Ford Motor Company (F) Q3 2006 Earnings Report, Transcript and Summary

Micki Maynard - The New York TimesBill Koenig – BloombergJeff McCracken – The Wall Street JournalJoseph Sweeney - Oakland PressJohn Stoll - Dow JonesAmy Wilson - Automotive NewsPoornima Gupta - Reuters

Good day, ladies and gentlemen, and welcome to the Ford Motor Company third quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Diane Patton, Managing Director of Investor Relations. Please proceed, ma'am.

Thank you, Michelle and good morning, ladies and gentlemen. Welcome to all of you who are joining us either by phone or webcast. On behalf of the entire Ford management team, I would like to thank you for spending time with us this morning. With me this morning are: Alan Mulally, President and CEO; Don Leclair, Chief Financial Officer; Mark Fields, President of the Americas; and Mark Schultz, President of International Operations. Also in the room are Peter Daniel, Senior Vice President and Controller; Ann Marie Petach, Vice President and Treasurer; Mark [Kozman], Director of Accounting; and K.R. Kent, Ford Credit's CFO. Before we [break in transmission] and as indicated in our press release and 8-K, we will be revising our financial results. Our third quarter results discussed in our presentation materials do not reflect those adjustments, which will be reflected in our third quarter Form 10-Q. Although some of the information being presented today will differ from that which will be included in our upcoming 10-Q, we think it still provides a good sense of our third quarter automotive results. 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 equivalents 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 is summarized at the end of this presentation. These risk factors are also detailed in our SEC filings, including our Form 10-K, 10-Q, and 8-K. With that, I would like to turn the presentation over to Alan Mulally, Ford's President and CEO.

Thanks, Diane, and good morning, everyone. This is my first quarterly conference call as Ford Motor Company's President and CEO. I would like to start it off by saying I look forward to getting to know each of you as we have an open dialogue about Ford's progress and future. I also want to share my views on the quarter's results and on where we need to go from here. But before I do that, I want to ask Don to give you some background and detail on our plan to restate certain financial results because of our reassessment of the very complex accounting standard concerning the use of derivatives.

Thanks, Alan and good morning. I'm going to track along, starting with slide 2. What I want to do first is explain what is going on with the restatement. It deals with our hedge portfolio and our application of hedge accounting. We have always prided ourselves on good internal controls, and we are -- and I am -- disappointed that we are going to have to restate our financials. But I do want to explain why we use derivatives and how we have re-evaluated our accounting for them. From an economic sense, we did the right thing, but the accounting is very complex. We face many financial market-related risks in our business. Our results can be affected by changes in interest rates, foreign currency exchange rates, and commodity prices. We reduce the business exposure to these risks by hedging them in the financial markets using derivative contracts. The objective of our use of derivatives in hedging is to reduce economic risk and volatility. We have a long-standing, disciplined approach to hedging, which is defensive in nature. We use swaps, forwards, and options to manage our risks and trade these derivatives with highly-rated counterparties. Now on slide 3, we talk about Ford Credit. We use interest rate and currency derivatives to match more closely any changes in the value of our assets and changes in the value of our liabilities. As a part of the routine review of Ford Credit's annual 10-K with the division of corporation finance of the SEC, we reviewed again our policies on hedge accounting. As a part of that process, we and our outside auditor, PricewaterhouseCoopers, have re-evaluated Ford Credit's accounting for certain interest rate swaps. At the time we put these swaps on, we believed that these swaps met a selective set of accounting rules,…

Thank you. As Don said, we expect to be ready to give complete details of these restatements by the time we file our 10-Q. Now turning to slide 7, let me address our preliminary third quarter results. By now, many of you have seen our third quarter summary. Excluding special items, earnings from continuing operations were a loss of $0.62 per share or $1.2 billion. Including special items, we lost $5.8 billion, for a third quarter net loss of $3.08 per share. Clearly, this performance reflects the challenges we are working through with North America, Asia-Pacific, and Africa, and with our Premier Automotive Group. The special charges primarily reflect the costs we are incurring to restructure these businesses, particularly in North America, and the revaluation of assets related to our automotive operations in North America and Jaguar/Land Rover. The quarter's bright spots included South America, which delivered another period profitable growth and solid profits at Ford Motor Credit. Though it lost money in the quarter, Ford of Europe continues to improve and should be profitable for the full year. We also finished the period with strong liquidity, ending the quarter with $23.6 billion in cash. However, let me make it clear: these results are unacceptable. Perhaps more importantly, we know where we are with our business, and we know why we are where we are. We are committed to moving from here to create a viable business going forward. As I have examined our performance, I clearly see the opportunities that will allow us to do so. Onto slide 8, please. While Ford Motor Company has great assets and strength, it also has tremendous opportunities it has yet to fully realize. These opportunities include leveraging our global assets to significantly improve our product strategy, and production quality and productivity, and more productive and collaborative partnerships with our suppliers, unions and our dealers. I have also met a skilled and motivated team in Ford who are excited and have begun to work together more closely on these opportunities. They have inspired me with their love of the Company, their enthusiasm for our customers, and their desire to move forward to improve our products, production processes, and our business performance. Going forward, our business priorities and focus will be: Now we will have a more detailed review of the quarter's results from Don; and following Don's review, Don, Mark, Mark and I will answer your questions. Thank you.

Thanks, Alan. Onto slide 10. As a reminder, these results are preliminary. This slide shows our standard financial metrics for the third quarter and the first nine months compared with a year ago. Third quarter revenue of $36.7 billion and automotive sales of $32.6 billion were both down from a year ago. Lower volume, adverse mix, and higher incentives primarily explain the automotive revenue decline. The total revenue was down by more than the decline of automotive because of the sale of Hertz late last year. The third quarter tax rate on continuing operations, excluding special items, was 17.8%. Effective this quarter, we have established a valuation allowance of $2.2 billion against deferred tax assets, primarily at our North America and Jaguar/Land Rover operations. This allowance was established because of the cumulative losses we have incurred and the financial outlook for these operations. We still recorded partial tax offsets during the third quarter, because we began the quarter with a small net tax liability. Starting with the fourth quarter, however, we will not record tax offsets for further losses or profits for these operations until we return them to sustained profitability. If we had not established this deferred tax valuation allowance, we estimate that our operating results, excluding special items, would have been a loss of about $0.42 a share. Now slide 11 provides some detail on our special charges. Special charges decreased earnings by $5.3 billion pretax or $2.46 during the quarter. During the quarter, we recognized a net charge of $861 million for jobs bank and employee separations directly related to our plans to idle facilities in North America. The charge reflects the plan to sell or close all the automotive components holdings plants by the end of 2008, as well as the planned idling of Maumee Stamping…

Thank you, Don. Wrapping up, I would like to summarize a few key points. This is a critical time, and we clearly recognize it and plan to deal with the business reality we are facing. We're taking actions to improve our cost structure, including further salaried and hourly personnel reductions, substantial plant idlings to match our capacity with realistic sales demand, and accelerated completion of ACH restructuring by 2008. We have more new products coming, and they are targeted at delivering profitable growth. Although this will be realized fully over time, we are leveraging our global product development and production systems to deliver what our customers want and prefer. Finally, we're taking steps to ensure that our liquidity remain strong. Now, we must work to ensure our great company is also truly a profitable one, capable of delivering real growth and real value over time. I am confident we can accomplish just that. The principles I outlined are focused on a single forward business plan. Now I will turn it over to Diane to begin the question-and-answer session.

Thank you, Alan. Ladies and gentlemen, we're going to start the Q&A session now. We have a little bit more than an hour 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 timeframe, I ask that you keep your questions brief, so that we don't have to move callers along. So with that, Michele, can we please have the first question?

Your next question comes from (Operator Instructions) Your first question comes from Jon Rogers - Citigroup. Jon Rogers – Citigroup: Yes, good morning. I have a question on just the mix impact. It looks like, on the slide, $1.1 billion unfavorable for mix and volume. Don, can you just give us some color on which is more important to that calculation? Is it volume or is it mix? As the Taurus platform comes out, does that help or hurt your volume/mix impact?

You are on slide 17, so you are talking about North America? Jon Rogers – Citigroup:

The volume is about three-quarters of that and the mix is the balance. Going forward, I would say that dropping the Taurus will hurt, but not very much. Jon Rogers – Citigroup: Okay, so if volume is three-quarters, it looks like sometime in the middle point of next year, as your volume bottoms, we should see that becoming a little bit more favorable. Is that true?

Well, what we are trying to say is the production cuts, particularly in the fourth quarter, reflect the fact that the mix in the market has changed and we are adjusting our inventory of trucks and SUVs, in particular. So going forward, the first half of next year, the production of trucks and SUVs will be lower than the first half of 2006. So it won't be until the second half that we will start to see the benefit of the cost reductions flow through. Because what will happen in the first half is the unfavorable effects of the production change will still be overcoming the benefits of the cost reductions. Obviously, over time, the cost reductions in the second half of next year will start to mount up and we will see some improved performance on a year-over-year basis. So we're just trying to give a sense that the fourth quarter of this year and the first half of next year will be tough profit comparisons. Jon Rogers – Citigroup: Okay, thank you.

The only thing I will add is on the volume that Don mentioned. Clearly, last year in the third quarter, we had the Family Plan, which obviously not only lifted the industry but also our sales as well. This quarter, we did not have that.

Your next question comes from Scott Merlis - Thomas Weisel Partners. Scott Merlis - Thomas Weisel Partners : Good morning, everybody. How are you? Could you give us some more granularity on some of the cost improvements in terms of what is coming from suppliers? What isn't? What is happening with commodity costs? On slide 13 you show your cost changes.

We talked about the warranty. For current model, quality and performance is improving. We have some reserve adjustments, a non-repeat in North America, and a current adjustment in Jaguar/Land Rover. Manufacturing and engineering, overhead reflect our ongoing cost reductions and personnel reductions. Pension and OPEB largely reflects the retiree healthcare agreement with the UAW. The depreciation is unfavorable because of the accelerated depreciation related to the plant closings.

Thank you.

Your next question comes from Brian Jacoby - Goldman Sachs. Brian Jacoby - Goldman Sachs:

Well, first off, we have very little of our bank lines drawn. I think there are some local lines that are drawn. None of the global lines are drawn. You know, they are all top quality. No material adverse clauses or any covenants. On our secured financing, as I mentioned , we are projecting to have negative cash flows. We do want to make sure we have plenty of liquidity, not only to cover operating losses and our restructuring, but to make sure we have a cushion in case there are some bumps in the road in the economy. We are going to be working on some secured financing. It's early days on that now, and we can't really go into it any more than that. Brian Jacoby - Goldman Sachs: Is it something you will offer your existing banks, the option to go into this, similar to what has been done with other auto manufacturers?

It is likely that we would include our existing banks. Brian Jacoby - Goldman Sachs: Okay, thank you.

Your next question comes from John Murphy - Merrill Lynch. John Murphy - Merrill Lynch: Good morning. Alan, given your initial review of the product pipeline now that you have been there for a little while, I am just wondering what your take is and what you think you might be able to do in the near term, and maybe the long term, to improve the product pipeline.

Well, I haven't had a chance to start those detailed reviews. I am very encouraged by the progress that we have made. Clearly, Ford has recognized the shift in consumer demand in the last couple of years. They have really focused more on the fuel-efficient, smaller vehicles, not only in the autos but also in the crossover vehicles. I had a chance to review the new Edge in great detail, and also some of the vehicles that are going to follow on that platform. I think that what we're doing on the fuel efficiency and the styling and the value, I am very encouraged by what we're going to do on the Automotive side going forward here. John Murphy - Merrill Lynch: Don, on liquidity, at what point, do you become concerned on your gross cash balance? I mean, $20 billion at the end of year doesn't seem like you're anywhere a near a crisis. But you mentioned potentially pushing on unsecured borrowing. What is the cash level where you are comfortable getting down to, without having to do something like that?

Well, clearly, liquidity is a high priority for us; and obviously for me. We spend a lot of time doing planning and stress testing to make sure we have enough. As you say, we have plenty now. I just mentioned we do expect to have some significant cash outflows. So we want to make sure we have enough going forward. We do have some internal targets for liquidity, but we don't really want to go into those now on the call. John Murphy - Merrill Lynch: Just two housekeeping items. How do you think we should be modeling other auto? It was a big surprise in the quarter, a pretty big swing. Just wondering how you think we should be looking at that going forward? Also, what is the ballpark estimate for the equity charge in the fourth quarter for pension and OPEB coming on the balance sheet?

I would look at other auto in the fourth quarter at about the run rate, if you exclude the special tax-related items; and I would do about $150 million or $200 million loss. Just put that in. The charge to equity for the pension and OPEB coming on the balance sheet, not through income, just straight through equity, should be somewhere around $13 billion. John Murphy - Merrill Lynch: The problem with other auto is it has been a big surprise for a couple quarters.

That is because we have had some of these things come up and we don't know when prior audits are settled with the IRS. We have to book them when they are settled. So we had one in the second quarter of last year, I think; so we had a big unfavorable comparison in the second quarter. We had one settled this quarter, so we have a favorable this quarter. I would use around that $150 million per quarter for the foreseeable future going forward. John Murphy - Merrill Lynch: Okay, thank you.

Your next question comes from Chris Ceraso - Credit Suisse.

Thanks, good morning. I have a few items. First, if you could comment, Don, on the valuation allowance. How much of this is mechanical, based on the losses that you have incurred so far? How much reflects your view of the operating performance on a go-forward basis?

Well, there were three impairment tests that we went through in the third quarter. We talked about this on September 15, that we would be doing this. First, we tested for goodwill. That is an annual test. There was no impairment there. We checked several of our operations, where our recent performance had indicated that we should do so, according to the accounting rules. What we looked at was obviously North America and Jaguar/Land Rover. Because of the current performance and the projected performance being effectively different than the plan we had a year ago when we did the testing, we did the calculations. It's basically the cash flows that the businesses generate did not justify what we were carrying them on the books at. So we had to write the book value down to the fair value. Then on the deferred taxes we went through the same thing. The testing is a little bit different there. But what we concluded was given the projections that we have going forward in the U.S. in Jaguar/Land Rover, we shouldn't have any net tax assets. So we had a small tax liability at June 30; basically zeroed that out; and we will be having a zero go-forward until we reach sustained profitability.

A question on the Financial company. It looks like if I compared to the second quarter, charge-offs were a little worse. The loss to receivable ratio deteriorated. But it looks like the allowance for credit losses actually came down about another $100 million. Can you explain both of those items, and why you have got the allowance continuing to come down when it looks like losses are getting a little worse?

I am going to ask K.R. to go through that.

On the credit losses for the quarter, they are up a little bit versus the second quarter; but there are down from the comparables versus last year. The loss to receivables on a worldwide basis for the quarter for the managed portfolio is about 43 basis points, which like I said, is up a little bit versus second quarter but it is still a substantial reduction from last year. We continue to see very good performance on this.

Okay. You are comfortable continuing to bring down the allowance for credit losses, even though the trend has maybe turned a little bit?

The receivables continue to perform very well. We think that the allowance for credit losses, right now, the reserve on our balance sheet is appropriate.

A question if I can on the attrition program. Can you give us any comments on the early success or any kind of take rate indications from the hourly workers? Then just remind us what the window is here. When do people have to come in and make this decision? When do you expect the bulk of the people to leave and the cash flow to take a hit from this?

We opened the window for the hourly, all the Ford hourly employees, last Monday on the 16th. That window is going to go through November 27. So once we close that window, we will obviously give you an update at that time. We do expect all of the individuals that take the buyouts to leave the Company at the latest by September of next year. But we think the bulk will happen in the first and the and the second quarter of next year. We are a little ahead of the game, to give you a sense of this, at our ACH facilities. We did have somewhere in the neighborhood, a little above 4,000 people who have signed up for the program which represents about 40% of the ACH hourly workforce. But those are the only results we have in so far.

Okay, great. Thank you very much.

Your next question comes from Douglas Carson - Banc of America. Douglas Carson - Banc of America : I wanted to ask a quick question about Europe. The top line was up 13%. It looks like volumes on a unit basis are better. Can you give us a little color on what vehicles are driving that, and what some of the end-markets look like in Europe?

Doug, this is Mark Schulz. Sales were down for the quarter, but we expect this to pick up for the full year. We have got an array of new products coming out across the region, launched by country and market. We have got the S-MAX, the new convertible Cabriolet Focus, Galaxy, the new Ford Transit that just won Van of the Year. So it is really a full range that is ramping up second half of this year and into '07. Douglas Carson - Banc of America : Okay. Then kind of just to redirect over to PAG, down $593 million on a pre-tax basis. Does that number continually putting pressure on the results give you any more focus on assets in PAG away from the ones you have already mentioned, like Jaguar or Land Rover? It just seems to be a continuing drag on full year results.

As we mentioned, for the third quarter there were some special causes, like the warranty accrual. Again as you go through each of those, there is an array of new products coming at Volvo, the C30, the new S80, S60, as we ramp up into early next year. We have gone through restructuring plans, consolidating from three to two plants at Volvo; the same at Jaguar. Although we are not pleased with the performance of each of those constituents, we think we are on track for some improvements going into the fourth quarter.

As I mentioned, we do expect PAG to be pretty close to breakeven in the fourth quarter, reflecting the sales and production of those new vehicles that Mark mentioned, as well as improved cost performance. Douglas Carson - Banc of America : Lastly on Ford Credit, you talked about the secured type of financing. It looks like the $30 billion to $40 billion window for secured; a big range in there. The $10 billion delta from where we are now, can we assume that that is the new secured funding that you are talking about? Ann Marie Petach: Well, talking about our Ford Credit, and this shown on slide 34, we have got two bits of funding we have shown a range for, which are additive. They both for 2007 and those reflect both what will be done in the public markets and the private markets. The ranges are wide at this point because we have quite a bit of flexibility in our funding plan to move between those two different markets. Totally separate is the Automotive secured financing, and that is not shown here.

Just to clarify, the forecast for this year, if you add up the public and the private, is a range of $45 billion to $53 billion; and next year, our forecast is a range of $40 billion to $60 billion. So it's a little wider range right now, because we are further out in the year, but it is not much different than what we have been able to accomplish, what we believe we can accomplish this year. As Ann Marie said, the secured financing that I was making reference to was on the parent Company's side. This specifically refers to funding the Credit Company. Douglas Carson - Banc of America : Okay, great. All right. Thanks very much.

Your next question comes from Robert Barry - Goldman Sachs. Robert Barry - Goldman Sachs : Good morning. You mentioned on slide 37 that you've got about $9.5 billion to $10.5 billion of special items, but a cash impact this year of only about $1.5 billion. Is it fair to assume that that cash impact is going to escalate a bit next year? If so, about how much do you think it could be?

Well, the cash effect of the entire $9.5 billion to $10.5 billion is about $4 billion. So it is fair to say some of that, a large part of that, will happen next year. That gets into what I was saying earlier about we expect large cash outflows the next couple of years. Robert Barry - Goldman Sachs : Okay, and in terms of the change to the warranty accrual at Jaguar, is that something that you normally do every third quarter, or was there something special about it this quarter?

We look not every third quarter, but we take a thorough review of our reserves. The prior model performance of some of the models at Jaguar and at Land Rover was not maturing or improving at the rate that we thought it would. We saw a change in that rate during the quarter. So in accordance with good accounting, we reflected that adjustment in our reserves this quarter. Robert Barry - Goldman Sachs : I see. It is not that it is the regularly timed challenge, it is on a periodic basis?

It is an ongoing review with us. Robert Barry - Goldman Sachs : Okay. Then finally, just on slide 33, on Ford Credit; the last bullet is participating in various alternative business arrangements. Could you just expand on what you mean by that? Does that include the possibility of a stake sale at some point?

No, our view is, and has been, it is and is going to be that we think Ford Credit is a core asset, a strategic asset; and we intend to hold onto it. Now there's certain areas where having a complete full-line captive finance company doesn't make as much sense. You may be familiar with the project we have in Brazil, where Ford Credit is partnered with Bradesco Group's automotive finance unit. We take a fee for the origination and the servicing; and Bradesco helps with the financing. It is that kind of thing that we may be doing in selected areas around the world. Robert Barry - Goldman Sachs : Expanding the Brazil model into other markets.

Right. Robert Barry - Goldman Sachs : Okay, thank you.

A good example of the kind of thing we might be looking at.

Your next question comes from Ronald Tadross - Banc of America. Ronald Tadross - Banc of America : Thanks, good morning everyone. I just wanted to start on the cost reduction topic. Toyota recently told us they are targeting over $5 billion of material cost reductions over the next three years. They already have a pretty high margin. So I am wondering, do you have to do better than the $5 billion to increase your competitiveness on a relative scale?

Yes, when you look at the overall cost reductions we have through the end of 2008, we said we were going to take $5 billion of total operating costs. Obviously, as we go forward, a big piece of that, even beyond that are our material costs. If you recall, we did say back in January we were going to go for about $6 billion in material costs through the end of the decade. We have had to move off of that for a certain period of time, due to the fragility in the supply base as well as raw material prices. That being said, we are moving very fast to change our business model, particularly around the platform strategy that we have, to get more commonality across our vehicle lines. We have specific teams focused not only on that, but also near term, how do we leverage more our commodities within the business, as well as value management? So we are targeting $5 billion in operating costs through '08. It is not going to stop there. I suspect as we go out beyond that period, we're going to see good progress particularly on material costs, to get ourselves competitive early in the next decade. Ronald Tadross - Banc of America : Okay, but it does take a little time because of the product cycle?

Well, I think it does take a little time given some of the complexity that we have. But again, one of the reasons that we have pushed in other areas of the business on costs like accelerating some of the idling, like taking some actions across our hourly and salaried workforce, and like accelerating our ACH timetable to try and offset, at least in the near term, those actions which will take a little bit longer term on the material cost side. Ronald Tadross - Banc of America : Okay, thanks. Just two other quick things. On slide 18, the fleet sales are still running about 30% of total sales. I'm just wondering, do you guys have a short-term target or a two to three-year target on what you can get that down to as a percent?

Yes, in the third quarter, our fleet sales ran about 24% of our total sales, which was up about 7 points from last year. But again, last year we were comparing to the Family Plan, where we had obviously a high level of retail sales. We said at the beginning of the year that our fleet sales would be up anywhere between zero and 5%; and we are still trending towards that direction. We have said very clearly, as we look going out over the next couple years that our total market share will come down in the 14% to 15% range. The majority of that, almost all of it, is due to the fact that we will be deemphasizing the fleet sales area. All I would say is within the fleet market we are going to be deemphasizing daily rental fleets. Commercial and government fleets are fairly good businesses for us. So I think you will see that daily rental business come down significantly. Not abandoning it, but significant. Ronald Tadross - Banc of America : All right, then just one last thing on the fourth quarter. I'm not sure if you said $500 million or $1 billion on restructuring. Then it looks like there is about $2 billion used on working capital. Does that sound right? If so, does that reverse in the first quarter, mostly?

No, just a second. I am not sure I got the sense of your question. Ronald Tadross - Banc of America : Don, I'm just trying to get into what part of the fourth quarter cash burn will be reversed in the first quarter? It looks like you're going to burn about $3 billion to get from the $23.6 billion to the $20 billion, $20.03 billion, $3.5 billion. It looks like if you assume that the earnings are pretty similar to the third quarter, you use a little more on restructuring, maybe $1 billion; I think you said $1.5 billion for the total year and it looks like you did $400 million in the third quarter. So I'm just tried to get at how much is the negative working capital, the changes in receivables inventory, and payables, going to be in the fourth quarter?

Yes, thanks for that clarification. I wasn't sure what you were really asking about. You know, there are a lot of moving parts in the cash forecast in the fourth quarter, obviously. There are some things, there will be some payments for separation programs, there will be some pension contributions, there will be some more inflow from the VEBA and dividends from the Credit Company. But the biggest thing that drives the reduction in cash from the $23.6 billion down to about the $20 billion is our Auto profits. Net spending will be slightly positive. There will be some improvement in working capital as we always see, as we typically see in the fourth quarter, as we reduce our inventories to make sure we ship all our units to dealers before the holiday shutdown. There will be some expense and payment timing differences. But the biggest piece of the reduction in cash during the fourth quarter is the profits. Ronald Tadross - Banc of America : Even the depreciation? It sounds like the profits then are going to be a negative $3 billion number or something, pretax?

Without giving any specific guidance, the profits will be worse in the fourth quarter than in the third Ronald Tadross - Banc of America : All right. Thank you.

Your next question comes from Eric Selia – JP Morgan. Eric Selia – JP Morgan: Good morning, guys. First, just to clarify what you just said, is there going to be another drawdown of the long-term VEBA in the fourth quarter?

It is not really another drawdown. On September 15, we said that we would end up moving about $3.4 billion. We had $3 billion of that accomplished by September 30, so other $0.4 billion. Eric Selia – JP Morgan: Okay, great. I appreciate the clarity. Then back to a prior question, on slide 33, with the alternative business arrangements, it sounds like what I am calling it is a captive conduit program, where you guys capture the origination and servicing fee, and lean on someone's better balance sheet to improve the access to liquidity. The question I have is, what type of reservations do you guys have toward selling a majority stake to a high-rated finance company? Because it sounds like you are going to move towards that, if things deteriorate. Then, kind of clarifying that question, what benefits do you lose versus the increasing liquidity and access to liquidity, if you were to sell a majority stake with, let's say, a five-year call for you guys, to potentially recapture that asset in five years when things do improve?

As we have said on numerous occasions, we think the Credit Company is a strategic asset for us. It is really important for us, we think, to maintain control over the synergies that we have between the financing arm and the marketing and sales arm. For those markets where the synergies are large, that is really, really important. When we see other markets, for example, Brazil, where the synergies historically have not been as great and the funding prospects are difficult, then it makes sense for us to look at partnering in these selective areas. We have done some of that in the past, and you will see us doing more of that in the future. But in the scheme of things, that is around the edges. We're going to be really focusing on making sure we have a wide and diverse source of funding for the Credit company to get us through this period of restructuring on the Auto side. That is our strategy. Eric Selia – JP Morgan: On some of the synergies, is it mainly buying back off-lease vehicles? It is a [inaudible] interest, and then obviously retaining more of your customers if you do finance them. Are those the major areas? Are there any more that you benefit from?

I don't really want to go into a whole long discussion of that. But it really starts with the very beginnings of how the marketing programs for each quarter and month and each region and activity in the country -- be it the U.S. or the UK -- how all that is developed. The marketing team and the Credit company team work together throughout that whole process. It includes leasing, and things coming back off lease, and the auctions, and that whole process. Eric Selia – JP Morgan: Okay, I guess the only thing I am confused on, is with a fully bought-in financial buyer, why would you lose those synergies if you were to have an uncontrolling stake? I'm confused by why the incentives would change for a fully vested financial buyer?

Well, we would just really prefer to have a complete control over this process and not to have what would be a third party really involved in those decisions. Eric Selia – JP Morgan: Okay, thank you.

Your next question comes from Colin Langan - UBS. Colin Langan - UBS : Thanks for taking my question. Can you guys actually just talk about the risks to the supply base? It doesn't appear the situation is getting a lot better. Could there be a domino effect where you would actually start seeing some large players getting hurt in the fourth quarter?

Well, I think, we have seen obviously some large players go into bankruptcy during this year. Our purchasing team tracks all of our suppliers, including not only those suppliers that are in bankruptcy but distressed suppliers. I guess to one degree or another we have actually gotten a bit of a core competency in managing this situation. I think the net of it is if you look at the track record just over this past year, we have had literally no supply interruptions to our plants, with the exception of one case. I think that bodes well as we go forward. At the same time, as you know, we are implementing our aligned business framework strategy, of which we named 36 suppliers already, where we work a lot more closer with them in the upstream but also giving them longer-term contracts to allow them to secure their future and make their plans accordingly. Colin Langan - UBS : Actually just as a last question, could you just give me an update on how the launches are coming? It seems like a lot of products are coming out over the next couple months. Are they on pace?

Yes, the launches are going well. We just launched, as you know, our Expedition and Navigator. The manufacturing launch went very well. The units are just showing up into the dealers' lots. Early indications, although it is very early days, Navigators are staying on the lot an average of just about five days. The dealers are getting good grosses on them. The Expeditions are just starting to show in dealers' lots. The early mix is very good; about 60% is extended length; and of that 60%, about 80% is high series version. So market acceptance and manufacturing launch on those products have gone well. We went to a Job One manufacturing launch of our Edge and MKX last Monday in Canada, which Alan attended. That launch is going well. We're working up the ramp-up curve on that. We also just had our media event, actually on the same day, out in San Francisco, and got a lot of positive responses. So far we have over 20,000 dealer orders. So I think the manufacturing launch is going according to plan; the market acceptance is going well. I think that bodes well for a number of the launches that we have coming up, particularly in the first half of next year. Colin Langan - UBS : Okay, great. That's all I had. Thank you very much.

Your next question comes from Brian Johnson - Lehman Brothers. Brian Johnson - Lehman Brothers : Yes, a couple questions on Ford Credit and then a broader one. What was the provision for loan losses that you took in the income statement, as opposed to the loss to receivables? Same thing?

Just a second, we are looking that up.

The provision for credit losses for the quarter was $66 million. Brian Johnson - Lehman Brothers : As a percent of receivables, what was that?

As a percent of receivables? Sorry, the loss to receivables was 43 basis points. Brian Johnson - Lehman Brothers :

This is Ann Marie. If you are on slide 34 and you look at the forecast column for 2006, the range for 2006 is not that different. It is $45 billion to $53 billion. So you can think of the range not being that much. As we are moving to doing more asset-backed financing, the maturities of the obligations are more closely mirroring the maturities of the assets; whereas before we did fund longer. But I think it is a reasonable funding plan based on what we have accomplished this year. Brian Johnson - Lehman Brothers : Okay. Then a broader question for Mr. Mulally. Given what you're seeing of the product pipeline and then of the Way Forward plan, with its layoffs driving cost reductions, is that going to be enough for '08? Or are there substantial changes that are going to be needed in the renewal of the UAW contract to restore profitability?

Yes. And when I say that, I think that the Way Forward plan absolutely is moving aggressively to restructure our capacity to lower demand and take out the $5 billion of operating costs by 2008. But clearly our plan is to keep working our productivity after that. But of course every opportunity that we have, including the negotiations with the UAW, will be focused on improving our competitiveness and our productivity. Brian Johnson - Lehman Brothers : Okay, thanks.

Your next question comes from Philip Watkins - Commerzbank. Philip Watkins - Commerzbank : I was just wondering, I'm a credit analyst, in relation to the extra secured funding, whether there had been any discussions with the rating agencies about potential additional subordination for bondholders?

Well, we have had discussions, as you might expect.

What we do expect is that the rating agencies will state their own opinions on that as the time comes and that has greater clarity. In the lack of clarity, they may be watching this. So I wouldn't be surprised to see them today have an opinion out there that says this would have an effect potentially.

Okay. I guess it is receivables you're talking about on the Automotive at the parent side?

On the parent side we haven't specified what assets we are talking about.

Okay, all right. Thank you.

Michelle, can we switch over now and take some questions from the media, please?

Your next question comes from Brett Hoselton - KeyBanc Capital. Brett Hoselton - KeyBanc Capital: I apologize, I am not from the media. Can I ask a question anyway?

Yes.

That is very kind of you. Don, I was hoping you could discuss the future of Ford Motor Credit profitability. In other words, when you think about where profits are going for Ford Motor Credit, what are the primary factors or drivers you see impacting the profitability? Things that will impact it positively and those things that might impact it negatively?

Well, I think there are a couple of key factors we have seen in the last couple of years and going forward. One of them is the asset balance mix has come down. It has come down a lot in the last couple of years and it may go down a little more going forward. But I wouldn't think at nearly the rate it had in the past. Obviously, that is one thing. Another is that we have had some really good performance on the portfolio and so the credit losses have improved. In fact, we have been releasing reserves. I think we have nearly reached the end of that. Then lastly, with the change in interest rates, we are seeing some margin pressure. I think that we are certainly seeing it this year; and we will see it into next year. I think those are the three really big drivers of the business on profits.

Then on slide 34, as we think about the mix of public and private transactions here, what kind of an impact does that have on the profitability of Ford Motor Credit going forward?

I don't think it will have a big impact. These are all secured for the most part. I think, not a big impact on that mix.

Okay, thank you very much.

Your next question comes from Micki Maynard - The New York Times.

Good morning, everybody. I want to go back to what you were saying about capacity utilization, because you made a differentiation between 84% of capacity versus 100% of manned capacity. I have not ever heard anyone distinguish the two that way. So could you explain to me a little bit how you get 84% of one and 100% of another?

Sure, it is hard to hear your question. But I think what you are asking is why are we 84% on one measure and 100% on another?

Yes.

That is because they are two measures. If you think of a plant that is a big auto plant that runs on two shifts, could produce, on overtime, 300,000 units, let's say. But alternatively, demand has fallen for those products; so we only have one shift; and we are not working any overtime. So then the capacity on a manned basis is 100,000.

Okay.

The capacity is 100,000. If we only need to sell 100,000, then it is 100%. But that difference between the 100,000 and the 300,000 gets into the capacity utilization measure for installed capacity. So that is really what is driving it. In the short run, it makes sense for us to take the people out and basically shrink wrap the capacity where the real cost is. The cost is largely in the people on the assembly line. For these plants, by and large, most of them are old and fully written off so we are able to achieve most of the cost-savings potential early and then that keeps us from having to do something that is uneconomical or take an added step to close a plants that is still earning us a profit, an incremental profit, in the short run, but for which there isn't a good business case to continue to reinvest. It is just the best way for us to move forward and get out capacity in line. Long term, we will have both measures right there at the same level and at 100%.

Toyota's capacity utilization is somewhere between 97% and 106%, depending on which plant and whether it is running any overtime or 24-hour operations. I am not sure if they have any in the United States; but I know they have one in Europe that is a 24-hour operation. So if you look at 97% to 106% at being the benchmark, is 84% capacity utilization good enough?

Well, 84% is not good enough in the long term. We know that.

But what is the long term?

It is a little bit past 2008. What we were talking about was where we would be in 2008. So in the shorter term, which is what 2008 is for us, we are going to get the people out and get the manned capacity utilization to 100%. It will take us a little bit longer than 2008, as we said; but by the end of the decade, we will get to that 100%.

Okay. Then I had one other question for you, because you said that the 2 points of market share loss during the summer had largely been, and I hope I am stating this correctly, because of the absence of the Friends and Family employee discount programs. Am I saying that correctly?

Yes, Micki. When you look at the 2 point loss for the quarter, it was primarily due to the fact that we didn't have the family plan. If you actually look at the industry, about eight-tenths of our loss for the quarter was based on segmentation moves; and a little over 1 point was based on our own market share performance. A lot of that, obviously, had to do with the Family plan from last year.

Because others didn't have their family plans really either. Chrysler had one for a little while, GM had some discounts. But you were kind of net-net with everybody else. So is it really fair to blame it on the absence of employee discounts? Or is it more of a sort of mix and attractiveness issue?

Well, I think that overall, GM had their plan last year and so did Chrysler also at the same time, when we kind of reflect back on what happened between retail and fleet sales last year. I think looking at third quarter year-over-year is interesting. But I really believe that the year-to-date numbers tell, I think, a more cogent story about what is happening with our business. Year-to-date, our share is at 16.4%; and that is down nine-tenths from the same period last year. Then when you peel that back, about six-tenths of that is industry; so industry working against us in terms of the segmentation shifts. And about three-tenths of that is our own performance; and that is really concentrated in some of our medium and large SUV sales. So I think that is the a more telling story about the trends.

Okay.

Michelle, can we switch over to the next question from the media, please?

Your next question comes from Bill Koenig - Bloomberg. Bill Koenig - Bloomberg : Good morning. A quick question on the securitization. I know you said you didn't want to comment on specific assets, but just to be sure I understand this, essentially you are talking about taking some of the assets of your Auto operations and using them as collateral for Financing. Is that right?

That's right. Bill Koenig - Bloomberg : Okay. My follow-up question is, what does it say about your financial situation? I would assume that is not your first choice for financing. How do you arrive at this point where you had to look at this possibility?

Well, I don't know if I would agree that it is not our first choice. Given where we are, that is our first choice; that is why we are talking about it. We arrived at this situation because we want to make sure that we have enough liquidity and capital to continue on our product investment plans and to restructure our business and to make sure that we have a liquidity cushion in the event of something unexpected in the economy. Bill Koenig - Bloomberg : And will we get more details later on what –

We went through it, Bill. Bill Koenig - Bloomberg : I'm sorry?

That is pretty much the process we went through. Bill Koenig - Bloomberg : Okay. No, I just wanted to say, will we know later which assets are used for securitization, for secured financing?

I think it will be pretty evident, yes. Bill Koenig - Bloomberg : Okay, thank you.

Your next question comes from Jeff McCracken – The Wall Street Journal. Jeff McCracken – The Wall Street Journal : Good morning, everybody. Looking at the Jaguar and Land Rover, what value is there left in those assets after the write-down?

Well, we don't disclose the assets. We don't disclose the results of the individual brands within PAG. But there is less than there was, and it is at a level now that is consistent with the plan that we have going forward. Jeff McCracken – The Wall Street Journal : Is a greater than zero?

Yes. Well greater than zero. Jeff McCracken – The Wall Street Journal : Okay. Then I have a revenue question. It seems like the trend for a while has been for the revenue per vehicle at Ford to go down. Do you expect that to change or improve with the Edge and the Super Duty and the new Nav and whatnot coming? Or is this a longer-term trend that a couple vehicles is not going to overcome?

I think there are two things going on. Right now, we have in effect gotten back in the passenger car business in the U.S. in a big way with the Fusion and the Milan and the Lincoln MKZ. We started selling those in volume in the fourth quarter last year. So for the first three quarters of this year, we have seen comparisons on a per-unit revenue basis with a base last year that did not have those passenger cars that have a lower revenue. Starting in the fourth quarter, those comparisons will improve because of that. Going forward beyond that, as you point out, the Edge and the MKX are going to help; and they are going to help in a big way to take away some of the loss of revenue we have seen in the traditional sport utility vehicle. Does that answer your question? Jeff McCracken – The Wall Street Journal : Pretty much. Then I would think the elimination of the Taurus has helped with the revenue per vehicle as well.

That will help as well, yes. Thanks for pointing that out. Jeff McCracken – The Wall Street Journal : Yes, a quick follow-up. I think it was Eric Selia that asked the question, and you basically said the fourth quarter would be worse than the third quarter. Did I hear that correctly?

Yes. Jeff McCracken – The Wall Street Journal : There you are just talking about obviously operating?

Right. Operating profits excluding special items. I was just trying to explain the components of the change in cash flow from the third quarter to the fourth quarter. Jeff McCracken – The Wall Street Journal : Thank you.

Your next question comes from John Stoll - Dow Jones. John Stoll - Dow Jones : I'm just wondering, Don or Mark, if you can talk a little bit about cost performance. What we are going to see in the fourth quarter? The question was already asked, but I'm just looking for a little bit more specifics, fourth quarter this year and 2007, as we walk up to the 2008 goal.

I think on the cost side, as Don mentioned, when you look at our third-quarter results, and I am speaking here primarily for North America, it was driven by a couple of things: our warranty improvements; some improvement in manufacturing, particularly in some of our efficiencies; and engineering. I think on the warranty, as we say, I won't give too much specifics on the fourth quarter, but when you look at our warranty on a year-to-date basis, our warranty year-over-year has improved about 4.5%. Very importantly, when you look at our '06 models and we measure what we call three-months in-service, our 2006 models on a per-unit basis has improved about 24% versus the '05 models and even more so on the '04 models. So I would expect that performance to continue going forward. At the same time, particularly as we implement some of the buyouts, continue to make progress on our labor and overhead efficiencies and manufacturing, and as we look at opportunities to get more synergies and commonality in our products in the engineering area, I would expect further improvement there. But bottom line is the elements that drove our third quarter cost performance I would expect to continue in the fourth. John Stoll - Dow Jones : And through 2007 are we going to be able to see a lot more headwind on the cost-cutting side?

Can you repeat that? We did not hear that.

John, we can't hear you. John Stoll - Dow Jones : I'm sorry, can you hear me now?

Try it again. John Stoll - Dow Jones : Is 2007 going to look a lot like the third and fourth quarter as well? I mean, the same fundamentals for cost-cutting? Or are we going to see a lot more related to the attrition, now that more people are leaving the Company?

We should start to see more of things related to the attrition programs and the buyouts, both on the hourly and the salaried. Through next year, that will make up a bigger and bigger part of the cost savings. JOHN STOLLOkay, so we're not going to see anything dramatic from 2007 to 2008 as far as costs. We are going to see a substantial improvement next year on the cost side?

I think we are going to see some improvement on cost next year. But we still are expecting raw material commodities to be potentially a drag into next year. But certainly, during the first part of next year, we should start to see the employment reduction programs really start to add to our cost savings potential here at Ford, particularly in North America. John Stoll - Dow Jones : Okay, thank you.

Your next question comes from Joseph Sweeney - Oakland Press. Joseph Sweeney - Oakland Press: Don, will you have to make a contribution to your pension fund? Is that figured into your liquidity calculations at this point?

Yes, that is figured into our calculations. As we indicated, we have made some pension fund contributions this year, but not in the U.S. Our major U.S. funded pension plans are pretty much fully funded. What we are talking about are overseas funds, mainly in the UK. We will continue to make some contributions there. Joseph Sweeney - Oakland Press: They are fully funded even with the actuarial adjustments you have had to make because of the buyout?

Yes. Joseph Sweeney - Oakland Press: Okay, thank you.

Your next question comes from Amy Wilson - Automotive News. Amy Wilson - Automotive News : Alan, I wanted to ask you, obviously the Company is exploring asset sales. What is your initial feeling on the value of the PAG brands outside of Aston Martin? What is the value of those brands to the Company?

Well, part of my initial review of PAG, I think that Mark and the team have put in all of the right actions to return those brands to profitability, especially with their investment in the new automobiles, but also their investment in the measures they are taking to increase their productivity and their quality. Even though we had a setback with the warranty accruals on Jaguar, I think that the fundamental plan that Mark has put in place is a really good one. So clearly, they are going to have increasing value over time and over the long term. With respect to the rest of the portfolio, as any good business would do, we will continue to review all the elements of the portfolio and make our assessments going forward. Amy Wilson - Automotive News : Do you have a feeling yet whether you should keep those other brands?

No, I don't. I really think it is going to hinge on how the businesses are doing and can we make profitable growth businesses out of them with the actions we have taken and additional actions that might be required. We also have to review that in the overall Ford portfolio going forward. But clearly, reviewing that is high on my priority list. Amy Wilson - Automotive News : How soon do you expect to be able to make a final decision on whether those brands stay or go up for sale?

No timeline. I would characterize it as a continuing evaluation. Amy Wilson - Automotive News : Okay, thank you,

Your next question comes from Poornima Gupta - Reuters. Poornima Gupta - Reuters : Could you give us an update on the sale of Aston Martin? How many offers have you received so far? Do you have a shortlist at this point?

Well, we have received a number of inquiries; many, many inquiries. We are in the process now of whittling that down to a shorter list. When we have something to report on that, we will update you on that. But I will tell you there is a lot of interest and we feel very good about how the process is going. Poornima Gupta - Reuters : Thank you. Can you give us a timeline on the sale? Do you expect to sell it maybe next year or this year?

We would not expect anything to close before the end of this year. Poornima Gupta - Reuters : Thank you.

That is consistent with our plans.

Your next question comes from Ladies and gentlemen, we will now be switching back to investor questions. Your next question comes from Peter Nesvold - Bear Stearns. Peter Nesvold - Bear Stearns : Good morning. Can you maybe give us some perspective on the attrition so far? The 40% take rate at the former Visteon plants, how does that compare to your previous expectations?

Well, it is slightly above our expectations. Clearly, it is in pensions as people have elected to take the buyouts. Obviously we will see how that goes as the dates come forward. But it's been a little bit better than our expectations. As I mentioned for the Ford hourly, the window is still open. We don't have anything to share at this point, because it is still early days on that. Peter Nesvold - Bear Stearns : Do you have any sense of whether or not that better than expected attrition is driven by the fact that you expect either to close or sell those plants by the end of '08? Maybe can you give us some context around the demographics of the people taking those offers versus the UAW at Ford?

I think what we have offered the folks there is a very large package of a number of different programs that suits the different kind of demographics or where people are in their life stages. So I think we have provided them a lot of different choices. I think that has helped the take rate. As we go forward, particularly on the Ford side, clearly we don't expect a 40% take rate on the Ford hourly side. But nonetheless, we will see how it goes. We will provide the appropriate amount of demographics at the appropriate time once we tally up all the numbers.

Michelle, we have time for one more question, please.

Your final question comes from Jonathan Steinmetz - Morgan Stanley. Jonathan Steinmetz - Morgan Stanley: Thanks. Good morning, everybody. Just a follow-up on the Ford Motor Credit question. Your return on equity in the quarter was about 9%. It seems like it is hard to imagine the credit loss type of numbers getting substantially more favorable. You're talking about private funding. When you think about this business, I thought you used to talk about a low double-digit sustainable return on equity. What do you see as sustainable here? What type of return do you need to see to justify staying in the business?

Well, right now, we are a little bit below our long-term target. That low double-digit was our target and still is; and we are going to get back to that, but probably not for the next couple of years, until we get through the restructuring of the Auto side. Jonathan Steinmetz - Morgan Stanley: Don, how do you think you get back to that in the sense of again, hard to imagine credit loss getting a lot more favorable; the compression on the finance margin at least for a little while. What is the driver to getting back there?

Well, I think it is a couple of things. You're right, I don't think the credit loss situation is going to get much better than it is now. But there is some margin compression. What we typically see is that when interest rates go up, the margins decline; and when they stabilize, they are restored. So I think we will get back to some reasonable profitability. But ultimately, what we need to do, and it's what our management team is committed to doing, is fixing our Automotive business. When that happens, the Credit company will come around as well. Jonathan Steinmetz - Morgan Stanley: Okay. Do you have an exact number on the Jaguar/Land Rover warranty accrual figure?

Yes, we do, but we don't break that out. Jonathan Steinmetz - Morgan Stanley: Okay. But I think you had a $300 million for that bucket, pretax. Is that the vast majority of it?

That was the largest part of it, certainly. Jonathan Steinmetz - Morgan Stanley: Okay, thank you.

Ladies and gentlemen, if you do have any additional questions please feel free to call either investor relations or public affairs. Thank you very much for joining us.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your presentation and you may now disconnect. Have a great day.