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Ford Motor Company (NYSE:F)

Q1 2008 Earnings Call

April 24, 2008 9:00 am ET

Executives

Lillian Etzkorn - Director, Investor Relations

Alan Mulally - President and Chief Executive Officer

Don Leclair - Executive Vice President and Chief Financial Officer

Peter Daniel – Controller

Neil Schloss – Treasurer

Mark Kosman - Director of Accounting

K.R. Kent - Ford Credit CFO

Analysts

John Murphy - Merrill Lynch

Rod Lache - Deutsche Bank

Brian Johnson - Lehman Brothers

Himanshu Patel – JP Morgan

Chris Ceraso - Credit Suisse

Peter Nesvold - Bear Stearns

Douglas Carson - Banc of America

Jonathan Steinmetz - Morgan Stanley

Mark Warnsman - Calyon

Patrick Archambault - Goldman Sachs

Operator

Good day ladies and gentlemen and welcome to the Ford Motor Company first quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Lillian Etzkorn, Director of Investor Relations. Please proceed.

Lillian Etzkorn

Thank you, Pat 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 CFO.

Before we begin, I would like to review a couple of quick things. 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 first 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 equivalents as part the appendix to the slide deck.

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

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

Alan Mulally

Thanks, Lillian and good morning to everyone. We’ll begin on slide 2 by reviewing the key financial results for the first quarter. Don will take us through the details and provide our outlook, and then I’ll come back and wrap up before we take your questions.

But first, I want to extent our condolences on behalf of the entire Ford team to the family of Geoff Polites who passed away over the weekend. Geoff spent a total of 38 years as a dedicated Ford employee and dealer. As CEO of Jaguar-Land Rover, Geoff was instrumental in turning Jaguar-Land Rover back to profitability and steering it through the pending sale of the business to Tata Motors. We will miss Geoff.

Now, because Jaguar-Land Rover is held for sale, we’re excluding its results from continuing operations in 2008, although they are included in the 2007 data. As shown at the top of this slide, vehicle wholesale last quarter were over 1.5 million units, down 119,000 from the same period in 2007. This reduction includes 68,000 Jaguar-Land Rover and Aston Martin units, and 51,000 at other operations. Ongoing company revenue was $39.4 billion. Excluding Jaguar-Land Rover revenue was up slightly with favorable exchange offset by lower volume and lower net pricing.

Pre-tax results from continuing operations were a profit of $736 million, an improvement of $669 million from the same period in 2007. This included about a $900 million improvement in automotive operations profits, partially offset by lower profits at Financial Services.

Our first quarter net income was $100 million, including $416 million of pre-tax special charges. As we ended the quarter with $28.7 billion of gross cash, down $6.5 billion from year-ago levels, this reduction was part of our plan and largely reflects implementation of the initial part of our VEBA agreement with the UAW. Overall, as we have said, our plan is working and we continue to show significant progress.

Turning to slide 3, first quarter profits were driven by strong results at Ford Europe with profits of nearly $740 million and Ford South America earning over $250 million. In addition, Ford North America results improved by nearly $600 million; this is more than explained by favorable cost performance.

Ford Asia-Pacific, Africa, Mazda and Ford Credit were profitable. Volvo incurred a loss. We reduced our costs by $1.7 billion with $1.2 billion of that coming from North America. This keeps us on track toward our $5 billion cost reduction target by the end of 2008.

Ford’s quality continues to improve across the globe. In North America, our initial quality is among the best in the business. Our latest competitive survey shows an 8% improvement compared with last year, which puts Ford initial quality in a statistical dead heat with Honda and Toyota and we have improved for the fourth year in a row.

As you can see in slide 4, the first quarter saw several noteworthy examples of how we continued to make progress on our four priorities to aggressively restructure to operate profitably, accelerate new product development, finance our plan and improve our balance sheet, and work together as one team leveraging our global Ford assets.

We’ve begun more extensive integration of our global product development and purchasing functions. This action will save Ford time and money by working more closely together on a global basis, transforming the way we design, develop and procure the components for our new products.

The Ford Fiesta, our all-new global car, was introduced to great reviews at the Geneva Auto Show and this past weekend in Beijing. Fiesta will be sold in virtually all of our major markets worldwide by 2010.

We are in the process of reducing our hourly personnel in the US by another 4,200 as a result of the recent enterprise-wide buyout. Once this action is implemented, we will have reduced total hourly personnel by about 40,000 since the end of 2005.

We agreed to sell Jaguar-Land Rover to Tata Motors. We expect the deal to close during the second quarter. We are also continuing the disposition of our non-core assets. This past quarter we sold the ACH drive shaft business and Primus Financial Services in Japan and we recently announce the sale of our glass business at ACH.

In addition, we introduced Drive One, a grass roots multimedia campaign in the US, using the employees and dealers working together as advocates of our Ford products.

Now turning to slide 5, looking ahead we remain committed to our key business objectives, including our goal of reaching North America and overall automotive profitability in 2009, despite the challenges of soft economies, rising oil and commodity prices, and adversity in the credit markets. Going forward, we will continue to right-size the business. This includes continuing to work with our union partners to reduce hourly personnel in North America through buyout offers made to employees affected by capacity actions or facility closures in specific locations.

We are very excited about the upcoming launches of the all-new Ford Flex, the Lincoln MKS, and Ford F-150 in North America, giving us a US showroom with 70% new or refreshed models, consistent with our plan. Two new models will help sustain our momentum in Europe with the launch of the Ford Kuga in the second quarter and the Ford Fiesta later this year. We’ll continue disposition of the businesses within ACH and complete the Jaguar-Land Rover sale, and we are working on strengthening Volvo’s business by enhancing its premium position and its product lineup as well as improving its quality, productivity and its cost structure.

Now I would like to turn it over to Don to take you through the first quarter results in a little more detail.

Don Leclair

Thanks, Alan. Let’s go on to slide 7, which provides a few details on the first quarter. Starting at the lower left our net income for the quarter was $100 million and our net income included taxes in areas outside of the US where we were profitable, as well as minority interests in profitable affiliates. Adjusting for these items leaves a first quarter pre-tax profit of $320 million and these results include pre-tax charges for special items of $416 million, which we will cover.

Excluding these special items we recorded a first quarter pre-tax operating profit of $736 million; that’s up $669 million from a year ago. In most of the following slides we’ll focus on these pre-tax operating results.

Slide 8 covers our special items, which were a pre-tax loss of $416 million. This included a $223 million charge associated with separation programs in North America, largely related to the hourly separation programs in the US and associated curtailments to our benefit plans. In addition, we’ve taken $108 million charge related to the reduction of our dealer base, including a write-off associated with our investments in US dealerships.

We also recorded a $70 million charge as a result of the restructuring of our investment at Ballard which we announced in November of last year. Additional charges in the first quarter totaled $13 million which were largely related to personnel reductions in Ford Europe and in Asia Pacific.

Given the pending completion of the sale of Jaguar-Land Rover, we are treating their results entirely as a special item because they are no longer a part of our ongoing operations. At the end of the fourth quarter, we classified our Jaguar-Land Rover operations as held for sale and at that time, our book value of Jaguar-Land Rover approximated the net cash proceeds we were expecting to receive upon sale.

At the end of March, we signed a definitive agreement to sell Jaguar-Land Rover for approximately its year end 2007 book value. As a result, in the first quarter Jaguar-Land Rover’s positive operating results were essentially offset by impairment charges. The recently announced sale of our ACH Glass business will result in largely non-cash special charge in the second quarter. Slide 9 shows our pre-tax profits by sector. As you can see the automotive profits were 669 and the Financial Services side was $67 million.

Now, let’s go on to the automotive sector. Slide 10 shows the changes in the first quarter compared with a year ago, an improvement of $900 million. Compared with 2007, volume and mix was $700 million unfavorable primarily due to lower volume and unfavorable mix in North America and lower volume at Volvo. Net pricing was $100 million unfavorable, more than explained by decreases in North America and that was partly offset by improvements in Europe and South America. Costs were $1.7 billion favorable, which we’ll cover later. Exchange was $200 million unfavorable, more than explained by the impact of the weakening of the British pound compared with the euro, and the US dollar compared with European currencies.

Net interest and related fair market value adjustments were $200 million favorable. Other factors were $300 million favorable including improved results from our operations in Turkey as well as improved parts profits.

Finally, the non-recurrence of 2007 profits for Jaguar-Land Rover and Aston Martin also affected the year-over-year comparison by about $300 million. Excluding Jaguar-Land Rover, as you can see just at the top inside the box there, ongoing Automotive profits improved by about $1.2 billion this quarter.

Now, slide 11 explains our cost performance. Warranty expense was about $200 million lower, mainly due to favorable adjustments to Ford Europe warranty reserves reflecting improved quality. Manufacturing and engineering cost were about $300 million favorable, more than explained by the continued benefit of our restructuring actions in North America. Reductions in manufacturing costs were partly offset by higher engineering expenses.

Net product costs were $600 million lower, largely reflecting favorable material cost reductions and favorable mark-to-market adjustments on commodity hedges in excess of commodity cost increases. These factors were partly offset by added product content. Spending-related costs improved by $300 million, mainly elimination of accelerated deprecation and amortization for facilities that we’ve recently closed.

Pension and retiree healthcare expenses were $100 million lower, primarily reflecting healthcare efficiencies. Overhead costs were about $100 million lower as were advertising and sales promotions.

Now onto slide 12, which shows pre-tax results for each of our automotive operating segments and other automotive. As discussed previously, starting this quarter we revised our reporting to provide separate results for Volvo. As shown on the chart, before interest and financing-related costs, our automotive operations on an ongoing basis earned a profit of $850 million during the quarter, an improvement of over $1 billion compared with a year ago.

We’ll focus here on other automotive. In the first quarter, other automotive was a loss of $181 million and that included net interest expense of $472 million and favorable fair market value adjustments of $291 million. First quarter net interest expense was higher than our prior guidance, primarily due to lower than expected returns on our cash portfolio, as well as losses on the temporary asset account that we established based on our agreement with the UAW last year.

Going forward, based on lower interest income from our cash portfolio reflecting generally lower interest rates, we now expect net interest expense to be in the range of $250 million to $300 million per quarter this year; that’s about $100 million higher than our prior quarterly guidance. This amount, however, will continue to be subject to market volatility because the temporary asset account is largely invested in equities. The favorable fair market value adjustments primarily relate to the impact of changes in exchanges rates on intercompany loans.

Now for the next section of slides, we will cover each of the automotive operations starting with North America on slide 13. First quarter wholesales were 704,000. That’s down 40,000 from a year ago, primarily reflecting a decline in industry selling rates from 17 million down to 15.6 million units this year and that was partly offset by an increase in dealer inventories.

Revenue for the first quarter was $17.1 billion down 1.4 from a year ago, explained by lower volumes, adverse mix and lower net pricing. Pre-tax results were a loss of $45 million, an improvement of nearly $600 million compared with 2007. Now slide 14 provides an explanation of that improvement. Volume and mix was $500 million unfavorable primarily reflecting the decline in US industry volumes and favorable mix resulting from the industry shift to smaller vehicles, partly offset by higher dealer inventories.

Net pricing was unfavorable by $300 million, primarily reflecting higher retail incentives and an increase in lease mix; that was unfavorable mix on the volume and mix. Net pricing, unfavorable by $300 million and costs improved by $1.2 billion. The improvement was explained by lower structural costs, including manufacturing spending related and overhead; and net product cost improvements. This included favorable material cost reductions and favorable mark-to-market adjustments in commodity hedges in excess of commodity cost increases and these were partly offset by added product features. Exchange was about $100 million favorable.

Going forward we expect North America’s rate of improvement to be somewhat less than in the first quarter, in part due to continuing mix shift to smaller vehicles as well as the absence of hedging gains and the absence of dealer inventory increases. In addition, the second quarter will be affected by the production reductions that we will cover later.

Slide 15 shows US market share for Ford and Lincoln Mercury. For the first quarter, our market share was 15%: that included 9.8% for retail and 5.2% for fleet. Retail market share declined by 0.3%. Significant segmentation shifts away from full-size pickups and medium and full-size SUVs, where our share is high, where largely offset by share improvements from recently launched models including the Focus, the Escape and the Edge. Our fleet share grew slightly compared with last year, with a further decrease in daily rental sales offset by growth in commercial and government sales.

Slide 16 provides a summary of our progress on cost reductions in North America. Including the $1.2 billion in the first quarter, we’ve now achieved cumulative cost reductions of $3.3 billion compared with ‘05. This slide now contains data on personnel levels and straight-time manned capacity that we previously provided on separate slides, and you can see those at the bottom. Further detail on personnel is contained in the appendix, and we have revised the personnel metric reported here to align more closely the data reported in the North American business unit with the geographic data provided as a part of our 10-K. The only remaining difference relates to personnel at dealerships that we are required to consolidate under FIN 46.

Slide 17 is based on a slide that we showed you in January and it provides a summary of past and projected cost reductions in North America. You can see in the middle column there we made $1.2 billion of cost improvements in the first quarter. These results included about $250 million of mark-to-market hedging gains related to commodity price increases that are not expected to be incurred and not offset by hedges in future quarters. And, we expect that the rate of structural cost improvements will slow as we progress through the year because of most of last year’s improvements were achieved early in the year. We remain on track to deliver our $5 billion cost reduction target.

Now, on to South America on slide 18. First quarter sales were 92,000 units, up 8,000 from a year ago. Revenue was $1.8 billion, $500 million higher than last year, primarily reflecting a stronger Brazilian currency, favorable net pricing, and higher volumes. South America earned a profit of $257 million. This is $144 million better than a year ago, mainly due to higher net pricing and volume and mix, and that was partly offset by higher costs, including higher commodity costs.

Slide 19 covers Ford Europe, where wholesales were 500,000 units in the first quarter, equal to a year ago. First quarter market share was 8.9% in the 19 markets we track, down 0.2% from a year; and that largely reflected reductions in daily rental sales in several markets and reductions in dealer demonstrator units in Germany.

Revenue was $10.2 billion, 1.6 higher than last year, primarily due to favorable currency translation, mix, and higher pricing. First quarter profits were $739 million, over $500 million more than a year ago.

Now slide 20 provides an explanation of the improvement at Ford Europe. Volume and mix was about flat, and net pricing improved by $200 million primarily reflecting strong acceptance of our new products. In total, costs decreased by $300 million and that was largely explained by net product cost improvements including material cost reductions and mark-to-market gains on commodity hedges in excess of commodity cost increases. These factors were partly offset by higher product content. Warranty cost improvements primarily related to adjustments to prior period warranty reserves were also included and those were due to improved quality.

Exchange was $200 million unfavorable, mainly due to weakening of the British pound compared with the euro. Other factors were $200 million favorable largely reflecting higher profits at our European joint ventures including our operations in Turkey. Overall, Ford Europe is off to a good start. We expect less year-over-year improvement during the remainder of the year because of the hedging gains and the warranty reserve adjustments will not repeat.

Slide 21 covers Volvo. First quarter wholesales were 106,000 units; that’s down 22,000 from a year ago. This reduction is explained primarily by lower retail sales in the US and Europe, lower dealer inventories mainly in the US and, as of the first quarter of this year, Volvo no longer is the distributor for Renault in Scandinavia. The year-over-year decline related to this was about 6,000 units in the first quarter and will be about 23,000 units in the full year.

Market share in the US was 0.7 of a point, in line with a year ago and market share in Europe was 1.4%, down 0.1 of a point. Revenue was $4.2 billion, down $400 million, primarily reflecting lower wholesales, partly offset by exchange. The first quarter results were loss of a $151 million, down $245 million compared with the same period a year ago.

Slide 22 explains that $245 million decrease. Volume and mix was $210 million unfavorable, primarily explained by lower retail volumes, reduced dealer inventories in the US and Europe, and discontinuation of our distribution agreement with Renault. Net pricing was down $40 million compared with 2007. In total, costs decreased by $110 million, largely explained by net product cost, manufacturing and warranty improvements. Exchange was about $70 million unfavorable, primarily reflecting the weakening of the US dollar relative to the euro and the Swedish Krona. Other factors were $35 million unfavorable.

Going forward, we expect Volvo to improve sequentially through the balance of the year. The projected improvement reflects an implementation of the following actions: Launching the all new XC60 into a growing and new segment for Volvo; restructuring and consolidating the North America sales company and distribution network, including moving its headquarters to New Jersey and focusing on improved margins at lower volume; and continuing efficiency programs to reduce costs, including reducing line speeds and personnel levels; and continuing to pursue growth in Russia, China and other emerging markets.

In addition, the dealer stock reductions implemented during the first quarter are not expected to be repeated during the balance of the year. Volvo, however, remains exposed to exchange rates and raw materials variability.

Now slide 23 covers Asia-Pacific and Mazda. Overall first quarter profits were $50 million and we’ll discuss Asia-Pacific more on the next slide, but we did earn $49 million from our investment in Mazda and associated operations, and that’s an increase of $28 million compared with 2007.

Slide 24 covers Asia-Pacific. During the first quarter, wholesales were 129,000; that’s an increase of 3,000 compared with 2007 and this increase is more than explained by higher volumes in China. Revenue in the first quarter was $1.7 billion, down $100 million from 2007, largely explained by the lower volume outside of China. Asia Pacific and Africa reported a profit of $1 million in the first quarter, and that’s $27 million better than 2007. The improvement largely reflected favorable cost performance and higher profits in China, partly offset by unfavorable exchange and unfavorable product mix, primarily in Australia.

Slide 25 shows automotive cash and cash flow. We ended the first quarter with $28.7 billion in cash, down $5.9 billion compared with year end 2007. Our operating-related cash flow was $1.5 billion negative in the first quarter. This reflected our Automotive pre-tax profit of$ 700 million; capital spending during the quarter which was about $100 million lower than depreciation and amortization; changes in working capital and other items of $1.3 billion negative, primarily reflecting timing differences in non-cash items and profits; and payments of $1 billion to Ford Credit reflecting our changed upfront payment of subvention. Excluding the upfront subvention payments, our operating cash flow was $500 million negative.

Our separation programs resulted in an outflow of $100 million for the quarter and we contributed $600 million to our non-US pension plans. Consistent with our UAW agreement, we reclassified $1.9 billion of VEBA assets out of our cash and contributed $2.7 billion of cash to the temporary asset account. We received a tax-related payment from Financial Services of $900 million and Ford Credit did not pay Ford a dividend during the first quarter.

Slide 26 summarizes our net liquidity on March 31. Total liquidity including our available credit lines was $40.6 billion. Automotive debt was $27.1 billion, and upon implementation of the independent VEBA debt will increase by about $6.3 billion.

Now let’s turn to slide 27 and Financial Services. Earnings at Financial Services were $67 million, $226 million lower than the same period a year ago. We’ll cover Ford Credit later; Other Financial Services reported earnings of $31 million in the first quarter, and that’s $31 million higher than in the same period a year-ago, and the increase primarily reflects gains related to real estate transactions.

Slide 28 explains the change in Ford Credit’s profits from the year ago. Ford Credit’s earnings were $36 million in the first quarter, about $300 million lower than in 2007. The decrease in earnings primarily reflected higher provision for credit losses, higher depreciation expense for leased vehicles, and higher net losses related to market valuation adjustments from derivatives. These factors were offset partly by lower expenses, primarily related to the non-recurrence of last year’s restructuring costs, as well as higher financing margins.

In summary, the continued weakness in the US and Canadian used vehicle auction market has adversely impacted the value of off-lease as well as repossessed vehicles. Delinquencies and repossessions have increased slightly since last year in the US. Ford Credit’s financing margins have improved year over year. Underlying market interest rates, especially in the US have declined. However the repricing of risk is a partial offset.

Finally, Ford Credit’s North American business center restructuring, which continues to improve its operating efficiency and cost, was completed in the first quarter of this year.

Slide 29 covers the funding outlook for Ford Credit. Ford Credit’s funding strategy includes maintaining strong liquidity to meet near-term funding needs by having a substantial cash balance and committed funding capacity.

The left box shows Ford Credit’s committed liquidity programs and cash and the utilization of its liquidity sources at the end of the first quarter. Ford Credit’s liquidity exceeded utilization by $24 billion. Ford Credit will continue to diversify its global asset-backed funding capabilities, renew committed asset-backed funding capacity including outside of the US, and continue to access the unsecured market if and when it make sense. As we have done in the past, Ford Credit continues to consider and implement alternative business arrangements to improve funding capability, where it makes sense. For example, we recently completed the sale of Primus Japan.

At March 31, 2008, our managed leverage was 9.4 to 1 compared with 11.1 to 1 at March 31, 2007. As discussed in our year end call, we had planned that Ford Credit would pay regular dividends in 2008, but given the present credit market conditions and to maintain greater flexibility in the execution of our funding plan, we elected to not to reinstate these dividends at this time. It is unlikely that Ford Credit’s managed leverage will reach 11.5 to 1 by year end 2008 as previously projected.

In summary, we believe we have a funding plan that will provide sufficient liquidity at Ford Credit.

Slide 30 shows where we are on our planning assumptions and operational metrics for 2008. Total industry sales during the first quarter were equal to a SAAR of 15.6 million units in the US and 18 million units in the 19 markets that we track in Europe. Based on the decline in economic conditions we now expect the US industry to be in the range of 15.3 to 15.6 for the full year, and that includes medium and heavy trucks. European industry volumes could well be above 17.6 million units for the year.

On the operational metrics, our current model quality continues to improve and as Alan mentioned earlier based on latest surveys, Ford’s initial quality in the US is among best-in-class. automotive costs were reduced by $1.7 billion, consistent with our plan. Our market share was down slightly compared with last year in the US generally on track with our plan. Absolute operating cash flow was $1.5 billion negative. This was consistent with our plan and we continue to expect operating cash outflow in personnel separation payments to be in the range of $12 billion to $14 billion for 2007 through 2009. Capital expenditures were $1.4 billion, also consistent with our plan.

Slide 31 shows our production plans for the second quarter. In North America, the production schedule is 710,000 units, down 101,000 units from 2007 and 20,000 units lower than our prior guidance. The change includes a 40,000 unit reduction in trucks, partly offset by increases in car production. For Ford Europe, we expect second quarter production of 565,000, up 53,000 from a year ago and for Volvo we expect production to be equal to a year ago.

Slide 32 shows our 2008 outlook by sector. We still expect the Automotive full year pre-tax results to be a loss, but equal to or better than 2007 when you exclude Jaguar-Land Rover from last year’s results.

As mentioned previously, the first quarter results were aided by several factors that are not likely to continue to occur and these include recognition of mark-to-market hedging gains related to commodity price increases that we expect will be incurred through cost of sales later in the year, but not offset by hedges in future quarters. Also, the reductions in warranty reserves are not likely to be repeated, and nor will the increase in dealer inventories be likely to be repeated.

In addition, we expect that the industry volumes will weaken somewhat from first quarter levels and vehicle segmentation will continue to shift away from areas where our share has been high.

Financial Services’ 2008 pre-tax results are expected to be worse than 2007, but profitable for the full year. Total company pre-tax operating results, including special items, are expected to be a loss and worse than 2007, reflecting the expected decline in Financial Services’ results. We also expect special items to be less than 2007, with full year personnel-related restructuring costs below $1 billion. The total pre-tax results are expected to be a loss, although improved compared with 2007 when you exclude Jaguar-Land Rover from the results.

Now I would like to turn it back to Alan.

Alan Mulally

Thank you Don. Slide 33 provides our assessment of where we stand on achieving our key business metrics and financial goals. The profit improvements we have seen in our ongoing automotive operations, $1.2 billion this quarter and over $3 billion last year, largely from our restructuring efforts and our strong flow of new products coming later this year, give us added confidence that we will meet our 2009 profitability targets in spite of the economic conditions worse than we initially envisioned.

I want to emphasize that we are committed to returning to profitability in 2009 and we see achievement of our 2008 cost reduction as a key element in that plan. We will continue to focus on cost reductions in 2009, and the full benefits of the UAW agreement should be achieved in 2010. We expect our US market share to be in the low end of the 14% to 15% range and we are still planning to be in the range of $12 billion to $14 billion cash outflow for 2007 to 2009 to fund operating losses and the restructuring of our business.

Now on to slide 34 which summarizes the four key priorities of our plan. One thing I’m sure you noticed by now is our plan is unchanged. Results this quarter are encouraging, and although the quarter included some one-off items, the underlying business is improving. We remain cautiously optimistic despite the external difficulties; our plan is working. Our initial quality continues to improve it is now among the best in the business. The restructuring in North America is taking hold and our product pipeline is full.

We are particularly encouraged by the outstanding performance in South America and Europe. In the past several years we have substantially restructured these businesses and the flow of new products that customers truly want and value has been accelerated. We believe this is an indication that our efforts to leverage Ford’s global assets across the world will bear fruit.

As we look forward to the balance of the year and next, we have many great new products ready to come to the market. These include the new Ford Flex, the F-150, and the Lincoln MKS here in the US and the new Ford Kuga and Fiesta in Europe, with the Fiesta coming soon thereafter into China and the rest of our markets around the world. The external environment certainly is challenging and we have been adapting and we have been taking, and will continue to take, the actions to stay on our plan.

Now we would like to take your 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 in the call. In order to allow as many questions as possible within our timeframe, I ask that you keep your question brief so that we don’t have to move callers along after a couple of minutes. So, with that may we please have the first question?

Question-and-Answer Session

Operator

Your first question comes from the line of John Murphy - Merrill Lynch.

John Murphy - Merrill Lynch

I just wanted to focus on the cost side first. I just think about the cost savings in the first quarter, just trying to parse that out a little bit better. First, was there any recognition of savings from the 4,200 workers that were bought out in the first quarter?

Don Leclair

No.

John Murphy - Merrill Lynch

Was there any recognition of OPEB savings in the first quarter and what was that amount, if there was?

Don Leclair

Well, not OPEB savings from the UAW agreement, no.

John Murphy - Merrill Lynch

So that hasn’t been recognized yet.

Don Leclair

Right.

John Murphy - Merrill Lynch

On the material cost reductions, those are the things that ramp up through the course of the year, but you’re launching the F-150, which typically would have a big increase in material costs. Should we think about that as sort of a net neutral as we go through the year, the F-150?

Don Leclair

If you look at slide 17 those cost reductions are on that third line. See where it says material cost reductions? That kind of goes across. And that should just about get us, that 0.3 running rate should get us right in there for what we show for the balance of the year. Now, the increase for the F-150, to the extent there is any, will be right in that 0.5 which is on that first line, on the product adds, if that’s helpful..

John Murphy - Merrill Lynch

So the two of those are netted together. Okay, that’s great.

Don Leclair

Right.

John Murphy - Merrill Lynch

And then also on D&A in the quarter, it looked like D&A was down $264 million year over year. Is that something we should expect to continue and what was the big driver of that?

Don Leclair

Well, as I mentioned the big causal factor for that is last year we had accelerated the depreciation of the plants we were going to close, so that when we did close them there was no write-off and that’s just how the accounting rules work. Now that those plants are closed, we won’t have that much drag from the accelerated depreciation. I don’t think we will see quite that much depreciation good news throughout the year.

John Murphy - Merrill Lynch

How should we think about that in the full year, because not $1 billion for the year, what would you ballpark that at?

Don Leclair

No just think about half that for the full year.

John Murphy - Merrill Lynch

Okay, so almost $500 million year-over-year?

Don Leclair

Maybe a little more than half a billion. How’s that?

John Murphy - Merrill Lynch

Alan, just on the product side, I am trying to focus on the revenues here. You are introducing the Fiesta in the US in a couple of years. Transit Connect sounds like it’s coming here. Are there any other big opportunities you see from global product, particularly from Europe where you have some pretty good product to drive revenue in North America, where you might be able to fill in some gaps or become more efficient on the revenue line?

Alan Mulally

You bet. Well clearly on the smaller and the medium-sized cars and utility, the vast majority of those are moving to global platforms. So we’ll continue when it make sense, not to short cycle where it doesn’t make sense but we pretty much have laid the plans in place to get to all of those global platforms over the next few years and then we’ll do the minimum amount of change on top of that for the unique areas around the world, the unique markets. But we feel really good about the plans that Derrick and the rest of the team have put together to leverage these global assets worldwide. It will essentially be all of the vehicles in the small and medium size.

John Murphy - Merrill Lynch

This is more of a hypothetical question on the product side. If we think about the Ford and Lincoln product lineup and the good, better, best strategy that’s sort of always been the theory in the industry would you feel confident that Ford and Lincoln on its own, outside, not including Volvo, would give you enough products to work the consumer through that good, better, best strategy?

Alan Mulally

Absolutely. I would maybe suggest that a refinement to that is that, I think that maybe in the past when we’ve had all of the other brands that we had more of a strategy of being competitive. I think that going forward now with a full product line under the Ford brand, small, medium and large; cars, utilities and trucks, you’re going to see us move to we’ll have an attitude of best-in-class in each one of those segments. When we leverage the Ford assets around the world, so that we get the value of the volume and the quality that goes along with that, I think it’s going to really, really help us provide a much better portfolio and a value proposition to our customers.

Operator

Your next question comes from the line of Rod Lache - Deutsche Bank.

Rod Lache - Deutsche Bank

I was hoping we could talk a little bit about the cost savings, which clearly accelerated. You had a negative $200 million on the cost in auto in Q4; and it was a positive $1.2 billion in Q1. Specifically, how much was the commodity hedging gain in Europe? You said it was 250 in North America.

Can you also give us the historical adjustment to the warranty for the quarter? You had some something in excess of the period costs in Europe, it looks like.

Don Leclair

Yeah, both of those, Rod, were about 100.

Rod Lache - Deutsche Bank

100 for commodity hedges in Europe?

Don Leclair

About 100 on the commodity hedging in Europe and about 100 on the prior period warranty adjustments.

Rod Lache - Deutsche Bank

The commodity outlook does reflect some intensifying headwinds. There’s been a lot of talk about steel recently, surcharges and that sort of thing. Could you just give us an update on what your thoughts are relative to what steel is doing, and how that is going to be managed? What kind of impact do you see going forward?

Alan Mulally

Well, certainly steel prices have been going up and we can read all about that in the newspapers. But for the most part, we have contracts with the major mills in most regions of the world and so we tend to see the changes in steel prices in kind of a step function.

Rod Lache - Deutsche Bank

So, you are not seeing any anything like a surcharge in excess of what your contractual pricing is at this point?

Alan Mulally

No.

Rod Lache - Deutsche Bank

Can you just lastly, just talk about the strategy for getting 20% of the workforce to the lower wages? It does look like the take rate on the initial round of buyouts is lower than maybe some had expected. What happens from here to get to that kind of number?

Alan Mulally

I think our fundamental strategy is to size our production to the demand and the changing model mix. At this time we don’t have any more plans for a company-wide buyout, but clearly plant by plant and vehicle by vehicle, we will size that production capacity to that demand. So, we’ll continue to be taking actions on all of our fixed cost following that strategy.

Rod Lache - Deutsche Bank

Can you do that outside of just the voluntary buyouts that you’ve been doing so far? What other options can you pursue?

Alan Mulally

We will work all of the elements of the fixed costs, because the number one thing as we’ve talked about is to size the production to the real demand.

Operator

Your next question comes from the line of Brian Johnson - Lehman Brothers.

Brian Johnson - Lehman Brothers

A question for Alan around page 17, but more around the business and operational strategy as opposed to the details of the numbers. If you compare the $3 billion goal for ‘08 and $5 billion over the time period, where you are on it now in terms of where it’s going to come from versus what you might have been thinking say at this point last year, what are the major puts and takes? Underneath that is how have you compensated for the rising costs of commodities in some of these products? Was that in your thinking or have you gone and found other cost reductions to offset some of that?

Alan Mulally

You bet, an important question. That’s why we really want to keep grounding all of us on the data that we are showing on chart 17. Clearly, what’s new for us going forward has been the material cost reductions, because that’s tougher and the commodity prices, but also it means that we have now moved even faster on taking out more of the structural costs.

So I think overall clearly it’s a more challenging environment than when we laid out the plan. But, again our fundamental approach is to size the business to the real demand and get back to profitability, and that step of removing the $5 billion out of the fundamental cost structure in ‘08 is clearly the most important first step this year.

Brian Johnson - Lehman Brothers

Are you saying that material cost reductions are more than you would have looked at or thought was possible maybe a year, year-and-a-half ago?

Alan Mulally

Less, lower.

Brian Johnson - Lehman Brothers

Lower.

Alan Mulally

That’s why we have increased our efforts on the rest of our structural costs.

Brian Johnson - Lehman Brothers

Given the lower take rate on attrition and the pace of employees being divested, where are you getting the offset to that in structural costs? Or increase that target?

Alan Mulally

Well it also includes the employees also. We are just not going to do it with a company-wide buyout, but plant by plant and vehicle by vehicle, we’ll continue to reduce the employment accordingly and the rest of those structural costs. But, we’re just not going to do an employee-wide buyout anymore.

Brian Johnson - Lehman Brothers

Would that mean additional capacity reductions or shift idlings?

Alan Mulally

Yes, and employment reductions.

Operator

Your next question comes from the line of Himanshu Patel – JP Morgan.

Himanshu Patel – JP Morgan

I want to go back to Rod’s question. On the attrition program given the now weaker industry volume, just conceptually does it make sense to not exercise the lower wage portion of the union contract now? Would you rather just not replace anyone in the system and just reduce overall headcount, is kind of what I’m getting at. Is that how we should think about how Ford would use the attrition program?

Alan Mulally

That’s step one. And clearly the highest priority is to size it to the current demand, and also to be looking ahead at these increasing headwinds. I think that over time then as we stabilize and the economy comes back then that’s going to be a chance for us to really take advantage of the opportunities for employment and lower rates.

Himanshu Patel – JP Morgan

Right. Alan, the contract is a four-year contract, obviously. Would you envision getting at least 20% of the workforce down to the lower wage rate by the end of the contract or would you be fine that not happening as long as overall headcount was going down?

Alan Mulally

I think that would be something that we will give you further guidance going forward; I think it’s little too early to tell that. The most important thing right now as we’ve talked about, is to get us sized to this real demand and get stabilized and then it’s just all going to be a plus after that.

Himanshu Patel – JP Morgan

Staying on North America net pricing was negative $300 million, I think it was to the tune of positive $1 billion in each of the last two quarters of 2007. I think the comparison year-over-year for Q1 was actually pretty easy as well. Did something sharply deteriorate on the net pricing side, or does this have something to do with fleet mix or any of that, that could be influencing that number?

Don Leclair

It’s mainly due to the fact that the economy is softening, demand is weakening and the incentive level really across the board in the industry has increased, plus we ran a slightly higher mix of leasing in the first quarter that has a little higher incentive level attached to it.

Himanshu Patel – JP Morgan

So would you expect net pricing, Don, to kind of stay at this rate for the next few quarters or was this abnormally weak?

Don Leclair

I’d say that we expect net pricing to be tough for the year. I don’t want to give an estimate for the balance of the year, but we expect it to be tough while the economy continues to slow. As it picks up, which we hope it will do some time but we are not sure when, we expect those pressures to abate somewhat.

Himanshu Patel – JP Morgan

Can I shift gears to Europe? You had a $700 million profit there and it sounds like there was $300 million are one-time funding between warranty and mark-to-market gains on commodity hedges. I mean even if you back that out, you did north of a 4% pre-tax margin in Europe this quarter. That’s clearly fairly high relative to anything you’ve done in the past decade. Is this sort of the new starting point? Should we think about mid single-digit margins in Europe for the foreseeable future?

Don Leclair

Well, as we said back in January, we’ll be disappointed if Ford Europe doesn’t do better this year than last year and the first quarter is a strong indicator. As Alan said, we’re really pleased with how things are going in Ford Europe and we think it’s an indication of what happens when you do aggressively restructure and do accelerate the flow of products.

The reason we are encouraged by that is first we’re doing well in Europe but it’s a good sign for us as we bring the products across and leverage the assets. So we’re really pleased with how things are going in Ford Europe, a lot more new products coming this year as well.

Operator

Your next question comes from the line of Chris Ceraso - Credit Suisse.

Chris Ceraso - Credit Suisse

A few short-answer questions. First on the steel contracts, Don, are those annual? Will these open up at the end of the year?

Don Leclair

They do vary and they vary by region. Generally they are about a year, but they don’t all start on January 1. There is a step function throughout the year and the timing and the amounts vary, depending on whether you are North America, Europe or Asia, South America.

Chris Ceraso - Credit Suisse

What about the North America one?

Don Leclair

I think for competitive reasons we’d really rather not comment on the specifics at any one steel company or region or anything.

Chris Ceraso - Credit Suisse

The $12 billion to $14 billion full-year cash burn, does that include the $4.5 billion that goes into the VEBA that went in the first quarter?

Don Leclair

No, and that was 12 to 14 over three years.

Chris Ceraso - Credit Suisse

Right.

Don Leclair

Right.

Chris Ceraso - Credit Suisse

So, that does not include the $4.5 billion.

Alan Mulally

Does not, correct.

Chris Ceraso - Credit Suisse

Alan, I know you’ve been talking, hammering on this point for a long time about simplification of components and streamlining and so forth.

Alan Mulally

Encouraging.

Chris Ceraso - Credit Suisse

Encouraging. Has that started to show up in any of the numbers yet? Is any of that in these material cost numbers or the structural cost numbers, or is that still something that you are going to see down the road?

Alan Mulally

Just a little bit, because your real opportunity is, as you know, with the development of the new vehicles. I am really encouraged by the efforts; we’ve included the dealers with us as well as product development, as well as our suppliers, and we just see a tremendous opportunity to simplify these vehicles and package the vehicles with the options that customers really want, with and take all that complexity and the hassle out of it.

You can just imagine what that’s going to mean to the cost structure inside Ford, as well as throughout our supplier base. It’s a big element of Jim and Derrick’s plan, having it driven from the market and then drive it all the way through to the suppliers. So we’ll start seeing the benefit of that next year, and then more and more each year thereafter, especially with each of the new model inductions because you get a real chance to make a significant step improvement in that complexity reduction.

Chris Ceraso - Credit Suisse

Don, can you put a number around how much of the inventory build helped in the quarter? You mentioned that a couple of times in terms of why Q1 was a little bit stronger.

Don Leclair

No, I would rather not because that’s too close to telling you what our margins are by vehicle line. But, it was a 32,000 increase during the quarter, and 34,000 on a year over year.

Chris Ceraso - Credit Suisse

What about the change in incentive accounting? You mentioned this on the last call, was that a factor in helping or hurting the results in Q1?

Don Leclair

No it wasn’t.

Chris Ceraso - Credit Suisse

What are you thinking now in terms of the timing of recognizing on the P&L the benefit from the healthcare deal in 07? Is it still third quarter ‘08?

Don Leclair

We’re not sure. As far as it looks now we’re on track to achieve what we need as far as court approval and all the documents and the proceedings are occurring as we thought and I guess we have no real update now, other than that.

Operator

Your next question is from the line of Peter Nesvold - Bear Stearns.

Peter Nesvold - Bear Stearns

If I just take a step back at this point, because I think a lot of the details have been covered here, I certainly agree with your point that US auto sales are getting weaker here not stronger, and it does seem that there are couple of hundred million dollars of benefits from warranties in the quarter. But I’m struggling to understand why don’t you exit this year profitable in North America if you’ve got the 150 launch, if you got the healthcare deal at your back and if you’ve got more headcount reductions coming?

Alan Mulally

Well, the trajectory that we laid out in the plan has us getting back to profitability in ‘09, as we’ve talked about, and the progress in ‘07 and ‘08 are tremendous improvements in the fundamentals. As we talked about, we have the one-offs in the first quarter, and also the slowing industry throughout the rest of this year. I think with the cost reductions we have in place, we are going to be able to achieve the $5 billion. It’s a major improvement on our plan to make the improvement we are making in ‘08 on the way to profitability in ‘09. So, I think it’s about right at this point, Peter.

Peter Nesvold - Bear Stearns

I think the trajectory is even stronger than what you’re outlining here. Am I unreasonable to anticipate that you could actually exit this year by fourth quarter profitable in North America, and then certainly full year in 2009?

Don Leclair

Certainly our goal is to be profitable in 2009 for the full year. I think the best way to think about the progress that we are making in North America is to think not about the absolute amounts but to look at the improvement each quarter. What’s happening now is the business is improving fundamentally underneath and that’s being masked in part by some of these one-offs but importantly by the slowing economy. I mean the industry volumes are sharply lower than they were a year ago, and the mix is tough and working against us in raw materials prices.

Despite those tough external conditions the business is getting better. I think the thing to focus on is the year-to-year improvement each quarter as the business gets better, despite the challenging external environment.

Operator

Your next question comes from Jonathan Steinmetz - Morgan Stanley.

Jonathan Steinmetz - Morgan Stanley

I know you like to do a walk year on year but if we can think a little bit sequentially versus Q4. I am still in North America trying to understand this a little better. It looks like you went up by around $1.5 billion pre-tax. The volume seems to explain maybe $300 million, $400 million, and I guess the commodity hedging maybe a few hundred million, but it seems like there is the better part of a billion that’s hard to reconcile. I’m just wondering Don maybe or Alan if you could talk about what items may have affected that sequentially, since there was pretty limited restructuring sequentially?

Don Leclair

Okay. That’s true there was but there is actually a lot going on there. As you say, the volume and the mix was a not a big contributor but there was a lot on the cost reduction side, and that includes material costs. We had some warranty adjustments at the end of last year, and then when you compare those to the start of this year, there are some things that are seasonal in nature that tend to make the fourth quarter worse than the first quarter. Those would include things like we generally do a lot of advertising towards the end of the year. Just the fact that we draw down our inventories at the end of the year and we don’t do that so much at the end of the first quarter. All those contribute, as it’s mainly on the cost side and as you say, the volume and mix was not an important contributor.

Does that help?

Jonathan Steinmetz - Morgan Stanley

Yes it helps. Let me switch to Ford Credit. How do we take your comments on it? Are you saying there will be no dividend this year, or just a reduced dividend, or it’s wait and see?

Alan Mulally

I think its wait and see. We had no dividend in the first quarter and the way things look right now, I’d be surprised if we have a dividend in the second quarter. But, it’s too early to say there will be no dividend for the full year, and we’re just doing this to be cautious.

Jonathan Steinmetz - Morgan Stanley

Lastly, maybe Alan on Volvo, you had about a $150 million loss, if I pro forma things for the OPEB deal as well as some of the cash burn here, you could be reasonably net debt, have a reasonable net debt position as a company. It’s not something that you guys seem to relish and it’s not a big profit contributor and it might fit better elsewhere. Are you thinking about that as a source of liquidity or are you still looking to turn that around internally?

Alan Mulally

Our priority now is to improve the business dramatically.

Operator

Your next question will come from the line of Mark Warnsman - Calyon.

Mark Warnsman - Calyon

Regarding exchange, do you see the US dollar remaining weak on a sustained basis, first? Second, is it correct to assume that you’ll continue to look to match your cost and revenue basis by currency? Following on to that, to what extent do you see a weak dollar impacting your sourcing pattern on both sides of the Canadian border, the Volvo footprint, and then ultimately how you are factoring exchange into the One Ford strategy?

Don Leclair

That’s a lot to try and remember but I’d say that if you start off, we are projecting the dollar relative to the yen and the euro and the pound to be generally in line with most external observers, at least through the end of this year or early next year. Our plan is to, where it makes sense, to produce where we sell. Now that doesn’t apply to every single part of the business.

I am not going to comment about the US-Canada sourcing right now.

Mark Warnsman - Calyon

Regarding the American Axle strike, have you seen changes in the market dynamic for full size pickups and SUVs and has it had an impact, either positive or negative, on your business?

Alan Mulally

I assume you mean the American Axle has affected of some of our competitors’ production and have we seen an effect in the market because of that? I’d say no. No, we haven’t.

Operator

Your next question will come from the line of Patrick Archambault - Goldman Sachs.

Patrick Archambault - Goldman Sachs

I just wanted to see if you could provide a little bit more color on Financial Services on slide 28. I understand that a lot of these headwinds are very dependent on the overall credit market, but could you try and give us a sense of what here might be one-time in nature and what might be sustained headwinds throughout the balance of the year?

Don Leclair

Well that’s an interesting question and I think a tough one. If you just take it one step at a time on the financing margin, I think the rates, base rates are low in the US; that’s by policy, and we’ll have to wait and see how that goes. I think that will change as the economy changes, and the spreads, or the pricing of credit risk, that’s a function of how things go in the credit markets.

The things that are happening to us, that are affecting our results importantly, aside from that, are really in two areas. One of them is the auction prices for large pickups and large SUVs, and those are going down and that’s related to gasoline prices. We have a forecast on gasoline prices as does everyone else, and we think we have a good forecast for where that’s going to come out, but we’ll have to wait and see. That’s affecting how we value our lease portfolio as well as our credit losses, because it makes each repossession more expensive. The thing that’s not recurring is last year’s one-time restructuring costs, which were largely in the first quarter and that we’re now beginning to see the full benefit of the operating cost improvements that are related to that restructuring. Does that help?

Patrick Archambault - Goldman Sachs

Moving to slide 25, on the automotive cash flow in terms of the changes in working capital, other timing differences, does that include adjustments for non-cash things like the fair value adjustments for FX and hedging, and if that is in that bucket, can you give us a sense of what’s really just simple working capital and what is just add-back of non-cash cost saves?

Don Leclair

Let me see if I can help you there. Those loan revaluations were about $300 million, the hedges were a similar amount. We had cash taxes in there of $200 million and then timing differences on marketing and warranty accruals were about $0.5 billion. Working capital is actually favorable, and there is a whole host of other things that offset that.

Patrick Archambault - Goldman Sachs

That’s helpful color. Lastly, just to push the steel issue a little further, there are reports of one of your competitors in negotiations with Nippon Steel for some kind of a surcharge. Is this something that you are in talks with and would consider, or can you say that absolutely this is something that’s not going to happen until contracts reprice?

Don Leclair

I think it’s best if we don’t comment on that for competitive reasons. What I will say is that a part of what Alan described earlier about trying to communize and make global our efforts in product development and purchasing is that we will be seeking to have more common specifications of steel across the world which will help our steel suppliers, as well as help ourselves have sensible discussions with them. We have some work to do within our own operations to improve our ability to have lower steel costs.

Operator

Ladies and gentlemen, we will now take questions from the media.

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Source: Ford Motor Company Q1 2008 Earnings Call Transcript
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