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Ford Motor Company (NYSE:F)

Q4 2006 Earnings Call

January 25, 2007 9:00 am ET

Executives

Alan Mulally – President, CEO

Don Leclair - CFO

Peter Daniel – SVP and Controller

Ann Marie Petach – VP and Treasurer

Mark Kosman - Director of Accounting

K.R. Kent - CFO, Ford Credit

Mark Fields - President of the Americas

Raj Modi - IR

Analysts

Rod Lache - Deutsche Bank

Himanshu Patel – JP Morgan

Jonathan Steinmetz - Morgan Stanley

Eric Selle – JP Morgan

Chris Ceraso - Credit Suisse

Ronald Tadross - Banc of America Securities

Robert Barry - Goldman Sachs

John Murphy - Merrill Lynch

Journalists

Micki Maynard – The New York Times

Bryce Hoffman - Detroit News

Tom Krisher - Associated Press

Amy Wilson - Automotive News

Bill Koenig - Bloomberg News

John Stoll - Dow Jones

Sarah Webster - Detroit Free Press

Jeff McCracken - Wall Street Journal

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Operator

Good day, ladies and gentlemen and welcome to the Ford Motor Company fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Raj Modi, Director of Investor Relations. Please proceed, sir.

Raj Modi

Thank you, Cindy 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 Alan Mulally, President and CEO; Don Leclair, Chief Financial Officer; and Mark Fields, President of the Americas. Also in the room are Peter Daniel, Senior Vice President and Controller; Ann Marie Petach, Vice President and Treasurer; Mark Kosman, Director of Accounting; and K.R. Kent, Ford Credit's CFO.

Before we begin, I would like to review a couple of quick items. A copy of this morning's earning release and the slides that we will be using today have been posted on Ford's investor and media websites for your reference. The financial results discussed herein are presented on a preliminary basis. Final data will be included in our Form 10-K for the year 2006.

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 their GAAP equivalent as part of the appendix to the slide deck.

Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance. Actual results could differ materially from those suggested by our comments here. Additional information about the factors that could affect future results are summarized at the end of this presentation. These risk factors are also detailed in our SEC filings, including our annual, quarterly and current reports to the SEC.

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

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Alan Mulally

Thank you, Raj and good morning, everyone. We will begin by reviewing a few of the key financial results for 2006, then Don will take us through the details for 2006 and the outlook for 2007. Then I will come back and wrap up before we take your questions.

Let's begin with slide 2. As expected, unfavorable volume and mix in North America, including lower dealer inventories, contributed to a deterioration in fourth quarter operating results. During the period, losses from continuing operations were $2.1 billion, excluding our special items. Including special items, our fourth quarter net loss was $5.8 billion. This includes $3.8 billion of charges, primarily reflecting hourly separations related to the enterprise-wide buyout program in the United States.

For the full year, we reported a net loss of $12.7 billion. This included the effects of special charges, primarily separation costs and fixed asset impairments. We recognize the position we are in and we are taking the appropriate steps to confront the issues we are facing. We have a plan and we are on track to deliver it.

An otherwise difficult year did, however, end with a success. Thanks to strong investor interest, our financing effort allowed us to finish the year with $33.9 billion of cash, a very strong liquidity position.

Turning to slide 3. In 2006, we began taking aggressive steps to address our operational issues and we accelerated our efforts to return North America to profitability no later than 2009. These efforts included reducing our salary-related costs in North America by about one-third, or the equivalent of 14,000 positions, largely by the end of this quarter. Buyout offers were extended to all UAW hourly employees. We had about 38,000 acceptances, the vast majority of whom will leave by September of this year. And we idled our St. Louis and Atlanta assembly plants to eliminate excess production capacity, $1.4 billion of cost savings in North America that go toward our goal of reducing North America's 2005 operating costs by $5 billion by the end of 2008.

And we launched some great new products, such as the Ford Edge, the Lincoln MKX, the Ford Expedition and the Lincoln Navigator, all in North America, as well as the Ford SMAX, Galaxy and Transit in Europe, the Jaguar XK, Land Rover LR2, the Volvo S80 and C30 and the Mazda CX9. The initial response to these new products has been very positive.

As I mentioned, we ended the year with $33.9 billion in cash, providing us ample liquidity to fund our restructuring, to keep investment in new products and to provide a cushion for a recession or other unforeseen event. We have streamlined our senior management organization and formed a global team to drive efficiencies in product development across all of our business fields.

Turning to slide 4, which summarizes the results of our operation. As discussed on the last slide, North America has begun restructuring in earnest and is on track to profitability in 2009. Our other regions are gaining momentum and have had some successes in 2006 that we expect to build on in 2007. South America had another very strong year with profits growing substantially. In Europe, we significantly increased profitability compared with 2005. We won both Car and Van of the Year in Europe with our SMAX and Transit vehicle. We foresee continuing profitable growth for Ford of Europe.

PAG. also improved substantially as the year progressed. Our fourth quarter results were strong and we expect to build on this momentum with new product introductions at both Volvo and Land Rover.

In Asia Pacific, we incurred a loss in 2006, largely reflecting the segment shift out of higher-margin large cars in Australia and slower economic growth in Taiwan. We have had strong performances however in our fastest-growing segments. Our sales in 2006 were up more than 90% in China and in India. In anticipation of further growth in China, we are launching new engine and assembly plants later this year. Mazda continues to perform well with operating profits improving again during the past year. In addition, Ford Credit continues to support our automotive business and produce solid profits.

Now, I will turn this over to Don.

Don Leclair

Thanks, Alan. Over to slide 6. This shows our standard financial metrics for the fourth quarter and the full year. Fourth quarter and full year revenue were down from 2005. That reflected lower volume, higher incentives and adverse mix, mainly on the automotive revenue decline and revenue was also down in total because of the sale of Hertz late in 2005.

We are changing our reporting metric on unit sales from vehicle unit sales to vehicle wholesales. Wholesales are better aligned with profitability and we have it included in the appendix of this presentation to provide relevant historical information. Wholesales for the fourth quarter and the full year were both down from year-ago levels.

Also, we are showing our book equity here at the bottom of the slide and as we mentioned last quarter, a new accounting standard, no. 158, was issued in September. This changed the accounting for pensions and OPEB to reflect previously unrecognized amounts, such as assumption changes, benefit plan changes into equity and these amounts previously were disclosed in the footnotes. The new accounting standard does not affect the amount of pension or OPEB expense.

Slide 7 provide some details on our special items. Special items reduced earnings by $3.8 billion pretax in the fourth quarter and primarily reflected a charge of $1.9 billion for personnel reductions, mainly related to the enterprise-wide buyout. In addition, there was a charge of $1.4 billion for pension curtailment related to the North American hourly separation programs. Finally, we continued to reduce personnel outside of the U.S. and charges for this were $420 million. These were mainly at Volvo, Ford Australia and Jaguar and Land Rover.

Slide 8 shows the pretax results by sector, excluding special items. The total fourth quarter loss was $2.1 billion. That is $2.6 billion worse than a year ago. That included a loss of $2.5 billion on the auto side and a profit in financial services of $416 million. The total company loss for the full year was $3.3 billion, including a loss of $5.2 billion on the auto side and a profit in financial services of over $1.9 billion.

Now let's turn to the automotive sector. Slide 9 shows an explanation of the change in full year automotive profits from a year ago. For the full year, we lost $5.2 billion and that is about $4.2 billion worse than 2005. Compared with 2005, volume and mix was about $3.3 billion unfavorable and net pricing was unfavorable by $1.9 billion. These declines were more than explained by adverse volume and mix and higher incentives in North America. Costs were $1.4 billion favorable and we'll cover that more on the next slide.

Exchange was about $600 million unfavorable largely due to the expiration of hedges that were put in place a few years ago. The interest was nearly $400 million favorable, primarily reflecting the impact of higher interest rates on our cash portfolio. As shown at the bottom of the slide, the fourth quarter automotive results were a loss of $2.5 billion, $2.4 billion worse than last year and the decline is more than explained by adverse volume and mix and higher incentives in North America.

Now the details of our favorable cost performance of $1.4 billion are shown on slide 10. Warranty expense was $100 million unfavorable and this reflected favorable coverage performance at North America, but this was more than offset by higher costs in Jaguar and Land Rover where we made some accrual adjustments related primarily to prior models. Manufacturing and engineering costs were about $1 billion favorable. Net product costs were flat compared with 2005 levels. Depreciation and amortization increased by about $100 million and this was more than explained by the acceleration of depreciation associated with announced plant closings.

Pension and retiree healthcare expenses were $500 million lower than 2005 reflecting primarily our retiree healthcare agreement with the union and improvements related to revisions to our salaried benefit plan. These were partly offset by the impact of reducing the discount rate and long term expected return assumptions. Overhead costs were $400 million favorable and the cost of advertising and sales promotion were up $300 million.

Now slide 11 shows our pretax results for each of our operating automotive segments, as well as other automotive. We will focus here on other automotive. In the fourth quarter, other automotive which consists of interest and financing-related costs was a loss of $59 million. That is an improvement of $43 million when compared with the prior year, more than explained by higher interest income. For the full year, our other automotive profit of $247 million reflected primarily higher interest income from our cash portfolio.

Now for the next section of slides, we will cover each of the automotive operations, starting with North America. Wholesales were down in the fourth quarter by 214,000 units to 626,000. That decline is explained by our decision to reduce dealer inventories by over 160,000 units, as well as lower market share. Revenue for the fourth quarter was $15.1 billion and that is down $6.3 billion from a year ago and that decline reflected lower volumes, higher incentives and a higher mix of passenger cars. More than half of this decline reflected the reduction in dealer inventories. The loss was $2.6 billion worse than in 2005. I will cover that more on slide 13.

The largest causal factor for the $2.6 billion decline is volume and mix reflecting lower dealer inventories, unfavorable mix and lower market share. These totaled $1.9 billion. Also net pricing was $1.2 billion unfavorable, largely reflecting higher incentive spending. These market factors were partly offset by about $300 million of cost reductions reflecting lower OPEB expense and lower manufacturing and engineering costs. The full year explanation is shown at the bottom of the slide.

Now the next four slides are intended to provide you with an update on our progress in improving the business structure in North America. Slide 14 shows our U.S. market share for Ford and Lincoln Mercury. We had a very strong retail share in September and there was some payback in the fourth quarter and in total, not shown on the slide, our second-half retail share was about 11%. For the full year, market share was 16%, including retail at 10.8% and fleet at 5.2%.

As previously indicated, consistent with our plan to reduce sales to daily rental companies, we have eliminated production of the Taurus, Freestar and Monterey during 2006. So going forward, our fleet share will decline while we focus on our retail market share. To achieve that, we have begun to accelerate our pace of new product introductions. Most recently with our new crossover vehicles, the Ford Edge and Lincoln MKX. Coming soon are an upgraded version of the Escape and the Mariner, the new Super Duty truck, freshenings of the Ford 500, Freestyle, Montego and Focus, as well as the Mustang Shelby GT. This pace of new product introduction is consistent with a plan to replace or significantly freshen 70% of the product line for North America by 2008.

Now slide 15 tracks our progress in achieving our employment reduction goals. As of the end of December, we have reduced our salaried equivalent positions to 37,700. That is a reduction of 4,800 since year-end 2005. We expect to achieve most of the remaining reductions early this year. December 31st hourly employment, excluding ACH, was 77,900 and that is a reduction of 7,700 from the end of 2005. Our plan is to operate with 55,000 to 60,000 employees by the end of 2008. We are on track to achieve this and a further 7,000 people have left already this month.

There were 11,100 ACH hourly employees at the end of last year. That's a reduction of 2,800 since the end of 2005 and a further 1,000 have already left this year. Our plan is to sell or close all of the ACH facilities by the end of 2008 and to-date, we have reached agreement in principle to sell three facilities and announced plans to close four additional facilities. In summary, we are on plan in all these areas.

Slide 16 shows our maximum installed assembly capacity and our straight time manned capacity and changes since the year end 2005. Since then, we have reduced our maximum installed capacity to 4.1 million units, down 700,000 and our straight time manned capacity 3.4 million units. By the end of 2008, we will reduce our max installed capacity to 3.6 million and that is with all plants assumed to operate on two shifts. Our actual straight-time manned capacity by year-end 2008 is projected to be 3 million. That is about equal to our projected sales.

The Wixom assembly plant is scheduled to stop production in the second quarter of this year. Beginning of January this year, we eliminated shifts at Norfolk and Twin Cities and later this year, we will idle the Norfolk assembly plant and eliminate shifts at St. Thomas and Michigan Truck and we will be adding a third crew at the Dearborn Truck Plant. Reducing our manned capacity in this manner allows us to achieve major cost savings while allowing plant idlings to be coordinated with product changes, which we believe is the best economic approach for us. By the end of the decade, our maximum installed capacity will be reduced so that it closely matches our projected vehicle sales.

Slide 17 shows our cost performance in North America, which was $1.4 billion for the year and our plan through 2008 is to reduce our annual operating cost by $5 billion compared with 2005. Much of these savings will be associated with our personnel reductions and capacity reductions and we will make further progress toward that goal this year. As previously discussed, our cost reduction efforts will not stop in 2008. They will continue, although the make-up of the reductions will likely change over time with more of the cost reductions coming from our product and purchased material costs.

Now onto South America and slide 18. Fourth quarter wholesales were 106,000 units. That is up 17,000. Full year sales were 381,000 up 46,000 primarily reflecting stronger industry volumes. For the fourth quarter, revenue was $1.7 billion compared with $1.3 billion in '05 and full year revenue was $5.7 billion, up $1.3 billion and both increases reflected higher vehicle volume, a stronger Brazilian currency and favorable pricing. South America posted a pretax profit of $114 million in the fourth quarter, down slightly from a year ago and the full-year pretax profits were $551 million. That is an increase of $152 million. The increase in profits is explained by higher volumes and that was partly offset by unfavorable exchange.

We had a good year in Ford of Europe. In the fourth quarter, wholesales were 494,000 units, up 22,000. Fourth-quarter market share was 8.3 and that is up four-tenths of a point compared with 2005. Revenue was $8.8 billion, up $900 million and the fourth quarter profit of $232 million was an improvement of $208 million compared with a year ago and that is primarily explained by higher volume. For the full year, profits were $469 million, $396 million better than 2005. The fourth quarter and full year results included the favorable impact of about $90 million from several non-recurring factors that individually were immaterial, but were largely all in the same direction.

PAG fourth quarter wholesales were 200,000 units, that is up 4,000 from 2005. In the fourth quarter, U.S. PAG share was 1.1%. That is down one-tenth from 2005, primarily at Volvo. Fourth quarter Europe PAG market share was 2.3, equal to a year ago and the revenue was $8.6 billion, up more than $600 million from the year ago, reflecting primarily increases at Volvo and positive mix at Jaguar. Fourth quarter pretax profits were $191 million. That is $129 million better than a year ago and the improvement primarily reflects favorable volume and mix at Volvo due to the new product introductions, as well as favorable pricing at Jaguar and Land Rover. These were partly offset by the effect of a weaker U.S. dollar against the European currencies.

Full year results were a loss of $327 million, $238 million worse than in 2005 and the decline is more than explained by prior model warranty accrual adjustments at Jaguar and Land Rover, as well as unfavorable currency exchange. Those declines were partly offset by cost reductions in favorable mix and pricing.

Now onto Asia Pacific, Africa and Mazda. Fourth quarter results were a loss of $84 million and for the full year, we lost $17 million. We will cover Asia Pacific more on the next slide. Mazda continues to perform well and for the fourth quarter, we earned $51 million from our investment in Mazda and associated operations; for the full year, we earned $168 million. The full year decline of $87 million is more than explained by the non-recurrence of gains on our investment in Mazda convertible bonds in 2005.

Slide 22 on Asia Pacific, wholesales were up slightly versus 2005. Volume increases in China and India were partly offset by declines in other markets, mainly in Taiwan and Australia. Excluding the volume growth in China, which is not included in our consolidated revenue, our wholesales would have been down by 10,000 units. For the full year, wholesales increased by 44,000 units compared with 2005 and volume increases of about 90% in China and India were partly offset by volume declines, mainly in Taiwan and Australia. Revenue was $200 million below 2005 in the fourth quarter, mainly reflecting the lower volumes, adverse exchange and mix.

The Asia Pacific reported a loss of $135 million in the fourth quarter is $96 million worse than 2005, reflecting adverse volume and mix as well as exchange, partly offset by favorable cost reductions.

Slide 23 shows automotive cash and cash flow. As Alan mentioned, we ended the year with cash of $33.9 billion. That is an increase of $10.3 billion compared with September 30 and an increase of $8.8 billion compared with year end 2005. That includes $12 billion of financing that we completed in December. Operating cash flow was $1.8 billion negative for the quarter, and $5.6 billion negative for the full year. The full year change includes net spending of about $300 million favorable and working capital changes of about $2 billion unfavorable. This reflected lower production volumes on accounts payables, the effect on our inventory of having several new product launches at year end and the changes in our value-added tax receivables collection process in Europe. Pension payment timing differences were $1.3 billion favorable for the full year. Separation programs were an outflow or $1.2 billion and we contributed $800 million to our pension plans worldwide. Earlier this year, we indicated our plan to draw down our retiree VEBA over time and that had a favorable impact of $3.4 billion on our cash for the full year.

On slide 24, we show our liquidity position at the end of last year and as Alan mentioned, we are beginning this period of extensive restructuring with a strong liquidity position. Including our cash and credit lines, that amounted to $46 billion. This level of liquidity is higher than we previously anticipated due to somewhat improved automotive cash flow in the fourth quarter and a strong market acceptance of the recent capital market actions. This allowed us to increase the size of our convertible notes and bank revolver. In addition, we have $3 billion in our long-term VEBA, which is accessible over time and as we announced previously, we are continuing to pursue the sale of Aston Martin and APCO.

Now let's turn to financial services. Earnings at Ford Credit were $406 million in the fourth quarter; that is $76 million down from 2005 and for the full year, Ford Credit earned over $1.9 billion and that is down $970 million. Other financial services reported earnings of $10 million for the fourth quarter and $13 million for the full year.

Slide 26 covers the change in Ford Credit's pretax profit for the fourth quarter compared with 2005 and the decrease in earnings primarily reflected higher borrowing costs and higher depreciation expense, partly offset by mark-to-market valuations on our derivative portfolio. Bankruptcy filings, repossession ratios and loss of receivables ratio all improved compared with the same period last year and we ended the year with managed receivables at $148 billion and that is down $2 billion from a year ago.

Now slide 27 provides an update on our pension plan. Worldwide 2006 pension expense, excluding special items, was $1.4 billion, up $200 million from 2005, reflecting lower discount rates and lower expected asset returns. Year end 2006, our U.S. funded plans were overfunded by $1.2 billion and worldwide, our pension plans were underfunded by about $8 billion, an improvement of $2.4 billion from year end 2005.

Slide 28 provides information on OPEB and excluding special items, our 2006 OPEB expense was $2.1 billion and that is down $700 million reflecting improvements associated with our salaried benefit plan and our retiree healthcare agreement with the UAW. Not shown on the slide, total U.S. healthcare expense, including active employees, was $3.1 billion or about $1,200 per vehicle. Retiree benefit payments were $1.5 billion in 2006 and the VEBA balance was $4.9 billion at year end 2006. Of this, $1.8 billion is available to be used within the next 18 months to pay for retiree benefits, as included in our automotive cash. At year end 2006, our OPEB plans had a funding shortfall of $25.9 billion and that is a $6.9 billion improvement from 2005.

Slide 29 summarizes the results of our planning assumptions and operational metrics. Total industry sales were $17.1 million in the U.S. and $17.8 million in the 19 markets that we track in Europe. On the operational metrics, we improved our current model quality performance and our market share was down in the U.S. and several other markets. Europe and Asia Pacific and Africa were flat. Our cost performance was $1.4 billion favorable. Capital expenditures were $6.8 billion and year end cash was $33.9 billion. Excluding the proceeds of our recent financing, our year end cash would have been about $22 billion.

On slide 30, you can see that the results for all our business segments are in line with the outlook we provided at the third-quarter earnings review.

Now I will spend a few minutes on our 2007 outlook. And if you go to slide 32, that shows our planning assumptions and metrics. We are expecting total industry sales in the U.S. to be about $16.8 million and $17.6 million for Europe. We expect the industry pricing environment to continue to be tough in the U.S. We expect to continue to improve our quality and on market share, we plan to reduce fleet shares in the U.S., but new product introductions should allow us to stabilize retail share in the U.S. and grow share in most other regions.

We plan to continue to reduce costs during 2007 and we are on track to deliver $5 billion of cost reductions in North America compared with 2005 by the end of next year. We had defined previously that during 2007 to 2009, cumulative automotive-related cash outflows would be about $10 billion and restructuring expenditures would be about $7 billion. We also have said that we expect over half of this $17 billion cash outflow will occur in this year. These cash outflows include our plans to continue to invest in new products at about the same level we had over the last several years, or about $7 billion annually.

Slide 33 describes how our costs will be changing in 2007 by major category. We expect commodity costs to increase this year by about $1 billion. We expect regulatory compliance costs, particularly those for diesel emissions, to continue to increase for the year. Advertising costs should be about flat and all other costs will be declining, driven largely by structural improvements and other product cost efficiencies.

Slide 34 shows our 2007 outlook by operation. We expect improved results in North America, but we will still incur a substantial loss there this year. Losses are also expected in Asia Pacific and Africa. We expect PAG to be profitable this year and we also should see continuing improvement in results from South America, Europe and Mazda. In total, we expect that results from our automotive operations before interest will improve from last year. Net interest expense, however, will be unfavorable and that primarily reflects the impact of the new debt, as well as the absence of tax-related interest income. Total automotive results, therefore, are expected to be worse in 2007 than in 2006.

Now the next slide, slide 35, starts with total automotive and goes from there down to net income. In 2007, Ford Credit's pretax profits are expected to be substantially lower than in 2006 due to margin and volume pressures, as well as lower credit loss reserve releases. Also beginning this year, Ford credit will suspend dividends to Ford. Year end managed receivables will be in the range of $140 billion to $145 billion, down from $148 billion at the end of last year. Total pretax results, excluding special items, will be worse than in 2006.

As we have mentioned before, we will no longer record tax offsets with the bulk of our losses and we expect our overall taxes to be around zero or possibly even an expense this year until we return to sustained profitability. The profit impact of special items, however, is expected to be substantially less than in 2006 and should be in the range of $1 billion to $2 billion, excluding any gains or losses from the sale of operations. Including the impact of special items, we expect our net results to be substantially better than in 2006.

Slide 36 provides some further information on our plan by quarter. We expect U.S. market share to be down compared with 2006 through the third quarter, reflecting lower fleet sales. As we indicated late last year, North American production is expected to be down through the first half of 2007, which should increase somewhat in the second half. During the third quarter of 2006, we realized over $600 million of favorable tax-related interest. This is not expected to repeat in 2007. The structural cost reductions will grow during the year as personnel are separated, plants are idled and capacity is reduced.

On the tax front during 2006, our pretax losses were reduced by tax offsets into the third quarter, but during this year, as I mentioned, there will be essentially no tax offsets. In total, consistent with what we have been saying, we expect U.S. market share and most earnings comparisons will be tough for the next three quarters.

Slide 37 covers our production plans for the first quarter in the North America. We're scheduling 740,000 units and that is a 10,000 unit reduction from the previously announced level of 750,000 units. Ford Europe, we are looking for 520,000 units. That is up 29,000 from a year ago and for PAG we expect first quarter production of about 210,000 units, up 15,000 from 2006.

Now I will turn it back to Alan.

Alan Mulally

Thank you, Don. Before we take your questions, I'd like to close by reiterating our four key priorities:

First, continuing the aggressive restructuring of our automotive business. This requires taking dramatic steps which have already begun. In 2007, this will mean further progress on reducing our operating costs while also strengthening our presence in key segments, such as our crossovers and our passenger cars.

Second, we will continue to focus on our product development and manufacturing efforts. A top priority will be the development of a truly global product plan, one that takes full advantage of our global assets and resources. As the company moves faster to build cars and trucks people want and value, we will reduce the complexity of our vehicles by having fewer engine and transmission combinations, fewer platforms and more [top hats] and as we make our investments in new products, we will continue to improve our production systems' quality, productivity and flexibility.

Our third priority is the one we have accomplished, funding our plan. Going forward, we will ensure that capital is used wisely and always with an eye towards creating value for our shareholders.

Finally, we will remain focused on teamwork, responsibility and accountability. The core values of our fourth priority, working together. This means a continuous focus on how our progress measures up against our promises and on what we must do to deliver even greater improvement going forward.

In summary, we know where we are. We are dealing with it and we are on plan. With that, we would like to take your questions. Thank you.

Raj Modi

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

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

Question-and-Answer Session

Operator

Thank you, yes sir. Your first question comes from Rod Lache - Deutsche Bank.

Rod Lache - Deutsche Bank

Good morning, everybody. I have got two for Don and one for Alan. Just really quickly, Don, you had previously given a walk from 2006 to 2009 and it looks like the starting point now is closer to $6 billion loss in North America; I think you had previously walked from $5 billion. Can you give us a little bit of an update on that?

There has been some talk about bidding activity on some of these ACH facilities like Sterling. Can you elaborate on what is happening as far as resolving those issues?

Thirdly, Alan, do you have any preliminary thoughts on these proposals from the President on healthcare taxes and these moves? Do they have any bearing on your thinking strategically as far as healthcare or CAFE cost savings?

Alan Mulally

You bet. We will start with Don.

Don Leclair

We will go in order. Rod, we showed that chart on our November 14 conference call and at that time, we were in fact forecasting just about this same level of loss in North America. As you may recall, we had some bars that had numbers in them and we had some bars that didn't; and that first bar in '06 actually was slightly more than a $6 billion loss. So actually since that time, things have gotten just a little bit better, mainly on the cost side and it is very consistent with what we have said.

So our plan going from '06 to '09 achieving profitability is essentially as it was. So to repeat, the '06 number that we showed on that chart was about $6 billion loss for North America.

Rod Lache - Deutsche Bank

Okay. And you had $3.6 billion going forward as the planned cost savings? You had $5 billion in total, and now you're saying that $1.4 billion was in 2006 already? So $3.6 billion going forward?

Don Leclair

And on that chart we had showed $4 billion and now if you stay exactly with the arithmetic, it is $3.6 billion. But I have to tell you that Mark Fields and his team have a plan to get to profitability in '09 and we have been through it time and again -- we go through it with Alan every Thursday, as you know -- and it is right there and we are on track.

Now on ACH, as I mentioned, we have reached agreement in principle to sell three of those businesses and we have announced the closure of four other locations. That puts us almost halfway through that. We are having discussions with several suppliers and we really don't want to go any more into it than that. When we have something to share with you, we will share it.

Alan Mulally

Rod, on your question about the State of the Union message, we will clearly continue to evaluate exactly what that would mean to us, but I would be pleased to give you my initial reaction. On the healthcare, with the $15,000 deduction that is in the proposal it looks like we would not be hurt by that. On the positive side of that, I think it is terrific, like all of us believe, that the administration is trying to move forward to deal with this very important piece of our competitiveness and we are absolutely committed to working with the administration on improving our competitiveness for all manufacturing in the United States.

On the energy policy, we are very pleased with the way the President presented that, by looking at a total reduction on oil without getting into the specifics on how we would do that as far as the CAFE rules. Clearly with the number that he put out, it would be very aggressive if you accomplished all of that with just fuel mileage increase each year; but he also committed that he believes the right way to do that is to have the Department of Transportation and the experts and the automobile industry really determine what we can do with all of our investment-enabling technology and then make a reasonable proposal going forward.

So again, we are committed to working with them and we think we have room there to develop a viable improvement plan that doesn't hurt us.

Operator

Your next question comes from Himanshu Patel – JP Morgan.

Himanshu Patel - JP Morgan

Good morning, guys. Three questions as well. First one for Alan. Alan, you have set up a decent amount of liquidity now. I am wondering, would you be interested in using some of that liquidity to engage in a deal with the union whereby you potentially would buy out the healthcare benefits?

Number 2 for Don: on the cash flow statement, just a little bit more color on what the big cash inflow source was on other payment timing differences? Was it incentive accruals or something else?

A third one for Alan again. Thoughts on Jaguar and Volvo now. Have you guys, after having looked at the business, any sense of what you would like to do with that going forward?

Alan Mulally

You bet. Let's see if we can do this in the order that you asked them. On the healthcare and our liquidity, we believe we are in a really solid position on liquidity to handle not only the automotive losses, but the restructuring charges and to have a cushion to deal with unforeseen larger economic cycle events going forward.

On the healthcare and specifically what we do with the union, in our dialogues, we have everything on the table, all the elements of our competitiveness that we are talking to the UAW about and clearly some of the more recent agreements that people have made have some pretty innovative features in it, like the arrangement with Goodyear; so we are clearly looking at all of those and they will be in our dialogue on increasing our competitiveness with the UAW. We have no specific plans to move that healthcare to the union.

Don, do you want to take the second one and I will come back?

Don Leclair

Yes, the biggest piece of the expense and payment timing difference is pension and OPEB. That is normally what it is and that is what it is this year. There are other things that tend to be more variable, such as marketing reserve changes and warranty reserve, but the biggest piece of it is pension and OPEB.

Himanshu Patel - JP Morgan

Is there any sort of reversal on that in the next quarter, Don?

Don Leclair

No, that will be a long time before that reverses, many years out in the future.

Alan Mulally

On our portfolio across the world, we are continuing to evaluate all the brands and their financial performance and projections and we have made no additional decisions except for Aston Martin, which is proceeding on our schedule to divest of that good business this year.

On Jaguar and Land Rover and Volvo, I would like to comment though that we are very pleased with the progress that all three of those businesses are making, especially over this last year. They are continuing to improve. They've got a very good product lineup of Volvo is coming back really strong. Jaguar is making great progress on their cost structure, to also support their new product line. And of course, Land Rover is doing very well.

So even though some of them are coming back from a loss position, we are very pleased with their progress, both on the quality of productivity and on the product development. We will continue, as any good business, we will continue to look at our entire portfolio strategically and operationally going forward, but no additional decisions as of now.

Operator

Your next question comes from Jonathan Steinmetz - Morgan Stanley.

Jonathan Steinmetz - Morgan Stanley

Thanks, good morning everyone. A couple of questions; first a big picture one for Alan, and then one for Don. Alan, I guess with $5 billion plus in automotive losses and you are talking about $3.6 billion of incremental cost cutting, the math doesn't work through '08 in any way to get anywhere near profitability. I am just wondering what you need to see to put out some additional cost-cutting targets, what extra information you need to gather here and how long you think that process takes?

Alan Mulally

Well, going back to where you started, our plan is to take out $5 billion by 2008 and then continue our cost reduction forever. In our plan, you mentioned 2008 -- I think you probably meant 2009 -- our plan is to return to profitability in 2009. As we discussed, we have taken out about $1.4 billion up until now and so we feel like we are right on plan through this year and next year to take out the $5 billion. The more that I review the details, the more confident I am that we can continue that cost reduction through 2009 and on.

Now having said that, the operating mode that we have is to have a solid plan that we absolutely believe that we can deliver on. Every quarter, every year, I keep looking, I keep identifying the risks and identifying the opportunities, mitigate the risks and keep looking for more opportunities to improve the plan incrementally. I think over time, we are going to be able to do that.

Jonathan Steinmetz - Morgan Stanley

Don, on the Credit company, I guess the provisions were about $30 million in the quarter, the charge-offs are almost $200 million. You talked about that being unfavorable next year. Can you give any clarity on how unfavorable we should expect that or where maybe that allowance account goes? I mean is this going to start being a couple hundred million dollar a quarter line item on the provision side, in all likelihood?

Don Leclair

Let me come back to one thing on that question you asked Alan, just so we are clear, coming from the $5 billion automotive loss this year. That included a large one-time dealer inventory reduction in the fourth quarter that we don't expect to repeat. So the running rate that we are coming from for 2006 is not nearly as good or bad as it seems, and then you put on the cost reductions, the 3.6, plus the continued cost reductions in '09, and that is how that math works.

On your credit question, I am going to ask K.R. to answer that.

K.R. Kent

Jon, on the credit losses, they are a function of the portfolio quality, the servicing and collection practices and obviously the economic conditions. Over the last several years as we have improved the quality and improved our servicing and collection practices, you have seen the improvements we have had in the reserve itself.

Going forward, a lot of it depends on how the credit metrics continue to perform. In the last couple of years they have been performing very well. It won't be as large as we've seen in the last couple of years, but it might be a little bit of an improvement but not very large.

Operator

Your next question comes from Eric Snell – JP Morgan.

Eric Snell – JP Morgan

Good morning. Just two follow-up questions: one, Himanshu's question on the buy down of the healthcare, I was just wondering how has the union, Alan, received potential changes in the retiree healthcare, given that the current contract does go to 2011? I mean when it was done, it seemed like it was an untouchable and now it seems like it is an attainable goal.

Alan Mulally

You bet. Let me just make a comment and then I will ask Don for his opinion too, for historical context. We have continued to talk about this with the UAW and my understanding, Don, is over the last few years, we have made a lot of progress in the retiree healthcare area, especially. I am very pleased and positive with the UAW's response to working all the elements of continuing to improve our productivity and I am cautiously optimistic that it is going to be a big part of our negotiations this year.

Don, you want to add anything else?

Don Leclair

No, I don't think so, Alan. I think I will just mention as well that we have had a good and constructive dialogue with the union; that has been continuing. We have a number of things that we need to do and we both want to work together and our goal is to improve the competitiveness of Ford Motor Company here. That is about as much as we want to say about it now.

Eric Snell – JP Morgan

That sounds great. The second question is on Ford Motor Credit, there was one line item, a bullet point to one of your slides back in the fourth quarter talking about Ford Motor Credit's profitability declining in '07, but increasing in 2008. And as I look out, as the prior question, consumer losses are probably going to increase, the portfolio is going to shrink and financial margins are probably going to be lower. What is going to offset that 2008 versus 2007 beyond the branch consolidation and people cut? I have got to think that there has to be a bigger swing number there.

Don Leclair

There are a lot of things involved there and there certainly are improvements in operating costs. In 2007, we are in the process of doing the restructuring and then in 2008, you see the benefits of the restructuring, so there is actually quite an improvement in operating costs from '07 to '08. But the main thing that drives the profits is we tend to price from Ford Credit to the auto company in arrears of the change in interest rates. So in a rising interest rate environment, the margins of the Credit company get squeezed and then as interest rates stabilize, eventually the margins catch up. Then if interest rates go down, the interest rate because we price in arrears, margins will expand. So that is what you're seeing there is a margin expansion in '08.

Eric Snell – JP Morgan

So basically it is like a raw material. It is sticky on the upside, but you benefit if it were to drop or stabilize as you pass that through?

Don Leclair

'07 is the trough of profitability for Ford Credit.

Eric Snell – JP Morgan

Is there any effort to move towards shoring up better financing, potentially through the conduit program you guys have in Brazil? Is there any thought to doing that in the U.S.?

Don Leclair

No, we have a number of things that we are doing on the funding front. We've got a lot of sources, a lot of flexibility. I think we ended '06 with $22 billion in cash, so we have a lot of flexibility and a lot of alternative avenues. We have pursued those kinds of things in the past and we may continue to selectively, but I don't think so here in the U.S.

Operator

Your next question comes from Chris Ceraso - Credit Suisse.

Chris Ceraso - Credit Suisse

Thanks very much. A couple of points of clarification and then more of a strategic question. First, can you just give us a feel for where we are on the Super Duty launch, you started building those -- when will they be available?

The second one, on slide 35 Don, you mentioned that including special items, results would be much better, but I just want to clarify that ex items, net results for the business will be worse year to year?

The more strategic question, market share. Can you just talk a little bit about how you expect to see market share trends shape up in the near term? Will you dip below that 14% to 15% target? Maybe talk about where you see retail share in 2007 and then do you expect it to come back up in the later years to be in line with that target?

Don Leclair

You bet. We have got Mark here and he was actually at the Super Duty launch. So it would be fun for him to give you a perspective on the acceptance.

Mark Fields

On the Super Duty launch, as you know, we went to manufacturing launch late last year. So we have been working our way up the ramp-up curve for production. We actually just started shipping both gas and diesel units earlier this week. So those will start showing up on dealer lots in the next couple of weeks and we will have a market launch sometime mid to late February. So the launch is going extremely well and we're very pleased with it.

Alan Mulally

Do you want to cover the market share, Mark, on North America?

Mark Fields

On the market share trend question, Chris, obviously our target throughout the business plan period is to be in the 14% to 15% range and we have said within that, our focus is going to be primarily retail share during that time period. Most of that share loss we expect to come out of fleet sales.

As you look at 2007, we ended 2006 at about 10.8% retail share. Our objective going forward in '07 is to achieve somewhere in the range of that range -- somewhere in the 10.5% to 11% range. We think when we look back on how we are going to achieve that, obviously we have some key products coming into the market like the Super Duty, which is 40% of our F-Series sales. Our new Escape, which is a very high-volume segment, which also is a segment that is growing quite well these days, as well as the freshened 500 and Freestyle and then the Focus a little later this year. As well as, we will have a full year of the Edge and the MKX, which launched late last year. So I think we are being realistic.

When we look out a little further to your question of, will the share come down and dip up on retail, I think we are being very realistic and our goal is to stabilize that. As we come out with new products, we will see how we do in the marketplace, but I think we are being very realistic in our share assumptions going forward.

Don Leclair

Especially dealing with the stopping of the Taurus and the Freestar and the Monterey.

Alan Mulally

To your question on profits, I think I would like to answer that by going back to slide 34 and just going through the whole list to make sure we are all straight on what we are saying here.

As far as the automotive operations are concerned, that is in effect earnings before interest and taxes, we expect to improve from '06 to '07 -- not by a lot -- but we expect an improvement. We expect the interest, the other automotive will be worse because of the interest on the new financing that we acquired in December, as well as a non-recurrence of a tax benefit in the third quarter of 2006. So total automotive, including interest, will be worse.

Then if you go all the way down, the Credit company will be worse -- as we discussed -- because of the margin pressure and the non-recurrence of credit loss releases because of lower volume. So in total, the pretax results excluding items will be worse.

The tax situation will be worse because we had a tax offset to the losses in '06 and we will not have that in '07. In fact, we may have tax expense in certain jurisdictions to go along with the losses in other jurisdictions. So taxes will be about zero this year and they will be worse than last year. So the after-tax results, excluding items, will be worse, but we will have far less in the area of special items. We mentioned going from $12 billion down to $1 billion or $2 billion, right around in there. So the net results, net income will be significantly better for the company this year.

Chris Ceraso - Credit Suisse

One quick one, Don, if I can. Where do you see pension and healthcare expense in '07, just a ballpark?

Don Leclair

I think pension and healthcare expense will be about the same. I think we will have higher service and interest costs and that will partly be offset by the full year effect of the UAW healthcare. We had that in for about half the year in '06. We'll have a full year of that, so a little improvement there. So I would say it is about the same.

Operator

Your next question comes from Ronald Tadross - Banc of America Securities.

Ronald Tadross - Banc of America Securities

Good morning, everyone. I have one question for Alan and then maybe another one for Don. Alan, on the timing of the labor negotiations, could you just tell us a little bit about what is happening now and when do you whittle down the issues on the table to the ones that are important?

Don, the $1 billion increase in commodity costs, does that mean your product costs in '07, your total product, will be up or down?

Don Leclair

Well, let me take the product cost one first. The commodity costs are going up $1 billion and we expect our total product costs to be nearly offsetting that.

Ronald Tadross - Banc of America Securities

So you'll be flat overall?

Don Leclair

Close to that, yes.

Alan Mulally

On the union negotiations, we haven't started the formal negotiations. As you know, that timing is led by them as they talk to all three of the companies here. But we continue to work with them on all of our quality and productivity issues in a normal way, but that schedule, I would think we will know a lot more about that from them over the next couple months.

Ronald Tadross - Banc of America Securities

And then, Alan, I think you took a strike at Boeing. I know it's a bit of a sensitive issue. Maybe you could just tell us philosophically how you think about a strike, because I think a lot of investors believe really to make the significant gains in a business, companies need to take a strike.

Alan Mulally

Sure. I'd be glad to give you my thoughts about that. I have always approached it by really focusing on the business and what is required to make the business more competitive going forward because the only way for this to work for all of us is if we execute this turnaround and we deliver a viable, profitable growth going-forward plan for Ford; because if not, then all the constituents, all the stakeholders, the only way we can all benefit is if we have a profitable growth for all going forward.

So my focus has always been on what does it take to improve our competitiveness going forward? I have also been very respectful of the union as an institution and either one of us, the union or Ford, can destroy the Ford Company. So it is not about taking a big stance. I think it is more about what do we really need to do to improve the competitiveness of Ford?

The strike that you mentioned at Boeing with the IAM, we did have a short work stoppage, but we got to the place where we really got down to the issues of what it really takes to be competitive and for that moment, we couldn't come to an agreement. But as you noticed, the dialogue was so clear and so real that within a few weeks, we were able to all appreciate that we were going to really hurt the corporation and hurt each other that we found a way to take the final steps together and still move the company forward as far as our productivity and financial performance.

So that is my general approach to negotiations.

Ronald Tadross - Banc of America Securities

I appreciate that. It seems like the union needs to save face in front of their members, or at least look like they are working for their members. Is there anything other than a strike that you think might help them do that?

Alan Mulally

Well, I am really pleased with the cooperativeness and the relationship that Ford has with the UAW leadership. Even though we have agreements in place, we have continued on both sides to improve our competitiveness since the last fundamental agreement was signed and all of our cooperative operating agreements with each of the sites and each of the locals, everybody has been working the competitiveness of Ford.

I look at this as just another step on a relationship and an attitude that the only way this is going to be good for everybody associated with Ford, including the employees and the union, is if we keep finding ways together to improve our competitiveness.

So I don't think of this as a one-off, one-time big deal as much as a continuous improvement in our competitiveness where both of us are committed to it.

Operator

Your next question comes from Robert Barry - Goldman Sachs.

Robert Barry - Goldman Sachs

Hi guys, good morning. Just a couple of housekeeping items and then a bigger picture question for Alan. One is in the past, I think you had indicated that the interest expense would track -- or the other category -- would track at about 150 to 200. You said it is now going to be worse. Is there any better sense you can give us on numerically what that would be?

Alan Mulally

I would say you could use about $300 million per quarter for that. If I could, I want to come back on one question we had earlier about the pension and OPEB expense. I was not thinking about the change in discount rates and that would really swing things to a slight decline. So we expect slightly lower pension and OPEB expense in '07 compared with '06, reflecting the things I mentioned from the first time I tried to answer it plus the discount rate. So slightly down on that.

Robert Barry - Goldman Sachs

On slide 13, the volume mix bar, could you roughly break out what part was volume and what was mix?

Alan Mulally

Yes, the volume and mix is about 20% volume and the balance is mix.

Robert Barry - Goldman Sachs

The big picture question is on the move to common global platforms. I am trying to think about what is happening here that is different and when it is going to have an impact. Because I feel like there has been a move to common platforms by Ford and most OEMs for some time. Are we on a different trajectory now, or is the plan to be on a different trajectory? When will the incremental impact come? Is it something that really won't start to show up in the results until a few years down the road as you start actually designing and starting to manufacture new products?

Alan Mulally

I think you've got it exactly the way we were looking at it. I was very pleased at the progress, the initial progress that Ford has made around the world, because as you know in this area Ford traditionally has grown up as pretty independent Fords in the Americas, in Europe and Asia Pacific, but a few years ago, the leadership decided that one of the competitiveness factors going forward would be that we would actually use more of our products and leverage these assets and resources around the world. We have done that not only with the Ford brands, but also by utilizing the best practices at Mazda and at Volvo.

So I would characterize our plan going forward now as accelerating that trend and we have just so much opportunity to do it because in the automobile industry with the investment we make each year -- not only in the product, but also in capital on the manufacturing side -- that we can absolutely design or create this new product family and our new more flexible, more efficient production system every year going forward with every model introduction.

So our plan is that with every new product development, that we not only develop the new product, but we also do it and leverage resources across the world, and we also link that together with the manufacturing plan and more flexible manufacturing with more of the platforms in each of our manufacturing facilities as we drive the quality of the productivity also.

The good thing is that it can happen pretty aggressively because just in North America, as Mark has pointed out, our plan is to refresh 70% of our products by 2008 and have 100% of them refreshed by 2010. I think as we go forward here that next year, the year after, every year, we will continue to improve our operational performance by this key strategy.

Robert Barry - Goldman Sachs

So as you are essentially refreshing the products, you are moving them on to what you would target three years down the road or five years down the road being a few global platforms?

Alan Mulally

Exactly -- exactly. Because the neat thing is because of how much we do each year, that you have a real opportunity with every introduction to create not only a more efficient platforms, but a more efficient production system.

Robert Barry - Goldman Sachs

Do the gains slowly build over time or is it one step back, two steps forward?

Alan Mulally

I think it is going to be steps forward, not steps back. We are where we are. We have a solid plan and the operating rhythm that we have described is that we wanted to make sure we had a really solid plan going forward, and then each year with our product development and our capital expenditure, we have a vision out there now that we're getting clearer and clearer on, about where is the manufacturing footprint going to be, what are the vehicles in the line-up going to be, what is going to be the rationalization of the product line inside each brand. Every year is another step to a simpler, more efficient product line and production system.

Also I might point out that we talk a lot about the vehicles themselves that we see, the top hats and the platforms, another tremendous opportunity for us is to do the same thing on the engines and the transmissions. So we have that in the plan also.

Don Leclair

Rob, this is Don. Just to come back on your question on 13. I misspoke. It is 80% volume, 20% mix for the fourth quarter on the bars and for the full year, it is about one-third mix, two-thirds volume. Of the volume in the fourth quarter, a large chunk of that went to dealer inventory reductions.

Raj Modi

Cindy, could we have the next question please?

Operator

Your next question comes from the media from Micki Maynard – New York Times.

Micki Maynard – New York Times

Good morning, everyone. I would like to have you walk me through some numbers here because Don, you were giving your discussion, you said that I believe in 2008, you would be at straight-time capacity of 3 million in North America. Do I remember that correctly? Straight-time manned capacity? Hello?

Don Leclair

Yes.

Micki Maynard – New York Times

So last year in North America, you did about 3.1 million units, including Canada, at 17% market share just in North America. You are saying your market share will drop to 14% but the broader market is expected to drop this year. How will you maintain 3 million units if you are saying market share is going down and the market itself is expected to go down?

Don Leclair

I am not sure I am recognizing the numbers that you are quoting there right now. Maybe we could take that offline, because I see different numbers.

Micki Maynard – New York Times

Okay. Well, then let me ask one other question. There have been some media reports here in Detroit in the last couple of days that Ford is considering paying bonuses to some executives, either retention bonuses or just regular bonuses for 2006. I wonder if that actually is under consideration and if that is something that you plan to do?

Alan Mulally

Yes, it is under consideration as part of our overall compensation plan to make sure that we are paying competitive wages and benefits, but we have not made any final decisions yet.

Micki Maynard – New York Times

When do you expect to do that?

Alan Mulally

I think over the next couple of months.

Operator

Your next question comes from Bryce Hoffman - Detroit News.

Bryce Hoffman - Detroit News

Hi, guys. I want to follow up on Micki's question actually. You talked, Alan, about how much progress you have made with the UAW on these competitive operating agreements and how you applaud their spirit of cooperation. We understand though that they have kind of put that on hold, talks on the COAs right now, because of this bonus issue. Can you comment on that?

Alan Mulally

We continue to work with them on the COAs, but we had a couple of them that did slow up for a little bit, but our commitment is to keep working it together.

Bryce Hoffman - Detroit News

And just one follow-up question, just a point of clarification, Alan. You said that you are cautiously optimistic that it is going to be a big part of our negotiations this year, in response to the question about health care. Were you talking about UAW health care benefits?

Alan Mulally

No, I was thinking of it more in a general sense than health care. All the wages and benefits, including the healthcare, we need to continually be addressing it.

Bryce Hoffman - Detroit News

Thanks a lot.

Alan Mulally

And just to add to your question, there are so many different ways that we are getting at this that you're seeing a lot of companies work together with their employees to get at it. So we don't have a one specific improvement plan that we want. We want to be open to all thoughts about how to improve our competitiveness and that is going to be our attitude going in.

Operator

Your next question comes from Tom Krisher - Associated Press.

Tom Krisher - Associated Press

Hi, guys. Of the $33.9 billion in automotive sector cash, you borrowed $12 billion of that. Is that correct?

Don Leclair

In December, that's correct.

Tom Krisher - Associated Press

And then how much of that $33.9 billion is obligated to pension and other fixed costs? How much can you actually tap into of that?

Don Leclair

Well, we can access nearly all of it very quickly. None of it is directly attached in that sense. Let me try to come back to Micki Maynard's question.

Alan Mulally

Micki, are you still on?

Don Leclair

No, she can’t… unfortunate. Let me try to answer the question. We are looking at capacity in North America, and that is capacity that is in place to service the market in the U.S. and Canada and in Mexico. We have some exports on the U.S. that go outside, but count as U.S. production. We have some sales, mainly in Mexico, that are imported from outside North America. We did have total sales in North America of about $3.1 million. We expect that to decline this year by 100,000 units or so, consistent with the market share going down.

Production isn't going down quite as much because the production changed at the end of last year. It's got the dealer inventory reduction in it, so it gets a little hard to track, but we do expect to have our capacity by the end of this year quite closely aligned to our actual sales. That is our manned capacity.

Now we are not going to get our installed capacity down until later on. But we do expect to be quite close on the manned capacity at the end of '08. Actually very close at the end of '07 and then have the installed capacity brought in line with sales by the end of the decade.

Operator

Your next question comes from Amy Wilson - Automotive News.

Amy Wilson - Automotive News

Good morning. Alan, I wanted to ask about how you are thinking about your management team and where it is right now. Obviously you have set that out as a crucial part of the plan and you have brought in one of your former colleagues from Boeing on the HR side. Do you have any other plans to bring in any other help, or do you think your management team is exactly where it needs to be?

Alan Mulally

I have no other plans at this time. I think that just to comment on Jerry, Jerry is a terrific leader and a lot of experience in HR and negotiations and Joe Laymon had a chance to meet Jerry when he was recruiting me and came to appreciate him as much as I do. I thought it was terrific that Joe wanted to utilize his talents when he retired from Boeing. They’ve got a great relationship and as I've said before, Joe is doing a great job. He is our HR leader, I think it is terrific that he is tapping into Jerry's expertise going forward here.

On the Ford leadership team, I am really, really pleased with the direction in which we are headed. The announcement we made a few weeks ago where we streamlined the organization and we really added even more focus to each of the markets in each of the regions around the world is being very well-received. Mark clearly is doing a great job in the Americas.

And then having Lewis Booth in Europe and PAG reporting to me directly now, and also John Parker who manages Asia-Pacific and Africa and the Mazda relationship reporting to me directly, it is the communication and the speed of the communication, the speed of the action of those three business units right to the market, right to the customers has been terrific.

To leverage our assets and our resources across the world by naming Derek to lead the product development and Betty for quality and manufacturing engineering and Tony Brown for the purchasing worldwide and Nick for the information technology has been really terrific. You can imagine the dynamics of that now when we are all together on Thursdays and in our other meetings. We have all the functional expertise now represented. There is drive in quality and productivity disciplines all being pulled together by the three business units.

We are pulling together fast and I am very pleased with the team we have in place.

Amy Wilson - Automotive News

Do you see, as far as the functional disciplines go, is there any more opportunity going forward for another one of those global jobs?

Alan Mulally

I think we are pretty good for right now. We will continue to look as we go forward on the plan to see if we have any other areas that we can enhance it. But it is a pretty robust team now and many companies, I have noticed, that are also moving to this model where traditionally maybe you had the HR function, the finance function, maybe legal and communications that went across the enterprise and across the globe and across the world, but I think more and more people are appreciating the value of a global perspective to leverage the assets across the company in the engineering, the manufacturing, the IT and the purchasing world. Quite clearly it has been a real asset to our competitiveness.

Operator

Your next question comes from Bill Koenig - Bloomberg News.

Bill Koenig - Bloomberg News

As long as we are asking about reports -- and I won't be proud, it was in the Detroit News yesterday -- there was a story about a $715 million loss at Jaguar last year and it is projected to be lower, but still substantial this year. First of all, are those figures correct? Second, do you have the time to be dealing with a problem as thorny as Jaguar while you've got an even thornier North American problem?

Alan Mulally

I missed your second question.

Bill Koenig - Bloomberg News

Okay. The second question is do you have the time and resources to deal with Jaguar, which has been going on for 18 years, at the same time you've got an even thornier, bigger problem in North America?

Alan Mulally

Okay. I understand. On the first question, the numbers are wrong and I would also like to comment that we are really pleased with the progress that Ford of Europe and Jaguar and Land Rover and Volvo are making. We have invested in their new product line-up, it is being very well-received. They are making tremendous progress, all of those brands, on their quality and productivity. So we are very pleased with their progress.

On the second, I think my thought on that is that they have very, very solid plans in place and it is not taking a lot of extra effort to get a plan. The real effort is helping them and just paying attention to everybody staying on the plan and executing on the plan that they have, which is a very good business plan going forward.

Clearly, each of the businesses is in the same place right now. North America has a very good plan, South America, Asia-Pacific and Europe. So the real thing right now is that everybody stays laser-focused on implementing this plan, making sure we have got all of the risks identified, mitigating those risks and in continuing to look for more opportunities to keep improving our plan year after year.

Operator

Your next question comes from John Stoll - Dow Jones.

John Stoll - Dow Jones

I would like to follow up on the question earlier about bonuses. I guess given the financial condition and the numbers and also the ongoing costs, your drive to cut costs on a plant by plant level, it was sort of surprising to hear that you are considering bonuses.

Is this a shift? Because Ford hasn't published or provided bonuses recently and I'm wondering if this is a shift in mentality on how to compensate workers, incentivize workers and how that should be received by the UAW after the COAs?

Alan Mulally

Sure. I would be glad to share a thought about that with you. The most important thing in our consideration for all of our employees is that we are paying or compensating our employees competitively. The executives, the management, all of our employees, that we are competitive; because, at the end of the day, everything about our performance going forward is going to be dependent on having a skilled and motivated team going forward. A big part of that is that we are competitive with the other businesses that we are competing against.

The issue about the leadership and the bonuses, it really fits into that because as you know, more of the compensation of the senior leaders is tied to performance on accomplishing the plan. We use the word bonus, but it really is an inherent key piece of their compensation and we want to make sure that it is competitive and that we pay them for the performance that they are achieving.

Now we are in a tough situation right now and we are in a turnaround situation and we need the absolute best, skilled and motivated team in all of the positions. That is the way we are looking at it, is to make sure that we are paying for performance, even though it is really a turnaround situation. We need that performance and that performance against the plan more than ever, and we need the right team and a motivated team to do that.

We have really clear expectations, really clear expectations on their performance and we are going to continue to pay competitively for that performance. That is the fundamental philosophy in all of the pay codes.

John Stoll - Dow Jones

Can I ask an unrelated question on product development? One of the benchmarks that has been floated out there and you have done it is –

Raj Modi

John, you are cutting out.

John Stoll - Dow Jones

Sorry, Raj. Can you hear me now, Raj?

Raj Modi

Yes.

John Stoll - Dow Jones

One of the product development questions that I had was you've pointed to Toyota as a benchmark and I don't think anybody would blame you for that. One of the advantages that Toyota has is an almost infinite pile of cash that allows them to take risks and innovate in ways that other manufacturers can't.

How does Ford work around the limited margins? You guys are tiptoeing, as it is, financially and to go and innovate or out-innovate or try to at least keep pace with the top global competitors seems miles away from where we are right now. Is that true and how do you encourage product development in that kind of an atmosphere?

Alan Mulally

I think that it is absolutely not true because if you look at the data, our investment is very, very competitive with our competition and the neatest thing about the plan that we have put together is that many companies in a situation like this maybe would sacrifice long-term viability by not investing in what they need to do on product development in the near term. Our plan is clearly to continue to invest to create long-term products that the customers really want and value and a viable Ford.

So when you think about our priorities that we have talked about, the first one is to restructure ourselves aggressively to match the capacity to the lower demand and the model mix and operate profitably. So that is the number one thing we have to do that allows us to keep investing.

The second is that we are accelerating the development of our new products and our new production system that will also enable us, long term, to have the products and services that people want.

That leads us to the third part of the plan and that was the reason that we secured the loan and the financing to be able to finance not only the restructuring in the near term, but also the long term product development. So there is nothing that I can see right now that I wish I had more money for to invest across our product line. I just want to get absolutely laser-focused on an investment strategy that ends up with a clear, rational, really competitive product line and production system. We have the money and the plans in place to do that now, so I don't think we are at a disadvantage. I think we are down to doing what we have done in the past and that is to make the vehicles that people want.

When you think about it, we are in this situation because we had really focused on the bigger SUVs and trucks and we have done very well in that. 30 years of industry leadership with the F-Series, fabulous Explorers and Expeditions and the bigger SUVs. Now we are going to complement that with a great set of new, smaller cars and crossovers and SUVs that our customers really do want. So we have the investment in place and I am very confident that we can create a very competitive product line.

Another nice thing or a neat thing about that is that it is not just about the car as we know it today, but you saw the response that we got from the sync capability where we are starting to network the car and link it to the global Internet system. I think those kind of innovations that allow people to be connected in our new world are going to be just as important in our vehicle design as the other elements that people appreciated in the past.

Operator

Your next question comes from Sarah Webster - Detroit Free Press.

Sarah Webster - Detroit Free Press

Good morning. Alan, you said that you feel that your capital expenditures on product development is competitive, but GM just recently upped their spend to $8 billion, Toyota spends $10 billion, and you are still at $7 billion. Given the fact that you have conceded that your system for product development is less efficient than it needs to be, it seems like Ford should be investing at least some of the money that you have obtained through your financing to upping your expenditure. If you could address that one more time?

Alan Mulally

Sure, Sarah. Good morning to you. I think the way we are thinking about it is that as we focus our portfolio and we focus our family in each of the brands that allow us to get a more investment per vehicle and then to have that consistency of purpose that we've talked about, I think will allow us to get a lot more value for our investment dollar.

But I would like to say again I have looked through the entire product development plan not only on the capital that we mentioned -- which is the $7 billion that Don mentioned earlier -- but also through all of the engineering investment that we make that helps create the products that between the engineering investment and the capital investment which covers the production, that there is not other money that I would like to invest. I think we have got the right amount of money and we are getting clearer and clearer on the focus on our product development strategy.

With every product development, every new car, it is also going to be part of a more flexible, enhanced, higher-quality production system where we can do more vehicles per plant, more flexibility, more volume.

You add those two together and I think that is going to be a key to our competitiveness going forward. We are really creating our new Ford product line and new production system with every introduction. I feel very good about the investments that we have in place right now.

Sarah Webster - Detroit Free Press

I also wanted to address this issue of bonuses and compensation. As far as I know, executives at Ford have been getting retention bonuses related to the Way Forward all the way back as far as December of 2005. Are you under the impression that your staff, your white-collar staff there, is not compensated fairly or competitively today?

Alan Mulally

I am sorry, Sarah. Would you say it again? I want to make sure I answer the question you are asking.

Sarah Webster - Detroit Free Press

Well, you said that you are giving or considering these bonuses because you want the staff there to be appropriately compensated. It is our understanding that retention bonuses have been going out not just through all of 2006, but in part of 2005 as well. I guess I am wondering if you don't feel that your staff there is already appropriately compensated?

Alan Mulally

I see what you mean, I think. I don't know about the past as well, but I know that when you look at 2006 and the objectives that we laid out because the team here really started in 2005 with their 2006 plan on this turnaround. When you look at the key measures for quality and cycle time and cost and market share and customer satisfaction that this team has made great progress, especially through the latter half of 2006, made great progress against those objectives. So that is the basis of the pay for performance.

Now getting back to the bigger issue is that including in the pay for performance is you want the total compensation to be competitive so you attract the types of people you need; clearly at the higher levels, more of their compensation is at risk. So you really do want to have their performance and their compensation tied together.

As hard as this is, they are really performing on many aspects of the plan and that is what you want to compensate them for so you can keep the talented people that you really need.

Operator

Your next question comes from Jeff McCracken - Wall Street Journal.

Jeff McCracken - Wall Street Journal

Good morning, everybody. On slide 32, you talked about industry net pricing and you expect it to be lower in 2007. My question is why it would be lower, if you were going to be getting out of the rental car business in '07? Wouldn't it theoretically get better in '07 if you have or are exiting the rental car business? I wonder if perhaps any of that relates to the F-Series or the F-150 and the cost pressures that would come with a new Silverado and a new Tundra.

Don Leclair

Let me try and answer that, Jeff, because what slide 32 was trying to show -- and maybe we weren't clear enough -- is the U.S. industry net pricing. So what we were trying to say there is that we expect the pricing environment overall in the U.S. to be down, as it has been the last few years. You can see that on Bureau of Labor Statistics reporting. What we are saying is that we expect these volumes we project to be slightly down from last year, mainly in the first half, and that is consistent with the overall level of economic activity in the country, gasoline prices and so on and within that, we expect that pricing environment to continue to be tough.

That was the competitive setting there. We weren't really saying anything about our own performance within that tough pricing environment. The point you make is correct; that we do expect a benefit from having reduced our participation in the daily rental business. Some of it we will see right away and in terms of less incentives going out to sell cars to the daily rental companies and then later on, we expect improvement in residual values. So that slide there was really talking about a total industry setting where we have our own plan internally -- Mark does -- to try and improve our margins on the pricing side.

Jeff McCracken - Wall Street Journal

So do you think --?

Raj Modi

The last question please.

Jeff McCracken - Wall Street Journal

What was that?

Don Leclair

Jeff, did you have another one?

Jeff McCracken - Wall Street Journal

I guess my follow-up was just what is your projection for Ford net pricing? Is it to be lower in '07 or flat or up?

Mark Fields

I think our projection, Jeff, very simply is about flat to maybe slightly down and again, as Don was mentioning, I think there's a number of things that are working in our favor, as Don mentioned, exiting the Taurus and the Freestar business, which is not a particularly good business for us in terms from a pricing standpoint. But at the same time, when you look at the flow of products we have coming -- the Edge, the MKX, very importantly the Super Duty, which again is 40% of our F-Series sales -- plus the fact that it shouldn't be lost on us that we had some of our competitors taking very significant actions in the fourth quarter of last year to address their inventory problems.

When you look at our position going into 2007, we're very comfortable with our inventory position. We're about 66 days supply, down 10 days from last year and down 20% in total volume.

So we are going to have to see how the market goes, but I think we're very prepared both from an inventory and a new product introduction standpoint. We will watch the market and if it is more competitive, then we will take actions on the cost side to offset that.

Raj Modi

Cindy, we have time for one more question, please.

Operator

Thank you, sir. The last question will come from John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

Good morning, guys. I got in under the wire here.

Alan Mulally

Hi John -- a lot of pressure on you.

John Murphy - Merrill Lynch

If I could sneak maybe two quick ones in here. First, the cash burn for the quarter was much better than we expected and I think was generally expected. I don't know if I am reading too much into it here, but does that mean the restructuring actions may be moving slower than expected? Or also maybe conversely, that you guys might be more efficient with your cash than had previously been expected and this $17 billion burn through 2009 might be an aggressive assumption?

Second Alan, specifically on your management philosophy here, there has been a lot of expectation for a long time that you would come out with your new plan, maybe the new Way, Way Forward plan and I was just wondering if you think what is out there already with the Way Forward plan is sufficient for milestones and a roadmap publicly and maybe even internally?

And then with your Thursday meetings that you just continue to chip away and maybe go faster in those milestones that are out there already, or do you need to come out with a new plan above and beyond the Way Forward?

Alan Mulally

We will have Don go first and then I will finish up.

Don Leclair

I will try and answer your question on the cash flow in the fourth quarter. I don't know what you were projecting, but our cash outflow in the fourth quarter was a little bit better than we were expecting and that was mainly from cost performance. I'd say that it doesn't indicate anything at all that our restructuring is behind. In fact, our restructuring is on plan or maybe a little ahead of plan in the sense that we have got more people that took the industry-wide buyout and we are on plan with ACH.

So from my perspective, the plant idlings are on schedule. We are on schedule or a little ahead of schedule with the restructuring. We did a little bit better on operating cash flow -- just a little -- and I would say right now, we want to stick with the projection we made for '07 to '09 cash outflow that we used as a part of the financing that we raised in December.

Alan Mulally

Very good, Don. On your other question about the plan and going forward, I think the way I would characterize that is that we have a very solid plan in place that we think deals with our business realities and returns it to profitability and has the investment needed in the near term to create a product line that people really do want and value in our new world, and a new production system that delivers even higher quality and productivity for a viable Ford going forward.

Now clearly, Mark and the North America team really led this, dealing with the reality when they looked at the world with really clear glasses in 2004 and 2005 and started with the Way Forward plan. I think that they also took a really good move as the economic situation deteriorated, by developing the accelerated plan. I had a chance to participate with Mark and the team on that.

But also the other thing we have done over the last few months is really focused the rest of the brands on a better, continuous improvement plan also and all of that is what we have reflected in the current plan.

So I think it is a solid plan. I think that with respect to your comment about the milestones, we have put out really clear metrics and milestones to share with you and with everybody outside Ford and inside Ford because we want everybody helping on this plan. So the data that we have shown on the employment and the facilities and the divestitures, all of those, that is the plan and we're making great progress on that as Don mentioned and we will continue to update everybody.

Now having said that, all good businesses have a good solid plan and they are always looking at the risks to mitigate those and they are always looking for additional opportunities to improve the plan. So as we go forward here each quarter, each year, our goal is to mitigate those risks and keep improving the plan incrementally going forward.

But I think we have got a good solid plan and even more importantly, we have got an operating rhythm and an attitude and a team that knows that our real success here is based on mitigating those risks and finding more opportunities to improve the plan as we go forward.

I think we are in a good operating rhythm and we will keep sharing our progress with you each quarter.

Raj Modi

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

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Source: Ford Q4 2006 Earnings Call Transcript

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