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Executives

George Sharp - Executive Director, IR

Stuart Rowley - VP and Controller

Neil M. Schloss - VP and Treasurer

Michael Seneski - Chief Financial Officer and Treasurer, Ford Motor Credit Company

Analysts

John Lovallo - Bank of America/Merrill Lynch

Adam Jonas - Morgan Stanley

Joseph Spak - RBC Capital Markets

Patrick Archambault - Goldman Sachs

Rod Lache - Deutsche Bank

Ford Motor Co. (F) Special Call March 15, 2013 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the 2013 Ford University Conference Call. My name is Katina, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call, Mr. George Sharp, Executive Director of Investor Relations. Please proceed.

George Sharp

Thank you, Katina and good morning ladies and gentlemen. Welcome to all of you who are joining us today either by phone or webcast. On behalf of the entire Ford Management team, I'd like to thank you for spending time with us this morning, so we can provide you with a number of updates to Ford University. This is an important part of our process to share with investors, our guidance, and how we report against that guidance during the upcoming year.

Now with me today are Stuart Rowley, our Corporate Controller; Neil Schloss, Corporate Treasurer; and Mike Seneski, Ford Credit CFO.

Now before we begin, I need to cover a few items. Copies of this morning's presentation slides have been posted on Ford's Investor and Media website for your reference. The financial results presented are on a GAAP basis, and in some basis on a non-GAAP basis. The non-GAAP financial measures discussed in this call are reconciled to the US GAAP equivalent as part of our various SEC filings.

Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance. Of course, actual results could differ materially could differ materially from those suggested by our comments today. The most significant factors that could affect future results, are summarized at the end of this presentation. These risk factors and other key information are also detailed in our various SEC filings.

With that, I'd now like to turn the presentation over to Stuart.

Stuart Rowley

Thanks George and good morning everybody. This is Stuart Rowley, and I'd like to welcome you also to our third annual Ford University call.

As shown on slide 2, we will begin Ford University by reviewing our 2013 key metrics and guidance. Next, we will move to our business focus topics, these include pension funding and de-risking and share counts and warrants, which Neil Schloss will take you through. The fourth credit, value proposition, which Mike Seneski will cover, and finally, capital spending in Asia-Pacific, Africa, [the treatment] of our European restructuring costs, and warranty reserves, which I will review. Then we will open it up for questions.

As with past years, there is a reference section at the end of the slides deck, and although we won't be going through them today, this has been updated to the latest information available in our 2012 10-K.

Turning to slide 3, this is a summary of the guidance we've provided in January. Note, that our outlook for the European industry is at the lower end of the range of $13 million to $14 million units, and that our automotive operating related cash flow includes capital spending of about $7 billion. The increase in capital spending includes both capacity, and product actions, as we continue to invest in growing the business. Overall, we expect 2013 to be another strong year for Ford Motor Company, as we continue to work towards our mid-decade outlook.

Moving to slide 4, this is a summary of the segment guidance we provided as part of our fourth quarter earnings announcement in our 2012 10-K report. I would like to highlight that the effects of the recent devaluation of the bolivar, discussed in our 10-K, was assumed in the full year guidance provided during earning. Specifically, we noted in that filing that the Venezuelan government announced a devaluation of the bolivar, from an exchange rate of 4.3 to 6.3 bolivars to the US dollar. Had the devaluation occurred on December 31, 2012, this alone would have resulted in a translation loss of approximately $200 million.

Also a quick point on how to think about our net interest expense guidance. We have said this will be filed in our fourth quarter run rate, which was $147 million, or about $600 million annualized. The increase versus this run rate reflects the incremental interest expense associated with our recent $2 billion issuance at 4.75%, offset partially by retiring $600 million at 7.5%, as well as lower interest income than the $272 million we realized in 2012.

I'd also like to note that the $1.4 billion of incremental debt will be used for additional pension contributions, which will benefit our pension expense by a greater amount than the interest incurred on that debt. On slide 5, you can see the Ford Credit Guidance provided previously.

Now, I will hand over to Neil Schloss.

Neil M. Schloss

Great, thanks Stuart and good morning everyone. Our first topic is pension funding and de-risking. We discussed our strategy in last year's Ford University call, and those materials are available on our investor website.

Today, I would like to update you on our progress, reinforce the strategy's benefits, and respond to your questions.

Turning to slide 7, let's first recap pension risks. Our pension exposure, that is the size of our pension liability, and the size of our pension shortfall is large and volatile. The exposure impacts many of our financial metrics. Simply, shortfall or the difference between pension assets and pension liabilities. They can require cash contributions, which draw capital from our core business. They often are viewed externally as debt, impacting our credit rating and our borrowing costs, and they increase the variability of our pension expense.

Large obligations and shortfalls also make the stock price more volatile, which ultimately lowers the market valuation and multiple. This is supported by industry research. Taken together, these factors introduce non-core financial risk, on top of business risk, leading to the need for a de-risking strategy.

Slide 8 shows our pension shortfall at year-end 2011 and 2012, and the year-over-year change, a total deterioration of about $3 billion. First, asset returns, which were strong last year, reduced the shortfall by $7 billion. Next, obligations grew by over $5 billion, representing accrued benefits and interest costs. We think of returns as first covering this growth, any positive returns beyond this, helps to reduce the shortfall.

In 2012, the net of returns and increased obligations reduced the shortfall by $1.8 billion. During 2012, we contributed $3.8 billion to the funds, including $2 billion of discretionary contributions to our US funded plans, $1.4 billion required contributions to our funded plans outside the US and $400 million to our worldwide unfunded plans. Finally, discount rates declined, which increased the present value of our liabilities by $8.9 billion, more than offsetting asset returns and cash contributions. We cannot control discount rates, but we can impact the size of our liability and shortfall by taking actions now to strengthen our balance sheet.

Slide 9 summarizes our strategy. On the liability side, our strategy limits the growth of the liability, including closing plans to new entrants, and offering lump sum payments where possible. Importantly, we expect interest rates will rise and help to reduce the size of the liability and the shortfall over time. On the asset side, our strategy assumes positive asset returns, cash contributions and better matching plan assets to plan liabilities, so the shortfalls do not reoccur. We will talk more about contributions in a few minutes, but keep in mind that this element of de-risking is part of an overall capital strategy, focused on maintaining a strong balance sheet, and an investment grade credit rating.

We manage our cash across these priorities and others, including funding our pension plans, and offering a sustainable dividend that grows with earnings. Our de-risking strategy is a multiyear strategy. Rising interest rates and asset returns will help achieve our goals, and reduce required contributions, and if rates remain low or fall as in 2012, de-risking will minimize the need for higher than planned future contributions. Overall, we are taking a balanced view over time, using many tools to achieve de-risking benefits.

Slide 10 shows the progress we have made to-date. All of the major worldwide plans are now close to new entrants, limiting the obligation growth. The last of our major open plans, the Canadian Hourly and UK Salaried plans, closed to new entrants in 2012. We also offered lump sum payments at retirement where possible, as well as our one-time program for 90,000 existing salaried retirees in the US, which will continue into 2013.

Over time, we are migrating our asset mix to higher fixed income allocation, to better match to our liabilities, and significantly reduce the volatility in our shortfall. We took a big first step in 2007 and 2008, moving our fixed income allocation and our major plans from 30% to 45%, which helped us in the subsequent downturn.

The US fixed income target is 80%, to be reached as funded status improves over time. At year end 2012, we had 55% of our assets in fixed income securities. The Canadian plan also will move its long term target to 80% fixed income, beginning in 2013. The 80% allocation to fixed income and 20% to growth assets, reflects the best risk return trade-off, balancing lower volatility and growth potential.

Finally, in 2013, we plan to contribute about $5 billion to our funded plans, $3.4 billion of which is discretionary. These discretionary contributions are $1.4 billion higher than 2012, reflecting the net proceeds from our $2 billion 30-year bond issuance in January.

Slide 11 focuses on the de-risking benefits to investors. Industry research shows that companies with large pension obligation and short falls tend to have higher stock betas. This contributes to our stock price volatility in up and down markets, although recent data suggests that stocks with large pension obligations and shortfalls, may not outperform as much as they might have historically in up markets.

Funding and de-risking the pension plan should lower our stock beta. This in turn will lower our cost of capital, and drive the valuation in multiple, drive the higher valuation in multiple. Obviously, our operating performance is the major driver to our stock price. But addressing pension risk can be beneficial in supporting the value of our equity.

Funding and de-risking the plan also will reduce funded status volatility, stabilizing pension cash requirements, and protecting us from unplanned cash demands. This enhances our ability to continue investing in the business, and lowers our overall risk profile.

Let's move to slide 12; the most significant goal of de-risking is to reduce the funded status volatility. Our strategy assumes the normalization of the interest rates over time, which will reduce our liability and our shortfall. This will take time however, and the rate increases alone are unlikely to cure the existing funding shortfall. Asset de-risking will largely offset the interest rate sensitivity of the liability, and more specifics on this I will cover on the next slide.

Our plans will remain subject to volatility until they are fully funded and de-risked. Market events could prolong the duration of the shortfall, and potentially make it worse, triggering mandatory contributions and drawing cash from other priorities. Our strategy begins to take action now, and does not wait or overly rely on favorable interest rate increases. If rates rise faster than expected, we may achieve our goal more quickly, while requiring lower contributions.

Slide 13 shows the sensitivity of the US pension plans to a 1 percentage point change in interest rate. For reference, the liability sensitivity is available in the company's 2012 annual report in the MD&A section on page 72. Although not disclosed in our 10-K, we have estimated here the sensitivity on the fixed income asset to the same change in rate. A 1 percentage point rate increase reduces our US liability by over $5 billion, improving funded status. However, the rate increase also reduces the value of our fixed income assets by about $3 billion, reducing the net benefit of our rate increase.

On the other hand if rates decline, the negative effect of higher liability is buffered by the increase in the value of the assets. A significant rise in rates would be required to cure our pension problem, if taken in isolation. We therefore don't believe its prudent risk management to remain exposed to rates and wait until they rise.

The bottom table shows the sensitivities at our long term asset allocation targets. When fully funded and de-risked, interest rate changes have little impact on funded status, as assets are better matched to plan liabilities. A summary of pension expense and its impact on the balance sheet over the past few years is shown on reference page, slide 58.

Slide 14 addresses most of the frequent questions we receive from investors. Additional questions are addressed on reference slide 59. Reducing funding status volatility is a key priority. It's an important part of our strong balance sheet, and maintaining an investment grade credit rating. We balance cash contributions and our pensions with other capital allocation priorities, including funding our plan and offering a sustainable dividend that grows with earnings. The $5 billion contribution this year is not a run rate. The 1.4 year-over-year increase in discretionary contributions, should be viewed as a onetime event, reflecting the proceeds from our $2 billion debt offering in January. Otherwise, discretionary contributions would have been flat year-over-year.

Our goal is to fully fund our pension plans, progressing toward this goal in the near term. De-risking will sacrifice expected returns, as we move to a target asset mix with more fixed income, with the benefit of our asset returns that are matched to the changes in the value of our liability. In terms of annual contribution, here is a baseline; we have been making mandatory contributions to our funded plans outside the US in the range of $1.1 billion to $1.6 billion annually and these will continue until plans are fully funded.

We also will continue to pay about $400 million annually on an 'as is' basis for our funded plans. The remaining unfunded plan obligation will remain on our balance sheet; and lastly, we will have discretionary contributions to the funded plans as appropriate, and as we approach fully funded. As we have said today, we don't believe it's prudent to remain exposed to downsized risk of our underfunded plans. If market results and interest rates are favorable, we will stop [cinder] and contribute less.

Turning to slide 15, let's review our share count and the impact in the recently expired warrants. Slide 16 is a table pool directly from our 2012 10-K report. The table lists the components that comprise our fully diluted common share count. One of the components that has impacted our fully diluted shares, has been warrants that were issued in 2009 to fund partially the hourly healthcare VEBA trust. These expired at the end of 2012.

As shown in the footnote, 2012 average diluted shares included 53 million shares for warrants outstanding, prior to exercise and 9 million shares outstanding issued for warrants that were exercised. The total impact of the warrants on our average 2012 share count was 62 million shares. The dilutive share count also reflects the impact of the convertible note, by application of the 'if converted' method. However, upon conversion, we have the right to settle these securities in cash or a combination of cash and stock.

Slide 17 highlights the average share count impact of the warrants on our outstanding shares used for our EPS calculation, for the fourth quarter and full year 2012, as well as the first quarter 2013. As discussed on the previous slide, for both fourth quarter and full year 2012, the impact was a combination of average basic shares actually issued for warrants exercised, and the calculated average net dilutive shares from the warrants outstanding prior to exercise.

At expiration, a total of 106 million shares were issued, and will be included in our share count and EPS going forward, beginning in the first quarter 2013. This will increase average diluted shares by 35 million compared with the average fourth quarter level. No warrants remain outstanding.

Turning to slide 18, Mike Seneski will take you through Ford Credit's value proposition.

Michael Seneski

Thanks Neil. Today, I will provide an overview of Ford Credit's value proposition, which enables us to profitably support Ford, its dealers, and our customers through economic cycles. We strategically deliver value to having more than 50 years of consistent financing experience for all dealer needs.

Turning to slide 20, it's important to note that Ford Credit is integrally tied to Fort Motor Company. Our profitability is based on setting competitive leverage and return targets. We have a relentless focus on driving value, based on a competitive funding structure, best in class operating cost structure, and best in class risk management. We have a comprehensive customer relationship management process, that emphasizes the sales and service experience, and drives repeat Ford business, and only Ford business.

Ford Credit's processes and focus create what we call the virtuous circle, and you can see that circle on slide 21. Through our relationship with Ford, we are able to offer integrated, go-to-market strategies to and for our dealers. We have a vested interest in their success. We provide consistent wholesale financing to about 80% of the dealers in the US and virtually all of the dealers in Europe. We maintain consistent underwriting standards through business cycles, which allows our dealers to know that we will be there to put a deal together.

As an example of our consistency over the past five plus years, Ford Credit has financed three out of every four US customers with sub-620 FICO scores who purchase a Ford.

Additionally, the full array of products and services that we provide to our dealers is fully supported by robust training and consulting services, which provide dealers the tools necessary to meet customers' needs. All of these factors are what we believe leads to higher loyalty, satisfaction, and profitability, so let's look at the supporting factors.

First, on slide 22, let's look at loyalty, as that's really the competitive advantage that we bring to Ford. As shown customers who finance with Ford Credit have about a 10 percentage point loyalty advantage, versus customers who use other financing sources. This loyalty advantage directly lead to more Ford sales.

Next, on slide 23, let's look at satisfaction with the financing process; versus other dealer arranged financing, customers are about 10 to 15 percentage points more satisfied with Ford Credit, consistently. We are able to do this, because we work together with Ford and its dealers in full alignment in ways that no other finance service company can replicate. Simply put, satisfied customers are loyal customers.

Slide 24, shows some facts about dealers who floorplan with Ford Credit, versus those that do not. As evidenced, that the virtuous circle truly works, not just for customers, but for dealers and Ford as well. When we look at automotive retail market share and each dealer's market area, the fourth quarter 2012 data shows that dealers with floorplan with Ford Credit have an eight-tenth of a percentage point higher share than those who do not. The Ford Credit share, Ford retail sales for those floorplan dealers is about 13.8 percentage points higher, than the share of non-floorplan dealers.

With regards to customer satisfaction with the new vehicle purchases, floorplan dealers have a 1 percentage point higher score. Certifying pre-owned sales as a percent of total used vehicles sales are 63% higher from floorplan dealers. This is very important for both Ford brand health, as well as dealer profitability as well as customer satisfaction; and for add-on product sales, ESP and Wear Care product penetration are higher by 33% and 10% respectively. As the data shows, being a floorplan dealer with Ford Credit, enhances loyalty and customer satisfaction to the benefit of Ford, our dealers and our customers.

Moving to slide 25; finally, in addition to the benefits we bring to Ford dealers and customers, the business has been very profitable. Over the last 20 years, we have generated $43 billion in pre-tax profit, a consistent earnings stream, with the exception of the lease impairment in 2008. During the same period, we paid a reliable flow of dividend, totaling $27 billion. Cash flows, that go directly into financing new product programs, which continue to average the circle.

With that on slide 26, Stuart Rowley will now take you through our capital spending in Asia-Pacific, Africa.

Stuart Rowley

Thanks Mike and we will move to slide 27. This slide shows the number of assembly plants we presently have in Asia-Pacific, Africa, as well as those that are under construction. As you can see, we presently have 10 assembly plants in Asia-Pacific, Africa, and four additional assembly plants under construction. In addition, although not shown on the slide, we also have three power train plants under construction.

We have three assembly plants in China, with three more to be launched. All of these assembly plants are owned by our unconsolidated joint ventures in China. In ASEAN, we have two, wholly-owned or consolidated joint venture facilities, and one unconsolidated joint venture facility. In the remaining locations, all of the assembly plants are wholly-owned or consolidated joint ventures, including the new assembly plant under construction in India.

Moving to slide 28; this slide compares the funding of investments in our unconsolidated joint venture facilities, with those that are wholly-owned or consolidated. Capital spending for our unconsolidated joint ventures is funded directly by the joint ventures, and is not included in our consolidated capital spending levels. In Asia-Pacific, Africa, this includes our joint venture in China and Thailand, as shown on the prior slide. It should be noted that our unconsolidated joint ventures outside Asia-Pacific, Africa, are handled in the same way, including our joint ventures in Turkey and Russia.

No equity contributions are projected for any of our joint ventures. Further, all of our joint ventures in Asia-Pacific, Africa, presently pay dividends, and this is expected to continue. Of course, the capital spending for our wholly-owned facilities is fully funded by Ford, and is included in our consolidated capital spending levels.

Turning to slide 29; I will now take through the treatment of restructuring costs related to our European transformation plan announced in October of last year.

Turning to slide 30; we tested the European business for impairment, using our economic and business projections for the business, and concluded that as of September 30 last year, the fair value of the business, exceeded our book value. As a result, no asset impairment was required. Our long term economic and business projections did not change during the fourth quarter of 2012. More information about our impairment testing is available beginning on page 75 of our 2012 Form 10-K. We will incur various impacts related to the restructuring of our European business.

Our operating results will include accelerated depreciation associated with our announced planned closures. The Costa Rican [Figueroa] footprint, including depreciation and amortization, as well as launch and other related costs as a result of these actions, as well as the financial impacts of loss reduction and deferred launch of new products. We will report the special items separation related costs.

Turning to slide 31, I will now take you through some information on our warranty reserves. Slide 32 discusses how we follow specific rules of the road, in booking warranty expenses, and how this can result in warranty costs being uneven, both in absolute sense and on a period-to-period basis. Ford provides warranties on the vehicles we sell. Warranties are offered for specific periods of time and/or mileage, and vary depending on the type of product, the usage of the product, and the geographic location of the sale.

Also included in the reported warranty costs, are the costs associated with product recalls, as well as other customer service actions, such as roadside assistance. Estimated lifetime warranty costs are developed using historical warranty information for each vehicle line, by model year, and are accrued for at the time the vehicle is wholesaled.

Following a defined set of rules of the road, the initial estimate of warranty costs are compared with actual experience, and as appropriate, the lifetime estimates are revised. This can result in significant one-time positive or negative reserve adjustments, as accruals are adjusted in a given quarter. In the case of older model year vehicles, for which we no longer carry reserves, such as the Windstar, the effects of any field service actions, directly impact our bottom line.

Slide 33, shows a table from our 2012 Form 10-K. Last year, actual cash payments for warranty were $2.3 billion. $545 million or nearly 20% lower than 2011. Based on the rules of the road discussed on the prior slide, accruals for warranties for vehicles sold in 2012 were $1.9 billion, 15% or $330 million lower than 2011. As a result, warranty reserves at year end 2012 were $3.7 billion, $200 million lower than year end 2011.

This concludes our 2013 Ford University presentation. Please be sure to review the reference material included in this deck, and the Credit University package, which is also posted for your information.

At this point, myself, Neil, and Mike, will be happy to take any questions that you might have.

George Sharp

Thanks Stuart. Now we will open the lines for Q&A session. Now during this session, please feel free to ask questions about either the materials just presented, or the reference in Ford Credit materials provided. If you have any questions related to our recent proxy statement or other business issues however, please direct them to investor relations. And of course, in order to allow as many questions as possible within our timeframe, please keep your questions brief. Katina, could we have the first question please?

Question-and-Answer Session

Thank you. [Operator Instructions]. Your first question comes from the line of John Murphy, representing Bank of America/Merrill Lynch. Please proceed.

John Lovallo - Bank of America/Merrill Lynch

Hi guys, this is actually John Lovallo on for John Murphy. Thanks for taking the call.

George Sharp

Good morning John.

John Lovallo - Bank of America/Merrill Lynch

I guess the first question would be, you guys have certainly done some good work on the pension side. Has been there any thought that you are taking some of the liability off the books completely, somewhere to one of your -- one of your competitors had done with the credential?

George Sharp

I think from our perspective John, we have -- obviously when the process of the lump sums, which will impact the US salaried retirees, and that will obviously remove liability from our books. Given our present position, we see a lot of work that we can do on the funded plans, leaving them on our books, and just getting them better funded and de-risked and not yet worry about to the point where we are overfunded and have to pay a premium on top of that to annuitize.

John Lovallo - Bank of America/Merrill Lynch

That's helpful. Thanks. Next question would be, given your outlook for European production, it seems like things have softened a bit since the fourth quarter call. Is it region specific or is it pretty broad based across Europe?

Stuart Rowley

John, its Stuart here. We have seen a softer industry in Germany during the beginning of the year, but we guided previously, the 13 million to 14 million units, and we are now at the lower of the end of that range. I'd say it's fairly broad based, the UK is maybe holding up better than some other markets, and Germany is a little softer.

John Lovallo - Bank of America/Merrill Lynch

Great. If I could just sneak one more in here guys, the higher satisfaction rate that you guys talked about at Ford Motor Credit versus other financing arrangements, what would you say were the primary factors, and would you also say that it's probably pretty consistent with other OEMs who have in-house financing, versus using outside financing?

Stuart Rowley

I really think it goes back to the virtuous circle. I mean, we are so integrated, not only with Ford and the dealers, it allows the entire process in the F&I office to be that much more efficient and effective. I can't really talk to others, but, you know, if you look at other people's performance and what they are doing with their captive companies, it might lead you to believe that others have the same type of performance that we do.

John Lovallo - Bank of America/Merrill Lynch

Okay. Thank you very much guys.

Operator

Your next question comes from the line of Adam Jonas, representing Morgan Stanley. Please proceed.

Adam Jonas - Morgan Stanley

Thanks everybody, and really -- I really appreciate that you take the time to do this. First question on slide 30 of the main deck, the treatment of the European restructuring costs. You provide a better visibility on trying to bucket the operating impact for what's hurting Europe this year, and particularly accelerate depreciation, where you called out around the $400 million impact this year. Can you help us bucket the other three forces of the operating results, the cost to reconfigure the other related cost and the lost production in your forecast of around $2 billion, what's interpolated there?

Stuart Rowley

Adam, it's Stuart here.

Adam Jonas - Morgan Stanley

Hi Stuart.

Stuart Rowley

We haven't provided any quantification of those elements. In terms of what is involved in those, on the lost production, maybe starting at the bottom. One thing that we have discussed is we made a discretionary decision to defer the launch of our new Mondeo product, which is the sister product of the Fusion when we concluded to propose to close the Genk facility. So that is a product that we would have been benefiting from in 2014 calendar year, and obviously therefore not in our results. Additionally, as you are aware, we have been in the negotiation process with -- and representatives in Genk during the first quarter and we had limited production during that time, and that has an impact on our results.

As we progress then to implement our transformation plan, we will incur incremental costs to reconfigure the footprint as we move product around -- CD products plan to go to Valencia, which doesn't presently produce those products and the C-MAX, which we have proposed to move from Valencia to St. Louis. So all of those things come at a cost, incremental to what may have been viewed as normal business, and we will record in our normal operating expense. It's not meant to be a fully comprehensive list, but we just wanted to provide some texture.

Adam Jonas - Morgan Stanley

Thanks for that. Appreciate the context there. But will it be offline order of magnitude that we assume that those other -- the other factors beside the accelerated depreciation of $400 million, taken together with this delay of the Fusion, the operation reconfiguration that those combine would be at least as high as the $400 million impact?

Stuart Rowley

Well, we haven't provided quantification of that item.

Adam Jonas - Morgan Stanley

Okay. I have a couple of questions for Mike Seneski. Just referring to slide 27 of the credit deck, where you show the lease return volume, plummeting to 62,000 units in 2012. Based on your origination volume, which I am sure you are looking at, can you give us the numbers of off-lease return volume that you are expecting in 2013 and possibly 2014, given that you know [with] the pipeline?

Michael Seneski

I think we have guided that for this year, we would see up around 100,000 units I believe. We haven't given guidelines for 2014, but you will see another order of magnitude increase. Obviously, the 2012 low numbers come from reduced leasing in 2009, which we started to have a pick-up in '10 and '11. So I would say -- you are not that far off with the same order of magnitude for '14 versus '13.

Adam Jonas - Morgan Stanley

So we are anniversarying on a very steep point of off-lease volume, given that the recovery 36 months ago was quite steep, is that fair to assume?

Michael Seneski

It's not just us, it’s the entire industry.

Adam Jonas - Morgan Stanley

Now Mike, when you give those numbers like the 62 and then 100 and what not, is that already adjusted, that's the units that you get back, that's based on the 60ish% kind of return rate or is that the total number of leases, like is that the entire number, including those that are bought out by the lease terminations?

Michael Seneski

Termination, return rate and return volume, right. So if you look at 2012, there was about 100,000 -- this is just US-only, 100,000 units 62% return rate order then you get 62,000. Next year, I haven't given guidance really on the return rate, but what we are saying is you probably see closer to, just for the US alone, about 150,000 cost terminations and then you got to determine what the return rate is going to be off that.

Adam Jonas - Morgan Stanley

Great, thanks for that. And the average term, I guess you give it here, but it looks like it would balance out, if something is slightly less than 36 months. I don't know if you have an exact number?

Michael Seneski

Sounds right. You are going to get a combination of 24 and 36 and 39 is really used to try and get you, so that you don't have returns coming back in the non -- in the lower used-car value periods.

Adam Jonas - Morgan Stanley

Thanks for that, and just one final question Mike, on slide 26 of the Credit deck, you show the -- again a plummeting of, not only the worldwide chargeoffs to 16 bps, but also your credit loss reserve to 44. I know I ask you this over and over and you are probably annoyed but, are we kind of seeing an inflection? I mean, there has to be some theoretical minimum, as you kind of -- as subprime gets back into the market? I know you are very cautious there, but are we now seeing -- we can't get any lower right, is that fair and can you quantify perhaps how order of magnitude of an increase we could expect to see in these numbers, particularly the reserves in 2013? Thanks.

Michael Seneski

If you actually look at slide 51.

Adam Jonas - Morgan Stanley

I must have missed that.

Michael Seneski

Give you a little bit of a view. I think the key point is, we believe that 2012 was a historical low, and that we are going to start to see an increase off that. The 10-year average is about 67 basis points versus the 16 that you saw last year. Obviously we don't expect to go back to that level, to that historical average, but we do expect to see a pickup off that. Remember, in the second quarter, we had an 8 basis point [LDI] here, and we don't really expect to see that again.

Adam Jonas - Morgan Stanley

Okay. But that diagonal shaded portion is supposed to express a rough order of magnitude, uppish, and they are not $100 million but something sub that --

Michael Seneski

Yeah, (inaudible) on again. We will give you some updates in the first quarter, and you will be able to see how we are doing. Recognize that also the reserves are going to increase, just because we are growing, right. (Inaudible) grow this year, and you got higher credit losses, so you are going to get an increase, that's not going to affect the reserves as a percent of the total as much, but that's certainly a couple of a headwinds for our profit this year.

Adam Jonas - Morgan Stanley

Totally clear. Thanks very much. Appreciate it.

Operator

[Operator Instructions]. Your next question comes from the line of Joseph Spak, representing RBC Capital Markets. Please proceed.

Joseph Spak - RBC Capital Markets

Good afternoon. Thanks everyone again for doing this. Really appreciate the additional color on getting back to the pension plan on the interest rate sensitivity to the assets. I just had maybe a little bit of a technical question. As you move to the 80% fixed income, is that actually straight fixed income investments, or is there a little bit of an immunizing portfolio there with some hedges involved?

George Sharp

No, it's strictly a fixed income portfolio from a standpoint of basically corporate and different types of fixed income securities to match not only the liability itself, but the interest rate component of that, so we pretty get close to a duration match, and so we don't take risk from a standpoint of being long or short, and so the interest change changes on the liability will mirror the changes that we get on the assets.

Joseph Spak - RBC Capital Markets

Okay. Yeah, I guess, immunizing it at these levels could be a little bit difficult. I mean, that's something you would eventually be able to consider as rates move higher, and you get into a better position?

George Sharp

We have done a lot of work from the standpoint of the analytics that go underneath it, and we have come to the 80% conclusions for several reasons, including the nature of the discount rate being essentially a AA rated bond, and as you guys well know, the access to enough AA bonds are probably not existent, and so you have to sort of play around a little bit from the standpoint of A and BBB as well, and recognize that also, if you went to 100% bonds which we get a lot of questions on as well, you get survivability risk, because the index, if there is a defaulting bond, you just take it out of the index. Unfortunately, you just can't take that out of your portfolio. So you really -- we have done a lot of modeling, and 80% bond seems to be the sweet spot from the standpoint of the risk reward trade-off, and also give us a little bit of growth assets that will allow us to fund some of the future service and things that we would occur over time for the actives.

Joseph Spak - RBC Capital Markets

Okay great. Then one more from me. If you look to page 27 which is the capital spending in Asia Pacific and specific with China, with three plants under construction, can you remind us, or if you haven't already said this and just tell us, what sort of segments each of those plants, as they come on '13, '14, '15, are geared towards?

Stuart Rowley

We have provided guidance for -- or we have communicated new facilities we are having under construction in our CAF joint venture in Chongqing and Hangzhou and then a third one in a JMC joint venture. We haven't provided details on which products will be produced in those vehicles, that will be closed at the time.

Joseph Spak - RBC Capital Markets

Okay. Thanks again for those guys. Thanks.

Operator

Your next question comes from the line of Patrick Archambault representing Goldman Sachs. Please proceed.

Patrick Archambault - Goldman Sachs

Thanks a lot. Good morning and appreciate the detail here as well, it is very helpful. I guess just one of the questions I was recently asked, I wanted to get a clarification. I mean, to move to this kind of 80% LDI positioning in the pension. Is that something that you would consider doing before you are fully funded, or is that kind of -- as your funding gap closed, that just closed to zero then you eventually get to the 80%?

George Sharp

Our strategy is clear, we are going to manage the glide path down. So as we get better funded, we will sort of continue to work down toward the 80%, or up to the 80% from our fixed income allocation. If rates start to go up, we will accelerate and we will just manage that curve down, to get us to the 80%.

Patrick Archambault - Goldman Sachs

Okay, helpful. In terms of your international pension liabilities, I take the view there is that, the cash calls will continue to be sort of pay-go, there is not really any plans to fund those, is that correct?

George Sharp

Well, I think what we have said in Canada, is we are going to start the same process in 2013 toward the 80-20 mix, and started the non-voluntary. So the mandatory contributions that we have been making outside the US is really the UK and the Canadian plan, those will continue. But we would also hope that we will get the international plans under the same strategy. So longer term, we can get all the plans to fully funded and de-risk.

Patrick Archambault - Goldman Sachs

Okay. Interesting, so there are -- because you haven't typically made voluntary contributions in those international plans, have you?

George Sharp

Correct.

Patrick Archambault - Goldman Sachs

Okay. But that could happen in the future. Okay.

Michael Seneski

And I think it will depend on where they are. Right now they have mandatory, and I think we have a global strategy, and this is the funded plans. There is also unfunded plans that obviously the big one being in Germany, that would obviously not have the same strategy.

Patrick Archambault - Goldman Sachs

Okay. I have one follow-up actually on slide 33, the warranty. I just wanted to understand, how these accruals as the third item down, which are down 15%, which I take it is on new vehicles. How did that perform sort of on a per vehicle basis, and what's the main rationale for that coming down, is that -- I know you had some quality issues with electronics, is that just a sign that you have kind of largely worked through those areas?

Stuart Rowley

Patrick, this is Stuart. We have very prescribed rules that we follow in establishing our accruals. We set the accruals on a by vehicle, by model year, by markets sold basis, and we select the accrual level based upon actual historical experience, and we update that accrual regularly on a set cadence, based on that actual experience. So what that does in effect over time then, is it averages in actual warranty expense experience. So to the extent that quality improves over time and reducing our expense over time, that will be reflected in our cost accruals and our reserves.

Patrick Archambault - Goldman Sachs

And is it safe to say, this would be easily calculated, but is it coming down on a per unit basis as well as in aggregate?

Stuart Rowley

Yes.

Patrick Archambault - Goldman Sachs

Okay. All right great. Thank you very much for the slides and the presentation.

Operator

Your next question comes from the line of Dan Galves representing Deutsche Bank. Please proceed.

Rod Lache - Deutsche Bank

It's Rod Lache actually. Couple of questions on Ford Credit, just hoping you can give us some perspective on the mix of the originations, what percentage of that has been subprime, and how does that compared with what we have seen in recent history, and also related to that, just based on some of the data that Experian and others have released, it looks like, just the increase in credibility in that area has been a big plus for the overall market. I think in the fourth quarter in particular, subprime on a year-over-year basis is up by something like 30%. How should we be thinking about that over time? Is there much room left to go potentially in penetrating some of these other tiers and could that be significant and continuing to help the [industry] growth?

Michael Seneski

Sure Rod, its Mike. I think the first thing you got to remember is, subprime is up, but so is prime, right, the whole market is growing. As it relates to Ford Credit, I have said this time and time again. Our origination practices are extraordinarily consistent. So as we are seeing that total market grow, certainly we are growing the amount of subprime, but it's in proportion and out of that, out of every four -- we finance three out of every four customers who are subprime, who end up buying a Ford vehicle and that stayed pretty constant. So again, I think we have seen it move in concert with the industry, and we played as we always play, and our goal is to be extraordinarily consistent in that regard.

Rod Lache - Deutsche Bank

Okay. But recently we have seen, for the industry broadly, maybe that wasn't the case with Ford. Kind of disproportionate growth in the subprime tiers, I think in the fourth quarter prime was pretty flat on a year-over-year basis in terms of origination, and subprime was up like 30%. That doesn't speak to Ford specifically, but for the overall market. Is that an area that you think maybe just because of the magnitude of the pullback, that's something that can continue to broadly be an opportunity for the overall industry and for Ford Credit, disproportionately, or not anymore?

Michael Seneski

Our economist Ellen Hughes-Cromwick has stated a number of times that, we really don't see credit availability as an issue. In the auto industry, anybody who wants -- who is trying to get a car for the most part, can get one. So I am not sure that there is greater opportunity than what we are seeing today.

Rod Lache - Deutsche Bank

Okay. And what is the percentage of your originations that would fall into that category?

Michael Seneski

What we say is, we are about 5% of the assets that we originate we would call high risk, that doesn't necessarily mean subprime, because it's related to our model. Look at under 620, you'd have to go to our prospectuses and see what we do from an AVS perspective, but very consistent.

Rod Lache - Deutsche Bank

Okay. Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back to Mr. George Sharp, for any closing remarks.

George Sharp

Well thank Katina. That concludes today's presentation. I hope that this was beneficial to all of you, and we thank you for joining us.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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