Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ford Motor Company (NYSE:F)

October 25, 2012 9:00 am ET

Executives

George Sharp - Director of Investor Relations

Alan R. Mulally - Chief Executive Officer, President, Executive Director and Member of Finance Committee

Stephen T. Odell - Chairman and Chief Executive Officer

Robert L. Shanks - Chief Financial Officer, Executive Vice President, Chief Accounting Officer and Chairman of Global Risk Management Committee

Analysts

John Murphy - BofA Merrill Lynch, Research Division

Emmanuel Rosner - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Colin Langan - UBS Investment Bank, Research Division

Adam Jonas - Morgan Stanley, Research Division

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

Rod Lache - Deutsche Bank AG, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Ford Motor Company conference call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to your host for today's call, Mr. George Sharp, Executive Director of Investor Relations. Please proceed, sir.

George Sharp

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

Now today's presentation will focus on the actions we are taking to accelerate the transformation of our European operations. Next Tuesday, we'll be holding our normal conference call on third quarter earnings, so your questions related to earnings can be handled at that time. Presenting today are Alan Mulally, President and CEO of Ford Motor Company; Stephen Odell, Chairman and CEO of Ford Europe; and Bob Shanks, Chief Financial Officer. Also in attendance are Stuart Rowley, Corporate Controller; and Neil Schloss, Corporate Treasurer.

Before we begin, I'd like to cover a few items. Copies of this morning's press release and the presentation slides that we'll be using have been posted on our investor and media website for your reference. Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance. Of course, actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are summarized at the end of this presentation. These risk factors and other key information are detailed in our SEC filings.

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

Alan R. Mulally

Thank you, George, and good morning to everyone. And to those listening from Europe, good afternoon. We are pleased to have the opportunity to review the plans we announced yesterday and earlier today to achieve profitable growth for our operations in Europe. Let's start by turning to Slide 2, please.

This, of course, is our ONE Ford plan. It has been unchanged for many years. It is the plan that is transforming our business in North America and it is the plan that is driving our growth in Asia Pacific and Africa and South America. And it is the same plan that we are using to address the European crisis affecting our business.

We are moving decisively to mass production to demand; accelerating the development of new products and technologies that will expand our portfolio, giving us a product lineup of best-in-class cars, utilities and trucks that is among the freshest and most advanced in Europe; taking actions to strengthen our Ford brand; improving the efficiency of our operations; taking advantage of opportunities to grow our business; and leveraging the global assets of the Ford Motor Company worldwide.

Stephen Odell, Chairman and CEO of Ford Europe, will now take us through the actions we are announcing today. Stephen?

Stephen T. Odell

Thank you, Alan. Before talking about the actions we're announcing today, it's important first to understand and recognize the importance of Europe to the global automotive industry and to Ford.

Within the global automotive industry, Europe is the second-largest automotive region in the world, behind Asia Pacific Africa. It is also home to growing markets, such as Russia, Turkey and Eastern Europe. For Ford, Europe is an important part of the company representing slightly more than 1/4 of our Automotive revenue and vehicle volume.

Our brand is well regarded and is second in the region in terms of sales. The products we sell are, for the most part, from our global ONE Ford product portfolio. We have a history of more than 100 years serving customers in Europe, supported by substantial investments we and our dealers have made across the continent. Europe is also an important center of engineering, research and development, supporting all regions of the company. We also have 3 large and successful joint ventures in Europe. And as at the end of 2011, we had 47,000 employees. We progressively restructured our business since the late 1990s, resulting in a cumulative profit over the 2004 through '11 period. But we incurred a loss through the first half of this year as the business environment significantly deteriorated.

As outlined here on Slide 4, the business environment in Europe is very difficult due to structural issues associated with the sovereign debt crisis that likely will continue for a considerable period of time and will take time to resolve. As a result, we expect continuing economic weakness in the region. Consistent with that, we continue to project an industry volume of about 14 million units this year, which would be the weakest industry since 1994. For 2013, we expect flat to lower industry volume. By mid-decade, we expect the industry to grow only modestly with volume increasing to about 15 million units, well below the peak industry of 2007 of 18 million units. On the other hand, we do project stronger growth in markets such as Russia and Turkey, which are not included in the 19 markets we call Europe for the purposes of industry volume and market share.

Companies with production bases in Europe are facing increasing pressure from imports due to the unbalanced Korean Free Trade Agreement. And indeed, there's further risk as consideration is given to similar agreements with Japan and India. There is also a high degree of regulation of the European automotive industry, with cost to meet the stringent and increasing regulatory requirements expected to rise. And continued excess industry capacity, unless addressed meaningfully, is expected to limit pricing opportunities for all manufacturers. This is the business environment against which we are developing our plans to achieve profitable growth of Ford in Europe.

Let's now turn to Slide 5. Our strategy is based on 3 equally important fundamentals of our business. First, an unprecedented product and technology acceleration, delivering a model lineup that will be among the freshest in the region to drive revenue and margin growth. Secondly, a comprehensive series of initiatives to strengthen further our Ford brand, emphasizing class-leading quality, fuel efficiency, safety, smart technology and value. And finally, a more efficient cost base, including a more optimized manufacturing footprint that significantly improves utilization. All 3 elements of our strategy are facilitated by leveraging the global assets of our ONE Ford plan.

So let's now look at each part of the strategy in more detail, starting on Slide 6. Last month, we detailed an aggressive product acceleration in Europe, leveraging the company's ONE Ford global portfolio and targeting opportunities in the large car, sport utility and commercial vehicle segments. Specific product announcements included plans to introduce 15 global vehicles within 5 years. New Fiesta, on sale later this year, redesigned inside and out with new technology offerings, including the range-topping Fiesta ST performance car coming next year. New Mondeo, an all-new version of Ford's large car, featuring premium design and craftsmanship and smart technology. Mondeo is now expected to be launched in Europe late 2014, pending confirmation of our plant rationalization plans. Expansion in the growing European sport utility segment, starting with the all-new Kuga later this year, followed by the EcoSport small SUV within 18 months. And then later, next-generation Edge, a larger, premium utility vehicle already popular in other parts of the world. And finally Mustang, the iconic American sports car, is coming to Europe.

Shown here on Slide 7 is our commercial vehicle range, which will be rolling out over the next 2 years as we completely redesign and expand this very important portfolio of products. It includes the new Transit, Transit Custom, Transit Connect and the all-new Transit Courier, plus a family of new Tourneo people carriers. The lineup also features our global range of pickup that we launched earlier this year. Both Transit Custom and the Ranger pickup recently received recognition for excellence, with the Transit Custom voted International Van of the Year and Ranger, the only vehicle in its class to be awarded a 5-star Euro NCAP safety rating.

We're not only accelerating the introduction of new products. And as shown here on Slide 8, we're also rolling out new technologies at the same time. This includes EcoBoost engines, including the 1-liter EcoBoost, which recently won International Engine of the Year; SYNC in-car connectivity; inflatable rear seat belts; MyKey; and other drive-assist features, such as Active Park Assist.

Let's now turn on to Slide 9 to our brand, which is another critical element of our plan to profitably grow in Europe. As I mentioned earlier, the Ford brand is already highly regarded across Europe, but it can be strengthened further, providing us both growth and margin opportunities. Central to our strategy, we'll be emphasizing the Four Pillars of our global Ford brand strategy: quality, green, safe and smart, while providing outstanding value as perceived by our customers.

In addition, we are investing in and working on other initiatives. And those include innovative and integrated marketing for our products, technologies and brand. New retail and fleet products in growing segments has already identified. Using our new products to deliver healthier channel mix; specifically growing higher-margin retail and commercial fleet share while rebalancing our lower-margin rental and dealer self-registration or demo sales; developing new series mix opportunities to drive higher contribution margins; strengthening our retail network profitably and customer retail experience; strategically destocking to historically low levels of dealer inventory benefiting Ford, our dealers and our customers. This is enabled by recent improvements in our logistics and IT systems that reduce the time from order to delivery. We expect to have the destocking largely completed by the end of this year. And finally, investing for growth in expanding markets such as Russia and Turkey. We know from our experience in other parts of the world the importance to a profitable business of enhancing the perception of our Ford brand.

The third element of our strategy is cost. That is increasing the efficiency of everything we do in serving our customers in Europe. Although we have already taken or announced many actions in response to the tough environment in Europe, today, we are announcing several actions intended to improve the efficiency and utilization of our manufacturing footprint in Europe. The effect of these planned actions will be to reduce our installed vehicle assembly capacity, excluding Russia, by 18% or 355,000 units. This will yield gross cost savings totaling $450 million to $500 million annually.

And the planned actions include our intention to close the Genk, Belgium vehicle plant in late 2014, which triggered the start of an information and consultation process with Genk employee representatives. This would result in producing our large cars in Valencia, Spain, which would become a fully utilized Flex C and CD mega plant. To accommodate this and pending further study, we will produce our C-MAX and Grand C-MAX products in Saarlouis, Germany, which would become a fully utilized mega plant, building these products as well as Focus.

We also plan to close in 2013, 2 facilities in the U.K.: a vehicle assembly plant in Southampton, currently building Transit; as well as stamping and tooling operations in Dagenham. Transit production will be consolidated in Kocaeli, Turkey, also becoming a fully utilized mega plant producing commercial vehicles. Ford's U.K. operations will remain the center of excellence for powertrain development and production. This includes plans to add a new, next-generation, low-CO2, 2-liter diesel engine in Dagenham that will power future Ford vehicles beginning in 2016. This engine will be developed at Ford's Technical Centre in Dunton, one of the largest auto research and development centers in the U.K. Additional investment is also expected at Ford's Bridgend Engine Plant in Wales.

The actions we are announcing today along with an initiative to reduce salary and agency positions across Europe, announced previously, affect 6,200 positions or about 13% of our European workforce. Now Bob will take us through the implications of our plan for Europe on our outlook.

Robert L. Shanks

Thanks, Stephen. As a result of the deteriorating environment in Europe, as well as elements of our own transformation plan, we now expect Ford Europe's pretax loss for 2012 to exceed $1.5 billion. This includes more than $400 million related to dealer stock reductions and in addition, about $100 million of accelerated depreciation associated with our planned manufacturing footprint actions.

Compared with our prior guidance, the higher loss is explained primarily by the strategic destocking actions we're taking in the fourth quarter. Compared with 2011, this reflects lower industry volume and Ford market share; the effect of our strategic destocking initiative, which will be reflected in the fourth quarter; higher incentives net of pricing; higher pension expense; and restructuring-related cost; and lower parts and services sales.

The 2013 profit outlook for Ford Europe is similar to 2012, but the causal factors are somewhat different. Compared with this year, we expect to incur increased restructuring-related cost, mainly accelerated depreciation; higher pension expense due to lower discount rates; and investments for growth and to implement the changes already noted in our manufacturing footprint. We expect favorable market factors to offset these factors, primarily nonrepeat in 2013 of the 2012 destocking action.

We project Ford Europe will return to profitability by mid-decade. This will be driven by higher industry volume, higher Ford market share from our products and brand initiatives, growth in emerging markets, a richer mix, improved contribution margin and our more efficient manufacturing footprint. A partial offset will be higher structural costs as we reconfigure and grow the business. As we proceed with our restructuring, most financial effects will flow through our operating results. Employee separation costs, however, will be reflected as special items. Longer-term, we're targeting to achieve an operating margin of 6% to 8% in Europe.

Now turning to Slide 12. As we advised last week, we'll announce our third quarter results next Tuesday. But we can tell you now that total company pretax profit and operating EPS are better than the second quarter despite a substantial loss in Europe. This represents an improvement from our most recent guidance. For the full year, we continue to expect strong total company pretax profit and positive Automotive operating-related cash flow. And we are continuing to work toward our mid-decade guidance.

So with that, Alan now will summarize today's announcements.

Alan R. Mulally

Thank you, Bob, and thank you, Stephen. Today, we have announced plans to achieve profitable growth in Europe. We recognize the impact our actions will have on many employees and their families in Europe, and we will work together closely with all stakeholders during the necessary transformation of our business in Europe. The same ONE Ford plan that transformed our business in North America and is guiding us towards a better future, is being used to address the crisis in Europe.

Our strategy to return Ford Europe to health is based equally on product, brand and cost, each important to achieve our objectives. We project to achieve profitability in our very important European operation by mid-decade and we are targeting long-term to achieve an operating margin of 6% to 8%. As is our normal process, we will continuously monitor the current reality we are facing, and consistent with our ONE Ford plan, assess opportunities to strengthen our business for profitable growth. Thank you again for joining us today. We would be pleased now to take your questions.

George Sharp

Thanks, Alan. Now we'll open the lines for about a 40-minute Q&A session. We'll begin with questions from the investment community, and then take questions from the media. [Operator Instructions] Anne, can we have the first question, please?

Question-and-Answer Session

Operator

Yes. And the first question comes from the line of John Murphy with Bank of America.

John Murphy - BofA Merrill Lynch, Research Division

Just one question for you, first. What are the booked and cash costs of this restructuring rationalization?

Alan R. Mulally

We'll turn to Bob for that.

Robert L. Shanks

Yes. What we're expecting is about a $100 million of accelerated depreciation this year, and that will be in the fourth quarter. And that's related to the facility actions that we're talking about. We'll expect those costs to increase next year, and then we'll have the separation cost. Now the accelerated depreciation will go through the operating earnings. The separation cost will be incurred a bit in the fourth quarter this year, and that's related to the salary initiatives that we announced a month or so ago. And then you'll see in '13 and '14 progressively as employees -- and when employees are separated, you'll see the separation costs come through both profits and cost. So it will be not a onetime cost charge or cash hit, it will be something that kind of comes in over the next 2.25 years. And then John, we'll also have higher capital spending to do the resourcing of the products. And over time, that would flow through the operating results in depreciation and amortization.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And separation cost typically run around $150,000 per employee. Is that a rough ballpark?

Robert L. Shanks

It's different by facility. But I think you could look at the past and see what we've incurred and we'd probably see similar results going forward.

John Murphy - BofA Merrill Lynch, Research Division

Okay. Then second question just on capacity utilization. It looks like by our numbers, that you would have gotten to the high 70% range on capacity utilization straight time by 2015. But it looks like what you're implying here is that you might get to the mid-80s by 2015. I'm just trying to understand where you think that gets by mid-decade and really what kind of capacity utilization number you need to be profitable to this 6% to 8% range that you're targeting on op margin.

Robert L. Shanks

Well, let me answer that in 2 different ways. One, if you look at the current year, we're operating at an installed capacity utilization rate that's below 70% across all of Europe, excluding Russia. If we had been able to take these actions this year and resource everything, we would have improved the breakeven by about 15 points. So it would have been a bit over 80%. So as we go forward, clearly, our objective -- and you could hear that in Stephen's comments when he was talking about fully utilized mega plants. As we go forward and as we start to see the industry come back a bit by mid-decade and our call is that it will to the tune of about 15 million units, along with a bit of share growth, largely driven by our investments in an expanded commercial vehicle portfolio, we would expect to have very healthy rates of utilization.

John Murphy - BofA Merrill Lynch, Research Division

Okay. And then I just have one last question on the pricing strategy. I mean, it sounds like you're pushing product, which is great, it's similar to what you did in North America. But the environment in Europe is much tougher. I mean, you have pricing discipline sort of across the industry in North America. You have a complete lack of pricing discipline across the industry in Europe. Just wondering how you think that's going to shape up in the coming years, if that will get better as other companies take capacity out or you're just going to remain sort of in this tough environment and really have to fight hard to get price, even with this very good product cadence.

Alan R. Mulally

You bet, John. Let's turn to Stephen.

Stephen T. Odell

As Bob said, the outlook that we have for 2013 as an industry, either flat or even slightly below where we've been running this year. So certainly, the pricing pressure will remain through that period. In the outyears, we've got some view of moderate industry growth, which we believe will give us some pricing opportunity. I really don't know nor would attempt to comment on other capacity actions by other manufacturers. But this will enable us to give excellent utilization of our plants and will therefore enable us to give channel mix decisions. We'll have a completely flexible Valencia plant, where we can move between C and CD, depending on demand and channel. So I think it does give us more flexibility going forward. Clearly, we'll be in a competitive environment and we'll have to be priced accordingly.

John Murphy - BofA Merrill Lynch, Research Division

So there's no assumption that pricing in general improve in Europe, it will be -- it will remain tough going forward?

Stephen T. Odell

I think it's tough going forward. There is a view that as the industry starts to improve, there is some opportunity. Again, there could be greater opportunity depending on capacity actions by other manufacturers.

Alan R. Mulally

I think also, Stephen, you might comment on moving into some of the new market segments with some leading products, too, that will really contribute.

Stephen T. Odell

Thank you, Alan. The Kuga, obviously, is doing very well. The new Kuga will, we believe, continue to do well. Edge is an entry into a segment we've not been in before. EcoSport is an entry into a segment we've not been before, as indeed is the Transit Courier. And half of our Transit range is all-new in segments we haven't operated before. So we think there is definitely opportunity there for us. Mustang, of course, is a segment we've not been in and we think will just be a wow product for us.

Robert L. Shanks

And John, I would add that when you look at the really tremendous pace of product introductions, as Stephen outlined, historically, even in the markets that we're in today, we're able to get pricing related to the product itself and the equipment and features that we add. And we certainly believe that we'll be able to do so in the future. And that is part of the roadmap that would get us to profitability by mid-decade.

Operator

And our next question comes from the line of Emmanuel Rosner with CLSA.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

So first, the $450 million to $500 million of annual growth savings that you're expecting sounds a little bit lower than I would have calculated based on the number of positions that are eliminated, as well as like 3 plants. Can you maybe tell us how you think -- how you've been thinking about that? And how do you reconcile that with the expectation of being profitable by mid-decade knowing that you expect to lose about $1.5 billion or so next year?

Robert L. Shanks

Yes. The $450 million to $500 million is around the facility actions. And it's clearly driven by the positions that will be ultimately eliminated, and then also, of course, lower operating cost and the depreciation that will ultimately go away as the facilities are written off. It -- you could get a higher number from 2 perspectives. One, we have based our savings from the point in time when the facilities are closed. So between now and then, we would expect there to be some efficiencies. And of course, the accelerated depreciation will have been eliminated by the time the facilities close. In addition, we do receive what are called down-day subsidies in the Belgium facility. And of course, we've had a lot of down days there of late. And so if you were to eliminate those subsidies and just looked at sort of the effective -- the gross positions being eliminated, you'd get a somewhat higher number. So with those caveats, that's how we get to the $450 million to $500 million. Now looking ahead, that's clearly an important factor in terms of what return the business to profitability. But as we indicated in the comments, we actually do expect our structural costs to increase in the aggregate because of the investments that we're making in growth, and of course, to reconfigure the business. So other things that will be benefiting us between now and then is the fact that the industry will be stronger somewhat, which we outlined. We also expect to grow our market share a bit, largely driven by the expansion of our commercial vehicle portfolio. We are working on series mix opportunities. And of course, a number of the products that we're talking about tend to be higher and new entries are higher-margin products, which will benefit us. We talked a bit about the improvements on our contribution margin both from pricing related to the product but also continued efficiencies in freight and also material. And then the rest of it sort of -- some of the impact that we're seeing in the near term this year and next year in terms of accelerated depreciation and that sort of thing will have been eliminated by the time we get to mid-decade. So you put all that together and you've got a profitable business.

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Okay. No, that's very helpful. And just as a follow-up, so these $450 million to $500 million, that's gross cost savings. How should we think about the net numbers? Are there additional employees you need to hire in the other facilities in order to accommodate this increased production there?

Robert L. Shanks

Well, we are -- we are clearly going to have to invest in the business, both for growth but also to reconfigure it, which we've mentioned. And so that is one of the factors that's resulting in a higher structural cost. So we have assumed that will occur in our walk to profitability by mid-decade. But we're not providing any specific numbers at this time.

Operator

And our next question comes from the line of Brian Johnson with Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

As sort of building on the last question, if we take a $1.5 billion loss and then we take out the, let's call it, $500 million of capacity actions, we're still at $1 billion. If you were to kind of break it between product launches, other costs, SG&A saves and perhaps materials and commodities, how would you kind of bucket the way you close the next $1 billion?

Robert L. Shanks

Well, let me -- I'm not going to provide any specific numbers, but let me just give you the big chunks. So we think we'll get some significant improvement in terms of the recovery of the industry. And that's not just on the vehicle side but we've actually seen our parts and services sales and profitability decline quite a bit over the last year or so. So we expect that to come back. As I said, market share and improved product and series mix and then contribution margin improvements, which will come from material cost as well as a bit of pricing that we talked about related to new product and other efficiencies, particularly in freight. And then that will be offset by the structural cost that we'll be investing in the business. The other thing to remember when you're looking at the mid-decade versus now, we are taking a substantial hit to profitability this year from all the destocking that we've done. So it's over $400 million. Of course, that will not have -- that will not be repeated. In fact, we'll have to build stocks up a bit as the industry expands, both from share and from industry, and that will contribute positively as well.

Alan R. Mulally

Stephen?

Stephen T. Odell

Yes. Just to add, and Bob may have said it, but I think it is worth reemphasizing, that we've put investment into our JVs in Russia and Turkey. And they are businesses that will grow substantially. The Russian industry, by the end of this decade, will be the largest industry in what we consider Europe and will contribute substantial profits for us.

Brian Arthur Johnson - Barclays Capital, Research Division

And in terms of the profit contribution -- or at least could you remind us of the volume, which you probably won't give us, on LCVs, but at least the volume contribution now and where you might see that mid-decade?

Alan R. Mulally

Stephen, did you hear?

Brian Arthur Johnson - Barclays Capital, Research Division

The question is: a, what percent of just unit sales are LCVs now, how would you see that mid-decade; and b, any color on the relative profitability of that segment?

Stephen T. Odell

Is that specific to Russia or to general...

Brian Arthur Johnson - Barclays Capital, Research Division

No, no, no. Overall Europe.

Stephen T. Odell

I won't be specific because you put a target out there and it can move around. But we're very confident that with the incremental product that we're putting into segments that we don't currently act in that we see share growth. We've been actually relative conservative on that share growth in order to make sure that we can improve our margins going forward. So if you don't mind, I won't put a specific number out there.

Brian Arthur Johnson - Barclays Capital, Research Division

And just to remind us of the percent of your mix now that's LCVs, just unit count?

Stephen T. Odell

It's about 300,000 units. I mean, it -- we see it going considerably above there as we add new products and new segments.

Operator

And our next question comes from the line of Colin Langan with UBS.

Colin Langan - UBS Investment Bank, Research Division

What happens if the -- I mean, what is the risk to this plan? I mean, is there any risk that the union -- what happens if the union doesn't approve the changes?

Alan R. Mulally

Stephen?

Stephen T. Odell

Well, as we've mentioned both in the press and on this call, in Belgium, we are, as you allude to, in a consultation phase. We believe that will take somewhere between 4 and 6 months. It's slightly difficult to judge the endpoint. But we've gone through a lot of thought to determine what are the right actions to take for the company. And as difficult as the discussion and the decision was to move forward with the consultation, we absolutely believe it's the right thing to do. I mean, Genk, for instance, is our lowest utilized capacity plant. And I think it -- although we'll have the right level of consultation, our view is that the correct thing to do is to close that plant in 2014. But we will obviously respect the consultation process that's in place. On the U.K., as usual, we'll have consultation with our unions. But I do believe it is somewhat compelling, firstly, that we are investing in the U.K. We're investing between -- about GBP 1.5 billion in the U.K. to ensure that we really focus on the high-technology capability that we have with engines, both designing and engineering them. So we're actually putting investment in the U.K. and the separations in the U.K. are voluntary. And we'll attempt to make room for people that still want to stay and move them around the organization. So I can't predict at this point the union reaction since we just met with them this morning. But we believe we are being extremely fair. We're being open and transparent with the unions. And obviously, the discussions will proceed.

Colin Langan - UBS Investment Bank, Research Division

Okay. And any color on the total -- I mean, what should we model in, in terms of over the next 2.25 years, the total cash cost of all of the actions that have been taken?

Alan R. Mulally

Bob?

Robert L. Shanks

We're not going to be providing any specifics on that, but we will have substantial cost outlays to support the new products, to support growth and also pensions in the U.K. but very importantly as well, the employee separations. And we'll report, as I mentioned, the in-place separations as they occur quarter-by-quarter.

Colin Langan - UBS Investment Bank, Research Division

And just one last one and just to clarify, the $450 million to $500 million in cost savings, I mean, does that include depreciation? Because it sounds like next year, there's going to be maybe $400 million of accelerated depreciation...

Robert L. Shanks

For the most part, we're past the depreciation because, as I said, we assume that savings from the time the plants close. And of course, the accelerated depreciation would end at the time the plants close.

Colin Langan - UBS Investment Bank, Research Division

Okay. And the run rate in Q4, is that a good proxy for the accelerated depreciation impact next year?

Robert L. Shanks

More or less. I mean, I think we're looking at probably something to the tune of about $400 million next year.

Operator

Mr. Adam Jonas.

Adam Jonas - Morgan Stanley, Research Division

Adam Jonas, Morgan Stanley. So just a question about in the spirit of shared sacrifice for those plants that will continue with the organization going forward, are you able to give us any color on what they were able to do? For example, in Valencia, what kind of concessions or flexibility or wage structure or work rules, anything that they did to deserve and earn to stay surviving?

Stephen T. Odell

This is Stephen. We haven't yet approached either Valencia unions or government. It's actually inappropriate to do that until we've started consultation process with the Genk unions, and indeed, the Belgium government. We will have ongoing dialogue. The principal reason for believing that the correct thing to do is to move production to Valencia, Valencia capacity utilization is much higher than Genk and we will be able to include both C and CD product in that facility, making it extremely flexible. So we haven't asked for or engaged in any dialogue yet with either the Spanish, Valencian or the local authorities or the unions.

Adam Jonas - Morgan Stanley, Research Division

Okay. And just last question, just on the outlook for Europe in 2013, a couple of things. Just want to confirm that when you say volume flat or down slightly, does that also include Russia and Turkey in that definition?

Stephen T. Odell

No. I'm sorry, I should have been more specific. That includes what we call Western Europe, the 19 countries. So my 14 million is for Western Europe. And indeed, the similar number is for the same markets. We actually see Turkey increasing its industry next year and Russia, the same.

Adam Jonas - Morgan Stanley, Research Division

Okay. And just finally then, when you mentioned outlook for 2013 similar to 2012, just to be a little bit more specific, does that also mean that $1.5 billion or losses exceeding $1.5 billion that you're targeting for 2012, that we should expect something similar for 2013 including many of these operationally run-through costs like the accelerated depreciation?

Robert L. Shanks

Yes, that's correct.

Operator

And our next question comes from the line of Michael Ward with Sterne Agee.

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

Just when you talked about the inventory hit of $400 million, is that over and above what you did in the second quarter?

Alan R. Mulally

Stephen?

Stephen T. Odell

Yes. It's Stephen. It's total. We have progressively reduced our inventory to match demand, as you've seen in each of the quarterly profit announcements. We're going a step further in bringing the inventory down to a level that we haven't run at before, a very low days supply. And so that's the cumulative impact of adjusting according to the industry and then going deeper on dealer inventories.

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

Okay. And then when you talked about your pretax targets, does that include any contribution from your joint venture partners in Europe?

Robert L. Shanks

Yes, it does.

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

Okay. And so in total, now when you're looking at the 2013 outlook, it -- does that include or exclude? I wasn't quite sure where you were standing as it relates to the employee separation charges.

Robert L. Shanks

It excludes that because we, traditionally, for all of our restructuring actions, North America, here, wherever, we put those through specials.

Operator

And our next question comes from the line of Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

Just a few things. I don't know if maybe this can be asked this way. But of the cost savings that you've outlined, the $450 million to $500 million, can you clarify how much is cash versus noncash and how does it ramp?

Robert L. Shanks

Yes. The most of it is cash-related.

Rod Lache - Deutsche Bank AG, Research Division

And will any of that be seen in 2013? Or does that just come in mostly in 2014?

Robert L. Shanks

Yes, very little in '13 because the U.K. facilities only close in middle of 2013. And Genk, subject to the consultation process, wouldn't close until late 2014. So book [ph] to the savings will be coming in as the facilities close.

Rod Lache - Deutsche Bank AG, Research Division

And can you clarify for us what you might be targeting for sort of the European break-even point? That I think in North America, you were very explicit that you wanted to be at breakeven at the trough of the market. Is there a volume for Ford or for the market that you sort of figure with the various capacity actions that you're taking plus the product actions? Is there a level that you can sort of be targeting in the intermediate term?

Alan R. Mulally

Stephen?

Stephen T. Odell

Well, I think our guidance that Bob gave to be profitable by mid-decade helps get us there. We'll have some industry pickup by then, probably not a great deal. We'll have a number of restructuring actions behind us, and we'll also have a great deal of the new product to arrive. So I think you can project that at or slightly before mid-decade is our break-even level, without giving a specific capacity number.

Rod Lache - Deutsche Bank AG, Research Division

And just lastly, you took out 50,000 units of inventory in the first half. I think you got to about 165,000 units, which I recall being in the mid-50s in terms of days supply. What's this target that you are expecting in terms of just ongoing inventory levels?

Alan R. Mulally

Stephen?

Stephen T. Odell

Our expectation is that dealer days supply would be below 40 days, probably around 38 days.

Operator

And our next question comes from the line of Patrick Archambault with Goldman.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I guess, my question was a bit of a follow-on. Are there -- I didn't really see much on SG&A or kind of overhead expense in here. Is there anything that can be done sooner. Sort of as per Rod's question, a lot of what you have going on here sort of is '14 and out. Is there anything sort of on the fixed cost side that is a lever that you could pull a little bit sooner than that to get some kind of benefits next year? Or are you doing that and seeing that offset by structural cost in other places?

Alan R. Mulally

Stephen?

Stephen T. Odell

Thank you, Alan. I think obviously you've seen that we have a voluntary salary headcount reduction program in place and we expect around 500 people to leave before the end of the year.

We've pushed down on all of our fixed costs, including fixed marketing, including agency costs and we've taken out a lot of the -- any flex that we saw in the system. So it was obvious though, that we needed to do more than that in the industry that we're facing now and going forward, which is why we've announced the actions that really move it forward apace.

Alan R. Mulally

Bob?

Robert L. Shanks

Yes. And perhaps I could just provide some perspectives. Unlike North America, which was a very, very bloated business, Europe has no restructuring for many, many years, and actually is very lean in terms of SG&A. And they have taken down everything they possibly can, including, for example, advertising and sales promotion this year, which of course, will build up as we move forward and the new products come in and the industry starts to come back. So you probably wouldn't expect to see as much opportunity as you might have, for example, if you were looking at a business like North America was. There are opportunities, and Stephen and the team have really gone after them. But we're just coming from a different start point than, for example, the case of North America.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. Very helpful perspective. If I can just get one more in. On Slide 9, you talk about kind of rebalancing the channel or healthier business channel mix away from, I guess, rental and dealer self-registrations and demo sales. Can you just provide a little perspective? How important are those channels for Ford right now in Europe? Can we hear a lot about that?

Alan R. Mulally

You bet. Very important.

Stephen T. Odell

It varies by country. Germany, for instance, including the premium manufacturers, has a quite a long history of self-registrations, if you like, and demos being between 25% and 30% of the industry. And we've participated at the national average level. It is actually relatively profitable business, but it's -- what we're practically seeing is rather unusual in other markets around the world. Rental business is pretty much across each of the markets. New products obviously is an opportunity for us to shift business to higher-profit retail, away from some of the demonstration business, even less than the industry average does, and profitable fleet. So we think that there's an opportunity here. In fact, retail and fleet were flat in 2012 and rental share was down. So we've already started to take those actions and we'll kind of accelerate them as we've got better use of our capacity and new products coming through.

Operator

[Operator Instructions] We will now take a few questions from the media. And the first question comes from the line of Karl Henkel with the Detroit News.

Karl Henkel

I know that this is probably looking too far in the future. But do you believe that these moves provide you with enough flexibility and enough potential capacity should the market really rebound? And how much of that played into the factors of the time line of when this decision was made?

Alan R. Mulally

Very important, Karl. Stephen?

Stephen T. Odell

And certainly in the near term, we believe we've got more than adequate capacity and very well-utilized capacity in the near term. Remember, our capacity in Russia is being put in place to serve that Russian market as it grows. So we treat that in a different fashion. We are also -- we'll have flexibility in as much as we will, and indeed, do import Ranger. We'll obviously be importing Mustang, importing EcoSport and other products. So we've got an opportunity to flex our manufacturing capacity in Europe where necessary, even on the plant configuration that we'll have.

Operator

And our next question comes from the line of Alex Webb with Bloomberg.

Alex Webb

I had a couple of questions, particularly about Spain. You said that you're going to boost the capacity utilization there. But does that entail the addition of any further jobs there? And did the -- have the reforms enacted by the Spanish administration had any influence in your decision to take jobs to or to take more capacity to the facility there? And finally, I was keen to perhaps have some more info on what you think needs to be done more broadly across the industry in terms of reducing capacity.

Alan R. Mulally

Stephen?

Stephen T. Odell

We haven't had any dialogue, as I mentioned before, with the Spanish unions. As perhaps plays into my last question, we will have the flexibility to increase capacity utilization in Spain as required, and more importantly, probably the flexibility between C and CD platforms from that one plant. So as necessary, we would add jobs, but we're not in a position really to address that at this point. In terms of competitive capacity, I think if you look at a market that was running at 18 million pre-2008, is now running at 14 million, and probably had surplus capacity when it was running at 18 million, I believe it's fairly evident that there is surplus capacity across most manufacturers. I don't know how or when that will be addressed. But given the protracted nature of the recession, my view is at some point, it has to be addressed. And hopefully, you see that Ford are doing what they think they need to do and operating under the ONE Ford plan.

Alex Webb

Do you mind if I just ask one quick follow-up to that? As you're putting in these measures, if others don't follow your lead, do you think you will still derive the full advantage of the closures which you're enacting now?

Stephen T. Odell

We're determined that these are measures we have to take really under any situation. It clearly would be -- could be considered more difficult in the outyears. But we think what we're doing is appropriate and necessary to achieve the financial goals that Bob and Alan have laid out.

Operator

And our next question comes from the line of Deepa Seetharaman with Reuters.

Deepa Seetharaman

First, I just wanted to ask, Alan, do you get the sense that we -- the business, the trough for Europe, that this is as bad as it's going to get?

Alan R. Mulally

Let's start with Stephen's thought about that.

Stephen T. Odell

Actually, if you'd have asked me that 2 years ago, I'd have said, "Yes, that's the trough then." So I think it's difficult to predict. I think we are, though -- it does feel like we're running at a very low level. And even having said that, we've still said that it could be likely that next year's industry could fall slightly below the levels that we're seeing this year, simply because there's so much support for incentives for consumers to buy products. And frankly, we do need to see some signs of economic recovery or indeed, stability. And employment is the key factor for me, I think. We will see industry levels in Europe remain at this level until we start to see some positive signs in confidence in employment levels. Alan?

Alan R. Mulally

I'd only add that I think one of the neat things about this announcement today is that we are really trying to reflect the reality of a slower growth, especially in Western Europe going forward. And that's why we need to move decisively now to right-size our capability to the real demand but have that flexibility to grow as we come back, especially with the higher growth rates in Russia and Turkey and Eastern Europe, as Stephen mentioned.

Deepa Seetharaman

Right. And you're confident that the measures that you've announced this week will be enough?

Alan R. Mulally

I think they're absolutely appropriate for the current reality. As you know, part of the way we operate every week and every month is we'll continue to assess the situation and we'll continue to take appropriate action decisively like we have.

Deepa Seetharaman

Earlier in the call, Bob said, in response to a question about separation costs, I think, Bob, you said it would be similar to what Ford has done in the past. Can you give us a sense of what the past separation cost per worker was?

Robert L. Shanks

It will be subject to consultation process in Genk, in particular. So it's tough to say. But the cost on average will clearly exceed $100,000 per person. And we'll just have to see how much more it might be. But it will be more than $100,000 per person.

Deepa Seetharaman

Okay. And just to clarify one other thing, I thought I heard you say the capacity utilization in Europe. Once all these capacity cuts are instated, would your capacity utilization in Europe be in the mid-80s? Did I understand that correctly?

Robert L. Shanks

No, what I said was that in the current year, we're below 70%. We're in the 60s. If we were able to see the benefit of all of these changes theoretically this year, and have resourced the products and so forth, it would have improved our breakeven by about 15 points, so we would have been a little bit over 80%. Now moving forward, clearly, as the industry recovers, as our share improves, we're going to have good, healthy rates of utilization.

Operator

And our next question comes from the line of Mark Schneider with Handelsblatt.

Mark Schneider

I would like to ask you 3 questions. The first one is why have you separated the news flow and even confirmed Genk building the new Mondeo last week? The second question is what consequences have the steps of the greater loss in Europe for Ford's corporate earnings in 2012? If you may answer that one. And the last question is do you accept European governments, like the French, helping other car companies? Or do you think about steps, for example, at the European level against such measures?

Alan R. Mulally

Sure, Mark. I think we'll have Stephen address your first and your third question, then we'll come back to Bob for the company answer.

Stephen T. Odell

We thought it was important, and indeed, respectful for the parties that we were addressing to separate the discussions, and therefore, the news. We met obviously with the -- we presented to the Belgian unions, and then we met with the Belgian government. And at that point, it was necessary, of course, to talk to outside entities and let people know what was going on. We then broke -- discussed the news with the U.K. unions this morning and thought it was appropriate to make the release at that time. I really think it's important, given the level of discussion, that we respected that confidentiality with the parties, and that's why we split the discussions. In terms of European government help, and particularly on the -- I think you alluded to the -- I suspect the PSA announcement. As far as I'm aware, it could not comply necessarily with European law, and a number of OEMs have already suggested that, that needs to be looked into at a European level. In the end, I just don't -- and this is my view. I don't think it's sustainable for support from government to keep competitive companies going forward, especially in a protracted, downsized economy.

Alan R. Mulally

Very good. Thank you, Stephen. And Bob?

Robert L. Shanks

Yes. And in terms of the impact of what we're doing in Europe and situation in Europe on the total company, as I mentioned earlier, we expect for the full year that we're going to have strong, total company pretax profits. We'll reconfirm existing guidance to that extent on Tuesday. And we also expect to have a positive Automotive operating-related cash flow. So we're still going to have a very, very good year this year.

Operator

And our last question then will be from the line of Mike Ramsey with Wall Street Journal.

Mike Ramsey

I just want to get a 40,000-foot question really. What you're doing, you've kind of mentioned before, you're going to try to take the same approach you took in the United States in Europe. And it's one thing to talk about it and another thing to execute it. I'm wondering why everyone else says it's so hard to restructure in Europe, but you've been able to kind of come out and say, "We're going to do these sweeping things and not be afraid to go forward." Is Ford somehow in a different position than the other automakers who are struggling with capacity? Or are you just more committed, so to speak?

Stephen T. Odell

This is Stephen. I wouldn't deem to say what other manufacturers should do or feel. I think what's important is that Ford is being driven by our key principles. And one of those key principles is to right-size capacity to demand. That's a prerequisite to having a profitable business going forward, along with having the right products at the right time. And I think all we're doing is living the outcome of our ONE Ford principles. And that's really important to do.

Alan R. Mulally

Thank you, everyone. That concludes today's presentation. And thanks again to all of you who joined us today.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ford Motor Co. - Special Call
This Transcript
All Transcripts