Ford Motor Company
Q3 2008 Earnings Call Transcript

Published: 7 Nov 2008

[Operator:]

Good day ladies and gentlemen and welcome to the Ford Motor Company third quarter earnings conference call. My name is Katina and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to our host for today’s call, Miss Lillian Etzkorn, Director of Investor Relations. Please proceed.

[Lillian Etzkorn:]

Thank you Katina and good morning ladies and gentlemen. Welcome to all of you who are joining us either by phone or web cast. On behalf of the entire Ford management team, I would like to thank you for spending time with us this morning. With me this morning are Alan Mulally, President and CEO, and Lewis Booth, Chief Financial Officer. Also in the room are Peter Daniel, Senior Vice President and Controller; Neil Schloss, Vice President and Treasurer; Mark Hoffman, Director of Accounting; and K. R. Kent, Ford Credit, CFO. Before we begin, I would like to review a couple of quick items. Copies of this morning’s earnings release and the slides that we will be using today have been posted on Ford’s Investor and Media web site for your reference. The financial results discussed herein are presented on a preliminary basis. Final data will be included in our Form 10-Q for the third quarter. Additionally the financial results presented here are on a GAAP basis, and in some cases on a non-GAAP basis. The non-GAAP financial measures discussed in this call are reconciled to their GAAP equivalent as part of the appendix to the slide deck. Finally, today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance. Actual results could differ materially from those suggested by our comments here. Additional information about the factors that could affect future results, are summarized at the end of this presentation. These risk factors are also detailed in our SEC filings, including our annual, quarterly, and current reports to the SEC. With that, I would like to turn the presentation over to Alan Mulally, Ford’s President and CEO.

[Alan Mulally:]

Good morning. As you all know, the global auto industry is facing unprecedented challenges. The turbulence in the worldwide economy continues to undermine consumer confidence and impact our business, as do the tight credit markets. In the U.S., October marked the lowest industry sales rate in 25 years. Vehicle demand is down substantially in Europe and in Asia as well. While Ford has been dramatically by the difficult business environment, we remain absolutely convinced that we have the right plan and are taking the right actions to weather this difficult period and emerge as a lean, globally-integrated company poised for long-term, profitable growth. In these challenging times our plan is more important than ever

[Lewis Booth:]

Let’s move on to Slide 8, which provides more information on our third quarter results. Start to your lower left, our net loss for the third quarter was $129.0 million. Our net loss included minority interests in profitable affiliates. This net loss also included $462.0 million of tax benefits, more than explained by an adjustment for accounting standard FAS 109 which relates to our deferred-tax asset evaluation allowance which may at least [inaudible] with us in the fourth quarter. Adjusting for these items leaves a third quarter pre-tax loss of $540.0 million. These results include favorable pre-tax special items of over $2.2 billion and we will cover these on the next two slides. Excluding these special items, we recorded a third quarter pre-tax operating loss of over $2.7 billion. Most of the following slides will focus on these pre-tax operating results. Now on to Slide 9, which covers special items in the third quarter. We recorded a charge of $197.0 million, largely related to hourly and salaried personnel reduction programs in the U.S. Largely offsetting these changes was a $320.0 million gain due to reduction in the number of personnel in our job security benefits reserve, primarily due to changes in the ACH plan. We also incurred $94.0 million of charges primarily related to personnel reduction programs in Europe, Australia, and Volvo. Finally, the $2.3 billion improvement near the bottom of the slide primarily represents the curtailment gain related to the VEBA agreement with the UAW. We will provide more information on the VEBA agreement on the next slide. On Slide 10, during the third quarter, related to our UAW retiree health care settlement agreement, we received court approval and successfully concluded our pre-clearance review of the accounting treatment with the SEC. As a result, we recognized a curtailment gain in excess of $2.0 billion. This was included as a special item on the prior slide. This, and other efficiencies, resulted in ongoing health care cost savings of about $2.0 billion, about the same as our earlier estimate. About half of these savings will be recognized this year, with all of the savings being recognized in 2009. The annual ongoing net cash flow benefit is about $1.0 billion, unchanged from our earlier estimate. The net cash savings include health care savings of $1.6 billion, offset by interest on the debt on that will be used to settle the health care obligation. Between the third quarter effective date and year-end 2009 implementation date, all income and expense related to UAW retiree health care will be defined as a special item. This reflects Ford’s obligations to pay into the new VEBA are capped, as provided in the settlement agreement and that all related amounts will be eliminated on an ongoing basis after 2009. Moving to Slide 11, I would like to talk about the status of our ACH divestiture actions. ACH was formed in October 2005 with 17 plants, two of which were subsequently transferred to Ford. It had two missions

[Alan Mulally:]

Going forward let’s turn to Slide 36. We believe the downturn in industry volume will be now broader, deeper, and longer than previously expected. Industry volumes next year are expected to decline compared with 2008 levels. Some recovery is expected in 2010. Ford’s overall market share should be about the same as 2008 with our new products. We expect the U.S. market to continue to trend toward smaller, more fuel-efficient vehicles going forward. Our suppliers and dealers are under increasing pressure, the financial markets remain volatile but are projected to stabilize and gradually improve over the next year, commodity prices are expected to remain below recent peaks but likely also will continue to remain volatile, the U.S. dollar has strengthened against most currencies and given the overall uncertainty in the economic environment, we do not plan to provide additional guidance at this time. Slide 37 summarizes the key aspects of our plan. These have not changed. We are more focused that ever on implementing our transformation plan to respond to the significant challenges presented by the continuing global economic downturn. We are pleased that we went to the capital markets at the right time to obtain liquidity to finance our plan and that we sold non-core brands to raise further capital and allow further focus of our resources. I am especially pleased with how the team is working together to create One Ford and leverage our global resources. Despite the present turbulence in the worldwide economies, I continue to believe that Ford is well positioned to take advantage of our scale and global product strengths. With a balanced portfolio of small, medium, and large cars, utilities, and trucks, and a sharp focus on the Ford blue oval brand across the globe, we can effectively operate through the current downturn. Going forward, this balance portfolio will allow the flexibility to adapt more easily the changes in our environment and begin to grow profitably as the global economy rebounds. As shown on Slide 38, despite the recent changes in the global market place, our plan to invest in new smaller, fuel-efficient vehicles in a more balanced global-product portfolio remains in place. In combination with the business improvements achieved recently we expect the One Ford product development vision and process to enable us to deliver a range of highly acclaimed smaller vehicles in what we call the global segments, that is B, C, CD, and commercial van segments beginning in the middle of next year. By 2010 about 40% of our entries in North America and these segments will be shared with Ford of Europe. Platforms and top hats, with 100% of the lineup in these segments shared with Ford of Europe by 2013. This compares with nothing in common today. And every new product we introduce, not only those in the global segments but also those that will be regionally offers only, will provide fuel economy that will be best, or among the best, against facing competition. Our new products will be assembled in plants featuring lean manufacturing techniques and in nearly all facilities flexible body shops will make them competitive with the best in the business. And many of our power trains will be built in plants that can flex, among the I4, V6, V8, or diesel engines. Importantly, we expect to have our vehicle assembly capacity matched to demand. As we make these changes we intend to continue fixing the fundamentals of the business, including a significant reduction in structural costs next year. We also will continue ongoing consolidation of our dealer network. As shown here on Slide 39, to support new product investments and offset continued industry weakness, Ford is implementing a series of actions that are expected to improve automotive cash by a total of $14.0 billion to $17.0 billion through 2010. The actions include

[Lillian Etzkorn:]

We are going to start the Q&A session now. We have about 45 minutes for the Q&A. We will begin with questions from the investment community and then take questions from the media, who are also on the call. In order to allow as many questions as possible within our time frame, I ask that you keep your questions brief so that we don’t have to move callers along after a couple of minutes.

[Operator:]

(Operator Instructions) Your first question comes from John Murphy - Merrill Lynch.

[John Murphy:]

I first wanted to ask about working capital. There are a lot of questions around this, but specifically on the $3.6 billion use in the quarter, that was much higher than we were expecting. It sounds like it was because of a payables issue. Wouldn’t that have been offset by receivables being reduced so that there would have been a net impact that would have been smaller? And is this an ongoing issue or is this really just a step function down and we’re not going to see a big burn again from working capital in the fourth quarter, which is traditionally a little bit stronger?

[Lewis Booth:]

Let me answer the payables piece of the question. They did come down significantly because of a lot of production and we do expect some further reductions in the fourth quarter because of the lower production in the fourth quarter around the world. We would expect to see that begin to flatten out as we look forward to 2009 as production begins to settle, and perhaps grow it towards the backend of the year as we begin to see a very modest recovery.

[K. R. Kent:]

On the receivables, generally the receivables are paid off by the credit company really short term. It’s like two and a half days or so that we put them on to our books and then it would be wholesaled out to the dealers. And payables are a much longer term.

[John Murphy:]

So we should assume there would potentially be another hit in the fourth quarter and then we’re flat. That step function has changed going into next year.

[Lewis Booth:]

There will be some in the fourth quarter, yes.

[John Murphy:]

One thing that we struggle with in looking at the company is trying to understand man capacity, install capacity, and capacity utilization and you didn’t touch on that in this quarter. And it’s clearly a big issue for the company going forward as far as right sizing. Can you give us an update on where you stand on capacity actions and highlight a little bit the delta between your structural capacity and your man capacity and how cost savings might develop as you cut capacity going forward.

[Lewis Booth:]

We’re not going to give you specific numbers today. In the very near term we’re going to have some down production weeks, particularly in the U.S. In the fourth quarter as we continue to lower production to make sure we don’t build stocks. We did that in the third quarter. What we really try to do is make sure we keep production in balance with demand because we don’t want to build dealer stocks in this period. Longer term it is very much going to depend on what happens to the economic outlook in 2009 around the world.

[Alan Mulally:]

And I might just add that we continue with our plan to make the best economic decisions in the near term because clearly some of the plants, we’re not using to full utilization. But we have great contribution from the products that are there. And we are absolutely going to tie the changes that we make to increase the utilization and the efficiency to when it makes sense economically with our product cycle plan with the product strategy going forward. And we feel we really have improved that over the long term and so as we go forward we will share more of that with you with the cycle plan.

[John Murphy:]

No new capacity actions?

[Lewis Booth:]

No, with the buyouts we achieved in the third quarter we’ve got minimal surplus people in North America.

[John Murphy:]

Yesterday was the first day you were down in D.C. with sort of your cross-town rivals, talking about the current situation and the need potentially for some government support for the industry. I was just wondering what you think Ford might need, in general, in this potential help from the government, or is there the potential for Ford, given all the liquidity that you pulled in at the end of 2006, to get through this without any government support, contrary to maybe some other players in the industry?

[Alan Mulally:]

I will be glad to give you my perspective and you are always welcome to join us. I am very encouraged with the dialogue, with not only the U.S. government, but the governments around the world, as everybody is dealing with this economic slowdown and what it means to the economies worldwide. And with respect to the U.S. government, I think I would like to focus on three key things that we are working with. The first one is that during the 2007 Energy Independence and Security Act, that legislation last year, I was really proud of Ford, we stepped up to be part of that solution. And in addition to the conversation on fuel mileage and the commitments we made on that, we also had a very good conversation about the investment it takes to bring those fuel-efficient technologies to market. And then they also included in the legislation low government loans to help us support the implementation of that fuel-efficient technology. So that piece of it now has gone to the Department of Energy and yesterday they released the draft of their criteria for applying for those loans. We spend time talking about that and understanding that. And then of course we will bounce our product development and our enabling technology plan up against that and get our request in sooner rather than later. So I am very pleased with the development in that area. On another piece, associated with the government’s work to free up the credit, on Ford Credit’s side we have registered to sell up to $16.0 billion of asset-backed commercial paper through the U.S. government’s commercial paper facility and through October 31 we have utilized about 25% of that. So that’s a key part of freeing up liquidity for everybody but specifically for Ford Motor Credit to be able to make the loans that the customers really do need. And then maybe the last piece that I would highlight that we spent time on yesterday was additional funding under the guise more of a bridge loan. Clearly none of us know what the future really is going to turn out, but clearly the economy could degrade much faster and put the industry at risk. So one of the things we talked about was having a bridge loan capability that we could access if it deteriorated substantially. Now, having said all that, as we pointed out in the call, our basic plan is to enhance our cash position, continue to invest in the new products that people really do want, and continue on our restructuring. And we are not assuming that kind of help from the U.S. government because clearly we don’t know what that might be. But we are absolutely going to continue to dialogue with the U.S. government and others, that if things deteriorated substantially that we could do what it takes to keep this very important industry going for the United States and be part of the solution to turning the economy around.

[Operator:]

Your next question comes from Christopher Ceraso - Credit Suisse.

[Christopher Ceraso:]

What is your position, or willingness, to the extent that you do participate in additional bridge loans, in granting equity or warrants in the company?

[Alan Mulally:]

What we talked about yesterday is we would want to specify the specific funding mechanism but we were certainly open to talk about the different possibilities. But we’re not that much further than that right now. We will absolutely update you as we go forward.

[Christopher Ceraso:]

You did outline in the deck here today that equity-for-debt swaps would be part of your cash improvement plan. How much of that $6.0 billion to $8.0 billion do you think would come from that mechanism? It would be $2.0 billion or $3.0 billion. Can you explain that for us?

[Lewis Booth:]

It’s about $1.0 billion in the $6.0 billion to $8.0 billion of which we have executed roughly half and the cash starts coming back to us in 2009 and 2010 as a full-credit debt pays off.

[Christopher Ceraso:]

You mentioned that you are starting to recognize the benefit from the VEBA plan. Did that already happen in Q3? Was that included on Slide 15? And why are you calling this out as a special item then?

[Peter Daniel:]

We are calling it out as a special item because there is a large one-time curtailment gain that is not reflecting the ongoing performance. So that’s the reason that we’re calling it out as a special.

[Christopher Ceraso:]

Is it the gain that you’re going to call out? Maybe I misinterpreted it. It sounded like on an ongoing basis you were going to call out the cost savings associated with this plan as a special item.

[Peter Daniel:]

Going forward until we fully implement it at the end of 2009 we are going to call changes as special because effectively we’ve locked out the obligation. So there will be ups and downs and we’re going to call them all as special because we don’t have any ongoing obligation.

[Christopher Ceraso:]

And on Slide 15 you showed savings from pension OPEB for the third quarter was $400.0 million. Did that include some of the effective of VEBA?

[Neil Schloss:]

Yes, a little bit.

[Christopher Ceraso:]

It was not called out or did you call that out?

[Peter Daniel:]

Up until August 29 where we had the agreement ratified by the courts, up until that point it was part of normal. Past August 29 that we’ve treated everything as a special.

[Christopher Ceraso:]

It looks like Visteon may run out of money at some point in the not too distant future. What is Ford’s position with regard to further financial assistance to help them restructure?

[Lewis Booth:]

We can’t comment on that.

[Operator:]

Your next question comes from Himanshu Patel - JP Morgan.

[Himanshu Patel:]

Could you comment on the earnings outlook for Latin America going forward?

[Lewis Booth:]

We are going through a very strong period at the moment. We do expect that to come off. We are seeing some industry beginning to downturn. We are also seeing currency moving against the dollar reported earnings in Latin America. So we are expecting to see them come off what has been an extraordinary strong performance.

[Himanshu Patel:]

And on that same line of thinking on Europe, the profits were down this quarter but it didn’t look like your volumes came off that much in Q3. Fourth quarter looks like industry volumes are slowing significantly. Is it reasonable to assume Ford Europe would still remain profitable next year, given the level of registration declines we are seeing in Europe?

[Lewis Booth:]

Based on our present assumptions for next year, it is reasonable to assume that Ford Europe will remain profitable next year. We are seeing, actually the Western Europe volume has come off a little. The biggest deterioration has been in some of the developing and Eastern Europe markets, particularly Russia and Turkey, for example.

[Himanshu Patel:]

And can you talk about in Europe what is the financing situation for consumers?

[Lewis Booth:]

I don’t think we have got a specific issue in Europe compared to here. It’s very tight worldwide.

[Himanshu Patel:]

Has there been any marked deterioration there in the last couple of months?

[Neil Schloss:]

Are you talking specifically like on consumers financing vehicles?

[Himanshu Patel:]

Yes.

[Neil Schloss:]

Ford Credit is still open for business so we have been doing our piece. We have seen some banks pull back a bit but it hasn’t been like it has been in the U.S.

[Himanshu Patel:]

And on Volvo, I just noticed in the appendix on [the slide deck] it looked like Volvo’s headcount sequentially was flat between June and September and I think you were talking about taking 6,000 heads out. What is the cadence of that headcount reduction at Volvo going forward?

[Peter Daniel:]

Within Sweden there is a very organized approach where you agree to the reductions that you are going to take and then you discuss specifically how you are going to achieve them. And that happens over a six-month period, consultations between the company and the authorities and then the company and the unions. So about 2,000 of those people will be out by the end of the year and the remaining 4,000 will be out in the first quarter.

[Lewis Booth:]

On the agency, it will probably be a little bit faster.

[Operator:]

Your next question comes from Rod Lache - Deutsche Bank Securities.

[Rod Lache:]

The $8.0 billion to $9.0 billion of operating cash improvement you’ve got on Slide 39, it looks like that’s cumulative. And it looks like you are taking your capex down by $1.0 billion to $2.0 billion versus where it had been running. I just want to make sure we understand that properly. Is the prospective cost reduction, the structural cost reduction that you are targeting, something like $6.0 billion to $8.0 billion cumulatively, like $3.0 billion to $4.0 billion a year?

[Peter Daniel:]

Also included in that $8.0 billion to $9.0 billion is some improvements in working capital. So the actual structural is a little bit lower than you are implying. Specific to capex, it will be about $2.0 billion in the period, about $1.0 billion in each year. We have done that without specifically affecting the product program. And one of the reasons that we’ve been working so hard on the structural costs is to make sure we continue to invest heavily in our new product program so that as things begin to improve we have got a fully competitive lineup around the world of both new product and fuel-efficient product within it.

[Alan Mulally:]

And we are really starting to see the benefit of the synergy of our global product development system, too, now, which is really helping us on that.

[Rod Lache:]

Is this working capital a big number? You are already experiencing an impact right now, I would imagine that that is something that is not permanent necessarily.

[Peter Daniel:]

It’s not a huge number.

[Rod Lache:]

If it’s below the $3.0 billion to $4.0 billion how does that break down between U.S. and it sounds like some of the actions you’re taking are international. Can you tell us what your North American structural costs are at this point and whether you are managing your structural costs to a specific SAR break-even point?

[Lewis Booth:]

We have the structural cost reductions agreed by each unit but we’re not going to share them with you.

[Rod Lache:]

Is there a SAR break-even point that you are trying to manage the U.S. or the North American business down to?

[Lewis Booth:]

Again, we’re not going to comment explicitly. We are managing to ensure that we achieve the minimum cash balances that we judge necessary to keep the business running and we have developed this list, in the next two years, the tough period that we see ahead of us, we have developed these lists of actions to ensure we’re in the range of the minimum we recognize. Of course, based on our assumptions.

[Alan Mulally:]

And just a little more color. Clearly what we have there on Slide 33 is the 13.7 for the year-end as a SAR and our guidance is that we believe that 2009 is clearly going to not be better, which means probably a little bit lower. And we’re not recovering until 2010, so you can see we’re trying to be conservative here going forward.

[Rod Lache:]

If the VEBA assets lose money between now and contributing it, do you have to true that up? And can you update us on what the status is of pension performances?

[Lewis Booth:]

In terms of the VEBA assets, we don’t have to true them up. And in terms of the pension performance, we will update that when we file the 10-K.

[Operator:]

Your next question comes from Brian Johnson - Barclays Capital.

[Brian Johnson:]

On the VEBA, are you pursuing and have you got an SEC agreement around the question settlement accounting FAS 106 paragraph 90, or negative plan amendment accounting 106 paragraph 55?

[Lewis Booth:]

We got an agreement from the SEC to do settlement accounting.

[Brian Johnson:]

So why the one-time wasn’t gain larger then, reflecting the full mark down of the OPEB?

[Lewis Booth:]

There are several elements to it. The first one is a curtailment gain. Then you have an actuarial gain which goes through our [inaudible] and that gets offset by any accumulated losses you might have. So it’s quite complicated accounting. There are various elements to it. The one-time you see now is essentially the curtailment gain.

[Brian Johnson:]

On the cash saves, is that cumulative, that is this cash will be saved by the end of 2009, or is this a run rate that you should be in by Q4 2009?

[Lewis Booth:]

This is a non-VEBA question, right?

[Brian Johnson:]

Yes.

[Lewis Booth:]

The cash saves we’re showing as cumulative through 2009 and through 2010.

[Brian Johnson:]

Any sense around the cadence by quarter?

[Lewis Booth:]

Yes, but we’re not going to share it.

[Brian Johnson:]

And on Ford Credit, what is the ROA or net income level they need to achieve to be comfortable with resuming the dividend slowup? I know it’s not based on profits, it’s based on shrinkage, but how are you thinking about managing their liquidity versus the needs of Ford auto?

[Peter Daniel:]

There are a couple of pieces that go with this. We’re going to make the cash payments to do the reduction in the receivable portfolio as it declines. And there are a couple of pieces that are driving the decline, including Jaguar Land Rover moving away, Mazda moving away, and then the industry decline as well. And we will balance the return of capital with our successful execution of the funding plan as well to make sure we continue to support Ford in the financing of the products.

[Operator:]

Your next question comes from Itay Michaeli – Citigroup.

[Itay Michaeli:]

On the $14.0 billion to $17.0 billion, can you quantify what part of the Ford Credit piece is the capital contributions and what the timing on that might be?

[Lewis Booth:]

It’s about $3.0 billion and it’s some in next year and some in the following year. And I think it’s about half-and-half.

[Itay Michaeli:]

This might be early, but as you think about potential bridge loans from the government, to what extent does the highly encumbered asset base from the revolver and term loan potentially pose a hurdle, or do you not see that as a real hurdle at this point?

[Neil Schloss:]

I think from the perspective of the revolver and the term loan, which did pledge most of the assets and I think as far as we know at this point, we haven’t had discussions specifically on what the government would want as support, or as Alan said earlier what tails come with it.

[Itay Michaeli:]

I notice you didn’t break down the payment timing differences separately from working capital on the slides. Were those negative as well? And should we expect that to also be an outflow in Q4 with production remaining sequentially flat?

[Lewis Booth:]

There will be some impact in the fourth quarter and in terms of the difference, it’s warranty and marketing. And it’s not a huge amount. The big piece out of that item was payables.

[Operator:]

Your next question comes from Douglas Carson - Banc of America.

[Douglas Carson:]

GMAC announced intentions to try to gain bank-holding status, which I think surprised a lot of people. I know the ownership structure is very different at Ford Motor Credit, but do you see any strategic advantages for such actions at Ford Credit? Is that something that you could potentially even consider? It would help the cost of capital a lot. Clearly there are advantages to wanting such status.

[Lewis Booth:]

The strategic advantage we see is having Ford Credit as an owned, captive financing company. That’s the strategic asset. Given that’s our view, we couldn’t apply for a bank holding company because of that ownership structure. So our structure is unchanged. We see Ford Credit as a key part of the way we do business.

[Douglas Carson:]

With the availability for credit down, across the market, and volumes slowing, a lot of dealers that I spoke to are challenged to get financing, not just at Ford but across the industry. Do you envision any specific help for those dealers? How does it feel out there when you are talking to your dealers?

[Neil Schloss:]

As far as wholesale financing goes, right now in the U.S. we are doing about 77% of our dealers. And the other 23% obviously have been done through other banks and other finance companies. And in Europe right now we are financing 98% of the dealers. So, so far, as we’ve been able to continue to fund ourselves, we have been very supportive of our dealers, from the funding aspects.

[Lewis Booth:]

And I can just close out the bank holding company question, I think you know we do have an application pending for industrial loan bank and obviously we would welcome that because that would put us on parity with some of our competitors who already have ILCs approved. And on financing, one of the reasons that we’re keeping our production very much in line with demand is we’re trying to control dealer stocks to help their financing burden.

[Operator:]

Your next question comes from Patrick Archambault - Goldman Sachs.

[Patrick Archambault:]

I wanted to follow up on the DOE loan program issue. I guess yesterday there was a summary sheet that came out. One of the things that was kind of new in there was they provided a base year for fuel economy improvements, right? It was previously unspecified and they said 2005. I guess the reaction that people seemed to have to that was just would this kind of constrain the number of programs that might qualify for this because I guess most of us thought they would make it as broad as possible just to help maximize the impact from a liquidity perspective. I just wanted to get your thoughts because that seems like kind of a high hurdle for 25% improvement.

[Alan Mulally:]

We were very pleased with that development because we could have chosen a later year, too. And so going back to 2005 we think is a positive thing to accelerate the maximum amount of technology. I think the other part that we just don’t know yet is how broad the interpretation will be of the guidelines and the breadth of the enabling technology and the plant conversions that we will be able to apply. And we just don’t know that yet until we get into the process.

[Patrick Archambault:]

Do you have a general sense if, on that definition, how much of your U.S. launches that you have coming in the foreseeable future might just immediately qualify and meet that 25% increase?

[Alan Mulally:]

We do not but we are studying that now. Now that we have the guidelines. We just got them yesterday. We will let you know sooner rather than later because another neat thing about the plan is that they, from our understanding, they want to move decisively and we think there’s a chance of even being able to come to some conclusions as early as the fourth quarter. So we are going to move very aggressively to comply.

[Patrick Archambault:]

You mean make decisions about disbursements by the fourth quarter?

[Alan Mulally:]

Yes. From the conversation we have had I think what they’re going to do is maybe do a bi-quarter and they are shooting to have it done as early as the fourth quarter, which is terrific.

[Patrick Archambault:]

It sounded like from the language as well they were open to kind of pre-funding a number of programs, right?

[Alan Mulally:]

You bet. Again, I think it’s a real positive development because they are really trying to meet the intent of the legislation and that is to accelerate the implementation and bring to the market the fuel-efficient vehicles we all want, so I think they’re really being responsive.

[Operator:]

Your next question comes from Bryce Hoffman – The Detroit News.

[Bryce Hoffman:]

Alan and Lewis, you talked about being on track or even a little bit ahead of track on the $5.0 billion in cost reductions. But the question is, is $5.0 billion still enough? That was based on a whole different set of assumptions, wasn’t it?

[Alan Mulally:]

Absolutely is the answer, because when we set that objection, the world has really changed since then, especially the U.S. economy deterioration. And the North American team have done a fabulous job at working their fundamental structural costs and exceeding their original targets during the toughest of times. Now clearly the big message today is that we, with the economy further degrading, that we are going to get ahead of it again and take additional action to match the production to the real demand and continue to improve our productivity. And so it’s never over and these are tough actions but this is the appropriate thing to do and we’re going to do it decisively. So we’re going to keep improving.

[Lewis Booth:]

Just for clarity, the $5.0 billion was through the end of 2008. So we’re on track to achieve that and obviously we have a lot more to do going forward.

[Bryce Hoffman:]

One other point of clarification. Did I understand you correctly that you have already sold some asset-backed securities through the government’s bailout program?

[Alan Mulally:]

Yes, about $4.0 billion. Another great program by the U.S. government to get this credit flowing again for all of us.

[Operator:]

Your next question comes from Jeff Bennett - Dow Jones Newswires.

[Jeff Bennett:]

Alan, on non-core assets that you continue to look to sell those. What would you now classify as a non-core asset and also could you explain your stance regarding Volvo now, just based on the deterioration that continues to affect them?

[Alan Mulally:]

Our focus on Volvo is clearly to improve their current business performance. And we are really working on the new vehicles, especially on the premium side, and we are also, as you can see today, we continue to move decisively on the cost structure and the productivity. But that’s our main focus with Volvo. And with all of our assets we are continuing to focus on the blue oval around the world and we are always looking at all of our assets to make sure we are divesting of the ones that are not key to our long-term growth.

[Lewis Booth:]

Within non-core assets we are also looking at some sale of land and buildings that we are not using. We are obviously continuing to work our ACH plan, so there’s a lot of little things in there.

[Operator:]

Your next question comes from Bill Koenig – Bloomberg News.

[Bill Koenig:]

I just wanted to clarify two numbers that were mentioned. Lewis talked about something connected with worldwide job cuts and 25% was mentioned. What was the 25% and how many jobs are we talking about? And the time frame?

[Lewis Booth:]

To ensure there is no confusion, the 25% was explicitly the cuts we have announced in Volvo since the end of June. 2,000 in June and another 4,000 in October. So that’s the 25%. We are implementing reductions around the world and the announcement we made today was a further 10% cut in personnel-related costs in North America.

[Bill Koenig:]

Also you mentioned that there would be a few select models that might be affected by delays in product development. It doesn’t sound like you want to specify models, but in terms like say a proportion of the product portfolio, roughly how many models are we talking about?

[Lewis Booth:]

Let me put it in context, we told you in the second quarter that by 2010 we would be at just slightly better than 40% of our products coming in the segments we talked about in North America and it’s just slightly under 40% now. So it’s very few and it’s very select.

[Operator:]

Your next question comes from Amy Wilson - Automotive News.

[Amy Wilson:]

I just wanted to follow up on that non-core issue. I’m wondering if you can say whether you consider Volvo or your stake in Mazda in to be core versus non-core.

[Alan Mulally:]

Our focus right now on Volvo is to improve their current business performance. And we also have a very mutually beneficial relationship with Mazda. We don’t see that relationship changing going forward.

[Amy Wilson:]

But you don’t want to put a label to them as to whether they’re non-core or core. Is that correct?

[Alan Mulally:]

No.

[Amy Wilson:]

And I just wondered if you could clarify for me, I was a little confused by what you were saying about the fourth quarter as far as the cash outflow. Were you talking about we can expect a bigger outflow in the fourth quarter than we saw in the third quarter?

[Alan Mulally:]

It will be less. Because of the unique situation in the fourth quarter that Lewis described, especially that dramatic reduction in the truck production that we took to clear out the 2008 models, we have a very successful launch of the 2009.

[Amy Wilson:]

Was there a specific portion of it that you said would be higher or were you just talking about higher than 2007?

[Alan Mulally:]

It will be lower cash flow output.

[Operator:]

Your next question comes from Sarah Webster – Detroit Free Press.

[Sarah Webster:]

Our readers here are most curious about the job cuts. Can you elaborate on when the 10% reduction, whether it will be voluntary or involuntary, and when employees will know whether or not they will be keeping their jobs?

[Alan Mulally:]

It will be involuntary and it will be by the end of January. And part of that will be attrition, too, so it will be a mixture.

[Sarah Webster:]

Will that cut be concentrated in North America?

[Alan Mulally:]

Yes.

[Sarah Webster:]

Will it all be in North America?

[Alan Mulally:]

Yes.

[Lewis Booth:]

That 10% is specific to North America.

[Operator:]

Your next question comes from Paul Eisenstein – Detroit Bureau.

[Paul Eisenstein:]

I just want to be very clear, with Volvo and Mazda, there has been a lot of coverage and a lot of speculation about those. While you are cautious about the issue of declaring them core assets, I just want to make sure that at this point we have no reason to believe that there are any intentions of either selling off your stake in Mazda or selling Volvo. That’s the first question. Second part is, as you look at the deteriorating economy, realistically, do you see it necessary for Ford to receive significant loans, or at least some loans, from the government to maintain a healthy and viable position? Could you proceed as you are going now, or would you need the loans that are already, as you suggested, beginning to get loosened up and possible a portion of the $25.0 billion additional money that Pelosi and others are now talking about?

[Alan Mulally:]

Maybe I will address your latter question first. With respect to our fundamental plan going forward, the way I would think about it is that the way we see the world over the next couple of year is that we anticipate that 2009 will be no better than 2008, with a recovery happening in 2010. Based on that, with some robustness in our plans and conservatism, that we are going to improve our cash position by that $14.0 billion to $17.0 billion to add to the position that we have, so that we can continue to invest in the new products and continue our restructuring. And we are not assuming the government loans in that plan. Now, the reason we are talking to the government, and it’s not just the U.S. but around the world, is that clearly the world could deteriorate. The economies could deteriorate further and it could put the automobile industry at risk. And so the most important thing we want to do is make sure we have this dialogue and we have mechanism in place that if it deteriorates substantially we would be able to access a bridge loan and pay it back and get through the downturn and keep this very important alive. Because it is so important to the economy and the recovery. So that’s the good conversation we’re having with the government. On the Mazda and the Volvo, our relationship with Mazda has not changed. And whenever we have anything to announce we’ll announce it. On Volvo, I would just like to go back to the most important thing we’re doing on Volvo is focusing on improving their business performance. It’s a great brand. We’re really focusing on the product line, the premiumness of it, and also on the productivity and the costs. And we’re making great progress. You saw the announcement we were making today. And the reason I’m avoiding the non-core asset is that clearly we are focusing most of our attention on the blue oval around the world but Volvo is a great brand and we’re improving its performance, also. So that’s what we mean by that.

[Operator:]

Your next question comes from David Bailey – Reuters.

[David Bailey:]

In terms of the blue-collar buyouts, obviously you had 2,600 as you reported here. Do you expect to have any further buyouts on the hourly workers in North America at this point?

[Alan Mulally:]

The key to that question will be the market and the economy and the industry levels, and then our production rates going forward. And we will continue implementing our plan of matching our production to the real demand and sizing ourselves accordingly. Because the most important thing we do is support the customer with the demand that they really want, not over-produce so we don’t have to discount the vehicles and ruin the residual values. And that plan has worked very well for us and the customers going forward. So then we will size our production capability to the production. So that will go with the production changes we make in the future.

[David Bailey:]

And with the white-collar expense cuts, 10%, should we assume that’s 2,200 involuntary cuts by the end of January?

[Alan Mulally:]

That 10% is in total cost. So it doesn’t translate into a specific number of employees.

[Operator:]

Your next question comes from Joann Muller – Forbes.

[Joann Muller:]

You mentioned a couple of times you are talking to other governments around the world. Can you be more specific? Are you talking about similar types of loan programs in Europe or Asia that the U.S. Congress is also considering?

[Lewis Booth:]

The most significant is the direct loan that the European Automotive Industry Association has requested from the European Commission of 40.0 billion Euros . And we are working within the ACEA association to pursue that opportunity. That’s very similar to the intent of the U.S. Energy and Independence and Security Act because it’s particularly associated with the very significant improvement in CO2 and fuel economy that the European industry is having to make between now and 2012.

[Joann Muller:]

Obviously the government doesn’t want to just throw good money after bad here. They have been critical of some of the decisions that the auto industry has made in the past. And it seems like they are looking for some strings attached. My question is, what strings do you think are reasonable, but more importantly, how will those strings change the way the auto industry looks five to ten year from now?

[Alan Mulally:]

I think it’s premature to speculate on what will be in the agreements that we reach, but I would offer that the tone of the conversations is very positive, because of the actions that have been taken over the last few years by the automobile industry in support of energy security, energy independence and sustainability. And as you well know, we stepped up first when we went through that legislative process over the last few years to be part of the answer to those very important issues. So the response that we are getting is that this is an important industry, we’re moving in the right direction, and in Ford’s case we’re improving the efficiency on every vehicle size, we are complementing our larger vehicles with a full complement of small- and medium-size fuel-efficient vehicles. So we are getting a very positive response. And the real conversation about additional financing is really around the fact of how important the industry is and if the economy really degraded substantially it’s a very important aspect that we have the automobile industry stay in business to be part of the answer of economic recovery. So that’s really the tone of the conversations. And I think it’s just too early right now to speculate on what the agreements will entail.

[Lillian Etzkorn:]

That’s going to conclude today’s presentation.

[Alan Mulally:]

I would like to say one last thing. My team has surrounded me with notes saying that I misspoke earlier and that I said [Focus] instead of the Taurus, which will be delivered next year with the eco-boost engine. So it’s the Taurus and not the Focus that I said.

[Operator:]

This concludes today’s conference call.