Ford Motor Company (F) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ford Motor Company's Second Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. K.R. Kent, Director of Investor Relations. Please proceed.

Thank you, Crystal, 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. With me here today are Alan Mulally, President and CEO of Ford Motor Co.; Lewis Booth, Chief Financial Officer. Also in attendance are Bob Shanks, Vice President and Controller; Neil Schloss, Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO. Before we begin, I'd like to cover a few items, copy of this morning's press release and the presentation slides that we will be using today have been posted on Ford's Investor and Media website for your reference. The financial results discussed here and are presented on a preliminary basis. Final data will be included in our Form 10-Q. 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 the U.S. GAAP equivalent as part of the appendix to the slide deck. Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance. Actual results could differ materially from those suggested by our comments made here. The most of significant factors that could affect future results are summarized at the end of the presentation. These risk factors and other key information are detailed in our SEC filings, including our annual, quarterly and current reports. With that I'd now like to turn the presentation over to Ford's President and CEO, Mr. Alan Mulally.

Thank you, K.R., and good morning, everyone. We are pleased to have the opportunity today to review our second quarter business performance and the progress we continue to make in delivering our plan. Overall, we had a very good second quarter, in line with our plan despite a challenging business environment. Let's start by turning to Slide 3. Our second quarter business performance was marked by Automotive growth, solid profitability and strong positive Automotive operating-related cash flow. Both volume and revenue were higher than a year ago. We earned a pretax operating profit for the eighth consecutive quarter. And in addition, each of our Automotive operations as well as Financial Services was profitable. Net income totaled $2.4 billion and Automotive operating-related cash flow was a positive $2.3 billion. We continue to strengthen our balance sheet, reduce an Automotive debt by $2.6 billion in the quarter. Market share was higher at 3 of our Automotive operations compared with a year ago, with shares in South America unchanged. Overall, we had a very good second quarter and first half, and we are well on track to deliver our guidance of improved total company pretax operating profit and Automotive operating-related cash flow for the full year compared with 2010. We accomplished these results while continuing to invest for future growth, focused on developing our outstanding products, the segment leading quality, fuel efficiency, safety, economy and technology. While this is increasing cost in the short term, it is in line with our plan. These actions are also driving higher volume, richer mix and stronger transaction prices. Slide 4 summarizes our second quarter business results compared with a year ago. Vehicle wholesales were 1.5 million units, up 101,000 units or 7% from 2010. Revenue was about $36 billion, an increase of about $4 billion or 13%. For comparison purposes, we excluded Volvo wholesales and revenue from 2010. Pretax operating profit excluding special items was $2.9 billion or $0.65 per share. This is $64 million lower than a year ago, with gains in the Automotive sector offset by the anticipated reduction in Financial Services. Net income attributable to Ford, including unfavorable pretax special items of $272 million, was $2.4 billion or a $0.59 per share. This reflects a $201 million decrease from a year ago. In the first half, vehicle wholesales increased by 9% compared with the same period a year ago and revenue improved 15%. First half pretax operating profit excluding special items was $5.7 billion, a $763 million improvement; and income attributable to Ford was $4.9 billion, a $265 million improvement. We ended the quarter with $22 billion of Automotive growth cash, and with Automotive growth cash exceeding debt by $8 billion, a net cash improvement of over $13 billion compared with a year ago and $3.3 billion higher than the first quarter. Slide 5 details our key product and sales highlights from the second quarter. We continue to demonstrate strength in mature markets including increasing total market share in the U.S. from 16.9% to 17.3%, growing market share in Europe from 7.9% to 8.3%, remaining #1 in Canada, including posting our best June result in 22 years. In the emerging markets, our momentum is accelerating with our second quarter performance boosted by solid growth in Turkey, Russia, China and ASEAN. Our safety commitment continues to gain recognition as the 2012 Focus, the F-150 and the Lincoln MKX were awarded Top Safety Pick ratings from the Insurance Institute for Highway Safety. In addition, the Focus also won a Euro NCAP maximum 5-star rating. Our commitment to customers was also on display as Lincoln was named the top brand in the 2011 Auto Pacific Vehicle Satisfaction Awards. At the New York Auto Show in April, we previewed our fresh in 2013 Taurus with significant advances in fuel efficiency, technology and design. In the pursuit of world-class efficiency and performance, we announced a plan to offer a new 1-liter, 3-cylinder EcoBoost engine and an all-new 8-speed transmission. Turning to Slide 6. We now review our business highlights from the second quarter. We've made significant announcements during the quarter as we continue to boost our commitment to growth. These included a $350 million investment with our joint venture partners in China to build our first transmission plant in the country, with initial capacity of 400,000 fuel-efficient, 6-speed transmissions. Also in China, we plan to double our dealer body over the next 4 years from 340 today to 680. And we announced our plan to build our next generation small SUV in China. In India, we are supporting our growth presence with a $72 million investment to increase production capacity at the Chennai engine plan. In South Africa, we began production of the all-new Duratorq diesel engine and announced our plan to export the new Ranger pick-up to 148 markets from our plant in that country. In Europe, we realigned our production plans for Spain, Germany, Romania and Turkey, moves that will increase manufacturing productivity and improve flexibility, as we launch at least 20 all-new or significantly freshened vehicles in the next 3 years. During the quarter, we also signed an agreement with Sollers, establishing a 50-50 joint venture aimed at increasing our participation in the Russian market. And finally, we announced our plan to triple production capacity of electrified vehicles in the U.S. to more than 100,000 units by 2013. Now I'd like to turn it over to Lewis, who will provide more details on our second quarter financial results.

Thanks, Alan. Let's start with Slide 8, which summarizes our financial results compared to the year ago. As Alan mentioned, pretax operating profit was $2.9 billion. Our net income attributable to Ford was $2.4 billion. Net income declined more than pretax operating profit due primarily to special items. Special items were $272 million unfavorable, $177 million more than a year ago. The special items included personnel reduction actions, Mercury and other dealer-related actions in North America, and pension settlements in Belgium. Details are provided in Appendix 3. Provision for income taxes was lower in the second quarter this year providing a partial offset to the unfavorable special items. Presently, we believe the majority of our valuation allowance on net deferred tax assets will reverse as early as the fourth quarter this year. This will lead to a more normalized operating tax rate that will approach 35% this year. At that point, we would revise the operating EPS for the proceeding quarters 2011, as well as for the full year to reflect an operating tax rate approaching 35%. Importantly, as we have said, the reversal of the valuation allowance will not affect our cash tax payments, which should remain low for a number of years. Slide 9 summarizes our pretax operating results by sector. The total company second quarter pretax operating profit of $2.9 billion includes $2.3 billion for the Automotive sector and $602 million in the Financial Services sector. As shown in the memo, total company pretax operating profit decreased by $64 million compared with the year ago, although Automotive results improved by about 10%. Compared with the first quarter of 2011, total company pretax operating profits increased by $41 million, driven by improved Automotive results, and lower Financial Services results were a partial offset. Slide 10 highlights the key markets factors and financial metrics for our total Automotive business. Wholesales and revenue both improved compared with a year ago and pretax operating profit of $2.3 billion increased by about $200 million. Operating margin, which we define as Automotive pretax operating results, excluding other Automotive divided by Automotive revenue, was 7%, down 2.1 percentage points from a year ago. Most of the margin decline can be explained by higher commodity cost. The margin impact of cost increases in other areas, that is, costs associated with new products recently launched or to be launched later this year; high volumes compared with last year; and investments we're now making for future products in growth is more than offset by higher net pricing and volume effects. In the first half, wholesale volume, revenue and pretax operating profits were higher than the year ago period, but our operating margin at 7.3% is down 0.5 percentage point. Slide 11 shows pretax operating results for each of our Automotive operations as well as for other Automotive. Total Automotive pretax operating profits of $2.3 billion was led by our North American operation with our remaining Automotive operations also profitable. The loss in other Automotive of $76 million is more than explained by net interest expense of $88 million comprised of $202 million of interest expense, offset partially by interest income. As shown in the memo, Automotive pretax profit was higher than the second quarter 2010, more than explained by other Automotive. When compared to the first quarter 2011, Automotive pretax profit improved due to other Automotive, North America and to South America. Slide 12 summarizes the $200 million increase in automotive pretax operating profit compared with 2010 by a causal factor. Improvement is driven by net -- by higher net pricing at each of our Automotive operations. Favorable volume and mix in North America and lower net interest expense. Net interest expense improved due primarily to debt repayments made since the beginning of the second quarter 2010. Contribution costs, which include material costs, warranty expense and freight and duty costs increased. About half of the increase is due to commodities costs. Material excluding commodities also increased, reflecting added content, technology and features for our new products, offset partially by material cost reduction from our suppliers. Other costs increased by $600 million, primarily explained by structural costs. About 3 quarters of the increase reflected manufacturing, engineering and advertising sales promotion costs to support our higher volumes, product launches, future growth and plan building initiatives. Slide 13 summarizes the $200 million increase in second quarter total Automotive pretax operating profit compared to the first quarter 2011 by causal factor. The change is explained primarily by favorable volume and mix in North and South America, favorable fair market value adjustments and lower net interest expense and higher net pricing at each of our Automotive operations. Cost increases, both contribution costs and other costs were partially offset. The higher contribution costs were explained by commodities costs, and other costs reflect mainly the impact of higher volumes and investments for future growth. Turning to Automotive business in North America. Slide 14 highlights the key market factors and financial metrics. Wholesale and revenue improved 12% and 15%, respectively, compared to the year ago. Pretax operating profits of $1.9 billion is essentially unchanged and operating margin at 9.8% was 1.4 percentage points lower. The lower margin is more than explained by higher commodities costs. U.S. industry SAAR, at 12.4 million units was higher than a year ago. Our U.S. total market share increased by 0.4 percentage points. In the first half, wholesale volume, revenue, and pretax profits were higher than in 2010, but operating margin was lower. Slide 15 shows the change in second quarter North America pretax operating results compared with 2010 by causal factor. Overall, second quarter results were unchanged. Volume and mix was $400 million favorable, more than explained by higher U.S. industry volume, favorable dealer stock changes and higher U.S. market share. Dealer stocks detailed in Appendix 6 increased during the second quarter in line with the higher sales volume. This compares to unchanged stocks in second quarter 2010. Net pricing was $900 million higher, reflecting the strength of our brand, our outstanding products, a disciplined approach to incentive spending, our continuing practice to match production to customer demand and a generally supply constrained environment. Contribution costs increased by $800 million, reflecting material excluding commodities, mainly new costs associated with our new products and higher commodity costs. Other costs increased by $400 million, primarily structural costs associated with higher volumes, pension and other benefit costs and investments in future products. As shown in the memo, pretax operating profit increased by $100 million compared to the first quarter 2011, explained mainly by favorable market factors and exchange, offset partially by higher other costs, primarily structural costs. On Slide 16 shows our second quarter U.S. market share. U.S. total market share in the second quarter of 17.3% was up 0.4 percentage point compared to the same period last year. This is explained by a higher share in both retail and fleet segments. Our U.S. total market share was up 1.3 percentage points compared with the first quarter, driven mainly by our share performance in cars. In our retail share of the U.S. retail industry, estimated at 14.3%, was up 0.2 point from a year ago. This reflects 0.7 points of positive share performance mainly utilities and trucks offset partially 0.5 point to segmentation changes. Our retail share of the U.S. retail industry at 14.3% was up 0.8 point from the first quarter, reflecting 1 point of share performance, offset partially by 0.2 point of segmentation changes. The share performance is driven by utilities and trucks. Turning now to South America on Slide 17. Results for South America continued to be strong with the second quarter marking the 30th consecutive quarter of profitability by our operations in South America. Wholesale volume and revenue improved 4% and 12%, respectively, from a year ago. The pretax operating profit of $267 million was down $18 million. Operating margin at 9.1% declined 1.9 percentage points, more than explained by higher commodities costs. In South America industry start at 5.4 million units was higher than a year ago and our market share at 9.5% was unchanged. In the first half, wholesale volume and revenue increased compared to a year ago while pretax profit was down. Operating margin at 9.1% was down 1.5 points. Slide 18 shows the $18 million decrease in second quarter South America pretax operating results compared with 2010 by causal factor. Net pricing was higher, more than offset by higher commodities costs and increased structural cost driven by local inflation. And as shown on the memo, pretax operating profit improved $57 million compared to the first quarter 2011, explained primarily by favorable volume mix, exchange and net pricing with higher cost that partial offset. Slide 19 tell us Ford of Europe. Wholesale volume was about the same as a year ago, while revenue increased by $1.5 billion or 20%, reflecting primarily exchange and favorable vehicle line mix. Pretax operating profit at $176 million was $146 million lower than a year ago. And operating margin at 2%, decreased by 2.3 percentage points. This reflects primarily higher commodities and other costs including investments in our brand and future products. Industry SAAR at 14.9 million units was equal to a year ago and second quarter market share at 8.3% was up 0.4 percentage points, reflecting favorable market reception to our new Focus and C-MAX products. In the first half, wholesale volume revenue pretax profits improved compared with a year ago while operating margin declined. Slide 20 shows $146 million decrease in second quarter Europe pretax operating results compared with 2010 by causal factor. Volume and mix was $15 million unfavorable, more than explained by unfavorable stock changes. During second quarter 2010, dealer stocks increased as we replenished inventories following the end of scrappage programs. This year, stocks declined during the quarter. Our net pricing of $102 million reflects mainly the new Focus and C-MAX products and higher costs reflect increased commodity cost and other costs more than explained by structural costs. As shown in the memo, pretax profit decreased by $117 million compared to the first quarter of 2011, more than explained by unfavorable volume mix and other changes primarily lower profitable parts and service operations and lower subsidiary results. Slide 21 summarizes the key market factors and financial metrics for Asia Pacific and Africa. Wholesale volume and revenue increased by 8% and 17%, respectively. Pretax operating profit of $1 million declined from the $113 million we made a year ago. The lower operating margin reflects primarily higher structural costs as we invest for future growth, was unfavorable product line and market mix. Asia Pacific and Africa industry SAAR of 27.8 million units was lower than a year ago, reflecting impact of Japan events. And our market share of 2.9% was up 0.5 percentage points, reflecting growth in China and the success of Fiesta in the ASEAN markets. In the first half, wholesale volume and revenue increased, but pretax profit and operating margin declined. And this is due to the higher structural cost related to our investments for growth as well as unfavorable product line and market mix. And Slide 22 shows the $112 million decrease in second quarter Asia Pacific and Africa pretax operating results compared to the year ago. The lower profit primarily reflects higher costs, which include the investments we're making to grow custom markets in the region, as well as unfavorable product line and market mix. And as shown in the memo, Asia Pacific and Africa's pretax profit decreased by $32 million compared to the first quarter, more than explained by higher other costs, primarily structural costs. Slide 23 covers second quarter actual production and our plans for the third quarter. Second quarter 2011 total company production was 1.5 million units, up 56,000 units from a year ago with about 40,000 units higher than our most recent guidance. The improvement is primarily in Asia Pacific and Africa, where we're able to manage successfully through the events in Japan and avoid some of the production losses that we had anticipated. We expect total company's third quarter production to be about 1.4 million units, up 92,000 units from a year ago, reflecting continued strong customer demand for our products. When compared to the second quarter, our third quarter production will be down 149,000 units. The decrease reflects our normally scheduled vacation shutdowns during the third quarter, but is also generally used to prepare for new models. Turning now to Slide 24 and a review of Automotive gross cash and operating-related cash flow. We ended the quarter with $22 billion in Automotive gross cash, an increase of $700 million from the end of the first quarter. This reflects positive Automotive operating-related cash flow of $2.3 billion, mainly the flow through of our pretax -- sorry, our pretax Automotive operating profits of $2.3 billion. And in addition, we received $1 billion of distributions from Ford Credit. Our cash flow before changes in debt and pension contributions is $3.6 billion. Net debt repayments in the cost of total $2.6 billion. We also made payments of $500 million to non-U.S. funded pension plans. And in the first half, our cash flow before changes in debt and pension contributions totaled $7.2 billion. Slide 25 summarizes our Automotive sector cash and debt position at the end of the second quarter. Automotive debt was $14 billion, a reduction of $2.6 billion from March 31. This includes $2.3 billion of payments on our term loans and full repayment of the outstanding balance of $800 million on our revolving credit line. These actions were offset partially by an increase in low-cost loans to support advanced technology. Our net cash as of June 30 was $8 billion and Automotive liquidity was $32.2 billion. Turning now to Ford Credit. Slide 26 shows $284 million decrease in second quarter pretax results compared with a year ago by a colossal factor. In line with our expectations, the results reflect primarily lower credit loss reserve reductions and the non-recurrence of lower lease depreciation expense with the same magnitude as 2010. As shown in the memo, Ford Credit's pretax profit decreased by $109 million compared to the first quarter, reflecting primarily lower credit loss reserve reductions and a number of smaller items included in other, such as higher storm losses in our Insurance business. Slide 27 covers Ford Credit liquidity and funding. The left box shows committed liquidity programs, cash and the utilization of Ford Credit's liquidity sources at the end of the second quarter. Ford Credit's available liquidity was about $17 billion. As shown in the right box, Ford Credit completed $19 billion of funding, and is on track to achieve its full year funding plan. Our liquidity remains strong and we will continue to maintain cash balances, funding programs and committed capacity to ensure we have strong liquidity to meet our business from funding requirements. Our funding strategy remains focused on ensuring we have access to a variety of markets, channels and investors. At the end of the second quarter, Ford Credit's managed leverage was 7.5:1 and equity was $9.7 billion. Let me now pass you back to Alan Mulally.

Thank you, Lewis. Slide 29 provides an overview of the business environment. In the second quarter, global growth was affected by several developments, supply disruptions due to the events in Japan, slowed GDP growth in many markets. Global automotive industry production was impacted adversely by 2.5 million units in the second quarter. Several emerging markets including China, India and Brazil tightened monetary policy through interest rate increases and other measures to slow down inflation. This policy in turn slowed economic growth in these countries to more sustainable rates than in 2010. The European debt crisis and the U.S. budget issues are generating a high level of uncertainty in the financial market. For 2011, we continue to expect global economic growth in the 3% to 3.5% range. The impacts from the events in Japan are receding, fuel prices are moderating and growth in emerging markets such as China and Brazil, although moderated, remain at very robust levels. On balance, incoming economic indicators are consistent with continued economic expansion of the global economy for the remainder of this year. Slide 3 (sic) _ summarizes first half results and our planning assumptions and key operational metrics for full year 2011. We maintain our industry outlook for the U.S. In Europe, however, a strong first -- after a strong first half, we are seeing some sign of weaknesses leading us to upgrade our full year guidance to 14.8 million to 15.3 million units. On operational metrics, as discussed previously, quality remains mixed due to some near-term issues in North America, which we are addressing. We are pleased with the progress we have made to date on these near-term issues, and we are on track to achieve our quality improvements in our International operations. We expect U.S. and Europe market shares to equal or improve from last year's results. We expect total company pretax operating profit to improve compared with the $8.3 billion earned in 2010. We continue to expect commodities and structural costs to each increase by about $2 billion compared with 2010. The increase in structural cost is consistent with supporting higher volumes in the short term, as well as our plan to grow our business, strengthen our brand and improve our products through our business planning period. Although not shown, we expect our structural cost as a percent of net revenue to improve, compared with 2010. For the full year, we expect Automotive operating margin to be equal to or improved compared with the 6.1% of 2010, despite higher commodity costs. We expect Automotive operating relating cash flow to improve from 2010's $4.4 billion. Capital expenditures remain in line with our most recent guidance. Our first half performance was very good. While we remain on track to deliver continuing improvement for full year pretax operating profit and automotive operating-related cash flow compared to 2010, we expect second half results to be lower than the first half. In our Automotive sector, this reflects increasing commodities and structural costs, as well as seasonal factors that tend to favor the first half. At Ford Credit, we expect lower profit the second half, in line with the factors that we have highlighted previously. Slide 31 summarizes our plan. We remain focused on delivering our ONE Ford plan, which is unchanged. Aggressively restructure to operate profitably at the current demand and the changing model mix, accelerate development of new products our customers want and value, finance our plan and improve our balance sheet and work together effectively as one team, leveraging our global assets. While there are growing concerns in several areas, as previously noted, we expect the global economic recovery to continue. We will continue to monitor our external environment closely and take appropriate and decisive action in response to whatever challenges and opportunities may arise. We continue to progress our plan to deliver profitable growth for all. Under our ONE Ford plan, we will continue to invest and profitably growing our business around the world while maintaining an unrelenting focus on improving the competitiveness of all of our operations. In 2011 -- 2011 is an important step in this journey and we are pleased to report that we are right on track with a strong first half performance. Now we will be pleased to take your questions.

Thank you, Alan. Ladies and gentlemen, we're now going to start the Q&A session. [Operator Instructions] We will begin with questions from the investment community and then take questions from the media who are also on the call. [Operator Instructions] Crystal, can we have the first question, please?

Certainly. [Operator Instructions] Our first question comes from the line of Brian Johnson with Barclays Capital.

Couple of questions. A housekeeping one on the valuation allowance. And then, want to talk a bit about the mix between the pricing. And then the content cost on Slide 15. The housekeeping question, pretty simple. Do you have any update on your valuation allowance and its impact on GAAP, and I should point out, not cash EPS?

No. No updates, Brian. It's -- and I think the only thing we're paying a bit more expressive about it is the full quarter.

Okay. Second question, on Slide 15, how should we think about where the trend you've talked about with, for example, the Fiesta and the Focus, of customers moving towards the upper end of the model line, which improves pricing and/or incentives? I assume it's not improving mix, versus the cost of putting in those touch screens, leather seats and so forth. Can you just kind of walk us through where those costs would be? And then, how much is really then, kind of, if you will, hedonic price increase, to use your economist terms, versus pricing to cover the content costs?

I don't think we're seeing much real pricing in the market. I mean I think most of the pricing we're seeing, as I said, would be equipment we're putting in our vehicles. And you are seeing some mix effect within the mix. We see some series mix improvements in North America on our smaller cars, as we improve our series mix, move us towards more profitable entities within the vehicle line. But we're not -- but truly, most of our pricing is because of the improved equipment of the vehicles.

Brian, I might just add that to your question that, we're seeing generally an appreciation by the consumers in the content, no matter what the size of the vehicle is. Whether it's an F-150 down to your point, whether it's a Fiesta or a Focus. People are making a lifestyle choice on the vehicle that works for them, whether it's a car utility, truck or a small or medium or large vehicle. But what they really want is the very finest quality, fuel efficiency, safety, the features, and of course, the best value. And that's of course, that is the Ford plan and, that's what we're seeing reflected in the numbers put on the revenue side as well as the content that we were adding.

So just mechanically, would that option mix play out in increased $400 million of pricing, but offset somewhat within that $400 million material, excluding commodity line?

Yes, I mean that was why we sort of phrased it that way, this pricing and to a certain extent, share improvements, doesn't come for free. As it comes with improving our products. So we're getting better pricing for them and giving some share gains.

Our next question comes from the line of Chris Ceraso with Crédit Suisse. Christopher Ceraso - Crédit Suisse AG: Just a couple of items. First on the guidance for the $2 billion in material cost. I noticed that steel, for example, which is a big input for you, prices are down maybe 15% or 20% from the peak around April. If that's right, is there any room for you to do a little bit better than that $2 billion number that you've guided to for the full year?

No, no. We don't anticipate a significant amount about or more than 50% of all our commodity of course are locked into our contracts and for steel, it's like 70% or 80%. So I think, you'll still see us in the next couple of quarters sharing commodity cost increase and we're still guiding it, about $2 billion. Christopher Ceraso - Crédit Suisse AG: Okay. So maybe slightly better, but probably close because you're mostly locked in?

Yes. Christopher Ceraso - Crédit Suisse AG: And then just one kind of bigger picture question about your investment in your growth in Asia, which per your mid-decade guidance, looks like it will explain a lot of the growth. Can you give us an idea of how big that will be and when can this be $1 billion contribution business by 2015, 2020? What's your outlook there for Asia, in China, in particular?

Well, a couple of things, one, it won't be a significant contributor to our business, but it will be in the latter part of the planning period. I think you have to remember in China, our business is done in joint ventures, so we only need to see the equity share of the profits from the China business. So China won't be quite as big a number as you'd like to see because it's going to be an equity share rather than a wholly-owned subsidiary-type share. And I think, you can understand I'm not going to give you specific guidance on absolute profits. Christopher Ceraso - Crédit Suisse AG: Right.

Well, Chris, as we earlier pointed out in the mid-decade guidance, the market is going to be increasing, I mean, overall worldwide from 74 today to nearly 97. And China alone, to your question, is going to be nearly 28% of the total market. And clearly, with the performance today and where we're going with the more extended product line, serving nearly 70% of all the market segments in China, we anticipate our presence to increase dramatically. Just a little bit more context with what Lewis said.

Our next question comes from the line of Adam Jonas with Morgan Stanley.

Just a couple of questions. First on the fin co, if we hold you to the guidance, previous guidance of about $1.9 billion full year target, given the headwinds that you'd anticipate on the credit losses and the residuals, that would imply that you're going to be seeing your run rate of profit fall about half from what you did in the $600 million you did in the second quarter, does that make any sense? Or does that need to be revised a bit? That's my first question.

I'm just trying to follow your math. We're not expecting the run rate to drop that significantly. But our guidance on the profit effect hasn't changed, but I'm not sure we guided to $1.9 billion. We guided to $1.1 billion.

Yes. What we have said was the impact, the impact of the credit loss reserves and the lower depreciation expense, those 2 items would be about $1.1 billion. Obviously, there's other factors in the business like our financing margin and volume as well. So we have said about $1.1 billion for those factors and then other factors will change it accordingly.

So I think you're getting to a probably too low of a number in the second half.

Fine, thanks for clarifying that. Second, just on your full year U.S. target for the SAAR of 13 to 13.5, I think many on this call would've felt it could've been very reasonable if you biased the low end of that range or even went below 13 million, given some of the disruptions and lack -- and the supply constraints that you alluded in your call. So what is it that gives you the confidence to kind of keep reiterating the 13, 13.5, because that would imply kind of approaching $14 million run rate towards the end of the year? If you want to isolate the 1 or 2 key things that you'd hammer home that really give you that confidence.

Yes, 2 factors. One, the underlying demand is still growing a little bit, slower than any of us hoped as we have come from the reception -- the recession, but about on track with where we expected. And so that's the first, and we still see some modest underlying growth and I think the second thing is, as demand -- demand is there and as supply becomes available following on from the Japanese disaster we expect to see some buffer in the third and fourth quarter with that supply coming on stream. So we told you at the end of the first quarter that we felt towards the bottom end of the range. It's more likely now, whereas, perhaps in the middle of the first quarter we were thinking that the top end was more likely. So we've assumed, we've indicated we think the bottom end of the range is more likely. The other encouraging thing is we have seen fuel pricing moderate somewhat in the last couple of months, and that's also helping customers feel a little bit more confident about buying.

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

First question on cash flow. You guys are guiding to an improvement of in free cash flow from the $4.5 billion that you saw last year on the Automotive ops. And you've been running -- you've run at $4.5 billion through the first half of the year. I'm just curious as we look to the second half, if there was any items other than a slowdown in the pretax income that you're guiding to like working capital or CapEx really increasing that would drive slower cash flow in the second half of the year, cause you're managing that inventory level real Steady Eddy, so it doesn't seem like working capital would swing around that much. Just trying to understand what the -- if you're really talking about just flat cash flow in the second half of the year or 0 cash flow?

John, we are saying to continue to expect to have positive cash flow in the second half. But you're right, profits will be low, we guided for the normal seasonal reasons, we expect profits to be a bit lower. And the second thing is our CapEx lines of $5 billion to $5.5 billion is back-end loaded. We went through $2 billion of CapEx in the first half, so I think you can see both those factors will make the second half, not quite as productive from a cash flow point of view as the first half. We know we have an extremely strong focus on cash, and that's enabled us to make these extraordinary improvements on our balance sheet, and that focus hasn't changed.

Okay. Second question just on the pricing and incentives. As we look at Slide 12, which is the walk through the total Automotive business, and we look at that for this quarter and last quarter, it looks like pricing incentives are a positive $2 billion. And I'm just trying to understand, is that the kind of thing that you think you can keep going, going forward? Is that purely because of the content and the products that you're introducing? Or are there some market factors that are helping drive that $2 billion plus in incentives and pricing through the first half of the year?

Well, it's primarily driven by great products, I mean actually a whole underlying business is driven by continuing to launch great products. I think we could conclude in the second quarter that there was in a supply constrained environment, there was some favorable market factors. But we expect that to even not prevail in the second half as supply becomes more readily available.

And then just a last question. You're running a 10% pretax margin North America in the first half for this year. That was sort of the higher end of your guidance range at the Analyst Day. Is there any reason to think that maybe in the near term, you might not be able to exceed that if the industry recovers next year?

I think we'll tell you about next year, when we get a bit close to seeing the industry recover. Our guidance for this year for both total Automotive and for North America is to equal or improve versus last year, and I think we'll just stick with that for now.

And then just lastly, on Appendix 18, Ford Credit managed receivables have been inching up since the end of the year. Is there a move to finance more and more vehicles, since your cost of funds goes down or is that just a sort of a seasonal blip from the end of the year that have seems to have cropped up in the first quarter and the second quarter?

Aside from this one, there's a little bit of currency, excluding currencies probably about flat. So I think we're at the bottom of the nadir of the way we have been reducing our receivables, primarily because of the roll off of the premium brands in the Jaguar Land Rover, Volvo and Mazda, and then now any about I think from memory it's 3% of the managed receivables. So we would expect as that roll-off finishes and as the business starts, the industry start improving and you've seen our volumes improve that managed receivables will start going up towards the back end of this year and then continue up as we described in our mid-decade outlook. Our buying policies with our customers haven't changed with, in if you want to buy a Ford car, come to a Ford show and a Ford Credit team is ready to finance it. Risk profile hasn't changed. The way we're managing our business hasn't changed.

Our next question comes from the line of Seth Weber with RBC Capital Markets.

Back on Slide 15, I'm just looking at the mix/other contribution of the $0.2 billion negative. I mean I thought I heard you talking about a favorable mix, can you just maybe clarify what's going on there? And maybe, is higher fleet sales weighing on that? Or can you give any color there?

No, we're really talking about -- we're not talking business mix there, we're talking about product line and series mix. And there's a couple of -- there's several things going on there. First of all in North America, we're seeing a shift towards our cars, as our cars are increasingly competitive and that's adverse product line mix. But within our cars, we're seeing positive series mix. We're also seeing a little bit of negative mix around some of the adoption of our higher fuel economy vehicles we're working on. And then there's a negative effect in Europe on series mix as Fiesta ages a little bit and the high series mix has just weakened a little bit. Offsetting Europe by strong positive product line mix on the new Focus and the new C-MAX. So there's a sort of in the sum of all the other things, and if you go to individual business unit slides, you'll see that in some business units, mix is negative, and in some business units, mix is positive. And it's a combination of all of those factors. I mean Focus, Focus in our product line mix numbers, Focus dominates. And obviously, it's great news in Europe because we're moving mix. As we said, we'd move to towards the C-class away from B-class, cause our C-class cars are now, brand new and very, very competitive with Focus and C-MAX. And in Europe -- in North America, there's negative product line mix because we're selling more cars, which is what we wanted to do. But cars that have a negative margin effect compared to trucks -- a negative profit effect compared to trucks.

Okay. It seem like it ticked down from the first quarter, so that just -- sorry in North America that just seem a little unusual, but -- is that the mix shift [indiscernible]?

Again, it's really in North America is Focus because we didn't start releasing Focuses until very close to the end of the first quarter. And we've essentially shipped most of the old Focus by very early in the first quarter. So you're right on Focuses on the first quarter, and either the cars got off to a great start in the second quarter, and that's why you see a slight drop down as you commented on.

Okay, that's actually very helpful. And then, if I could ask a follow-up, just the gains in market share in North America, it's kind of a tough question, but is there any way to handicap how much you think, how much of those gains you think are attributed to the Japan supply issue? And where do you think share might end up for the year?

Well, it's certainly -- repeating the guidance on share, we expect to -- improve compared to last year. It's really hard. And I think, essentially buying or selling on just how much was the effect of the Japanese. We honestly couldn't follow up the increased demand for small cars during the second quarter because we are flat out on Fiesta and we are flat out on Focus. So there's a lot of what ifs, if we've had a bit more supply available but...

But clearly led by the strength of the product line.

Our next question comes from the line of Itay Michaeli with Citi.

I wanted to go back to the materials x commodity line item. I think it's been about a $700 million drag year-to-date. I know you've called that out as a drag in the full year, but Lewis, I was hoping you can help us frame how to think about that line item say, in the next couple of years. Is that going to continue to be a drag on earnings on an annual basis? Or might that reverse back to being a neutral or even a source of earnings?

So to start off, I realize that as a category it's sad to describe it as a drag, but actually the underlying pieces of the business have great products. You'll get great revenues and you'll have customers coming to shows to buy the cars rather than selling more price. I mean that's -- the underlying thesis of the recovery of Ford is to have great products in all segments. So but as I said earlier on, this stuff doesn't come for free. The only way you can have great products is to have some additional costs, essentially with improve future levels, improved equipment levels. But we're getting rewarded for that by improved market share and improved price position. I think over time, we'll continue to -- we're in a, I feel like, an expensive period because we're moving to global products and to big upgrades, and particularly in North America. And you've seen those big upgrades last generation of Focus to this generation of Focus. There's a substantial change in our positioning in the vehicle and the price position of the vehicle. Over time, I think that may moderate a little bit, but you will not see us backing away from world-class products getting world-class revenues because we tried doing it the other way and it doesn't work.

Yes, absolutely, I think that's right, I would agree. Just 2 quick follow-ups on balance sheet. One, any update, Lewis, on your plans to repay the term loan B? I don't know if you also have an update on the pension performance year-to-date?

Yes, we don't typically comment on the pension performance during the year, so I don't have an update for that. No specific comments about how we came to the term loan. We still -- we told you that mid-decade, we'd like to have about $10 billion of debt on the balance sheet. We've been paying close attention to the balance sheet in the last 6 quarters. I think you can expect us to continue to look for opportunities to improve the business.

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

My first question was also on Slide 15. It looks like for the last couple of quarters, you've done a very good job of offsetting these material cost and kind of what you call, contribution costs with pricing, despite the significant headwinds there. This quarter, it does look, however, like the leverage that you would've gotten from the volume piece was offset by increases in fixed costs. Clearly, based on your guidance that you've outlined to us, there's quite a bit of growth ahead. Can you talk a little bit about what's going to allow you to outgrow your fixed costs in subsequent periods? Is it kind of some of these investments that you're making paying off? Is it just the leverage piece coming back in great orders of magnitude as the volume recovers? That was my first question.

Yes, I think it's really continuing to get the benefit of investments in making new products. So that's I think what you're seeing. And within the other costs, within manufacturing and engineering, it's roughly half and half volume-related costs in manufacturing and increased engineering for future products. So we're just going to keep, as I said earlier, keep working on new products and expect to get the benefits of it. Because as we described in the mid-decade outlook, within all our cost elements and particularly, our structural cost elements, you hear us talking a lot about growth. But the other thing that we're doing inside the company is working on functional excellence and we expect to continue to see benefits of functional excellence for a couple of reasons. One is as a get we get better at working ONE Ford, the skill teams are getting better at generating efficiencies. And the further we get down the line on global products, the more we're going to see the benefit of scale. And I think that scale -- gives us confidence in the improvements we're going to see in North America, the improvements we're going to see in Europe and then it’s the fundamental basis for getting into Asia.

Okay, great. That's helpful. I have kind of a similar question actually for Europe on referring more specifically to Slide 20. I guess there you had more flattish volume and kind of the trade-off between pricing and contribution cost was positive and also a very big increase in fixed. Can you tell us a little bit more about how you would expect that segment specifically to trend year-on-year? Are some of those fixed costs there again kind of temporary investments that should abate? Or is it your product that is going to come back in terms of the portfolio you have? Because I remember in your outlook meeting, you did have a pretty big increases in profit expectations for that segment.

A couple of things, we need to keep the volume change in perspective. In 2010, remember at the end of the first quarter, we've seen continued stronger-than-normal demand in Europe because of scrappage programs, and we've got to a pretty low dealer stock level and we had a big dealer stock build in Europe in the second quarter of last year. As we continue to manage our stocks in Europe to make sure that we keep them in line with demand, we've seen a small stock decrease this year. So there's a big year-over-year dealer stock change and you can see that fold out in the first call we have a box of 184. Second thing in Europe is, I think you're going to see the benefit of new products. One of the reasons you see a pickup in advertising sales promotion is that we still have a revenue gap against the best of our competitors in Europe. I think as our products continue to improve and we got a very fresh product lineup, and you know we've told you that we're going to have I think 20 new products between 2011 and 2013. So I think we're expecting to achieve what we've achieved in the U.S. and the story is very similar. Great products, well-positioned in the market, well-communicated with some of the creative work that Jim Farley's team has done and is now spreading around the world enabling us to close the transaction price gap in Europe against the best of our competitors. And so I see it is a similar story to the one that you're seeing unfolding in the U.S. And we are not backing off the intensity of product renewal in Europe. And it's enabled by the fact that Europe is no longer sitting out, trying to do it all on their own with nobody else sharing it, the way they used to be. Because it's actually all the European products are global products now.

Our next question comes from the line of Peter Nesvold with Jefferies. H. Nesvold - Jefferies & Company, Inc.: I guess a question for Bob. Bob, I think there's some perspective in the investment community that in mid-June you talked on expectations for 2Q and really, all you said was 2Q numbers would be line or below 1Q. And not to split hairs, but numbers were a little bit better than 1Q. So kind of point one, is just to ask, was there something that might have changed in the back half of June? And the reason I even raised this is to give us a few pennies, and trying to think about your comments about the second half being lower than the first half.

There was actually at the time that I spoke in Chicago, there was a wide range of projections by the analysts, and some are quite high. And what we wanted to do was just reiterate the guidance that we have provided at the Investor Day and that we've actually said in the first quarter call, which is the first quarter potentially would be the best of the year. And we just -- what I actually said in the Q&A session, the group is at the second quarter, we come in very close to the first quarter, potentially a bit lower, which is actually what it looks like internally at the time. So we did have a pretty good close, but all it did was just close a little bit of the gap that ended up with a result that is sitting effectively right on top of the first quarter. So I think we feel very comfortable with the guidance that we gave and felt like we were kind of segueing through the investment community, where we expected our outcome to be. H. Nesvold - Jefferies & Company, Inc.: Okay. And so the question there is -- the reason I raised that, so you did about $5.7 billion pretax in the first half of the year and you've talked about 2H being maybe a little bit lower than first half. When I look at one of the big deltas, $400 million of structural and materials costs are higher in the second half versus the first half. It would seem like the SAAR being higher in the second half versus the first half might offset that. And I was just hoping that maybe you can walk through what are the major levers or contingencies that could inflect the second half earnings trajectory? I'm trying to get a sense of, are you basically giving pretty similar second half versus first half? Or should I just kind of start to anticipate like a 5% or 10% type downtick in the second half for the year?

Okay. Let me try and answer that. This is Lewis. A couple things. One, we will incur as we've guided, increased structural cost and increased commodity cost in the second half. And I think you can expect to see some increase of material costs as well as we continue to invest in our products. So that guidance is unchanged, $2 billion for the full year, around $2 billion for commodities and around $2 billion for structural cost increase. Second factor affecting the second half versus the first half is Ford Credit. As we've guided the benefits of the very good credit climate and the lease depreciation expense, is reducing during the year and that will continue in the second half compared to the first half. And the third factor is this is a seasonal business. So low the fire [ph] rates will be going up. The production and household rates will not be as high in the second half as they are in the first half for good reasons, planned vacation shutdowns, the Christmas shutdown. And there's one other thing I was going to mention, it's gone. The SAAR rates will reflect that because they are adjusted. Wholesales, we would expect to see lower in the second half compared to the first half or maybe the same on the SAAR rates are higher.

I think it's also important to keep within the context of the reiteration of the guidance for the full year, taking into account the seasonal factors we've talked about in the investment in the future products in the second half. We also are reiterating our guidance for our total company pretax operating profit and Automotive operating-related cash flow of exceeding and improving over the 2010 performance year-over-year.

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

Could you comment on whether was there any impact in the quarter from the Japan earthquake disruption that negatively impacted results at all, or is that immaterial in the quarter?

I think there are a couple impacts that we can point to. One is on the supply side, we saw some lost units in Asia Pacific, about 14,000 lost units in Asia Pacific, better than what we expected when we talked to you in the end of the first quarter. We have seen some increased cost, the part of development communities have to work hard to revalidate or validate some new parts, some replacement parts. We've had some premium freight. We had parts in the air rather than on the sea to make our pipeline shortages. And any of that sorts of things, maybe not hugely material, but real, nevertheless. And we've seen some series mix weakness on some of our vehicles in North America, where we've been short of some high series navigation units where we have to restrict our series supply a little bit. But I just want to go back to the overall guidance for the year. It was a good second quarter, and we feel on track to beat last year's $8.3 billion pretax profit. So to me, that's significantly in the balance of second quarter was, it wasn't an easy quarter. Economic uncertainty, working our way through the Japanese tsunami issues and we delivered good results. And that's because I think you know our prices now are decisive actions. When we know we've got issues, whether they're internal or external, we respond to them and keep driving the business. And the thing is that's -- for me that's the pleasing thing about our second quarter. This is continued implementation of the ONE Ford plan, whatever the circumstances.

I mean we're talking around a couple hundred million-dollar impact or is it smaller than that or any sort of range of the actual?

It's less than that.

Okay. And Slide 13, you talked about -- you highlighted there's $700 million sequential increase in structural cost. I mean is that normal? It seems it's surprisingly high given the Focus was launched in Q1, I would've actually thought structural costs actually could even have been eased sequentially or is that just a normal seasonal impact?

No, it isn't seasonal. There's one normal thing and I think there's one thing that's relatively new for Ford. The normal thing is our volumes were up and our volume-related costs and manufacturing went up as a result of that. I think the other thing you're seeing that we've been talking about, we haven't done for some years, and we're now starting to do is investing for the future, investing in growth. And you're seeing us do that in engineering. You see us doing it in advertising and sales promotion. You actually see it in -- when you look at Asia Pacific that, that profitability is impacted by the investments we're making for the future. And that's the new thing for Ford that we are investing in the future. While we have the strong business now, we're investing for the future, where we need to develop the opportunities in the growing markets.

But does that mean most of the sequential is going to be in emerging markets going forward? Or, cause, I would think most of that growth would be outside of North America?

Well, I think you're going to sift, I think it's going to depend on the areas that North American volumes got. You're going to see continued increase in the structural cost in North America. We are continuing to work on ensuring our product freshness is amongst the best in the industry and that's going to be true in North America and Europe, as well as Asia Pacific and South America. So I think you're going to see structural cost spread around. I think on the cost base of Asia Pacific, it's going to look a bigger percentage increase. But in terms of incurring structural cost increases, I think you're going to see it spread across the business units.

And just one last one on when Sollers -- and I don't know if that's final or not, but I assume it's not final yet. I mean, would that impact your European segment reporting as you lose maybe half of the profit coming out of Russia?

Yes, we're not ready to talk exactly how that is going to reflect our reporting until we've closed the deal. And we'll be ready to talk to you about that in maybe the next call.

Our next question comes from the line of DeeAnn Durbin with Associated Press.

Just a quick one for Lewis. I heard you say that the pricing gain was primarily due to strong products. But I just wanted to clarify, do you expect that to moderate somewhat in the second half in the U.S. as supplies return to normal? And second, for Alan. I see that the quality outlook is mixed for the rest of the year. And I'm wondering if knowing what you know now about your quality rankings, do you think MyFord Touch was released prematurely? And how are you going to get a fresh start with consumers on that technology?

Sure. Let's start with Lewis.

Okay, on product pricing, on the pricing part, we expect to see continued positive pricing in the second half. I think where you may see some changes versus the second quarter is on incentives because as the supply come towards more normal, maybe increased incentive activity, but I think it's too soon for us to forecast that for sure.

And on your second question, as we pointed out in the first quarter, we are watching the consumer trends very closely. We clearly saw some areas that were a potential for improvement. And I think what we really learned out of that is that we are more -- we believe even more and MyFord Touch and SYNC and voice-activated, and hands on the wheel and eyes on the road than ever before, and we're absolutely committed to that. And we're also committed to using the feedback we're getting from the customers. The 2 issues that we really had was, one was just a computational capacity of the system, it was not as great as we needed it. But the other one was, we were giving them very good choice between the test screen, the controllers and voice-activated. And so we have taken that input. We have most of the improvements identified. We're incorporating those improvements now, and we're very pleased with the acceptance by the consumers and the fixes also. So those were the big lessons learned. The other one of course was on the 5- or 6-speed transmissions as we dramatically use them to improve our fuel efficiency. We're getting some good feedback on just the shifting sequence and the way it felt for the customers, and we are incorporating those improvements in the system, too. So I think we'll be moving back up where we were before pretty soon.

Our next question is from the line of Greg Gardner with Detroit Free Press.

Help me understand what contingency plan you have if there is no resolution in Washington over the debt?

Well, clearly, we're continuing to watch the situation very closely and we'll take appropriate action. I think that we're all very encouraged, as hard as this conversation has been, is the conversation is taking place, it's not just on one thing, it's on the things that affect the total U.S. economy, and that is not only the debt ceiling but also the budget deficits, also the trade deficits. So I think this realization that the economic growth and expansion in the United States is really, really important to all of us. So I'm very confident we're going to get this, I guess some solutions to get us going again.

[Operator Instructions] And our next question comes from the line of Chris Wayward [ph] with USA Today.

Following up on DeeAnn's question. So Alan, quality problems. You say they're limited to 2 areas, the transmission smoothness and MyFord Touch?

Yes.

And you feel that -- how bad do you think these problems were and how long do you think they'll be before they're completely resolved?

Well, I think it's -- when you introduce a new technology like this that is so connected to a way that the consumers operate the vehicles, we are expecting to get really good feedback on what can make it even better. And just like the consumer electronics industry, our plan is to listen really carefully and incorporate that feedback in a very timely manner to continue to improve the system. What as I pointed out, Chris, we believe more than ever in both of the sets of technology, as far as the usefulness and the reason to buy Ford products. And the vast majority of the consumer, over 60%, 70% absolutely are pleased, and it's a reason to buy. So we're going to continue to incorporate the feedback in a very timely manner, and people absolutely love the direction that we're going in fuel efficiency and really smart design and removing and reducing driver distractions. So a very important part of the plan. That's why we move so aggressively earlier in the year before a lot of the other surveys came out.

And Alan, as Lewis alluded to, what sounded like shortages of your most fuel-efficient cars last quarter, but you feel like you've got that under control, too?

Well, clearly, yes. But clearly, we are coming back from an unprecedented recession, and the whole supply base, we're bringing back up. We've dealt with very decisively with the Japanese disaster. And so we're making progress. We're doing that very thoughtfully, very carefully as we increase production and mass the production in world demand and some of our vehicles, especially with the rapid increase in fuel efficiency. We don't have as many of them as the demand, but we're going to continue to work on it and continue to mass production of all the vehicles to the real demand. But we're coming back, and we're coming back in a very thoughtful plan, careful way.

Our next question is from the line of Jennifer Kiter [ph] with Fox News Radio.

Question for you about the union negotiations, how you feel going into these? And how do you think these numbers might play into them?

Well, I think, it's a very -- to answer your specific question, these numbers are very positive for our negotiations because they really demonstrate what we have done together, all of our employees, all the stakeholders, our Ford store owners, our suppliers, our employees, the UAW, because what we have done in these results are a result of all the stakeholders working together on every element of competitiveness at the Ford business plan. And the fact that we are now transforming the company, we are profitability growing based on the strength of this great product line and strong business results, that gives us the opportunity now to continue to invest in the business and grow it further and provide great jobs and great careers, in addition to great products at Ford. And so the conversations we continue to have are, what can we do together to continue to improve the competitiveness of every element of the Ford plan and the fact that we have now announced that we're going to be hiring 7,000 new employees over the next 2 years. The fact that we're converting truck plants to car plans to provide this full family of best-in-class vehicles. So that's what the conversation is really about is, what more can we do going forward to improve every element of competitiveness? Because that is what everybody, everybody is most concerned about and most excited about. So I think it's, there's going to be a very positive set of negotiations just like they have been recently.

And Mr. Mulally, they can't -- if it gets to this point, which I'm sure both sides, hope it doesn't, but if there is a strike. I mean they can strike at Ford. They can't do it at GM and Chrysler. How do you feel that puts you -- an unfair advantage here?

Well, I think it's really premature to talk about a strike. Nobody wants a strike. I mean the most important thing we do is to continue to improve the competitiveness of the business, and that's what we're absolutely focused on.

Our next question comes from the line of Jamie LaReau with Automotive News.

My question was similar to Greg's regarding Washington talks on the debt. I know you don't want to go into too much specifics, but do you have a war plan, a backup plan? I mean, can you give us any indication of what you're thinking in terms of how you would address it?

No, we can't, Jamie, the most important thing is we look at all the elements of the business and what it would mean. But I'm just absolutely confident that these issues are really important, and we're going to get to a resolution that continues to move the United States forward, but we'll monitor it carefully. We'll look at all the parts of the business and we'll move decisively, depending on what happens, just like we have on everything else that we've faced over the last 5 years, as you well know, is that we just monitor the situation so carefully and then we move decisively.

And we're switching back to analysts now, and our next question comes from the line of Himanshu Patel with JPMorgan. Himanshu Patel - JP Morgan Chase & Co: There's just been this huge amount of increase in antitrust investigations with many suppliers across the globe. I'm curious, A, are you guys at all surprised by this; and B, I'm wondering if you have any views on whether these investigations could result in any sort of material change in Ford's procurement cost prospectively?

Himanshu, I don't think that's something we'd comment on. Himanshu Patel - JP Morgan Chase & Co: I wanted to go back to the question on Slide 30, you reiterated the $2 billion structural cost increase number for this year, and it looks like half of that has been done for the first half. I'm wondering, Lewis, was there anything in the structural cost that went into this year's budget that you would sort of deem as, I don't want to say, onetime or nonrecurring, but that truly kind of stood out to you as some sort of catch-up investment that would not necessarily repeat itself next year?

No, I don't think so. I mean one of the things we didn't do was stop investing as we went through the worst of times. And I think what you're seeing is continued -- us continuing on that path and increase engineering for more products, keeping our product pipeline fresh because we know how important that is. The volume related costs, I mean, tend to be go with whatever the volume is going to be. And advertisers, sales promotion -- you can say in general, it's specific to the number of launches you have in any one year, but we are doing more to communicate our brand as our products get more and more across the board competitive. So I don't see any particular one-offs. Himanshu Patel - JP Morgan Chase & Co: And lastly, I wonder if you can comment? You touched a little bit on pricing in the second half, and I think you mentioned that incentive could creep up as the supply situation eases. I'm curious what you think will happen to just overall pricing in non-North American regions as the Japanese production kind of come back online? Or I guess said differently, do you kind of feel like places in Europe, Latin America, Asia, that a material portion of the pricing strength you're seeing in those regions right now is due to the events in Japan and therefore, maybe some of that tailwind phase in the second half?

No, I think the pricing is around 2 factors, one is our product strength and second is with continuing to think -- and you can see it in this data that we're managing our production today in line with the demand. In truth, the impact to the Japanese supply constraints is not huge in Europe, not huge in South America. And in the markets where it was most impactful in Asia Pacific, probably the markets that are least -- we participate least. I think in particular, the Japanese market itself. And in China, we've seen our business continue to grow and I think the pricing pressures in China have more to do with the market than specifically to do with Japan. Indeed, the Japanese, aren't particularly a huge force. I mean I think the biggest impact was in the U.S. market because other than obviously Japan itself. But for us, Japan is almost nonmaterial.

Our final question today comes from the line of Rob Lache with Deutsche Bank.

A couple of things. One is, I appreciate the comment on maintaining $10 billion of gross debt around the middle of the decade. But if you include the dividends from Ford Credit you guys generated over $7 billion of free cash flow in the first half alone. So it looks like you can get to these debt targets relatively quickly, just hoping that you can maybe communicate some broad financial target for what you want to maintain in terms of gross cash, kind of in the same time frame, just so that investors can kind of think about what part of the company's cash might be available to them longer term.

I think that's a fair question. I think we're not quite ready to answer that yet. Obviously, I think we're all very sensitive to how important liquidity is. And I think, that's going to continue to play heavily in our thinking, particularly, while the economic environment seems a little unsettled. But when we're ready to talk about it, I think we'll -- I think that's the first question for us to answer. I'm looking forward, Rod, I'm looking forward to being able to have that debate, because I think our progress from a very debt-laden balance sheet to where we are now has been dramatic. So I think that conversation is getting closer, and that will be a delight.

We're looking forward to that, too. On Slide 24, just a quick clarification, just below the operating cash flow line and just below the receipts from Ford Credit you show $400 million of other. Can you remind what that was? What you put into that category? It's below the operating cash flow.

Yes, it's from foreign currency translation and really is other. I'm sorry.

All right. And then just lastly, I was hoping you could comment on just the outlook for Europe in the back half and whether you are expecting it to remain profitable. And then in North America, if there is a bonus paid to UAW members as part of the new contract, do you typically expense that in the quarter that, that happens? Or do you amortize that over the course of the contract? And is that something that you've kind of incorporated in terms of your thinking when you provide that broad kind of margin and earnings guidance?

I think conversations typically amortize it or accrued during the year by quarter. I wouldn't give any guidance on how much and precisely. I'm sorry. On the European guidance, I think we were prepared to set the line to it, we expect to be profitable in the full year in Europe. I think there's a lot to go to, to watch closely in Europe. I'm encouraged by the European team. I think we had a good launch of Focus, a very good launch of C-MAX. We are working as we've told you before, not to chase marginal deals. I don't think you could see that in the underlying performance of Europe. But -- the third quarter is always a bit of a threat in Europe because of the long vacation shutdown periods. But we expect to throttle within full year.

Thank you. That concludes today's presentation. We thank all of you for joining us.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect and have a great day.