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Executives

George Sharp - Director of Investor Relations

Robert L. Shanks - Chief Accounting Officer, Vice President and Controller

Neil M. Schloss - Vice President and Treasurer

Michael L. Seneski - Chief Financial Officer of Ford Motor Credit Company

Analysts

Brian Arthur Johnson - Barclays Capital, Research Division

John Murphy - BofA Merrill Lynch, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Adam Jonas - Morgan Stanley, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Eric J. Selle - JP Morgan Chase & Co, Research Division

Ford Motor Company (F) Ford University Conference Call March 9, 2012 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Ford Motor Company, Ford University Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. George Sharp, Executive Director of Investor Relations. Please go ahead, sir.

George Sharp

Thank you, Keith, and good morning, ladies and gentlemen. Welcome to all of you who are joining us today either by phone or webcast. On behalf of the entire Ford management team, I'd like to thank you for spending time with us this morning so we can provide you with a number of updates to Ford University. This is an important part of our process to share with investors our guidance and how we report against that guidance during the upcoming year. With me today are: Bob Shanks, presently our Corporate Controller and soon to be our CFO; Neil Schloss, Corporate Treasurer; Mike Seneski, Ford Credit CFO; John Murphy, Director of Investor Relations; and Lee Kremzier, Director of Corporate Finance.

Now before we begin, I'd like to cover a few things. Copies of this morning's presentation slides have been posted on Ford's investor and media website for your reference. The financial results presented are on a GAAP basis, and in some cases, on a non-GAAP basis. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent as part of our various SEC filings.

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

With that, I'd now like to turn the presentation over to Bob Shanks.

Robert L. Shanks

Thanks, George, and good morning, everyone. This is Bob Shanks, and I'd like to welcome you today to Ford University.

If we can turn to Slide 2. We hope that the discussion today will help you better understand and use our planning assumptions and metrics to evaluate our financial progress throughout the year. There are also some other important topics that we'd like to talk to you about today, such as our pension derisking plan, which Neil will take you through, and tax rates. And this year's presentation also includes clarification on select topics from last year. We've also included in the slide set all of the subjects we covered last year and, although we won't be going through them today, we've updated them with the latest information and we're happy to answer any questions that you might have on these subjects. Mike Seneski, our Ford Credit CFO, is also with us, as George mentioned, and he can provide further insight to questions that you might have related to Credit University, which is also posted for your information.

As shown on Slide 3, we've chunked our Ford University into 3 main sections: first is a discussion of our 2012 key financial metrics and guidance; headline topics, such as pension derisking, tax matters, which includes the release of our valuation allowance, the impact on operating EPS, cash taxes and our revised effective tax rates; and finally, Automotive operating margin, with focus on structural costs, commodity hedging and warranty rules of the road. And as I mentioned a moment ago, we'll also provide more texture around a few topics that we covered in Ford University last year.

Now let's move on to Slide 4, which summarizes our key financial metrics, which are unchanged from the guidance that we've provided in January. So let's go through them. Compared with 2011, we expect 2012 Automotive pretax operating margin -- or rather profit, excluding special items, to improve despite the challenges that we're facing in Europe. Ford Credit is expected to be solidly profitable but a lower level than in 2011. And total company pretax operating profit is expected to be about equal to last year, and we expect our Automotive operating margin to improve. We see our Automotive structural costs increasing by less than $2 billion as we support higher volumes, new product launches and growth plans. And our capital spending is expected to be in the range of $5.5 billion to $6 billion as we continue to invest in our business. And finally, we expect commodity cost to show a nonmaterial increase over 2011. Longer-term, of course, we expect commodity prices to continue to trend upward, given global demand growth.

Now let's move to Slide 5, where you can see our assumptions by segment. Let's turn then talk about North America first, which we see it continuing as our core Automotive operation with improved profitability for full year 2012 compared with 2011. Looking ahead for South America. Competition in the region is intensifying with substantial capacity increases planned by a number of companies and new entrants. Against this background, we expect Ford South America to continue to generate solid profitability this year, although somewhat lower than 2011. We're continuing to work on actions to strengthen our competitiveness in this changing environment, and these actions include fully leveraging our ONE Ford plan, including the introduction of an all-new lineup of global products over the next 2 years, starting generally in the second half of the year.

In Europe, the external environment is uncertain and likely to remain so for some time. Given the challenges in that region and our updated industry volume assessment of about 14 million units for the 19 markets that we track, we expect our first quarter 2012 results for Europe to be about the same or somewhat worse than they were in the fourth quarter last year. We expect Ford Europe's pretax results to improve from that level during the year, largely reflecting the impact of the pace of our new product introductions and our continuing work on our cost base, with full year results for Ford Europe limited to a loss ranging from about $500 million to $600 million. Going forward, we will continue to review taking accelerated actions to strengthen and improve our business there. This will include fully leveraging our ONE Ford plan and our global resources to service customers in Europe. We expect Ford Asia Pacific Africa to grow volume and be profitable for 2012 even as we continue to invest there in additional capacity and in our product lineup for an even stronger future in line with our ONE Ford plan.

For other Automotive, we expect net interest in 2012 to be about equal to 2011. And this reflects the fact that while our net interest expense will be reduced due to lower debt levels, lower interest rates will result in lower interest income. Fair market value adjustments are also included in other Automotive, and they reflect mainly our investment in Mazda, which was a negative $100 million impact in 2011. Results in 2012 will depend largely on the value of Mazda's stock. Now please note that we don't separately report a corporate or central expense category. Such costs are allocated to our Automotive business units as well as to Ford Credit.

Now let's move to Ford Credit guidance, which Neil will discuss.

Neil M. Schloss

Thanks, Bob, and good morning, everyone. Moving to Slide 6, let's review Ford Credit's guidance for 2012. As we've previously guided, Ford Credit is expected to be solidly profitable for full year 2012 but at a lower level than 2011, primarily reflecting: fewer leases being terminated and related vehicles sold at a gain; lower credit loss reserve reductions; and lower financing margins, driven in part by our move toward an investment-grade balance sheet and the runoff of higher-yielding assets.

Ford Credit's $2.4 billion pretax profit in 2011, the contribution related to the lease and credit loss factors, was about $800 million favorable. And these factors are expected to be minimal in 2012. In addition, year-end 2012 managed receivables are projected in the range of $85 billion to $95 billion, and we anticipate distributions of between $500 million and $1 billion. We now move to our section on headline topics.

Turning to Slide 7. We announced during our fourth quarter 2011 earnings call a long-term strategy to derisk our funded pension plans. I'd like to spend a few minutes explaining the reasons we are pursuing this strategy, what the key elements of the strategy are and how the strategy will benefit both the participants and the company. More detail on pension and OPEB accounting and reporting on these slides could be found on Slides 64 and 65.

Slide 8 shows how volatile the funded status of our pension plans can be. Looking back, in 1999 our U.S. plan started with a surplus and moved to a shortfall in 2002 following the tech bubble burst. At 2007, we moved back to a surplus as a result of contributions and improved discount rates and asset returns, only to move back to a shortfall following the 2008 downturn. These ups and downs have been driven primarily by market factors outside the control of the company.

Slide 9 shows the company's Automotive debt and net unfunded pension obligations at the end of 2011. From a balance sheet perspective, the underfunded pension obligations tend to be viewed as debt. However, unlike standard debt that has a fixed rate of interest, the pension shortfall effectively has a perceived variable principal balance. And this balance changes based on discount rates, asset returns, although the pension benefits to be paid do not change. Discount rate is prescribed by financial reporting rules and driven by market factors outside our control. The company has made significant progress on reducing its Automotive debt to $20.5 billion since its peak in 2009. This amount has been partially offset, a $3.5 billion increase in pension shortfall, as discount rates have dropped to their lowest levels in the past 25 years.

On Slide 10, we outlined the financial impact pensions have on our business. An underfunded pension plan results in higher pension expense and requires cash contributions, which draw on capital otherwise used to support our core Automotive business. In addition, because an underfunded pension plan is viewed as debt, this could impact our ability to borrow at competitive rates, progress towards improving our credit rating and the company's market valuation. Volatility of the funded status drives unpredictable variability in our profits and our cash and adds noncore financial risk. Together, these all introduce financial risk on top of our normal business risk and highlight the need for a derisking strategy.

Turning to Slide 11. Our objective is to derisk and fully fund our global funded pension plans over the next few years. The key elements of our derisking strategy, which we showed during our fourth quarter 2011 earnings call, include limiting the liability growth in our funded plans by closing participation to new entrants, including most recently, our U.S. hourly plan and our largest U.K. plan. Also, our U.S. salary plan will begin offering lump-sum payouts with an option to future retirees. While we have no plans to freeze or terminate our plans at this time, we monitor and evaluate the competitiveness of our benefits on a periodic basis.

We are reducing plan deficits through cash contributions. As part of our long-term derisking strategy, 2012 cash contributions to funded plans are expected to be about $3.5 billion globally, including discretionary contributions to our U.S. plans of about $2 billion. The contributions beyond 2012 will vary by year based on funded status projections at the time, driven by discount rates and asset return assumptions, which are volatile and difficult to predict. We will better match the plan assets to the characteristics of the liability by progressively rebalancing assets to more fixed income-like investments over the next several years as funded status improves. And finally, other strategic actions are under development, which we will share with you when they are appropriate.

I'd like to spend a couple of minutes on Slide 12 because it's important to understand what better matching our assets and liabilities entail. And a bit later, I'll discuss why better matching assets and liabilities reduces risk. The first point is to recognize that pension liabilities and bonds have similar exposure to interest rates. As interest rates rise, values fall. And the opposite is true, as interest rates fall, values rise. Prior target asset allocation of 45% bonds and 55% growth assets provide an insufficient match and the allocation did not vary with funded status. The growth assets, which includes hedge funds, real estate, private equity and public equity, do not move in tandem with the liability, bonds do.

Under derisking, the assets will become better matched as a result of increasing the bond allocation to 80% as funded status improves and contributions to help achieve full funding. The 20% growth asset allocation allows us to retain some asset diversity and growth potential and reflects the best risk-return tradeoff under unpredictable conditions. A 100% bond portfolio would not eliminate risk fully because there is no perfect asset-liability match. As we said earlier, interest rate changes can impact the plans' funded status materially. On Page 78 of our 10-K, we provide sensitivities for both the amount of liability and related expense to changes in interest rates and changes in expected long-term asset return. Please note that the amount of assets invested in fixed income instruments, which are also impacted by changes in interest rates, would provide a partial offset to the change in liability and expense.

Slide 13 illustrates the shift along the glide path in asset allocations to 80% bonds and 20% growth assets. Progress along the glide path will be contingent on the funded status, which in turn will be driven by market performance of discount rates and asset returns, as well as cash contributions. We plan to make contributions over time because market conditions and optimal timing are difficult to predict. We expect to reach fully funded status in the next several years with variability on a plan-by-plan basis. Our asset mix for our U.S. plans at year end 2011 was about 48% growth assets and 52% bond. Our expected long-term return on assets is 7.5%, reflecting our present asset mix and planned funded status. As we progress our derisking strategy and the funded status improves, then the movement toward 80% fixed income assets on our glide path will lower the expected long-term rate of return.

Slide 14 shows that derisking reduces the risk to the company of being significantly underfunded. The value of this reduced risk comes with an asymmetric tradeoff. Rating agencies and analysts generally do not give credit for overfunding. And overfunding has limited value to participants and the company, as it is easily lost when market conditions change. Risk reduction has far greater value than the loss of the potential surplus under a plan that is not derisked and is volatile. Downside risk protection has greater value because it protects funded status in weak economic scenarios and eliminates the risk of unplanned cash contributions when the business can least afford it. It also reduces exposure to perceived debt, which improves our ability to borrow at competitive rates, reduces volatility in profits and cash and eliminates noncore financial risk. Bottom line, derisking makes the plan more secure for both participants and the company.

Turning to Slide 15 and summary of this section. The company takes its pension obligations very seriously. We believe pension derisking is an important step to reducing the overall risk to the company. Our strategy includes limiting liability growth by closing plans to new entrants, where possible, and providing defined contribution plans. We are also offering lump-sum payout options to future U.S. salary retirees upon retirement. We plan to derisk and fully fund the plans over the next few years, starting with contributing about $3.5 billion in 2012 and then of matching plan assets to liabilities over time as funded status improves.

Other derisking actions are under development. The impact of our derisking strategy will make the plans more secured for participants and the company; reduce volatility in funded status, profitability and cash flow; strengthen the risk profile of the company by reducing noncore financial risk and improve the company's valuation.

And with that, I'll turn the presentation back to Bob.

Robert L. Shanks

Thanks, Neil. Now I would like to cover 3 topics related to tax. First, I'd like to discuss the release of most of our valuation allowance in 2011 and the impact that it has on our EPS calculation. Secondly, a brief discussion on our cash taxes. And finally, I'll touch on what this means to our effective tax rates on a go-forward basis.

Now moving to Slide 17. I'll start with the release of our valuation allowance. In the fourth quarter of 2011, as you know, we released almost all of our valuation allowances against net deferred assets, primarily deferred tax assets in the U.S. The release was recorded as a tax benefit to the income statement, resulting in an abnormal effective tax rate for the year. This release will result in an increase in our ongoing booked tax expense. Based on accounting guidelines, valuation allowances against net deferred tax assets are applied as required on an asset-by-asset and country-by-country basis. As a result of testing, we retained approximately $0.5 billion of valuation allowance in North America related to various tax and local operating tax loss carryforwards and about $1 billion primarily against our South American operations.

Shown on Slide 18, we retrospectively adjusted our operating EPS for the first, second and third quarters of last year. The bottom table reflects our 2011 results, consistent with more normalized effective tax rates. Please note that going forward, these are the EPS comparators that we'll be using for all year-over-year comparisons. It's also important to understand that only operating EPS was adjusted. Net income is unaffected.

And moving to Slide 19. The release of the valuation allowance has no impact on our underlying tax attributes. But instead, implies that the utilization now can be anticipated for accounting purposes. Global tax attributes, such as net operating losses and credit carryforwards, are subject to country-specific utilization limitations, likely resulting in nonlinear consumption across countries. Based on our projected profitability, worldwide cash tax liabilities are expected to remain low for a number of years as worldwide tax attributes generated in prior periods are consumed to offset current period cash tax liabilities.

We'll now describe effective tax rates on Slide 20. U.S. statutory tax rates are actually somewhat over 35% when factoring in the impact of state and local taxes. Statutory tax rates outside the U.S. tend to be lower than the U.S. statutory tax rate. Generally, the U.S. taxes income of non-U.S. operations when dividends are repatriated, ultimately resulting in the higher U.S. statutory tax on repatriated non-U.S. earnings. Non-U.S. earnings deemed to be indefinitely reinvested are taxed at non-U.S. statutory tax rates. The accounting rules introduce quarter-to-quarter volatility as year-to-date tax expense is recorded based on full year projections with a cumulative catch-up effect in the current quarter. So for example, assuming equal profits across all quarters, if the full year tax projection was 30% for the first 3 quarters and then changed to 28% in the fourth quarter, the true-up effect to meet the full year projection would result in a 22% effective tax rate in the fourth quarter. We calculate and disclose in our 10-Ks an effective tax rate that excludes the impact of equity in net results of affiliated companies because these are accounted for on an after-tax basis within our operating PBT. These earnings, therefore, are excluded from the denominator in calculating an effective tax rate. At this time, Ford's projected profitability suggests a global effective tax rate that's expected to average about 30% over our planning period. This rate excludes the impact of special items and it will vary on a year-to-year and quarter-to-quarter basis.

On Slide 21, we show the effective tax rate for 2011 on a pro forma basis, revised to show more normalized tax rates after the release of the valuation allowance. As you can see, the full year rate was 31.9% after subtracting equity and net result of affiliates from our pretax profits. We also show as a memo that the tax rate would have been 30.1% as a percent of our total pretax results before subtracting the equity in net results of affiliates. For 2012, our guidance assumes there will once again be a renewal of tax legislation, extending the use of the U.S. research and development tax credit. This is assumed to be approved later this year. Accounting requirements defer recognition of the benefit related to the credit until the law is actually enacted. As a result, our effective tax rates for quarters prior to enactment will be higher. While we expect our full year rates in 2012 based on operating results to be similar to 2011, our first quarter rate will be closer to 35%, both before and after adjusting for equity and net results of affiliates due to R&D credit timing and other factors, including the calendarization of the profitability of our affiliates.

Moving on to Slide 22. What we're going to do now is we're going to dive into our third headline topic, which is Automotive operating margin. So let's turn on Slide 23, which shows that our Automotive operating margin is calculated by dividing Automotive EBIT, excluding special items, by Automotive revenue for each segment and for Ford total Automotive. Automotive EBIT is equal to pretax results, excluding special items, and other Automotive, which is comprised of net interest expense and fair market value adjustments. As shown, volume and mix in that pricing are the key drivers of revenue, while contribution cost and structural cost are the primary elements of cost. I'll provide further details on the components of both on the next slide.

Slide 24 outlines many of the key elements that affect our Automotive operating margins. Volume and mix is directly impacted by wholesale volumes, component sales, product mix and series mix and option rates within a product line. Net pricing is affected by wholesale pricing, which may include pricing for new design features added to a vehicle, such as more powerful engine, or pricing actions to better align a vehicle competitively or to recover higher commodity cost. Net pricing also includes the impact of changes in marketing incentive.

Let's move on to contribution costs. These include material costs, including component purchases and commodities; freight, including duty; and warranty. And then finally, our structural cost, which we'll discuss in more detail in just a few slides, include manufacturing, engineering, depreciation and amortization, advertising and sales promotions, A&S expenses and pension and other fringe benefits.

Let's move on to Slide 25. I'd like to discuss a couple of elements of contribution cost in more detail. And what we'll do first is spend a few minutes discussing commodity hedging, and then we'll cover our warranty reporting process. So here on Slide 26, we'll describe how we hedge for commodities. As you know, commodity prices are highly volatile. We use index pricing with our supply base on selected commodities to isolate price volatility related to commodity prices. We then hedge, where we can, the underlying commodities to reduce the risk, using forward-year contracts with a maximum maturity of 2 years. Liquid hedge instruments do not exist for steel and a number of other commodities. And so as a result, we hedge about 25% of our annual buy of commodities and raw materials. Less than 100% of these exposures are then hedged, and the hedge percentage declines over time. As a result, hedging provides a partial offset only to the change in underlying commodity costs.

On Slide 27, we describe the accounting and cash impacts of hedging. Most commodities that we purchase are embedded in components and not purchased directly. As a result, the hedges are considered to be nondesignated and do not qualify as a result for hedge accounting treatment. Because of this, any change in market value of all forward hedges must be booked to income in the present period, while the impact to component prices is realized over time. The cash impact of the hedges, however, will be recognized in the future when the forward contracts are settled and it is determined by market prices at the time of the settlement. The reason we hedge is to reduce volatility of cash flow and long-term profits.

On Slide 28, we discuss the specific rules of the road that we follow in booking warranty expenses and how this can result in warranty costs being uneven, both in the absolute sense but also on a period-to-period basis. Ford provides warranties on the vehicles that we sell. We also offer warranties for specific periods of time and/or mileage, which vary depending upon the type of product, usage of the product and the geographic location of its sale. Also included in our reported warranty costs are the costs associated with product recalls, as well as other customer service actions, such as roadside assistance.

Estimated lifetime warranty costs are developed using historical warranty information for each vehicle line, by model year and are accrued for at the time the vehicle is wholesaled. Following a defined set of what we call rules of the road, the initial estimate of warranty cost is compared with actual experience, and as appropriate, the lifetime estimates are revised during each quarter. This can result in significant one-time positive or negative reserve adjustments as the accrued estimates are trued up. The resulting one-time reserve adjustments are included in our reported warranty cost and can make comparisons between periods difficult. Changes in the warranty reserves included in the notes of our 10-K include changes for vehicle warranty coverages, product recalls and warranties on aftermarket parts. All elements of warranty are included in the reported year-over-year profit variances.

Let's move on to Slide 29. This slide provides more details on the elements of structural cost, which I mentioned specifically earlier. On the next slide, I'll provide further details on the key components and cost drivers for these costs. As you can see here on Slide 30, and we'll start with manufacturing. Manufacturing consists primarily of hourly and salaried personnel; plant overheads, such as utilities, scrap and taxes; and launch expense. Volume and sourcing changes, as well as vehicle content, are the key drivers of changes in these costs. So as a result, that's why we call them structural costs, not fixed costs, because to some extent, they will vary with volume, and manufacturing is one of the key categories where this occurs. Engineering consists primarily of hourly and salaried personnel, prototype materials and outside engineering services. The number and complexity of our product programs drive these costs. The depreciation and amortization component, which we often refer to as spending-related, primarily consists of depreciation and amortization but also includes asset retirements and operating leases. As you'd suspect, our past and present capital spending drive these costs. Advertising and sales promotions include advertising, marketing programs, brand promotions, customer mailings and promotional events and auto shows. The number of vehicle launches and our worldwide brand-building efforts also drive these costs.

Administrative and selling expenses, which we also refer to as overhead, include salaried and purchased services related to our staff activities, including our information technology group. Any increase in these costs would be driven primarily by growth. Pension and other fringe benefits consists primarily of past service pension costs and other postretirement employee benefits. As Neil mentioned earlier, discount rates and asset returns are the key drivers of changes in these cost elements. In addition to the cost drivers that I described, efficiencies and normal economics also impact essentially all of these costs as well.

With our structural cost, most of the time, the costs are incurred in advance of the benefit realized. And Slide 31 is a demonstration of this. For example, engineering costs for new product programs are incurred well in advance of the introduction of the new product itself. In this case, the revenue and profit benefit will not be realized until 3 years after the expense is incurred. Similarly, the costs for advertising and sales promotion related to brand building, for example, usually do not result in benefit immediately. However, we expect a more near-term benefit from advertising and sales promotion costs related to the launch of a new product. Launch-related manufacturing costs are incurred before job one of a new vehicle, so the revenue and profit benefit is realized somewhat later than the cost. For the last item shown, depreciation and amortization, the timing of the cost and the resulting revenue and profit are more closely aligned since the depreciation and amortization expense does not start until production begins.

Now let's turn to Slide 32, which shows a few topics from last year for which we'll provide additional texture. And the first topic we'd like to talk about is our treatment of our Chinese joint ventures, which we'll cover on the next slide.

So here on Slide 33, what I'd like to provide are more details regarding how we report for our Chinese joint ventures. Consistent with the treatment of unconsolidated joint ventures under accounting rules, we include vehicles sold by our joint ventures in our wholesale category. But revenue from vehicles produced and distributed by our unconsolidated affiliates is not included in our consolidated revenue. Automotive segment profits do include Ford's share of the after-tax profits of these affiliates. We generally reflect changes in these profits in our other variance category.

For our 2 major China joint ventures, Changan Ford Mazda and JMC, variances are reported, however, at Ford's share across all of our variance categories, including volume and mix, net pricing, contribution costs and other costs. We do this because of their relative magnitude. For example, they represented nearly 60% of Asia Pacific Africa's wholesales in 2011, and with further growth, is expected to become even more material over our business planning period. This presentation of the results for these joint ventures reflects the manner in which we internally analyze our results for this region. Although this is different from the reporting of a number of our competitors, we believe this approach provides added transparencies for ourselves but also for investors.

Turning to Slide 34. I'd like to provide additional details on compensation costs. While regular compensation costs are included in structural costs, as we described earlier in the deck, contingent or at-risk compensation expense is not included in structural costs. They're included in net interest and other. Because these costs generally are contingent on achieving certain performance objectives, we don't bin these costs within our normal compensation expense or structural expense. Items in this category include performance-related bonuses for salaried and hourly personnel, as well as contract ratification bonuses for UAW workers. We accrue performance-related bonuses quarterly based on the projected full year payment amount. We adjust or true-up the reserves each quarter as needed. The recent UAW contract ratification bonus was expensed in the fourth quarter of 2011 when the obligation was incurred.

Now let's turn to Slide 35, where we'd like to talk a little bit about the difference between production, wholesale and retail sales. Let's talk first about production versus wholesales. Within a specific Automotive segment, the difference between production and wholesale volumes is primarily explained by the net imports and exports with other Automotive business segments, as well as changes in company-owned finished vehicle inventories. Now when we go to wholesales versus retails, within a specific Automotive segment, the difference is primarily explained by changes in dealer-owned stocks. In addition, wholesale and production volumes for a given region include vehicles sold to other OEMs, such as Mazda. These units are not included in that segment's retail volumes. Please note that our convention is to report retail shares for vehicles sold in just the major markets of a given region. As you can see in the lower box, wholesales were greater than production in the fourth quarter. This is the result of our year-end shutdown, which effectively diminishes our in-transit pipeline. In the first quarter, we build the company stock back up by replenishing the in-transit pipeline, resulting in wholesales being less than production. As you're aware, our revenues are based on wholesales, they are not based on production.

And turning to Slide 36. I'd like to provide more details on our 2012 production calendarization because this year, it does not follow our normal seasonal pattern. For 2012, many of our new product launches and capacity actions are expected to occur later in the year. This includes major new product launches, such as the Escape, Fusion, the B-MAX, the EcoSport, as well as the move to 3-crew shifts at our Chicago, Michigan and Louisville assembly plants. Similar patterns are evident in our other overseas operations. In addition, we have planned first quarter dealer stock reduction actions as part of our ONE Ford plan of matching production to demand. As a result, volumes and profitability this year are expected to be somewhat more backloaded than they are in a normal year.

Now with that, it concludes our 2012 Ford University presentation. Please be sure to review the reference materials included in the deck, as well as the Credit University package, which is also posted for your information. And at this point, what we'd love to do is to have whatever questions you might have and we're prepared to answer them.

George Sharp

Thanks, Bob. Now we'll open the lines for about a 45-minute Q&A session. Now during this session, please feel free to ask questions about either the materials that we’ve just presented or the reference or the Ford Credit materials also provided. [Operator Instructions] Keith, can we now have the first question?

Question-and-Answer Session

Operator

Certainly. The first question is from the line of Brian Johnson of Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

I've got 3 questions and if you want to go through the queue and get back to them, I’m happy with that as well. First question -- there’s one around pension derisking, one around structural cost, fixed and varied. And the third there, I do have some questions around lease returns back to the Credit University. First, you mentioned additional actions under development. The UAW contracts have that rider that lump-sum buyouts would be possible without putting the contract to a vote. Wondering if there's any progress you can talk about on any kind of lump-sum buyout discussions, either with the union or any plans vis-à-vis the white-collar workforce.

Neil M. Schloss

Brian, this is Neil. And I think at this point, all we're saying is we've got a long list of things that we are looking at. And when we get them far enough, we will let everybody know.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. Second, on structural costs, helpful to get this breakout. But if you try to roll it up and divide structural cost into fixed-fixed and semi-fixed. Fixed costs that aren't going to vary with the economy or production volumes and then semi-fixed costs, let's say, for every 0.5 million or, say, 0.25 million units of production are going to inch up. Can you just kind of recap which of these categories would have that semi-fixed nature? And then if we look overall at structural cost, what the overall fixed versus semi-fixed component is?

Robert L. Shanks

Okay. That's a good question because there's also different types of volumes at play. So if you're just talking about unit volume, which is the most sort of obvious volume impact, as I mentioned earlier, we will have volume changes that are not variable on a per unit basis but more step-level that you'll see in manufacturing. And those will -- you would incur those, for example, from the shift changes, line speed changes, overtime. We talked about adding shifts, so those are added people. So that's added volume. So they're kind of more step-level or not necessarily going to vary with each unit of volume. But that actually, over the last couple of years, has been a pretty precise number within our manufacturing/engineering cost change that we report in the earnings call, and probably the largest of the purely volume-related impacts. So within advertising and sales promotion, we also have one which is more actually per unit change and it’s related to the Tier 2 and Tier 3 advertising that we have in the U.S., where a number of years ago, we changed how we fund that with the dealers. And the results of that from an accounting perspective was for us to move that from what had been a variable incentive or a revenue reduction, which was up in contribution cost, down into fixed cost. And that does actually vary pretty directly up and down with volume because that's just how it's constructed in terms of how we fund that with the dealers. Then I think the other thing, Brian, you have to think about is other types of volume that we kind of touched on them somewhat briefly. But a given year we’ll have a different number of product programs, and so it'll have a different impact in engineering, or also it's not just a number but where product programs are in their development cycle. Launches, will clearly also affect the number of launches, will affect manufacturing expense. They'll also affect our advertising and sales promotion expense. And then there's kind of volume in the sense of the number of people that we have, which is driven by growth in large part. And that will just be spread all the way through many of the elements of cost. So volume has many different definitions. And I've just touched on a few, but it goes from the ones that are more linear, which is what people normally think about. But we also have other elements or things that are volume-related, which are very closely relied to our growth aspirations and plans. In terms of what's the mix between the 2, I mean, we don't have that mix. We don't actually think about our structural cost in that way other than just trying to pull out and internally recognize how much is probably within that manufacturing and advertising and sales promotion category that I just mentioned.

Brian Arthur Johnson - Barclays Capital, Research Division

And maybe just a managerial comment, sort of how do you monitor these? And we had a talk with Marchionne the other week on his conference call. And he said the number one thing they debated, Auburn Hills has the right balance between structural cost, variable cost and then the quality of the vehicle and the price. How is that dialogue playing out at Ford? Bob, congratulations on your future role. How do you see that playing out? And just any changes, as you may be focused more on the cost side of that or swing the pendulum back a bit towards some cost controls.

Robert L. Shanks

Well, we think we have very effective cost controls. And it's an area that we've learned some hard lessons over a number of years. And so I don't think what you're seeing with our increasing -- I know what you're not seeing in our increasing structural cost is lack of cost control. But it is a very specific point of view about where we're going to make investments to expand our product portfolio, strengthen the products themselves, expand our capacity to support our growth aspirations, better balance our geographic participation in the global industry. We're investing in brand because we certainly have learned and are actually able now to, particularly in the U.S., correlate the value of investments and a stronger brand with higher revenue. And that would show up in higher advertising and sales promotion expense. So you see that going up and you might think, "Well, they're out of control. Or why are they spending so much?" We actually understand that, that's driving a more favorable brand opinion and directly correlates to higher revenue, which as you know, has been a key driver of our stronger business results over the last number of years. So we look at it very closely. It's reviewed at least every week with the senior team and on our Thursday PPRs [ph]. And it's also the subject of a lot of review within the business units. The other thing that we do is we have a very close hand on our breakeven, breakeven at the company level, breakeven by business unit. And of course, that is a really good way of understanding the overall structure of your business and what you can afford and what level of volume you can support before you start running into difficulties from a profit perspective. And we also look at the overall structure of our business, revenue, what's our contribution margin percentage, what is our structural cost as a percent of net revenue. So I mean, there's so many different ways that we look at this and measure it to make sure that everything boxes and makes sense. Because the one thing I think you also have to be careful of is if you focus inappropriately on just one sort of line item of the business or one kind of part of the business at the expense of the others, you miss the interconnectedness. And it's not as pure and simple as saying, "I'll just look at structural cost, and up is bad and down is good." You have to look at the totality of all of it.

Brian Arthur Johnson - Barclays Capital, Research Division

And just the engineering cost -- and I'll get to my Ford Credit question which is quick. Is there a rule of thumb for if a vehicle launches in year 3, what percent of the engineering is at year 2, year 1 right now? I can't tell if year 0 here would mean that it would be 3 years before the launch or just 2 years? And then kind of is it kind of equal? Or does it kind of hit a peak and then trail down in year 2?

Robert L. Shanks

You mean of the development cycle?

Brian Arthur Johnson - Barclays Capital, Research Division

Yes.

Robert L. Shanks

I think it's more -- I'm trying to think. Probably we've incurred about 50% of our engineering at the time that we approve a program. And so that probably means it's more front-loaded. And then once we kind of approve a program then we get some -- we're closer to job one than the earlier, the start point of the overall development cycle. So by the time we get to our program approval, we’ve probably incurred about half of our engineering expense.

Brian Arthur Johnson - Barclays Capital, Research Division

And the program approval’s typically how many months or years before start of production?

Robert L. Shanks

It's a little bit more than a year.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And then final question, Slide 32, the North American Ford Credit lease termination volume. Could you give us a feel for just the cadence of that through the year? I imagine it's first half-loaded, just given when the world fell apart in '08. Or is it pretty steady throughout because we’ve already lapped those '08, '09 terminations?

Michael L. Seneski

Brian, which terminations are you talking about, the 2000...

Brian Arthur Johnson - Barclays Capital, Research Division

No, Slide 32, North American lease termination volume, you have an estimate of 117,000 units in 2012.

Michael L. Seneski

Let's see. So of that, the termination volume’s actually pretty flat, a little bit more front-loaded in the first half of the year, call it 60% in the first half, 40% in the second half of this year.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And if you [indiscernible] stepping through supplemental depreciation, had you taken all of the gains in the used car market that were due to the Japanese quake into account in your depreciation schedules? Or did you leave yourself some room to say, "Okay, when this car comes back in 2012, Japanese supply is going to be back, and we can't have the -- we probably won't have the same values that we might have had in May and June of 2011"?

Michael L. Seneski

We actually, Brian, tie to ALG's -- they publish a new book every couple of months on forward values, and that's what we use to -- obviously, with a little bit of management discretion, but we use that. So it's really a forward look that ALG has, and we take that in.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And that's why there were the big gains when...

Michael L. Seneski

Yes.

Operator

Your next question comes from the line of John Murphy with Bank of America Merrill Lynch.

John Murphy - BofA Merrill Lynch, Research Division

Well, I'll try to rip through these questions pretty quick. On Slide 4, the increase that we're looking at for CapEx is about an increase of about 1/3 at the midpoint of the range. Just curious, that $5.5 billion to $6 billion, is that sort of where we're going to see CapEx going forward? Or could we continue to see big sort of chunky increases in CapEx as we look out beyond 2012?

Robert L. Shanks

Well, we have -- there's actually quite a bit of capacity that is in that number in addition to the product spending. And I think what you'll see over the next 2 or 3 years is maybe a greater than normal percentage of capacity spend to the total than what we would see normally. So there could be some peaks. But over our planning period, I think we've guided and I would still stand by that, about $6 billion or so a year of capital spending. But you'll see ups and downs on that. And I think what you'll see, as I said in the next 2 or 3 years, is quite a heavy percentage of capacity-related spending versus what would be a normal ongoing rate.

John Murphy - BofA Merrill Lynch, Research Division

So it would be fair to say that the bulk of that increase really is your international growth -- to fund your international growth capacity?

Robert L. Shanks

Across all of our business units. I mean, don't forget, we just talked about a number of capacity increases here in the United States. So we're growing here, as well as we are growing around the world.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then if we look at sort of a similar item on Slide 5, the increase of $2 billion in structural cost. I know obviously, there is some float-up in structural cost. But by definition, structural cost should be more structural and shouldn't be quite as variable. And it seems like they've been relatively variable in the last 2 years. I'm just curious, as we step forward, when we start to see a slowdown in the increase in those -- in the increase in structural cost, when does the second derivative really slow down on that increase?

Robert L. Shanks

A lot of it's tied -- in fact, most of it is tied to our growth and I hope we never stop growing. So as long as we're continuing to grow, we're investing more and more in expanding our product portfolio and supporting our geographic expansion around the world, more and more into technologies and so forth, and we're getting the revenue for it. I mean, as I said earlier in the response to Brian, we keep a very, very close eye on those costs and how it kind of fits in and supports our overall structure of the business and our breakeven. Those are investments that we're making to continue our growth and expansion. So I'd -- will it be as heavy as they've been, if you will, from the last couple of years' perspective? I mean, we'll have to wait and see. But it's all driven mostly by growth.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And I'm just following the order of the slides here. If I were to look at Slide 6, sort of second bullet point, you start with $2.4 billion in pretax profit for 2011. Ford Credit, you kind of talk about $800 million of good guys from the leases and credit loss factors, which seems to imply you're starting at a sort of a normalized base of about $1.6 billion in pretax in 2011. So as we step forward into 2012, would it be fair to think of the pretax profit for Ford Motor Credit on a year-over-year basis off of that base and think that there's some benefit from volumes or increase in loan originations, and then we've got to think about credit performance on top of that? Just trying to understand if that $1.6 billion base is a good starting point. And then obviously, we have to think about the swing factors off of that.

Michael L. Seneski

John, it's Mike. What we've said is that although you will see a little bit of volume good news, and I think we actually highlighted that on slide -- of the Credit University, Slide 15. We believe that the margin impacts from the strategies that are listed there will actually more than offset that. Plus as we start to grow, you have to add to the credit loss reserve as well. So those 2 factors will more than offset volume growth. And so we'd expect to be down a little bit from that one, too.

John Murphy - BofA Merrill Lynch, Research Division

And I apologize, I haven't gone through all the detail on the Ford Credit slides. But if we think about sort of your funding strategy, how much more are you going to be keeping on your balance sheet versus spending through the ABS market? I'm just trying to understand the split there because, obviously, in the long run, that's a good thing. You kind of mentioned it, your cost of funds will go up for a period of time until you get to investment grade. I'm trying to understand sort of the balance between what cut stays on balance sheet versus what's been put out in the ABS market.

Michael L. Seneski

If you -- Slide 39 of the credit deck kind of lays out we ended 2011 with securitized funding as a percent of managed receivables at 55%. And what we've said is that our mid-decade guidance is about 35%. So it would be our plan to systematically walk from that 55% to 35%. And you can see where we expect to be in 2012, recognizing that, that 49% would reflect the conversion of fuel notes to unsecured this year upon achievement of investment grade.

John Murphy - BofA Merrill Lynch, Research Division

Okay, that's actually incredibly helpful. I apologize, I hadn't seen that. Slide 12, if we look at the pension plan and what you're doing there, obviously, it seems like you're going to duration-matched. Do you believe without freezing the plans, you can get fully duration-matched and you'll have a lot less sensitivity here? Or do you think you really ultimately need to freeze the plans? And do you think that's the kind of discussion you can have with the UAW once you get closer to 100% or get close to fully funded on the UAW U.S. pension plans?

Neil M. Schloss

John, this is Neil. The way that this strategy has been laid out and the way the modeling is done is getting to the 80-20 fixed versus growth to allow us to get all the plans fully funded without making changes like you mentioned.

John Murphy - BofA Merrill Lynch, Research Division

But as a pensioner or somebody receiving pensions, if I were to think about the flip side and taking the counterparty risk to this pension plan, I might be a lot happier if you’ve frozen these plans and they're out, and I’ve got a commitment from you and from that -- from the pension plan that there's a certain asset mix, and I'm duration-matched and I'm in pretty good shape, as opposed to the risk they may continue to take if you don't do that and you have the discretion to change the asset mix around. I mean, it seems like everybody wins if you get to fully funded duration-matched and freeze the plans and make that commitment to the pensioner. Is that sort of a logical thought process?

Neil M. Schloss

I think we believe that everybody wins if you can get the plans fully funded and match up the assets with the liabilities consistent with what we have here. I'm not sure I would go the step further that says if you freeze the plans, everybody's better off.

John Murphy - BofA Merrill Lynch, Research Division

But theoretically, you’d have the discretion to go into riskier assets and maybe -- I mean, not that you would, but I mean, as a pensioner, you would look at this and say the person who's managing the assets has the ability potentially to go to riskier assets and decrease the probability of me getting my pension at the rate that's guaranteed. I mean, it seems like the pensioner might be happier with that.

Neil M. Schloss

Yes, I think from the standpoint -- I mean, obviously, we can make changes as we want to. But then you're saying that the underlying recipient of pension assets would be better capable of managing those assets, which I guess, I would question.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then on Slide 29, that discussion is incredibly helpful on contribution cost versus structural cost. Would you put those contribution costs in the ballpark of 55% to 60% of operating costs? Is that a rough good ballpark to think about there?

Robert L. Shanks

I think what we've said -- the only thing that we said with regard to contribution costs is that our material costs are roughly about 2/3 of our total cost.

John Murphy - BofA Merrill Lynch, Research Division

And general costs are about 2/3 of your total operating cost? Okay, great. That's helpful. And then just lastly, on Slide 36. Obviously, you're talking about calendarization this year in 2012. Do you think something has fundamentally changed in the business, as you look at product launches, where you're going to have less of a focus sort of in the August to October range on new product launches? And that's going to be sort of more rolling throughout the year. So some of the seasonality that we've seen historically is really just not going to be in the business and there might be just a smoother cadence through the course of the year on product launches and the rest of the business because of that.

Robert L. Shanks

Well, I think that's maybe not a bad point of view to have. I think it's really only in the U.S. where there seems to be such a focus on old models, new model in the fall. We don't tend to have that so much outside the U.S., at least that's been my experience. And I think as we kind of think about the company globally and roll out our products around the world, I think you will see them just coming at various times in the course of the year. And certainly, this year, we've got products that are launching kind of earlier this year, some of the less major changes here in the U.S. But we've got some other significant actions that are happening in late first half, and then quite a bit in the summer. And latter part of the year, we've got capacity actions that are taking place throughout. So I think the facts themselves demonstrate that you'll see potentially significant actions taking place throughout the year.

John Murphy - BofA Merrill Lynch, Research Division

That's a function of an active strategy as opposed to happenstance, right? So this should be something we should think about going forward, though, is about the smoothing out of these product launches?

Robert L. Shanks

Yes, it's a reflection of our plan.

Operator

Your next question comes from the line of Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I guess, maybe starting with the pension side of things. One of the things I'd better like to understand is more the cadence of changing the funding mix. I understand there's the rationale behind moving more towards to higher bond allocation and derisking the plan. But we happen to be in a period of extremely low, like call it, record-low, at least in recent history, interest rates. Is that something that you plan to do after discount rates go up and sort of you use that to grind the funding gap down a little bit further? Or is that something you're not going to take any kind of interest rate risk at all and very methodically every year move to a certain allocation higher in bonds?

Neil M. Schloss

Patrick, if you go to Slide 13 and look at sort of the right box, it really is a good pictorial over really on how the strategy works. And your point was well taken from the standpoint of it really is a combination of what rates do, what returns do and the cash contributions that go in that allow you to actively manage down the glide path and being able to make changes to it as you go in time. So as assumptions change, as rates change, you can speed up, slow down, you can put cash in, not put cash in, depending on where the underlying physicals are. But it really is a glide path down to an 80-20 mix, about the same time aligning with 100% fund status.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. But it does sound like you're leaving yourself a little bit of leeway to take advantage of rates and opportunistic market changes to sort of time the payments and sort of what kinds of assets they go into.

Neil M. Schloss

Yes.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. The -- on Slide 12, you said that, I don't know if you said it directly or you kind of implied it that the expected return on assets would go down as you have to go into -- as you go into a greater proportion of fixed income instruments. Does this mean that to really kind of derisk the plan, you'll have to be overfunded relative to sort of, I guess, not only the asset base but levels of funding that you've carried in the past? Or how does that work? Because I'm assuming you won't be able to keep it at 7.5% once you get to that 80-20.

Neil M. Schloss

No, correct. It would come down. And the important piece is going to be that you continue to outearn the discount rate once you get to fully funded. And that's the point of going to 80-20 and not 100%.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, got you. That makes sense. In terms of moving to Slides 29 and 30, there's been a lot of questions asked about this. But maybe just tying it all together, could we -- within your mid-decade plan, you do have a certain amount of global operating margin expansion that's laid out. And maybe could we walk through really quickly Slide 29 and 30 and maybe get a better sense of, for instance, on Slide 30, where some of the leverage points are? I get it. Your structural costs are going to rise with growth. But presumably, there's an ability to see some of these rise by a lower rate and maybe it's adding your capacity in lower-cost regions, leveraging engineering, what-have-you from global platforms. Love to hear that. And then likewise, kind of the same question for Slide 29, given global architectures and everything you've sort of got in process there, where are the leverage points on the contribution costs as well?

Robert L. Shanks

Yes. I'm trying to think how to answer your question. So when you think about the mid-decade guidance, I think we guided that the company is thinking about being roughly 50% larger than where it was the last year. So that's a significant growth from where we are today. And as you pointed out rightly, that will impact structural cost from the standpoint of increasing structural cost. We've talked a lot about expanding the product portfolio. That's going to impact engineering. So there's -- and depreciation and amortization clearly is going up. Because if you look at, go back x number of years and look at what we invested in terms of capital spending and what I just said earlier about $6 billion a year, I mean, the math is there. It's going to increase going forward. But again, all within the context of a business model that will have higher revenue, very healthy contribution margins and far larger scale than what we have today. And so in that environment, we are targeting to have very, very healthy levels of breakeven at the corporate level but also in each of our regions that we believe will enable us to earn the types of returns that we've talked about. So will the pace of the increase go down? It could, maybe it should. And we certainly have a great deal of efficiencies that are baked in to some of the areas that you talked about. Derrick Kuzak and the R&D team are achieving extremely high levels of efficiency in terms of what they're able to put out in terms of content from the PD factory relative to the amount of resources that we're investing there. So that's an example. John Fleming and the manufacturing team achieving very, very healthy levels of labor and overhead efficiencies through the manufacturing arena. So all the way through all the areas that you just talked about -- I mean, advertising and sales promotion, Jim Farley has got some fantastic initiatives underway, where he's approaching global launches of global products, which for the most part, is now what our portfolio reflects in a way that gives us the ability to achieve significant efficiencies from the old approach of everybody launching on their own individually, doing their own thing in all the regions of the world. So that's all baked in, and I think will and is having a positive impact on our structural cost if you put aside the growth aspects that we talked about. I don't know if that answers your question, but...

Patrick Archambault - Goldman Sachs Group Inc., Research Division

It does. Yes, it sounds like just looking at Slide 30, manufacturing, engineering, advertising, sales promotion, all can see pretty good leverage. Maybe it's the D&A and administrative expenses that rise more just in line with sales or something like that.

Robert L. Shanks

Yes, absolutely, absolutely. And in terms of -- can you repeat your question on Slide 29?

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Yes. Well, I mean, it was a similar question. I'm assuming there's leverage on -- I don't know if leverage is the right expression, but there's margin opportunity on variable cost as well outside of pricing. And I just wanted to kind of get a sense of what that is. I mean, the obvious point would seem to be the global architecture is right and how that can bring relevant scale over the next few years.

Robert L. Shanks

Yes, I think in the whole area of contribution margin -- let's talk about not only the cost but the revenue, the content side. I think there's potentially opportunities in terms of a question around have we found the sweet spot, the optimal mix of content relative to price, how we have established our theories for the individual product lines across the world. I think there's -- there has to be, and I think we believe, there are opportunities to get that better and better and better or more right, more right, more right. And clearly, that's something that we're focusing on internally. And we learn with every launch, and we learn by looking at competitors in terms of maybe some better ideas to find that optimal, sweet spot in that space. So I think going forward, we believe there's opportunities there. And in terms of cost, if you're looking at 29, just kind of working up the page, on warranty, we have benefited hugely over the last several years from the improvement in quality from the perspective of customer perception and what that's meant in terms of our brand strength and therefore the revenue we can get. But on the cost side, we have seen a huge improvement in our warranty cost over the last 5 or 6 years. And we clearly believe that there's much more to achieve there. And clearly, that has a role to play in the future. On freight, I think we're not as good as we need to be in terms of perhaps achieving optimal levels of freight costs. And I think that's an area that we're certainly focused on internally in terms of how to, again, find the best mix of patterns, carriers, [indiscernible], loads, whatever you want to call it, in terms of getting parts to plants and vehicles to customers. And so I think there's opportunities there. And on material cost, I think we're just in the early stages of understanding the benefits of ONE Ford, understanding the scale that, that provides us and the benefits of that scale. I think we have a lot more to learn from that, which I believe will give us new and additional insights in terms of how to squeeze more cost out that will obviously be a huge benefit of our ONE Ford plan. So I think in all the areas that you talked about, tons of opportunities on contribution cost, but also more on the revenue side of the business.

Operator

Your next question is from the line of Adam Jonas with Morgan Stanley.

Adam Jonas - Morgan Stanley, Research Division

Just a couple of questions, back to pensions. I know you didn't want to elaborate on these other options or these other actions that you say are under development. But I can't help but notice that the language that you use to describe pensions kind of holistically is nearly identical to that used by GM. Are these actions that could be, you think, discussed with the UAW together with GM in a kind of collective type of way? Or is this something you think has to be done on your own? That's my first question.

Neil M. Schloss

I think what we're doing clearly is to identify where we can make improvements on both the liability and the asset side. We are very independent in our thinking from a standpoint of how we're doing it, when we're doing it and why we're doing it. And we would expect to continue to do it in that same way.

Adam Jonas - Morgan Stanley, Research Division

Okay. Let's move to commodity costs. You talked about the overall commodity cost outlook for this year being not material. I just want to confirm, is that after the nonrepeat of the derivative pain you felt last year? Or is that on a prederivative basis?

Robert L. Shanks

That includes the impact of hedging.

Adam Jonas - Morgan Stanley, Research Division

That includes the impact of hedging, okay. And then the comment about the back-loaded profit more than normal. In 2011, roughly 70% of your auto pretax, just isolating auto, was generated in the first half. Go back a year before that in 2010, 60% roughly was generated in the first half. Do you think that this year, when you say back end-loaded more than normal, is 50-50 something we should be thinking about? Or are you alluding that you could even -- you wouldn't rule out making even more money in the second half than in the first?

Robert L. Shanks

Well, we're suggesting it's not going to be 70-30.

Operator

Your next question is from the line of from Itay Michaeli with Citigroup.

Itay Michaeli - Citigroup Inc, Research Division

A couple of questions on the pension derisking. First, just a follow-up on Pat's question. As you rebalance your assets towards fixed income instruments, that will put some pressure on the expected return and ultimately earnings, granted it's noncash earnings, but still some pressure on earnings. Just curious if that was contemplated in the mid-decade goals that you outlined last year? Or should we think about this as perhaps a new headwind to think about in the context of the 8% to 9% operating margin goal by mid-decade?

Neil M. Schloss

Very consistent with what we said mid-decade would be.

Itay Michaeli - Citigroup Inc, Research Division

Excellent. And then a second question on pension is just around the lump-sum option. Do you think that option also could apply to existing retirees on pay status? There's been some talk of whether it can be done to existing retirees already on pay status or if it can only be done to retirees about to go into pay status. Just curious if you have a view on whether the lump-sum payout could also be done to the existing retirees already on pay status.

Neil M. Schloss

I think from our perspective, what we've announced so far is just future retirees. I think the one suggestion you're making is one of those items that are on the list.

Itay Michaeli - Citigroup Inc, Research Division

Okay, great. And then I guess, just lastly for me, the commodity cost increase or the guidance for 2012, that does exclude the other material x commodity line item. Is that right?

Robert L. Shanks

Yes. We're just talking to commodities including hedging.

Itay Michaeli - Citigroup Inc, Research Division

Just commodities. So just curious why you refrain from guiding to that other specific commodity x material line item. Is it just a bit tougher to have a view on that? Or is it just not something you'd like to share for competitive reasons? Just curious as to why that particular line item doesn't receive its own kind of set of guidance and parameters.

Robert L. Shanks

Well, we don't generally guide on individual sort of line items of the business. We basically guide to total company and we guide to the business units as we've done this year. The reason that we've talked about commodity costs of late is because they've been so extreme and volatile. And as you know, not a whole lot you can do about them in the near term. Sometimes you win when they go down and sometimes you lose when they increase. But not a whole lot you can do. And we've guided to the structural cost because it is an important part of an automotive company's business. It certainly is something that we're all sensitive to because of the experiences that we've had in the past relative to those costs not being as tight as they should be and the impact they have on breakeven, along with all the other aspects of the business. And so we've chosen to share that, so you guys understand where they're going.

Itay Michaeli - Citigroup Inc, Research Division

Right. But you do feel like you have a fairly good visibility around the other material line item?

Robert L. Shanks

We have extremely good visibility on every aspect of our business.

Operator

And your final question is from the line of Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

A couple of things on pensions, first. I appreciate you have nothing to announce relative to lump-sum buyouts or restructuring of the pension obligation. But could you give us a sense of some of the big regulatory considerations around those -- that subject? What are the risks and rules surrounding it or some of the sort of big-picture items to keep in mind from a regulatory standpoint surrounding those sorts of things?

Neil M. Schloss

I think probably the biggest thing, Rod, is the fact that, obviously, when you're talking about qualified plans, they have very specific rules about how you go about different actions, including the prescription of the rates you use to determine the amounts. And I just as soon not get into which approvals you need to have in order to do it as well. But it's really the assumptions that you use that are there to protect the participant.

Rod Lache - Deutsche Bank AG, Research Division

And can you give us a sense of what the rates are that they would prescribe?

Neil M. Schloss

Not at this point.

Rod Lache - Deutsche Bank AG, Research Division

Okay. Can you give us a sense of -- I would imagine you have some hedges on your fixed income portfolio. Maybe one way to sort of characterize that for us is you guys provide on the liability side the sensitivity to rate changes. What would the impact be, net of hedges, on the asset side for, I don't know, 25, 50 or 100 basis point change in rates or whatever you would care to comment on.

Neil M. Schloss

If you looked at -- I mean, we obviously disclose in the 10-K the sensitivity to the obligation. Given our asset mix of fixed income being about half of our overall portfolio, the impact, which would include hedges, would offset about half of it.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And just lastly on the pension, could you tell us at this point what the average yield is on your assets and what the average duration is on your liability?

Neil M. Schloss

I think the best we can do is give you what our returns were in '11, it's 7.7%, which took into consideration the asset mix that we disclosed at year end. And the duration of the liability would be very similar to the duration of the sort of the index that the LGC [ph], which is one of the benchmark indices that we use to manage our fixed income portfolio.

Rod Lache - Deutsche Bank AG, Research Division

And what is that roughly?

Neil M. Schloss

And that's about 13 years.

Rod Lache - Deutsche Bank AG, Research Division

Okay. Are you there today in terms of duration-matching on the asset side, at least in your fixed income portfolio?

Neil M. Schloss

We are very close to our duration from a standpoint of the liability versus the index on the piece that's managed in fixed income.

Rod Lache - Deutsche Bank AG, Research Division

Great. And just one last thing, not on pensions, just on the structural costs. Can you give us just a rough distribution of how you're allocating that $2 billion increase for this year? Obviously, you've got a number of planned expansions outside of North America, but you’ve also -- you're obviously planning for some volume growth in North America as well. So how does that all net out?

Robert L. Shanks

Yes, we don't provide that. But if you go back and look at the last several years and look at where the increases have been, it probably wouldn’t be significantly different from that.

Operator

You actually have one more question. It's from the line of Eric Selle with JPMorgan.

Eric J. Selle - JP Morgan Chase & Co, Research Division

On Europe, you guys identified the price risk early and we appreciate that. Several questions on that. How can you guys stay disciplined on the production and sales with somewhat of a high fixed cost over there? Secondly, post the restructuring you guys did 7 years ago in Europe, could you guys benefit from a capacity reduction? Or would that be seen as kind of a short-term fix that you're chasing this blip down? And then third, let's say this is a long-term decline, are there any levers you can pull today that could help out in 2013?

Robert L. Shanks

So what was the first question again?

Eric J. Selle - JP Morgan Chase & Co, Research Division

How are you guys staying disciplined? I mean, obviously, that played out in North America well, staying disciplined in production and sales, but that was because sales ramped back so fast. I mean, let's say they stay down, how do you guys continue to stay disciplined there?

Robert L. Shanks

I think it's a philosophy of how you run a healthy automotive business. So I think it's ingrained in our point of view about what you need to do and have to do in order to run a business in this industry that's going to achieve appropriate returns. And that means sometimes in the short term, if your structural costs aren't right, your breakeven isn't right or the industry volumes were too low, all of which applies to Europe at the moment, by the way, you're going to have some pain. And that's what we're seeing with the losses that we've guided to for this year. But I think we've learned enough over the last number of years that it really doesn't pay to kid yourself to just fill capacity and fill plants with products people really don't want. It destroys brands, it destroys value. And it's just a fundamentally unhealthy way to run this business. So we are where we are. You made the point that we've done a huge amount of restructuring in Europe over the last 10 years. But clearly, at the level of industry that we've guided to for this year, our breakeven is too high. And so that's an interesting input for us and something that we're looking at, along with focusing on opportunities in the business around what we think we can do to further strengthen the brand, what additional revenue that we can garner in the region and so forth. So we're kind of looking at Europe holistically in terms of how we can make that a significant contributor to our business over time, which we're very sure that we can do.

Eric J. Selle - JP Morgan Chase & Co, Research Division

That's helpful. And then real quick, I'll sneak one in on China. Obviously, we saw the pricing [indiscernible] were like 3% the first couple of months of the year, and you blended out the New Year's, it fell in both months. So it is down. Do you characterize that as the low-end minibus weakness? And conversely, are you guys continuing to grab share and penetrate the Tier 1, 2, 3 markets?

Robert L. Shanks

Well, it's still early in the year. I think we've mentioned that we're expecting industry sales to grow about 5% in China this year. And interestingly, the government just recently, I think, came out with an announcement about what their expectations were, which aren't quite at that level, but clearly coming down from where they had been. So I think there's a general view that with the actions that the government has taken to kind of cool down the overall economic growth to a more sustainable level, I think they've pulled back a bit on incentives they provided to certain segments within China. And it includes some of the ones that you've touched on, that we think a 5% growth rate this year is what we would expect at this point in time. And so far, from what we've seen in the beginning of the year, the pace appears to be consistent with that.

Operator

Ladies and gentlemen, that's all the time we have for the question-and-answer portion of the call. I'd like to turn it back over to Mr. George Sharp for closing remarks.

George Sharp

Okay. Thank you, Keith. Okay. Well, that concludes today's presentation. I hope this was beneficial to all of you, and we thank you for joining us.

Operator

Ladies and gentlemen, that concludes today's conference. Thanks for joining us. You may now disconnect. Everyone, have a great day.

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