Good day, ladies and gentlemen, and welcome to the Ford third quarter earnings conference call. At this time, all participants are in listen-only mode. If at any time during the conference you require operator assistance, please press star followed by zero, and an operator will be happy to assist you. We will conduct a question and answer session towards the end of this conference. I would now like to turn the conference over to your host for today, Mr. Ted Cannis, Executive Director, Investor Relations. Please proceed, sir.
Thank you, Chantele, and good morning. Welcome to everyone joining us today. On behalf of the entire Ford management team, I would like to thank you for taking the time to be with us so that we can provide you with additional details of our third quarter 2015 financial results. Copies of this morning's press release and the presentation slides are available on Ford investor and media websites. The financial results discussed today include references to non-GAAP financial measures. Non-GAAP financial measures are reconciled to the U.S. GAAP equivalent in the appendix to the slides. Today's presentation includes some forward-looking statements about our expectations for Ford's future performance. Actual results could be different. The most significant factors that could affect actual results are summarized at the end of this presentation and are detailed in our SEC filings.
Now presenting today are Mark Fields, our President and CEO, and Bob Shanks, our Chief Financial Officer. Also participating are Stuart Rowley, Corporate Controller, Neil Schloss, Corporate Treasurer, Paul Andonian, Director of Accounting, and Marion Harris, Ford Credit CFO. Mark, over to you.
Great. Thanks, Ted, and good morning, everybody, and thanks for joining us. The overall headline is we had an outstanding third quarter, and we remain on track to deliver a breakthrough year. Looking at the numbers, we earned $2.7 billion in pre-tax profit, which was more than double a year ago. We earned $1.9 billion in net income, also more than doubled. Our automotive operating margin came in at 6.5%, which was up four points. Our automotive operating related cash flow was $2.8 billion, and this resulted in a number of records for the quarter. We had a record third quarter pre-tax profit and a record third quarter automotive operating related cash flow. As we look at the business units, we had our best quarter ever in North America.
We had our best third quarter at Ford Credit since 2011, and we have not had a better third quarter in Europe since 2009. South America improved despite the tougher external conditions that we're seeing in the marketplace. Along with those results, we also delivered strong top-line growth. Our wholesale volume was up 7%, our revenue was up 9%, or 16% at constant exchange, and our global market share came in three-tenths of a point higher. That's the third quarter in a row of year-over-year global share growth. Along with this growth, we also achieved sustained pricing power, and that's really on the back of the strength of our new products. If you take a step back and look at the first nine months of the year, it's an equally strong headline.
We earned $7 billion in pre-tax profit and $5.2 billion in automotive operating related cash flow, and both are more than all of last year. Looking at our launches, 14 of our 16 new vehicle launches have been completed successfully, and that's on top of the record 24 global launches which we had last year. Importantly, our quality remains strong, and it's also improving in every region around the world. Turning to F-150, our F-150 is performing extremely well in the marketplace, and we also just revealed our all-new Super Duty, which will be coming in 2016. Looking at our third quarter F-Series sales in the U.S., well, it was our best sales in nine years. We also continue to build on our strong truck franchise around the world. If you look at Ranger, well, that's the best-selling pickup in Europe, Australia, New Zealand, Vietnam, and the Philippines.
The Ford brand is the commercial vehicle leader in Europe, and we recorded our best sales in 12 years there, led by the Transit family. Even as we're delivering these results with one foot in today, we also have one foot in tomorrow, delivering emerging opportunities through Ford Smart Mobility. Ford Smart Mobility is our plan to take Ford to the next level using innovation in connectivity. Our year-to-date results. Our plan, our people, and our process are delivering and importantly creating value for our stakeholders. As we go into the fourth quarter and close the year and go into 2016 and beyond, we're going to stay absolutely focused on our three priorities, which are accelerating the pace of progress on our One Ford plan, delivering product excellence with passion, and driving innovation in every part of our business.
At this point, I'll have Bob take us through some slides.
Okay, Mark, thanks. On behalf of the 195,000 men and women around the world of Ford, I am very pleased to take you through the details of what they accomplished in the third quarter. Let's start on slide four on the upper left, let's start with the top line. We delivered a very strong performance on both wholesale volume and revenue. As Mark mentioned, wholesale volume was up 7% and revenue was up 9%, 16% if you adjust for constant exchange. Going down and looking at the operating results, both the automotive sector and financial services contributed strongly to that third quarter record profit of $2.7 billion. We had earnings per share of $0.45, which was up $0.21. Now, after two quarters of no special items, we have a special item this quarter.
It is a positive item of $166 million, and that reflects an investment that we have in an aluminum casting supplier named Nemak. They had an IPO in the quarter, we revalued that investment in line with the IPO that generated this non-cash improvement of $166 million. Now, just for information going forward, we will mark to market this investment each quarter, and we will reflect the gains or losses in other automotive. Now, that combined with the strong pre-tax result, generated the after-tax result, the net income of $1.9 billion, which was up 129% from a year ago, and earnings per share of $0.48. Going down to automotive cash flow, $2.8 billion, very strong, and again, a third quarter record. We ended the period with $22.2 billion in cash, automotive debt of $12.8 billion, and net cash of $9.4 billion.
If you look at the year-to-date results, just two things I want to highlight. Again, on the pre-tax results, the $7 billion that we have generated so far, that is 10% higher than what we generated in all of last year on a pre-tax basis. If you go down the slide further, let's go back to the operating related cash flow, again, compared with all of last year, what we have done through the first nine months is already 44% higher. Very strong performance through the first nine months of the year. Let me just close with a couple of comments on taxes. Let's talk about the quarter first. I have seen a lot of articles thus far that is highlighting the tax rate difference. Versus fFirst Call estimate , we nailed the operating results. We came in a little bit different on the tax rate.
We originally had guided to 34%. We actually came in at 33%. The First Call estimate was 32%. That entirely explains the $0.01 difference from the First Call estimate . For the full year, we are revising our guidance for the tax rate. We had been at 26%, which was about where we were last year. It looks like now we are going to come in at about 30%. All right, let's go on, and we will look at the automotive sector in more detail on slide five. Let's just go right through the bars, going from left to right. The wholesales were up 103,000 units, 7%. The revenue was up $3 billion. That is 9%, again, 16% after we adjust for exchange. The operating margin up more than two and a half times at 6.5%, and we tripled our pre-tax results at $2.2 billion.
If you go to the lower left, you can see the global industry SAAR was actually up a million units. That was driven by North America and Europe. Global market share was up three-tenths of a point to 7.6%. Again, the third consecutive year-over-year improvement on a quarterly basis. That was broad-based. That was driven by North America, South America, and Europe. Again, go back and look at the year-to-date results just below the bars, and they're improved right across the board. Okay, let's go on to slide six, and we'll look at what drove the $1.5 billion improvement in our automotive sector results. The simple answer is very strong market factors, very strong volume, favorable mix, and very strong net pricing.
You can see that that was far in excess of the investments that we continue to make in the business to support growth, not only in this quarter, but in the quarters in the years ahead. Okay, let's go on to slide seven, and here we'll look at the absolutes by segment within the automotive sector. North America had that fantastic result that was mentioned, $2.7 billion. That's the best quarter that North America has ever had. If you look at the other business units, while cumulatively in a loss, this is the fourth quarter in a row that they have improved on a year-over-year basis, and in this quarter, improved by $240 million. Looking at other automotive, that is primarily net interest expense, and we continue to expect our full-year result in that space this year to be $650 million.
Okay, let's go on to slide eight, and we'll start going through the business units, and we'll start with North America as usual. If you go left to right here, tremendous results right across the board. Wholesales up 16%, and within that 106,000 units, you had 45,000 units coming from F-150. So we're back with the F-150 full availability. We ended the quarter with kind of inventories that we'd like to see, and we're ready to move forward now into the fourth and continue the strong performance that was already referenced. If you look at revenue, that was up very strongly at 19%, operating margin 11.3%. This is even better than we did in the second quarter. If you look at the pre-tax results, again, that best ever result of $2.7 billion.
If you look at the SARs, both on a regional basis and in the U.S., we had strong improvement on a year-over-year basis. Whichever way you look at it, our share improved. The North American share improved, the U.S. market share improved, and our U.S. retail of retail, which isn't shown, also improved by 0.4 points. So very strong performance in very strong industries, resulting in extraordinarily strong financial results, something we're very proud of. If you look at the year-to-date results, again, right across the board improved compared with the prior year. All right, let's go on to slide eight, and we'll look at what's behind the $1.3 billion improvement in North America. Again, very similar to what we saw in the automotive sector, its market factors.
Very strong volume and mix, a strong net pricing, again, in excess of the investments that we've made to grow the business in this quarter and in forward years. The other item I would call out is in other, we saw strong performance also coming from our parts and services business.
Just a couple of comments on the F-150 because there's always lots of interest in F-150. The bottom line is we are seeing very strong demand for the product. We're continuing to see a rich mix. We see fast turn rates, much faster than the segment average. The transaction prices are up $2,800 year-over-year and higher than our two main competitors. If you think about retail market share, our retail market share in the quarter has actually climbed above the pre-changeover levels, and we believe there's more upside in our total share as we begin shipping more F-150s to our fleet customers during the fourth quarter and into next year.
Because of that, we're expecting North America to have a very strong year with top line growth and also a full-year profit that will be higher than what we achieved last year. We are now revising our guidance on the margin to be at the upper end of our guidance of 8.5%-9.5%. Really strong performance from North America driving the overall company. Let's go in and look at South America and actually some really great things happening here. Our team has done a wonderful job in a very tough environment of delivering a result that's actually a little bit better than what it was last year. If you look at the wholesales, the wholesales are down 10% in industries that are down 20% for the region, 25% in Brazil.
If you look at revenue is down 32%, almost all of that is exchange related. Operating margin down on the lower revenue, but you can see the pre-tax result actually coming in slightly better than what it was a year ago. If you look at our share on the lower left, very strong performance both in the region and in Brazil, and that was driven, once again, by the very strong market reaction to the Ford Ka. If you look at the year-to-date performance, we're down on the top line, but doing better in terms of the financial results, again, based on what the team has done in this very tough environment. Hats off to the team in South America. Let's go on to slide 11 and look at the small change year-over-year, you can see that it was really driven by net pricing.
Most of that is to recover the effects of the inflation and also the depreciating currencies. If you look on the volume and mix call-out box, you can see the big impact of the industry decline, which is partially offset by the strong share performance the team has delivered. For the full year, we continue to expect to have a pre-tax loss that will be reduced compared with 2014, but we feel very good about what the team has done and clearly has positioned the business to recover very quickly once the external environment starts to cooperate. Okay, let's go on to Europe on slide 12. Again, some good things to call out here. Very strong top-line performance. Wholesales up 17%. The revenue was up modestly in $, only 2%, but if you look at it again on an exchange-adjusted basis, up 16%.
The operating margin and the pre-tax results improved by nearly 60%. If you go down to the third quarter SARs and shares, you can see very strong growth, both at the regional level, but also in the Europe 20. We did improve share across the region. We had a small decline in Europe 20, which was driven by the launch ramp-up of the S-Max and the Galaxy, along with the aging of the Fiesta. On a year-to-date basis, we're seeing improvement in wholesales. Revenue is off again. That's more than explained by exchange and strong improvement in terms of the financial results. All right, let's go on to the next slide and we'll look at what was behind the $257 million improvement in Europe's results. Again, very similar to auto sector, very similar to North America.
On the back of great products and good go-to-market strategies, you can see improvement in volume and mix and net pricing, more than offset by or partially offset by very modest increases in cost. If you look at other, that is largely explained by the consolidation of Russia. Overall, again, the team's doing a great job here of having us moving forward in a positive direction, and we feel that we're very much on track to move towards a profitable position. We'll be talking about that more early in 2016.
Just a couple of comments. As you look at our transformation plan, which we've had in place for a while, it's gaining momentum and we're confident that we're on track for a return to profitability in the region. If you look at the industry overall, it's improving, but it's still a bit of a two-speed recovery with markets like U.K. and Germany doing better than some of the southern markets. That being said, it's improving. The commercial vehicle segment industry itself is performing well, and Ford's commercial vehicle performance is doing extremely well. We're the number 1 commercial vehicle brand in the region for the quarter and also for the full year. It really is an exceptional performance on our commercial vehicles led by our Transit. We're still seeing some muted pricing across the industry, but Ford's mix and rates are strong.
I think all this combined has allowed us to not only grow our share, but also improve the financial performance that Bob just brought you through.
Okay, thanks. Let's go on to slide 14, and we'll look briefly at Middle East and Africa. What I want to highlight here is not so much the financials. The absolutes are relatively small. The results are near breakeven. The team in Dubai is doing a good job. They've laid out an overall strategic framework for how we can participate in what's going to be a very important region in the next five, 10, 20 years and starting to put the building blocks of actions in place in order for us to participate in that. In the quarter, they did announce a partnership with a local company in Nigeria for us to start assembly of Ranger pickups relatively soon. Again, for the full year, expect to deliver about breakeven results. Let's move on to Asia Pacific on slide 15.
Again, looking at the key metrics here, a little bit different than some of the other regions we've looked at. The wholesales were down by 12%, 40,000 units. 35,000 of that was in China, and I'll come back to that in just a minute. The revenue was flat in dollar terms, but again, adjusted for inflation, it was up 12%. Just to remind you, that does exclude the China joint ventures because they're unconsolidated. The operating margin was down, and the pre-tax results were generally in line with where they were last year. If you look at the Asia Pacific SAAR, that declined, and that was more than explained by a reduction in the China industry SAAR. In terms of our share, our Asia Pacific share was down a tenth of 3.5%. That was driven by Australia.
In China, you can see that we held our share of 4.7%. That equaled the quarterly record that we set a year ago. If you look below the bars, you can see the year-to-date results basically down right across the board. I should also comment on the fact that if you go back within the bars on slide 15, we do have the equity after-tax earnings in our China JVs. You can see they were down about 15%. Let's go to the next slide, and I'll give you some of the insights in terms of what's happening. A pretty modest decline, but within the numbers, and let's look at the volume and mix in the call-out box. You can see a pretty sizable stock adjustment.
We took stocks down in the quarter, that was something that we had talked about on the second quarter call, as we wanted to get our day supply in line with the decline that we'd seen in the overall industry. We progressed on that in the first half. We needed to go further in the third quarter, the team did a good job of that, they also did call the overall run rate of sales properly. We did end the quarter right where we wanted to be in terms of stocks, it did affect profits on a year-over-year basis by about $130 million. The other thing you don't see on the slide is we had a supplier constraint that's now resolved that constrained our production and affected profits to the tune of about $60 million.
Overall, we think the team has responded well to the slowdown that we've seen in China, we are expecting to have a very strong fourth quarter. In fact, we think it's likely to be a record quarter on the back of new products and in some cases, built in new capacity that's come on stream this year. We also expect to see a seasonal increase in China that we always see in the fourth quarter as the industry prepares for Chinese New Year early in the following year. Of course, the government has taken a number of stimulative actions recently, including a purchase tax reduction, which will favorably benefit about 70% of our portfolio. We've already seen the benefits of that in our showrooms. We feel very strong and positive about the full year and looking forward to the fourth quarter.
Just a couple of comments on the China industry. We are seeing a stabilization, as Bob mentioned, we do expect a lift from the stimulus package. As he mentioned, we're seeing showroom traffic improve. We're seeing closing ratios improve. Unquestionably, we see this as a really good opportunity because 70% of our sales have the engines that are eligible for the stimulus. Just across Asia Pacific, as Bob mentioned, we're confident in a strong fourth quarter. As he mentioned, likely it's going to be a record, it's because of the industry lift, the new products, which happen to be good margin products. We're at the optimal stocking level, we won't experience the destocking we had in the third quarter. The supplier constraint is behind us, the seasonal factors.
We feel really good about where we're heading in the fourth quarter and into next year.
Yep. Okay, very good. Let's go on to Ford Credit on slide 17. Ford Credit, again, I mentioned it earlier, but very strong performance. The best quarterly result since 2011 at $541 million, and that was driven by growth. You can see the $115 million from volume and mix. Most of that is volume, and then we also benefited from favorable mix associated with leasing in North America. In terms of our guidance for the full year, we continue to expect Ford Credit profit to be about equal to higher than what it was last year. We've narrowed the range of our call for managed receivables to $124 billion-$127 billion.
Still looking for $250 million of distributions from Ford Credit in the fourth quarter. We expect to temporarily see our managed leverage a little bit higher than the 8 to 9 to 1 target due to the translation effect of the strong U.S. dollar. Okay. With that, let's leave the business units and we'll go on to cash and cash flow on slide 18. Again, I've touched on much of this, but let me highlight once again the strong operating cash flow of $2.8 billion. You can see that was driven by the automotive pretax profits, but we also saw some good performance in working capital and also other timing differences. Going down further on the page, you can see we actually had no pension contributions in the quarter to our funded plans. I talked about this earlier in the year.
I said that the contributions would be largely biased towards the first part of the year. We still have a couple hundred million dollars ahead of us that will be done in the fourth quarter, ending the year with about $1.1 billion of contributions. We had $600 million in dividends in the quarter, $1.9 billion of shareholder distributions to date. Since 2012, when we restored the dividend, we've had shareholder distributions of $8.5 billion. Liquidity ended at $33.2 billion in the quarter. Very, very strong. Okay, let's turn to slide 19 and look at our planning assumptions and key metrics. At the top, you can see industry volume, and if you look at the third column there, you can see, as we usually do at this point in time, we've narrowed our call to around a single point estimate.
In the U.S., we're looking at 17.7 million units. That would be up 5% from last year and in line with the year-to-date results. In Europe, about 16 million units. That would be up 10%, and again, pretty much in line with the year-to-date results. In the case of China, we were at 23 million-24 million in the last call. We've narrowed that now to 24 million based on the actions the government has taken, which would be in line with where we were last year, and a little bit higher than the year-to-date results. In terms of the financial results on the rest of the page, everything remains on track.
Certainly, I don't want to not state the fact that we expect to see the company come in with a pretax profit within the range that we've had all year long of $8.5 million-$9.5 million. Overall, very strong results for the quarter, for the year-to-date, expecting a strong fourth quarter and the breakthrough year that we've been talking about since January.
A couple of comments on the industry, the U.S. industry in particular, before I wrap it up. We would characterize the U.S. industry as healthy. Barring any type of shock, whether it be economic or policy-related, we do see industry sales staying well supported at the current levels for the next few years. In other words, we expect it to be stronger for longer. Transaction prices are strong across the industry and for us. Replacement demand is back to its historical level of about 70% of industry sales. When you combine that with the vehicle park age, the oldest it's ever been at 11 and a half years, we think that bodes well. The labor market is steadily improving. We're seeing better wage and income growth.
When you look at the full-size pickup segment, which is important to us here in our biggest and most profitable market, 50% of full-size pickups on the road today are 10 years or older, and actually, 25% of them are actually 20 years or older. As we stand back across our lineup, we think we are very well-positioned overall, and also with the F-150 and the 2016 launch of the new Super Duty coming down the pike. Let me just sum it all up. We had an outstanding third quarter, as we mentioned, it was a record third quarter profit. With that, higher wholesales revenue and market share and also a better margin. We're firmly on track to deliver the breakthrough full year.
For 2015, if you look at the regions, we continue to expect North America to be very strong, both in profit, but also substantial top-line growth with margins in the upper end of the 8.5%-9.5% range that we've guided to. As we look at Europe, we expect improvement in Europe as we continue moving towards profitability, and we'll have more to say about that in January. Our Middle East and Africa business unit will deliver break-even results. South America will deliver better results than last year, despite the much tougher environment we're seeing. Asia Pacific is going to have a strong year and a particularly strong fourth quarter, and likely a record fourth quarter with the new capacity and the products that are coming online in combination with the government incentives promoting smaller vehicles in China.
Of course, continued strong and steady returns from Ford Credit. As we look at 2016, we expect a strong year with the momentum that we built in 2015, particularly in the second half of 2015. We expect that to carry over into 2016. A little bit longer term, we're on track to deliver our strategic objectives, which are around being the top five in global sales, having a better balance of profit and sales around the world, 8%+ operating margins, being in the top quartile of total shareholder returns, and being highly regarded by our stakeholders. As you look at the third quarter, we think there's more proof there that we have the right strategic framework, we have the right proven process, and of course, we got the right team, and we're consistently delivering.
With that, why don't we go to the phone line for your questions?
Ladies and gentlemen, at this time, if you would like to ask an audio question, please press star one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star two. Press star one at this time to begin. Your first question comes from the line of Ryan Brinkman of J.P. Morgan. Please proceed.
My question, maybe first on Europe. I'm curious what you think the trend is going to be there between diesel and gas, given the events since your last call. Can you talk about your mix of diesel versus gas in the region? I think, too, you have a higher mix of light commercial vehicles, which are generally diesel and are going to remain diesel. Can you maybe break that out for us without the impact of LCVs? I'm trying to understand if there were a shift toward gas in the region, if you would benefit from that. Just on a similar note, I think there's an opportunity now for your prices in Europe to converge with Volkswagen's more quickly than maybe was earlier hoped for.
That's a key long-term positive, but should we also worry that maybe their prices have to come down near term, pressuring the industry? Thanks.
Okay, thanks, Ryan. Let me take the first part of that question. First off, as a company, we're well-positioned to respond to wherever the marketplace goes. If you look at some of the statistics, our total sales in Europe are about 55% diesel, so it's slightly less than the total industry. When you break that out, our cars are about 44%, which is below the industry. We do have the capability to actually go up to about 80% of gas engines, so we have that flexibility. On the LCV side, probably about 97% of our LCVs are diesel. We see that continuing strong. It's really too early, Ryan, too early to tell what changes in the marketplace we'll see. We have not seen any changes in terms of customer ordering.
We've actually seen a little bit of uptick in interest on diesel on our build and price internet marketing tool that we have out there. In terms of the pricing, again, we're going to continue to come out with best-in-class products. We're seeing the strong pricing, particularly across our vehicle lineup. That, as you noted from what Bob took you through, our pricing was positive across Europe. In terms of what some of our competitors will do, we don't know. We're just going to stay focused on our plan and keep driving the business forward.
Okay, thanks. Then just for my last question, maybe on Asia Pacific. I think the guidance earlier in the year was that the profits would inflect from the first half to the back half as you launched new products and lever new facility investments. Since then, you surprised with a really very strong 2Q, then the profits were softer in Q3. Q4 is going to be strong, you say. I'm just curious what the biggest differences there have been, whether there was some sort of pull ahead, maybe from Q3 to Q2. Then just lastly, it looks like you actually increased your market expectation for China. Now you're saying 24 million versus 23 million-24 million. Mark mentioned the government tax incentives on 1.6-liter in blow engines.
Can you talk about, specific to those incentives, what percentage of your vehicles qualify for them, whether you've seen an uptick in your own sales since they've been announced, and then just lastly, maybe high level, do you think that China has found a bottom here?
I think I can remember maybe a third of that. What I don't cover, just ask again, Ryan.
Sure.
In terms of the calendarization, I think you'll still see a stronger second half than a first half, and it's going to be driven by the fourth quarter. I think we probably would have expected third and fourth to be a little smoother than what it's going to turn out to be, but that's because of the de-stocking action that we had to take in the third. We did that actually through the first and particularly in the second, but the industry continued to slow a bit ahead of us keeping up with that. We caught up in the third quarter, but now looking forward to a very strong fourth. We also were affected, obviously, in the third by the supplier constraint, which isn't something that we had expected, and some of that we'll get back in the fourth quarter as well.
That's really what's behind the calendarization. Generally, if you still look at second half versus first half, it will be consistent with what we said from the very beginning and one of the factors behind the company's better second half than first half.
Just your question around what percent of our vehicles are available for the incentives. 70%. When you look at the engines that we have and the small EcoBoost engines that we do have, we think we have an opportunity there. In terms of have we reached a bottom? Well, what we've seen, as I mentioned in my remarks, we've seen a stabilization. I think the good news is we've seen a bit of a stabilization on the passenger car market. When you look at all of the actions that the government has taken and the PBOC has taken over the last number of months, we think that bodes well. We think we've found a bit of a bottom in passenger vehicles.
Commercial vehicles, still a little bit of weakness there that we're seeing persistent, and that'll be a big determinant of where the economy is heading. We're still seeing some weakness there.
Okay, great. All very helpful. Thanks. Congrats on the quarter.
Thank you.
Your next question comes from the line of Joe Spak of RBC. Please proceed.
Good morning. Thanks for taking the question.
Morning.
I first wanted to get a little bit of better sense of the puts and takes for the fourth quarter North America margins. You're showing production up 12%, and calling that the higher end of the range, but that would still be a step down from what you've done year to date, which I think was sort of 9.9%. Maybe you could give us first some of the offsets there.
All the numbers you cited, Joe, are correct. 9.9% year to date, the 11.1% second quarter, 11.3% in the third, I think we were 6.7% in the first when we were still launching in the launch of the F-150. We do think we'll come in at the upper end of that range, which would obviously suggest a fourth quarter that's going to be lower than we saw in the second and third, and that's driven by normal seasonal factors. If you looked at our business year in and year out, right across the board, North America, other regions as well, we have cost increases on a sequential basis going from the third quarter into the fourth quarter, and we expect to see that happen again this year.
We'll still see positive on a year-over-year basis, I expect to see positive top line in terms of volume, in terms of still see good mix. We'll still see positive pricing, but we will see that seasonal cost increase. The other thing I'll mention that's different this year than some other years is the fact that there are aspects of the UAW agreement, once we conclude one, that we will book in the fourth quarter. For example, if we were to have signing bonuses, which it looks like GM agreed to and FCA, those would be booked in the quarter that the agreement is confirmed or ratified. That would take place also in the fourth quarter.
just to-
That's considered I'm sorry, go ahead.
Joe, just to put that into perspective into the entire year, again, in a year in which we had a lot of launches, and particularly in the first half of the year, launching the second plant for F-150, we're guiding to the upper half of 8.5%-9.5%. That gives you a little bit of perspective of the momentum as we get into 2016.
Yeah, on that point, if you look at North America from 2010 to 2014, it's averaged 9.1%. It looks like we have the chance of even doing better than that despite the launches that so affected us at the beginning of the year. Joe, you were going to say something?
Yeah, I was just going to ask, any potential UAW agreement is considered in that guidance for the year?
Yes.
Okay. In South America, you talked about some positive stuff for Ford there, but obviously the commentary on the environment is a difficult one. I guess what I'm wondering is over the past four or five years, you've done a pretty good job of pricing for some of the currency moves. I guess what I'm wondering is if that you're beginning to hit the limits of what you can do there, how have some of your recent pricing actions been received in that region?
Well, we priced more than the industry would, but that's really what needs to happen, is there needs to be more aggressive pricing overall by everyone in the market because the impact of the depreciating currencies and the local inflation, we just can't keep up with it. We have been quite active on the pricing front, but it's just not been something that everyone. I think you've got a number of players, particularly the larger players, that are trying to protect their market share positions and not responding to the forces that we're seeing. If you look at the Real, for example, over the last year, it's depreciated by 63%. If you look at inflation in Brazil, it's running about 10%, and in Argentina, 15% to 26%, 27%, depending upon whether it's the official inflation rate or the one that people actually live with.
That's really what's happening, is it's just the environment is really eating away at the overall cost positions that everybody has there and the revenue that we're generating.
Okay, thanks.
That being said, Joe, that being said, when you look at our plan of introducing new product and the fact that we were able to gain 1.4 points of market share, when the economy does turn, we think we'll be well-positioned from a product standpoint, from a cost standpoint. Keep in mind, before 2013, we had nine years of good profitability out of the region. We're taking the long view, but we also understand in the short to medium term, it's going to be volatile, and it's going to be challenging.
Just to underscore that, if you go to slide 11 and you look at the contribution cost and structural cost, which are netting to basically about nothing there together, there's about $100 million of inflation effects in those numbers. The teams actually delivered cost reductions of about $100 million just in the quarter on a year-over-year basis. We're swimming hard. It's just the current's quite strong against us.
Your next question comes from the line of Colin Langan of UBS. Please proceed.
Oh, great. Thanks for taking my questions.
Sure.
On slide nine, you show net pricing and contribution costs. When I net them together, it's fairly flat, slightly negative, I guess. I'm a bit surprised given you talk about the F-150 had ATPs up, I think you said $2,800. You have the new Explorer, the Edge. How should we think about net pricing going forward, and sort of what is the drag in there that's preventing net pricing from being more positive?
Yeah, I don't think there's a drag at all, Colin, I'll say what I've said, I think, for two quarters in a row. When you look at the business, you've got to look at the whole business. If you look at the volume and mix, let's start there first. I just mentioned we were up over 100,000 units year-over-year in volume. 45,000 of that is F-Series. Clearly a significant factor behind what you see on industry share stocks. On mix, and most of that 547 that you're looking at there is actually favorable mix, and much of that is F-Series. You have to look at the impact that the new product has on volume, that it has on mix, and that it's got on net pricing. Obviously, it's a factor in net pricing. It's not the only factor.
On the contribution cost, that's not all F-Series. You've got Explorer, you've got Edge, you've got a number of new products which also are contributing to everything. You really have to take all of that and you've got to put it together, and of course, the result is a fantastic margin.
There's been a lot of questions on the F-150. Can you clarify whether the new F-150 is more profitable than the outgoing model given the higher aluminum cost now that it's been in the market for a while?
I'll say what I said for about a year and a half. The F-150 margins are very profitable, and we're very satisfied with the contributions they're making to the overall business. The other thing I would remind everyone is that this is a positive contributor to our achieving our regulatory compliance on fuel economy, which gives us options on other parts of our portfolio as we're developing those products. The effects of the F-150 are very positive in and of itself, but also in other ways across other aspects of our business.
I know you're not going to talk about 2016, but your earlier comments talked about margins being at the high end of the range despite H1 launch costs. How should we think about that, though, those costs into 2016, because you do have the heavy duty coming. Is that going to be a flat year-over-year, or is this still net down when we think about launching into next year?
We'll talk about margins as well as other aspects of our guidance in the call in January. As Mark mentioned, we're looking forward to a very strong 2016 for the company coming off of everything that we've built this year. North America will have strong results. There is the F-Series or Super Duty launch next year, but that'll be a more normal launch because we've got a separate body shop. We're going to take all the actions that we need to take in regularly scheduled downtime, as opposed to what we did in Dearborn and Kansas City. It's a very different type of launch and clearly benefiting from everything that we've learned on the first two. This will not be the effect that you saw with the F-150. It will be a normal launch.
Your next question comes from the line of John Murphy of Bank of America Merrill Lynch. Please proceed.
Just a first question, if we could maybe look at slide nine. One of the things that I think we were a little bit surprised at was the increase in structural costs and to a lesser extent, contribution costs here. Can you just remind us how you're thinking about structural costs at this point and how you think about sort of your breakeven level, relative to the U.S. SAR right now? It does seem like there's some costs that are creeping in here that we weren't really expecting.
They're not creeping in, they're planned. If you think about what we're thinking about for the business, we've been talking for quite some time about profitably growing the business. Where we see opportunities to invest in the business, to do so and get an appropriate return on our invested capital, we will. Here what you see is investments that we're making in product, investments we're making in advertising sales promotion. You have an increase in D&A as we've ramped up our spending as the business has grown, and we see opportunities to do so profitably going forward. All of that is necessary and supportive of the types of margins that we're delivering. If you think about the breakeven we're targeting, I think we talked about this back on our investor day.
We're targeting to get to a breakeven that's equivalent to two-thirds of our wholesale volume, that is exactly where North America is. Everything is where it should be for North America. When we look ahead, if we have opportunities to invest in the business and grow it in a profitable way with the appropriate returns, we will do so.
Okay, that's helpful. Then just a second question. As you look at how the year has progressed here, Bob, it does sound like things have shifted a little bit. Obviously you're still going to have second half profits that are higher than first half profits, what do you think the major puts or headwinds that you're running into that are changing that a little bit? It just does seem like there's a little bit less optimism relative, second half versus first half, relative to where there was maybe at the beginning of the year.
Well, John, I'm not sure why you would say that. The year is playing out very much like we had expected. We feel that we're exactly where we thought we would be at the beginning of the year. We see the second half still being stronger as we had expected than the first half. We delivered outstanding results in the second. Here we are in the third. The fourth sequentially will be lower as it normally is, on a year-over-year basis, it's going to be spectacular.
Bob, you talked about-
We think the year is playing out exactly as we had said it was going to play out.
Bob, you talked about the seasonal pattern that was typical where the first half was stronger and the second half was weaker.
Now it seems like you're pointing to seasonal factors in the fourth quarter, putting pressure on North America, which is what you didn't say before. You actually said the second half would be stronger and you wouldn't see the typical seasonal factors. I think that's where things have changed a little bit relative to what we were expecting. It just seems like that's a change.
Okay. I respectfully disagree. Why don't you go back and look at the graphic that we provided? You'll see the second half was stronger than the first half. You'll see that the first quarter was the weakest quarter of the year, and you'll see that the fourth quarter was trailing off a bit from the third quarter. That's exactly what's going to happen.
Your next question comes from the line of Emmanuel Rosner of CLSA. Please proceed.
Hi, good morning, everybody.
Good morning.
I wanted to ask you just a little more color on the comments that you made on the Super Duty launch being more of a regular launch versus the F-150. I guess as we're trying to, from our side, trying to understand the implication of a launch and obviously some downtime next year, but then also potentially offset by additional strength on the F-150. What does a regular launch mean compared to what we saw on the F-150?
Well, Emmanuel, what you saw on the launch of the F-150 is obviously we took significant downtime to completely rebuild the body shops. And what we've been able to do with the spacing that we have in our Kentucky truck operation, the body shop actually started being constructed in 2015, and it's going to be completed by the end of this year. We won't have the extended downtime that we had in Dearborn Truck or in Kansas City. Overall, what we'll see is the typical model year changeover that happens during the shutdown period over the vacations. That's what we mean by a more normal launch. We handle it during the shutdown periods, during the vacations, and then we're up and running.
Okay. That's helpful. Two quick question on the North American volume in the quarter. On the production side, it looks like you produced maybe 5% fewer vehicles than you had guided just three months ago. I'm curious where that comes from. And then when I look at your earnings contribution from volume and mix in the quarter in North America, obviously very strong $1.6 billion, divided by the delta in wholesales, looks like it's a $16,000 contribution margin per vehicle or so, when you said that only about half of the increase is the F-Series. Can you maybe explain the high contribution?
Yeah, the contribution margin that you're seeing is because we have a number of very high margin products that we've been launching. Explorer, which is very high margin. Edge, which was really coming out in the quarter very strongly because we'd launched it, I think, the prior quarter. That's a very high margin product. And of course, Mustang. Mustang is doing extremely well, too. So you've got a lot of very high margin products that were driving that increase and generating the type of margins that you're seeing.
Your next question comes from the line of Rod Lache of Deutsche Bank. Please proceed.
Wanted to also ask you about that on slide nine, the North American bridge. Typically, you provide the material X commodities, the commodity, and the warranty items for the contribution costs. I didn't see that this time for the segment. You had it for the overall company. I was hoping you can get that. More specifically, I believe that there was a $500 million warranty charge last year. I'm assuming that that's in the year-over-year comparison. Is the contribution cost actually more like $927 ex that or is that $427 really the contribution cost year-over-year?
Yeah, Rod, if you were to look at the company slide, which is back on slide six. The callout explanations are very much the North American callout explanations. If you just factor them down very slightly, that's basically what you would see in the case of North America. North America, in terms of material, excluding commodities, would be $1.1 billion. The commodity is about $325 million. The structural related cost about $320 million. You can see the North American results very much mapping to the total company. In the case of warranty, we saw good news of about $340 million year-over-year in North America. That's exactly what you're talking about. We did have some reserve adjustments that we normally make in the third quarter. That's when we do our deep dives, particularly on both coverages, I think, and also field service actions.
We also had the one-time actions last year, which obviously didn't happen this year. Net it to good news. That's really what's behind that $418 that you see on slide six.
Okay. Thanks. That's helpful. I was hoping you could just comment on going forward. One of your competitors recently suggested that they may be able to mitigate regulatory cost inflation through 2018. Just given that you've already absorbed a lot with F-Series to help you guys achieve some of these targets longer term, is that something that you think Ford can achieve?
Well, we're not talking about the forward years today. When we did have our investor day some time ago, we talked about the fact that particularly towards the end of the decade, if you look 2019 and 2020, I think there's a lot of work the whole industry's got to do at that point in time in response to compliance, particularly around emissions and fuel economy. I think we feel good about where we are up until 2019. Then there's sort of a step level increase then that we're all going to have to continue to work on, particularly with more electrification that's going to be required in that timeframe.
Okay. Just one last one, if I can sneak it in. You provide all the buckets for the Asia bridge, and I was wondering if you might be able to just give us a sense of how, if we were just to think about China specifically, how would the bridge be bucketed? What would the structural costs be doing? What is pricing doing on a year-over-year basis as we look at Q3.
Yeah, we're not going to break out individual markets within a region, I think it would be fair to say that in general, because we do include on an equity after-tax basis the year-over-year variances from the China JVs within these data that you're seeing on slide 16. You could imagine that a lot of that is going to be driven by China just because of the size of that business within Asia Pacific. I think you're probably looking at China when you're looking at the slide here for the most part.
Your next question comes from the line of Adam Jonas of Morgan Stanley. Please proceed.
Hey, Mark. Hey, Bob.
Hey.
Toyota recently made a statement in the media in Tokyo that it expects sales of gasoline and diesel engine cars will be, they said, near zero by the year 2050. I know 35 years is a long time, is that crazy? What do you think of that forecast?
Well, I can't speak to some of my competitors. In terms of our business plan, that's a long business plan that we'd have to look out. Our plan, as you know, Adam, very simply is provide the power of choice to consumers. We have terrific internal combustion engines, electrification. We have all the different variants. We're working on hydrogen fuel cells, et cetera. We have great diesel engines. Our approach going forward is fuel economy is important to customers, and so emissions and things of that nature, and we're going to continue to provide that choice and products that will appeal to our customers that are interested in those things. Those are the things that they're interested in, and we're going to continue to work at it.
Great, Mark. Maybe nearer term, this is something I think I asked you about at the Detroit Show almost a year ago. The topic of active safety and tying in life-saving and accident prevention technologies, software, and sensors and things that also happen to make cars more fuel efficient. Any update on progress of how Ford and some of your competitors have been able to convince the regulators that, look, these things should actually start getting some credit on the fuel economy side?
Well, from our standpoint, we're actively engaged with the regulators, it's an active, ongoing discussion. We share the same objectives. We want to reduce the number of accidents, we want to reduce the number of fatalities, we want to reduce congestion, we want to improve just the overall safety for our customers. We're in active discussions right now. I think the things that you mentioned are things that we're talking to them about because we feel they do require consideration, and we'll see where we come out on those discussions.
Your next question comes from the line of Matt Stover of SIG. Please proceed.
Thank you very much. A question about Asia Pacific. It's been some time here where one hand offers, the other hand took. China, it's down, but it's doing pretty well. It's doing about $1.2 billion in profit. The other APAC businesses are losing about $1.2 billion annualized. I guess I kind of understand the story in China, but I'm wondering how we should think about those other losses outside of China that are dragging down the results within the region.
Well, let me first start with China. You're only looking at the China joint ventures. We have three other areas of our business in China that would come to what we would call China as we're looking at it internally. You've got the built-up imports that we send into China on the Ford brand. We've got the Lincoln products that we're also exporting into China. As you might expect, since we're in the process of just launching that brand and launching the network and the products, that is not this year contributing positively to profits. We've also got engineering costs that we're incurring today inside Ford that we will only receive compensation for in future years once we start building the vehicles that we're engineering. That's a cost, if you will, that we incur until that point in time.
You have to look at all of that in order to have a complete view of what our profitability is inside China. Looking at the JVs is going to give you not a complete understanding of what that story is. If you look at the rest of the region, the rest of the region for the last two quarters, this quarter and the second quarter, actually has improved on a year-over-year basis and was pretty flat in the first quarter. The efforts that we have underway in India, Australia, and ASEAN are making great progress in terms of getting those businesses where they need to be. In the case of Australia, we would expect that inflection point, if you will, to occur when we close our manufacturing facility there in October of next year.
The team's doing a very good job of repositioning the brand and the product lineup to prepare for that. In the case of India, we just launched the brand new Sanand facility and the new product that we're building there, the Figo, and that's off to a good start. There'll be a while as we add product and add volume there to get that plant up and running to the level that we expect it to be. In the case of ASEAN, we've actually made very good progress in ASEAN in terms of getting that region back to profitability and just sort of skirting around that level at the moment. We feel really good about the progress we're making. They have more work to do, and we expect that to contribute positively in the relatively near future.
Those are the three areas, and again, all progressing very nicely and all contributing positively on a year-over-year basis. China is the reason why the region declined year-over-year, both in the third quarter and the second quarter.
Your next question comes from the line of Patrick Archambault of Goldman Sachs. Please proceed.
Great. Thanks for squeezing me in here. A couple of clarifications. Just one on, I think it might have been Emmanuel's question, and forgive me if that was answered, but I think there was a question about the shipments being different in Q3 for North America relative to what was originally guided for. What was the reason for that? Was that some of the ramp challenges with frames that we've been reading about, or was there something else that led to that difference?
Thanks. From a production standpoint, what we ran into, Patrick, was a supplier-related production disruption, and we are now through that. It did impact our production in North America, and it did impact our production in China. As I said, we're through that. It is not related to F-150. Actually, our production in F-150 came just about bang on what we expected. It was some other vehicles, some of our utilities that impacted a number of our plants.
Got it. Okay, that's helpful. Just while we're on the same topic of North America, a lot of time is spent on slide nine, just the net pricing piece, just taking that on its own. It is down. The year-on-year increase is down from the second quarter, where I think it was around $700 million, if I'm remembering correctly. Is this kind of, for the fourth quarter, the new run rate of pricing, or is this something that could pop up back towards that previous increase? Just the thing that comes to mind is there was at least one month in the quarter where incentives were pretty big on the F-150, and I feel like they moderated after that. Just wanted to try and put those things together.
Patrick, just to be clear, you're talking about sequentially second to third quarter in North America?
Let me see if I have volume.
Yeah. Well, if your question was the second to third quarter change, we had lower volume. It was down about 45,000 units. Again, that's because of plant shutdowns that we have in the summer.
We will now take questions from the media community. Your next question comes from the line of David Shepardson of The Detroit News. Please proceed.
Thanks for having me call. Mark, I wonder if you would like to respond to Republican presidential candidate Donald Trump, who, over the last six months, has been heavily critical of Ford's announced plans to expand its investments in Mexico by about $2.5 billion. Could you just sort of address generally whether you think it's appropriate to be investing in Mexico, in response to suggestions that Ford should be spending more resources here in the U.S.?
Thanks, Dave. Listen, as we said, we have not talked to Donald Trump, we have not made any changes to our manufacturing plans. Dave, as a company, we deal with the facts are stubborn things. At Ford, we're proud of the facts. Unfortunately, we suspect the facts are getting lost in the politics. The reality and the facts are that we've invested more than $10 billion in the U.S. in our plants since 2011. We've also added 25,000 U.S. employees. When you look at the way we spend our investments, 80% of our North American investments are here in the U.S., 97% of our engineering is done here in the U.S. We're a multinational company, we invest in all the markets we do business in. You just saw the numbers here in the U.S.
We've been in Mexico for 90 years, this kerfuffle that we've seen yesterday around our F-650 and our F-750 and what's going on, we did resource them from Mexico to Ohio. We made that decision back in 2011, that was long before any candidates announced their intention to run for U.S. president. As a matter of fact, that was made before the last presidential election. Those are the facts. As we look at that, facts don't cease to exist because they're ignored. Those are the facts at Ford, we are very proud of the fact of what we do in terms of doing our part to drive economic development in the U.S. and in many other markets we do business around the world.
At this time, I would like to turn the conference back over to Mr. Ted Cannis. Please proceed, sir.
Mark, Bob, anything you want to say to wrap up?
All right. Thanks very much, everybody, and your information will be out on the website.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.