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Ford Motor Company (NYSE:F)

Q4 2009 Earnings Call Transcript

January 28, 2010 9:00 am ET

Executives

Brian Harris – Director, IR

Alan Mulally – President and CEO

Lewis Booth – EVP and CFO

K.R. Kent – Ford Credit’s CFO

Analysts

Joe Amaturo – Buckingham Research

John Murphy – Banc of America Merrill Lynch

Rod Lache – Deutsche Bank

Brian Johnson – Barclays Capital

Chris Ceraso – Credit Suisse

Himanshu Patel – J.P. Morgan

Patrick Archambault – Goldman Sachs

Bryce Hoffman – The Detroit News

Dee-Ann Durbin – The Associated Press

Brent Snavely – Detroit Free Press

Chris Isidore – CNN Money

Joann Muller – Forbes

Jeff Bennett – Dow Jones

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter Ford Motor Company earnings conference call. My name is Katrina, 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. Brian Harris, Director of Investor Relations. Please proceed.

Brian Harris

Thank you Katrina, 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 would like to thank you for spending time with us this morning.

With me here today are Alan Mulally, President and CEO of Ford Motor Company; and Lewis Booth, Chief Financial Officer. Also in attendance are Bob Shanks, Vice President and Controller; Neil Schloss, Vice President and Treasurer; Paul Andonian, Director of Accounting; and K.R. Kent, Ford Credit’s CFO.

Before we begin, I would like to cover a few items. Copies of the morning’s press release and presentation slides that we will be using here today have been posted on Ford’s Investor and Media Website for up to your reference. The financial results discussed herein are presented on a preliminary basis. Final data will be included in our 2009 Form 10-K. 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 of Ford's future performance. Actual results could differ materially from those suggested by our comments made here. Additional information about the factors that could affect future results is summarized at the end of this presentation. These factors are also detailed in our SEC filings, including our annual, quarterly, and current reports.

With that, I would now like to turn the presentation over to Ford’s President and CEO, Mr. Alan Mulally.

Alan Mulally

Thank you, Brian, and good morning everyone. We are very pleased to be able to share today our fourth quarter and full-year 2009 financial results.

As you all know, 2009 was an extremely challenging year for the global automobile industry. For Ford, it was also a pivotal year and the strongest proof yet that our One Ford plan is working, and we are forging a path toward profitable growth by working together as one team leveraging our global scale. Despite the deep, deep economic downturn, historically weak sales, and the government-funded bankruptcies of our domestic competitors, Ford returned to profitability in 2009.

For the full year, excluding special items, we posted a pre-tax operating profit of $454 million, a $7.3 billion improvement over 2008, despite the decline in business conditions and lower worldwide revenues. On an after-tax basis, including special items, Ford’s full-year income was $2.7 billion. In addition, we returned to positive automotive operating related cash flow in the second half of the year, increased full-year market share in North America, South America, and Europe, while continuing to improve transaction prices and margins, reduced automotive structural costs by $5.1 billion, exceeding our 2009 goal by over $1 billion and made progress in strengthening our balance sheet.

We finished the year with automotive gross cash of $25.5 billion. However, we still have significantly higher debt on our books than our key competitors. Our North American operation posted a fourth-quarter pretax operating profit, excluding special items, of $707 million, its second straight profitable quarter. As a result of our 2009 US financial performance, we will pay profit-sharing to 43,000 eligible US hourly employees, consistent with the 2007 UAW-Ford Collective Bargaining Agreement. The average amount is expected to be approximately $450 per eligible employee.

Ford's product resurgence continued in 2009, with the launch of more cars and trucks, our customers want and value, such as the Fusion Hybrid and the Transit Connect, recently named North American Car and Truck of the year respectively.

Looking ahead, while the business environment remains difficult for the full-year 2010, we plan to be profitable on a pretax basis, excluding special items, in North America, total automotive, and total company, with positive automotive operating related cash flows based on our assumptions.

Our full-year 2011 guidance remains unchanged also. We remain on track to be solidly profitable on a pretax basis, excluding special items, with positive automotive operating related cash flows based on our assumptions.

I did start off by providing you with an overview of our financial results and business, products, and sales highlights. Then, Lewis Booth would walk us through the financial results in even greater detail. Finally, I will recap our 2009 performance, and summarize our 2010 outlook and our plan going forward.

Turning to slide three, I will begin by reviewing the key financial results.

As shown at the top of the slide, vehicle wholesales in the fourth quarter were 1.4 million units, up 301,000 units from a year ago. Our fourth quarter revenue was $35.4 billion, a $6.4 billion increase from the year ago. The increase was more than explained by higher volumes and favorable net pricing. Our fourth-quarter pretax operating profit, excluding special items, was about $1.8 billion, a $5.5 billion improvement from a year ago.

Automotive results improved by $4.4 billion and Financial Services improved by $1.1 billion. Our fourth quarter net income attributable to Ford was $868 million, including unfavorable pre-tax special items of $711 million, a $6.8 billion improvement over a year ago. For the full year, pretax operating profit, excluding special items, was $454 million and net income attributable to Ford was $2.7 billion, despite revenues that declined by about $20 billion. We ended the year with $25.5 billion of automotive gross cash, up $12.1 billion from a year ago. This will be discussed in even more detail later.

Now let us turn to slide four. In addition to total company pre-tax operating results improving by $5.5 billion compared with the same period last year, results improved in all of our operations. We reduced our automotive structural costs by $500 million compared with the fourth quarter of 2008, bringing full-year structural cost reductions to $5.1 billion, which exceeded our goal in 2009 by over $1 billion.

Ford North America had an operating profit of $707 million, a $2.6 billion improvement from a year ago. Ford South America had an operating profit of $369 million, a $264 million increase from a year ago. Ford Europe had an operating profit of $305 million, a $643 million improvement from the year ago. Ford Asia Pacific and Africa had an operating profit of $19 million, a $227 million improvement from a year ago. And Volvo had an operating loss of $32 million, but a $704 million improvement from a year ago.

Finally, Financial Services had an operating profit of $683 million, a $1.1 billion improvement from a year ago.

Slide 5 details some of the key business highlights since our last earnings release. We announced a $2.3 billion investment in Brazil over five years. This underscores our commitment to modernizing our plants and expanding production in our profitable South American operation.

Earlier this month, we signaled our plans for vehicle electrification, when we announced a $450 million investment to build a next-generation hybrid and plug-in hybrid at our Michigan Assembly Plant, and move the development and assembly of battery packs in-house at Ford. The investment will create 1,000 new jobs for the plant.

On December 31, 2009, we completed the transfer of our UAW retiree healthcare liabilities to the UAW Retiree Medical Benefits Trust or VEBA. As part of this, we transferred assets into the VEBA trust and made a $500 million prepayment of our obligation to the VEBA Trust to reduce our debt.

Another key move related to the balance sheet was completing our plan to amend and extend our revolving credit facility. Revolving lenders agreed to extend the maturity of $7.9 billion worth of debt commitments to 2013 from 2011.

We issued $2.9 billion of convertible notes to continue to strengthen our balance sheet, a key pillar of our One Ford strategy.

We also announced in December that we have settled all so static terms on the sale of Volvo to Geely. We Expect to reach the definitive sale agreement in the first quarter of 2010, with the closing of the sale likely to occur in the second quarter of 2010.

Turning to slide six, we will look at Ford’s product highlights since our last earnings release. Ford unveiled the 2011 Fiesta for the US market at the Los Angeles Auto Show in November. Production begins later this quarter. The Fiesta is off to a very strong start in Europe and in Asia with sales of about 600,000 vehicles since the vehicle was launched in Europe in late 2008, and in Asia in early 2009.

We were honored with both the North American Car and Truck of the Year Awards. Media have voted the 2010 Fusion Hybrid as Car of the Year and the 2010 Transit Connect as Truck of the Year at the North American International Auto Show. The Fusion also won Motor Trend’s prestigious 2010 Car of the Year Award, topping the field of 23 contenders. Our next-generation Ford Focus ECOnetic was launched during the quarter in Europe with even lower CO2 emissions.

At the Brussels Motor Show, we unveiled refreshed versions of the S-MAX Crossover and the Galaxy MPV for Europe, with high efficiency engines and more distinctive designs. The vehicles go on sales in the spring of 2010. In Brazil, we launched the new Ford Focus 1.6 liter Flex, a hatchback with the new Sigma Flex Fuel engine, and the Ford Ikon sedan led its segment in a J.D. Power study of initial quality for the Indian market.

On slide 10, I will cover Ford’s fourth quarter and full-year sales highlights. Our strong product lineup drove full-year market share gains in North America, South America, and Europe, while maintaining share in the rapidly growing Asia-Pacific and Africa regions. In addition, we continue making improvements in transactions prices and in margins. In the US, Ford Lincoln and Mercury fourth quarter sales were up 13% versus a year ago, leading to Ford’s first full-year market share gains since 1995.

Fusion sales rose 22%, seeing a new annual record, while the F-Series was the Number 1 selling truck for the 33rd straight year and the Number 1 selling vehicle for 28 consecutive years. In South America, Ford Brazil has best ever full year sales, thanks to a 15% increase in 2009. Sales for Ford Europe increased 19% in the fourth quarter, led by the Fiesta, Focus and Ka, Ford strengthens its position in Europe the Number 2 brand. Full-year market share in the region of 9.1% increased a half a point, setting a 11-year high. Fiesta climbed to a Number 2 best-selling spot in the region in 2009.

Fourth quarter sales for Ford Asia-Pacific and Africa rose 53%. Full-year sales were up 15% in the region and making an annual record. Ford sales in China led the full-year increase up 45% from year-ago levels.

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

Lewis Booth

Thanks Alan. Let’s move on to slide 9, which provides more detail on the financial results. Our fourth quarter pre-tax operating profit excluding special items was about $1.8 billion, a $5.5 billion improvement from a year ago. Rest of the remaining slides will focus on these pre-tax operating results. Our pre-tax operating profit excluded unfavorable special items, with $711 million, which we will cover on the next slide, and we recognized $109 million of tax expense and $65 million of our income was related to non-controlling interests.

Bottom line, fourth quarter net income attributable to Ford was $868 million, a $6.8 billion improvement from a year ago. For the full year, pre-tax operating profit excluding special items was $454 million, a $7.3 billion improvement from a year ago. Full-year net income attributable to Ford was $2.7 billion, which included about $2.6 billion of special item net gains we will discuss on the next slide.

As mentioned last quarter, a new accounting standard effective January 1st, 2010 relating to the consolidation of variable interest entities will require us to deconsolidate many of our joint ventures. This will have no effect on net income attributable to Ford and is expected to have minimal impact on cash flow. This change however is estimated to reduce our full-year 2010 pre-tax operating and business segment results by $350 million to $400 million.

Our 2010 first quarter earnings review will provide additional information on this accounting standard change. Slide 10 covers special items, which are unfavorable pre-tax amount of $711 million in the fourth quarter. We recorded $346 million for retiree healthcare and related charges, reflecting primarily a net loss on the settlement of the UAW retiree healthcare VEBA agreement, and this will be covered in more detail on the next slide.

We recorded a charge of $296 million for job security benefits, explained primarily by a reserve increase related to the announced closure of St. Thomas plant next year, an additional global personnel reduction charges of $173 million. Also, we recorded a $134 million of health-for-sale accounting-related adjustments for Volvo, reflecting the elimination of depreciation and related costs. Based on our plan to sell Volvo, beginning in the first quarter of 2010, all of Volvo’s financial results will be reported as special items and excluded from our operating results.

For the full year, pre-tax special items or net gains about $2.6 billion, which is more than explained about $4.7 billion of gains on debt reduction expense, offset partially by global personnel reduction actions and the UAW retiree healthcare VEBA agreement.

Slide 11 provides an update to our UAW retiree health care and OPEB liabilities. On December 31st, 2009, we completed the transfer of our UAW retiree health care liabilities to the UAW Retiree Medical Benefits Trust or VEBA. Assets were transferred to the Trust and our obligations were irrevocably settled. The settlement, a net loss of $264 million was recognized, reflecting the 2009 amended UAW VEBA agreement and the fair value of assets transferred on December 31st, 2009. Settlement of the obligation reduced our global OPEB liabilities by about $10 billion from $16 billion [ph] at year-end 2008 to $6 billion at year-end 2009.

The remaining amount is related primary to UAW healthcare and UAW [ph] life insurance liabilities. As discussed last quarter, incremental debt of about $7 billion was recorded on the balance sheet reflecting the remaining fair value of the notes under the 2009 amended agreement after initial payments of $2 billion and a prepayment of $500 million made on December 31, 2009. 2010 interest expense relates to this debt is now projected at about $600 million. This interest expense is included in our scheduled payments of the notes. 2009 global OPEB cash benefit payments were $1.6 million, including $1.1 billion for UAW retiree healthcare.

Slide 12 provides an update on our pension plans. Worldwide 2009 pension expense, excluding special items, was $600 million, up $100 million from 2008, reflecting primarily returns on lower 2008 year-end asset balances. In 2009, we made $900 million in cash contributions to our worldwide funded pension plans, down $800 million from 2008. Pension contributions made in 2008 included $600 million related to the sale of Jaguar Land Rover. At year-end 2009, our US funded plans were underfunded by $4.6 billion and worldwide our pension plans were underfunded by $12 billion. We do not have a requirement to fund our major US pension plans in 2010.

Now on to slide 13, which shows our pretax operating results by sector. Our fourth quarter pretax operating results were a profit of about $1.8 billion. These results included a profit of $1.1 billion for the automotive sector on a profit of $683 million for financial services. As Alan mentioned and as shown in the memo, total company fourth quarter pretax operating results improved by $5.5 billion compared with the same period last year. Our results also improved by $646 million compared to the third quarter 2009. Our full-year pretax operating results were a profit of $454 million, which included losses of $1.4 billion for the automotive sector offset by a profit of $1.9 billion for financial services. As shown in the memo, total company full-year pretax operating results improved by $7.3 billion compared with 2008.

Let's move to slide 14 which shows fourth quarter pretax operating results for each of our automotive segments and other automotive. In the fourth quarter, almost all of our business segments reported a profit for the quarter and showed significant improvement compared with a year ago and compared with the third quarter 2009 as shown in the memo. We will cover the automotive segments in more detail on the upcoming slides. Fourth quarter other automotive loss was $298 million, reflecting primarily net interest expense of $292 million, which was comprised of about $350 million of interest expense offset partially by net gains associated with our investment portfolio and interest income.

Slide 15 shows the change in fourth quarter pretax operation results compared with 2008 by total factor. Overall, fourth quarter results improved by $4.4 billion compared with a year ago. Volume and mix was $ 1.7 billion favorable explained primarily by an increase in dealer stocks to demand for our products, higher global industry volumes and market share improvements. Net pricing was $1.7 billion favorable, explained by improvements across all of our business segments, including our continued disciplined approach on incentives and selective top line pricing in the US. Cost decreased by $1.7 billion reflecting primarily lower raw material costs, including the non-recurrence of unfavorable mark-to-market adjustments on commodity hedges and structural costs reductions.

Exchange was $800 million unfavorable related primarily to North America which consist of balance sheet valuation adjustments and South America, which was explained primarily by unfavorable exchange in Argentina and Venezuela. Net interest and fair market value adjustments were essentially flat. Low interest expense primarily associated with our debt restructuring actions was largely offset by the non-recurrence of favorable fair market value adjustments.

Slide 16 shows full-year pretax operating results for each of our automotive segments and for other automotives. For the full year, automotive pre-tax operating losses were $1.4 billion. As show in the memo, this loss was greatly reduced compared with a year ago; it will be discussed in more detail on the next slide. Full year other automotive loss was $1.1 billion reflecting primarily net interest expenses of $1.2 billion, which was comprised of over $1.5 billion of interest expense, offset partially by net gains associated with our investment portfolio and interest income.

Moving to slide 17, which shows a change in full-year pretax operating results compared with 2008 by total factor. Overall, full-year results improved by about $5 billion compared with a year ago. Volume and mix was $3.7 billion unfavorable explained primarily by a significant decline in global industry volumes, a reduction in dealer stocks and lower component sales was more than offset by overall mix. These declines were offset partially by market share improvements. Market share improvements reflected primarily a 1.1 percentage point increase in the US and 0.5 point gains in both Europe and in South America. Net pricing was $5.5 billion favorable explained by improvements across all of our business segments and the success of our product lineup around the globe.

A significant portion of the net pricing improvement was in the US as we maintained our disciplined approach on incentives on selective top line pricing and continued to manage our production and dealer stocks in line with demand. Costs decreased by $5.8 billion, explained primarily by $5.1 billion of structural cost reductions which we will discuss in more detail on the next slide, and lower material costs included a non-recurrence of unfavorable commodity hedge adjustments. Exchange was $2.1 billion unfavorable, explained primarily by North America, South America and Europe. And the net interest and fair market value adjustments were $200 million favorable, explained by lower interest expense, offset partially by lower favorable fair market value adjustments.

Now to slide 18, which explains our full-year automotive structural cost reductions of $5.1 billion, including, as shown in the memo, a $500 million in the fourth quarter. For the full year, manufacturing and engineering costs were $2.7 billion lower, reflecting largely the continued benefits of improved productivity, personnel reductions primarily in North America and Europe, and progress on the implementation of common global platforms and further development processes.

Spending-related costs improved by $600 million, reflecting primarily lower depreciation and amortization expenses; including the impact of prior-year asset impounds. Pension and retiree healthcare expenses were $800 million lower, reflecting primarily the effect of the UAW Retiree Health Care VEBA agreement. Overhead costs were $400 million lower, which included salaried personnel reductions and other restructuring expenses. And finally, advertising and sales promotions were $600 million lower than the year ago.

As mentioned last quarter, we have achieved significant structural cost reductions over the past four years. Going forward, as we increase production to meet demand, we expect automotive structural cost to increase somewhat.

Through the next section of slides, we will cover each of the automotive segments, starting with North America on slide 19.

In the fourth quarter, wholesales were 613,000 units, up 147,000 units from the year ago, reflecting primarily the increase in dealer stocks and market share improvements. Fourth quarter US total market share for Ford, Lincoln, and Mercury was 15.1%, up 1.1 points from a year ago, which will be discussed in more detail later. Although not shown, total market share was 15.3%, up 1.5 points from a year ago. And fourth-quarter revenue was $15.8 billion, a $4.5 billion or 40% increase from a year ago, reflecting primarily higher volumes and favorable net pricing. And for the fourth quarter, Ford North America reported a pre-tax operating profit of $707 million, a $2.6 billion improvement from the year ago, which we will cover in more detail on the next slide.

Slide 20 provides an explanation of the change in North American results compared with 2008 by total factor. Volume and mix was $1.3 billion favorable, reflecting primarily higher dealer stocks to match demand for our products, favorable series mix for F series and Taurus, market share improvements, and higher US industry volumes. Net pricing was $1.1 billion favorable, reflecting primarily the success of our new products, selective top-line pricing, and our continued disciplined approach to incentives.

Cost decreased by $800 million, reflecting primarily the lower raw material costs, including the non-recurrence of unfavorable mark-to-market adjustments on commodity hedges. Lower warranty costs; reflecting primarily the non-recurrence of unfavorable warranty reserve adjustments and structural cost reductions.

Exchange was $600 million unfavorable, reflecting primarily the balance sheet impact of a weaker US dollar relative to the Canadian dollar. And for the full year, as shown in the memo, Ford North America reported a pre-tax operating loss of $400 million, a $5.5 billion improvement from the year ago. The improvement reflected primarily favorable net pricing, structural cost reductions, favorable mix, and market share improvements; offset partially by lower industry volumes and unfavorable exchange.

Slide 21 shows US market share of Ford Lincoln and Mercury. In the fourth quarter, US total market share was 16.1%, up 1.1 points from a year ago, reflecting primarily the higher share for Fusion, Taurus and Escape. Additionally, our retail share of the retail industry was an estimated 13.8% in the fourth quarter, up 0.7 points from a year ago, the highest in any quarter since the third quarter of 2006. For the full year, US total market share was 15.3%, up 1.1 points from a year ago. This improvement marked our first full-year market share increase in the US since 1995, and reflected primarily the higher retail share resulting from demand for Fusion, Escape, and the F-150.

Although not shown, Canada total market share was 15.2% for the full year, up 2.6 points from a year ago, the highest for any year since 2001. Our market share improvement in 2009 made Ford the best-selling brand in Canada. Growing awareness and consideration for Ford products has enabled the company to achieve these market share gains, while reducing incentives. In addition, customers equip their products with high levels of content and technology, which further contributed to higher transaction prices for most Ford products.

Now, on to South America, on slide 22. In the fourth quarter, wholesales were 131,000 units, up 33,000 from a year ago, reflecting primarily an increase in dealer stocks and higher industry volume, offset partially by lower market share. Fourth-quarter market share was 9.7%, down 6.7 points from the year ago. Although not shown, full-year market share was 10.2%, a half point gain from the year ago. Fourth quarter revenues were $2.6 billion, a $900 million increase from a year ago, reflecting primarily the higher volumes and favorable net price.

For the fourth quarter, Ford South America reported a pre-tax operating profit of $369 million, a $264 million increase from the year ago. This decrease is more than explained by favorable net pricing and higher volume and mix, offset partially by unfavorable exchange Argentina and Venezuela. For the full-year, as shown in the memo, Ford South America reports a pretax operating profit of $765 million, a $465 million decrease from a year ago. This decrease reflected primarily unfavorable exchange and higher material costs, offset partially by favorable net pricing.

Slide 23 covers Europe. In the fourth quarter, wholesales of 432,000 units, up 54,000 units from a year ago, reflecting primarily a high European industry volumes and market share improvements in the 19 markets that we track. Fourth quarter industry SAAR for the 19 markets that we track was 16.6 million units, up 1.8 million units from year ago, driven primarily by scrappage programs. And fourth quarter market share was 8.9%, up four-tenths of a point from last year, driven by the strength of the Fiesta, Focus, and the Ka. Fourth quarter revenue was $8.7 billion, a $1.1 billion increase from a year ago, reflecting primarily higher volumes and favorable exchange translation offset partially by unfavorable product mix.

For the fourth quarter, Ford Europe reported a pre-tax operating profit of $305 million, a $643 million improvement from the year ago. This we will cover in more details in the next slide. Slide 24 provides an explanation of the change in Europe results compared to 2008 by polls factor. Volume and mix was unchanged. High European industry volumes and market share improvements from the 19 major markets were offset by unfavorable product mix and lower industry volumes in Russia and Eastern Europe. Net pricing was $200 million favorable, reflecting primarily pricing in Britain and Russia to offset unfavorable currency effects. Costs decreased by $500 million, reflecting primarily lower material costs, including commodities and structural cost reductions.

And exchange was $100 million unfavorable, reflecting primarily the weakening of the precious Pound compared to the Euro. For the full year, as shown in the memo, Ford Europe reports a pre-tax operating profit of about $100 million, a $1 billion decrease from a year ago. The decrease reflected primarily lower industry volumes, unfavorable product mix in part due to government scrappage programs and lower dealer stocks, offset partially by structural cost reductions.

Slide 25 covers Asia-Pacific and Africa. In the fourth quarter, wholesales were 146,000 units, up 47,000 units from a year ago, reflecting primarily strong performance in China, which was up 34,000 units. Fourth quarter industry SAAR was 28 million units, up 10.1 million units from a year ago, explained primarily by 94% increase in the Chinese industry. And fourth quarter market share was 2%, roughly unchanged.

Fourth quarter revenues which excludes sales of our unconsolidated China joint ventures was $1.6 billion, a $200 million increase from a year ago. The increase was more than explained by higher volumes outside of China and favorable net pricing. For the fourth quarter, Asia-Pacific and Africa reported a pre-tax operating profit of $19 million, a $227 million improvement from a year ago. The improvement reflects primarily favorable net pricing, higher China joint venture profits and structural cost reductions.

For the full year, as shown in the memo, Asia-Pacific and Africa reported a pre-tax operating loss of $75 million, a $78 million improvement from a year ago. This improvement was more than explained by structural cost reductions and favorable net pricing, offset partially by lower volumes outside of China.

Slide 26 covers Volvo. In the fourth quarter, wholesales were 100,000 units, up 20,000 units from a year ago, reflecting primarily higher industry volumes and market share improvements. Fourth quarter market share in the US was six-tenths of 1% and share in Europe was 1.5%, both higher than a year ago. Fourth quarter revenue was $3.9 billion, a $600 million increase from a year ago, explained primarily by higher volumes. And for the fourth quarter, Volvo reported a pre-tax operating loss of $32 million, a $704 million improvement from a year ago, explained primarily by structural cost reductions, higher volume and mix, favorable net pricing, and lower material costs, offset partially by unfavorable exchange. For the full year, as shown in the memo, Volvo reported a pre-tax operating loss of $653 million, an $812 million improvement from a year ago. The improvement was more than explained by structural cost reductions, favorable exchange and lower material costs, offset partially by lower industry volumes.

Overall, based on significant improvements in 2009, Volvo is on track with its plan to return to fundamental health supported by the strong product pipeline. As mentioned earlier, based on our plan to sell Volvo, Volvo’s financial results will be reported as special items and is excluded from our operating results in 2010.

Slide 27 shows automotive gross cash and operating-related cash flow. We ended the year with $25.5 billion in automotive gross cash, up $1.7 billion from the end of the third quarter of 2009. Our automotive operating-related cash flow was $3.1 billion in the fourth quarter, reflecting automotive pre-tax operating profit of $1.1 billion. Capital spending during the quarter that was $100 million lower than depreciation and amortization. Changes in working capital and other timing differences were $2.3 billion positive. This is explained primarily by favorable working capital of about $800 million and other timing differences related to end-of-year production shutdowns.

Additional favorable timing differences in marketing payments and one-time tax refunds were offset partially by unfavorable timing differences for healthcare payments and finally the payments of $400 million to Ford Credit, reflecting upfront payments of subvention. Based on the positive operating-related cash flows during the third and fourth quarter, our full year operating related cash flow outflow was $300 million. Other major changes in fourth quarter automotive gross cash includes payments of $2.5 billion on notes and amounts due to the new VEBA, including a prepayment of $500 million. The net $1.9 billion repayment related to our revolving line of credit extension as we restructured the commitments to extend maturities to December 2013.

Equity issuance proceeds related to our revolving line of credit extension – sorry, equity issuance proceeds related primarily to our recently announced plan to issue up to $1 billion of equity and additional cash inflows of $2.8 billion were more than explained by the issuance of convertible debt. Including these impacts, the total increase in automotive gross cash during the fourth quarter was $1.7 billion. Slide 28 describes changes in automotive debt during the fourth quarter. We ended the year with $34.2 billion of automotive debts, an increase of $7.4 billion from September 30. Significant changes in our debt balance include as previously discussed we concluded our agreement to transfer our UAW retiree healthcare liabilities to the VEBA trust. As part of this agreement, we should (inaudible) after making $2.5 billion of payments on December 31, 2009 including a $500 million prepayment had a fair value of $7 billion.

We entered into an agreement with our lenders to reduce and extend to 2013 from 2011 most of our secured revolver credit facility. As a result of the agreement, the extended revolving facility was reduced by $2.6 billion of which $1.9 billion was repaid and $700 million was converted to a new term loan. At year end, we had $7.5 billion outstanding with the extended and non-extended revolving assets. In addition, we issued $2.9 billion principal amount of convertible debt maturing in November 2016 and this debt has an initial carrying value of $2.2 billion.

Slide 29 summarizes our automotive sector’s cash and debt position. At the end of the fourth quarter, automotive debt was $34.3 billion of which $2 billion matures during 2010. Our gross cash net of debt as of December 31, was $8.8 billion negative. As motioned earlier, the adoption of a new accounting standards related to consolidation will require us to deconsolidate many of our joint ventures. This will result in about $550 million of cash and about $800 million of debt being deconsolidated in first quarter 2010. The decrease in debt includes about $500 million of debt obligation maturing during 2010.

Now let’s turn to slide 30 on financial services. For the first quarter, the financial services sector reported a pre-tax operating profit of $683 million, a $1.1 billion improvement from a year ago. For the full-year, pre-tax operating profit was $1.9 billion, a $2.4 billion improvement for a year ago. Other financial services reported a pre-tax operating loss of $13 million in the fourth quarter, a $1 million decline from a year ago. For the full year, the pre-tax operating loss was $106 million, an $84 million decline from a year ago. This decline is related primarily to real estate transactions. For the fourth quarter, Ford Credit reported a pre-tax operating profit of $696 million, a $1.1 billion improvement from a year ago, which we will cover in more detail on the next slide.

Slide 31 provides an explanation of the change in Ford Credit results compared to 2008 by total factor. Volume was $200 million unfavorable, reflecting declining receivables. As shown in the memo on the lower left of the slides, Ford Credit’s December 31, 2009, managed receivables were $95 billion, $23 billion lower than a year ago. This decline is explained primarily by lower industry lower volumes, lower dealer stocks, and the impact of divestitures and alternative business arrangements.

Financing margins improved by $100 million reflecting primarily lower borrowing costs and the decline in the provision for credit losses of $500 million reflects primarily a higher credit loss reserve release and lower charge-offs. Residual losses declined by $500 million, reflecting primarily the impact of higher auction values on vehicles returned during the quarter. Other was $200 million favorable. This was more than explained by the non-returns in net losses related to market reduction adjustments, derivatives and lower operating costs.

For the full year, Ford Credit pre-tax operating profit was just $2 billion, a $2.5 billion improvement from a year ago. This improvement reflects primarily lower depreciation expense on leased vehicles due to higher auction values and a lower provision for credit losses, offset partially by lower volumes. We expect Ford Credit to be profitable in 2010, but lower than 2009 based on low average receivables on the non-recurrence of certain favorable 2009 factors.

Slide 32 covers the liquidity and funding outlook for Ford Credit. The left box shows Ford Credit’s committed liquidity programs and cash, and the utilization of this liquidity sources at the end of the fourth quarter. Ford Credit’s liquidity exceeded utilization by about $21 billion. We continue to see positive momentum for the third consecutive quarter evidenced by improved market access and credit spreads. In 2009, Ford Credit issued about $5 billion of public unsecured debt and completed about $15 billion of public securitizations, included a non-health retail securitization transaction of $1.6 billion in November.

Outside of the United States, Ford Credit has executed its funding plans by completing securitizations and issuing unsecured debt in both public and private markets. Ford Credit remains dependent upon capital market access for its funding strategy and we will continue to extend the term of securitization on unsecured funding.

Ford Credit plans to renew committed capacity consistent with the size of its balance sheet, but will continue to explore and execute alternative business and funding arrangements in those locations where it lacks diverse funding capability. And Ford Credit's funding structure remains focused on maintaining liquidity to meet short-term funding obligations, including holding substantial cash balance. At the end of the fourth quarter, Ford Credit’s managed leverage was 7.3 to 1 and Ford Credit's equity was about $11 billion.

Slide 33 covers our first quarter 2010 production plans. In North America, the first quarter production schedule is 570,000 units up 21,000 units from a year ago and up 20,000 units from our prior guidance. In South America, the first quarter production schedule is 111,000 units up 12,000 from a year ago. And for Ford Europe, we expect first quarter production of 440,000 units up 97,000 units from a year ago. And for Ford Asia Pacific and Africa, we expect first quarter production of 147,000 units, up 49,000 units from a year ago. And at Volvo, we expect first quarter production of 93,000 units up 28,000 units from a year ago. Overall, the first quarter production increased from a year ago reflects strong customer demand for our products and the non-recurrence of prior year dealer stock declines.

Now I would like to turn it back to Alan to recap our 2009 performance and summarize our 2010 outlook and our plan going forward.

Alan Mulally

Great. Thank you very much Lewis. Slide 35 provides an overview of the business environment. Global economic conditions are improving that remained fragile. Modest recoveries in some markets are held back by weak labor markets and tight credit. The consumer spending outlook for the US and Europe remains weak with the low trend growth likely in 2010. In addition, our suppliers and dealers have been weakened by the impacts of the global economic downturn.

With the worst of the financial crises now subsiding, global central banks are likely to remove some stimulus by retiring special lending programs and begin modest policy interest rate increases. Even with this, interest rates are likely to remain relatively low in 2010 and supportive of the economic recovery. Upward pressure on commodity prices has resumed in conjunction with the emergence of an economic recovery. This trend is likely to continue in 2010. Our business continues to be affected by currency volatility; reasonably the US dollar has gained some ground against the British Pound and the Euro.

Global industry volume last year is estimated at 64 million units down around 6% compared to 2008. This reflected weak conditions in the US market with more modest declines in Europe owing to substantial scrappage programs. For 2010, we expect to see a gradual improvement in global industry volumes but significant uncertainties remain. As a result of the very effective 2009 European scrappage programs, there is expected to be substantial payback in 2010, particularly in Germany. We expect to see continued growth in Asia Pacific markets in 2010 supported by robust economic performance in that region also.

Now on slide 36 which shows the results of our 2009 full-year key planning assumptions and our operational metrics; industry volume was 10.6 million units in the US and 15.8 million units in Europe, basically consistent with our previous guidance. On the automotive operational metrics, US Ford Lincoln and Mercury brand vehicles had the fewest number of things gone wrong among all auto makers. International results remained mixed as Europe continues to address a few issues. This showed a 6% improvement and things gone wrong compared with third quarter of 2009.

Automotive structural costs were reduced by $5.1 billion for the full year, exceeding our full year target of $4 billion. US total market share was 15.3%, our share of the US retail market was 13.1% and Europe market share was 9.1%, all improved compared with 2008 reflecting the success of our strong product lineup. Automotive operating related cash flow was $300 million negative, in addition to our improved profitability the substantial change from 2008 reflected in part a large increase in payables as we returned to balances closer to normal and inventory reductions to lower ongoing levels. Capital expenditures were $4.5 billion, a decrease from our initial guidance largely reflects efficiency, our product plans remain intact.

On the next slide we will summarize our 2010 outlook. Slide 37, we expect full-year industry sales to be in a range of 11.5 million to 12.5 million units in the US and 13.5 million to 14.5 million units in Europe. On the automotive operational metrics, we will continue to improve quality. As mentioned earlier, we have achieved significant structural cost reductions over the past four years. And going forward, we expect automotives structural costs to be somewhat higher as we increase production to meet the demand. We anticipate our full-year US total market share and our share of the US retail market to be equal or improved compared to 2009.

Europe market share is expected to be about equal to 2009. Automotive operating related cash flow is expecting to be positive, but less than the run rate implied by the strong second half 2009 cash flow. Recent performance was heavily influenced by seasonal factors including normal yearend inventory reductions and significant non-recurring factors such as tax refunds and higher production to rebuild depleted dealer stocks. Capital spending is expected to be in the range of $4.5 billion to $5 billion as we continue to focus on our product plan. This plan assumption excludes Volvo and joint ventures that will be disconsolidated.

On a comparable basis, 2010 capital spending is up about $1 billion from 2009. For the full year 2010, we plan to be profitable on a pretax basis, excluding special items, for North America, total automotive and total company, with positive automotive operating related cash flow based on our assumptions. Our full-year 2011 guidance remains unchanged. We remain on track to be solidly profitable on a pretax basis, excluding special items, with positive automotive operating cash flow.

Slide 38 summarizes the key aspects of our plan going forward. These clearly have not changed.

To sum up, we are proud of the way the entire Ford team worked together to deliver results in the fourth quarter and all of 2009, including substantial improvements in profitability and cash flow across all of our business segments. Our reputation for producing best-in-class vehicles is growing around the world, as evidenced by our market share growth in most of our major markets and by our improved pricing performance.

In 2010, we will continue our momentum on plans to deliver substantially more new or refreshed products than we did last year, even though last year was very active in terms of car, crossover, and truck relaunches. This year, we will bring to the market more products that people want, class leading fuel economy, quality, safety, and technology. This will include products like the Fiesta, redesigned Edge and the Lincoln MKX, and Super Duty in the US; the Figo in India; the new C-MAX and updated versions of the S-MAX, Mondeo and Galaxy in Europe. In addition, we will begin production of the new Explorer in the US.

In 2010, we are also focused on continuing to lead with efficient and world-class power trains. Ford will continue to introduce nine new and upgraded engines and transmissions in North America, as part of our five-year effort to overhaul the entire global power train portfolio. By the end of this year, nearly all of Ford’s North American engines will have been upgraded or replaced since 2008.

Ford’s transformation however, remains a work in progress and is far from complete. The economy remains soft in the areas of the world and the global auto industry continues to wrestle with excess vehicle capacity, volatile commodity prices, and a fragile supply base. As we look at the work we have left to do, we are more confident than ever that our plan provides a solid blueprint to transform Ford into a lean company that delivers profitable growth for all the stakeholders.

And now, we would be happy to take your questions.

Question-and-Answer Session

Brian Harris

Thank you, Alan. Ladies and gentlemen, we are now going to start the Q&A session. We have about 35 minutes from the question-and-answer period. 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 much time as possible for questions within our timeframe, please keep your questions brief.

Katrina, can we have the first question please?

Operator

Thank you. (Operator instructions) Your first question comes from the line of Joe Amaturo, representing Buckingham Research. Please proceed.

Joe Amaturo – Buckingham Research

Good morning. How are you? One question, Alan; you did a very good job with net pricing in 2009, and I was just wondering, you know, what approach you expect to take in 2010, particularly given some of the current events with one of your major North American competitors?

Alan Mulally

Well, the initial answer to that question, Joe, is that we are very pleased to see the customers appreciating the value that we are incorporating in all the vehicles. And so, you know, as we go forward, as you well know, we are improving the breadth of our product line, plus the quality, so we anticipate that the customers will continue to value that. We expected that last year itself, we think it will be maybe a little bit less than we experienced last year. Clearly, that will be bounced the value that we will be increasing for the new products.

Joe Amaturo – Buckingham Research

Okay, great. And then, one other; Lewis, maybe you could explain this exchange issue and how much of it was due to the Canadian dollar, particularly as it relates to the North American automotive performance; and then, what you would expect in 2010 or what we should expect in 2010 as it relates to FX?

Lewis Booth

Most of the effect was the Canadian dollar, and it was promising to adjustments. And I don’t know, Joe, I'm not really prepared to guess what we are to expect from that share.

Joe Amaturo – Buckingham Research

I guess I should probably ask you a little differently, I mean, do you have any hedges in place as it relates to the foreign exchange or –?

Lewis Booth

We have some hedges on inter-company loans, but not on policy [ph] assessments.

Joe Amaturo – Buckingham Research

Okay, great. Thank you, and excellent quarter.

Alan Mulally

Thanks a lot, Joe.

Operator

The next question comes from the line of John Murphy, representing Banc of America Merrill Lynch. Please proceed.

John Murphy – Banc of America Merrill Lynch

Good morning, guys. We have a pretty good view of what happens at the end of the purchase funnel, obviously, and the numbers we are seeing on a monthly basis. But at the beginning in that consideration set, I wonder if you could just highlight what you are seeing, maybe statistically or whatever comments you can make on the expansion of the consideration set for four products that will ultimately lead to you know, the execution of the sale.

Alan Mulally

You bet. Well, it is a pretty neat story, John, as I know you know, because the four brands that has always had tremendous recognition, and one of the most recognized brands around the world. And the neatest thing is that with the prove points, especially on the product side, the complete family, the best-in-class on quality and fuel efficiency and safety and the neat features on each one of the new vehicles, and of course, the value proposition is that we are seeing a dramatic improvement in the favorability, which is the next step on the purchase tunnel [ph]. And we are starting to see that improve all the way through the tunnel now and the more the people appreciate, especially this complete family of vehicles now that we have always had that on the SUVs and the trucks as you know, but what’s really moving very fast is appreciating for the smaller and mid-sized cars and utilities. So, an upper trend that we anticipate will continue.

John Murphy – Banc of America Merrill Lynch

Okay, and then second, just staying on the product, you got to explore any Super Duty launching in the second half of this year, which should be pretty favorable for mix, but obviously you know, the Fiesta would be mix down, I mean, in general would looking at mix in 2010 versus 2009 as about neutral be a fair assessment or, I mean, you know, how should we think about mix, or how are you thinking about mix in 2010?

Lewis Booth

Sure, let me – we are just kind of looking at some data. The Super Duty, just to make sure that we got is second quarter and Explorer is in the fourth quarter.

John Murphy – Banc of America Merrill Lynch

Got it.

Lewis Booth

Okay, and which is a part of your answer also is that we are seeing, you know, continuous strong demand for all of the segments of our product line, and I think it just gets even more enhanced as we add some more of the smaller medium-sized vehicles. So, I think overall, I would say about the same.

John Murphy – Banc of America Merrill Lynch

Okay, and then just –

Alan Mulally

Once we get little bit more information –

Lewis Booth

It’s probably a bit bad, because the Explorer comes in right around you, really doesn’t get much production. So, I think we are going to see the impacts of Fiesta more than we are going to see the impacts of Explorer. So, I think we are going to see a bit of adverse product mix.

John Murphy – Banc of America Merrill Lynch

So, that Super Duty is launching in the second quarter, so you get almost three quarters of that?

Alan Mulally

Yes, that’s correct.

John Murphy – Banc of America Merrill Lynch

Okay. And Lewis, just on Ford Motor Credit, continuing to outperform here, used car pricing is fading a little bit, but it’s not, you know, dropping off, so in that lead stuff, it sounds like it should be reasonably good this year, but we are also seeing your securitizations being upsized, spreads tightening, I mean, what is – I mean, how should we think about this, because I understand there are some factors that were not repeatable, but you are doing $500 million to $600 million in pre-tax profits here for the last three quarters. I mean, should that really be killing off that much from there?

Lewis Booth

Yes, there’s couple of quite significant items. One is our receivables take another pretty substantial hit in 2010, because of you know, as the industry levels have downsized and we have rolled off some of the book, but we are also rolling off Jaguar Land Rover book, the Mazda book, we are starting to roll of the Volvo, but we are making progressing on that. We have taken, we have found alternative business arrangements in some of the Asia-Pacific and European countries. There was also, I think we have talked about this in the second quarter, there was a pretty substantial currency gain on unhedged in the company loan that from then it was several hundred dollars, I think $300 million. So, there are a couple of pretty big, and one non recounting it and the other is the fact that we have been downsized in the Credit company to recognize the realities of our future ability to fund and also the fact that we are no longer managing the PAG business.

Operator

The next question comes from the line of Rod Lache representing Deutsche Bank. Please proceed.

Rod Lache – Deutsche Bank

Good morning everybody.

Alan Mulally

Hi Rod.

Rod Lache – Deutsche Bank

A couple of things, just looking at the North American results this quarter, if I look at North American shipments sequentially, it looks like they were 115,000 units higher, and earnings of $350 million better. So, it’s about $3,000 per unit, and I was wondering whether it just looks a little like relative to what we have seen in the past, but can you just comment a little bit of that sequential walk as you have done in the past?

Alan Mulally

Yes, I will just give you an update in a minute. Yes, I think the reason that (inaudible) were some seasonal structural cost changes on a quarter-over-quarter basis that go up a little bit in the fourth quarter. Other than that, nothing really significant, we are still continuing to feel pretty good about the margin before we get to fixed cost.

Rod Lache – Deutsche Bank

Okay, but you would include those seasonal issues in the volume line as you have broken that out?

Alan Mulally

No.

Rod Lache – Deutsche Bank

Okay. Can you, I guess maybe just switching gears a little bit, K. R., I didn’t see an mention this quarter about planning or plans for bank holding companies status or looking to get any kind of support there, I was wondering if you can comment on those plans and are there any implications that you see from the proposals in Washington vis-à-vis taxing liabilities of financial institutions, how do you see that kind of affecting your business if at all?

K.R. Kent

Yes, just a couple of things. There are no plans to recover bank holding company. That’s clear. We still have a pending application on the ILC.

Rod Lache – Deutsche Bank

Sorry, yes, ILC.

K.R. Kent

Sorry.

Rod Lache – Deutsche Bank

I apologize.

Alan Mulally

Big difference.

Rod Lache – Deutsche Bank

I understand right.

Alan Mulally

We know you do.

K.R. Kent

And that application is still pending, Rod. As we have always said, it was always a small piece of the business if it goes through. As far as regulatory changes, it’s really hard for me to tell at this point in time, we are getting our funding done, we are getting the securitization done, spreads are tightening, things are looking really good from our perspective as far as being able to compete in the marketplace and get people on to Ford vehicles and keeping our dealers funded.

Rod Lache – Deutsche Bank

Okay.

Alan Mulally

We are still convinced that we don’t do the year that captures credit companies of strategic assets, absolutely.

Rod Lache – Deutsche Bank

Yes. And just back to the motor company, could you just talk about where your UAW cost per hour is today all in and can you just remind us, it looks like you are storing a higher people, what is the all-in costs for new hires, do you have any targets for the ratio of Tier 1 versus Tier 2? And also, just given the European decline, are there any actions that you are taking to mitigate some of that decline? That will be my last question.

Alan Mulally

Okay. Let me answer the second part first. The European decline, during the year, we took out a substantial, during 2009, we had a substantial deal-out stock reduction in Europe, because frankly scrappage were a lot stronger than we expected, and continued a lot longer. So, with that repeat of that which we don’t anticipate, we will have about flat production year-over-year. So, you know, structurally, with Europe is about where at least things change, we will take another look, but we think we are about okay. In terms of the way we are on the UAW, we are really not much different from where we have talked to you about before. We are now at about $55 an hour against, you know, best estimate when they still had a substantial number of attempts of the – about $50 now. When we got up to a 20% blended rate of new hires would be, that would close the gap to $50, but you know, we haven’t got near-term hiring plans that would get us up to that $20. So, we are still less than we have – as production grow, just making sure we are utilizing people we already have.

Operator

The next question comes from the line of Brian Johnson representing Barclays Capital. Please proceed.

Brian Johnson – Barclays Capital

Hi, good morning. Two questions, one housekeeping and then one strategic about South America. On the housekeeping front, what was the contribution to cash flow above and beyond net profits from the translation of balance sheet currency impact you talked about?

Alan Mulally

Hold on, I am just asking my housekeeper. What don’t you ask the second question, we will just –?

Brian Johnson – Barclays Capital

Yes, could you give us some color on both how on what you see for South America going forward, particularly in light of or particularly your expectations maybe for market growth Ford position, obviously it’s an important product geographic area reported several other global competitors, and then how that might translate to profitability, in particular these 14% EBIT margins we are seeing are those going to be sustainable?

Alan Mulally

You know, we just announced a very substantial investment plan in South America. It’s obviously both products and we expect capacity as well as continued work on patron down in South America. We don’t expect it to be a growing area, and we expect it to continue to be a significant credit to our profit stream, but beyond that, we wouldn’t speculate on just how much.

Brian Johnson – Barclays Capital

Are you running full capacity?

Alan Mulally

We are just about flat out, yes. The Thomas plant is flat out, the Sao Paulo, I think has a bit of open truck capacity, so it’s flat out, and we are flat out on power train. In terms of your question, it’s pretty timely in terms of the exchange rate effect, 0.2 billion [ph] something like that, from just about an exit.

Brian Johnson – Barclays Capital

Okay, thanks.

Alan Mulally

Thanks Brian.

Operator

The next question comes from the line of Chris Ceraso representing Credit Suisse. Please proceed.

Chris Ceraso – Credit Suisse

Thanks good morning.

Alan Mulally

Good morning Chris.

Chris Ceraso – Credit Suisse

Couple questions around the finance company, first, the size of the book you referenced in the slide around 11 billion, and I don’t mean to be picky here, it’s 10.3 the last quarter, is that 11 a rounded number or you are growing the book here?

K.R. Kent

You are talking about the 11 billion of equity trust?

Chris Ceraso – Credit Suisse

Yes, exactly. Is it like 10.5 and you put it as 11 because it’s rounded or what’s the –?

K.R. Kent

No, it’s pretty close to 11. One second, I will find it. 10.969 [ph].

Chris Ceraso – Credit Suisse

Okay, so where do you see that going? Lewis mentioned the JLR and the Volvo and the Mazda, where does the book value go, let’s say by the end of 2010?

K.R. Kent

Real high level, we mentioned that we are sizing the balance sheet, was reduced to about between 80 billion and 90 billion, we ended the fourth quarter at 95 billion. JLR, Mazda, and Volvo receivables will continue to wind off, which should free up capital. So, the 11 billion ends up being in our profits for 2010, plus the plant distributions that we have planned. We plan to pay $1.5 billion of distributions in 2010, which reduced the 11 billion down, then it will be offset by profit, it will end up being between 10 billion and 11 billion by the end of the year.

Chris Ceraso – Credit Suisse

Okay, and then is it trying to take away some of the noise of the different adjustments and one-time items? Is it, I mean, you guys used to do something in the neighborhood of a 14% ROE in the Credit business, is that a good neighborhood, is that like an after-tax return on equity around 14%?

K.R. Kent

We don’t actually give any guidance on that. You know, it’s a fair long-term objective.

Chris Ceraso – Credit Suisse

All right.

Alan Mulally

And this is a long term, Chris.

K.R. Kent

Right.

Chris Ceraso – Credit Suisse

Just lastly and just so I understand how you are doing the math here, on the $500 million favorable that you showed in the finance company in the quarter, is that the change in the value of the lease book that you are writing up, so that you depreciate differently, or is it the benefit of vehicles that are coming off lease that are worth more than you thought they would be?

K.R. Kent

Yes, it is primarily the vehicles that actually came off lease and were sold at auction during the quarter compared to where they have been depreciated to prior to, basically prior to the quarter. So, some of it is, for example, like the impairment we took. You can’t actually undo an impairment when it comes to a depreciable asset. So, eventually when the vehicles come back, they go through auction, we will recognize that gain at that point in time.

Chris Ceraso – Credit Suisse

So, how much more of this do you expect and how many more quarters can you continue to book again vehicles come off lease?

K.R. Kent

It will, I don’t have a specific forecast again, but at least a several more quarters.

Chris Ceraso – Credit Suisse

Several more quarters, okay. At the same tight magnitude?

K.R. Kent

That I don’t want to get into just yet.

Chris Ceraso – Credit Suisse

Okay, thank you very much.

K.R. Kent

Could I just before the next question, I would just clarify our response to Mr. Brian on the São Paulo facility. We are at capacity on cars, but we are operating on one shift. So we are at man capacity rather than at facility capacity.

Operator

The next question comes from the line of Himanshu Patel, representing J.P. Morgan. Please proceed.

Himanshu Patel – J.P. Morgan

Hi, good morning. Couple of questions. Just given what is happening with commodity costs, can you guys touch on what the outlook is for net product costs in 2010?

Lewis Booth

Yes, we expect them to be going up. We do think we are starting to see commodity turns. As we start the new contracts, we would see some increased price because of that. So, product costs, we expect to be going up a bit.

Himanshu Patel – J.P. Morgan

Okay, and then Lewis, could you give us any help on 2010 pension expense and pension cash contributions?

Lewis Booth

I am not sure I can be of help. I am sorry. I just worked out why I can’t be helpful. We will give you the details, Himanshu, in the 10-K when we finish the analysis.

Himanshu Patel – J.P. Morgan

Okay, and then I guess there is a story out today about Ford halting production of the China version of the Transit because of the same accelerator problem that Toyota has. Can you just give us a sense for where are you on the analysis of this issue? Could this – is this pretty isolated in your view, or is there a chance that this could spread to North America or Europe as well?

Alan Mulally

Our assessment right now is it is very isolated, this is a little bit more information. You know, following our normal process, when anybody has an issue in the industry, we check everything about the Ford design and production worldwide and as you pointed out, it appears to us that there might be a similar design in one of the older Transit, what they call in China the Transit Classic, that is being produced in our joint venture with Jiangling Motors. And so they announced this morning, with our support, that they are going to suspend production until they can finish the investigation. It involves less than 2000 vehicles and it appears that the design might be similar, which kind of fits with them switching suppliers in December last year over to the CTS supplier. So, we think it is pretty isolated, but you know, we are aggressively running at the ground.

Himanshu Patel – J.P. Morgan

Okay, thank you.

Operator

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

Patrick Archambault – Goldman Sachs

Hi, good morning. You know, I wanted to just get a little bit more guidance on the impact of Volvo being put into special items. You know, how separate is Volvo operationally as well as administratively. You know, when you do alternately sell it, you know, how much penalty can we sort of expect from some of the duplicative administrative and operating functions that you will sort of – that will remain with you that you would have to sort of restructure separately? You know, how much of a penalty in and above removing whatever future PVP [ph] forecast we would have in our models should we be thinking about, both in terms of when it actually comes off the books as well as how it'll be treated when you report it as a special item.

Lewis Booth

If you can think of all the pretty stand-alone capability in terms of product development and manufacturing, some shared engines, they supply Ford with engines and Ford supplies them with engines, and an independent sales network and dealer network. So there are a couple of areas where we are going to have to work to make sure we don’t incur – I don't know what the word is, dis-efficiencies. But I don't think there is going to be a material effect. And we will obviously, when we do the deal, it will be somewhat like Tata-Land Rover, where there will be some short-term transitional service agreements, where as they build up (inaudible) for example in accounting or IT or whatever that we continue to provide them with a service for a period. And then there will be some long terms agreements on major license like engine supply, or so. But I am not anticipating a material financial effect.

Patrick Archambault – Goldman Sachs

Okay, great. And I guess just another one just on the cash flow. You mentioned that in this quarter, you know, some one-off tax benefits that you know, I think we are part of that sort of working capital other. Can you quantify those for us?

Lewis Booth

Yes, it was about $400 million from memory.

Alan Mulally

You know, the reason we are talking about – and I'm not using it as a guide for future levels, obviously, as we started seeing production come back to more reasonable levels, we started seeing the payables coming back to more reasonable levels, which is how things duplicate and we also – the business units, particularly in the fourth quarter did a knockout job on bringing down inventory. And the challenge for us as we start increasing production, particularly in North America as we go forward will be making sure that inventory don’t break up a little bit. So that’s why we think third and fourth quarter a little unrepresentative of our running rate.

Operator

(Operator instructions) Your next question comes from the line of Bryce Hoffman representing The Detroit News. Please proceed.

Bryce Hoffman – The Detroit News

Good morning, congratulations gentlemen. I just wanted to ask a question about Toyota. Do you foresee any impact or any opportunity on your US business from the Toyota recalls?

Alan Mulally

The way that we are approaching it Bryce is that we are really focused on the customers and what they want. And going through – one of the new things about going through 2009 was how (inaudible) to see the customers considering Ford and also buying Ford. And so clearly everybody realizes now that we are competing with the best in the world including Toyota. So we anticipate that going forward in 2010 that we are going to see more and more interest in Ford.

Bryce Hoffman – The Detroit News

Have you seen opportunities out from Toyota’s trouble to pick up any share from them?

Alan Mulally

I think it’s going to depend on how this all plays out and how fast Toyota gets this behind them. But clearly, with a void right now and people needing vehicles I am sure that there is going to be even more interest in Ford. But the really cool thing is it’s really an opportunity for our products to be viewed again.

Bryce Hoffman – The Detroit News

Great. Thank you.

Alan Mulally

You are welcome.

Operator

The next question comes from the line of Dee-Ann Durbin representing The Associated Press. Please proceed.

Dee-Ann Durbin – The Associated Press

Good morning gentlemen.

Alan Mulally

Good morning.

Dee-Ann Durbin – The Associated Press

I was wondering if you could give me an example of favorable net pricing on a specific vehicle.

Lewis Booth

A couple of ways. As we launched new products have increased content, but the customers see as value we can get the opportunity to price for that, and then I would say, see the vehicle as more attractive than its predecessor. We’ve been able to reduce incentives because people see our vehicles now as world-class whereas, in the past, historically on some of our vehicle lines. Our customers didn’t see that. So what we are really trying to do is with world-class products achieve competitive levels of revenue, which means typically slightly higher, strictly priced with significantly reduced incentive. So you get a better transaction price. But it’s all around the product and it’s all around getting competitive prices rather than getting prices at high end. And the Tourist [ph] is a good example, when the Tourist – when we launched we were able to close the gap of our competitors because we had a fundamentally brand new product that the customers thought was really worth, what we were asking come to pay for it.

Dee-Ann Durbin – The Associated Press

Thanks.

Alan Mulally

I assume you wanted a general answer on dollars and cents?

Dee-Ann Durbin – The Associated Press

Actually dollars and cents.

Alan Mulally

So send in your order, we will help you out.

Dee-Ann Durbin – The Associated Press

Thank you.

Alan Mulally

You are welcome.

Operator

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

Brent Snavely – Detroit Free Press

Hi guys, and congratulations.

Alan Mulally

Thank you.

Brent Snavely – Detroit Free Press

I guess one broad question, one specific one. On the profit sharing with the UAW, do you now expect or have they agreed to end this sort of mass country wide grievance effort that is under way?

Alan Mulally

We have no comment on where they are on that Brent. But clearly it is a very positive development as we move forward to be able to recognize people for the great progress we are making.

Brent Snavely – Detroit Free Press

And then broad picture on this restructuring and turnaround plan, you have been on for several years. You called 2009 a pivotal year for Ford, just where you guys at now in terms of the progress of completing Ford’s turnaround?

Alan Mulally

At the broadest level to your question, we are never going to be done; we are going to continuously improve forever. The new thing about the – your question about the pivotal year, and it really is favorable and historic that during the worse economic recession in 30 years or 40 years because of the strength of the plan we put in place a few years ago, we were able not only to survive but also to create a foundation that is delivering now profitable growth during that year, based on the strength of our products and all the actions that we have taken on continually improving our quality and our productivity.

So, the way we are thinking about it of course is that going forward, as we stay on the same plan, we are going to keeping matching new capacity to the real demand, we are going to continue to improve our quality and productivity and we are going to lead with the freshest lineup and most complete lineup cars, utilities and trucks; small, medium and large with a best-in-class quality. So we look at this as a long term delivering great products, ever-improving strong business and being part of the solution for everybody going forward.

Brent Snavely – Detroit Free Press

Thank you very much.

Alan Mulally

You are welcome Brent.

Operator

The next question comes from the line of Chris Isidore representing CNN Money, please proceed.

Chris Isidore – CNN Money

Yes, three months ago when you reported the third quarter results, you weren’t quite ready to predict the profit for 2010. What has changed in the last three months that made you more bullish about the year ahead? And do you see there being more upside or downside to that forecast right now?

Lewis Booth

Coming to think of it, I think we have obviously got a good quarter under all that, so we continue to see good performance on the stuff under our control in terms of our business and the recession of our products. I think we are seeing perhaps the opportunity of a little bit more life in Europe, because some of the (inaudible) programs are continuing. You know, we said at the end of the third quarter the thing that is concerning us most was an inability to read the market trends as we were exiting the third quarter on the (inaudible), which had really sort of distorted the running rates in the US. We finished with a good December, so I think we feel just a little bit more positive that the green shoots are still there, they haven’t shriveled up. We remain concerned about the fragile nature of the economic recovery around Western Europe and the US, really encouraged by the growth in China, and our ability to participate in the growth of the rapidly growing Asia-Pacific sales. So it is just a tiny wee little bit of confidence than when we finished the third quarter, I think based on those factors.

Chris Isidore – CNN Money

Thanks

Operator

The next question comes from the line of Joann Muller, representing Forbes. Please proceed.

Joann Muller – Forbes

Hi, there. I had a question about the debt and I am wondering, what is your – what was the debt payment for the year last year in total, and what I am trying to get at here is, what is the debt penalty per vehicle and does it give you a disadvantage against your competitors?

Lewis Booth

There is no question that our net debt levels give us a disadvantage against our competitors, because of the higher interest rates we occur. You know, doing a direct comparison is a bit tough, because you have to understand the net cash. Not just the debt position, Joann, but you have got to look at the net cash position in terms of interest level. So we wouldn’t give a specific number, but we are acutely aware that we still have too much debt on our balance sheet. We worked at it very hard last year, with you know, debt restructuring and equity offering, a dribble out convertible term and prepayment to the VEBA and some payments of the revolver as part of the amended (inaudible) and we are going to continue to work on it. I think that we are focused on inside Ford is best way to improve our balance sheet is to improve the fundamental profitability of the company to generate, and the positive operating cash flow to enable us to pay down our debt. So, that’s our focus at the moment.

Joann Muller – Forbes

Can you elaborate on any actions you might be taking in the coming year?

Alan Mulally

No, I mean, the thing I can elaborate on is we still have a lot of work to do to continue to improve the business, being profitable as we have given guidance and generating positive operating automotive-related cash flow is the single most important thing we do in terms of, I think our balance sheet.

Joann Muller – Forbes

Based on your projections, do you have any estimate on how long it will take you to work that down?

Alan Mulally

We certainly do, but as you would understand, it’s not something we would share outside the company.

Joann Muller – Forbes

Okay, thanks.

Alan Mulally

You bet. Katrina, I think we just have time for one more question, please.

Operator

Thank you. The final question comes from the line of Jeff Bennett representing Dow Jones. Please proceed.

Jeff Bennett – Dow Jones

Thanks very much. Just two questions. Lewis, what are we seeing for the pacing of the commodity price increases, do you think it’s something that’s going to pick up in the middle of the year, or just kind of continually right throughout the year? And then, Alan, are you considering just an entire recall of the vans in China?

Alan Mulally

Lewis will go first here.

Lewis Booth

Okay. Well, we have already seen commodities start moving starting in the fourth quarter or the third quarter. So, I think we are seeing, you know, a steady increase during the year, but it’s going to be heavily dependent on industrial activity in China, and I think, so we are going to just have to watch this space very closely.

Jeff Bennett – Dow Jones

Okay, thanks.

Alan Mulally

And Jeff, with respect to that, the pedal assembly, we have not determined whether we have a problem there yet. What we do know is that, that we found a similar design that, and also the fact that they had switched suppliers to the CPS supplier. So, with what we know, that’s why we are very supportive of it, of the genuine motors and joint venture suspending production for those that less than a few thousand units. And so, we are continuing with our investigation, and then we will, you know, we will take the appropriate action. Also, I would like to just point out that we have found no issues with the customers with this issue in China also. So, but we are going to follow our normal decisive process and understand the issue and then we will move on it.

Jeff Bennett – Dow Jones

Okay, thanks.

Alan Mulally

You bet. Hi, thank you everyone. That concludes today’s presentation. We thank you all for joining us today.

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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Source: Ford Motor Company Q4 2009 Earnings Call Transcript
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