Ford Motor Co. Q2 2009 Earnings Call Transcript

Jul.23.09 | About: Ford Motor (F)

Ford Motor Co. (NYSE:F)

Q2 2009 Earnings Call

July 23, 2009 9:00 am ET

Executives

Bill Agne - Director of IR

Alan Mulally - President and CEO

Lewis Booth - CFO

Analysts

John Murphy - Merrill Lynch

Brian Johnson - Barclays Capital

Himanshu Patel - JPMorgan

Rod Lache - Deutsche Bank

Patrick Archambault - Goldman Sachs

Colin Langan - UBS

Chris Ceraso - Credit Suisse

Bryce Hoffman - Detroit News

Brent Snavely - Detroit Free Press

Jeff Bennett - Dow Jones Newswires

Eric Mayne - WardsAuto.com

Amy Wilson - Automotive News

Todd Lassa - Motor Trend

Robert Schoenberger - Plain Dealer

Chris Isidore - CNNMoney

Operator

Great day ladies and gentlemen, and welcome to the Ford Motor Company's second quarter earnings conference call. My name is Catina, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Bill Agne

Thank you, Catina. 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'd like to thank you for spending time with us this morning. With me this morning are Alan Mulally, President and CEO, and Lewis Booth, Chief Financial Officer. Also in the room are Peter Daniel, Senior Vice President and Controller; Neil Schloss, Vice President and Treasurer; [Mark Kozman], Director of Accounting; and K.R. Kent, Ford Credit CFO.

Before we begin, I'd like to review a couple of items. Copies of this morning's earnings release and the slides that we will be using today have been posted on Ford's Investor and Media website for your reference.

The financial results discussed herein are presented on a preliminary basis. Final data will be included in our Form 10-Q for the second quarter. Additionally, the financial results presented here are on a GAAP basis, and in some cases on a non-GAAP basis. The non-GAAP financial measures discussed in this call are reconciled to our GAAP equivalent as part of the appendix to the slide deck.

Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance. Actual results could differ materially from those suggested by our comments here. Additional information about the factors that could affect future results are summarized at the end of this presentation.

These risk factors are also detailed in our SEC filings, including our annual, quarterly, and current reports with the SEC. With that, I would like to turn the presentation over to Alan Mulally, Ford's President and CEO.

Alan Mulally

Thank you, Bill, and good morning. While the second quarter remained very challenging for Ford and the entire auto industry as a result of the continued severe economic headwinds, I am very pleased with the progress we made on our transformational plan.

Consistent with our plan, we remain focused on four areas: aggressively restructuring the business; accelerating the development of new products our customers want and value; strengthening the balance sheet; and working together as one global team.

We made significant strides in each of those areas despite the prolonged and deep downturn. In the second quarter, Ford's pre-tax operating losses were $424 million; an improvement of $609 million from year-ago results, despite sharply lower industry volumes in most regions.

As a result of a large one-time gain associated with the debt reduction actions completed in April, Ford reported net income of about $2.3 billion. We sustained progress on improving our balance sheet in the second quarter.

We completed debt reduction actions totaling $10.1 billion, and we raised $1.6 billion by issuing new common stock. Automotive operating related cash flows in the second quarter were $1 billion, an improvement of $2.7 billion from the first quarter, and improvement of over $6 billion from each of the third and the fourth quarters of 2008.

We also reduced automotive structural costs by another $1.8 billion in the second quarter and remain on track to exceed the $4 billion structural cost reduction target we set at the beginning of this year.

Driving our improved performance in this difficult economic environment is the encouraging progress we're making on the fundamentals of our business, lead by strong new products like the Ford Fusion, Ford F-150, and the Ford Fiesta, we gained market share this year in all major regions, North America, South America, Europe, and Asia Pacific and Africa, while achieving further improvements in our transaction prices and our margins.

Overall, we remain on track, based on our current assumptions to achieve our key 2011 profit and cash flow targets. I will start off today by providing you with an overview of our second quarter financial results and business results, sales and product highlights.

Lewis will then take us through our second quarter financial results in greater detail. Finally, I will summarize our plan going forward, including our outlook for the rest of this year.

Turning to slide three, I'll begin by reviewing the key financial results. As shown at the top of the slide, vehicle wholesales in the second quarter were about 1.2 million units, down 390,000 units from the same period in 2008.

Ford's second quarter revenue was $27.2 billion, an $11 billion decrease from a year ago. The decrease is primarily explained by lower volumes and unfavorable exchange, partly offset by favorable net pricing.

Our second quarter pre-tax operating loss, excluding special items, was $424 million, a $609 million improvement from a year ago. Automotive decline of $320 million was more than offset by a $929 million improvement at Financial Services.

Our second quarter net income attributable to Ford was about $2.3 billion, including a pre-tax special items net gain of $2.8 billion, more than explained by the debt reduction gain I mentioned on the last slide. We ended the second quarter with $21 billion of gross cash. This will be discussed in more detail later.

Turning to slide four. In addition to the total company pre-tax operating results being improved compared with a year ago, results at most operations were improved compared with the first quarter of 2009. In total, a $1.6 billion improvement.

We reduced our Automotive structural costs by $1.8 billion compared to the second quarter of 2008, with $1.2 billion of that improvement occurring in North America. Ford North America had an operating loss of $851 million, a $486 million improvement from a year ago.

Ford South America earned an operating profit of $86 million, a $302 million decrease from a year ago. Ford Europe had an operating profit of $138 million, a $444 million decrease from a year ago, and Volvo had an operating loss of $231 million , a $111 million decline from a year ago.

Volvo is reported as an ongoing operation. The effects of the held-for-sale accounting related adjustments are reported as special items. Ford Asia Pacific and Africa had an operating loss of $25 million, a $75 million decline from a year ago. Finally, Financial Services had an operating profit of $595 million, a $929 million improvement from a year ago.

Slide five details some of our key business highlights this quarter. We announced that we are investing $550 million to transform the Michigan Assembly Plant into a lean, green, and flexible manufacturing complex, where our next-generation global Focus will be built for North America.

A new battery-electric Focus will be built there as well in 2011. We launched a $500 million passenger car plant in Thailand in partnership with Mazda to build the Mazda2 and the Ford Fiesta, which will be exported throughout Southeast Asia, starting with the Mazda2 this fall.

Ford continued to outpace the industry average in the latest J.D. Power Initial Quality Study. We marked our eighth straight year of improvement in the Quality Study with the Ford and Mercury brands finishing among the top 10.

All Ford brands improved significantly in the J.D. Power APEAL study of customer satisfaction. The Ford F-150 and Ford Flex led their respective segments, and were noted for their fuel efficiency and their styling.

In addition, for the first time in the 28 year history of Global Quality Research System's study, US Ford, Lincoln, and Mercury brand vehicles had the fewest number of things gone wrong among all automakers. Customer satisfaction with vehicle quality also continued to improve, reaching its highest level in North America and equaling Toyota.

Slide six continues our key business highlights. In May, we raised $1.6 billion in common stock, offering 345 million Ford shares. We completed actions to reduce our Automotive debt by a total of $10.1 billion, which will lower our annual interest payments by more than $500 million.

Ford qualified for $5.9 billion in loans from the US Department of Energy over the next three years to develop advanced fuel saving vehicles. We will spend about $14 billion in the US over the next seven years developing advanced technology vehicles.

We completed our latest US buyout program, reducing hourly employment by approximately 1,000 employees. In addition, we reached agreement with the UAW, subject to court and other approvals, to allow Ford the option to fund up to half of its VEBA obligations with Ford common stock at market prices, instead of fixed prices in 2009, 2010, and 2011. Finally, we continue to advance discussions with interested parties regarding the sale of Volvo.

Turning to slide seven. Our strong product lineup continued to build global sales momentum compared to a year ago. Ford gained market share in all our regions compared to a year ago.

Importantly, these improvements represent healthy share gains, as we also achieved further improvements in our transaction prices and in our margins. US market share rose for Ford, Lincoln, and Mercury 2 points to 16.4%. Canada and Mexico also improved, with market share gains of 2.8 and 1.8 points respectively.

In June, Ford was Canada's top-selling brand for the first time in 50 years. Ford's share of the South American market improved by 1 point to 10.4%. In Europe, Ford posted a half point gain as market share rose to 9%, its highest second quarter level in the past 10 years.

The new Ford Fiesta is now Europe's number two selling car, with more than 300,000 units sold since its introduction there last fall. In the Asia Pacific and Africa region, Ford's market share was up 1/10 of a point. Also in Asia, Ford's total sales in China were up 39% in the second quarter of 2009.

On slide eight, the second quarter marked another wave of new products entering the market. Ford Europe also benefited from the successful launches of the Ford Transit Connect, the Ford Ranger, and the Ford Transit ECOnetic.

Began production of 2010 Ford Taurus and high-performance Taurus SHO in North America. Ford's flagship sedan arrives soon in dealer showrooms. Production has begun for the 2010 Ford Transit Connect for North America, a purpose-built van for small businesses which will debut this summer.

Production is underway for the 3.5-liter V6 EcoBoost engine, which will be available this year on the Lincoln MKS, the Ford Flex, the Ford Taurus SHO, and the Lincoln MKT. EcoBoost delivers the horsepower of V8 with the fuel efficiency of a V6.

Finally, the Lincoln MKZ, Ford Focus, and Volvo C30 earned the "Top Safety Pick" award from the Insurance Institute of Highway Safety. Ford now leads all auto brands in the number of IIHS 'Top Safety Picks.

Now, I would like to turn it over to Lewis to provide more details on our second quarter financial results.

Lewis Booth

Thanks, Alan. Let's move on to slide 10, which provides more information on our financial results. Ford's second quarter pre-tax operating loss, excluding special items, was $424 million, a $609 million improvement from a year ago. Most of the remaining slides will focus on these pre-tax operating results.

Our pre-tax operating results excluded the special items net gain of $2.8 billion, which we'll cover on the next slide. We recognized $25 million of tax expense, more than explained by taxes incurred in foreign locations where we were profitable.

Excluding income from non-controlling interests, our second quarter net income attributable to Ford was about $2.3 billion. Slide 11 cover special items. A pre-tax net gain of $2.8 billion in the second quarter.

In North America, we recorded a charge of $98 million, primarily related to personnel reduction actions in the US. We also recorded a charge of $110 million related to the UAW retiree health care VEBA agreement.

Operations outside of North America recorded a charge of $160 million for personnel reduction actions largely incurred in Europe. We completed our debt reduction actions in early April. As mentioned previously, recognized a $3.4 billion gain primarily associated with the conversion of $4.3 billion of our convertible note obligations, and the repurchase of $3.4 billion of our unsecured debt.

We recorded $141 million of held-for-sale accounting related adjustments for Volvo, reflecting the elimination of depreciation and related costs. The liquidation of a foreign subsidiary triggered the recognition of previously deferred foreign currency translation adjustments, resulting in a non-cash charge of $281 million.

Finally, we recorded an impairment charge of $92 million, primarily related to the sale of our transmission plant in Bordeaux.

Now on to slide 12, which shows our pre-tax operating results by sector? Our second quarter pre-tax operating results were a loss of $424 million, and these results include a loss of just over $1 billion for the Automotive sector, and a profit of $595 million for Financial Services.

As Alan mentioned, and as shown in the memo below the chart, total company results have improved by $609 million compared to the second quarter 2008, and by nearly $1.6 billion compared to the first quarter of 2009.

Let's move to slide 13, which shows pre-tax operating results for each of our Automotive operating segments and Other Automotive. We'll focus here on Other Automotive, and then cover the operations in detail on the next slides.

In the second quarter, Other Automotive was a loss of $136 million. Net interest expense of $271 million was partly offset by fair market value adjustments, primarily attributable to our investments in Mazda.

Slide 14 shows the change in second quarter results compared with the year ago. Volume and mix was about $2.2 billion unfavorable, primarily explained by the decline in industry volumes and a reduction in dealer stocks across all of our Automotive operations, partly offset by market share improvements.

Market share improved in all our regions, including a two point improvement in the US, up to 16.4%, and a half-point gain in Europe up to 9%. Net pricing was $1.2 billion favorable, primarily explained by higher pricing in the US, reflecting the success of our new products, including the F-150, the Fusion and the Mustang, and our continued disciplined approach on incentives.

Cost changes were $1.3 billion favorable, reflecting structural cost reductions, partly offset by higher material costs related to product content. On the next slide, we will focus on those structural cost reductions.

Exchange was about $400 million unfavorable, more than explained by unfavorable exchange in North America and South America. Net interest and fair market value adjustments were $200 million favorable, more than explained by fair market value gains, primarily attributable to our investment in Mazda, and to lower interest expense.

Finally, included in the Other decline of $400 million are lower parts and subsidiary profits largely related to the decline in industry volumes, and the impact of our lower ownership share in Mazda.

Now on to slide 15, which explains our automotive structural cost reductions. These were $3.6 billion in the first half; and as shown in the memo, $1.8 billion in the second quarter. Manufacturing and engineering costs were $1.9 billion lower in the first half, largely reflecting the continued benefits of personnel actions in North America and Europe.

Spending related costs improved by about $400 million, primarily reflecting lower depreciation expense. Pension and retiree health care expenses were $600 million lower, primarily reflecting the effect of the UAW retiree health care VEBA agreement.

Overhead costs were $300 million lower, including salaried personnel reductions and other restructuring actions, and advertising and sales promotions were about $400 million lower than a year ago.

Going forward, we expect our second half structural cost reductions will be lower than our first half reductions, largely because we completed most of our personnel reduction actions and our US hourly retiree health care VEBA agreement became effective by the third quarter of last year.

For the next section of slides, we'll cover each of the Automotive operations, starting with North America on slide 16.

In the second quarter, wholesales were 458,000 units, down 221,000 units from a year ago, primarily reflecting the 33% decline in US industry SAAR, from 14.6 million units in the second quarter 2008 to 9.8 million units in the second quarter 2009.

During the second quarter, we reduced US dealer stocks by 66,000 units to align with the lower industry volumes. In comparison, during the second quarter of 2008, we decreased dealer stocks by only 6,000 units.

Second quarter US total market share for Ford and Lincoln Mercury was 16.4%, up two percentage points from last year, reflecting higher retail and fleet share.

Second quarter revenue was $10.8 billion, a $3.4 billion decrease from a year ago, more than explained by lower volumes, partly offset by favorable net pricing. For the second quarter, Ford North America reported a pre tax loss of $851 million, a $486 million improvement from a year ago; and we will cover this improvement on the next slide.

Turning to slide 17. This slide provides an explanation of the change in North America results compared with a year ago. Volume and mix was $1 billion unfavorable, more than explained by the decline in US industry volumes and lower dealer stocks, partly offset by improved market share and favorable mix.

Net pricing was $900 million favorable, primarily reflecting the success of our new products, including F-150, Fusion and Mustang, selective top line pricing, and our continued disciplined approach on incentives.

Cost decreased by $1 billion. This was more than explained by lower structural costs, including lower manufacturing and engineering, pension and OPEB, spending related costs, and overhead.

These structural cost reductions were partly offset by higher material costs, primarily reflecting product content. Exchange was $300 million unfavorable, primarily reflecting the balance sheet impact of a weaker US dollar, relative to the Canadian dollar.

Slide 18 provides an explanation of the change in North America's second quarter 2009 results, compared with first quarter 2009. Volume and mix was $800 million favorable, more than explained by an increase in market share from 13.9% to 16.4%, and higher absolute US industry volumes.

Net pricing was about unchanged, and costs increased by about $500 million, primarily reflecting the non-recurrence of favorable first quarter warranty and reserve adjustments, and higher material costs, largely associated with distressed suppliers.

Exchange was $300 million unfavorable, primarily reflecting the balance sheet impact of a weaker US dollar relative to the Canadian dollar. The decline in Other includes lower subsidiary costs.

Slide 19 shows US market share for Ford and Lincoln Mercury. In the second quarter, our market share was 16.4%, up two points from a year ago and up 2.5 points from the first quarter of 2009.

Compared to 2008, share improvement is concentrated in Ford's newest products, the Fusion, the Fusion Hybrid, Flex, and the F-150, as well as our Escape small utility.

Customers are equipping these new products with high levels of content and features, which indicate that they value the quality, safety, fuel economy, and smart technologies of these features. This is encouraging because these product attributes are the underlying pillars of our product development and marketing plan.

Relative to the first quarter 2009, market share increased in the second quarter with retail share improvements primarily reflecting the new Fusion and Fusion Hybrid. Fleet share, although not shown, also improved with a continued focus on profitable fleet sales. Fleet sales benefited from improved residual values and our stable production schedule.

Now, on to South America on slide 20. In the second quarter, wholesales were at 111,000 units, down 8,000 units from a year ago, reflecting a decline in industry SAAR from 4.6 million units in the second quarter of 2008 to 4.2 million units in the second quarter 2009, and a small increase in dealer stocks, partly offset by market share improvements from 9.4% to 10.4%.

Second quarter revenue was $1.9 billion, a $500 million decrease from a year ago, primarily reflecting weaker Brazilian currency. For the second quarter, Ford South America earned a pre-tax profit of $86 million, a $302 million decrease from a year ago. This decrease primarily reflects unfavorable exchange, higher commodity costs, and lower volume, partly offset by favorable net pricing and product mix.

Slide 21 covers Ford Europe. In the second quarter, wholesales were 400,000 units, down 132,000 units or 25% from a year ago. This reduction is explained by lower industry volumes and substantial dealer stock reductions, partly offset by improved market share.

Second quarter industry SAAR for the 19 markets that we track was 16 million units, down 1.2 million units from a year ago. In addition, the Russian industry SAAR was 1.4 million units, down 1.8 million units or 56% from a year ago.

Second quarter market share was 9%, up a half point from last year, and our highest second quarter level in 10 years, reflecting the continued strength of our product portfolio.

Second quarter revenue was $7.2 billion, a $4.3 billion decrease from a year ago, more than explained by lower volumes, unfavorable exchange, and unfavorable product mix.

For the second quarter, Ford Europe reports a pre-tax profit of $138 million, a $444 million decline from a year ago, and we'll cover this decline on the next slide.

Slide 22 provides an explanation of the change in Ford Europe results compared to a year ago. Volume and mix was about $800 million unfavorable, primarily reflecting the decline in industry volumes, the dealer stock reductions, and unfavorable mix, partly offset by improved market share.

The industry volume decline included a significant decline in commercial vehicle volumes, primarily reflects the economic weakening in most European markets and in Russia. Net pricing was $200 million favorable compared to a year ago. This reflects favorable vehicle pricing, primarily in Britain and Russia, in part to offset unfavorable currency exchange effects.

Costs decreased by $200 million, primarily explained by structural cost reductions, reflecting continued progress on aligning capacity with demand. These improvements were partly offset by distressed supplier costs and product content. Exchange was about $100 million unfavorable, mainly due to the weakening of the British pound and the Russian ruble compared with the euro.

Slide 23 provides an explanation of the improvement of about $700 million in second quarter 2009 results compared to the first quarter 2009. Volume and mix was $400 million favorable, primarily explained by higher industry volume, driven by vehicle scrappage incentives, and a smaller decrease in vehicle stocks, including market mix.

Net pricing was $100 million favorable; and costs decreased by about $100 million. Other was $100 million favorable, primarily reflecting improved profits from our joint venture in Turkey.

Slide 24 covers Volvo. As Alan mentioned, Volvo is reporting as an ongoing operation. The effects of held-for-sale accounting related adjustments, primarily the elimination of depreciation are reported as special items.

In the second quarter, wholesales were 79,000 units, down 28,000 units or 26% from a year ago. This reduction is primarily explained by a decline in industry volumes, lower market share in Europe and Russia, and lower dealer stocks.

Second quarter market share in the US was six-tenths of 1%, and share in Europe was 1.2%. US market share improved by tenth of a point from last year, reflecting the launch of the XC60, and successful new marketing programs.

Second quarter revenues were $2.9 billion, a $1.4 billion decrease from a year ago, primarily explained by lower volumes and unfavorable exchange. For the second quarter, Volvo reported a pre-tax loss of $231 million, a $111 million decline from a year ago.

The decline primarily reflects lower volumes, partly offset by continued progress on cost reductions and favorable exchange. In the first half of 2009, Volvo has successfully launched the all new XC60 in North America, and the S80 long wheelbase in China.

Slide 25 covers Asia Pacific and Africa. In the second quarter, wholesales were 124,000 units, down 1,000 units from a year ago, primarily reflecting dealer stock reductions and lower sales in Australia and South Africa, partly offset by strong performance in China.

Second quarter industry SAAR was 22.8 million units, up 400,000 units from a year ago. While the Chinese industry increased by 22%, industry volumes in most of our other key markets were down anywhere from 10% to 35%.

Second quarter market share was 2%, an improvement of tenth of a point from last year, reflecting share improvements in China, Australia , South Africa, and Taiwan. Second quarter revenue, which excludes sales of our joint ventures in China, was $1.2 billion, a $500 million decrease from a year ago, more than explained by lower volumes outside of China and unfavorable exchange.

In the second quarter, Asia Pacific and Africa reported a pre-tax loss of $25 million, a $75 million decline from a year ago. This decline is more than explained by adverse market mix, partly offset by lower costs.

Slide 26 shows Automotive cash and cash flow. We ended the second quarter with $21 billion in gross cash, down $300 million from the first quarter 2009. Our Automotive operating related cash flow was $1 billion negative in the second quarter, reflecting an Automotive pre-tax loss of $1 billion.

Capital spend during the quarter was about $100 million lower than depreciation and amortization, although we expect second half capital spending to be higher, in part, due to the normal seasonality of our spending.

Changes in working capital and other timing differences were $500 million positive. This is explained by $1 billion of positive working capital due to higher payables and lower inventories, offset by timing differences primarily related to health care payments.

Payment of $600 million to Ford Credit reflects our change to upfront payment of subvention. Excluding the impact of the change to upfront subvention payments, our Automotive operating related cash flow was $400 million negative. The operating related cash outflow of $1 billion in the second quarter represents a $2.7 billion improvement over the first quarter. This primarily reflects improved cash from earnings, timing differences, and lower capital spending.

Other changes in gross cash include payment of $200 million for personnel reduction actions; pension contributions of $300 million; an issuance of equity in May of $1.6 billion; partly offset by cash utilized in debt reduction actions. Including all of these impacts, the total decrease in gross cash during the second quarter was $300 million.

Now let's turn to slide 27 on Financial Services. For the second quarter, the Financial Services sector reported a pre-tax profit of $595 million, a $929 million improvement from a year ago. Other Financial Services reported a pre-tax loss of $51 million in the second quarter, an $11 million decline from a year ago. This decline is more than explained by a loss related to our real estate transaction. We'll cover Ford Credit in more detail on the next slide.

So, slide 28 covers Ford Credit. In the second quarter, Ford Credit reported a pre-tax profit of $646 million, a $940 million improvement from a year ago. Volume was about $300 million lower compared with a year ago, reflecting declining receivables. As shown in the memo in the lower left of the slide, Ford Credit's June 30, 2009, receivables were $99 billion, about $37 billion lower than a year ago. This decline primarily reflected lower industry volumes, lower dealer stocks, the impact of divestitures and alternative business arrangements, and changes in currency exchange rates.

The financing margin was essentially flat compared to a year ago, and the decline in the provision for credit losses of about $100 million is more than explained by lower reserve increases.

Residual losses declined by about $800 million in the second quarter of 2009 compared with last year. This improvement primarily reflects the impact of improving auction values on the portfolio of leases, and lower losses on the vehicles returned during the quarter. Last year, during the second quarter, Ford Credit experienced declines in auction values.

The increase in Other primarily reflects net gains of about $250 million related to unhedged currency exposures, lower operating costs of about $60 million, and other improvements partly offset by non-recurrence of a gain of about $100 million on the sale of approximately half of Ford Credit's interest in its Nordic operations.

While Ford Credit's second quarter results were favorable, Ford Credit expects its second half 2009 results to be lower than the first half. Ford Credit does not expect the net gains on unhedged currency or improvements in lease residuals in the amounts experienced in the second quarter to continue.

Furthermore, Ford Credit expects year end receivables of between $85 billion and $95 billion, and this decline in receivables also will lower its second half results.

Slide 29 shows the liquidity and funding outlook for Ford Credit. The left box shows Ford Credit's committed liquidity programs in cash, and the utilization of its liquidity sources at the end of the second quarter.

Ford Credit's liquidity exceeded utilization by about $20 billion. During the second quarter, we've seen improvements in the capital markets with respect to both market access and funding spreads, enabling us to execute our funding plans.

Ford Credit plans to renew committed capacity consistent with the size of its balance sheet, and will utilize appropriate government sponsored programs for which it is eligible.

In the near-term, government sponsored programs in the US and around the world will be an important component of our funding plans. So far in 2009, we've completed about $7 billion of TALF-eligible securitizations, utilizing both retail and lease assets. We also continue to utilize the commercial paper funding facility and the European Credit Bank's facilities.

Gaining approval of our application for an industrial loan corporation is a component of Ford Credit's funding plans which would provide access to FDIC insured deposit funding.

Ford Credit will continue to explore and execute alternative business and funding arrangements in those locations where it lacks diverse funding capacity. Ford Credit's funding structure remains focused on maintaining liquidity to meet short-term funding obligations, including holding substantial cash balance.

By the end of the second quarter, Ford Credit's managed leverage was 8.4 to 1, and Ford Credit's equity was about $10.3 billion.

Slide 30 covers our 2009 third quarter production plans. In North America, the third quarter production schedule is 485,000 units, up 67,000 units from 2008, and unchanged from the level provided earlier this month.

For Ford Europe, we expect third quarter production of 385,000 units, down 9,000 units from a year ago. At Volvo, we expect third quarter production of 74,000 units, up 2,000 units from a year ago.

Overall, third quarter production is expected to be up compared with 2008 and second quarter of 2009 production. This increase is largely due to tightly controlled inventories, and higher market demand for our products.

Now, I would like to turn it back to Alan to summarize our plan going forward and the outlook for the rest of the year.

Alan Mulally

Thank you, Lewis. Slide 32 provides an overview of the business environment. We expect weak volumes this year across most markets, with worldwide sales down around 10% compared to 2008. This reflects continued weak conditions in the US market with more modest declines in Europe owing to the substantial scrappage programs there.

We now expect industry volumes in Europe and Asia Pacific and Africa to be somewhat stronger than our previous estimate. Some leading indicators are providing encouraging signals that conditions may stabilize in the coming months.

China in particular is seeing tangible improvements supported by the stimulus efforts from its government. Financial markets remain challenging, but have improved in recent weeks, although much of the activity is backed by Central Bank programs in key markets such as the US and Europe.

Our suppliers and dealers continue to be weakened by the impacts of the global economic downturn. Upward pressure on commodity prices has resumed, supported by market expectations of economic growth in the second half of this year. Currencies remain volatile, which poses some risk.

Now on to slide 33, which shows the status of our planning assumptions and operational metrics for the first half of 2009. Total industry volume was equal to a SAAR of 9.8 million units in the US, and 15.4 million units in the 19 markets we track in Europe.

We expect that the full year US industry will be in the range of 10.5 million to 11 million units. This is consistent with the outlook that we have communicated previously in the present economic outlook for the second half of the year.

Based on the first half European industry volume, we now expect the full year Europe industry will be in the range of 15 million to 15.5 million units, higher than our previous outlook of 13.5 million to 14.5 million units.

On the operational metrics, as mentioned previously, the Global Quality Research System study indicates the US Ford, Lincoln and Mercury brand vehicles have made significant progress, reducing things gone wrong, and improving fundamental customer satisfaction.

International operations generally show improvements in the latest GQRS study, with the exception of Europe, where we are working to address some recent issues. Automotive structural costs were reduced by $3.6 billion, which is on track to exceed our full year plan.

As Lewis mentioned earlier, second half Automotive structural cost reductions will be less than the first half as a result of the significant cost reductions achieved during the third and the fourth quarters of 2008.

US total market share was 15.2%. Our share of the US retail market was 12.8%, and Europe market share was 9.2% in the first half. Based on our market share gains during the first half, we now expect full year US and European market shares to improve compared to 2008.

Automotive operating related cash flow was $4.7 billion negative during the first half, on track with our plan. Consistent with our present planning assumptions, we expect Automotive operating related cash flows in the second half to improve from the first half levels. However, due to the substantial improvement in the second quarter, third quarter levels may not improve sequentially.

Capital expenditures were $2.4 billion, consistent with our plan. Overall, we remain on track to achieve or exceed all of our 2009 financial targets, and most of our operational metrics.

In addition, based on our current planning assumptions, we also remain on track to achieve our key 2011 financial targets. These include overall, North American pre-tax results being breakeven or better, excluding special items, and Automotive operating related cash flow being breakeven or better.

Slide 34 summarizes the key aspects of our plan. These have not changed. Clearly, the business environment remains difficult and demand for new vehicles continues to be weak around the world.

However, Ford remains focused on the four key pillars of our plan shown on the slide. These remain unchanged. Despite the challenges, Ford's underlying business is getting progressively stronger as we launch great new products that customers want and value, while continuing to aggressively restructure our operations.

We took several important steps in the second quarter to strengthen our balance sheet, including completing our $10.1 billion debt reduction initiative, and raising $1.6 billion through the sale of equity.

In addition, Ford is proud that it is among the very first automakers to qualify for Department of Energy loans to accelerate the development of advanced fuel efficient vehicles.

Based on our current planning assumptions, we have sufficient liquidity to fund our product led transformation plan, and provide a cushion against the uncertain global economic environment.

I am most pleased with the positive reaction to our new vehicles from customers around the world, from the new Ford car and Ford Fiesta to the Ford Fusion and the Ford Fusion hybrid to the F-150 pickup. We still have much more to come, such as the new Ford Taurus reaching showrooms now, and the Transit Connect, with the upcoming Lincoln MKT with EcoBoost engines.

Clearly, the road ahead remains challenging. While we still expect the economy to begin to improve in the second half of the year, the recovery is likely to be more modest than many of us had hoped.

Going forward, our balanced portfolio of best-in-class, small, medium, large, cars, crossovers, utilities, and trucks, produced and sold globally will provide us with the quality, scale, and the flexibility to adapt more easily and quickly to our ever changing environment, allowing us to provide vehicles that customers want and value.

I remain convinced, and I am more confident than ever that we have the right plan and the right actions to transform Ford into a lean company, delivering profitable growth.

Now, we would like to take your questions.

Bill Agne

Thank you, Alan. Ladies and gentlemen, we are going to start the Q&A session now. We have about 45 minutes for the Q&A. We will begin with questions from the investment community and then take questions from the media, who are also on the call.

In order to allow as many questions as possible within our timeframe, I ask that you keep your questions brief so that we don't have to move callers along after a couple of minutes. So with that, Catina, can we please have the first question?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of John Murphy, representing Merrill Lynch.

John Murphy - Merrill Lynch

One thing that seems to be getting lost in the shuffle here I think is that your capacity utilization rate in North America was incredibly low in the first half of this year. By my rough calculations, it is just a little bit better than 50%. I was just wondering if that jives with your calculations, and how we should think about operating leverage as that capacity utilization improves, because that is a horrifically low level, and the losses are pretty good performance in the face of that.

Alan Mulally

We are looking at that now. Are you thinking of manned?

John Murphy - Merrill Lynch

I'm thinking two shifts, straight time, basically assuming the capacity in North America is about 2.9 million.

Lewis Booth

By our analysis, first quarter was about 75% and second quarter was about 80%. So, the way we calculate the utilization, and that's manned utilization, John. So, perhaps offline we can take you through the numbers and try and understand the difference.

John Murphy - Merrill Lynch

Okay. But even with that, as we look at production ramping up in the third quarter and theoretically going forward, how should we think of that operating leverage as capacity utilization improves?

Alan Mulally

John, the way to think of it is we'll continue to improve the asset utilization. Remember, I know you know this well, but we have been making economic decisions at each point along the way, not just to consolidate the operations and get the utilization up, but make the best economic decisions through this downturn.

Clearly, the plan that we're operating on will be to build in more flexibility in each of the plants, just like we're doing with the new conversion of the truck plant to the car plant for the Focus, and get to a place where we have substantially more flexibility and ongoing higher utilization. That's the plan.

Lewis Booth

John, I think you recognize we have still got some plant closures ahead of us already announced. So, as the volumes go up, our utilization will continue to improve.

John Murphy - Merrill Lynch

Okay. Then secondly, Lewis, when we look at the payoff schedule for these notes owed to the UAW, it looks like next year in June, you could actually prepay this liability at $7.9 billion, given what you've gotten with the UAW. That is the number that we should be thinking about that could be funded with stock at current market prices? Is that the way to think about it, because I think there is a lot of confusion in the market that you might do an open market transaction; but it seems like this might be a more efficient way to go?

Lewis Booth

You're right. We have the opportunity to pay, but we also have a schedule over the next nine years. We have the option to pay it all in cash, or 50% of it in stock. The change that we just agreed with the UAW, the payments that were due at the end of this year, the middle of next year, and the middle of 2011 in the agreement we made early this year were at fixed prices of $2.00, $2.10, and $2.20.

Remember that when we did the deal our stock was about $1.55 I think or $1.54. We've have now agreed, we'll take away that fixing, and were we to pay the note in shares, it would be at the market price. So that gives us an opportunity should we choose to take it, to issue some equity at market price, which would be much less dilutive for those three payments.

John Murphy - Merrill Lynch

Then lastly, just on the cash-for-guzzlers program, you guys are doing a great job at advertising that in the media, and also on your website. Any early read on website traffic and traffic that that is driving, in addition to maybe any sales impact that you are seeing here in the early days?

Lewis Booth

It's too early to see the sales impact. We expect it to start tomorrow, but I think we've had about 500,000 hits. We've got this really nice link on our website, and it goes straight to a really good explanation and calculating tool. We have had 500,000 hits, which is very encouraging given there is a maximum of about 250,000 vouchers for the whole industry.

Operator

Your next question will come from the line of Brian Johnson, representing Barclays Capital. Please proceed.

Brian Johnson - Barclays Capital

A couple questions. One in North America, one in Europe. In North America, can you maybe, probably for Mr. Booth, talk us through the warranty reserving? I think both from a mechanical level, how do you look at it? Is there a run rate, percent of sales you target? Then kind of a more of a strategic question, if quality is improving why do we see a warranty reserve adjustment?

Lewis Booth

Sure. We true-up our warranty reserves annually when we have the data to support changes. We actually had good news in the first quarter, reflecting the improved quality we are seeing. So the second-over-first adjustment was just the non-recurrence of that true-up. In the forward periods, we are seeing continued improved quality that is flowing through to lower warranty costs, but we only do the true-up on the reserves once a year.

Brian Johnson - Barclays Capital

Do you always do that in first quarter?

Lewis Booth

Yes.

Brian Johnson - Barclays Capital

Okay. So, that is one of the factors that historically lead to first quarter over-performance?

Lewis Booth

We now have very clear rules of the road of how we do the warranty analysis. So, I think it's probably only a factor in the last couple of years.

Brian Johnson - Barclays Capital

Okay. The second thing is in Europe, trying to get a handle on sequential contribution margin per unit. It looked like on a year-over-year basis it was roughly 3,800 euros per unit. On a sequential basis, it looked more like 7,000 euros per unit. Is there something going on underneath that?

Lewis Booth

I don't know. I think offline we'll have to understand your analysis. Let me tell you what is going on in Europe. We are seeing margins improve on a per-unit basis as our products are well received, and we are getting both, better sticker price but also better mixes of our vehicles.

Year-to-year, we are seeing some adverse product line mix. The scrappage programs in Europe have been very favorable for small cars. In addition, with the industrial activity decline in Europe, we've seen commercial vehicles come way off. So, we've seen a real shift from larger cars or commercial vehicles to small cars, and that does muddy up the margin analysis a little bit.

Brian Johnson - Barclays Capital

Okay. Was light commercial vehicle up quarter-over-quarter, though? You mentioned the Transit launch.

Lewis Booth

Light commercial vehicles? I just don't know. I think it's flat. The Transit launch is a launch in the US, and it's the Transit Connect in Europe. The Transit and Transit Connect are both continuing. They are already well established vehicles, and we had a minor facelift that hit the market in May or June in Europe.

Brian Johnson - Barclays Capital

Is your structural cost level reflecting the full impact of various temporary labor programs and government programs? Can you get those through the whole year if you need those?

Lewis Booth

It varies Brian by country. At the moment, our mixes on small cars for example, we are running flat out on Fiesta in both Spain and particularly in Cologne. Our Focus is pretty much up there; and we're a bit quieter on the larger vehicles.

Operator

Your next question will come from the line of Himanshu Patel, representing JPMorgan. Please proceed.

Himanshu Patel - JPMorgan

A couple questions on international. Going back to Europe again, just sequentially, it looks like production was up about 16%; but revenues rose even a little bit more, about 20%. I'm just wondering, why is the mix impact from the scrappage programs not that evident? I would have imagined revenue should have underperformed the rate of increase in production.

Lewis Booth

You are talking second-over-first? You are talking second over first, right?

Himanshu Patel - JPMorgan

Yes.

Lewis Booth

We're already seeing strong small car sales, particularly wholesales in the first quarter. We're beginning to slowdown larger cars and commercial vehicles, because we are building dealer stocks in those. So I think it's probably that.

Himanshu Patel - JPMorgan

Okay. Then if we think about Latin America, sequentially again, first quarter '09 versus second quarter of '09, it looks like your wholesales grew pretty nicely, about 19%, 20%. However, the pre-tax profit really only rose about $20 million. So what drove that?

Lewis Booth

Exchange rates.

Himanshu Patel - JPMorgan

FX? Okay. Lastly, on pricing. We've seen the surge in used car prices. I noticed on your sequential North American walk, it looked like pricing I think was flat. I'm wondering, is there an opportunity now to start thinking about some more substantial price increases on new cars going into the second half given the sharp rise we've had in used.

Lewis Booth

I think when you look at it sequentially first of all, as you go through a model, you normally expect transaction prices to fade a little bit. I think it's encouraging that they haven't done. So, we've avoided that. I think the other thing is that, most of our pricing opportunities are actually as we launch our new products. As we equip them and the product attributes are fully competitive with the Japanese for example, that is when we are seeing the opportunity to take pricing opportunities and reduce incentive levels, so that our transaction prices are moving closer to our Japanese competition.

Himanshu Patel - JPMorgan

Then on cash flow, Lewis. Third quarter production ramping up, but you've got some distressed suppliers. How are you thinking about the outlook on working capital for third quarter?

Lewis Booth

I am going to give you total operating cash rather than just working capital. We are giving guidance that we expect the second half to be a lower cash outflow than the first half. What we're not committing to is whether third quarter will be sequentially better than the second quarter. Frankly, the second quarter was a little bit stronger than we'd hoped when we did our forecast earlier.

So, we're not guaranteeing that we will be able to meet the sequential improvement. It doesn't mean that we're off-track for the third quarter; we just thought the second quarter was excellent.

One of the things that is going to influence that is, as you can see in the cash slide, CapEx was a bit down in the second quarter. Nothing sinister in there, just a bit of seasonality. We did some extra work at the shutdowns; we will see the cash outflow of that in third quarter. So, we'll see CapEx up a little bit we think in the third-over-second.

We did see in the second quarter, payables creep up a little bit which is encouraging. I think we are really encouraged by our suppliers' ability frankly to restructure themselves much, much more effectively than we previously feared.

Alan Mulally

Overall, less cash flow in the second half than the first half.

Operator

Your next question will come from the line of Rod Lache, representing Deutsche Bank. Please proceed.

Rod Lache - Deutsche Bank

Just back to this $400 million sequential variance from warranty, I just wanted to confirm. This is just the non-recurrence of the gain as opposed to a charge, because I saw a $167 million favorable adjustment in your first quarter Q; which looks like a larger number.

Lewis Booth

It's a non-recurrence sort of gain.

Rod Lache - Deutsche Bank

Okay, so the number that we are seeing is sort of normal accruals, no out-of-period adjustments?

Lewis Booth

Yes, that's correct.

Rod Lache - Deutsche Bank

Then in North America, it looks like your positive year-over-year benefit from price is almost matching the performance you're getting on costs. It looks like $2,000 a vehicle, just taking the $900 million against the 458,000 wholesales.

I'm just wondering whether you have a view of what the gap would be for Ford today. There still are, in many categories, some pricing differences on where you are versus, for example Asian competitors. Is there a quantification that you've got of that gap and a view on whether you can close it?

Lewis Booth

We obviously have an internal view on that, which we would be reluctant to share. What we are doing and what we've committed to do is to close that gap as we launch products that are fully competitive. I think you can see whether it's on the larger cars or whether it's on Fusion, as we launch new cars, both with attributes that are fully competitive and also equipment levels that are fully competitive, we are closing up the transaction gap. Not just sticker price, but obviously incentive activity as well.

Rod Lache - Deutsche Bank

Okay. Alan, you've been pretty consistently saying that you expect to be profitable in 2011 on a 14 million market and 14% share. Your share has been running at least 200 basis points better than that; and I would suspect that your pricing experience is doing a bit better as well. Does that imply that your breakeven point could be closer to 11 or 12? Or can you just give us any thoughts updating your view on what your breakeven point would be?

Alan Mulally

Sure. Well, clearly the results today show that we are making progress both on the customer satisfaction and the revenue, the margins, as well as the fundamental restructuring on the cost structure. With everything that we see right now, it is the reason that we are holding firm on our guidance that we will get back to profitability and positive cash flow in 2011. It really goes back to the overall market.

We believe it's going to come back. It's going to start to come back led by the GDP in the United States in the third quarter, and pick up a little momentum in the fourth quarter and next year. But clearly, this is still a very fragile economy. So, we think the best guidance right now is profitability in 2011.

Rod Lache - Deutsche Bank

Okay. Just lastly, can you give us a sense of where your UAW hourly costs are running in terms of dollars per hour, and how you expect that to move at this point over the course of the contract?

Lewis Booth

I really don't have any update since we talked to you in the first quarter.

Alan Mulally

I might just add that you know that the significant transformation we made in that agreement was on the operating side as well as the retiree health care, where we essentially closed the gap with our competitors. Having said that, we have a very mutually beneficial relationship with the UAW of course, and we'll continue to work every element of competitiveness going forward.

The attitude that everybody has is terrific, because as we continuously improve our competitiveness, it's good for everybody. So, we feel good where we are right now.

Rod Lache - Deutsche Bank

Aside from that VEBA liability, is there a gap now just post bankruptcy emergence of Chrysler and GM versus where you guys are? Is there a material gap in what your labor costs are?

Lewis Booth

We see there are potential opportunities longer term, but not in the near-term.

Operator

Your next question will come from the line of Patrick Archambault, representing Goldman Sachs. Please proceed.

Patrick Archambault - Goldman Sachs

Yes, a couple ones. Just to get at Rod's question from a slightly different angle on pricing. For the last two quarters in North America, clearly you've seen some very good year-on-year momentum there. Arguably, one could say that part of that came from the fact that your competition was somewhat distracted with other things, and you had pretty good share gains, and I think the share gains and the pricing power are probably hand-in-hand.

So, what should we think about on a go-forward basis in terms of further improvements in your competitive position? Obviously your two biggest competitors have emerged and presumably have a little bit more time to focus on their marketing message and product and that sort of thing.

Alan Mulally

No, I understand. It's an important question. I think I would start with just our fundamental product strategy and the launch of these strong products. We made a commitment three years ago that we are going to have a significantly refreshed or all new for 100% of our product line by the end of this year, and we are meeting that commitment. We are very pleased with the response with the consumers on the quality, the fuel efficiency, the safety, the way they feel about the products.

As we talked about, we are also seeing that in the fact that they actually value these neat vehicles even more. Also to your other point, we are getting a very positive response to Ford creating a strong business, and the fact that we are not taking taxpayer money, but we did stand for the help for GM and Chrysler, for the good of the industry and the good of the US economy.

But, clearly, we had a plan that didn't need that. The fact that we are improving our balance sheet going forward, and we are continuing to invest in these great products, we are getting a very positive response for creating a long-term, strong business which people do take into consideration when they buy a car.

So you look at both the top line, the revenue side, the product side and you've seen the data that shows our refresh rates and our showroom age being near the most competitive over the next two or three years. I think on the product side we look good. I think our continuing work on the quality and the productivity, and improving the balance sheet also is being appreciated also. So, all part of our guidance to move back to a profitable growth in 2011.

Patrick Archambault - Goldman Sachs

So just to sum it all up, it does sound in terms of share and pricing that there is some sustainability in terms of the improvements.

Alan Mulally

Well, we sure believe so. Absolutely.

Patrick Archambault - Goldman Sachs

I guess just getting back to some of the cost questions that came up. With some of the competitor bankruptcies having been resolved, is there going to be a true-up agreement with the UAW to sort of harmonize the labor agreements with what GM has been able to accomplish in bankruptcy? I understand that you did preempt a lot of that.

Alan Mulally

Exactly.

Patrick Archambault - Goldman Sachs

Clearly there were some other things that were being discussed; wage freezes, more flexibility in terms of skilled trades and that sort of stuff, which seemed to be things that you might have been interested in pursuing as well. So just wondering, how are those discussions taking place? What might the timing be like to get those done?

Alan Mulally

I think my summary on that would be that the discussions continue like they always have, and we will not be disadvantaged going forward.

Operator

Your next question will come from the line of Colin Langan, representing UBS. Please proceed.

Colin Langan - UBS

Good morning. Just a quick question. In terms of looking forward in terms of profits, normally third quarter is impacted due to seasonality and usually the shutdowns lower production. But from your guidance it looks like production is going to be up quarter-over-quarter globally. Are there any other reasons why we should think that earnings might not improve as well with that higher production?

Lewis Booth

No, I think you're right that volumes drive our profits. I can't think of anything explicit. The one thing we're obviously continuing to be concerned about is basically two things. One is, will we see the recovery, because if we don't see the recovery then we would be looking at the production again. Secondly, what happens to the supply base, and do we have to take any actions?

I think the third thing, you and I are talking about the Auto company. The Credit company did have a very strong second quarter with a couple of things that we don't expect to see same strength in the forward quarters on the residual value improvement and the gain on a non-hedged intercompany loan from the Credit company to the Credit company in Canada, So you should take the Credit company piece out of that.

Colin Langan - UBS

Okay. Actually on the Credit company, when we look quarter-over-quarter, what was really the big difference? We saw the year-over-year analysis and the lease residuals was a big part. Was the intercompany loan was the big quarter-over-quarter improvement?

Lewis Booth

Plus some of the residual value improvements too.

Colin Langan - UBS

Just to compare the year-over-year improvement, that $800 million, that is not a markup of your residuals right, because once you take that impairment in specs, this just a relative comparison year-over-year since you took a big markdown last year?

Lewis Booth

That's correct, yes.

Colin Langan - UBS

Okay. Then just one last question. In terms of your reduction of your dealer network, obviously GM and Chrysler have been able to do a lot more in bankruptcy. Do you consider that a significant disadvantage? Do you have any quantification of how much is having a larger dealer network going to cost you going forward relative to your competitors?

Alan Mulally

I think our dealer network is a competitive advantage for Ford now, and it will continue to improve its competitiveness. Remember, in our case, when we decided to focus on the Ford brand and divested Aston Martin and Jaguar and Land Rover, and separated out Volvo, along with those divestitures went their distribution channels.

So we historically have had a very strong Ford Lincoln Mercury dealership, and distribution network throughout the United States in the small communities and medium-sized and large, really the only area that we continue to work on in a very collaborative way and have been, and been making great progress, have been in some of the large metropolitan areas where we had a few too many dealers.

However, we are making great progress on that. We are doing it in a collaborative way. The dealers are very excited about it, because clearly, for them to be able to improve their throughput and their profitability is most important for them also. So that's the only area in our distribution channel that we continue to improve, but we have a very competitive dealer distribution channel.

Colin Langan - UBS

Do you have any targets in terms of Metro dealers that you would like to or the number of dealers you are targeting to take out at present?

Alan Mulally

Yes, we have a very solid plan.

Operator

Your next question will come from the line of Chris Ceraso, representing Credit Suisse. Please proceed.

Chris Ceraso - Credit Suisse

On the commodity front, that's been a bit of a headwind here. Do you expect that to improve in the second half or no because it is more product content than raw materials?

Lewis Booth

We expect a modest improvement in commodity costs and we'll continue to add some costs because of the added product content. The absolute year-over-year will go down, but it does have more good news in commodities offset by continued added content on product. The added content is one of the things that supports our improved transaction prices.

Chris Ceraso - Credit Suisse

Just to make sure I understand. So far in the first half we've seen, when you do the year-over-year walks, commodities have been a headwind. What you're saying is in the second half it will be a small tailwind?

Lewis Booth

That's correct.

Chris Ceraso - Credit Suisse

With actual commodities offset by increase in content?

Lewis Booth

Yes. That's correct.

Chris Ceraso - Credit Suisse

Okay. How much leasing did you do in the US in the second quarter? What was leasing as a percent of your sales? How did that compare to the year ago? I'm just wondering because GM and Chrysler were basically out of the leasing business. So, I'm thinking that that was -- that maybe helped in your market share gains in the second quarter.

Alan Mulally

We are looking it up for you now.

Unidentified Company Representative

Yes, leasing in the second quarter was in the range of 3% to 5%, down substantially from last year where we did probably in the range of 15%. We're still in the leasing business. You can still get a lease from Ford.

Chris Ceraso - Credit Suisse

So leasing was only 3% to 5% of your volume in the second quarter?

Unidentified Company Representative

Of our retail financing that we do in the US.

Chris Ceraso - Credit Suisse

How much more do we have to go on these subvention payments to Ford Credit and the change?

Unidentified Company Representative

The changeover, when we announced it last year in early 2008, it literally will take as long as the vehicles are on our books. So it cumes down over time, but it will take till 2011, 2012. They will still be rolling on.

Chris Ceraso - Credit Suisse

At this kind of pace or was it $600 million here in the quarter?

Unidentified Company Representative

No, it keeps declining. I think in the last year it was only like $100 million or something like that, but it just keeps declining over time, as you make that changeover from the old way of doing business to paying it upfront.

Chris Ceraso - Credit Suisse

The last question. There was a comment in the press release that Ford plans to continue to improve its balance sheet. Do you have a ballpark number you can share with us of how much further you have to bring debt levels down? Is it in the ballpark of $10 billion? What kind of number are you looking at?

Alan Mulally

No, the guidance that we have given is to get back to profitability in 2011, and then on to investment grade. So, clearly that is our target.

Operator

Ladies and gentlemen, at this time we would now like to welcome questions from the media community. (Operator Instructions) Your first question comes from the line of Bryce Hoffman, representing Detroit News. Please proceed.

Bryce Hoffman - Detroit News

Just a couple of questions on the UAW front. You said you completed approximately 1,000 buyouts during the quarter. Is that in line with what you were expecting and are you continuing to offer buyouts? Should we look for more of those coming?

Alan Mulally

Yes, it is in line and they're about right; and no.

Bryce Hoffman - Detroit News

The second question; Lewis, you mentioned the distressed supplier issue a couple of times as an impact on the balance sheets of a couple divisions. Can you elaborate a little bit on where that's coming from specifically?

Lewis Booth

Yes, just for clarification. It's going to hurt our profits a little bit. It is not a balance sheet item per se. We have some distressed suppliers, so no secret about that. It is hard to generalize, Bryce. Some suppliers you have to give some slightly accelerated payment terms. We've had to perhaps not get the material cost reductions we expected. In some cases we had to loan them money. It does vary.

It is not a huge impact in the second quarter. It is something we are concerned about as we go through third and fourth quarter as we see the supplier cycle go through one cycle as they start handling the GM and Chrysler coming back from their extensive shutdowns. However, I also said that, we've been really impressed with the fortitude of our suppliers in terms of fixing their own problems and being fit for business with us. It's great.

Operator

Your next question comes from the line of Brent Snavely, representing Detroit Free Press. Please proceed.

Brent Snavely - Detroit Free Press

I was wondering if this is a good time now with your stock price trading over $6 to do another share offering.

Alan Mulally

We don't have anything to announce today on specifics, but clearly our plan is to continue to improve our balance sheet just like we have during the second quarter.

Brent Snavely - Detroit Free Press

Can you give any more guidance on your cash burn? It was substantially improved this quarter. How much can you improve that for the second half of the year?

Alan Mulally

The guidance that we're providing today, Brent, is that, our cash flow in the second half will be less than it was in the first half per our original plan.

Operator

Your next question comes from the line of Jeff Bennett, representing Dow Jones Newswire. Please proceed.

Jeff Bennett - Dow Jones Newswires

Thanks very much. Just a couple quick questions on Visteon. Can you give us any more clarity on them? I know they are going through the bankruptcy process, but are you having any difficulties with them? Are you moving product away from them?

Lewis Booth

No. We know they are going through a bankruptcy process. We haven't had any production interruptions, and we continue to work with them, as all customers are working with them to ensure product continuity.

Operator

Your next question comes from the line of Eric Mayne, representing WardsAuto.com. Please proceed.

Eric Mayne - WardsAuto.com

Alan, I have a question. You've mentioned customer satisfaction a number of times. Has Ford bridged that perception versus reality gap that I think a lot of executives have complained about in the past?

Alan Mulally

A really important question. We are making very, very good progress. I don't think we're clearly completely there, but in the US, I'll just use that as an example. We have a fabulous reputation and brand promise on the larger vehicles. As we pointed out, the new Ford is making a commitment to have a vehicle in every market segment that's absolutely best-in-class; quality, fuel efficiency, and safety, and the best value.

The response that we are getting and have over the last year to our new products has been phenomenal. Our favorable opinion in the customer's eyes has gone up 17%. The purchase consideration is climbing

You of course saw the results on market share and incentives and residual values all moving in a very positive way, really demonstrating that the consumers in the United States are really appreciating the product line and the quality and the strong business that Ford is creating. So I anticipate that we will continue to make good progress going forward.

Eric Mayne - WardsAuto.com

How much of that goodwill do you attribute to the fact that you haven't tapped into the treasury?

Alan Mulally

I think it's a really important point, but clearly, the fundamental purchase decision is established by the quality, the fuel efficiency, the safety, and the value of the Ford product line. The fact that we have a complete product line now where we are best-in-class in every segment be it in small, medium and large, cars, utilities, and trucks. Strong products; that's where it all starts.

Now, we're also seeing just a tremendous response from the fact that we are creating a very strong business going forward. The fact that we're not using taxpayer money, and the fact we're paying back our loans and we're moving very quickly to profitability and profitable growth is also a very important part of the customer's purchase decision. So, I think its great cars and also a strong business.

Eric Mayne - WardsAuto.com

Thank you. Could I ask Lewis to give us a little more color on your mentioned on vehicle contenting. What kind of content is in demand? What kind of trends do you see going forward?

Lewis Booth

Well, the best example I think is SYNC, a knockout product. The cars turn on the deal lots with SYNC. I think 3 times faster than without, some number like that. I think the real secret is to make sure we have content that customers recognize as having value; and I think the best example is SYNC that I could give off-the-cuff.

Alan Mulally

Another really neat thing that is happening is that, with the awareness about fuel efficiency in addition to quality and safety, we are just seeing a movement by the consumer to really appreciate quality and features in all the vehicles, no matter what their size.

So whether it's small or medium cars and utilities, people really do want the real features that they value. Just like Lewis mentioned the SYNC, but we could go on with the Cross Traffic Alert, the Blind Spot Monitoring, the Collision Warning, the Brake Assist, the Active Parking, the Ford Works Solution , the MyKey, the Easy Fuel, the Adaptive Cruise Control, people really do want the neat vehicles no matter what the size.

Lewis Booth

Thanks, Alan. I also mentioned attributes, and I think if you look at our new products and look at the materials that we are putting in them, they are really, really nice now.

Operator

Your next question comes from the line of Amy Wilson, representing Automotive News. Please proceed.

Amy Wilson - Automotive News

Lewis, I wonder if you could clarify a little bit talking about the distressed suppliers. You talked about the costs of those to you with accelerated payments. Were you also saying that you expect that cost of dealing with those distressed suppliers to go up sequentially in the third and fourth quarters as they are coming back up with GM and Chrysler?

Lewis Booth

No, I wasn't that specific and deliberately so. What I did say is, we are watching closely, because we think that our suppliers' cash flow will be most under pressure towards the end of the third quarter, early in the fourth quarter as they have gone through their first cycle where volumes have picked up around the industry, and they're seeing their real cash flow requirements. So we're watching it, but we're not giving any direction about changes versus second quarter.

Amy Wilson - Automotive News

So you still expect to have costs associated with that, but you're just not saying if you think it will be higher or the same or lower?

Lewis Booth

We expect to have some costs. We would be delighted if there aren't any, and obviously we're encouraging our suppliers to manage on their own. As I say, we have been really favorably impressed by their ability to do that.

Amy Wilson - Automotive News

Okay. Alan, I wanted to ask you kind of the playing field question. Some concerns have been raised about the role of the US government in your competitors across town, and Ford has expressed the concern to make sure that there is an even playing field. Right now, based on what's been done, do you think there is an even playing field?

Alan Mulally

Yes, we do, Amy. Just to reiterate what you said. We clearly were supportive of the US government helping restructure the industry in the United States for the good of the industry, but also good of the United States and also the economy. So, we are pleased that it was done, and it was done decisively.

Of course we know the government does not want to be in this business for the long-term. So, the only thing that we keep encouraging everybody is to make sure that we have transparency, and that we can know what's going on, and everybody can know what's going on. Clearly, we have seen no signs of yet that we are at a disadvantage.

Operator

Your next question comes from the line of Todd Lassa, representing Motor Trend. Please proceed.

Todd Lassa - Motor Trend

Good morning, gentlemen. Following up on the questions or the discussion regarding car content and 'One Ford' and so on; Ford is about to bring in a couple of smaller cars, a new Focus next year and the Fiesta. The idea of 'One Ford' is that, you have more or less one spec for the entire world.

However, those cars in Europe, average transaction prices are quite a bit higher than what they would be in the States. Do you have so much margin on those cars in Europe that you can bring them in with more or less the same content; sell them for $15,000 to $20,000 here? Where does 'One Ford' kind of end when you have to deal with different transaction prices on cars like that in the United States?

Alan Mulally

Part of the 'One Ford' plan is to utilize the innovation and the scale and leverage that capability around the world. Especially on the scale part, because the idea is that we move to volumes on all the platforms that allow us to even accelerate the improvement in quality and also productivity and cost reduction. So, that is one side on the cost side.

We also tailor the vehicles where they need to be tailored for the unique customer markets. Then the last thing that you're seeing in the United States on the smaller vehicles over the last few months is, the US consumer is now moving to really appreciate the value of the highest quality, the fuel efficiency, the safety, the smart features in all the vehicle sizes, small and medium vehicles, like they have with Ford in the larger vehicles.

So, I think it's the customer moving to a place where they appreciate all the attributes of quality in all the size vehicles, and also the fact we can now deliver that best value by leveraging our assets worldwide. So, it's kind of both of those pieces together.

Todd Lassa - Motor Trend

So you feel the American customer might be more willing at this point to pay more for a small car that just a few years ago might just be considered kind of an entry-level car, and the consumer would accept low levels of content in exchange for a low price?

Alan Mulally

Absolutely, and that's what we're seeing over the last year. I think that going forward; some big trends are going to facilitate that continuing evolution. We're seeing this all around the world including the United States, where people are thinking about energy independence, energy security, sustainability, and they really have moved quality and fuel efficiency and safety and value.

Those are the pillars of their purchase decision. The neat thing about the Ford plan is that Ford is going to be there for you if you need it. If you want a world-class smaller vehicle or medium size or large or a car, utility or truck, you have those choices, those world-class choices from Ford.

Operator

Your next question comes from the line of Robert Schoenberger, representing Plain Dealer. Please proceed.

Robert Schoenberger - Plain Dealer

Good morning. Looking at the product launches for this year, you have the Taurus and the Transit Connect coming out this summer. The Transit Connect is going into a fairly depressed commercial market and the Taurus is going into that large car market that hasn't been doing too well over the past couple of years. Is there any concern, not so much on the vehicles themselves, but the markets they are going into?

Alan Mulally

Not at all. Our plan is to be in every major market segment with a world-class vehicle. The sooner we get into those markets and reestablish ourselves, the better off we will be. We talked about this with the new 150 launch last year? Well, it's turned out that people really do value all of the attributes of that new 150.

So, on the products that you mentioned, the Transit Connect is a new product in the United States that I think is going to be really well received. It's the future of vans, small and large. Its fuel efficiency, its weight, its capability, its size, plus you add a couple of racing stripes on it like Lewis has, and it's really a cool vehicle.

The other one you mentioned is the Taurus. This is going to be our consistency and purpose. This is going to be our offering in the large sedan, and we're just very pleased with the response we're getting to the Taurus. Every year going forward, we will continue to improve it, but it's the same way whether it's the Fiesta, the Focus, the Fusion, the Taurus or the Mustang, throughout the entire lineup, is to be there in every market segment.

You saw that we are making our commitment of having 100% of our product line be refreshed or new by this year. Then we will end up being at the top of the newest showroom age over the next three years. So, this is a good time to be there for the consumer and be ready as the economy comes back.

Robert Schoenberger - Plain Dealer

Like we saw with minivans a few years ago, there were a lot of new products launched into a market that was shrinking rapidly, and that forced a few people out of that market. Is there any concern with that happening in the large cars as well? There are going to be some players pushed out as the Toyota Avalon, Ford Taurus, Chevy Impala size class continues to shrink?

Alan Mulally

I think the market will decide who is successful, but that is still a very significant market for us going forward. That is why we made an investment in the Taurus to be in that market segment.

Operator

Your final question will come from the line of Chris Isidore representing CNNMoney.

Chris Isidore - CNNMoney

Do you have any sense that consumers are less concerned about GM and Chrysler now that their bankruptcies are behind them? That some advantage you may have had up to this point has been lessened because they have been able to complete their bankruptcies relatively quickly? Or do you think there is still concern in the market about those two rivals?

Alan Mulally

Well, what we do know is that the consumers; and you saw it in the data presented today with our improvement in market share. What we do know is the consumers are much more aware of Ford. They are moving to consider Ford and buy Ford. They really appreciate the full product line. They like the quality and fuel efficiency and safety of the products.

Another important part of their purchase decision is that they believe that Ford is really building a strong business. So, that is what we do know, and I think that will continue for us going forward.

Bill Agne

Thank you. That concludes today's presentation. We thank everyone for joining us.

Operator

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

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