build and export to Europe a Mondeo in Mexico or in Flat Rock or an Escape in Louisville and send it to Europe, giving you the opportunity that if you had to close a plant in Europe that you can do that without any issue?

That's question one.

Question two is when do you stop -- when do revenues and sales in China start to overcome the expenses?

Do you have a sense of when that will start to not be a loss and will switch to the other side?

Sure.

On your first question, real good questions.

On your first question, Mike, clearly one real advantage of the ONE Ford plan is our ability to serve the different markets around the world with common platforms but also with the top hats that people really do want.

So technically absolutely, we can move the vehicles around.

But also we have to take into account what the transportation costs are and the freight and the other things that go with doing that.

We will continue to look at that, but the most important thing with respect to your question about Europe is that we continue to work on the fundamental cost structure for our operations there along with the revenue side.

On Asia Pacific, Mike, what's really neat about the Asia-Pacific plan of course is that we are putting in this capacity but also we're bringing in the new vehicles and we are timing it pretty close to the market.

You can see that in the financial numbers that even with the large investment we are making, we are staying very close to profitability.

And so I think it will go right with the vehicles and the production capability.

We are in the midst of bringing on nine new plants.

We are going to be going from five vehicles in China for example to 15 vehicles, where we are going to be going from maybe 30% market coverage up to nearly 65% market coverage.

So you can just see over the next few years and like the mid-decade guidance that we provided that as the production comes on and our ONE Ford vehicles are implemented, then the profitability and the contribution to the Company will just follow that over this next few years.

So we are very pleased with the progress we're making to date and it's going to be a very, very important contributor to Ford's growth plan going forward.

All right, thanks very much.

Katina, we have time for one more question.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys.

I'll sneak in two quick questions here.

First, on North America pricing, it's been positive for a while now but only slightly so.

Given your focus on keeping inventory lean and all these new product launches, I would have expected it to be a little bit better.

Is it the kind of thing that we are sort of going to see accelerate as we go through the second half of this year and we see this all new Fusion launch on top of really the first product in the product renaissance, the old Fusion and we will sort of get this redoubling of good product or all new product on top of the really good product and we will see some real pricing momentum in the second half of this year and maybe even more so going forward?

I'm just trying to understand why pricing hasn't been a little better given your lean inventory and very good product launches.

I am really glad you asked that question because I wanted to make this point.

When you look at slide 13 and you look at that net pricing of $100 million year-over-year, you look at that and your reaction could be exactly what you described.

But I think what you have to think about is a year ago, think about what the situation was like a North America and the US.

You had the Japanese that really had incredibly constrained supply.

The market was really able to leverage and use its pricing muscles, if you will, and to me what it says -- and we haven't had a lot of new product in the first half in North America.

And you know a lot of the pricing comes with new product.

So to me the message is we have been able to hold on to that pricing which could've been shorter term in nature because the Japanese clearly are back in the marketplace with adequate supplies of stock.

We have held on to that and added pricing.

And when I think about the second half of the year, we've got quite a bit of new product coming in play and I think that you will see us able to generate additional and incremental pricing compared to what we saw in the first half.

Having said that, I think, John, we have to remember that over the last number of years as we restructured North America and worked on the brand and improved the product, we've seen a dramatic closing of the discount versus our key competitors that we had for the Ford brand over that period of time.

So that one element of pricing recovery probably isn't there to the extent that it was over the past five, six years.

Okay, that's incredibly helpful.

Then just a second question on cash levels.

It seems like you are bouncing around between $9 billion and $10 billion and that seems to be your net cash target.

A lot of the free cash flow it looks like you will generate the second half of the year is going to get sopped up by your pension contributions.

Just wondering if that's correct and when we will see potentially more return of value to shareholders.

Do we need to get through these contributions to the pension plan, continue to generate free cash flow and then see this increased in the first half of next year?

Or could we see this more specifically in the second half of this year?

Yes, another good question.

We don't specifically have a target for net cash, if you will.

But in terms of capital allocation, we clearly have a lot of mouths to feed and we've got a pretty sophisticated and I think a well thought through capital allocation strategy and it touches on all the areas that you've talked about.

So what we try to do is to balance business needs and business opportunities with those of all the various stakeholders and make sure that we think we've got the right balance.

That is something that we update and look at regularly and we will continue to do that.

And in terms of dividends, in terms of buybacks and that sort of thing, nothing to announce differently today versus where we are, but it's certainly something that we are looking at constantly and if we have something new to say, we will share that with you.

But all else equal, Bob, that $3.5 billion that's going to pension plan is a pretty good sort of full stop on putting money into the pension plan because I mean it is a big contribution.

We shouldn't expect more going into the pension plan after that in the near term.

Is that correct?

Well, we're going to have substantial pension contributions over the period because we are substantially underfunded and most of what you will see over the coming years is mandatory in nature in terms of what we have to do.

So we will continue to have a pretty heavy requirement for pension contributions over the next several years.

Now we've got in the $3.5 billion or so that you just talked about, we've got $2 billion of voluntary contributions this year and that was part of our strategy, long-term strategy around pension derisking and we're not saying anything about that aspect of our contributions going forward.

But in total, they will be significant in the years ahead because we've got to close that gap that we had at the end of last year, which if I remember correctly was an underfunded status in total of about $15 billion.

John, as you know, it's just so good for the business to remove that volatility off the balance sheet so we can really focus on the automobiles through the cycle.

Absolutely.

Thank you very much, guys.

Okay, that concludes today's presentation.

Thanks to everyone for joining us.

We are done.

Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference.

This concludes the presentation.

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