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Executives

Brian Harris [ph] – Director, IR

Alan Mulally – President and CEO

Lewis Booth – EVP and CFO

Analysts

Joe Amaturo – Buckingham Research

John Murphy – Banc of America/Merrill Lynch

Itay Michaeli – Citi

Patrick Archambault – Goldman Sachs

Tim Denoyer – Wolfe Trahan

Colin Langan – UBS

Himanshu Patel – JPMorgan

Chris Ceraso – Credit Suisse

Rod Lache – Deutsche Bank

Brian Johnson – Barclays Capital

Bryce Hoffman – The Detroit News

Jeff Bennett – Wall Street Journal

Tom Walsh – Free Press

Dee-Ann Durbin – The Associated Press

Robert Schoenberger – The Plain Dealer

Brent Snavely – Detroit Free Press

Jere Downs – The Louisville Courier–Journal

Ford Motor Company (F) Q1 2010 Earnings Call Transcript April 27, 2010 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the first 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 facilitate 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 [ph], 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 [ph], Director of Accounting; and K.R. Kent, Ford Credit's CFO.

Before we begin, I would like to cover a few items. Copies of this morning's press release and the presentation 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. 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 the U.S. 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 made here. The most significant factors that could affect future results are summarized at the end of this presentation. These risk factors and other key information are 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 first quarter 2010 financial results.

This was another solid quarter for us and further evidence that our plan is working and we are delivering profitable growth. Despite challenging economic conditions and below trend global demand for vehicles, Ford posted a pretax operating profit of $2 billion, our best quarterly pretax operating profit in six years.

The basic engine that drives our business results products, market share, revenue and cost structure is performing stronger each quarter. Each of our Ford business units, North America, South America, Europe, Asia Pacific and Africa and Ford Credit delivered operating profits and each improved substantially compared with a year ago.

Perhaps, most importantly we continue to accelerate the development of products people really want and value. Vehicles like the Global Fiesta, the new Figo for India and the redesigned Super Duty pickup here in North America are further strengthening our balance line up of cars, utilities and trucks that offer the very best quality, fuel efficiency, safety, smart design and value. Based on our improving performance, the gradual strength in the economy and our present assumptions, we now expect to deliver solid profit this year with positive automotive operating related-cash flow.

While we are pleased with our progress, we do not underestimate the challenges ahead. We plan to stay completely focused on delivering on our One Ford plan. I will start off this morning by providing you with an overview of our financial results and business product and sales highlights. Then Lewis will walk us through the financial results in even greater detail. Finally, I will summarize our 2010 outlook and our plans going forward.

Turning to slide three, I will begin by reviewing the key financial results. Please note as a result of our agreement to sell Volvo, all of our Volvo's 2010 results are being reported as special items and excluded from our operating results. 2009 results do include Volvo.

As show at the top of the slide, first quarter vehicle wholesales were 1.3 million units up 267,000 units from a year ago. The increase was explained by higher wholesales in all of our automotive segments offset partially by the exclusion of Volvo wholesales.

Our first quarter revenue was $28.1 billion, a $3.7 billion increase. The increase was more than explained by higher volumes, favorable exchange translation and favorable net pricing offset partially by the exclusion of Volvo revenue.

If Volvo had been excluded from the 2009 automotive revenue would have increased by $7 billion or more than 30%. Our first quarter pretax operating profit excluding special items was $2 billion, a $4 billion improvement. Automotive results improved by $3.2 billion and financial services improved by $877 million.

Our first quarter net income attributable to Ford was $2.1 billion, including favorable pretax special items of $125 million; this was a $3.5 billion improvement. We ended the quarter with $25.3 billion automotive gross cash, up $4.4 billion.

Slide four details some of our key business highlights since our last earnings release. At the end of March, Ford entered into a definitive agreement to sell Volvo and related assets to Geely for $1.8 billion subject to customary purchase price adjustments.

We expect to close the sale in the third quarter of 2010. We also announced a series of new investments around the world. In Brazil and Argentina we announced plans to increase our commitment by $450 million to more than $2.6 billion by 2015.

In the UK, we announced a $2.3 billion investment in manufacturing facilities over the next five years to support production of low carbon emission vehicles. In South Africa, we announced a $400 million investment to support production of Ford's next generation compact pickup and the Puma diesel engine primarily for export.

Early in the quarter, we confirmed a $400 million investment in our Chicago Assembly Plant and the addition of 1200 jobs to support production of the next generation Ford Explorer.

And finally as part of our plan to improve our balance sheet on April 6 we paid down $3 billion of our revolving credit facility which remains available through December of 2013.

Turning to slide five, we will look at Ford's product highlights since our last earnings release. Ford, Lincoln and Mercury vehicles achieved the highest customer satisfaction and the fewest number of things going wrong among all full line manufacturers in the first quarter GQRS study for the U.S.

We started the year strongly with the reveal of the Global Focus at the North American International Auto Show. The vehicle goes on sale in North America and Europe early next year, and in 2012 for Asia. We also revealed 2011 Ford Edge and the Lincoln MKX, said to be the first vehicles equipped with MyFord Touch and MyLincoln Touch driver connectivity when they reach the showroom this fall.

At the New York Auto Show, we debut the Lincoln MKZ Hybrid, which is expected to be America's most fuel efficient luxury sedan. We also now star partnership with Microsoft to use Microsoft Home as a platform to help future owners of Ford’s electric vehicles manage their energy use.

Meanwhile in India, our new Figo is off to a strong start collecting 10,000 orders in the first month on the market. We also began production of the next-generation F-Series Super Duty line up at the Kentucky Truck Plant with new fuel efficient diesel and gasoline engines. And at the Geneva Auto Show, we announced the extension of our electrical vehicle plant to Europe.

By 2013, we planned to launch five full electric and hybrid vehicles. Turning to slide six, we will look at Ford sales highlights since our last earnings release. All of our automated segments reported an increase in sales, compared with the first quarter of 2009. In the U.S. we increased market share 2.7 percentage points to 16.6%, our highest share increase since 1977.

The Fusion F-150, Taurus and the Focus fueled our performance. Our product strength is also evident in Canada, where we stood as market leader over the entire quarter achieving a 29% increase in sales and a 15.5% market share. In South America, we increased sales by 14% and sold a record 88,000 vehicles in Brazil.

In Europe, we increased sales and achieved a 9.4% market share. In March, Ford was the best selling brand in the 19 markets that we track. And in the Asia Pacific region, Ford posted a 39% increase, thanks to the increased momentum of the Fiesta in several of the markets. Now I'd like to turn it over to Lewis to provide even more detail on our first quarter financial results.

Lewis Booth

Thanks, Alan. Let's move on to Slide eight. Our first quarter pretax operating profit excluding special items was $2 billion, a $4 billion improvement from a year ago. Most of the remaining slides will focus on these pretax operating results.

Our pretax operating profit excluded favorable special items of $125 million, which we’ll cover on the next slide. We recognized $50 million of tax expense, a $277 million increase from the year ago explained primarily by the non-returns of the prior year tax recovery.

Bottom line, first quarter net income attributable to Ford was $2.1 billion, a $3.5 billion improvement from the year ago. As we mentioned last quarter the new accounting standard on variable interest entity consolidation effective January 1, 2010 required us to deconsolidate many of our joint ventures and our 2009 results have been adjusted to reflect the new accounting standards.

Slide nine covers special items, which were favorable pretax amount of $125 million in the first quarter. We recorded $63 million of personnel and dealer related charges, related primarily to global personnel reduction programs. As mentioned earlier, based on our agreement to sell Volvo, all of Volvo's 2010 financial results are being reported as special items. We recorded a $188 million of held-for-sale adjustments for Volvo reflecting primarily the elimination of depreciation.

As shown in the memo, if we had continued to report Volvo as an ongoing operation we would have reported a first quarter pretax operating profit of $49 million for Volvo. This should represent an improvement of about $300 million compared to the first quarter 2009 explained primarily by higher volume and variable net pricing.

Now on slide 10, which shows our pretax operating results by sector. Our first quarter pretax operating profit was $2 billion; this includes a profit of $1.2 billion for the automotive sector and a profit of $815 million for financial services.

As Alan mentioned, and as shown in the memo, total company first quarter pretax operating results improved by $4 billion compared with the same period last year. Although not shown, our results improved by $395 million compared to fourth quarter 2009 despite the decline in wholesale volumes of 95,000 units for ongoing automotive operations.

Let's move now to slide 11, which shows first quarter pretax operating results for each of our automotive segments and other automotive. In the first quarter, all of our ongoing automotive segment reported a profit for the quarter and as shown in the memo, showed significant improvement compared with a year ago. We will cover the ongoing automotive segments in more detail on the upcoming slides.

The first quarter other automotive loss was $391 million. This is more than explained by net interest expense of $492 million which is compared to about $550 million of interest expense offset partially by interest income. In addition, there was a $101 million of favorable fair market value adjustments associated with primarily with our investments in Mazda.

As shown in the memo, the non-recurrence of Volvo's prior year losses improved our pretax operating results by $249 million compared to the year ago. Slide 12 shows the change in first quarter pretax operating results compared with 2009 by causal factor. Overall, first quarter results improved by $3.2 billion compared with a year ago. Volume and mix was $ 1.7 billion favorable explained primarily by the non-recurrence of prior year stock reduction to align with demand, higher global industry volumes and U.S. market share improvements. Net pricing was $1 billion favorable, explained primarily by improvements across all of our automotive segments and continued reductions in incentive spending in the U.S.

Cost were about flat reflecting primarily lower structural cost offset by the non-recurrence of favorable prior year warranty reserve adjustments. Total material cost was flat with higher raw material cost offset by a decrease in distressed supply spending. Exchange was a $100 million favorable and net interest and fair market value adjustments were largely unchanged in total.

Volvo’s impact represents the change in reporting as previously mentioned. For the next section of slides we will cover each of the automotive segments starting with North America on slide 13. In the first quarter, wholesales were 547,000 units up a 197,000 units from a year ago reflecting primarily market share improvements, a planned increase in dealer stocks compared to prior year stock reductions and U.S. industry growth.

Although not shown, we substantially lowered our day supply of vehicles in the U.S. to align with market demand for our products. First quarter U.S. total market share for Ford, Lincoln and Mercury was 16.6%, up 2.7 percentage points from a year ago, which will be discussed in more detail later.

In the first quarter revenue, was $14.1 billion, a $4.1 billion increase from the year ago more than explained by higher volumes and favorable net pricing. For the first quarter, Ford North America reported a pretax operating profit of more than $1.2 billion, a $1.9 billion improvement from the year ago and we will cover this in more detail on the next slide.

Slide 14 provides an explanation of the change in North American results compared with 2009 by causal factor. Volume and mix was $1.3 billion favorable reflecting primarily market share improvements, favorable changes in dealer stocks and higher industry volumes.

Net pricing was $800 million favorable reflecting primarily the success of our new products, selected top line pricing and continued reductions in incentive spending. Cost increased by $100 million more than explained by the non-recurrence of favorable prior year warranty reserve adjustments and higher material cost offset partially by lower manufacturing and engineering costs.

Excluding warranty reserve adjustments, the trend of warranty costs remains favorable as we continue to improve our overall quality, and exchange was $100 million unfavorable reflecting primarily the non-recurrence of favorable prior year balance sheet revaluations.

Slide 15 shows U.S. market share for Ford's Lincoln and Mercury. In the first quarter, U.S. total market share was 16.6%, up 2.7 percentage points from the year ago, reflecting higher shares across our full family of vehicles, cars, utilities and trucks.

We also improved fleet market share and performed strongly in all channels, rental, commercial and government, reflecting growing consideration from fleet buyers with Ford's improving quality, fuel economy and strengthening residual values. Additionally, U.S. retail share of the retail industry was an estimated 14.1% of the first quarter, up 1.5 percentage points from the year ago.

First quarter U.S. total and retail shares were the highest for any quarter in over three years. Although not shown, Canada total market share in the first quarter was 15.5%, up 1.8 percentage points from the year ago making Ford the market share leader for the quarter for the first time in at least 30 years.

Growing consideration for Ford products has enabled the company to achieve these market share gains while reducing incentives. In addition, customers continue to equip their vehicles with higher levels of content and technology, which further contributed to higher transaction prices on most Ford vehicles.

Now on to South America on Slide 16; in the first quarter, wholesales were 101,000 units, up 8,000 units from a year ago reflecting primarily higher industry volumes offset partially by a decrease in dealer stocks and lower market share. First quarter market share was 10.7% down two-tenths of point from a year ago, although down slightly compared to first quarter 2009, our market share is up compared with the last three quarters. First quarter revenue was $2 billion, a $600 million increase from a year ago reflecting primarily favorable exchange translation, favorable net pricing and higher volumes. For the first quarter, Ford South America reports a net pretax operating profit, $203 million, a $140 million increase from a year ago.

The increase is more than explained by favorable exchange in net pricing offset partially by higher cost. Now, slide 17, covers Europe. In the first quarter, wholesales of 416,000 units, up 73,000 units from a year ago, reflecting primarily the non-recurrence of substantial prior year stock reductions to align with demand as economic conditions weakened and higher European industry volumes in the 19 markets that we track.

Although not shown, our days supply of vehicles is below our normal planning levels based in part in demand related to the end of this scrappage programs. First quarter industry SAAR for the 19 market that we track was 16 million units up 1.2 million units from the year ago driven by continuation of scrappage programs in a number of markets and first quarter market share was 9.4% unchanged from last year.

First quarter revenue was $7.7 billion, a $1.9 billion [ph] increase from a year ago reflecting primarily higher volumes, favorable exchange translation and higher pricing, offset partially by increased incentive spending. And for the first quarter, Ford Europe reported a pretax operating profit of a $107 million, a $692 million improvement from a year ago. We will cover this in more detail on the next slide.

Slide 18 provides an explanation of the change in Europe results compared to 2009 by causal factor. Volume and mix is $300 million favorable, more than explained by the non-recurrence of substantial prior year stock reductions and the higher industry volumes.

Net pricing was unchanged compared to a year ago; higher vehicle pricing was offset by higher incentives in response to competitors spending increases and the action at the end of this scrappage programs and cost decreased by $300 million reflecting primarily lower material cost driven in part by a decrease in distressed supplier spending and lower warranty cost.

Other was a $100 million favorable explained primarily by higher cost profits and improved earnings at our unconsolidated joint ventures due to higher volumes.

Slide 19, covers Asia-Pacific. We revised our volume reporting for the Asia-Pacific Africa operation to include local brand vehicles produced by our JMC joint venture. For the first quarter 2010, volumes include JMC brand vehicles of 30,000 units, up 13,000 units from the same period last year.

Our pretax operating results continued to include our share of joint venture profits. For the first quarter, wholesales were 189,000 units, up 58,000 units from a year ago, with overall China wholesales up 51,000 units, largely reflecting strong industry performance.

First quarter industry SAAR was 30.2 million units up 9.4 million units from a year ago explained primarily by the 61% increase in the Chinese industry and the 33% increase in India. First quarter market share was 2% down one-tenth [ph] point from last year.

And first quarter revenue which excludes sales that are unconsolidated China joint ventures was $1.6 billion, a $400 million increase from a year ago reflecting primarily favorable exchange translation and higher volumes outside of China.

And for the first quarter, Asia Pacific Africa reported a pretax operating profit of $23 million, a $120 million improvement from a year ago. The improvement was more than explained by higher China joint venture profits driven by higher industry volumes, favorable net pricing, increases in industry volume outside of China and favorable exchange.

Slide 20 shows automotive gross cash and operating-related cash flow. We ended the first quarter with $25.3 billion in automotive gross cash, up $400 million from the fourth quarter of 2009. Our automotive operating-related cash flow was $100 million negative in the first quarter, reflecting an automotive pretax operating profit of $1.2 billion, capital spending during the quarter that was equal to depreciation and amortization, and changes in working capital that were $400 million negative, and other timing differences were $600 million negative.

These changes are related to seasonal inventory increases, normal timing differences related to our end of year production shut downs. These are our partial offset to the $2.3 billion of favorable inventory reductions and timing differences that we realized during fourth quarter 2009, and payment of $300 million to Ford Credit reflecting upfront payments of subvention.

Excluding our upfront subvention payments to Ford Credit, our first quarter operating-related cash flow was $200 million positive. Other major changes in first quarter automotive gross cash include separation payments of $100 million and pension contributions of $300 million, net receipts from our financial services sector of $500 million related to Ford Credit distribution, net receipts of about $500 million in loans including $300 million in loans from the U.S. Department of Energy for the development of more fuel efficient vehicles, and equity insurance proceeds of about $500 million, and other cash outflows of $600 million, including the net cash flows of Volvo, investments to support unconsolidated subsidiaries, and the impact of exchange on unknown U.S. cash balances. Including these impacts, the total increase in automotive gross cash during the first quarter was $400 million. Slide 21summarizes our automotive sector’s cash and debt position.

As shown in the left column, at the end of the first quarter, automotive debt was $34.3 billion. Included with our debt repayment within one year is $3 billion for repayment of our revolving line of credit. This was repaid on April 6th lowering our outstanding debt obligations and interest cost.

Excluding this repayment, our debt payable within one year was $2 billion. Our gross cash net of debt as of March 31st was $9 billion negative. The right column provides a pro forma of cash, debt and liquidity after the revolver repayment. It's important to know that while that action reduced our gross cash and debt by $3 billion, it did not affect automotive liquidity because the commitments to the revolving lenders have not been reduced. Now let's turn to slide 22 and financial services. In the first quarter, financial services sector reports a pretax operating cost of $815 million, an $877 million improvement from a year ago.

Other financial services reports a pretax operating loss of $13 million in the first quarter, a $13 million improvement from a year ago. And for the first quarter, Ford Credit reports a pretax operating profit of $828 million, an $864 million improvement from the year ago, which will cover more detail on the next slide.

Slide 23 provides an explanation of the change in Ford Credit results compared to 2009 by causal factor. Volume was $130 million unfavorable reflecting declining receivables. As shown on the memo on the lower left of the slide, Ford Credit's March 31, 2010 managed receivables were $90 billion, $16 billion lower than the year ago.

This decline reflects primarily the transitional Jaguar, Land Rover, Mazda and VOLVO financing to other finance providers and the decline in industry volumes over the past few years. Financing margins improved by $50 million reflecting primarily lower borrowing costs and the decline in the provision for credit losses of $440 million reflects primarily lower credit loss reserves and improved charge-off performance.

Residual losses declined by $440 million, reflecting primarily the impact of higher auction values on vehicles returned during the quarter and other improvements of about $60 million were more than explained by the non-returns of net losses related to market valuation adjustments to derivatives and lower operating costs.

We now expect Ford Credit's full year 2010 profits to be about same as 2009. The recent improvements in used vehicle auction values and credit loss performances are expected to offset the effect of lower average receivables and the non-recurrence of certain favorable 2009 factors.

Ford Credit is projecting distributions of about $2 billion to its parent during 2010, up from the $1.5 billion projected previously. Slide 24 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 liquidity sources at the end of the first quarter. Ford Credit's liquidity exceeded utilization by about $21 billion. Ford Credit's access in the capital markets and credit spreads continues to improve. In the first quarter, Ford Credit issued $500 million of unsecured debt and also completed more than $7 billion of securitizations.

Ford Credit remains dependent on capital market access for its funding strategy and we will continue to extend the term of securitization on unsecured lending.

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. Ford Credit's funding strategy remains focused on maintaining liquidity to meet short-term funding obligations, including holding a substantial cash balance. At the end of the first quarter, Ford Credit's managed leverage was 6.9 to 1 and Ford Credit's equity was about $11 billion.

Slide 25 covers our second quarter 2010 production plans. In North America, the second quarter production schedule is 625,000 units, up 174,000 units from a year ago and up 30,000 units from our prior guidance. Improvement in guidance is based on strengthening demand in the U.S. and Canada.

In South America, the second quarter production schedule is 135,000 units, up 25,000 from a year ago. And for Ford Europe, we expect second quarter production of 448,000 units, up 50,000 units from a year ago. And for Asia-Pacific and Africa, we expect second quarter production of 213,000 units, up 73,000 units from a year ago. Overall, the second quarter production increase from a year ago reflects continued strong customer demand for our products and maintenance of competitive stock levels and the non-recurrence of prior year stock reductions.

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

Alan Mulally

Thank you very much Lewis. Slide 27 provides an overview of our business environment. Global economic conditions are improving, modest recoveries in some markets are held back by weak labor markets and tight consumer credit conditions. The consumer spending outlook for the U.S. and Europe is likely to remain below trend in 2010. In addition, our suppliers and dealers have been weakened by the impacts of the global economic downturn.

Financials market conditions appear to be stabilizing. Global central banks are likely to improve some stimulus by retiring special lending programs and to begin modest policy interest rate increases. Even with this, interest rates are likely to remain relatively low in 2010 and supportive of economic recovery.

Upward pressure on commodity prices has resumed in conjunction with the emergence of an economic recovery. This trend is likely to continue throughout 2010. Our business continues to be affected by currency volatility. Recently the U.S. dollar has gained some ground against the British pound and the Euro.

This year's global industry volume is projected to exceed last year's level of 65 million units although excess industry capacity continues to persist in key markets. Many scrappage and other government incentive programs are ending primarily in the European markets. This impact has global volume, however is offset by gains in China, India, U.S. and Brazil, as well other emerging markets.

Slide 28 summarizes the status of our key planning assumptions and operational metrics for the first quarter and for our 2010 full-year outlook. First quarter industry volume was equal to a SAAR of 11.2 million units in the U.S. and 16 million units in the 19 markets we track in Europe.

We expect full-year U.S. industry volumes to be consistent with our previous guidance. Full-year European industry volume is now expected to be in the 14 million to 15 million unit range, which is somewhat higher than our previous guidance. This change reflects strong first quarter results although uncertainty remains in Europe about the extent of the payback from the scrappage programs.

On the automotive operational metrics, initial quality improved across all of our regions based on our latest global quality research system surveys. Automotive structural costs were reduced by about $100 million in the first quarter. As mentioned last year, we have achieved significant structural cost reductions over the past four years, and in 2010, we still expect full-year automotive structural cost to be somewhat higher as we increase production to meet demand and increase investment in our newer products.

U.S. total market share was 16.6% and the U.S. share of the retail market was 14.1% in the first quarter, both improved compared with 2009 and consistent with our plan. Europe's market share in the first quarter was 9.4% equal to a year ago, and on track with our plan.

Automotive operating-related cash flow was $100 million negative in the first quarter reflecting primarily seasonal timing differences and was consistent also with our plan. For the full-year, we remain on track with our plan to generate positive operating-related cash flow. Capital expenditures were $900 million in the quarter and consistent with our plan. Spending is projected to be higher than during the remainder of the year to support our new product programs.

Overall our performance this year is off to a more encouraging start than anticipated. Based on our improving business performance, a gradually strengthening economy and our present assumptions, we now expect to deliver solid profits this year with positive automotive operating-related cash flow.

Slide 29 summarizes our plan. We are encouraged by our continued progress this quarter, and remain focused on delivering the key aspects our plan, which have not changed. Aggressively restructure to operate profitably at the current demand and the changing model mix, accelerate the development of a new products our customers want and value, finance our plan and continuously improve our balance sheet and work together effectively as one team leveraging our global assets.

Our product momentum is growing, and our leadership in quality, fuel efficiency, safety, smart design and value is resonating with our customers. Going forward, we are entering into another period of exciting new product introductions around the world such as the new 2011 Mustang with new fuel efficient Powertrain. The redesign for Explorer that will redefine the SUV segment with vastly improved fuel economy and creature comforts and the new Transit Connect electric, the first is several new Ford electric vehicles coming out over the next few years.

In India, the new Figo is off to a very strong start; the Fiesta is already a success in China and is rolling out to other markets in Asia. In Europe we are bringing out the new C-MAX and Grand C-MAX multi-activity vehicles. The first offerings offer new global C-car platform. This will eventually underpin more than 2 million vehicles a year around the world including the new Focus that launches next year, an important next step in One Ford plan.

And as the graphic on the slide shows, we are committed to serving all the major global markets with a complete family of small, medium and large vehicles, cars, utilities and trucks and deliver profitable growth for all Ford’s stakeholders. While we are pleased with our momentum, the business environment remains challenging.

Even as we see positive signs emerging in the global economy, the recovery is gradual. Consumer confidence remains relatively weak and the global auto industry continues to wrestle with excess capacity. But we are committed to remain absolutely focused on executing our business plan while developing even a better plan for the future. And now we will be happy to take your questions.

Brian Harris

Thank you, Alan. Ladies and gentlemen, we are now going to start the Q&A session. We have about 50 minutes for 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 many questions as possible within our timeframe, please keep your questions brief. Katrina, can we have the first question please?

Question-and-Answer Session

Operator

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

Joe Amaturo – Buckingham Research

Good morning. I was wondering if you could tell us what percentage of the cash is domiciled in the U.S. and also what would make you – what do you need to see to make you more comfortable to further reduce the outstanding balances on some of the revolver?

Lewis Booth

Joe, about 70% of the things is domicile in the U.S. In terms of balances on the revolver, we have paid roughly half the revolver that we withdrew last February if we include the amend and extend in December where we paid off over $2 billion and $3 billion that we just paid off. We are committed to gradually pay it down and we haven't set a timetable for that.

Joe Amaturo – Buckingham Research

Okay, and then just one other one. Could you just tell us, give us some idea of how we should now think since production volumes are a little more normal this year or expected to be anyhow compared to last year. How should we think about the seasonality and the timing differences and the working capital as it relates to the cash flow?

Lewis Booth

Well, we have cleared the worst of the – the worst of the seasonality is behind us, so in the first quarter as we brought production back up in the industry and the plants came back up. Towards the end of the year we expect some change in payables because we've quite a lot of downtime as we change over around the world, particularly in North America and Europe for the new focus. So, we are still frankly assessing the impact of that. And then we also have the sort of boost we had in the last quarter from -- in that fourth quarter of last year from running down the inventory in the plants as we go towards the Christmas shutdown.

Joe Amaturo – Buckingham Research

Okay. Great, thanks Lewis and great quarter. Take care.

Lewis Booth

Thanks a lot.

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.

Alan Mulally

Good morning, John.

John Murphy – Banc of America/Merrill Lynch

If we look at the pretax margin in the quarter, it was 8.9% in North America, and that's a level approaching the late 90s, we haven't seen that kind of a margin since the late 1990s. I was just wondering as we look at slide 14 and the major factors you cited in the quarter if there was anything that you think is sort of one time in nature or anything that will reverse through the course of the year, will there be more launch costs that come in, or will be other raw material costs that come in, just trying to understand the sustainability of that 8.9% margin?

Lewis Booth

Yes. We've got a couple of things that will hit us towards as you go through the rest of the year. We have a lot of product launches planned towards in the balance of the year, so you will see things like launch costs go up and some fixed marketing go up. Also we are concerned about raw materials, we are seeing the pressure on commodities beginning to rise, so we expect to see some commodity pressure in the second half. Those I think are the principal -- we may see a bit of mix. We will see a bit of mix as we bring in Fiesta in this quarter, and we bring – we start getting towards Focus at the right end of the year, we can expect to see some mix deterioration I think.

We're sort of -- we are not really thinking of the $2 billion as a good going rate because typically we always have a strong first quarter to the –

John Murphy – Banc of America/Merrill Lynch

Okay. Then if we look at Ford Motor Credit, the equity at the end of the quarter was $11 billion. I know you guys have talked about that balance sheet, the Ford Motor Credit balance sheet shrinking over time. I mean is that balance sheet mean, does that shrinkage mean in the equity and the potential profits and returns there because the returns or the profit I should say, is really outpacing what we're expecting? I'm just trying to understand if that equity stays relatively high, and that might support Ford Motor Credit profits going forward.

Lewis Booth

I think we expect to see Credit’s profits come off a bit. As the receivables come down, they will come down as we transition way from the other brands until we start seeing the Ford volume coming back up again, so that's sort of three or four year period I think. Secondly, we've obviously been very fortunate in the way residual values have come back in the last six or eight months. That has enabled K.R. and Mike to write-down some of the credit loss reserves a bit and I think that will run out in the second or third quarter, so we are guiding that, we expect Ford Credit to make about the same amount this year as they did last year, which is obviously not four times eight.

John Murphy – Banc of America/Merrill Lynch

Okay, that would imply $1.1 billion, $1.2 billion pretax profit for the next three quarters, is that sort of a normal run rate on a quarterly basis you think going forward?

Lewis Booth

I don't know, John. I think I will just take a save on that, and I have to think about it. We do expect over time to perhaps free up some capital to return to the auto company. We think the credit company managed leverage has got lower than we would like particularly as we see our access to the credit markets improving quite significantly as you saw for example last week we think we will be able to consider reducing the amount of liquidity we have been holding at the credit company.

John Murphy – Banc of America/Merrill Lynch

Great. Thank you very much.

Lewis Booth

Thanks John.

Operator

The next question comes from the line of Itay Michaeli representing Citi. Please proceed.

Itay Michaeli – Citi

Great, thanks. Good morning. You raised your Q2 North American production schedule nicely, can you maybe share with us what the underlying assumptions for Q2’s SAAR and market share maybe incentives and also what you are targeting for inventory?

Alan Mulally

The full year SAAR was still a projected between the 11.5 and 12.5, I think we will probably fit in better than that than we were as we finished the end of March and we have not had a bad start to April in terms of the SAAR.

We are expecting net pricing to improve during the year so we are going to be watching very carefully our incentive levels of spending and our share in the first quarter is up but we are still only saying our plan is to sort of equal or improve over the -- for the year because we really are focused on profitability and market share over one of the outcomes rather than the measure [ph] we have tried driving the business as you know by market share in the past and it's not the best way to success.

Itay Michaeli – Citi

Absolutely, and a quick follow-up on automotive structural cost, can you maybe….

Lewis Booth

I am sorry, I didn't answer your question on day supply, we are going to keep dealer day supply well under control and about flat as we go out of the first quarter.

Itay Michaeli – Citi

That's very helpful. And then quickly on automotive structural cost, so you had a bit of a tail wind in the quarter. Can you maybe help us in terms of the order of magnitude of what the rest of the year looks like and then should we just plan in 2011 as production recovers automotive structural cost continue to go somewhat higher or is it 2010 more of a catch up from some of the cuts you made last year.

Lewis Booth

2010, frankly our view of sort of somewhat higher that we have talked about at the end of the last year is about where we are. We didn't incur quite what we were expecting in the first quarter but we think we are just around the corner. Couple of things going on, one is as you pointed out is the increased production and then the other is we are continuing to invest heavily in new product. We are looking at further growth opportunities. And I think, thinking about 2011, while we are not giving guidance, we're obviously very intent on making sure that we keep our product line up fully competitive because we are demonstrating the success of having a competitive product line up and we are talking about growth around the world as you saw in Alan’s section where we really are looking to make sure we are participating around the world.

Now we’ve sort of fixed the base of the business.

Itay Michaeli – Citi

That's helpful. Thank you.

Lewis Booth

Thank you.

Operator

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

Patrick Archambault – Goldman Sachs

Yes. Hi, good morning. Just wanted to dig into the timing differences on slide 20 again a little bit more. I guess you said that there was seasonal inventory increases. I take – generally speaking most of your inventory is kind of in the hands of dealers, right? So is that sort of international where maybe some of that is on your books that's causing that?

Lewis Booth

It's in-plant inventory on just parts. Obviously, as we go towards the end of the year we know we’ve got the Christmas shut down, where we are essentially trying to run down the in-plant inventory to as minimal as possible because we don't want parts lying around on the line side during the shutdown. And then the second thing is any vehicles that haven't yet been shipped to dealers and again when you have a sort of week or 10 days after the end of production before the end of the year you do your best to clear those out and ship them. And as we come back into production in the first quarter, you start seeing the line side inventory going which will be going up for obvious reasons, we will also see a little bit of company vehicle inventory arise.

For example, at the end of first quarter, we were right in the middle of the Super Duty launch, and we know we have this sort of batch-and-hold process where we hold vehicles until we are comfortable that we've had a clear run of production. So, our inventory at the end of the quarter, our vehicle inventory at the end of the quarter was just a little bit higher than it would normally be because of our launch process.

So, it's nothing to do with dealer stocks. Our practices around the world are the same as they are in the U.S.

Patrick Archambault – Goldman Sachs

Okay, great. I mean there is nothing in here that's related to like incentive accruals or timing differences on that, is that where that would impact cash flow to the extent there were any differences?

Lewis Booth

No material, as best I can define it. Just a couple more comments about the cash flow. First of all, although we are obviously disappointed it was a tenth negative. It's actually a little investment we projected a couple of months ago. We are pleased with the work the team did, and because it was a better than we projected, we now feel very, very confident about our ability to achieve full-year positive operating-related cash flow.

Patrick Archambault – Goldman Sachs

Okay, and one sort of just forward-looking question on cost. You used to, and it’s maybe somewhere in the slide deck, but you used to kind of breakout product cost in three buckets. You had commodities, product adds and then I guess procurement savings from your global platform.

On a go forward basis, can you talk a little bit about how you see those playing out this year? You did talk about commodities a little bit, but in terms of the cost savings and then some of the additional regulatory product adds and then – I mean if you are willing to look out a little further than 2010, that would be helpful as well, just so we can understand sort of how those opportunities and headwind stack up?

Alan Mulally

Yes. If you take without being too explicit, if you take the three buckets, we will continue to add some product cost for a couple of reasons. Some of it is regulatory, but really a lot of -- our increased product costs are to get the cars, the vehicles that customers want and value. So we have said we are not – we are going to launch vehicles that are best-in-class, and best in class does in some case require some additional product cost to ensure they are fully competitive and we have seen the benefit of that in terms of the incremental revenue we achieved from that.

We also see some increasing cost because we are equipping our vehicles better and I think that will continue particularly in North America as we are moving from one generation of product to the next generation of world class competitive products and particularly on the car side of the business.

We do expect to see some bad news on commodities and our expectations is that's probably not just a this year phenomenon and then we continue to work very productively with our suppliers to make material cost savings and that will continue. And we are – I think as we sort of globalize Ford, we are seeing real benefits with our suppliers of the global supply base and getting the economies of scale that we are sort of leveraging with reduced numbers of platforms.

So, we will – and I think in terms of this year, you can think of product costs and material cost savings as, we will be doing our best to try and wash those out with commodity cost as the area that will continue to grow. They are, actually.

Operator

The next question comes from the line of Tim Denoyer representing Wolfe Trahan. Please proceed.

Tim Denoyer – Wolfe Trahan

Hey. Good morning.

Alan Mulally

Good morning.

Lewis Booth

Hi.

Tim Denoyer – Wolfe Trahan

Quick question on the distressed supplier payments. You mentioned you said that there was a reduction in that that offset some of the higher commodity cost in the first quarter. Can you give us a sense of magnitude of what those supplier payments are in the first quarter, and is there any room for those to continue to decline?

Alan Mulally

No, and I am not going to give you the magnitude because they vary, what the payments are and why we help particular suppliers varies tremendously by the individual supplier. We are going to continue to I think as the supply base also returns to better outlook, I think we can hope to see distressed supplier costs being well containable. I think we should over expect some supplier rationalization still ahead of us because -- not the number of suppliers that went out of business in the down period. I wouldn’t may want as many as we expect to see, so there were still some supplies that are struggling a little bit.

Tim Denoyer – Wolfe Trahan

Okay, that's helpful. And then just quick question on labor. Can you give us a rough number of employees on the Sub and TAP programs and whether or not you have begun to hire any of the lower-tier wages yet?

Lewis Booth

We haven't begun to hire any of the lower tier employees yet. I am just looking to one of my colleagues to see if we’ve got a number but I don't think we have. We haven't got, there is not a lots of people as far as I remember but they don't have a number in front of me I am afraid.

Tim Denoyer – Wolfe Trahan

Okay. Thanks very much.

Alan Mulally

Thank you.

Operator

The next question comes from the line of Colin Langan representing UBS. Please proceed.

Colin Langan – UBS

Good morning. Could you provide a little color, it is sort of related question. North America revenue per unit was actually down year-over-year. Was that mostly related to lower F-Series mix? And then I guess on a similar note, when I look at the walk for North America earning, there was actually into a negative mix, or there is no negative mix highlighted. So is mix actually neutral in the quarter. I would have thought of the negative with less F-150?

Lewis Booth

Actually, the revenue walk is a bit peculiar because of some special factors from really pertaining to last year. The first was – and they more then explained the sort of reduction that you see, because we did get positive net pricing. The two special factors were – the thing you know in some, in most of our daily rental units, we book the wholesales when we ship the vehicles, but we bought most of the revenue when we sell the used vehicle. And last year, when we were right in the middle of the economic turmoil, our shipment – so our wholesales to daily rental companies was very low, but we were still pretty a more normalized number of units through the auctions, and therefore we had quite a lot of revenue without the equivalent amount of wholesales.

For example, this year, in the first quarter is just about flat. We are sort of putting through about the same number of vehicles through the auctions as we are wholesale to rental companies. So that's the biggest distortion factor, and it's last year's phenomena not this year phenomena.

And the other issue is that because our wholesales was so low last year, our parts revenue made a significant contribution to the total revenue. Our parts revenue has grown year-to-year, but nothing like the amounts our vehicle wholesale revenue has grown, so again that gives you a distorting effect in mix, and I'll say those two items more than explain the apparent reduction per unit and in fact we did get positive price. I don't think there was much mix effect in there, slightly, but one person saying slightly positive, one saying slightly negative. So it's about a wash.

Colin Langan – UBS

Even with lower truck production, is that a positive comment on the profitability of the car portfolio today?

Lewis Booth

I think that might be a step too far. So let me have a look at that Colin, I don't know for certain.

Colin Langan – UBS

And just one last one, you commented that Q1 is usually a seasonally strong quarter. I mean aside from the absolute production, are there any other adjustments in Q1 that sort of help earnings?

Lewis Booth

It's really – the things that are going to affect the balance of the year that I described I think to Joe or John. Higher fixed marketing, higher launch cost, commodity costs are beginning to hit us a little bit, some incremental engineering (inaudible) launch, such things. So, it is really second or first. Final three quarters compared to the first and again let just remind what Alan said because we now feel this is a more encouraging start than we'd anticipated. So, we feel very good about giving guidance that we will be solidly profitable this year which is, as you know is an adjective we previously used for next year. So, we have pulled ahead the adjective.

Colin Langan – UBS

Okay. Thanks for taking question.

Alan Mulally

Thanks, Colin.

Operator

The next question comes from the line of Himanshu Patel representing JPMorgan. Please proceed.

Himanshu Patel – JPMorgan

Hi, good morning guys.

Alan Mulally

Good morning.

Himanshu Patel – JPMorgan

Can we get any kind of color on how net pricing trended sequentially in North America?

Alan Mulally

Net pricing was about flat first over fourth which – we think that's some sort of little bit of positive pricing and a little bit of negative incentive spending but in the first quarter of this year we have the run out of the Super Duty and the run out of the Mustang so we have got a couple of big run out programs. So, we are obviously keeping a very close eye on that, because of some of our competitor activities but first over fourth was about flat.

Himanshu Patel – JPMorgan

Okay, and then what was the impact on European profits of the deconsolidation of the subsidiaries?

Alan Mulally

I think it was about half the total, so it's about somewhere between $200 million and $250 million.

Lewis Booth

And that was the ‘09 profit that we have now taken out. So, I am not telling you what was in the first, what would have been in the first quarter. I am telling you what was in ‘09 and that's a full year number.

Himanshu Patel – JPMorgan

Full year was, $200 million to $300 million?

Alan Mulally

200 to 250, 230 I think to be precise.

Himanshu Patel – JPMorgan

And that's mainly the Turkish JV.

Alan Mulally

That's the Ford Otosan JV primarily, yes; we have a couple of other JVs but the big one is Ford Otosan.

Himanshu Patel – JPMorgan

Okay. And then lastly any comment on just how long these lease residual gains last and to what magnitude over the next few quarters?

Alan Mulally

We are watching it closely. We saw continued modest improvements in the first couple of weeks of April that started to plateau off and we would expect to see a sort of a seasonal declines as we go towards the end of the year.

Himanshu Patel – JPMorgan

Okay. Thank you.

Alan Mulally

Welcome.

Operator

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

Chris Ceraso – Credit Suisse

Thank you. Good morning.

Alan Mulally

Hey Chris.

Chris Ceraso – Credit Suisse

I think it was a couple of years ago that you changed something with the way you accrue for or account for incentives and I am just wondering if there is something here in the first quarter where you had cash going out the door for incentives but it was not running through the P&L. Is that part of the $600 million negative on the cash flow and is that partly why the year-over-year change in price was so strong in North America?

Alan Mulally

You are right; we did make the change couple of years ago. So the year-over-year comparison is clean of any affect.

Chris Ceraso – Credit Suisse

So, but there is no cash going out the door for incentives in Q1 that did not go through the P&L?

Lewis Booth

There's the subvention payment that we show in the cash of – I can't remember whether it was 250 or 300 -- $300 million, but the year-over-year, we have that in last year as well.

Chris Ceraso – Credit Suisse

Okay. And then on the cost front, I am just hoping you can help us order of magnitude, you have mentioned that both structural costs will be going higher and material cost will be going higher. Is this 100 million, is it 500 million. What's the kind of ballpark that we are dealing with here?

Lewis Booth

We are really not going to go into that amount of detail. Chris, I'm sorry.

Chris Ceraso – Credit Suisse

All right. And if I can squeak in another just sort of a house cleaning item, can you use to the loss carry forwards from the motor business to offset taxable income at the finance company?

Lewis Booth

Yes.

Chris Ceraso – Credit Suisse

Okay. And then just one last quick one. What was the share count at the end of the quarter? What do you expect it to be in Q2?

Lewis Booth

The share count at the end of the quarter was $3.4 billion. I think that was the average outstanding.

Chris Ceraso – Credit Suisse

Is that a fully diluted number assuming -- let's assume you're in the same amount in this, in Q2 that you did in Q1?

Lewis Booth

If you guys have Appendix 1, Chris I think all the detail is in there. And if it’s not quite adequate, just give a call.

Chris Ceraso – Credit Suisse

Okay. Thank you.

Lewis Booth

Thanks a lot.

Operator

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

Rod Lache – Deutsche Bank

Good morning, everybody. I had a couple remaining questions on North America. First of all, I think last year in the first quarter you called out a $600 million warranty reversal on, I believe that $400 million of that was in North America and I did see the $200 million negative in the first quarter. Was there some remaining benefit there from warranty in Q1 in North America or elsewhere? Also I think you said something about you're expecting North American pricing to improve going forward? Could you just elaborate on that? I would imagine the pricing comparisons get a little tougher as you go through the course of this year.

Lewis Booth

Clean of the warranty reserve adjustment we made last first quarter, we are seeing positive warranty performances as the quality of our vehicles improves. I don't think that's just a North American phenomena. I think that's a more global phenomenon. So in terms of reconciling to the 600 and the 400, I've to just check that out. But I don't -- I think we are essentially clean, we are seeing good news in the warranty over the period.

And yes, we are still expecting to see positive net pricing in North America particularly as we launch our new products where – that's where we really saw the benefit of world class products.

Rod Lache – Deutsche Bank

Okay. So over the course of the year, even though the comparisons are more difficult, or should be a plus, and can you quantify your expectations for commodities at this point? It's pretty frequently in the news. I think Toyota said something yesterday but still how meaningful is that based on where spot prices are today and then lastly you did comment just qualitatively on some of the headwinds that you see cropping up, but you've got a pretty nice uptick in production as you head into Q2, which should contribute some operating leverage, just a net of these things. Is it your view that you would not be able to sustain these kinds of margins for a while or do you feel pretty comfortable just for the time being with this level of profitability?

Lewis Booth

Well, we are obviously we are very comfortable with the first quarter. We suggest that people recognize there will be some other events during the year that make that probably not a good guide for a running rate. I have enunciated those pretty clearly.

Rod Lache – Deutsche Bank

And commodity headwinds, any color on that for us?

Lewis Booth

Well, it's meaningful but we are not giving out specific details.

Rod Lache – Deutsche Bank

Okay. Thank you.

Operator

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

Brian Johnson – Barclays Capital

Good, my three questions that I have left all relate to your international operations, Europe, South America and then China. On Europe, can you give us your sense of how you expect the pricing to play out over the reminder of the year as scrappage programs wear off as you kind of pass the Fiesta launch and waiting for the focus towards the end of the year?

Lewis Booth

We are keeping a very close eye on the incentive spending levels in Europe. They are up sequentially reflecting couple of things; one, the national demand has gone down, in some cases competitors are sort of trying to match the old scrappage incentives with their own incentives. So, we're keeping a close eye on that, and you're right. We had a bonanza year last year with a brand new Fiesta and a brand new K. So the car is staying very fresh.

The Fiesta in particular, I think it was very close to being the top selling car, if not the top selling car in March. We’re having a bit of dispute with one of our competitors. But it was right up there. And then we have – I think the thing that’s going to work in our favor during this year is we have a really great freshening on S-MAX and Galaxy just in the marketplace. Then we’ve got, in the middle of the year, the Grand C-MAX, which is a new segment entry to us and one we’re desperate to get hold off to go against some of our competitors. And then by the end of the third quarter, we’ll have the new five-seater C-MAX, which I think you’ve seen is a knockout product.

We got a lot of Powertrain activities going on with substantial upgrades to diesels and we are launching eco-boost in Europe as well. We have got lots of activity, lots of product activity and the strength of the European story is just the same as the strength of the North American story, great product to helps you offset some of these pressures.

Brian Johnson – Barclays Capital

And in South America your margin ticked down sequentially. Was that pricing seasonality weakness in markets outside of Brazil where there are other makers that reported, although they don't breakout their earnings to the same extent, fairly good results in the quarter?

Lewis Booth

We did some material cost pressure. I think there was a little bit of industry mix as well.

Brian Johnson – Barclays Capital

Okay. Finally, you're at a point where you are ready to break out your Chinese joint venture equity income for our enjoyment?

Lewis Booth

No, I am sorry; we are going to have to disappoint you; you will have to find other enjoyments. Sorry Brian, I think there are lots and lots in the pitch to enjoy.

Brian Johnson – Barclays Capital

Okay. Thanks.

Lewis Booth

And I just -- we have had a lot of these discussions about the calendarization of our year but again I just want to emphasize that we did feel good enough to say we didn't expect to be solidly profitable this year and given where we were, given three or four months ago -- essentially we are really encouraged by the start we had.

Operator

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

Bryce Hoffman – The Detroit News

Thank you. Congratulations, gentlemen, on a good quarter. A couple of questions, first looking at Appendix 5, it looks like your North American headcount is down by a 1,000 people year-over-year. Where are you at in your right sizing if you will of your North American staffing levels? Should we expect to see continued declines or are you pretty much stable now?

Lewis Booth

We are pretty much stable. We are not in a position to start hiring yet. We are pretty much stable. The emphasis now I think is and we continued to see our volumes grow and then we will take a hard look at our people levels.

Bryce Hoffman – The Detroit News

And then second question, could you talk a little bit more about, if you will, the threat posed by the end of scrappage programs in Europe? How much could that negatively impact your performance going forward?

Lewis Booth

It's actually quite difficult to assess. We were forecasting a year of between 13.5 and 14.5 when we started the year in January, and the first quarter came in at 16. That was held up by two things. One was the completion of some orders that have been placed and that got scrappage vouchers for example, in Germany but haven't been delivered. Secondly, this increased level of incentive spend, but within that 16, Germany, for example, which is the biggest market in Europe was down about 20%, so we can see the impact of the scrappage comes off.

The German program was the strongest of the scrappage programs. So, the reason we've sort of increased the expectations for European industry is to between 14 million units and 15 million units now is because of the strong first quarter, but we are still expecting to see a pretty significant volume drop. And if we don't see that volume drop, then we think it will be at the expense of increased incentives. So that’s what we are trying to understand, what's going on with our competitors and how we would react appropriately.

Bryce Hoffman – The Detroit News

Thank you.

Lewis Booth

Thanks Bryce.

Operator

Your next question comes from the line of Jeff Bennett representing the Wall Street Journal. Please proceed.

Jeff Bennett – Wall Street Journal

Lewis, you said that Ford Motor Credit gave Ford Motor $2 billion this year, is that up from $1.5 billion?

Lewis Booth

That's correct. When we talked to you in January, we said we expect the dividend to $1.5 billion. We now expect it to be $2 billion.

Jeff Bennett – Wall Street Journal

And why is that?

Lewis Booth

Because frankly they are making more money than we expected in January, it’s a very strong first quarter. I'm quite -- just a damn good [ph] job by the team in Ford Credit and helped by some – frankly the recovery of the economy is translating into improved residual values, but because they are making a little bit more money, we think they can afford to dividend a little more money to the parent.

Jeff Bennett – Wall Street Journal

But what you are also telling us, though, is that is going to begin to wind down a little bit into the third quarter as those residuals come down and as you are replacing the Volvo credit?

Lewis Booth

It's going to come down a little bit, that’s why I was saying they recommend you take $800 million and multiply by it by four, we're giving guidance. We think it’s going to be about $2 billion about equal to last year.

Jeff Bennett – The Wall Street Journal

Okay. Thanks.

Lewis Booth

Just want everybody on the phone, we just like to clarify one thing that we have had one or two people slightly confused about, and that's on slide three and it’s the revenue where we show $28.1 billion. And I know one or two people thought that was somewhat of a disappointment and the reason it looks relatively modestly increased compared to a year ago is because that number excludes Volvo whereas the prior year included Volvo. And that number is also being adjusted for the variable interest entities, i.e. the deconsolidation of the joint ventures. To put it in perspective for the first quarter, if we included Volvo, the Volvo revenues is about $3.5 billion. And if we hadn't made the deconsolidation, the VIE revenue is about $0.5 billion. So, that number so being 28.1 would have been about $32.1 million which I think we are closer in line to some people's expectations. And I just wanted to clarify that because we have seen a few comments that implied you haven't rated out quite as clearly as we should have done.

I am sorry to interpret whoever who was about to ask a question.

Operator

The next question comes from the line of Tom Walsh representing Free Press. Please proceed.

Tom Walsh – Free Press

Good morning guys.

Alan Mulally

Hi Tom.

Tom Walsh – Free Press

One for Alan here. As the turmoil of 2008 and early '09 recedes into the rearview mirror, how much residual goodwill do you think you have with the American car buyer for not taking the money? I heard in an interview this morning where you mentioned that Ford had honored the shareholders and the bondholders. Just if you could elaborate on that a little bit.

Alan Mulally

Sure Tom, I think that we have gained quite a bit by the fact that not only are we clearly making some of the best cars and trucks in the world but also that we have continued to create a very strong business for the long-term because people wanted to be associated with a going concern, and somebody that cares about them, is going to be there for them. And clearly the fact that we have done this and we respected the shareholders, we respected the bondholders, we respected everybody that had invested in Ford and now we have created a very strong business. I think that resonates very well with our consumers.

Tom Walsh – Free Press

Thanks.

Alan Mulally

You bet.

Operator

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

Dee-Ann Durbin – The Associated Press

Good morning. Thanks for taking the call. How much do you feel that the first quarter was artificially inflated because we were making up for fleet low volumes last year, we had Toyota's incentive spending, China cars, trucks, sales way up. Or how much shows a real fundamental strength and real economic improvement?

Alan Mulally

I think it's absolutely a manifestation of the strength of our products. The breadth of them and the quality of our products because we are seeing so many new customers coming to Ford based on the strength of the products and the fact they we’re running a strong business, but I think that's absolutely the reason that you're seeing these results. And as we've talked about in the past these results now are a result of the three or four fundamental decisions that we made a few years ago.

One was you're going to focus on the Ford brand as you all know, and second that we are going to have a complete family of vehicles, small, medium and large cars utilities and trucks. Then the third big decision of course was that every new vehicle that we introduce would be the very best in the world in terms of quality, fuel efficiency and safety and smart design. And when you look at them and then of course leverage our global assets worldwide, so we bought all of that intelligence and scale to the consumer and you look at the sales numbers and in the first quarter, they are up 37% in the U.S. The market share itself is up 2.7 percentage points to 16.6, and that is absolutely on the strength of this product line. If you look at all of the products, the small, the medium and large, they are all growing at double digit rate. So, I think it's' a real testament to the strength of the products because at the end of the day, that's what people really do want in addition to buying from a strong company.

Operator

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

Robert Schoenberger – The Plain Dealer

All right. Good morning. When you calculate your profit share for the UAW workers, is that on a quarterly basis or is that on an annual basis?

Lewis Booth

Annually. Yes. It's done at the end of the year.

Robert Schoenberger – The Plain Dealer

Okay. So this won't have an immediate impact on the earnings for the UAW workers out there?

Lewis Booth

No. I mean we pay it annually. We calculate annually and pay it annually.

Robert Schoenberger – The Plain Dealer

Okay, great, thank you very much.

Operator

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

Brent Snavely – Detroit Free Press

Hello, everybody.

Lewis Booth

Hi Brent.

Brent Snavely – Detroit Free Press

You guys have mentioned the market share gains in the U.S., biggest gains since the fourth quarter of 1977. Do you think you can sustain that or what kind of market share gains do you foresee for the remainder of the year in the U.S. and also wondering what your market share outlook is for Europe as scrappage comes to an end but you do have other products in the pipeline?

Alan Mulally

Sure. Our guidance is on the U.S. that we'd be equal to or improve. I think we are clearly on track to meet that objective. And in Europe we had equal the market share of the last year and for the reasons that you said that with the scrappage program coming to an end, but based on the strength of our products even with the over capacity we have there we believe that we are going to be able to hold that market share. And clearly as you've seen, even in the place now we're the number one brand in Europe. So, the product, we've so many new products coming, we are going to have to freshest product line in the showroom of any manufacturer over the next two years. So, I anticipate that we are going to be able to deliver on that guidance on share.

Brent Snavely – Detroit Free Press

Okay. Thank you.

Lewis Booth

You are welcome.

Brian Harris

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

Operator

Your next question will come from the line of Jere Downs representing the Louisville Courier. Please proceed.

Jere Downs – The Louisville Courier Journal

Good morning, gentlemen. With the gains in market share, would that mean that previous comments that perhaps one to three plants in the U.S are extraneous, can you -- well how does that affect your over capacity in the U.S?

Alan Mulally

We didn't say anything about overcapacity in the U.S. today and we have been working, clearly been working matching our production, our capability to real demand. And as we mentioned, we feel we have a good match right now and we anticipate growing the business going forward as we pointed out in the guidance for this year and also for the next year.

Jere Downs – The Louisville Courier–Journal

Thank you.

Alan Mulally

You're welcome.

Brian Harris

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