Ford Motor (F) Mark Fields on Q2 2016 Results - Earnings Call Transcript

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Ford Motor Co. (NYSE:F) Q2 2016 Earnings Call July 28, 2016 9:00 AM ET

Executives

Ted Cannis - Executive Director, Investor Relations

Mark Fields - President, Chief Executive Officer & Director

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Marion Harris - Chief Financial Officer, Ford Motor Credit Co. LLC

Analysts

Brian A. Johnson - Barclays Capital, Inc.

Joseph Spak - RBC Capital Markets LLC

Adam Michael Jonas - Morgan Stanley & Co. LLC

Colin Michael Langan - UBS Securities LLC

John J. Murphy - Bank of America-Merrill Lynch

Itay Michaeli - Citigroup Global Markets, Inc. (Broker)

Ryan Brinkman - JPMorgan Securities LLC

Patrick Archambault - Goldman Sachs & Co.

Rod Lache - Deutsche Bank Securities, Inc.

James J. Albertine - Consumer Edge Research LLC

Emmanuel Rosner - CLSA Americas LLC

Operator

Ladies and gentlemen, thank you for standing by and welcome to Ford Motor Company's Briefing on 2016 Second-Quarter Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the conference over to Mr. Ted Cannis, Executive Director of Ford Investor Relations. Please go ahead, sir.

Ted Cannis - Executive Director, Investor Relations

Thanks very much, Kayla. Good morning and welcome, everybody, for our second quarter 2016 financial results. As a reminder, copies of the press release and the presentation slides are available on Ford's investor and media websites. The results discussed today include some non-GAAP references and these are reconciled to the most comparable US GAAP measures in the appendix to the slides.

Today's discussion includes some forward-looking statements about our expectations for future performance. Actual results may vary and the most again factors are included in our presentation.

As a reminder, Ford Credit will be holding a call at 11 today to review its second quarter results and later today we will be filing our 10-Q. As discussed in our July 15 Ford University Presentation, we are no longer providing sector financial statements. Instead, as you'll see in the presentation and our 10-Q as well, we are reporting segments focusing on automotive, financial services, and other business activities. Prior period amounts have been revised to reflect our reportable segment change.

Presenting today are Mark Fields, our President and CEO; and Bob Shanks, Our Chief Financial Officer. Also participating are John Lawler, Vice President and Controller; Neil Schloss, Vice President and Corporate Treasurer; Paul Andonian, Director of Accounting; and Marion Harris, our Ford Credit CFO.

Mark, over to you.

Mark Fields - President, Chief Executive Officer & Director

All right. Thanks, Ted, and good morning, everyone. Well, you can read our numbers and our comparisons with last year on slide three. So what I would like to do is provide some context for the quarter. And overall, it was a strong quarter. In fact, it was one of our best second quarter's ever and while pre-tax profits are down compared with last year's record second quarter, revenue was up 6%, so we grew the top line.

Global market share declined outside of North America but share was up in the US and Canada. Our automotive operating cash flow was an all-time quarterly record. Europe's pre-tax profit almost tripled from last year and North America and Ford Credit remained strong.

Now combined with our first quarter record, we achieved record first-half pre-tax profit and operating margins for both the company and for North America. Now we continue to expect another strong year and we are committed to our full-year guidance of company pre-tax profit and operating margin equal to or better than last year, but at the same time we now see a number of risks that the entire Ford team is working hard to mitigate to achieve our guidance, and we'll explain more as we go through the information this morning.

Now turning to slide four, we remain absolutely focused on the four drivers of shareholder value and I'm pleased to say we made progress on each. As I mentioned, we grew our top-line and we announced actions to continue to grow our core business, including new global SUVs and also positive sales momentum at Lincoln. We also continue to pursue emerging opportunities such as our investment in the Pivotal, which will further strengthen our cloud based software capabilities.

Our returns were strong, as I just reviewed; now in terms of risk, we received a rating upgrade by Fitch. Our business units outside of North America collectively were profitable for the third consecutive quarter and we achieved $1.6 billion of cost performance in the first half versus our plan. And in terms of rewards, we distributed regular dividends of $600 million to our shareholders.

Now slide five show some of the other highlights in the quarter, and I won't go through each of these, but as you can see they span everything from awards for new products and engines, to progress in our quality efforts, to launches of products and connected services.

But I will just point out in quality the J.D. Power IQS Survey. Lincoln came in at number seven and Ford came in at number 11. Both improved and really put the exclamation point on the efforts that our team has around continuously improving our quality for our customers.

Now let's turn to our view of the global business environment and how we see it on slide six. At the macro level, we're seeing higher levels of economic uncertainty. Financial markets and the sterling and euro are affected by Brexit and global interest rates have been reverting to recent lows.

U.S. growth is improving after a weak start we saw at the beginning of the year, but we are seeing signs of a maturing U.S. recovery. We do expect continued growth in China albeit that's supported by government stimulus measures, but we're also seeing increased pressures on margins. And while conditions in Brazil remain difficult, Russia is actually showing some signs of stabilization.

Now for Ford specifically, our risks are around lower pricing and higher incentives than we expected in the U.S. and China. A softer although still strong U.S. retail industry, the effects of Brexit on our operations in Europe, a more difficult external environment across many of our markets in Middle East and Africa, a weaker Chinese RMB and lower than expected auction values for smaller vehicles leased in the U.S.

So, with that, I'd like to have Bob take us through our performance, and I'll come back at the end and cover our outlook. Bob?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Okay. Thank you, Mark. We'll start on slide eight, which is our key financial summary. And what I'd like to do is just highlight a few of the key metrics in the first column on the second quarter, and then I'll do the same for the first half period, which is the third column.

So, as Mark said, it was a strong quarter for us. And to demonstrate that, if we look at the company-adjusted pre-tax results, you can see $3 billion, which was down 9% from the year ago, but it was, as Mark said, one of the strongest second quarters that we've had.

If you go down further to net income attributable to Ford, at $2 billion, that was also down 9% and adjusted earnings per share down 4%. If you go to the bottom of the chart, you can see the liquidity metrics. I'll come back to those later. So I won't go through them individually at this point, but you can see they were very, very strong.

If you look at the year-to-date column, let's hit the same lines on the chart. Company-adjusted pre-tax results of $6.8 billion. Remember, we had the best ever first quarter. So when we combine that with this strong second quarter, we ended up with a record for the first half, $6.8 billion. That was up 35%. And net income of $4.4 billion, that was up 33%, and then the adjusted earnings per share for the first half at $1.20, up 45%.

Let's go on to the next slide, slide nine. And here what I want to focus on are the absolutes before we get into some of the details within both the automotive segment and Ford Credit. Looking at the automotive segment, you can see the strong result at North America, $2.7 billion. It was down about 5%.

Europe was clearly a highlight among all the business units in the quarter. It was up three times from where we were last year, the best second quarter results ever. And that included some impact from Brexit, which I'll talk about in just a minute, but really a great result in Europe. And if you look at Financial Services, that includes a $400 million profit from Ford Credit. It was down, and I'll explain what was behind that.

If you look at the other business units, they were all in losses. South America, $265 million, down a bit. Middle East and Africa, down also, at a $65 million loss. And then we had our first loss in Asia Pacific in 13 quarters, at $8 million, and that decline was driven largely by China and we'll talk about that later in the presentation as well. I will highlight here all other. That's one of our new segments. That is primarily in this quarter net interest expense.

Okay. Let's go on to slide 10. And as usual, we'll look at the key metrics for the automotive sector. Very strong absolutes across the board but when you look at the comparisons versus last year some mixed results. Wholesale was flat, revenue up 5%, market share, Mark explained that, was down everywhere but in North America and the operating margin was a strong 7.7%, and the results a 2.8%. And then if you look at the very bottom of the page, we've provided you with the same metrics and on the year-over-year changes for the first half and you can see very strong performance right across the board with the exception of market share, where we were down just a touch.

Okay, let's go on to the next slide, slide 11, and we'll start breaking the automotive segment down. This is a view of what happened on a year-over-year basis that resulted in the decline of $130 million. So when you look at it overall you can see that the market factors, which is volume, mix, and net pricing, was down and that was driven by a higher incentives and that was mainly in the US. We'll talk about that when we get to the North American slides. You can see exchange was an issue of $269 million. We did have some favorable cost performance and that was largely driven by commodities.

And then in other to the far right, that was largely the gain on sale of an equity investment, I will touch on a bit when we get to North America.

Okay, let's go into North America on slide 12 and look at the key metrics. Again, very strong quarter for North America. The top line was essentially flat to very slightly up in the case of revenue. Market share flat but this was already mentioned, within that the US was up and that was higher fleet performance but also we had very strong retail share improvement for F-Series.

Canada was up, Mexico was down, that's how we ended up with sort of flat on a year-over-year basis. When you look at margin, 11.3%, that was down 0.9% but obviously it was over 11%, that's an outstanding level of efficiency and performance for the North American operations, and then $2.7 billion. If you look down at the bottom of the slide, really strong results in the first half, best ever for North America. We had very strong growth. We grew the share 12.1% margin and $5.8 billion in profit, up 31%. So really strong performance in the first half of North America.

All right, let's go to the next slide and look at what happened in the quarter. On a year-over-year basis, here the story is largely around incentives. If you look at the market factors, you can see that they were down on a net basis driven by the incentives and essentially what we're seeing is over time and particularly as the US industry has started to plateau and we're starting to get to a more mature part of the economic cycle in the US, we've seen sort of a very gradual rising – very modestly rising level of incentives for the industry and we have been increasing along with that.

Now what you also have happening on a year-over-year basis, which is maybe a little bit unique to us is the fact that a year ago we had very low incentives for the F-150, because remember we were coming out of the launch of Kansas City, I think it was around May when we got to full production. So we had very tight incentives, very high ATPs on F-150. We've become more normal if you will.

We're still in a good position relative to our peer set within the – particularly our domestic peers in terms of ATPs for F-150 as well as incentives, but there was a factor of in our incentives as well. But there's no question that we've seen an increase and that is more than what we had expected when we developed our plan at the beginning of the year.

When you look at costs, we were favorable on cost overall that was again driven by incentives, most of the good news – or rather commodities. Most of the good news on commodities in the company occurred in North America. And then to the far right, you can see the good news from that equity sale, which was the OEConnection sale that occurred in the quarter and that benefited North America.

Before we leave the slide, I just want to go back to mix. Mix is a very important part of the story across many of the business units but certainly North America was one of the stronger stories. That's product mix in the case of North America. When I get to Europe you're going to see the same thing along with good news on series, mix and options. A very important part of what's happening as we're seeing sort of car recession but this is actually been part of our strategy to focus on higher margin, more profitable vehicles, but also where the consumers are going.

The other thing, I would just note on this slide is that we have picked up in warranty cost. You can see that in the callout box the Takata recall. That was about $100 million and I just want to digress for just a moment to say, our approach inside Ford is unfortunately recalls are a normal part of business. So we do not put recalls and special items or exclude them from margins or exclude them from operating results as some of our other competitors do.

It is again unfortunately a normal part of business. We will report them at operating results. We always have, we always will. And if there is something of consequence that occurs, we'll just call it out and you can make your own judgments in terms of whether that's a run rate or not. Certainly they are lumpy.

Mark Fields - President, Chief Executive Officer & Director

Yeah, just a little bit more color on the US industry. Obviously as Bob mentioned, as it still remains at fairly healthy levels overall. The competitive environment has increased as growth has slowed and the retail industry demand has weakened, as we saw in the second quarter.

And this has resulted in higher industry incentives, with – if you look at the retail industry sales rate, it's actually declined three out of the last four months. So the bottom line is that we've seen a tougher pricing environment this quarter and we will face one going forward. And as Bob mentioned with the car segment, the most impact as various competitors look to protect their share.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Okay, let's move on slide 14 and will talk about South America. In South America, this is a story that is very much what has been the last number of quarters. External conditions particularly in Brazil continue to be pretty challenging. We saw a decline in the top line. You can see double digits. In the case of revenue, you can see it was down 17%. That decline is entirely due to the weaker currencies.

Market share was down as we focused on the most profitable parts of our portfolio, amid increasing discounts across the industry and then you can see the results in terms of margin and pre-tax results. This is largely what you are also seen in the first half.

I will say that the team has done a – continues to do a good job of focusing on the things that it can manage particularly on cost. And if you go to the next slide on slide 15, you can see the results of that. We once again delivered very strong cost performance. So if you think about last year, we delivered over $400 million of good news on cost performance. We had good news in the first quarter, another good tranche of performance here in the second quarter. But as you can see just to the left of that, we continue to see difficulties in pricing enough to be able to offset the effects of high local inflation and the weaker local currencies.

Industry, still an issue as you can see in the volume and mix, and then the balance sheet actually helped us this time. This was the strengthening of the Argentinian peso. We are seeing good things in Argentina. The new government is really getting traction in terms of turning that economy in a better direction and so that gave us some good news in the quarter.

Okay, let's go on to Europe, which as I mentioned earlier was a bright spot for us. If you look at the wholesale and revenue up double digits, share actually declined a little bit. That was market mix. The Southern European markets grew disproportionately. Our share performance there is a little below the average of what it is in Europe and so that affected us. Margin was 5.8%, which is a very, very good performance and the profit that I touched on earlier. And then if you look at the first half, we made $900 million in the quarter, a margin of 6% and you can see very strong growth at the top line as well and share was flat. So this is a really great story.

The other thing I want to highlight, we were committed to Russia. We stayed in Russia. We've been working to make sure that we're responding to the environment in Russia and it's paying off. Within the good news that we saw in the quarter, Russia was actually a good part of that.

And on that note, let's turn to the year-over-year on slide 17, and you can see the improvement of $300 million. It was market performance. It was favorable cost performance. And then in the case of exchange, this is the first time that you'll see us talking about Brexit. We had bad news of about $60 million on the balance sheet related to the weak sterling.

And one of the things that's important to note is that our strategy on hedging for the company is to go into a year with certain of our key currencies completely hedged from an operational exposure point of view. So we came into the year with the sterling and the euro completely hedged. So we don't see any issues relative to the weakness of the sterling on an operating basis for the balance of the year.

We have about 60% of next year's exposure already covered, and there's a little bit that's also covered all the way out into 2018. When we talk about Brexit effect later, you have to remember the $60 million because there is an impact in the second half that we'll talk about that's related to a weaker industry.

Mark Fields - President, Chief Executive Officer & Director

Just a little more on the Brexit. Obviously, it's important because 30% of our sales in Europe are in the UK. So we're closely monitoring the situation and, of course, engaging with key stakeholders. And that includes, as you could imagine, looking at consumer confidence levels, amongst other indicators.

And if you reflect, the industry back in the first quarter in the UK was at a record. But we saw that growth starting to decline in the second quarter ahead of the Brexit. And so far, as we look at July, by our reckoning, the industry is actually up in the UK, but on a retail basis it's down.

So as we look going forward, the industry could be down 5% to 10% for the rest of the year depending upon which outside forecast you look at. But even within that, we'll continue to work to deliver consistent market performance, including obviously continuing our strong growth in commercial vehicles.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

This is probably the best place to talk about the ongoing effect of Brexit. So we will talk about second half a little bit later in the presentation, but we are expecting to have headwinds of about $200 million this year associated with Brexit. It's this $60 million with another $140 million, $150 million related to a weaker UK industry.

When you get into 2017 and 2018, we see the impact on Ford being somewhere in the range of $400 million to $500 million in each year. And that is related again to weak industry or weaker industry in the UK, and then also you start to pick up a little bit of the bad news on exchange because of the fact that the hedging is only 60% in place for next year and less than that in 2018. So that's what we're looking at. We're not going beyond that in terms of what happens once they actually leave because there's just too much uncertainty, particularly around what will happen with tariff barriers.

Okay, all right, let's go on and we'll talk about the Middle East and Africa on slide 18. This is a story of just a bad business environment. If anything can go wrong it seems like it has. It's low oil. It's weak currency, it's just political strife. In South Africa, we've seen labor disruptions. It's just a, you name it, it's happening. And the results have been really weak industries. We're seeing declines of 30%, 40% in some of our markets. In some of the countries access to currency and so forth, it's pretty difficult.

But you can see the effect of that has only been a modest increase in the loss. The team has actually done a great job of working on the costs it can control because it does import most of the vehicles that it sells from other business units. But they've actually done a great job on costs and they've done a good job on pricing. And if you look at the market share, while it looks like it's down and in fact, it is, that is driven by the growth of the Iranian industry, which we don't participate in.

The overall region is down 300,000 units. Within that, Iran is up 300 units. So if we take Iran out, the team has actually increased our share by 0.6 points. So they're really doing a great job and on share, on cost, but the headwinds across the region are just so large that we're kind of swimming in place at the moment.

Okay, let's go on to Asia Pacific. Asia Pacific is an interesting story. We saw a decline in wholesales. Some of that was expected because we did have a planned eight week shutdown of our Chongqing number one assembly plant. That was for a complete overhaul of the paint booth there. So that was expected but frankly there were performance issues at Ford as well. There were also issues in terms of industry segmentation that we'll touch on.

If you look at revenue, revenue was up 17%. We did see a decline in market share that was China and if you look at the margins, obviously we were just below breakeven in margins and pre-tax results. And as I mentioned earlier, the first loss we've had in quite a number of quarters. And if you look at the year-to-date results, we've seen the top line grow share as well, but again our operating margin and pre-tax results down from a year ago.

I would highlight on the far right of the slide, our China joint ventures on an equity after-tax basis contributed about $300 million of profit. That was down about 28%. We still have very healthy margins there at 16.1%. I think that was down about 1.2 points from where we were this time a year ago.

What we have on slide 20 is a bit of what happened in terms of market share in China in the period, which really drove what happened in the region.

So if you look at the far left, last year, we did 5.3% in China. We're down about 0.9 points. And you can see the factors that drove that. Half of it was basically external. Industry mix – what that means, the mix of the industry was stronger on passenger vehicles. It was weaker on commercial vehicles. We have joint ventures that participate – two different ones that participate in each one of those.

The segmentation issue is that within commercial vehicles it was down, but it was actually up in the very low margin mini commercial segment, which we don't participate in. So if you think about the part we participate in, it was even lower. And so that was the effect that it had on our share from both the industry mix change and then the segmentation within commercial vehicles.

And then, on performance, we were off 0.4 points, and that was largely around weakness in the C segment and the small utilities where we're seeing a lot of competition from the domestics that are really coming up strongly and with really better products. And so it was a difficult situation for us.

We also had some go-to-market strategies, frankly, and the team immediately saw these issues. They actually started to occur in March. Immediate action was taken to address these issues. And you can see, looking at the share in April, May and June, we started to get back on track. And we feel like the second half of the year is going to be better for us and supported in part by a number of new product launches that are important that will help us.

Mark Fields - President, Chief Executive Officer & Director

Anyway just to – again, a little bit more texture on that, as we look at the movement during the quarter, in terms of our performance, we've also focused on the quality of our market share. So our mix of more profitable vehicles such as medium and large cars and SUVs and premium cars now account for about 40% of our sales in China, and that's up 5 points versus last year.

So, as Bob mentioned, we've taken actions to improve our market performance. And we have a number of important launches – the Taurus with a 1.5-liter engine. It will be the only large car eligible for the purchase tax incentive. The new Kuga, the new Mondeo, the Lincoln MKG and Continental, and the majority of these launches will benefit us in the fourth quarter, not so much the third quarter.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Okay. Let's go to slide 21, and we'll see what happened in terms of the year-over-year results. So I'm going to explain what you can see, and I'm going to explain to what we had expected because it's relevant to what we just talked about.

So you can see market factors were slightly negative, both pricing and then you can see volume mix is pretty flat. Within that, there actually was quite good news on mix. So with that mix and other, it was more like around $60 million, $70 million of favorable mix. And that's along the lines of what Mark talked about. When you look at the cost performance, it was up. We expected it to be up. It actually isn't up as much as what we had expected. And then exchange, this is a story of a weaker renminbi. As Brexit has occurred and it affected the sterling and the euro, the Chinese are now kind of targeting their currency against a basket of currencies, not just the dollar. As those weakened, we saw the Chinese start to push down the renminbi in response to that and that had an effect on us.

What we had expected to see in the quarter, we didn't expect the loss obviously, was the fact that we have stronger market factors. The net pricing in China have been worse than what we thought. We thought 5% to 6%. Actually year-to-date it's approaching 7% or high 6%s. We're at about 7% or so. We think this will mitigate in the balance of the year because if you look at last year, the decline was largely from this point through the rest of the year. So we think it will mitigate and we will end up at the high end of that range.

And when you look at the volume and mix, that was the share issue that we talked about. So team is all over it. We were working on it but that's really what happened to us in Asia Pacific in the quarter.

Let's go on slide 22, and we will turn to Ford Credit. Ford Credit grew, that's the first two metrics double-digits and that was really around the world. If you look at the pre-tax results, the $400 million that was down 21%. I'll show you why in just a minute. If you look at the portfolio performance, very healthy FICO scores in a good place, delinquencies up a bit. Although I will say something about that in just a minute in terms of credit losses and the loss receivables up 15 basis points, actually about where it has been the last two or three quarters. It's just up a bit from the last two or three, up more from a year ago. And starting to approach what the level of LTR that we saw before the great recession, so this is just getting back to sort of normal levels. It's not an issue per se.

Let's go into the next slide and look at the year-over-year. So the decline was largely around lease residuals and credit losses. In terms of lease residuals, it's really two things and it's in the callout box. If you look at the residual gains and losses, you can see on the year-over-year basis of the declines, so these are vehicles that come back, do we lose money or do we gain money? We actually gained money of the returned vehicles in the quarter. We just didn't gain as much as we did a year ago. So that's how we end up with the negative number.

And then in terms of supplemental depreciation, this is a reflection of lower auction values and a projection of lower lease-in values particularly for smaller vehicles. We've adjusted our depreciation glide path to those new lower endpoints and that's what's reflected there. When you look at the credit losses, this is largely around a couple of things. You can see the charge-offs. Those are the vehicles that we actually repossessed and that we took back to market and resold. And you can see there was a decline there of $34 million, and then we had to increase the reserve by $31 million.

But the thing I wanted to mention on this is there are a number of things going on in here. But while the delinquencies are up a little bit, what we're seeing happen is that the number of people who actually default once they are delinquent, if you will, is increasing versus were it has been. It's not a level that's of concern. It's actually just coming back again to a level that's more normal. I think there have been a number of articles from banks and others around that, but that's one of the factors.

The other thing is that the severity – so when we do take them back to the auction market, the severities are greater in part because of what I mentioned in terms of the lease-in values of the vehicles are lower overall but also because of the longer terms people are – the portfolio of people are turning the vehicles a bit earlier and so the severities are greater. Because of all of those factors, we also have had to increase the reserve in addition to the fact the business is just bigger. And so we have to increase the reserve in line with just a larger business.

Okay. Let's go to the next slide, and this is looking at trends. I'm just going to talk to the two on the right. I think I've already covered – the two on the left – the two on the right I've covered. We said in the first quarter that our lease penetration would decline. It did by 3 points in the second quarter. We think again for the full year it will be lower than it was in the first quarter, and you can see that we dropped a bit more than what the overall industry did.

And in the lower left, this is around what we talked about the auction values. This is a constant mix. So it's mix – the same as the second quarter. You can see that we are pretty flat in terms of values in the second quarter compared to the first but down from where we were a year ago. And that's largely around the smaller vehicles.

Okay. Let's turn now to cash flow. Cash flow, a very, very good story for us in the quarter. It was the best ever in the quarter and the half – $4.2 billion operating in the quarter, $6.9 billion in the half. It was driven by the profit, but also you can see that we had favorable working capital and we had favorable timing differences.

When we look at the full year, we do expect that the $6.9 billion will come down. So what we achieved in the first half will come down because we do see negative cash flow in the second quarter, largely driven by the third quarter. And we'll come back to that in just a minute. But we think largely this is around the fact that our working capital and the favorable timing differences will reverse by the time we get to the end of the year.

I will note on this slide we're taking our capital spending projection down. The guidance had been $7.7 billion. We're taking that down to $7 billion. It's largely around efficiencies on programs that are coming to a conclusion, and we're seeing we delivered them more efficiently and also lower non-product spending.

Okay, let's go to the balance sheet summary. This is a new slide we've developed just to capture all the balance sheet metrics. The only thing I will say here is the automotive balance sheet is very, very strong. Ford Credit continues to be well-capitalized and strong as well and then, finally, in terms of pensions, we're still on track to have the pensions largely funded and de-risked by the end of the year.

Okay, now let's switch gears and let's talk more now about what lies ahead not only in the second half, but for the full-year and I will touch very briefly on 2017, and of course, talk more about that at Investor Day in the middle of September. So what this slide basically says is compared with our prior expectations or prior guidance, when you look at GDP, we now expect global, US and Europe GDP to be somewhat softer than we had expected. Brazil and China pretty much in line with what we've expected since the beginning of the year.

When we look at industry volume, we do think the global industry volume is likely to be a bit higher than we had expected. That is driven by primarily China but also Europe is doing a bit better than we had expected at the high end of the range that we guided to earlier in the year. The softness is in the US. That is largely on the retail side of the business and also in Brazil.

Now let's go on to two special attention slides that we provided to help you understand the second half and also our view of the full-year. So the first thing I want to highlight is when you look at the far left that's the $6.8 billion company profit in the first half. Record results, fantastic. What is in there though is important to understand. A lot of the issues and risks that we will talk about for the full-year, they were there in the first half. They started to appear as the first quarter and then the second quarter unfolded. We offset those risks with $1.6 billion of favorable cost performance versus what we had expected at the beginning of the year.

So it wasn't an easy quarter or a easy half. We had to work to get there but the important message of this is that those risks flow into the second half. So for us to deliver the guidance that we are committed to deliver for the full year, we have to do that all over again. We're going to have to deliver stronger actions on cost. We're going to have to go back and look at the top line as well and find every dollar of revenue that we can get. That's what that next to last bar represents, the profit improvement actions.

So we do that, and we are committed to doing that, then we are able to deliver the guidance, which again we are committed to do, and that's what the right-hand bar reflects. What we're highlighting in between there with the red bars are the factors that are going to drive to a lower second half than is normal. Second half is normally lower. That's what the first red bar represents, but there is some other actions in there that I won't go through individually other than I'll touch on Super Duty that will give us a lower second half than what would be normal.

Super Duty is a very, very important product. It's high volume. It's very high margin. It's a big changeover because we have not had a complete redesign of this product for 19, 20 years. It's going into a big plant. It's aluminum. It's a new frame. It's powertrain upgrades. It's new features. It's new technologies. So we really haven't touched a lot of this product for 19 years.

So when we make this change, obviously, it's going to have an impact in the quarter from the launch affect and so forth, the cost. But even as we go through the quarter, we expect to have some impact because we do think we'll have lower contribution margins coming out of this than what we had going in.

Still very high contribution margins, among the best in the portfolio, but the new product which will be far superior than the one that we have today and certainly position the product to be a winner and a leader over the next decade and meet the regulatory requirements that we have to meet. There will be lower contribution margins when we come out of the launch, and that will flow through into the fourth quarter and the forward years.

Now, what will happen over time, as we'll start to get the cost reductions, which we normally get, which is what benefited the older F-Series over the course of that 19-year cycle. But it will also drive a weaker than normal third quarter along with some of these other factors. So to put that into context, usually, the third quarter is about a quarter of our full year results. It's likely to be half of that or lower. And that's largely around the F-Series effect.

So let's go to the next slide. Some of those risks that we talked about that were in the first quarter largely – or first half and that flow through into the year, shown here, it's around higher Ford and industry incentives. We talked about that. They're up. We're up in line with that. The weakness or the softness in US retail industry – we see the second half actually being softer than the first half on an absolute basis. Again, that is – it's retail.

These are absolutely strong levels. They're just not as strong as what we had expected. And in fact, looking into 2017, we think that we'll see further softness, as the cycle matures. If we go down the page, Middle East and Africa – I've already talked about it. That's going to continue the situation that we're facing. We are responding to that.

In Asia Pacific, the higher – the lower net pricing, the weaker exchange. We saw that. We're still dealing with it. And in Ford Credit, we have addressed the US auction values. But it will give us a lower second half in line with what we saw in the first half, when we earned over $900 million.

The opportunity is Europe. Now, we made a lot of money in Europe in the first half. We clearly have opportunity versus what we had expected at the beginning of the year, but we have to deal with Brexit. And we talked about that already. So we see these risks. We have seen them since the beginning of the year. We've been dealing with them very successfully. We will do so in the second half but that is work that is still yet ahead of us in. And Mark will talk to that in his comments, which I will turn over to him now.

Mark Fields - President, Chief Executive Officer & Director

Great. Thanks, Bob. So, as you can see on slide 30, we remain committed to our 2016 guidance. As we mentioned, we are facing risks to achieving that. Now I would like to talk about what we're going to do about it and if you go to slide 31, it shows you the improvement actions that we already have underway in the company. So to start as we match production to demand and be very consistent around that, that will help reduce manufacturing costs. We have implemented an aggressive company-wide attack plan on costs. And as Bob mentioned, it builds on the considerable cost progress that we achieved in the first half of the year with that $1.6 billion in cost improvements that we delivered versus our plan. And as you can imagine, it looks at everything from material costs and marketing and selling efficiencies to freight and admin reductions.

Now at the same time we have to put special attention on our go-to-market plans in the US and China, to deliver even more revenue and cost opportunities. In addition we are also utilizing our expanded data and analytics team to really pinpoint immediate areas of improvement in our market factors, including better volume and mix and pricing, which will in turn drive revenue. And then, finally, we have a number of significant vehicle launches around the world this year and we are challenging our team to deliver even more revenue and cost opportunities as we launch those vehicles and take advantage of those launches.

So we are aggressively executing on all these actions and, of course, we will provide an update on our progress during our Investor Day on September 14.

So, in summary, and in turning to slide 32, again, I would like to put the quarter in context for you. We had a strong second quarter. We had record cash flow and we had a record start to this year. And at the same time, we are seeing more pressure throughout the business for the remainder of the year.

Now some of it, as we've discussed is expected, such as the launch of the Super Duty in North America and some of it is not expected, such as the higher Ford and industry incentives in North America, a softening of the US retail industry, and uncertainty in Europe due to the Brexit effects.

So, as a result, we are calling the second half of this year and particularly the third quarter to be much weaker than normal. Now I just want to caution you against using the second half of the year as an indicative run rate for 2017. It isn't. We expect 2017 to be another solid year for Ford despite a likely absence of growth in the US industry volume and Brexit effects in Europe.

Now, I think you know us very well. The Ford team remains committed to delivering our plan for this year. But we also have a long track record of calling risks as soon as we see them and acting decisively to deal with them, and that's exactly what we're doing today.

So, with that, we'd love to take your questions.

Question-and-Answer Session

Operator

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brian Johnson from Barclays.

Brian A. Johnson - Barclays Capital, Inc.

Good morning.

Mark Fields - President, Chief Executive Officer & Director

Morning.

Brian A. Johnson - Barclays Capital, Inc.

I want to talk a little bit about North America. A couple of related questions. First, we talk about the inventory situation at the end of 1Q. Certainly we tracked how it's developing during 2Q and, even backing out Super Duty safety stocks, it looked like coming into the quarter there was a fair amount of inventory.

How much of the incentive activity has been related to working that down and perhaps versus sort of broader trends? Then what's your thinking on the trajectory of industry sales, particularly retail sales, through the second half and into 2017?

Mark Fields - President, Chief Executive Officer & Director

Well, Brian, let me take the second half of your question. Bob will take the first one on the industry sales. Here is how, I think, we characterize the market. If you recall, the vehicle sales for the industry grew at a really good pace in the early stages of the economic recovery. And if you recall, it actually outpaced the overall economic growth at the time.

And so, while the industry remains at fairly healthy levels, the competitive environment has intensified, as that growth has moderated and as we've seen some of the softness in the retail demand. And in that environment, you've seen, as we said, incentives creep up. And we've been about in line with that.

But also I think what it will result in probably for the remainder of this year, Brian, is a fairly volatile kind of SAAR factor from month to month because that will be influenced by any particular OEM or brand that wants to increase their incentives to maybe juice their market share or whatever.

As we get into – the bottom line is we expect in the second half of this year that the retail industry to be lower than the year ago. And as we get into 2017, obviously, we'll talk more about that in the future, but as Bob mentioned, we do expect the industry to be probably slightly down in 2017.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Okay. And, Brian, on your question around the inventory and our incentives related to that, I'd go back to what we talked about at first quarter and also the last chat that we had in March. We knew that we would be at higher levels of inventory, as we were – particularly, in the early part of the year because of the two factors.

One, we had to prepare for the Super Duty launch, which we touched on, and also because of the fact that many of our plants are running at three crew. And so, as a result, there will be periods where it's low absolute volume months where the inventory will be from a day's supply a little high, but it's to support the higher volume months of the year, particularly in the spring and the end of the year, into the summer, and so forth.

So we're comfortable with the levels that we've been at. The things that's kind of interesting in terms of responding to the softness, it's not been around incentives. It's been making production adjustments. Because if you look in the first half at – I mean, you wouldn't see this, but I'm telling you this.

If you look at the wholesale that we had planned, they are higher or were higher than what we actually delivered. Because even as we saw some of the softness that we've talked about occur in the first half of the year, Joe Hinrichs and the team are making production adjustments along the way. So we ended up with lower wholesales in the half than what we had expected.

I mean, that's how we primarily deal with that, is just adjusting production to demand. That's what we'll do in the second half, which is what Mark talked about in his comments. So the incentives, I think, are different. The incentives are really sort of an environmental issue, if you will, across the industry. And then for us, I think, there is a piece of what I talked about earlier around the normalization in this period versus a year ago of F-150.

Brian A. Johnson - Barclays Capital, Inc.

Okay, and just a quick follow-up. When you talk about incentives, I guess a housekeeping. Are the incentives adjustment you made here just based purely on what happened in the quarter? Are you at all forward-looking into the amount of incentives that would have been either anticipated for 3Q or booked or in place on June 30, continuing into July? And then second, just broadly, are you seeing the SUV – I actually mean CV market beginning to see greater incentive activity, not just the sedan market?

Mark Fields - President, Chief Executive Officer & Director

Well, when you look at it our overall going forward, as we said, Brian, one of the risks that we're calling out is lower pricing and higher incentives here in the U.S. And that's based on the softness that we're seeing in the retail market.

As you look at the data across the industry, cars, utilities and trucks, you can see as a percent of the transaction price, all of them are going up – cars the most because of what's happening with the segmentation. And in terms of commercial vehicles, not so much, that's still relatively balanced.

Brian A. Johnson - Barclays Capital, Inc.

Okay. Thanks.

Operator

Your next question comes from Joseph Spak from RBC Capital Markets.

Joseph Spak - RBC Capital Markets LLC

Thanks for taking a question. First one is, Bob, you made a comment about looking for every dollar on the revenue side. So in light of a higher incentive environment, I guess one way is to just move a little bit more volume. So can you just talk about the go-forward sort of discipline on incentives in the US environment?

Mark Fields - President, Chief Executive Officer & Director

Thanks, Joe. We're going to stay very disciplined in matching production to demand. And when you look at our approach going forward, as we mentioned, you will see some production adjustments in the second half and in the third quarter. And that's based on the fact our view of what we see is the retail industry going forward. So we're just going to stay very disciplined around that, Joe.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

And, Joe, I would just add. There are a lot of ways to get an extra dollar out of revenue, and mix is a really, really important one. If you look at the automotive segment and the year-over-year change, we picked up over $700 million of good news just from product mix with a little bit of good news from series, mix and options. I mean, that's something that we're very focused on. It's been part of our strategy in North America, in Europe and Asia Pacific. Mark touched on it.

And the other thing I don't want to leave unsaid – the great work that our global data insight and analytics team is doing. We're bringing new analytical tools to the table to help the marketing and sales teams be really focused and targeted in terms of where to find that extra dollar that's sitting there but maybe we're not capturing it because of lack of insight in terms of the specificity with which we can put all the tools together to get it and bring it back home. And that's exactly what that team has been helping us to do, particularly in the US, but now starting to do so in Europe and China as well.

Joseph Spak - RBC Capital Markets LLC

Okay, and I guess just following on that conversation, so you're talking about the US environment that's a little bit tougher, maybe slightly down, but the guidance in the back half in North America implies something about 6.5%, as you mentioned, sort of pricing and incentive way a little bit. So I guess given sort of what you're seeing from an industry perspective in just a little bit of a tougher environment, does that give you any pause for your breakeven analysis longer term? Or are we over – maybe, am I underestimating the impact of Super Duty in the back half? I mean, maybe you could give a better sense of what you think margins would be in the back half if you didn't have the Super Duty changeover.

Mark Fields - President, Chief Executive Officer & Director

Yes, I'm not going to go there in terms of giving you a view on margins. I think, clearly, they will be lower. There's no question about that because the second half will be lower. They usually are lower in the second half. This will be a weaker than normal second half. So that is what's going to happen. I would just go back to 2014. If you think about 2014, North America had lower margins than it had been running at because of the launch of F-150 and then they bounced back up in 2015, particularly the second half, and then early this year.

So what we're seeing is a really big launch. It's not going to take as much volume out as those launches did because we've learned so much from them, but it's a really big launch, and it's going to have an effect. It's really around all these other issues and the softening of the industry, the higher incentives. Those are the things that we're working on and I would actually call them sort of early signs of the maturation of the cycle. The structure that we've put in place in North America was designed to give us good results and good performance when things get tough and it is getting a little bit tougher. That's what we're seeing but I think the structure of the business is good and oh, by the way, remember that $1.6 billion of cost performance we talked about? A lot of that was delivered in North America. So we're keeping up if you will in terms of the structure of the business with what we're seeing happen. So, I think we're in good shape in terms of the robustness of their structure and prepared for that eventual downturn.

Joseph Spak - RBC Capital Markets LLC

Okay, thanks.

Operator

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

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thanks and good morning, everyone.

Mark Fields - President, Chief Executive Officer & Director

Good morning.

Adam Michael Jonas - Morgan Stanley & Co. LLC

So you probably saw Fiat Chrysler is ending production of all cars in the US by Q1 2017 on the grounds that they couldn't justify the use of capital for products they don't make any money on. Now, while recognizing that Ford is on a completely different level of scale of passenger cars in the US vis-à-vis Sergio's house, are you at least somewhat sympathetic to what Mr. Marchionne is saying? How much money do you actually make in small and midsize cars in the US and can one make the case that, over time, Ford, too, could be carless in your US plants?

Mark Fields - President, Chief Executive Officer & Director

Well, I think overall as you can expect, Adam, we look at how we spend our capital very, very carefully to make sure that we're earning a good return on it. When it comes to our portfolio, we've said very clearly, it's important to have a full portfolio in cars in particular to adjust to any changes we see in consumer demand, in terms of the economy, in terms of the regulatory environment. So those are just a few of the things that we look at as we're making investment decisions across our portfolios including small vehicles.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Okay. The second question is on Ford's strategic position in small downsized engine and fuel-efficient vehicles. The emphasis on smaller, lighter, and more fuel-efficient vehicles, I mean, we know that all good auto companies with an eye on the long-term have to do this type of thing. It's really existential but thinking nearer-term, does this strategy, it seems to work a lot better when oil is $100 a gallon or – sorry oil is $100 a barrel or gas is $4 a gallon. I'm just curious if you see any link between fuel prices and consumer buying preferences that could be creating some near-term headwinds to that strategy even recognizing it's the right one longer-term? Thanks.

Mark Fields - President, Chief Executive Officer & Director

Thanks, Adam. Well, as usual, we have to take – we have to live in today and we have to take a long-term view but overall what we're seeing is literally across every segment, whether gas is $4 a gallon or whether it's $1.50 a gallon, fuel economy is still an important purchase criteria for folks, because they have long memories. And so what we're seeing in terms of the take-up of our EcoBoost engines and the take-up of our smaller displacement engines like our 1.0-liter, which has won international engine of the year for like five years in a row. We're seeing very, very good take-up of that. And we think going forward that is exactly the right strategy. And yes, you could have some customers on the margin that say, while gas is low, so I'll purchase a bigger engine. But for the most part whatever they purchase, they want good fuel economy here in the US and globally.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

And Adam, I just would add that we're a global enterprise. Almost half of our volume is outside the United States due to taxation approaches outside the United States, the fact that oil prices are low has not really changed gas prices. So it is an extremely important consideration outside. So it's an important part of what we have to do not only here but also in serving customer demands elsewhere in the world, right.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thank you, Mark and Bob. One quick one, a third one, sorry. Do you guys think autonomous cars are little bit overhyped in the market here? That's it. Thanks very much.

Mark Fields - President, Chief Executive Officer & Director

Do I think they are overhyped in terms of level...?

Adam Michael Jonas - Morgan Stanley & Co. LLC

In terms of media perception and kind of the type of activities you're seeing from your competitors in acquiring assets and building them and the amount of press releases and CNBC time devoted to the topic; just more of a market commentary; just curious of your opinion. Thank you.

Mark Fields - President, Chief Executive Officer & Director

Well, as you know, we're working very hard on autonomous vehicles. Listen, whenever there's something new and shiny and sexy, I think sometimes the media does tend to write about things maybe in flourishing ways. I mean we're just going to stay very focused on our plan and as you know, as a company, there's a lot of announcements going on right now by a lot of competitors and I just want to be really clear. We are not in a race to make announcements. We are in a race to do what's right and best for our customers and best for our business, period.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thank you.

Mark Fields - President, Chief Executive Officer & Director

Thanks.

Operator

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

Colin Michael Langan - UBS Securities LLC

Great, thanks for taking my question. It was very helpful to see the first half versus second half walk but when we think about it year-over-year, obviously mentioned earlier, it seems like a pretty massive year-over-year deterioration, I think almost like $2 billion. And I remember last year you had some UAW signing bonuses in Q4. So, can you help maybe bucket on a year-over-year basis the big items that are dragging things down? Obviously Super Duty would be one. I mean you actually did take up full year production, I mean, I don't know how that's looking into H2. And then commodities that you mentioned (55:53) the first half, is that actually going to be a drag year-over-year? So what are the big items that are causing this?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Well, I guess, the first thing I just want to correct you on, there's no down because if there was a down we wouldn't need our guidance. It's to equal to or improve on what we did last year. So our expectation and our commitment is that it is not what's going to happen. Now we have risks that we have to mitigate, which is what we talked about throughout the call. But our commitment is that we will, as we did in the first half, we will find ways to improve. So that is not the plan. That's not where we would expect to end up or hope to end up.

But to your question, Colin, what you will see overall particularly in the second half, you'll see a bigger than normal cost increase and that will also be something that you'll see for the full-year. We had great performance on a year-over-year basis in the first half. Some of that's because it was a relatively quiet product period for us if you will overall globally. But when we get into the second half, we have Super Duty. We've got the Continental. We have some of the launches in North America that will take place in China, but very important and we'll talk more about this when we get to Investor Day, that was one of the bars on that waterfall charts, which was around product investment.

We have been seeing an increase in product investment from Ford over the last number of years actually as we got bigger. We expanded the portfolio, invested in more technologies, we went into new markets, we added capacity particularly in emerging markets.

Going forward, we're going to be completely replacing the C platform. We're going to be completely replacing the CD platform. We are investing heavily in electrification. Adam's point around autonomous vehicles, that's underway as we speak. There is regulatory requirements that we have to meet, which bring with it added investment as well.

So you will see an increase in both capital spending and engineering, and you'll some of that even in the second half relative to the first half. Because what we're showing you is an increase that's higher than normal. Normally, we see that happen. It's even higher than normal. And as we go into next year, that will be a factor.

So you will see higher cost overall in the year versus a year ago. That will largely occur in the second half of the year. But we don't expect to be down by the time we get to the end of the year. I mean, that's the risk, but our commitment is to offset that.

Mark Fields - President, Chief Executive Officer & Director

The other thing – just one other thing. The other thing that's affecting us half to half is, as I mentioned earlier in the year from some of our fleet sales, particularly rental car sales, they were very front-loaded because the rental companies wanted to buy at the beginning of the model year. So I think it's about – half to half it's about 170,000-ish less wholesales, if you will, because...

Robert L. Shanks - Chief Financial Officer & Executive Vice President

The fleet.

Mark Fields - President, Chief Executive Officer & Director

The fleet.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Yeah.

Colin Michael Langan - UBS Securities LLC

Got it. And kind of related, you mentioned in the first half there was $1.6 billion in costs to offset headwind. What are the major headwinds, just so I am clear? Is it really pricing and FX issues? Are those the issues? I mean...

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Yeah. If you look at...

Colin Michael Langan - UBS Securities LLC

It seemed like they actually came in better in the first half.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Yeah. If you look at that slide that shows the full year outlook and then shows the arrows up and down by region, most of those – slide 29 – most of those issues were actually in the first half as well. The incentives in the US; the industry in the US on the retail side was weaker than what we had expected; the external issues in Middle East and Africa; the pricing in Asia Pacific and China – we talked about that specifically in the quarter; the weaker exchange; the auction values. All of that was in the first half. It will flow through into the second half. We offset it in the first. We're committed to offsetting in the second along with Brexit issues, which are unique to the second half. So that's what we were talking about conveying.

Colin Michael Langan - UBS Securities LLC

Got it, and just one last question. On slide 13, there is that $1 billion of incentive. I remember last quarter there was a big chunk related to the F-150 sort of catch-up, and it was around, I think, $500 million. Is that an issue again in that big number? And is that...

Robert L. Shanks - Chief Financial Officer & Executive Vice President

No. That was more of a stock accrual affect in the first quarter. I think there may be a little bit of that in the second quarter but nothing like what it was in the first quarter. It's more normal if you will.

Colin Michael Langan - UBS Securities LLC

Okay. All right, thanks very much.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Thank you.

Operator

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

John J. Murphy - Bank of America-Merrill Lynch

Good morning, guys.

Mark Fields - President, Chief Executive Officer & Director

Good morning, John.

John J. Murphy - Bank of America-Merrill Lynch

Just a follow-up sort of on the pricing and incentive discussion in the US. I mean, it sounds like the environment is getting a bit tougher, but I was just wondering if you could demarcate or parse it out via cars and trucks. And given the (60:55) levels on CUVs and trucks are very high in the plant level and inventory is, in particularly, high, it just seems kind of curious that there would be real pressure on pricing there. I can understand the car side, but just trying to understand where you're seeing this in the model mix as well as why you think this is coming in at this time?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Well, we're seeing it across all the sectors. It hasn't been unique to any particular sector. As Mark mentioned, it's been particularly prevalent in cars because – I can't remember who used the term the car recession, I mean, I think that's a good way of thinking about it actually. We have seen that and it has had an impact in that segment, but frankly it's been across the board. It's just been sort of a slow, very modest, increasing level of incentives across the industry that's affecting the industry. So I wouldn't call out any particular segment, frankly.

John J. Murphy - Bank of America-Merrill Lynch

Okay. And then just a second question, Bob. You alluded to the Super Duty having a lower contribution margin. Is that really just around the launch and the early days and, as you get a few years in, you think it might have a similar contribution margin as the old Super Duty? Or is there something structural that's going on with the truck and the content in it that would provide...?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

No, it's not structural. Your question is spot on. I mean we have cost reduced the Super Duty for 19 years if you will. I mean, obviously, we did some things. There were some moderate changes along the way, powertrains and so forth. It's not like we didn't do anything but we did, but we haven't done a ground-up and this is what this is.

So, if you think about it, almost all the parts are going to be new or carry across from the F-150. So we're going to get a scale benefit because of the strategy that we're deploying. But you're right. What will happen once we get into production, we will start to benefit from cost reductions on the new part, but not only will Super Duty benefit, but so will F-150, because of the carry-across commonality between the two.

Mark Fields - President, Chief Executive Officer & Director

And just flipside of that, John, just speaking about the revenue for a moment, in this segment in the full-sized pickup segment, people pay – our customers pay for capability. We talked about that when we launched the F-150 and we've seen that across the board in terms of our ATPs, in terms of our lowest levels of incentives versus the competition.

People pay for capability. And when you look at the investments that we've made in the new Super Duty, because it is going to be the most capable, we think that is going to pay benefits on the revenue side of it. And as Bob mentioned earlier, we invested in this platform for a cycle, not just a freshening in terms of capability, meeting fuel economy requirements, etcetera. We took the long view on this. We've made the investment, and I think it will pay benefits for us over the next good number of years.

John J. Murphy - Bank of America-Merrill Lynch

That's incredibly helpful. And then, just lastly – and I know you guys very much do care about shareholder returns and the stock price. So I don't mean to – this is an interesting question. I mean, as you look at all the things that you have to deal with fundamentally in the business and all the issues that you're facing and opportunities, which there is a lot of good stuff out there, do you table sort of your view on what's happening with the stock in the short term and just look at this and say, we've got to execute through the cycle and on the other side of the cycle we'll ultimately get paid for this? And you kind of put that view of the volatility in the stock aside for now? I'm just curious, because the stock is having some wild swings here and I'm just curious how you are thinking about it. I mean, do you react to that or you just say we got to keep executing; we'll get through the other side of the cycle after we go through a downturn and the stock will be rewarded at that point for it?

Mark Fields - President, Chief Executive Officer & Director

Well, I think, it's kind of like, when you're having a bad golf game, you just kind of play through it. And I think, in our case, we're going to stay really focused on just delivering the business. And, of course, the stock price is very important to us.

But again I get back to those for elements that we showed in one of the charts. We reviewed that with our team every single week. How are we doing on growth, on returns, on derisking the business and on providing rewards for our shareholders?

John J. Murphy - Bank of America-Merrill Lynch

That's very good to hear. Thank you very much.

Mark Fields - President, Chief Executive Officer & Director

Okay. Thanks, John.

Operator

Your next question comes from the line of Itay Michaeli from Citi.

Itay Michaeli - Citigroup Global Markets, Inc. (Broker)

Great. Thanks. Good morning, everyone.

Mark Fields - President, Chief Executive Officer & Director

Good morning.

Itay Michaeli - Citigroup Global Markets, Inc. (Broker)

Just on North America, as we look at the changing business climate that you described, I'm curious on a normalized year basis, clearly after you get through Super Duty and seasonality in the second half of the year, how you're thinking about margins there relative to – I think the prior communication was that 8% to 10% range in North America. Just curious on the latest thoughts on that range.

Mark Fields - President, Chief Executive Officer & Director

That has not changed, Itay. That continues to remain our goal is 8% to 10%.

Itay Michaeli - Citigroup Global Markets, Inc. (Broker)

Okay. And then if we think about the competitive environment, does it all change your plans or potentially could change your plans to increase capacity in North America around 2018 or is that plan still intact?

Mark Fields - President, Chief Executive Officer & Director

Well, our plan is going to remain intact as we talked about. Part of as we look forward and as we've talked about, we're going to be introducing four new SUVs into segments that we don't compete in today, and as you know, we've made the announcement to build a plant down in Mexico for small vehicles. So we're pretty comfortable with the plans that we've laid out and we've talked about before.

Itay Michaeli - Citigroup Global Markets, Inc. (Broker)

Great. And then just lastly, are most of the second half mitigating factors in North America and if so, what are the puts and takes in the Asia-Pacific outlook for the company in the second half of the year?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Well, again, if you look at the slide, I'd say in terms of magnitude, yes, North America but we also highlighted the risks in Middle East and Africa although a small region for us we had expected a profit. We're a loss for the first half. So if you kind of think about that for the full-year, that's an offset that we have to create.

Asia-Pacific, we think that we've got a plan to get us moving in a more positive direction than certainly we were for the first half, but in terms of magnitude it's really North America. And then when I say North America, I think you kind of put Ford Credit with it because this is around US auction values in the US so it's largely around the US actually.

Mark Fields - President, Chief Executive Officer & Director

And just, again, a little bit more color on what we are doing in China in terms of what you asked. I mean, clearly, as Bob mentioned, we had some sales operation issues which the team has gotten a hold of, but as you look at the launches, the product launches in the second half of the year and as I said most of these will benefit fully in the fourth quarter, it's not only the launches that I mentioned, the Taurus with the 1.5-liter engine and Mondeo and Kuga. But we are going to have improved availability of our 2-liter version of the Edge.

The Edge has done extremely well in China. People are really clamoring for the 2-liter engine. We've broken through some capacity constraints recently. So we will have better availability of that. That plays into the growing segment. We'll have better availability of Explorer. But also on the cost side, Bob mentioned we faced competitive pressure in the C segment and that's – a lot of that is from the domestic competitors. And we have had an intensive focus on our Escort and our EcoSport in terms of attacking material costs and you will see that play out during the second half of this year.

Itay Michaeli - Citigroup Global Markets, Inc. (Broker)

That's very helpful. Thanks, Mark and Bob.

Mark Fields - President, Chief Executive Officer & Director

Thanks.

Operator

Your next question comes from the line of Ryan Brinkman from JPMorgan.

Ryan Brinkman - JPMorgan Securities LLC

Hi. Good morning. Thanks for taking my question.

Mark Fields - President, Chief Executive Officer & Director

Hi, Ryan.

Ryan Brinkman - JPMorgan Securities LLC

So question is on Asia Pacific outside of China. If you look at slide 19, still extremely strong margin in China. I think the implication here is that the consolidated operations outside of China lost maybe a little over $300 million and 2Q or upwards of $1.2 billion annualized.

Firstly, what drove that softer performance? And then how should we think about it moving forward? Should the losses start to mitigate as Australia manufacturing winds down? And then I can't imagine all of that relates to Australia obviously, so are there additional actions that you need to be taking or are already starting to take, maybe in India or Thailand, for example?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Yeah. Let me take that one. So when you look at the loss for the quarter, the JVs generated the $295 million. But there are other – I mentioned this every quarter – there are other parts of total China. So you've got Lincoln. You've got the Ford imports. You've also got engineering that Ford is incurring that the JVs pay back through royalties once the vehicles are in production.

So those sort of sit in a central pot, if you will, in Ford of China. So, actually, when you look at overall, what happened on a year-over-year basis, most of the decline actually was in China. Some of that was at the JVs. We talked about the 28% decline, but it was the other factors as well.

When you look at the balance of Asia Pacific, on a year-over-year basis, it was largely the Indian operations was a factor, but that was very much in line with our plan. In fact, when you think about what happened versus what we had expected, the operations outside of China in the second quarter did a bit better than we had expected. It really was around China.

Ryan Brinkman - JPMorgan Securities LLC

Okay. That's very helpful.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Bigger China – not just the JVs, but bigger China.

Ryan Brinkman - JPMorgan Securities LLC

Yeah. And then just last question on Brexit, again. Thanks for the color that you did provide. I think it might be a little harder, likely too soon to say. But at this point, is there any reason to re-evaluate or need to re-evaluate the 3% to 5% pre-tax margin that was indicated by, I think, 2020 to 2014 analyst day, or sort of more recently, some of the discussion about 6% to 8% margin longer-term in the region?

Mark Fields - President, Chief Executive Officer & Director

Yeah. Those – we're still shooting for those, Ryan. Clearly, as I said it, as a team, you know us. We're going to look at what the world throws at us, and we're going to act decisively on it. So we're going to have to see how Brexit plays out, but it will just provide more motivation for the team in terms of keeping us competitive and also at the same time putting us on that path to sustained profitability, as we think about Brexit.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

This is going to play out. It's not only an issue of seeing how this plays out and what the trading relationships are going to – or how they're going to play out, but it's also the timing. Because, clearly, once they start the clock on the Brexit negotiations it's about two years. So we have to look at all of that and we are scenario planning, but we are accounting for Brexit in the results that we have shown here in the outlook and we will talk about that at the Investor Day as well. We will put that all in there.

Ryan Brinkman - JPMorgan Securities LLC

Okay, thanks a lot.

Operator

Your next question comes from the line of Pat Archambault from Goldman Sachs.

Patrick Archambault - Goldman Sachs & Co.

Thanks for squeezing me in. Yes, just, I guess, a follow-up on China. It sounds like you are expecting a sequential improvement and let's just go through that. Is that both year-on-year as well as sequentially from first half to second half? And then as we think about the list of items, there has to be a pretty big impact from the non-recurrence of that downtime at that one large plant. You talked about products and then on slide 20 it does seem like while pricing is still negative from April to June, your slide makes the point that it has moderated. So, just wanted to see if we were tabulating all the items and thinking about that correctly.

Mark Fields - President, Chief Executive Officer & Director

Yes, I think what you should expect to see in the second half, I think we will have a very strong fourth-quarter as we did last year in China. Some of that is just seasonal as we start to build to prepare for the Chinese New Year, the following, early in the year, but also it's time to the product launches. So I think when you think about the profitability in the second half in Asia Pacific which – and, of course, China still drives much of that, I would think it to be concentrated largely in the fourth quarter.

Patrick Archambault - Goldman Sachs & Co.

And the items that we kind of listed off, those of the ones, right? I mean basically product pricing being bad but not as bad and the lack of downtime I guess?

Mark Fields - President, Chief Executive Officer & Director

Yes, we do think that the negative pricing we have seen year-to-date will start to moderate and that's in part because of the comp from last year is a bit different in the second half than it was in the first half.

Patrick Archambault - Goldman Sachs & Co.

Got you. And then just my last question is Brazil and South America specifically. It's an unusual thing to ask a question about like upside risk and potential improvement. But you cited improving fundamentals in Argentina and then also Brazil strangely enough, right, has seen a second derivative improvement across most of its macro metrics and currency has started to appreciate. So maybe just your perspective on how that plays into your outlook there and maybe it's a little bit too early to think about changing things.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Well, I think it's a little bit too early because despite some of the things that you mentioned, we have not seen the improvement in the SAAR factors and in the sales, as you saw from the data. So that really has to ultimately start playing itself out in consumer confidence and into industry sales, and we're not seeing that yet.

Patrick Archambault - Goldman Sachs & Co.

Got it. And even from a currency side, you are – I guess, it's just too nascent, I suppose.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Yeah.

Patrick Archambault - Goldman Sachs & Co.

Okay. All right. That's all I had for you guys. Thanks.

Mark Fields - President, Chief Executive Officer & Director

Okay. Thanks.

Operator

Your next question comes from Rod Lache from Deutsche Bank.

Rod Lache - Deutsche Bank Securities, Inc.

Hi, everybody.

Mark Fields - President, Chief Executive Officer & Director

Hi, Rod.

Rod Lache - Deutsche Bank Securities, Inc.

A couple things on North American, and one on China. Just first, at a very high level, could you just give us what your perspective is on what is driving the moderation in the North American retail market versus the run rate we were seeing in the back half?

And then, more generally, there was a thematic view that automakers would be more price-disciplined as demand moderates, given all the capacity changes and structural changes in the market. But obviously here we are looking at a 3% price decline year-over-year, with very slight moderation in volume, and I know part of that for you was the F series.

But how should we be thinking about the trajectory of price deflation that you'd be expecting in an North American plateau? And can you give us a little bit more color on what you expect for pricing in the back half?

Mark Fields - President, Chief Executive Officer & Director

Let me take the first half of the question on what's driving the moderation. I think it's a number of different things. I mean, obviously, Rod, you've seen, as I mentioned earlier, kind of that pent-up demand go away. So now it's really about replacement value.

In addition, you've seen used car prices go down. And when used car prices go down, obviously, there's an impact on the new car market. And then, when you look at some of the elements that are driving the retail business, there's been extended payments, there's been higher leasing, the low interest rates, I mean, that plays itself out over time. And you can see our strategy around that, particularly, in some of the leasing numbers that Bob showed earlier.

So I think those are some of the factors. Probably, there might be a factor of the noise that's going on right now around, here in the US around elections and what that means, because there's lots of things being said. That could impact it as well.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

But, on the question of price discipline, it's a very, very good question. I actually think the industry continues to be quite disciplined. So I think we need to put in context what's happened. I think we're in transition. If you go back and think about what's happened since 2009, the industry has grown way in excess of GDP over that period of time. And so we've all benefited from very, very robust growth of the industry.

It is now plateauing. And I think the industry and all the players in the industry – we have to kind of pivot, we have to transition, and I think that's what's occurring. And the reason I'm encouraged by the – encouraged to think that that will occur successfully is the fact that not only us but everyone, all the big players are very, very focused on margins. They know that's important, they know that's what counts, they're focused on that and I really believe that ultimately that will be the driver of decisions around how aggressively people go after a pie that isn't growing frankly any more.

The other thing that's probably different than it's been over the last two or three years is the yen. The yen has started to strengthen from the levels it had reached. I think it got to about a 120 level. You know it's been a 100, 103, 105, I mean that certainly put some constraints on the Japanese participants in the market in terms of maybe some of the benefits and the windfalls of the weaker yen that they were deploying that just isn't there anymore. So I think it'll probably take some time, but I think that the discipline that we've seen will stick and we'll get used to the new environment.

Mark Fields - President, Chief Executive Officer & Director

And that'll play out.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

That'll play out, yes. It's not going to happen overnight, obviously, yes.

Rod Lache - Deutsche Bank Securities, Inc.

Can you give us any color on expectations for pricing in the back half? And then on China, the pricing was effectively down 6% even with the 500 basis point decline in the taxes which is effectively another price cut for consumers. And I know the comps get easier in the back half of 2016 versus the back half of 2015, but is there any concern on your part that as you look out to 2017, if some of the tax, the temporary tax benefits moderated that actually for automakers, the pricing environment becomes more challenging?

Mark Fields - President, Chief Executive Officer & Director

Well, when you look at, on the moderation, I mean, clearly the end of year the purchase tax reduction is expected to expire. It's an interesting question because if you look at the Chinese SAAR in the second quarter, I think it was like 26.5 million units. I mean, it's incredibly strong. And you know part of it is, could you argue are people rushing to buy cars with six months to go on the purchase tax incentive reduction. I think at a SAAR at that level, and I couch that because the official Chinese numbers coming out from the government are not available. This is based on the manufacturers getting together and sharing their data but based on that, we do think that it's a sign of the strength of the market. So what that will mean for pricing next year, don't – I don't have a hard and fast thought on that, but I am encouraged by the level of sales that we're seeing well before the purchase tax incentive ends.

Rod Lache - Deutsche Bank Securities, Inc.

Okay.

Robert L. Shanks - Chief Financial Officer & Executive Vice President

And, Rod, on your question about what are we expecting for the balance of the year here, I would just say we're expecting the continued trend that we've seen, which has been very slow, modest increase. And so we're kind of baking that into outlook, and we'll see what happens.

Rod Lache - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

Our next question comes from the line of James Albertine from Consumer Edge Research.

James J. Albertine - Consumer Edge Research LLC

Thank you and good morning.

Mark Fields - President, Chief Executive Officer & Director

Good morning.

James J. Albertine - Consumer Edge Research LLC

Just had two quick ones. One on the credit side of the business and the other on just to go back to the UK for a moment. First, on credit, looking at your average FICO score, you're not in the business it seems of focusing too much on subprime.

But from an observational perspective and to tie together what you said about retail sales earlier being somewhat softer, what are you seeing, if anything, that would suggest some weakness coming from the subprime side of the market? And is that a leading indicator that could suggest sort of further tightening, as we think about credit for the back half of this year and into next year?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

Let me just give a high-level response, and then I'll ask Marion Harris our CFO to add any color or texture. As we show on slide 24 – and I think this is our point of view from just looking across the industry, there continue to be articles about subprime problems or a big increase in subprime. We just don't see that. Well, it certainly hasn't been the case for us in terms of our high-risk mix.

As you can see on slide 24, it's been absolutely constant over quite a number of years actually, not just the periods that we're showing here. So that certainly has not been something that is a factor in terms of our own result in our own business. And I think it's fair to say that we haven't seen a particular boomlet or a problem across the industry. But maybe you could add some texture on that.

Marion Harris - Chief Financial Officer, Ford Motor Credit Co. LLC

That's right, Bob. We're not seeing any leading indicators that suggest that there's any kind of particular problem emerging. And you said it earlier, the increased credit losses we're seeing are coming from some of the delinquencies that are moving towards default. But again, it's off of a very, very low base that still remains around historic lows on the delinquency side.

And as the subprime goes, we've seen subprime mix within new vehicle sales be very constant for a long period of time. In fact, it was down just a bit in the second quarter but not anything meaningful. And we're not seeing anything that's troubling from our portfolio. We buy a full credit spectrum.

James J. Albertine - Consumer Edge Research LLC

Okay. I appreciate that. Thank you so much. And then on the UK, understanding that July and August are somewhat lower seasonal months, when you look at unit sales every year and then September there tends to be a big registration changeover period that drives unit sales in that respect, and I'm wondering are there any indicators this far into the third quarter that would allow us to take of a view on September? So, in other words, are maybe orders up or down or flat and how should we think about that if at all? Maybe it's just a false indicator.

Mark Fields - President, Chief Executive Officer & Director

Well, I think there's – you're right, obviously because of the plate change, September is an important month, but clearly we got to be cautious about looking at a specific month even if it is a plate change month to understand what's going on in the marketplace. I think it's still too early to tell. As we mentioned, we're seeing some less foot fall traffic in our dealers, for example, in the London area, or in Scotland, but in other parts of the country, it's a little bit different. So I think it's going to play out over the next number of months. But our view is that the industry is going to come down to a certain degree.

James J. Albertine - Consumer Edge Research LLC

Understood. Thank you, again, for taking the questions and best of luck.

Mark Fields - President, Chief Executive Officer & Director

Okay. Thanks James.

Operator

Our next question comes from the line of Emmanuel Rosner from CLSA.

Emmanuel Rosner - CLSA Americas LLC

Hi. Good morning, everybody.

Mark Fields - President, Chief Executive Officer & Director

Good morning.

Emmanuel Rosner - CLSA Americas LLC

So, just one additional question on China and it's regarding your strategy. So, obviously a lot of big shifts in industry dynamics going on there, and then if we look at your performance in the quarter, it seems like decent amount of, sort of like, share loss and your explained that well, but the margins are still obviously incredibly highly at least by global auto making standards. So is part of your strategy there or even sort of like your whole strategy to essentially refocus on the profitable part of the market in the context of very deep competition and pricing pressure on other parts, and therefore, basically maximizing margin even if that means losing some share.

Mark Fields - President, Chief Executive Officer & Director

Well, as you know, Emmanuel, our first and foremost focus is on our operating margins and not necessarily just market share. But I think in China, we worked hard in putting out a full family of vehicles across the spectrum there, and our opportunity going forward is in the areas where we underperformed this past quarter, like in the C segment and the small SUV, is to work on our costs, work on the product deal and really leverage, as you mentioned, the strength that we've seen in mid-size cars, large cars and SUVs and as I mentioned earlier, some of the better availability of some of those vehicles. So it's really working both of those elements.

Emmanuel Rosner - CLSA Americas LLC

Okay, that's helpful. And then, I guess, just more broadly, looking at 2017, you are importantly cautioning against using the second half as sort of your new run rate, which obviously makes a lot of sense with what you have going on with the Super Duty.

But then looking just – beyond just the Super Duty factor, you're essentially talking about potentially larger risks or downsides from Brexit as well as the US auto industry that may be modestly down, pricing pressure both in China and in the US. What is the big pieces or big factors that looking into next year should be more positive and essentially argue that 2017 would be a better year?

Robert L. Shanks - Chief Financial Officer & Executive Vice President

I just mentioned a number of them. And Mark can chime in, and we'll talk obviously more about 2017 and beyond in the middle of September. But, first of all, we'll get out of some of the one-time unique issues that we saw in the second half and maybe to some extent in the first half.

But you'll also see – I think it does appear and there is articles that have been written about it that the emerging market downturn, perhaps, globally is beginning to bottom out. I talked about the fact that Russia is already improving. In terms of our own portfolio, there was a question earlier around South America. Our view – early view anyway is that there could be very, very, very, small levels of growth there next year. Nothing to quite hum about, but it would be great to see a positive number with no brackets around it.

And so that would be, perhaps, the beginning of a turn there and decline of the increased losses. So that's going to help. We're going to have – again, as always do a lot of product launches and I think going back to the earlier question around the portfolio, we really are focusing our investments very specifically to where we can make money. And I think that will be a phenomenon that will be even in sharper focus going ahead. And I think that will benefit.

For example, the four new SUVs that we've talked about globally – I mean, those are in the sweet spot of where consumers are going. Those are higher margin products. That will start to help us, as we move ahead. And the cost – I mean, we're going to really be – we will see cost increases, I'll call them, that are healthy to support the growing business and certainly to be a leader all these emerging opportunities ahead.

But other than that, we are going to be, as we have been, very focused on efficiencies and driving non-essential cost out of the business. We did that very successfully in the first half. We need to do that in the second, and we're going to do that going forward as well.

Mark Fields - President, Chief Executive Officer & Director

The only other thing I'll add is to Bob's point of focusing on where we make money and taking appropriate actions. Next year we are closing our facility, our assembly facility in Australia at the end of this year, that will pay benefits for Australia's performance next year. We are exiting – it's not big but we are exiting the markets of China and Indonesia, so – I'm sorry, Indonesia and Japan and that will pay benefits. So we are really starting to get very focused on this.

Emmanuel Rosner - CLSA Americas LLC

Perfect. Thank you.

Mark Fields - President, Chief Executive Officer & Director

Thanks.

Operator

There are no more questions at this time. I hand the call back over to Ted Cannis for any closing remarks.

Ted Cannis - Executive Director, Investor Relations

Thank you very much, everybody, and you can find our information on the website as described before. Thanks very much.

Operator

This is the end of today's call. You may now disconnect.

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