Ford Motor CEO Discusses Q3 2010 Results - Earnings Call Transcript

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Ford Motor (NYSE:F)

Q3 2010 Earnings Call

October 26, 2010 9:00 am ET


Alan Mulally - Chief Executive Officer, President, Executive Director, Member of Long-Term Incentive Compensation Award Committee and Member of Finance Committee

Kenneth Kent - Vice Chairman, Chief Financial Officer, Principal Accounting Officer, Treasurer and Assistant Treasurer of Ford Motor Company

Neil Schloss - Vice President and Treasurer

Robert Shanks - Chief Accounting Officer, Vice President and Controller

Shawn Ryan -

Lewis Booth - Chief Financial Officer, Executive Vice President, Director of Land Volvo Brand, Director of Ford of Europe and Non-Executive Director of Volvo Cars Division


Eric Selle - J.P. Morgan

Brian Jacoby - Goldman Sachs


Good day, ladies and gentlemen, and welcome to the Third Quarter Ford Motor Company Fixed Income Conference Call. My name is Steve and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Shawn Ryan, Investor Relations Manager. Please proceed, sir.

Shawn Ryan

Thank you, Steve, and good morning, ladies and gentlemen. Welcome to all of you who are joining us either by phone or webcast. On behalf of the entire Ford management team, I would like to thank you for spending time with us this morning.

With me this morning are Bob Shanks, Ford Vice President and Controller; Kenneth Kent, Ford Credit Vice Chairman and Chief Financial Officer; Neil Schloss, Ford Vice President and Treasurer. We also have some other members of management who are joining us for the call including David Brandi, Assistant Treasurer; Brian Shaw, Assistant Treasurer; and Paul Andonian Director of Global Accounting.

Before we begin, I would like to review a couple of items. A copy of this morning's earnings release and the slides we will be using today have been posted on Ford Motor Company's Investor and Media website for your reference. The financial results discussed herein are presented on a preliminary basis. The final data will be included on our Form 10-Q. Additionally, the financial results presented here are on a GAAP basis and in some cases a non-GAAP basis. Any non-GAAP financial measures discussed on this call are reconciled to the U.S. GAAP equivalents as part of the appendix to the slide deck.

Finally, today's presentation includes some forward-looking statements about our expectation for Ford's future performance. Actual results could differ materially from those suggested by our comments 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 the SEC.

With that, I would like to turn the call over to Ford Vice President and Controller, Bob Shanks. Bob?

Robert Shanks

Thanks, Shawn. We're pleased today to report strong third quarter results as we continue to gain momentum with our One Ford plan despite still challenging business conditions.

Turning to Slide 1, I'd like to review our key financial results compared with the year ago. Let me first begin by explaining how Volvo impacts our results. We completed our sales of our Volvo to Geely on August 2, and our 2010 results through the sale date were reported as special items and excluded from our wholesale's revenue and operating results. 2009 results on the other hand include Volvo.

As shown at the top of the slide, third quarter vehicle wholesales were 1.3 million units, up 15,000 units. The increase was explained primarily by higher wholesales in North America and Asia Pacific, Africa offset partially by the exclusion of Volvo from 2010 and lower wholesales in Europe. Excluding Volvo from 2009, the wholesale increase was 91,000 units.

Our third quarter revenue was $29 billion, a $1.3 billion decrease. The change in revenue primarily reflects higher volumes and favorable net pricing more than offset by the exclusion of Volvo from 2010, lower Ford Credit receivables and unfavorable currency exchange. Excluding Volvo from 2009, revenue increased by $1.7 billion.

Our third quarter pretax operating profit excluding special items was $2.1 billion or $0.48 per share, a $1.1 billion improvement. Automotive results improved by $953 million and Financial Services results improved by $100 million.

Our third quarter net income attributable to Ford including unfavorable pretax special items of $168 million was $1.7 billion, $0.43 per share which was a $690 million improvement. For the first nine months, pretax operating profit excluding special items, was $7 billion, an $8.6 million improvement and net income attributable Ford to was $6.4 billion which was a $4.5 million improvement. We ended the quarter with $23.8 billion of Automotive gross cash.

Let's turn to Slide 2 where we're going to go through our third quarter special items. They were an unfavorable pretax amount of $168 million. Within this, we recorded $33 million of personnel and duty related charges. And as we previously mentioned relative to the sale of Volvo which took place on August 2, we recognized $102 million of charges which reflected primarily pretax operating results through the sale date, loss on sale and other related charges offset partially by cessation of depreciation.

Lastly, we recognized $33 million of foreign currency translation charges related to non-core foreign subsidiary liquidations.

On Slide 3, we show our Automotive gross cash and operating related cash flow. We ended the quarter, as I mentioned previously, with $23.8 billion in Automotive gross cash which was up $1.9 billion from the second quarter of 2010. Our operating related cash flow was $900 million positive in the quarter reflecting an Automotive pretax operating profit of $1.3 billion; capital spending during the quarter of $900 million which was equal to depreciation and amortization; other timing differences of $200 million unfavorable and payment of $200 million to Ford Credit reflecting up front payment of sub-pension.

Other major changes in the third quarter Automotive gross cash included the following: First were receipts from our financial services sector of $1 billion which will be discussed in more detail later; secondly, net debt reduction actions during the quarter, which included further paying down our revolving credit lines by $2 billion, and we also used $300 million of cash proceeds from the sale of Volvo to partially prepay our secured term loan. These reductions were offset partially by receipts of government loans for the development of more fuel-efficient vehicles. Thirdly, we had equity issuance proceeds of $400 million which related primarily to the completion in September of our previously announced planned issue of up to $1 billion equity.

Next, as we previously announced, we completed the sale of Volvo for $1.8 billion of which $200 million was paid in the form of a note and the balance in cash. As a result, the estimated purchase price adjustment of $300 million on August 2, we received $1.3 billion in cash. The final purchase price adjustments are expected to result in additional proceeds to Ford. And finally, we have other cash changes of about $400 million primarily reflecting the exclusion of Volvo's cash balances as a result of the sale.

On Slide 4, we're summarizing our Automotive sector's cash and debt position. And as mentioned, our Automotive gross cash was $23.8 billion as of the end of the quarter. Our Automotive debt was $26.4 billion, and not shown, $1.3 billion of this balance will come due within the next 12 months.

As a result, our gross cash net of debt as of the end of the quarter was $2.6 billion negative which improved from $5.4 billion negative as of the end of the second quarter.

As shown in the memo, total liquidity including available credit lines was $29.4 billion. This liquidity includes $5.1 billion of available capacity under our secured revolving credit lines and about $0.5 billion of other affiliate Automotive credit lines.

In addition, today we've announced further actions to be completed in the fourth quarter to reduce our debt and strengthen our balance sheet. On Friday, we'll use cash to fully prepay the remaining $3.6 billion of debt that we owe to VEBA Retiree Healthcare Trust. This will lower ongoing annual interest expense by about $330 million.

As shown in the pro forma column, this will reduce our total debt to $22.8 billion which will be a net reduction of $10.8 billion in debt from the year-end of 2009. This net reduction will lower our ongoing annual interest expense by about $800 million. In addition, we've launched today conversion offers for our senior convertible debt securities of which $3.5 billion is outstanding, and $2.6 billion is carried as debt on our September 30, 2010, balance sheet.

Holders will be offered a cash premium as an inducement for them to convert to debt into shares of Ford common stock. Our debt and interest expense will be reduced to the extent holders elect to accept the conversion offers. Completion of the offers in the fourth quarter, however, will result in special items charges associated with the cash premium and a noncash loss related to the debt retirement. Any shares issued under these conversion offers are already reflected in our fully diluted earnings per share calculation. Even without the benefit of the conversion offers, we now expect our Automotive cash to be about equal to our debt by year-end, earlier than we previously expected.

Let's turn to Slide 5 for a summarize status of our key planning assumptions and our operational metrics for the first nine months as well as our 2010 and 2011 full year outlook.

For the first nine months, industry line for SAAR was 11.5 million units in the U.S., and 15.2 million units in the 19 markets that we track in Europe. We expect full year U.S. industry volume to be 11.6 million units and European industry volume to be 15 million units.

Let's now look at our other Automotive operational metrics. First, all of our regions are on track to improved quality compared with a year ago based on the latest Global Quality Research System surveys. Next in the first nine months, our Automotive structural costs were $700 million higher. And although not shown, commodity costs were $750 million higher compared with the year ago. We expect the full year Automotive structural and commodity cost each to be about $1 billion higher compared with the year ago. The higher Automotive structural cost support volume and growth for product plans. As a percentage of revenue however, our cost structure continues to improve.

U.S. total market share was 16.4% and U.S. share of the regional market was 14.1% in the first nine months. We're on track to gain full year market share in the U.S. for the second straight year which would mark the first time since 1993 that we've achieved consecutive annual increases.

In Europe, our market share for the first nine months was 8.6% which was down compared with a year ago. We now expect full year European market share to be consistent with our year-to-date performance.

Looking at Automotive operating related cash flow was $3.4 billion positive in the first nine months reflecting our improve profitability. For both the fourth quarter and the full year, we expect to generate positive operating related cash flow.

And finally, capital expenditures. There were $2.8 billion in the first nine months, and we now expect our full year spending to be about $4 billion, as we continue to realize efficiencies from our global product development processes. We remain on track with our product plans.

Overall, we're doing better than we expected through the first nine months of the year, and we expect to continue to deliver solid results in the fourth quarter with each of our operations being profitable.

Even without the benefit of the conversion offers, we discussed earlier, we now expect our Automotive cash to be about equal to our debt by year-end. For 2011, we expect to build upon our performance as share with continued improvement and whole company profitability and Automotive operating-related cash flow. In addition, we expect each of our operations to be profitable.

I'll now turn it over to KR.

Kenneth Kent

Thanks, Bob. Slide 6 shows Ford Credit's operating results and key metrics for the third quarter of 2010. As shown in the left box, our third quarter pretax profit was $766 million compared with a pretax profit of $677 million in the third quarter of 2009.

As you can see on the box on the right, our September 30 on balance sheet receivables were $83 billion, about $10 billion lower than the same period last year and about $10 billion lower than year end 2009.

These declines reflected primarily the transition of Jaguar, Land Rover, Mazda and Volvo financing to other finance providers and lower industry and financing volumes in 2009 and 2010 compared with prior years. Charge-offs for on balance sheet receivables in the third quarter were $95 million and the worldwide lost receivable ratio was a very low 44 basis points, which was down 53 basis points from the same period last year. I'll speak more about that in a few minutes.

At September 30, the allowance for credit losses for on balance sheet receivables was about $1 billion or 114 basis points of receivables. The allowance was about $600 million lower than year end 2009 and about $700 million lower in the same period last year.

We are projecting total distributions of about $2.5 billion during 2010. This is up from the $2.2 billion previously announced and that includes $500 million paid in the first quarter and $1 billion paid in the third quarter, which leaves $1 billion to be paid in the fourth quarter.

We will continue to assess our future distributions based on our available liquidity as well as our managed leverage. At September 30, our managed leverage was 6.3 to 1 compared with 7.7 to 1 at September 30, 2009. And at the end of the third quarter, our equity was about $11 billion.

Slide 7 provides an explanation of the change in Ford Credit results compared with 2009 by causal factor. Volume was $100 million unfavorable reflecting decline in receivable. And as you can see in the memo, Ford Credit's managed receivable at September 30 were $85 billion, $9 billion lower than a year ago.

The decline in the provision for credit losses of $200 million primarily reflects improved charge-off performance. The reduction in credit loss reserves this past quarter was of the same as the reduction in the third quarter of last year.

Lease residual improved by $100 million reflecting primarily the impact of higher North American auction values on vehicles returned during the quarter.

Other decreased by about $100 million reflecting primarily the non-recurrent prior year net gains related to unhedged currency exposures. As shown on the memo, $100 million decrease compared with the second quarter 2010 is more than explained by smaller improvements in the provision for credit losses and depreciation expense for leased vehicles. Based on these same factors, we expect fourth quarter 2010 results to be lower compared with recent quarterly results.

For the full year 2011, we expect Ford Credit to be solidly profitable that are in lower level than 2010 reflecting primarily the non-recurrence of lower lease depreciation expense and non-recurrence for credit loss reserve reductions of the same magnitude as 2010. And for a little bit more detail, the non-recurrence of lower lease depreciation expense relates to lower against associated with recovering a portion of the operating lease impairment from 2008 as leases terminate and the vehicles are sold.

And we'll also have fewer leased vehicles terminate in 2011 compared with 2010 resulting in fewer vehicles sold at a gain. For example, the recovery of lease impairment goes from about $640 million in 2010 to about $240 million in 2011. And lease terminations themselves declined from about $400,000 in 2010 to $230,000 in 2011.

Likewise, we expect the credit loss reserve will begin to level off in 2011 at about 1% of receivables from 1.14% of receivables at the end of the third quarter, resulting in less reserve release than we experienced in 2010.

Slide 8 shows quarterly trend of charge-offs and loss receivable ratio's from our on balance sheet portfolio. The top box shows loss receivable ratios for the worldwide portfolio and loss receivable ratios for the U.S. Ford, Lincoln and Mercury Retail and Lease business. Both worldwide and U.S. Ford, Lincoln, Mercury, loss receivable ratios in the third quarter are down from the same period a year ago, reflecting primarily lower repossessions and lower severity in the U.S. as well as lower losses in Europe impacting the worldwide ratio.

Both worldwide and U.S. Ford, Lincoln, Mercury, third quarter loss receivable ratios are higher than the second quarter of 2010, reflecting primarily higher repossessions and lower recoveries in the U.S. and again offset partially by lower losses in Europe impacting the worldwide ratio.

Charge-offs in the third quarter were $95 million which was down $145 million from the same period a year ago, and up $9 million from the second quarter 2010, reflecting the same factors I just mentioned.

Slide 9 shows the primary drivers of credit losses in the U.S. Ford, Lincoln and Mercury Retail and Lease business. Repossession from the third quarter were 16,000 units which was down 8,000 units from the third quarter of 2009, and up 1,000 units from the second quarter of 2010.

Severity of $6,600 in the third quarter was $700 lower than the same period a year ago, and $100 lower than the second quarter of 2010, more than explained by improvement in used vehicle auction values. Over 60 day delinquencies totaled 16 basis points in the third quarter which was down eight basis points from the same period a year ago, but up four basis points from the second quarter of 2010.

Bankruptcy filings totaled 10,000 in the third quarter down $3,000 for the same period a year ago and down 2,000 from the second quarter of 2010.

On Slide 10, we show that lease residual performance for the Ford, Lincoln and Mercury U.S. brands. Lease returned volumes in the third quarter at 39,000 were up 6,000 from the same period last year reflecting primarily higher terminations partially offset by a lower return rate. The third quarter lease return rate was 61% which was down nine percentage points compared with the same period last year. This return rate was down four percentage points compared with the second quarter 2010.

In the third quarter, auction values for 24 month lease vehicles at cost and mix were down about $350 per unit from the same period a year ago. Auction values for 36 month lease vehicles were up about $625 per unit from the same period last year.

Compared with the prior quarter, auction values worked marginally for both 24 and 36 month lease vehicles. In the third quarter, cars and crossovers represented 68% of new placement and our lease portfolio was presently 69% cars and crossovers.

Our worldwide net investment and operating leases was $10.5 billion at the end of the third quarter, down from $16.3 billion in the same period last year. This decline reflected primarily the transition of Jaguar, Land Rover models and Volvo brand to other finance providers and lower lease placements for Ford, Lincoln and Mercury brand vehicles. With that, I'll turn it over to Neil.

Neil Schloss

Thanks, KR. We continue to be on track with our 2010 funding plan. In the third quarter, we completed about $8 billion of funding including $5 billion of securitization transactions across all regions and asset classes. We also have three unsecured debt issuances totaling over $3 billion in the U.S., Canada and Europe.

We have completed another $2 billion of public and private securitizations during the month of October. Our credit spreads continued to tighten reflecting our improved credit profiles, strong investor demand for our transactions and supported markets. We have included a slide in the appendix that shows our recent credit rating history and progression toward investment grade.

During the quarter, we renewed $5 billion of committed capacity consistent with our plan and at lower cost and prior renewals. Our funding strategy remains focused on access to public and private securitizations, asset backed commercial paper and unsecured debt. Our liquidity remains strong and we will continue to maintain cash balances and committed capacity to ensure liquidity, adequately meets our business and funding requirements.

Slide 12 shows our trends in funding of our managed receivables. At the end of the third quarter, managed receivables were $85 billion. We ended the quarter with $20 billion in cash including about $5 billion to support on balance sheet securitizations. Securitized funding was 56% of managed receivables at the end of the third quarter. We are projecting 2010 year end managed receivables in the range of $80 billion to $85 billion and securitized funding to represent about 55% to 60% of total managed receivables.

Slide 13 shows our 2010 term funding plan for Ford Credit which does not include our short term funding programs or asset sales to our on balance sheet asset backed commercial paper program. Year-to-date, we have completed $24 billion of term funding, about $16 billion of this funding was public, including unsecured debt issuances totaling about $6 billion in the U.S., Canada and Europe and about $10 billion of securitizations in the U.S., Canada and Germany. Our recent unsecured debt issuance in Canada was our first since 2005.

In addition, we completed about $8 billion of funding through our private securitizations channels in the U.S., Canada and Europe. We project full year 2010 public term funding plans in the range of $16 billion to $19 billion consisting of $10 billion to $12 billion of public securitizations and $6 billion to $7 billion of unsecured debt. In addition to the public issuances, we are forecasting $8 billion to $10 billion of funding from our private sources.

Slide 14 details our liquidity programs and utilization. The top box shows Ford Credit committed capacity which includes unsecured credit facilities, FCAR Asset Backed Commercial Paper lines and our other asset backed bank capacity.

As of September 30, we had about $55 billion of committed capacity and cash after excluding securitization cash and adjusting for available assets, liquidity was $42 billion of which $17.5 billion was utilized, leaving about $25 billion available for use given our present level of eligible receivables.

Available liquidity is about $4 billion higher than second quarter and is 29% of managed receivables. As of September 30, our cash not related to securitization totaled over $15 billion. Committed capacity is up $1.2 billion compared to second quarter as several of our key banking partners have provided incremental capacity to support a variety of markets and asset classes.

We ended the quarter with about $8 billion of excess committed capacity providing a funding source for future assets and flexibility to shift capacity among markets and asset classes. Of the $35 billion of total committed capacity, about $7 billion is up for renewal during the fourth quarter of 2010.

Our renewal strategy will focus on optimizing capacity and liquidity. Additionally, during the third quarter, we repurchased or called about $1 billion of near-term unsecured debt securities.

In summary, Ford had a pretax operating profit excluding special items of $2.1 billion, about $1.1 billion improvement from a year ago. Net income attributed to Ford was $1.7 billion. Third quarter Automotive cash was $23.8 billion and we have liquidity in the Automotive world of $29.4 billion. Importantly, the strength of our business position, positions us well to further strengthen our balance sheet.

Today, we also are announcing further actions to reduce Automotive debt. During the third quarter, we paid down $2 billion of revolving credit line. On Friday, we will use cash to fully prepay the remaining $3.6 billion of debt we owe to the VEBA Retiree Healthcare Trust.

In addition, we expect further reduction to Automotive debt through conversion offers on two of our convertible debt securities.

For Ford Credit, the pretax profit was $766 million and net income was $497 million. Improved credit profiles and strong investor demand continue to drive credit spreads tighter.

Year-to-date including transactions expected to close this month, Ford Credit has completed $24 billion of term funding and Ford Credit ended the third quarter with liquidity available for use of about $25 billion.

I'll now turn it back to Shawn to start the Q&A session.

Shawn Ryan

Thank you, Neil. Ladies and gentlemen, we are going to start the question-and-answer session now. Steve, can we please have the first question?

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Doug Carson with Bank of America.

Unidentified Analyst

Question on Slide 13. Your unsecured, I guess, funding year-to-date is about $6 billion with a five-year trading where it is, I've got 4.2%. Can we see the mix over the next year or two of unsecured funding grow just in the past, it has been closer to 50/50. And now it's obviously a lot lower doing the cost capital changes over the last few years. Can we see more bonds coming out on unsecured side?

Alan Mulally

Yes, I think, Doug, we will. When we announced our earnings at the end of the year, and we will also lay out what our expectations are for the 2011 funding plan, which will include what our mix between unsecured and secured will be.


And the next question comes from the line of Eric Selle with JPMorgan.

Eric Selle - J.P. Morgan

Hey KR and Neil, I hope the pace of this debt reduction doesn't mean you won't consider Miami in March. Wow, it's impressive. Any ways, a couple of housekeeping. I look at your debt slide, it doesn't show the term paid down on the slide. Is that because it's offset by a DOE increase? Or am I missing something on the timing of that?

Neil Schloss

What slide number?

Eric Selle - J.P. Morgan

Slide 20. I'm talking about the Volvo proceeds, the mandatory payment.

Neil Schloss

Yes, it's netted with the draw down on the government financing that we are using to accelerate our investments in alternative technologies.

Eric Selle - J.P. Morgan

That's what I thought. And then secondly, if you look at the cash slide for Automotive, production was down pretty big for, I guess, it was down about 10% in North America and 18% in Europe. And there's not a huge working capital outflow that we usually see with that. Is there something there that I'm missing?

Neil Schloss

I think it's pretty consistent with our focus on cash in total when you look at both payables in inventory and the other related items.

Eric Selle - J.P. Morgan

And then flipping over to the Ford Credit side. I maybe wrong but that was first time I think I've seen a growth in conduit capacity over the last several years. Is there just the banks realizing this is as a very solid asset class and expanding that? I mean could you talk about the predisposition towards the banks on the conduit capacity?

Alan Mulally

I think you've got it pretty much spot on. They know the assets well. It's an asset class that performs consistent from year to year. We haven't changed anything from our originations standards. So as they looked to sort of re-establish or expand their balance sheet, this is our number one choice from them from a standpoint of asset.

Eric Selle - J.P. Morgan

And then looking at cash at Ford Credit, it grew as well. And I'm doing very, very rough math here but they are down only a $1.5. And then the net income being paid in dividends. What drove that rise in cash? Was there another asset that reduced? Or is it same amount just in the numbers?

Alan Mulally

I think we had a very successful funding quarter.

Eric Selle - J.P. Morgan

And then looking at the VEBA paydown in cash, I'm trying to think of an elegant way of asking but is there any way that you could issue shares to help fund that cash given the strike price?

Alan Mulally

Not if we want to pay it off. We have the ability. We in the VEBA agreement we have the ability to deliver shares for the annual payment. But any prepaid payment needs to be done with 100% cash. And the reality is, is we generated the cash from the operating part of the business. So that makes all the sense to use the cash to pay down debt.


[Operator Instructions] Your next question comes from the line of Mark Althere with Credit Suisse.

Unidentified Analyst

The orderly move in the delinquents in the repost, was that seasonality? Or was there something else there?

Lewis Booth

Yes, Mark. Typically, second quarter is usually the best quarter. And it did go up a little bit in the third quarter. But on an absolute basis, it's still relatively very low.

Unidentified Analyst

A little accounting on this, the converts. You mentioned you're counting it at the two, six the phase is three, four, five. What happens there when you pay that off? Balance sheet debt goes down? Is there income for the balance? Or how does that accounted for?

Lewis Booth

I think when we initially put the securities or when we initially issued the securities themselves, I'm going to get too complicated here real quick if I'm not careful. They bifurcated the debt piece from the equity piece. And so when we actually, and we actually said it in the earnings call this morning, we will actually take a special charge for the difference between the debt value, the fair value of the time we issued it to the fair value of the time that we extinguished it. So it will depend, the size will depend upon the participation in the transaction.

Unidentified Analyst

So essentially, if everybody participates, debt goes down by two, six. Equity goes up by two, six net of the charge roughly?

Lewis Booth


Unidentified Analyst

And then you save about $155 million of additional interest. So again if everybody took it, you're actually pushing about $1 billion pro forma of interest savings, is that right?

Lewis Booth

No. The $800 million that we quoted is our interest save. Excluded that, so your numbers are pretty close.


And your next question comes from the line of Brian Jacoby with Goldman Sachs.

Brian Jacoby - Goldman Sachs

A question on capital structure. You still have quite a bit of secured debt to paydown. But obviously, it looks like based on what you guys are saying, where you're going to end the year with debt and how 2011 could look. Have you guys at all begun to think about, I'm sure you have, but are we far off from thinking about an unsecured revolver and a capital structure at some point in the not-too-distant future? That would be the first question and obviously that's an integral part I'm trying to get to investment grade. And then the other question is switching gears to Ford Motor Credit. There's been just a lot of positive comments around, given lower industry volumes and vehicles coming off lease, that used car prices might actually continued to hover at pretty attractive levels for the better part of 2011 as well. Can you kind of tell us a little bit about how you're thinking about used vehicle pricing and vehicles coming off lease for Ford Motor Credit over the near-term and perhaps maybe looking out?

Neil Schloss

Brian, let me go ahead, this is Neil. Let me go ahead and take the first one and then I'll have KR answer the second one specific to credit. I think if you look at what an investment grade capital structure would look like clearly an unsecured revolver would be part of it.

Kenneth Kent

Again, Brian, on used vehicle prices, I wish I was a sous there. There are a couple of things in my mind that probably we'll keep them at or where we are running right now. And that's primarily the standpoint that the market that I particularly plan is a two- and three-year-old vehicles. And as I mentioned, we had about 400,000 lease terminations this year. And next year, we're going to be down to about 230,000 terminations. But not everyone of those vehicles ends up in auction market, obviously, as the consumer face off their loan and take their vehicle. But it's just an indication of a bit of a supply reduction next year. Not to mention other firms, but when you go back, effectively this is back in the 2008 when you think about 24 and 36 month leases, this is about the time 24 and 36 month leases should be coming back. We never got out of the Lease business, but it did reduce. So that's why you're seeing that lease terminations coming down. And I will point out that's also coupled with the Jaguar and the Mazda, Volvo's that have gone away. But other firms kind of got out of the leasing business which will also, I believe, should be reducing supply out there as well.


[Operator Instructions] And your next question comes from the line of Tony Venturino with Federated Investors.

Unidentified Analyst

Just a quick question, I don't want to fully get the point here with the credit metrics. But when I look at the Slides 8 and 9, things are ticking up in Q3. Is that seasonality or how do you see that? Are you seeing some maybe deterioration in credit quality and kind of where do you think this goes from here to stay at kind of 40 to 50 basis point level for your lost receivables and your charge off?

Kenneth Kent

Yes, Tony, just to give you a little bit of perspective. Typically the third quarter as far as repossessions go for example or the LTR, it's usually the best quarter and it usually goes up during the year. And we like to say some of it is related to tax refunds in the second quarter were people are able to catch up more. And then we also talk about at the end of the year its usually the worst part of the year. So there's always a bit of seasonality that flows through the business.

Unidentified Analyst

So you're not seeing anything outside of a normal seasonality that would give you any concern?

Kenneth Kent

No, and if you look at our loss receivable ratios and there are a number of reasons why they might be down but kind of do everything, where it potentially kind of back to where we were in 2006 and 2007.


And that concludes the Q&A portion of today's call. I'd like to turn the presentation back over to Shawn for closing remarks.

Shawn Ryan

Ladies and gentlemen, that concludes today's call. Thank you for joining us.


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

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