Ford Q3 2007 Earnings Call Transcript

Ford Motor Company

Q3 2007 Earnings Call

November 8, 2007 9:00 am ET

Executives

Lillian Etzkorn - IR

Alan Mulally – President, CEO

Don Leclair - CFO

Peter Daniel – SVP, Controller

Neil Schloss – VP, Treasurer

Mark Kosman - Director of Accounting

K.R. Kent – CFO, Ford Credit

Analysts

Rod Lache - Deutsche Bank

Jonathan Steinmetz - Morgan Stanley

Peter Nesvold - Bear Stearns

Chris Ceraso - Credit Suisse

Himanshu Patel – JP Morgan

Jairam Nathan - Banc of America Securities

Rob Hinchliffe - UBS

John Murphy - Merrill Lynch

Robert Barry - Goldman Sachs

Journalists

Tom Walsh - The Detroit Free Press

Jere Downs - The Louisville Courier-Journal

Tom Krisher - The Associated Press

Mike Spector - The Wall Street Journal

Jeff Bennett - The Dow Jones

Rick Popely - The Chicago Tribune

Bill Koenig - Bloomberg News

Bryce Hoffman - The Detroit News

Sarah Webster - The Detroit Free Press

Poornima Gupta - Reuters

Presentation

Operator

Welcome to the Ford Motor Company's third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today's presentation, Ms. Lillian Etzkorn, Director of Investor Relations. Please proceed, ma'am.

Lillian Etzkorn

Thank you, Bill 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; and Don Leclair, Chief Financial Officer. Also in the room are Peter Daniel, Senior Vice President and Controller; Neil Schloss, 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. The focus of today's call will be the third quarter financial results. We will not discuss our recent labor negotiations with the UAW. Once the tentative agreement is ratified, we plan to host a separate conference call to review the specifics. We ask that you refrain from any questions related to the contract today.

A copy of this morning's earnings 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-Q for the third quarter.

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 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 the future results are summarized as the end of the 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.

Alan Mulally

Thank you, Lillian and good morning to everyone. We will begin by reviewing the key financial results for the third quarter. Don will take us through additional details and then I will come back and wrap up before we take your questions.

I'm going to start with slide 2. As shown at the top of the slide, vehicle wholesales last quarter were nearly 1.5 million units, up 20,000 from last year. Total company revenue of $41.1 billion was up about 11% from a year ago. The increase includes favorable net pricing, exchange and mix. Profit before tax from continuing operations was $194 million, up $1.3 billion from last year. This includes a $1.5 billion improvement in automotive operating profits, partially offset by lower profits at Financial Services.

Our third quarter net income was a loss of $380 million, including $350 million of pre-tax special charges. We ended the quarter with $35.6 billion of gross cash, a decrease of $1.8 billion from the end of the second quarter. Overall, we are making significant progress implementing our plan. For the first nine months, our pre-tax results from continuing operations improved $2 billion from last year, and net income has improved $7.1 billion.

Now turning to slide 3, we continue to focus on the four priorities of our plan:

(1) Restructuring the company.

(2) Accelerating product development.

(3) Funding our plan and strengthening our balance sheet.

(4) Working effectively as one team globally.

We're taking the necessary steps to implement our turnaround plan, and we are on track to achieve our goal of profitability in 2009. Overall, our automotive operations improved substantially in the third quarter. In North America, results improved by $1.1 billion compared with last year, although the loss was $1 billion. During the quarter we reduced personnel by 6,800 people. Ford South America, Ford Europe, Ford Asia Pacific and Africa, and Mazda also reported profits for the third quarter. All of these business units except Mazda reported substantial improvements compared with the same period a year ago. PAG reported a loss but results were improved substantially from 2006.

Ford Credit continues to be profitable. While its results from the quarter were lower than a year ago, they remain in line with our expectation. Our main focus has been and continues to be our work on leveraging Ford brand across the globe. That said, we're continuing to explore the potential sale of Jaguar - Land Rover. Discussions are progressing with selected parties who have expressed interest, and we anticipate these discussions will culminate in an agreement no later than early next year.

In addition, as previously stated, we have been conducting a strategic review of Volvo, and we have developed a plan. As the first priority, take actions to improve the financial performance at Volvo. The plan also includes:

• Enhancing Volvo's position as a global producer of premium vehicles
• Establishing appropriate business arrangements between Volvo and the Ford brand operations to allow Volvo to operate on a more standalone basis within the Ford group in the absence of the PAG structure.
• Continue to achieve synergies between the Ford-brand operations and Volvo in areas such as product development and purchasing.

Also, we plan to disclose Volvo's financial performance beginning with its 2008 results.

Now turning to slide 4. During the quarter, we achieved some great results on our product quality and safety. In the 2007 annual US Global Quality Research System study, which measures things gone wrong and customer satisfaction with overall quality, Ford Motor Company improved by 11% versus the industry's 2%. The Ford Mustang Shelby, the GT 500, the Mercury Milan, Ford Crown Victoria, and the Lincoln Mark LT ranked best in their respective segments for things gone wrong. Lincoln Mark LT, Mazda Miata, and the Ford E-Series ranked best in their respective segments for customer satisfaction.

In addition, we continue to receive favorable quality endorsements from other third-party sources. On the safety front, Ford Taurus, Taurus X, and the Mercury Sable earned top Safety Pick ratings from the Insurance Institute for Highway Safety, for achieving the highest possible safety rating in frontal, side and rear crash test performance. The Ford Mustang convertible became the first sports car and first convertible in history to earn the highest possible safety ratings from the National Highway Traffic and Safety Administration, having earned five-star performance in all crash test and rollover categories.

In addition, we launched the Ford Sync, our fully-integrated voice-activated in-car communications and entertainment system that was developed in association with Microsoft. It won one of ten Popular Mechanics Breakthrough Awards, which recognizes products that set new benchmarks in design, creativity and engineering.

In South America, Ford sales are up 19% in the first nine months of 2007 and we had record profits in the region. Ford Europe had a very strong third quarter. In the first nine months, sales in the region were up more than 5%. Third quarter was the best ever quarter for Land Rover, and September was the best ever sales month.

In Asia, we continue to see growth. Ford China sales were up 27% year-to-date. In September, we officially launched operations at our new assembly plant in Nanjing, China. The new plant will produce the latest small car models from both Ford and Mazda. Overall, we made strong progress in the third quarter.

Now I would like to hand it over to Don to take you through additional details.

Don Leclair

Thanks, Alan. Let's move on to slide 6, which provides a few details on our profits. Starting at the bottom of the slide, our net loss was $380 million. This net loss included taxes in areas outside of the US where we are profitable, and excludes minority interest in profitable affiliates. Adjusting for these items leaves a third quarter pre-tax loss of $156 million from continuing operations. These results include pre-tax charges for special items of $350 million, which we will cover on the next slide. Excluding these special items, our pre-tax operating results were a profit of $194 million.

Slide 7 covers our special items, as I mentioned, the $350 million, including $110 million reduction in costs associated with separation programs in North America. That is largely explained by the net decision of over 700 workers to withdraw their prior decision to accept a buyout. In addition, there was a gain of $213 million for OPEB curtailment relating to personnel leaving as a result of the North American hourly separation program.

In line with the action we took last quarter, we also recognized additional mark-to-market gains of $37 million at Jaguar and Land Rover that previously would have been deferred. Additional charges during the third quarter totaled $78 million, mainly at Ford of Europe and PAG for personnel reductions and other restructuring actions. Finally, as we discussed last quarter, we recorded a charge of $632 million related to our previously-announced trust preferred securities exchange.

Slide 8 breaks down our pre-tax profit of $194 million by sector, including a loss of $362 million for Automotive and a profit of $556 million for Financial Services.

On to slide 9, which explains the change in third quarter profits compared with 2006. For the third quarter, Automotive results were $1.5 billion better than a year ago. Compared with 2006, volume and mix was $500 million favorable, with higher volume primarily in PAG and South America, and mix improvements in North America. Net pricing was $1.3 billion higher, mainly reflecting increases in North America. Europe and PAG also were favorable. Costs were about $600 million lower, and we will have more on that later.

The impact of continued weakening of the US dollar against key European currencies reduced profits by about $300 million. Interest was $500 million unfavorable and that was more than explained by the non-recurrence in other automotive of tax-related interest last year.

Slide 10 explains our cost performance, which was $1.8 billion favorable in the first nine months, with about $600 million of that occurring during the third quarter. Warranty expense was about $900 million lower. This primarily reflected the non-recurrence of unfavorable 2006 adjustments to Jaguar Land Rover warranty reserves, as well as improvements in Europe and North America consistent with our overall quality trends.

Manufacturing and engineering costs were about $800 million favorable, mainly reflecting the continued benefit of our restructuring actions in North America. Net product costs were $1.5 billion higher, largely reflecting higher commodity prices, diesel engine emission requirements, and added product features. These were partly offset by cost reductions.

Spending-related costs improved by $500 million, mainly due to the favorable effects of 2006 asset impairments as well as lower depreciation related to having had accelerated depreciation in 2006 for plants that were to be idled. Pension and retiree healthcare expenses were $800 million lower, primarily reflecting the mid-2006 implementation of our 2005 healthcare agreement with the UAW as well as ongoing improvements related to curtailments and higher pension fund asset returns. Overhead costs were about $400 million lower than a year ago, primarily due to our restructuring actions. Advertising and sales promotions were up about $100 million.

Slide 11 shows automotive pre-tax results for each of our operations and other automotive; and that consists primarily of net interest and financing-related costs. Before interest and financing-related costs, our automotive operations reported a loss of $391 million during the quarter, which you can see at the very top of the chart. That is an improvement of $2 billion compared with a year ago, with all business units except Mazda improving sharply.

We will focus here just a minute on other automotive and then cover the operations in detail. In the third quarter, other automotive reflected a profit of $29 million. This included net interest expense of about $200 million, more than offset by $190 million of favorable mark-to-market adjustments on inter-company loans at our overseas affiliates, as well as favorable tax-related interest income of about $40 million.

In total however, this was $524 million worse than a year ago, primarily reflecting non-recurrence of last year's tax-related interest income of over $650 million. We now expect the near-term trend of ongoing other automotive costs to be in the range of about $100 million to $150 million per quarter unfavorable, excluding any mark-to-market adjustments and other nonrecurring factors.

Now for the next few slides, we will cover each of the automotive operations, starting with North America on slide 12. Wholesales were 641,000 units, down 10,000 units from a year ago. This decline reflected lower market share -- which we will cover later -- and a decrease in industry volumes, largely offset by the non-recurrence of a substantial dealer stock reduction during the third quarter of 2006. At the end of September, US dealer inventories were down 17% or 114,000 units from a year ago. Period ending dealer inventories were at 73 days supply.

Revenue for the third quarter was $16.5 billion, up $1.1 billion compared with a year ago, due to favorable mix in net pricing, partly offset by lower volume. The loss of about $1 billion this quarter was $1.1 billion better than 2006.

If you go over to slide 13, it will explain that $1.1 billion improvement. Volume and mix was $400 million favorable, more than explained by favorable product mix. Net pricing improved by $1 billion, primarily reflecting reductions in retail incentive levels, pricing for new equipment being added to our vehicles, lower daily rental mix and differences in the timing of our incentives. In total, cost reductions were unchanged. Ongoing savings in manufacturing and overhead costs were offset by non-recurrence of favorable prior-period warranty adjustments in 2006 as well as higher net product costs. The increase in product costs included higher regulatory and commodity cost as well as added product features that were, in part, recovered by higher pricing. Exchange was about $200 million unfavorable, primarily reflecting the weakening of the US dollar.

Now slide 14 shows US market share for Ford and Lincoln Mercury. For the third quarter, our market share was 13.4%, including 2.9% for fleet and 10.5% for retail. Previously indicated and in line with our plan, we continue to reduce our sales to daily rental companies; and therefore our fleet share continues to decline.

Our retail share was 10.5% in the third quarter, down from the same period a year ago. The reduction in retail share primarily reflects lower full-sized pickup sales, lower mid-sized SUV and sport car sales. This reflects in part the weak housing market, higher gasoline prices, and the non-recurrence of major end of model incentive programs in 2006. Our newer products are doing very well in the marketplace, but their impact has been more than offset by weakness in some of our older products.

Slide 15 tracks our progress in reducing our employment. As of the end of the third quarter, we have reduced our salaried positions to 23,900 a reduction of about 7,600 since the end of 2006 and below our 2008 target. Our September 30 hourly employment was 59,700. It's a reduction of 18,200 people from year end 2006, including 5,200 during the last quarter.

At ACH there were 6,200 hourly employees at the end of the third quarter, a reduction of 4,900 since the end of last year. The bulk of these employees are planned to be redeployed or separated by the end of next year. Overall, we are on plan in these areas.

Slide 16 shows our assembly capacity plants in North America. Since year end 2005, we have reduced our maximum installed capacity by 1 million units to 3.8 million and our straight-time manned capacity has been reduced to 2.9 million units. The reduction shown in the third quarter of manned capacity from 3 million to 2.9 million reflects a line rate reduction at the Louisville assembly plant. By the end of 2008, our maximum installed capacity is planned to be 3.6 million units. Our straight time manned capacity by the end of next year is planned to be around 3 million units.

Slide 17 provides a summary of our progress on cost reductions in North America. Our goal is $5 billion of annual operating cost reductions by the end of next year compared with 2005. During the third quarter, we made significant progress in a number of areas such as manufacturing, spending-related and overhead costs. These are offset by the non-recurrence of warranty adjustments made last year, along with higher net product costs.

This year, we have made significant progress in reducing our structural costs. Much of this improvement has been offset by higher commodity costs and increases in product content, in part to meet regulatory requirements. Next year, we expect our structural cost reductions to continue, with improvements in essentially every area of the business including manufacturing, engineering, spending-related, and overhead costs. In addition, we are planning smaller changes in product content, and we do expect a tempering of commodity cost increases so that net product costs also should decline. We remain committed to our plan to achieve our cost-reduction target of $5 billion.

Now on to South America, on slide 18. Third quarter sales were 116,000 units, up 15,000 from a year ago. Despite the unit volume increase, our market share declined because strong industry demand continued to outstrip our ability to keep up. Revenue was $2.1 billion, $600 million higher than last year, reflecting higher volume, a stronger Brazilian currency, and favorable pricing. South America posted a profit of $386 million in the third quarter. This is $185 million better than a year ago, primarily reflecting favorable net pricing and higher volume.

Slide 19 covers Ford Europe. In the third quarter, wholesales were 422,000 units, down slightly from last year. Third quarter market share was 8.7% in the 19 markets we track. That is up 0.2 point compared with a year ago. Revenue was $8.3 billion, up $1 billion from last year, primarily due to favorable currency exchange. Third quarter profits were $293 million, an improvement of $306 million compared with a year ago.

This reflects the sixth consecutive quarter of year-over-year improvement at Ford Europe and the net profit improvement is more than explained by favorable cost performance and net pricing, partly offset by lower volume and unfavorable mix. The favorable cost performance primarily reflects improved quality and material cost reductions.

Slide 20 covers PAG. Third quarter wholesales were 171,000 up 20,000 from last year, primarily reflecting higher sales at Land Rover and Volvo, partly offset by a reduction at Jaguar. US market share was 1.1%; that is up 0.1 point, primarily due to increases at Land Rover. Europe market share was 2.2%; that is up 0.1 point as well, primarily at Land Rover and Volvo. Revenue was $7.4 billion, up $900 million from a year ago, primarily reflecting volume, favorable exchange, net pricing, with mix a partial offset.

Third quarter results were a loss of $97 million. That included a loss at Volvo, partly offset by a small profit at Jaguar and Land Rover. These results are an improvement of $411 million from 2006, which was primarily explained by favorable cost performance across all brands, including the non-recurrence of the unfavorable 2006 adjustments to warranty reserves. Higher volumes and favorable net pricing were partly offset by the continued weakening of the US dollar against key European currencies.

Slide 21 covers Asia Pacific, Africa and Mazda. Overall, third quarter profits were $48 million. We earned $18 million from our investment in Mazda; this is down $22 million compared with last year.

Slide 22 covers Asia Pacific and Africa. Wholesale volumes increased by 5,000 units, primarily explained by higher volume in China. Revenue in the third quarter was $1.8 billion, an improvement of $200 million, largely explained by exchange rates. Asia Pacific and Africa reported a profit of $30 million; that is $86 million better than 2006.That improvement reflected cost improvements and favorable net pricing, partly offset by adverse product mix, mainly in Australia.

Slide 23 shows automotive cash and cash flow. We ended the third quarter with $35.6 billion of gross cash. That is a decrease of $1.8 billion compared with June 30 and an increase of $1.7 billion compared with the end of last year. Our operating cash flow was $1.3 billion negative in the quarter. That included the automotive pre-tax loss of $400 million; capital spending during the quarter was about equal to depreciation and amortization; changes in working capital were $600 million negative.

Expense and payment timing differences were an outflow of $300 million. This is typical for the third quarter, where we make cash payments associated with accruals, mainly for marketing incentives that were made earlier in the year. Separation programs resulted in an outflow of $400 million for the quarter; and we contributed $200 million to our pension plans.

The positive cash flow in the first nine months is better than planned, primarily reflecting improvements in profits, and reductions in separation programs and capital spending. We expect, however, that the fourth quarter cash flow will be negative because of operating losses and expense and payment timing differences. As a result, we're expecting the full year operating cash flow will be about breakeven.

Slide 24 looks at our cash flow forecast for '07, '08 and '09, and breaks it down into a few major components so you can better understand what is going on. We now project that the 2007 to 2009 cash outflow for operating losses and restructuring will be in the range of $12 billion to $14 billion. That is $3 billion to $5 billion better than our original plan of $17 billion that we discussed at the time of our financing last year.

I would also like to point out that beginning in 2008, Ford plans to pay all interest rate supplement and residual value support to Ford Credit at the time Ford Credit purchases new contracts. This will reduce ongoing Automotive obligations to Ford Credit, and it is consistent with general industry practice. Ford will continue to make monthly support payments on existing contracts; and these should roll off by the end of 2011.

This change in practice is being implemented sooner than we had originally planned, in recognition of the strengthening of our financial position relative to the plan. As shown in the top of the slide on the right, these incremental payments are forecast to be about $5 billion during 2008 and 2009. The acceleration of these subvention payments will be more than offset by improvements in our operating cash flows that we have seen this year and that we project going forward, as well as lower expenditures associated with our personnel restructuring actions.

Further, Ford Credit plans to reinstitute distributions or dividends to Ford beginning next year. These distributions are shown in the memo and are not included in automotive operating cash flow. The level of distributions is based on Ford Credit maintaining its managed leverage between 11:1 and 12:1.

Now on to slide 25 which covers actions that we have taken to strengthen our balance sheet. In July, we completed conversion of $2.1 billion of trust preferred securities into shares of common stock. As I just mentioned, beginning in 2008 we will pay all interest rate subvention and residual support to Ford Credit at the time of origination for new contracts.

We also are strengthening our balance sheet with additional changes in our long-term investment strategy for our US pension fund. In July, we indicated that our year end 2007 asset allocation target was 45% for fixed income and 55% for public equity and other investments. Beyond 2007, we will be diversifying our asset allocation by further reducing public equity and expanding our investment in alternatives. Our new, strategic long-term targets are 45% fixed income, 30% public equity, and up to 25% in alternative investments. We expect to reach this target allocation within the next five years.

Now let's turn to slide 26 on Financial Services. Earnings at Financial Services were $556 million, $194 million lower than last year. We cover Ford Credit on slide 27. Ford Credit's earnings were $546 million in the third quarter. That is $184 million lower than in 2006. The decrease in earnings primarily reflected the non-recurrence of credit loss reserve reductions, higher depreciation expense for leased vehicles, and higher borrowing costs. These factors were partly offset by a gain related to the sale of a majority of our interest in Volvofinans and lower operating costs.

Overall, excluding the impact of gains and losses related to market valuation adjustments from derivatives, we still expect Ford Credit to earn on a pre-tax basis about $1.3 billion to $1.4 billion this year. This is in line with our previous estimate. We do plan to resume the use of designated hedge accounting for derivatives at Ford Credit next year, which will reduce our ongoing earnings volatility.

Now on to slide 28 for an update on Ford Credit's liquidity. At Ford Credit, we look to our committed capacity to provide funding flexibility and protect liquidity. Our liquidity in excess of utilization was $27 billion at September 30, unchanged from June 30. We completed our third quarter funding plan in spite of the recent market volatility.

We did have several weeks in August and September where we issued commercial paper overnight and at higher cost. In September, we temporarily reduced the outstandings for our FCAR program. Recently however, the spreads and terms have returned to more normal levels. Overall, the demand remains strong for Ford Credit's assets.

Slide 29 shows where we are on our planning assumptions and operational metrics. Total industry sales during the first nine months were equal to a SAAR of 16.5 million units in the US and 17.9 million units in the 19 markets that we track in Europe. Our full-year outlook now is in the range of 16.3 million to 16.5 million in the US and 17.7 million to 17.8 million in Europe. On the operational metrics, we continue to improve our quality and, as mentioned earlier, have received favorable endorsements from outside sources.

Market share was down compared with last year in the US. Share was higher in Europe but lower in South America and China due to capacity constraints. As a result, our share performance outside of the US is mixed.

Automotive costs were reduced by $1.8 billion during the first nine months compared with 2006, and this was better than plan. Absolute operating-related cash flow during the first nine months was $1.7 billion positive. We now expect full-year operating cash flow to be about breakeven, an improvement compared with last year's outlook. Year-to-date capital expenditures were $4.2 billion. We now expect that our full year expenditures will be about $6 billion.

Now we will go through our production plans for the fourth quarter. In North America the schedule is set at 645,000 units; 39,000 units higher than a year ago and consistent with the level we advised in the October sales call last week. At Ford Europe, we expect fourth quarter production of 480,000 units, down 2,000 from a year ago. For PAG we are planning on fourth quarter production of 188,000, up 9,000; primarily reflecting new product introductions.

Slide 31 shows how we expect to perform in the full year versus our plan. As you can see in the far right column, we are ahead of, or equal to, our plan in all areas. Starting at the top of the slide, we expect a substantial year-over-year improvement in the fourth quarter and for the full year for our automotive operations. We now expect on our pre-tax basis, including special items and including Ford Credit that our full year results will be in the range of a small loss to about breakeven.

Excluding any gains or losses associated with future divestitures, we anticipate full year special items to be in the range of $1 billion to $2 billion. This projection includes a one-time non-cash charge of approximately $1.4 billion related to a proposed change in business practice for approving and announcing retail variable marketing incentives to our dealers. Under our present practice, we announce and commit to incentives on a quarter-by-quarter basis. This change, which would occur late in the fourth quarter, would revise our process so that we announce and commit to incentives on an annual basis. Overall, we are performing significantly better than our plan, supporting our expected return to profitability in 2009.

Just a correction; a moment ago I mentioned that pre-tax operating results excluding special items -- I said including; I meant excluding special items -- so right in the middle of the slide where it says pre-tax operating results, the two asterisks on it, “small loss to breakeven” includes automotive and Financial Services; that excludes the special items charges which are shown two lines below that.

Now I will turn it back to Alan.

Alan Mulally

Very good, Don. Thank you very much. I would now like to turn to slide 32 and turn our attention to the full year outlook, and share with you our assessment of where we stand on achieving our key business and financial goals over the next few years.

We remain committed to our plan, and the improvements we are seeing in this year give us added confidence that we are on track to meet our 2009 profitability targets. We also are on track to meet our North American cost reduction target of $5 billion by 2008. We are also making progress on our market share goals. As discussed earlier, based on the improvements we have seen in our cash flow this year, we now expect our automotive operating cash flows and restructuring expenditures to be about $12 billion to $14 billion during the 2007 to 2009 period, a substantial improvement.

Turning to slide 33. In summary, our third quarter results and the company's performance through the first nine months of the year indicate that our plan is working and we are making significant progress.

Let me leave you with a few additional thoughts on our progress.

• We expect our automotive operations to show continuing improvements from 2006 levels.

• We now expect our overall pre-tax operating results to be a small loss to breakeven this year.

• We're deploying our capital wisely, and we're working as a global team to meet our goals.

• We have completed the financing part of our plan and we are moving forward to strengthen the balance sheet and reduce our risk profile.

We have a solid leadership team in place that is working even better together to deliver bottom line results around the world. The entire team is encouraged by the progress we have seen, and we remain committed to improving our business performance and delivering our plan.

With that, I would like to open it up for questions.

Lillian Etzkorn

Thank you, Alan. Ladies and gentlemen, we are going to start the Q&A session now. We have about 50 minutes 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.

As a reminder, we ask that you refrain from asking questions on the recent labor negotiations with the UAW, because we will not discuss the specifics until the agreement is ratified.

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 Bill, can we have the first question please?

Question-and-Answer Session

Operator

Your first question comes from Rod Lache - Deutsche Bank.

Rod Lache - Deutsche Bank

I won't ask about the specific details of this labor contract. But just relative to the Way Forward plan, could you just refresh our memory on whether the Way Forward plan included anything relative to the COAs or these opportunities that were highlighted in the labor contract?

Alan Mulally

At this point, Rod, I think the best summary is that our new agreement is very supportive of our plan to return to profitability in 2009 and then further on.

Rod Lache - Deutsche Bank

The convert in the note that is being issued, can you just give us the timing of that issuance?

Alan Mulally

No. Again, I know this is not very satisfying, but we really want to respect the UAW's process that they are going through to vote on the agreement. I will assure you that next week following the ratification we are going to provide you extensive detail on the agreement. Because it really is going to significantly improve our competitiveness going forward, and we look forward to that call with you.

Rod Lache - Deutsche Bank

Then on the operations, you guys are still showing on slide 24 a $2 billion to $3 billion operating cash flow burn. You are at close to breakeven this year. So are you expecting, then, some kind of deterioration from here?

Don Leclair

Rod, I think the best way to think of that is that comparing '08-'09 versus 2007 our profits will be better because we are moving up, we will be profitable in '09. There are a couple of one-offs that helped us this year on our cash flow, mainly in the area of tax that we don't expect to continue. But the big factor that drives the increase in the cash outflow is our CapEx will be higher in 2008 and 2009. Our operations will be improving each year going forward.

Rod Lache - Deutsche Bank

The pricing situation, it actually seems to be accelerating. Your retail market share has been pretty stable. Is this something that you see as surprising? Is that something that you see as sustainable? Is it kind of an industry-wide thing? Maybe just elaborate a little bit on that.

Alan Mulally

You bet, Rod. I think that is a very important point to us, because it is appearing to stabilize, which is another key part of our plan because we are really focused on adding some smaller cars and smaller utilities and the crossovers that the consumers really do want and value, adding that to our world-class large SUVS and trucks. The response that we are getting from those vehicles is very supportive of our plan. It looks like we are stabilizing the market share. Clearly, as we pointed out we are focused on retail over retail. We will get through this reduction to the fleet and focus even more on our customers.

Rod Lache - Deutsche Bank

The product is basically what is driving the improved pricing, the new products?

Alan Mulally

Yes, and Don pointed out another thing that is really working on the plan. That is making sure that we have the right content in the vehicles. He mentioned that we put some additional cost in on the features that people really do want. From a go-to-market point of view, that is really working on the net pricing.

Rod Lache - Deutsche Bank

My last point is there is a lot of speculation this morning after you guys changed the subvention policy with Ford Credit it seems like ultimately that would give you a lot more flexibility with Ford Credit. It gives you the ability to separate it maybe more easily. Is there anything to read into that at all?

Alan Mulally

No, Ford Motor Credit is critical to our operations going forward.

Operator

Your next question comes from Jonathan Steinmetz - Morgan Stanley.

Jonathan Steinmetz - Morgan Stanley

On the net price issue on slide 13, Don, you have got $1 billion favorable year on year. I think you mentioned retail incentives, new equipment, and lower daily rental. Is there any way you could talk a little bit about at least order of magnitude of each of these? How big a deal was lower F-Series incentives relative to this number?

Don Leclair

Well, to go along with what Alan was saying about the new products and trying to get the content right, one other thing that Mark Fields and his team have really stressed this year is to be much more disciplined. Last year, we had the big incentive program, including the 0% for 72 months; and we didn't have that this year. So that is a big piece of it.

Nearly half of that $1 billion is just in straight improvement in retail incentives. We have done some pricing that goes along with the equipment. The lower mix of daily rental was in there as well. So it is maybe half retail incentives and then a quarter pricing and a quarter business mix, Canada and Mexico and other things.

Jonathan Steinmetz - Morgan Stanley

On the cost-reduction side you're flat in the quarter. There has been some media speculation, anyway, about you accelerating some cost reductions in '08 in areas like sales and marketing or engineering and employment benefit type stuff. Can you just comment? With being flat and trying to get to the $5 billion, will you publicly say you're making an acceleration in some of these areas?

Alan Mulally

Jonathan, we will continue to make adjustments going forward. I think Don explained very well the situation on this last quarter. But going forward, we're very confident that we are going to achieve our cost reduction across the entire enterprise to achieve those goals on the way to profitability in '09.

Jonathan Steinmetz - Morgan Stanley

Similar to Rod's question on Ford Credit, turning to Volvo, you're also doing some things that suggest you want to keep it near term; but that maybe also make it a bit more easily severable. Can you just discuss the plan there? Is the idea to fix it to sell it, or fix it to keep it?

Alan Mulally

I think the plan right now is to fix it.

Operator

Your next question comes from Peter Nesvold - Bear Stearns.

Peter Nesvold - Bear Stearns

A lot of news out yesterday on deferred tax asset writedowns. If I look at the model it looks like if you lose money in 2008, is there a risk that you would also have to increase your valuation allowances against the deferred tax assets? Can you give us some kind of order of magnitude, perhaps?

Don Leclair

Well, it so happens that we did set up a valuation allowance for deferred tax assets in the US in Jaguar Land Rover in the third quarter last year. So we have done that. That is why our tax rates have been wobbling around this year, because we have lost money in some cases and had to book taxes in other areas. So we have already done that.

Peter Nesvold - Bear Stearns

So you don't see a further risk in the event of a net income loss next year? Forgive me if you went through this, but can you elaborate on the improved cash flow outlook, burning $17 billion versus now $12 billion to $14 billion. Any more color on what the primary drivers of that were?

Don Leclair

Sure. There's a couple of things. First off, it is the good performance this year and how that flows through. Then we are getting a little bit better handle on the kind of improvements that we will be able to make in our product development system, as an example; so lower and more efficient engineering and R&D and more efficient capital spending. It is just a whole range of improvements across the whole system. We just thought this would be a good time to really lay this out for you and help you to see just how much ahead of the plan we are.

Peter Nesvold - Bear Stearns

Your SAAR expectations for '08, I am assuming that includes heavies. How does that forecast for '08 compare to what your expectations were back in September '06, when you outlined the updated version of Way Forward?

Don Leclair

Well, as you know, at that time we set our plan for '07 at 16.8, so that was our baseline. It's going to be a little bit lower than that. It has been lower in the second half than the first half. So what we are looking for in 2008 and probably at least through the first half of 2009 is somewhere in the low 16s. That is a little lower than we were planning back about 15 months ago; but I think that is just the way it is. As Alan mentioned, we are constantly monitoring the situation and adjusting our plans, taking the necessary steps to achieve profitability in 2009.

Operator

Your next question comes from Chris Ceraso - Credit Suisse.

Chris Ceraso - Credit Suisse

As it relates to the cash flow, will there be more cash outflow for severance for people that left say late in the third quarter? Or have you gone through the bulk of that for the people that are going to separate under the attrition program that you have already done?

Don Leclair

There will be some more cash outflows in the fourth quarter of this year. Now if you look at chart 24, we show $5 billion to $6 billion; and I think our year-to-date is $2.1 billion. So we will end up this year somewhere in the $2 billion to $3 billion range, so a little bit more in the fourth quarter, and then the balance in '08 and '09.

Chris Ceraso - Credit Suisse

Can you just give us a little more clarity as to the change in your decision on the incentive accounting? Why are you doing that? Will you still make adjustments to the accrual quarterly as you go throughout the year?

Don Leclair

We will always make adjustments to the reserves to make sure that they are correct. The reason we are doing it is it is just a simpler and better way to communicate to the dealers, so that they know that the incentives will be there for the entire model year.

Chris Ceraso - Credit Suisse

Is this just on dealer incentives, or is this also on direct-to-customer incentives?

Don Leclair

This is for incentives, all incentives.

Chris Ceraso - Credit Suisse

Next question on Ford Credit. I think that you mentioned this on the call already, that it is still a strategic part of the business. I think you have always said that the game plan is to get the Motor Company fixed, so you get the investment grade rating back. Can you still run Ford Credit, say till 2009 or 2010, if it takes that long to fix the Motor Company? Or do you have to pursue some other action to get cheaper borrowing costs there?

Alan Mulally

Yes and no. We can keep operating just fine.

Chris Ceraso - Credit Suisse

What is the plan for rental sales in '08? Are you going to bring that down by another slug?

Don Leclair

We have set our plan for daily rental and I think the last big delivery of the old Tauruses to the daily rentals was in October of '06. So we are going to be staying on our plan, but the year-to-year reductions in the daily rental side will be less going forward. Having said that, we are very focused on making sure we have balance and not to oversupply our vehicles to the daily rental sector.

Operator

Your next question comes from Himanshu Patel – JP Morgan.

Himanshu Patel - JP Morgan

Europe was pretty strong this quarter. Could you talk a little bit about the sustainability of those profits into '08?

Don Leclair

The reasons why we are doing well in Ford Europe are pretty straightforward. We have sized the place. We lowered the capacity to meet the demand. We accelerated the product development, and we have got a great line of large cars out now, Galaxy, SMAX, and the new Mondeo. We have got a whole lot of new product coming next year. Our cost base is good, our plants are operating as capacity, and our products have been very well accepted. So we do think it is sustainable. In fact, we would be disappointed if we couldn't continue to improve.

Himanshu Patel - JP Morgan

Don, on slide 24, the accelerated subvention payments, the target there seems to be $5 billion up from $2 billion. Can you tell us how much of that increase has already been done, if any?

Don Leclair

Well, we haven't started that yet. Accelerating the subvention payments will start on January 1. So what this means is our plan had been to do $2 billion during the period, and two things have happened. One, the amount of subvention has grown because that is just the way it ended up, because there were more programs, particularly last year, where Ford Credit was used by Ford to sell vehicles. So the balance got bigger.

Then, we have decided to start earlier. We were going to start around the middle of next year, and we decided to do this on January 1. So whereas it was going to be $2 billion from like midyear '08 through the end of '09, now we expect around $5 billion for '08 and '09. As I mentioned, we expect that balance to eventually run off sometime in 2011.

Himanshu Patel - JP Morgan

On that same slide, I don't know if you can answer this or not, but would the restructuring costs forecast materially change with the implementation of the UAW contract? Or would you feel comfortable saying that that is still a good number that we can use?

Don Leclair

Maybe you could save that question for the conference call that Alan mentioned earlier. We would be happy to take that up then.

Operator

Your next question comes from Jairam Nathan - Banc of America Securities.

Jairam Nathan - Banc of America Securities

In context of what you guys said about South America, on your market share loss, I'm just wondering. Given all these cash outlays for restructuring, does that put you at a disadvantage in investing in emerging markets? How should we think about the sustainability of South American profits?

Don Leclair

Well, I think you asked a two-part question. One, are we going to invest in growth markets? I think we have good plans in China and Alan mentioned those. We are doing very well in Russia; recently announced a capacity expansion at our St. Petersburg plant and we are growing in India.

With respect to South America, these are really, really great profits in South America. It's really all the same things that I mentioned before: sizing the place right, getting the new products, positioning, and so on. But these are really outsized returns. So whereas I said in Ford Europe I thought we would be disappointed if we couldn't continue to grow the profits, I think in South America this is probably about as good as it gets.

Jairam Nathan - Banc of America Securities

Just one more question on Volvo. Mercedes and BMW earn 7%, 8% operating margins. You mentioned that Volvo was at a loss this quarter. Is there something you can achieve there on profitability?

Alan Mulally

I think that we can do substantially better than where we are today. We have got a great product line. We need to get the awareness, the consideration out, and work the cost structure like we are doing with the rest of our operations. But we can make a lot of improvement.

Operator

Your next question comes from Rob Hinchliffe - UBS.

Rob Hinchliffe - UBS

Back to slide 24 and cash flow, just the restructuring cash, and maybe there is an update coming, but going from $7 billion to $5 billion to $6 billion, what drove that $1 billion to $2 billion decline there?

Don Leclair

I would say that the biggest piece was that we were not quite sure what it was going to cost. We are actually in the position of having gotten more people out for less. That just means that we were unsure of the estimates at the time that we were going out to raise the financing last year. Maybe we were a little conservative on some of the numbers.

Rob Hinchliffe - UBS

On the subvention payments to Ford Credit, to what degree could that help Ford Credit's rating? Is that enough, do you think? When do you think it might be able to start to help, if it does?

Don Leclair

I think fundamentally, what helps Ford Credit's rating is Ford. If we stay on this plan, we will become investment-grade. Now will this help a little bit on the margin? We hope so, but that is not the fundamental driver in this case.

Rob Hinchliffe - UBS

You mentioned CapEx, Don, going up '08-'09. About how much, do you figure?

Don Leclair

Probably around $7 billion per year.

Rob Hinchliffe - UBS

Product costs going up and offsetting some of the cost savings. What does that look like to you in '08? Will cost savings be greater than the offsets? Or is this just an ongoing battle that it is going to be hard to get ahead of?

Don Leclair

I think it is going to be an ongoing battle; that is just the way this business is. But I think of it this way: that the cost reduction piece of it will be about the same or maybe a little better as we begin to reduce the complexity and become more global in our product development and leverage our assets.

Now, what is really going to make the big difference is we will have two things that will be less “bad” next year. One of them is raw material cost and commodities have really gone up this year and we don't expect to see that kind of an increase next year.

Secondly, we had a lot of regulatory increases this year, particularly related to diesel engines in the US, that shouldn't recur next year. So when you put all that together, we expect to go and do a lot better in the aggregate on the net product cost side in '08.

Operator

Your next question comes from John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

Alan, for a long time Ford's stance on Volvo has been that a sale is not a possibility. Now that you are going through this strategic review that you seem to have initiated, it sounds like all options are on the table, including potentially a sale. I was just wondering, the change in philosophy there, is that the function of what is going on more at Volvo or more of a function of what is going on at the Ford parent company?

Alan Mulally

You bet. I think that it is more along the lines of continuing to assess our portfolio, where each of the brands are and then what is the best thing for near and longer-term value creation.

Clearly, with what we shared with you about Volvo, we have decided the most important thing we can do in the near term is improve their fundamental cost structure. They have got a great product line that is set for the future. The best thing we can do in the near term is improve the cost structure. So that is what we are going to focus on.

John Murphy - Merrill Lynch

Just following up on the costs that are associated with Volvo here, the overhead costs with Volvo, Jaguar and Land Rover under the PAG umbrella. It sounds like there is almost a reallocation of expense going on here, and more of the overhead being allocated to Volvo is part of the pressure, and really just prepping the books for the JLR sale. Is there anything going on there that is out of the ordinary? Were there any overhead costs that are just unfairly being burdened on Volvo versus that aggregate umbrella here in the short term?

Don Leclair

No, we're constantly looking at our costs; that is an ongoing thing for us. But the amount of overhead associated with the PAG is really small. It is in fact inconsequential in the scheme of things. The issues are the same ones that Alan mentioned, and it is really not at all to do with overhead allocations.

John Murphy - Merrill Lynch

So what is the reason for the deterioration of Volvo here in the short term, specifically?

Don Leclair

The primary thing that has taken them off the plan has been exchange rates. Exchange rates have a number of effects, and the most direct is just the translation on the revenue. But then, the competition gets tougher all the way around, and the marketing incentives. So it is really important for us to step back in support of this next phase. To, as Alan said, work on the cost side; but also to work on the positioning of the brand, work toward a real premium position. That is going to be our main focus.

John Murphy - Merrill Lynch

Another question on the 7,000 workers that rescinded the buyouts. I was just wondering if you sort of could conjecture as to why you had 7,000 workers rescind the buyouts; and if that has any implications for potential future buyouts? Because if you're already having 7,000 workers that accept and rescind, it seems tough that you get a lot more buyouts going forward.

Don Leclair

I don't know exactly what you're referring to. But I mentioned I think 700 people.

John Murphy - Merrill Lynch

Okay, 700.

Don Leclair

That does not have a major implication; in fact, it was actually fairly close to the original estimate that we had in the number of people that might in fact rescind.

John Murphy - Merrill Lynch

Don, what changed or prompted the change in pension allocations going forward? Will that have any implications for the return assumptions on the pension plan?

Don Leclair

What prompted it was a whole range of things. But really as Alan mentioned, it was our desire to try and improve our balance sheet and reduce our risk profile. So what we're trying to do here is to actually reduce the emphasis on the return. We haven't yet decided what the effect might be on the return. As you know, only time will tell on that. But what we're really focusing on is to try and reduce the volatility and the potential risk of unplanned cash contributions.

So we are trying to reduce our risk profile, and that is really what this means here, as we try to improve our balance sheet. That would include the trust preferred exchange, and the subvention change with Ford Credit, and all the other things we have been doing, starting with the financing that we did last year.

Operator

Your next question comes from Robert Barry - Goldman Sachs.

Robert Barry - Goldman Sachs

A question on the commodities and regulatory costs. I think you said on the slide year-to-date commodities was up about $1 billion. Can you quantify the year-to-date increase in the regulatory-related costs?

Don Leclair

It's about half that size; maybe half, maybe a little more than half. Sometimes it is hard to define exactly where a regulation cost ends and a feature cost starts. So, it is more of an amorphous thing than a raw material price increase would be.

Robert Barry - Goldman Sachs

In terms of raw mats and these regulatory costs, is the message that they are going to be up again in '08, but just less of an increase? Or will they actually be down year over year?

Don Leclair

No, I don't expect them to be down. But the main increase that we saw in '07 -- and it wasn't just us, it was everybody – it was the law change for trucks and for diesel engines. Everybody put added equipment on their trucks and their diesel engines to do that. The law doesn't change again until 2010. So we don't expect a decrease, and we don't expect the magnitude that we saw this year.

Robert Barry - Goldman Sachs

Any ability right now to dimension the impact or the increase? Half of what it was this year, a quarter?

Don Leclair

What I said earlier was that we would expect, if you look on page 10, looking at next year, that the net product costs instead of being unfavorable would be favorable. So it could have a big impact when you take the commodities and the regulatory together with the cost reductions and the fact that we expect to see improvements in all those, but mainly on the commodity side and the regulatory. In fact, we are just looking at some sheets here while we were talking. It would appear that the regulatory is probably pretty close to the commodity cost. So more than half as much, just about the same.

Robert Barry - Goldman Sachs

Then two follow-ups on slide 13, under the volume mix bar, the mix was positive 0.5. Is there anything in particular driving that? Is there any fleet-related stuff in there? Or is that all in pricing?

Don Leclair

There's some fleet things in there. There was favorable mix in some of our PAG areas; but it is mainly in the US and North America. It includes the Edge and the Lincoln MKX and the series and option mix, not having the old Taurus any more. So it is a lot of things.

Robert Barry - Goldman Sachs

Finally, on the same slide you've got the manufacturing, engineering, and overhead up together about $700 million. How does that work? I mean, you're reducing headcount hourly and salary. You're reducing capacity. How is it that those items are still going up so much?

Don Leclair

Well, those are going down. It is the product costs and the warranty that are going up. So when you don't have brackets, the way we look at things, that is good. When you have brackets, those are bad. So the products costs are going up, the warranty goes up. Not that our warranty costs are going up, but year-over-year we don't have the reserve release that we had last year. Then the manufacturing, engineering, and overhead costs are going down by $500 million and $200 million, respectively. Does that help?

Operator

Thank you very much, sir. We will be moving on to the media portion of our Q&A today. Our first question from the press comes from Tom Walsh of Detroit Free Press.

Tom Walsh - The Detroit Free Press

Two questions. One quick on capital expenditures. The reason they went down this year or they are going down this year, is that conserving cash for the VEBA perhaps? Or is this a matter of the savings in the new product development structure?

Alan Mulally

It is absolutely the latter, Tom. The progress that Derrick and the entire team are making on the productivity of our product development system, great progress.

Tom Walsh - The Detroit Free Press

Second question has to do with market share. You have said that you are fairly confident that you have stabilized market share at a certain level. But I am looking at slide 14 and the year-to-year on both fleet and retail are down, 1 point in the third quarter on retail alone, and 0.7 point for the first nine months. Year-to-year, the numbers don't look stabilized yet. Elaborate for me a little bit on why you think the market share US numbers have stabilized or are about to stabilize?

Alan Mulally

The numbers you have on 14 are percents of the total. So you also have the fleet in there, that kind of camouflages the real essence, and that is retail over retail. The retail over retail is what we are really looking at as we take the fleet down. That has dramatically stabilized through this year. So that is the most important metric that we are looking at.

Tom Walsh - The Detroit Free Press

When you say stabilized through this year, you mean those 10% numbers across the 2007?

Alan Mulally

Well, retail over retail it is around 13%. We don't have it on that chart because those percentages are of the total. But retail over retail is what we are looking to stabilize, because that is the core of our business. We want to stabilize that around 13%.

Tom Walsh - The Detroit Free Press

And that is about where it is now?

Don Leclair

Yes. And that is actually about where it has been running almost for the last year, right around 13%. Maybe a little bit less, a little bit more in some months, but right around the 13%. We were down in the third quarter from last year, because last year we had some big incentive programs. This year, as I mentioned earlier, Mark Fields and his team have been very disciplined about not having big incentive programs at any one time, but trying to understand what the true demand is, sizing the capacity for it, reducing the complexity, and getting the product content right. So we are feeling increasingly confident that we are on the right track here.

Alan Mulally

Tom, just a little bit more color to your point. When you just look at October and year over year the Lincoln brand, the Milan, Mariner, the Mountaineer, up 17% and the Mercury up 25%. You look at that versus the Ford, and most of the Ford is the decrease in the fleet sales. You look at all that together, and that is around the 13% that we are starting to stabilize on. So it is a real testimony to the MKZ and the MKX as well as the new Ford vehicles, the Focus and the Fusion, the Escape and the Edge, complementing our bigger trucks and SUVs.

Operator

Your next question comes from Jere Downs - Louisville Courier-Journal.

Jere Downs - The Louisville Courier-Journal

Looking at slide 15 on your personnel reductions, the forecast for hourly in 2008 is between 55,000 and 60,000. Can you give me a little insider color on where that extra 4,000 would come from at 55,000? What circumstances would have you go down, and where?

Alan Mulally

It is really part of the Way Forward plan to restructure our operations to the current lower demand and the changing model mix. So that is just part of the plan to improve our productivity and reduce our cost structure.

Operator

Your next question comes from Tom Krisher – The Associated Press.

Tom Krisher - The Associated Press

I'm still a little bit unclear on Volvo. Alan, when I was driving back, you said on the radio that you are not going to sell it. Yet I am not hearing a definitive statement like that in any of the statements here. Is it fixing it, keeping it short-term, is that accurate?

Alan Mulally

Our plan now is to not sell it and to focus on improving especially the cost structure and the positioning of the brand itself, reflecting their new terrific lineup of cars and trucks, cars and crossovers.

Tom Krisher - The Associated Press

Does that mean keep it forever, then? It is forever a part of Ford?

Alan Mulally

It is what we have decided for now is our focus. Like we have talked about, we will continue to review the portfolio on a periodic basis. But our focus right now is to continue to improve their productivity and reduce their cost structure.

Tom Krisher - The Associated Press

The extra 4,000 on the hourly employee reduction, does that mean there is going to be another round of buyouts and early retirements to get there?

Alan Mulally

We will continue to reduce our employment consistent with our restructuring to operate at the lower demand over the next few years.

Tom Krisher - The Associated Press

I guess the current around of buyouts is pretty much over; so that would mean you would have to do something to prime the pump to get people to go.

Alan Mulally

We will continue to reduce our employment, consistent with restructuring.

Operator

Your next question comes from Mike Spector – The Wall Street Journal.

Mike Spector - The Wall Street Journal

Just a quick clarification. Are you saying your SAAR forecast for '08 is to the downside 16 million for light vehicles?

Don Leclair

No, that was total light and heavy, somewhere in the low 16's. We are not sure. 16.0 million to 16.5 million, somewhere in that range.

Mike Spector - The Wall Street Journal

What about for light?

Don Leclair

Probably take 300,000 off of that.

Mike Spector - The Wall Street Journal

So the question is, do you feel that you will be able to stay disciplined on pricing and stay on plan overall if you get a downturn to, say 15.5 million light or so, as some are predicting? And maybe higher regulatory costs if Congress passes CAFE?

Alan Mulally

Absolutely. The plan that we are on is really working, and that starts with sizing our operations to the real demand. That is why we are seeing the net pricing go up, because we are making the number of vehicles that people really do want and they really do value. So we're going to stay very disciplined on that element of our plan.

Mike Spector - The Wall Street Journal

Do you still plan to close all 16 plants as announced in the acceleration of Way Forward?

Alan Mulally

That is a great question for next week. I don't know whether you were able to hear the first part of the call, but we are going to have another conference call next week following the ratification vote. We look forward to explaining all the details of our new agreement with the UAW that not only is fair and respectful for our employees, but also allows us to significantly improve our competitiveness going forward.

Mike Spector - The Wall Street Journal

Just to recap, your plan going forward games in something like a 15.5 million light vehicle SAAR and possibly increased regulatory scrutiny with CAFE getting passed.

Alan Mulally

No, not 15.5 million.

Don Leclair

Let's take it again. We said somewhere in the 16.0 to 16.5 million.

Mike Spector - The Wall Street Journal

I'm just talking light right now.

Don Leclair

Then if you take off, say, 300,000 say 15.7 million, 15.8 million, up to 16.2 million, 16.3 million; right around in there. Maybe on light, you would say plus or minus a couple hundred thousand. We are looking at around 16 million for next year. That seems to be the way it feels and that is what we are planning on.

Alan Mulally

Having said that, none of us have a crystal ball and we have a lot of things going on in the marketplace. But another key element of our plan is that we are watching this very carefully. We are not going to get behind, and we're going to take the actions that we need to take to support the real demand.

Operator

Your next question comes from Jeff Bennett - The Dow Jones.

Jeff Bennett - The Dow Jones

Thanks very much. Could you give a little information on the Ford Motor Credit payments that will begin next year? What is causing that and about how much would they range?

Don Leclair

Well, it is really not a Ford Credit payment. The way Ford interacts with Ford Credit now is that when Ford provides an interest rate supplement to Ford Credit, or in effect subvenes the interest rate, Ford Motor pays Ford Credit along the same timeframe, as the retail contract. So if it is a three-year loan, then Ford would pay Ford Credit over that three-year period, just the way the consumer pays Ford Credit. That is how we do it today.

Starting January 1, what we're going to do is when there is a contract that is purchased and Ford Motor has provided some subvening of the interest rate, Ford will pay Ford Credit up front. The existing contracts that are on the books will continue to run off, and that will conclude by 2011 or so. Does that help?

Jeff Bennett - The Dow Jones

Alan, just a little bit more insight hopefully into the Volvo brand. What are you of looking at? Would it be more working it as more of a niche product, kind of like a Toyota Scion, kind of keeping it on its own? Do you want to kind of mix into your overall Ford presentation?

Alan Mulally

Our real plan there is to keep positioning the Volvo brand as a premium brand, which it clearly is now. In history, it was kind of like a near-premium the way some people would think of it. Clearly with what we have done on the product development, and you look at their cars and the new crossovers and the utility vehicles, they are really moving to a premium brand. So consistent with that, we just want to improve their cost structure going forward, and they are going to be fine, I think.

Operator

Your next question comes from Rick Popely - The Chicago Tribune.

Rick Popely - The Chicago Tribune

I just wanted to ask if when you talk about being profitable in 2009, that includes North America?

Don Leclair

Yes.

Rick Popely - The Chicago Tribune

North America will be profitable in 2009?

Alan Mulally

Yes, our plan is to have North American profitable, and our entire automotive operations worldwide to also be profitable.

Rick Popely - The Chicago Tribune

I asked that question because there are some dire predictions not only for the auto industry but just the economy in general, going forward for the next year. As you have said, you continue to remain on target for profitability. Can you talk about that a little bit as to how you're going to manage that?

Alan Mulally

I think it is two or three things. The first is that the fundamental of our plan is to size our operations to the real demand. So we watch the marketplace very carefully. The reason we are making such good progress here is that we aggressively restructured our operations to the current softening in the market place and the lower demand.

The second piece of it is we have been accelerating the development of the new cars and utility vehicles and trucks that people really do want and value today, especially the smaller and the medium-sized vehicles. The response we're getting from the marketplace is very positive, which allows us to stabilize our market share and our operations.

We will continue to do that going forward, always starting with our view of what has happened in the marketplace. But that is the reason we are making so much progress here and we should continue to make progress if we follow this plan.

Operator

Your next question comes from Bill Koenig - The Bloomberg News.

Bill Koenig - Bloomberg News

Based on the slide deck, it looks like you had a reduction of 33,600 in terms of US factory workers from both the ACH and Ford North America operations combined. Something like 37,000 had accepted buyouts in '06. I'm just wondering, is the 33,600 is that below your expectations? Were you disappointed in it? Or is that a good number of job cuts via the buyouts?

Don Leclair

Bill, that is just about on plan. It's a little hard to see, to tie out all the numbers, because the buyouts that you're referring to were for the US, for the UAW. These charts are total hourly including our operations in Canada and Mexico. But overall, we're very pleased with the progress that we have made.

Operator

Your next question comes from Bryce Hoffman – The Detroit News.

Bryce Hoffman - The Detroit News

Gentlemen, congratulations on the progress you are making. Just a little clarification. If I understood correctly, you said that you saved approximately $0.5 billion as a result of lower incentives. Is that correct?

Don Leclair

Right, year over year. Third quarter this year compared to third quarter last year. Remember, last year we had the big 0% programs for 72 months that were kind of across the industry. There was a big change and there was a lot of discipline on the part of our team here not to want to do that again.

Bryce Hoffman - The Detroit News

Do you feel that you're going to be able to maintain that discipline if your competitors resort to strong incentives again?

Alan Mulally

Absolutely. Again, the actions that we're taking to size the operation to the real demand and bringing out the new products, the most important thing that delivers is a match between what the customers want and what we are producing. Over time, we're going to continue to, I think, as we have shown in is we're going to get the value for these wonderful products because we are not producing too many and having to discount them.

Operator

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

Sarah Webster - The Detroit Free Press

Good morning. My question has to do with buyouts. You were asked if you were going to have buyouts, and you didn't really answer. You said you are going to continue to reduce your employment. As you know, the workers are voting right now on this. After what happened at GM and Chrysler with layoff announcements following the ratification, I know they are pretty skittish about that. Is there anything at all more you can say on the subject of how you're going to reduce your workforce? I mean, these workers are pretty nervous that you're going to turn around and do layoffs.

Alan Mulally

I understand completely, Sarah. Again, I know this is not so satisfying for today, but if we could hold that question till next week, because we're going to continue to respect our employees. The agreement that we have negotiated with the UAW is going to significantly improve our competitiveness going forward. We really look forward to sharing the details of all of that with you next week after they complete their process.

Sarah Webster - The Detroit Free Press

Well, can you say you won't do layoffs, involuntary layoffs of hourly?

Alan Mulally

Let's talk about that next week, okay?

Sarah Webster - The Detroit Free Press

One more question about Volvo. You are repositioning it. I guess I wonder if you could explain how that fits in with your other brands, such as Lincoln, going forward?

Alan Mulally

Well, I think that they both have unique markets and they are very well positioned. As Volvo has continued to move up from near-premium to premium, and clearly our positioning of Lincoln going forward as a wonderful, premium brand in between, I think they have very good and distinct markets.

Operator

Your final question comes from Poornima Gupta - Reuters.

Poornima Gupta - Reuters

Don, you mentioned the change in pension fund asset allocation. I was just wondering what the size of the fund is?

Don Leclair

It is about $45 billion for the US.

Poornima Gupta - Reuters

You also mentioned that the US auto market weakness may persist through the first half of 2009. What are some of the factors behind the forecast? Do you see continued weakness in the housing market?

Don Leclair

Well that would probably be among the main drivers, is the housing sector. We keep a close eye on that, and oil prices. I think those would be the main things.

Lillian Etzkorn

With that, I would like to turn it back over to Alan for closing comments.

Alan Mulally

Very good. Thanks, Lillian. Well, thank you all for joining us today. Clearly, it is exciting. As much as is going on in the world, it's a very exciting time for everybody associated with Ford. Clearly, the results that we shared today give us a lot of confidence that we are moving in a very positive direction to create an exciting and viable Ford Motor Company going forward.

I would also like to just ask you to consider, have you driven a Ford lately? If you're not, because the products that we have this year and the 2008 models and the new models that are coming out, especially close to home here in North America for next year, are just terrific.

So it's a really good time for everybody to know they've got great consideration with Ford. We hope to see you in a Ford product. With that, thank you very much for your participation today.

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