Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company 4th Quarter 2018 Earnings Conference Call. During the opening remarks, all participants will be in a listen only mode. After the opening remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded Wednesday, February 6, 2019.
I would now like to turn the conference over to Rocky Gupta, and Vice President of Investor Relations.
Thanks, Dorothy. Good morning and thank you for joining us as we review GM's financial results for the Q4 and calendar year 2018. Our press release was issued this morning and the conference call materials are available on the GM Investor Relations website. We're also broadcasting this call via webcast. I'm joined today by Miri Barra, GM's Chairman and CEO Dhivya Suryadevara, GM's Executive Vice President and CFO and a number of other executives.
Before we begin, I would like to direct your attention to the forward looking statements on the first page of the chart set. The content of our call will be governed by this language. I will now turn the call over to Mary Barra.
Thanks, Rocky, and good morning, everyone. Thanks for joining. We delivered very strong results in 2018 despite significant macro headwinds and in a year in which we transitioned to our light duty pickup trucks. Our North American performance was very strong as we launched all new pickup trucks and crossovers, China results were strong despite the market environment and GMS delivered record results. Let's get the full year 2018 numbers.
Net revenue was $147,000,000,000 EBIT adjusted was $11,800,000,000 EBIT adjusted margin was 8%. Our EPS diluted adjusted was $6.54 Our automotive adjusted free cash flow was $4,400,000,000 and this excludes the $600,000,000 in pension prefunding payments and ROIC adjusted was 24.9% on a trailing 4 quarter basis. As we shared in January, we expect to improve 2019 earnings and cash flow as we move into the next phase of our transformation, leaner, more agile and better positioned to win. Our favorable outlook is based on a continued robust mix of new products around the globe, continued cost efficiencies and our business transformation initiatives. We believe there will continue to be macro uncertainties, but we expect to manage through them based on current market conditions.
Let's look at our performance in North America, where we achieved a strong year, including record 4th quarter earnings. In the U. S, we led the industry in pickup sales for the 5th straight year and delivered more than 1,000,000 crossovers. We will benefit from a full year of sales of our all new light duty pickups and the cadence will continue with all new heavy duty models. We revealed the Chevrolet Silverado heavy duty yesterday in Flint and it will go on sale later this year along with the GMC Sierra Heavy Duty.
We are encouraged by the early success of the newly launched Cadillac XT4 SUV, which already leads in its segment and will also see a full year of sales of the new Chevrolet Blazer. I'd like to take a minute to update you on the business transformation actions we announced in November. We said we would align our product portfolio and capacity in North America with changing consumer preferences and transform the workforce to position the company for long term success. To date, nearly 9.50 U. S.
Hourly employees have been placed in U. S. Plants with products in key growth segments. At GM Canada, we are supporting affected employees by working with local colleges on retraining as well as with dealers and more than 20 local employers who have expressed interest in hiring these experienced employees. And we will also provide outplacement services to the impacted salaried employees.
Because of the strong business results we delivered last year, eligible hourly employees will share in this success through profit sharing payments later this month. Moving to our international operations, the actions we announced earlier last year have placed GM Korea on a path to enterprise level profitability. However, despite improved share in Brazil, the South America business remains a concern because of continued macroeconomic pressures. We are having productive discussions with key stakeholders to generate acceptable returns in the market. In China, we earned $2,000,000,000 in equity income last year in an increasingly challenging business environment.
While we expect macro issues and flat industry performance will impact our results this year, we remain confident in the long term position in China. We expect China industry sales to be roughly in line with 2018 levels based on expected GDP growth and our current assessment of market conditions. Last week, the government announced actions to stimulate the economy and the industry and we look forward to learning more about the details of these incentives. However, generally such support has had a positive impact on the auto sector. Our aggressive product cadence continues this year in China with more than 20 new and refreshed models from our Buick, Chevrolet, Cadillac, Baozun and Wuling brands.
This includes 7 SUVs and the first of our all new global family of vehicles. I also want to mention the momentum at Cadillac. Last month, we announced that it will be GM's lead electric brand when we introduce our next generation EV technology. Through technology, innovation and beautiful design, we are fully committed to restoring Cadillac to the luxury leader it should be. Last year, Cadillac posted another record year of global sales and we expect continued growth as we introduce a new model roughly every 6 months through 2021, including the XT6 SUV we unveiled last month.
Turning to our future mobility initiatives, we made real progress last year toward expanding our leadership in both autonomous and electric vehicles since first announcing our vision of a world with 0 crashes, 0 emissions and 0 congestion nearly 18 months ago. GM Cruise is deeply resourced to succeed with more than 1100 employees $5,000,000,000 raised in external capital from SoftBank and Honda in 2018. We have demonstrated our willingness to work with partners with common values and where a partnership can improve efficiency, capital spend and speed up development. For example, our AV collaboration with Honda builds on our existing EV battery fuel cell work. On the EV front, to encourage greater consumer acceptance of battery electric vehicles, last month we announced a collaboration with 3 partners to establish the largest collective EV charging network in the United States.
In addition, Cruise continues to focus on the entirety of the autonomous vehicle ecosystem, citing a partnership with DoorDash last month. So to recap, we had another year of strong earnings in a volatile environment. We offset macro headwinds with fresh products in the right segments by staying intensely focused on cost and by making the right business decisions throughout the year. So now I'll turn the call over to Dhivya.
Thanks, Mary, and good morning, everybody. We exceeded our expected 2018 results from both an EPS and adjusted automotive free cash flow perspective. Our performance was driven by strong execution across all of our operating segments, including record Q4 results in North America and GM Financial. We were also able to accelerate the execution of our transformational cost savings and started to see early benefits of these actions in the Q4. With that, let's review the results in more detail.
As Mary mentioned, we generated calendar year results of $147,000,000,000 in net revenue, dollars 11,800,000,000 in EBIT adjusted, 8% margins, dollars 6,540,000,000 in EPS diluted adjusted and $4,400,000,000 in adjusted automotive free cash flow, excluding the impact of pension contribution. In the Q4, we generated $38,400,000,000 in net revenue, dollars 2,800,000,000 in EBIT adjusted, 7.4 percent EBIT adjusted margins, dollars 1.43 in EPS diluted adjusted and $4,200,000,000 in adjusted automotive free cash flow. Let's turn to North America. In the calendar year, North America generated 9.5 percent EBIT adjusted margins despite over $1,000,000,000 of commodity headwinds and downtime taken for full size truck changeover. In Q4, North America delivered record EBIT adjusted results of $3,000,000,000 and 10.2 percent margins, up 20 basis points year over year.
Performance of our all new light duty pickups and strong material cost performance in the quarter more than offset commodity headwinds and the volume impact from downtime. The full size pickup truck launch has been very strong. We've experienced a smooth ramp up with the new models as well as sell down of the old models. We produced over 75,000 all new trucks in Q4 consisting primarily of highly profitable crew cabs. This contributed favorably to volume, mix and price during the quarter.
Let's move to GM International. Full year EBIT adjusted in GMI was down $900,000,000 year over year, primarily driven by FX headwinds in South America. For the Q4, EBIT adjusted in GMI was down $500,000,000 year over year due to South American headwinds as well as lower equity income in China. We still delivered full strong full year equity income of $2,000,000,000 in China driven by our market position, cost performance and a richer mix of Cadillac. Equity income for the quarter was $300,000,000 down year over year as a result of the industry slowdown, continued pricing pressure and partially offset by cost efficiencies and Cadillac growth.
Important to note that there were some factors specific to Q4, including lower production levels and elevated launch costs that impacted the results for the quarter by $100,000,000 A few comments on GM Financial, Cruise and our Corp segment. GM Financial posted all time record revenue of $14,000,000,000 for the year and all time record EBT adjusted of $1,900,000,000 In the Q4, GM Financial generated revenue of $3,600,000,000 and EBT adjusted of 400,000,000 dollars both records for the Q4. In October, GM Financial paid a dividend of 375,000,000 dollars As I mentioned last month, continued dividends from GM Financial provides an opportunity to strengthen our long term cash generation capability and narrow the gap between earnings and free cash flow. Cruise costs were $700,000,000 for the year and $200,000,000 for Q4. We expect to spend approximately $1,000,000,000 in the GM Cruise segment in 2019.
Corp segment costs for the full year were $600,000,000 including approximately $250,000,000 combined favorable impact from PSA warrants and revaluation of our Lyft investment. We expect the spend in the Corp segment to be about $1,000,000,000 in 20 19. In the Q4, Corp sector costs were impacted by unfavorable performance in PSA warrants and were $400,000,000 negative for the quarter. Before I close, I wanted to reiterate our outlook for the calendar year. As I mentioned last month, we expect strong EPS diluted adjusted in the range of $6.50 to $7 and adjusted automotive free cash flow in the range of $4,500,000,000 to $6,000,000,000 Touching on the headwinds, we will take downtime to the tune of 25,000 units as we prepare for the launch of our all new full size SUVs.
We expect China equity income to be down moderately year over year. We expect to see headwinds year over year from commodities and tariffs to the tune of $1,000,000,000 Finally, headwinds from depreciation and pension income are expected to be approximately $1,000,000,000 And as a reminder, since these are non cash items, they will compress the gap between earnings and free cash flow. Offsetting these are a number of tailwinds specific to GM. The full year benefit of our truck launch will provide tailwinds in volume, mix and price in 2019. We expect a meaningful benefit from a full year of XT4 and Blazer, the launch of Cadillac XT6, as Mary mentioned, and a rollout of our global family of vehicles.
We also expect year over year growth in high margin adjacencies like aftersales and OnStar. When you layer on top of that the transformational cost savings of $2,000,000,000 to $2,500,000,000 through 2019, we expect these tailwinds to more than offset the headwinds assuming a similar macro environment. It is also important to understand this year's quarterly cadence. We expect the Q1 to be the weakest since most of our SUV downtime will be taken in the Q1. In addition, we will have lower volumes in China given continued industry pressure while staying disciplined by reducing our inventory levels.
As we progress through the year, we expect to see improvements in China equity income following these inventory actions and with a strong product launch cadence later in the year. As a reminder, Q1 is typically our weakest cash flow quarter due to working capital seasonality. In addition, this year, given the SUV downtime that I just mentioned, Q1 cash flow is expected to be meaningfully below our historical averages. For the full year, however, we expect cash flow to improve after Q1 and our full year free cash flow, as I mentioned earlier, will be in the range of $4,500,000,000 to $6,000,000,000 In summary, we had a solid finish to 2018, and we will continue to stay focused on execution in 20 19. And as I mentioned in January, we have 3 key financial priorities, including improving our free cash flow and cash conversion, a best in class cost structure and efficient capital deployment.
That concludes our opening comments. We'll now move to the Q and A portion of the call.
Our first question comes from the line of John Murphy with Bank of America.
Good morning, everybody. Just a sort of a follow-up question to sort of your finish there, Dhivya. I Just curious if you could go through sort of the cadence of the truck launches. I mean, it sounds like you got 75,000 of the light duties in the Q4, but obviously that's much lower than the run rate that you'd expect on the new truck. When the HDs will actually start really contributing post their ramp of their launch and then when the SUVs will layer in.
So if we could just kind of think about when those launch the SOP is for those and when the real full throated benefit comes for each of the 3 sort of tranches of trucks?
Sure, John. So if you look at Fort Wayne, we're already up and running in full volume and that transitions is over. So, if you switch over to Silao, which is where we had taken our downtime in Q4, we are now up to full line rate production for a light duty pickup. So after January, we're up to our full level of production. So light duties, I would say, we're pretty much done with our transition.
If you switch over to heavy duty, most of the changeover, we have been working on it in 2018 and through Q2 of 2019, we will see a transition. And after that, starting in Q3 of 2019 is when you'll see the full production ramping up for heavy duties. For SUVs, we're going to take the 25,000 downtime for the year. That will be mostly in Q1 of 2019. And the SORP for that will be in 2020 and we'll have more to talk about that later.
Okay. That's helpful. Then just a second question. If you could sort of update us on what's going on with Cruise. I mean, obviously, there was some talk about getting launched with a fleet, commercial fleet this year.
It sounds like that might be a little bit delayed. And also maybe, Mary, if you can talk about sort of what's going on with the DOT petition on the 4th gen crews and if there's any word on that whatsoever?
So there's really no word on petition for our Level 4, our Track 4 vehicle, but we also are very capable of launching with a Track 3 model. So I think we're in good position there. We as we've been consistently communicating, safety is going to be the gating metric for Cruise. We have hired we're at 1100 people, so we've got the right team and the right focus. Dan, obviously, moving out there has been I think just shows our commitment to what we're doing there and being able to work on the whole ecosystem as well as the technology.
We continue to make rapid progress with the technology. I think that's as evidenced by the video we released just last month that shows that our vehicle can handle maneuvers that others are struggling with. So I think we're in a very strong position, if not a leading position. So we're continuing to make the rapid progress. We're going to make sure we meet all the appropriate safety thresholds that we've defined for ourselves as well as the regulatory requirements.
And this is going to be a really important and critical year and we're going to continue to update you as we progress. But I would say everything is moving forward in a very positive
sort of housekeeping. When we think about the GMF dividends, I think it was 4.34 in 2018. Sort of what is the progression as the balance sheet and the earnings grow at GMF? And how should we think about sort of the addition of cash flow in 2019 2020 beyond?
So John, you're absolutely right. The dividend in GMF is now at a level which is lower than what would be our steady state potential. If you look at our long term earnings before tax expectation for GMF that's in the range of about $2,000,000,000 And we expect that once we reach full captive and that's going to be likely in the early 2020s, we would be able to dividend the entire earnings before, at well after taxes net income, I would say to the parent. The curve between there and now would be determined by our leverage ratio along the way. And we have our managerial targets of 10 times leverage ratio for GMS.
And if we see potential for dividends, we will take that, but we will ultimately be governed by maintaining an appropriate leverage ratio and our communications to the rating agencies and how much dividends we take out of the FINCO. What we've assumed in our outlook for 2019 dividend perspective. And if we see anything above that, that would be upside. But we'll post you guys on that as we move forward with how the leverage ratio develops.
But simply, it's fair to say a 1,500,000,000 potential upside run rate to free cash flow as GMF normalizes into its size that you want to get it to. That's correct. Thank you very much guys.
Thanks, John.
Our next question comes from the line of Rod Lache with Wolfe Research.
Thanks. Good morning, everybody. A couple of questions. One is, the 4th quarter margin in North America obviously was really strong. It was up year over year despite the higher D and A, the commodity inflation, all those headwinds.
And obviously, you're still kind of early days in the truck launch. I was hoping you may be able to just address one aspect of how we should be thinking about the truck positive from where we are right now into 2019. At one point, you talked about, I think it was a $2,000,000,000 revenue opportunity for you as you converge your average transaction prices between where you were on the old trucks and where you expect to be, what's your updated view on that? Are you tracking towards that? Is that something we should see in 2019?
Sure. John, before we even get into the numbers, I would say from a truck launch perspective, we're really excited about the new generation of trucks and we're we have been in a leadership position that for many years and we expect to continue that with this brand new launches that we have. And within that Rod, if you remember, we had talked about releasing a number of constraints that we've historically had with our previous truck platforms, including crew cab capacity, which we have fixed that I would say with the current generation versus the prior generation. And also a wider and broader offering of vehicles including high content, high value. We were really participating in the middle of the curve and now we've sort of expanded that to the edges as well.
So put all that together, Q4 you're starting to see you already started to see the impact of pricing as well as mix in our new trucks. And what you're going to see in 2019 is you could easily run rate that off of Q4 and we're also not going to have the volume headwind that we saw in 2018 for light duties as we were transitioning them. So light duties, I would say volume up, mix favorable and pricing continues to be supportive as well. Heavy duties, you're going to see the similar dynamic in second half of the year. So you'll see a half year benefit of that.
And SUV is considered continues to be a transition year. So a simple way of looking at it for you would be to take the Q4 results for light duties and run rate that into 2019.
Okay, great. I was also hoping that you can address the non China part of GMI. It looks like it was about a $1,600,000,000 drag last year. What are your high level expectations for this going forward? Obviously, there's some Korea improvement.
And is the rest of it contingent on macro in South America? Or are there some other things that you would expect to be big drivers?
Yes. If you look at our South American business, over the last several years, we've taken a number of actions to right size the cost structure and set the business up for future profitability. And in fact, in Q4 of 2017, the business did breakeven and turn a profit. What happened in 2018 was, as you well know, the FX story there with the Brazilian real and the Argentine peso. What we've done since then is to start working with a number of our stakeholders, as you know in South America and we'll have more to say as we make more progress there.
But it's important to know a couple of factors specific to 2019. One is, we are going to have a full year impact of pricing in South America because price tends to lag FX there. So last year as we were experiencing headwinds in FX, we were pricing for them, but on a lag basis. So you're going to see a full year impact of that in 2019. And the second aspect is towards the end of the year, we're going to start to see the impact of our global family of vehicles.
And this is the portfolio that we shared more in detail about on the last month at our Capital Markets Day. That portfolio is a new architecture that replaces a number of legacy architectures. So the cost profile and the margin profile of the portfolio is different as well as the footprint for the portfolio where we are more hedged from an FX perspective. So you're going to start to see the impact of that. So year over year in 2019 based on everything in South America and the actions we've taken in Korea as well, we expect to see improvement from a profitability perspective in GMI.
Great. And just one last question. You talked about $4,500,000,000 to $6,000,000,000 of free cash flow, but $6,000,000,000 to $6,500,000,000 excluding the timing differences, which were, I think, largely related to supplier payment days. If we were to think about the underlying free cash flow of the business in 2019 to kind of use as for bridging purposes to understand where your the free cash flow generative power is of the company? Is it really closer to the $6,500,000,000 just on a go forward basis?
Yes. I think timing, you have it right, Rod. It was basically related to supplier payments as well as production timing and our changeover. And as we look at look beyond 2019, excluding the impact of timing, you're going to see the remaining cost savings flow through. We said $4,500,000,000 in total.
2019 we'll get about half of it. And the 2020 results will have the remaining benefits of the cost savings as well. And a couple of that with our CapEx savings, we talked about how our $8,500,000,000 run rate will get to a $8,500,000,000 current level will get to a $7,000,000,000 run rate by 2020. You're going to see the impact of that in 2020 as well. But obviously, all of that is in the context of the current macro environment.
And what I'm giving you is puts and takes assuming and nothing else changes, but you have these tailwinds working for us in 2020.
Great. Thank you.
Our next question comes from the line of Itay Michaeli from Citi.
Great. Thank
Just a first question on China. Given the recent challenges in the last few quarters, how are you now thinking about kind of normalized China margins for GM, say, over the next couple of years?
Well, I
think if you look at, there's kind of puts and takes there from a Cadillac perspective and launching more crossovers, we think there's an opportunity to continue to grow and improve the margins. Clearly, as we transition to more electrified vehicles, as we gain scale, that will be lower and then move higher. So we're still focused having strong margins in China. We'll go through a bit of a transition with the EVs, but we think that especially the growth of Cadillac and some of our larger SUVs will help offset that.
That's very helpful. And then I think you mentioned the $1,000,000,000 still assumed for commodities and tariffs. I'd love to get your thoughts on the tariff component in terms of what you're assuming and just some of the scenarios that we should be thinking about with Section 232 and some of the other items that are still outstanding out there?
Yes, Itay, it's a pretty volatile environment. So I don't want to put specific numbers on individual components here. You've seen some pullback in steel and aluminum, palladium has gone up and it changes day to day. So I wouldn't really break that down into individual components. We do have the 301 shares factored into our outlook for the year that's embedded in our $1,000,000,000 number.
And as we said last year, the amount since our sourcing for steel and aluminum is largely local, We don't anticipate any tariff component there. That's more with where the spot prices are moving and that tends to be lagged by a couple of months. So take that as a broader $1,000,000,000 number and we've shown during 2018 that we're going to work to offset that with material cost efficiencies and other efficiency that we can find and that's no different in 2019.
Our next question comes from the line of Joseph Spak with RBC Capital Markets.
Thanks. Good morning, Just one quick question, and I think Rod alluded to this. The higher D and A in North America, it looks like I think some of that was accelerated depreciation related to some of the actions you took in North America. Was that actually backed out then, the accelerated part from the adjusted results?
That's right. The accelerated depreciation
is a part of the overall charge for transformation,
which is treated as additional D and A, that is our normal cadence of our D and A normalizing to our capital levels. And we saw a portion of that flow through in the fixed component of our EBIT walk for the Q4 as well as the calendar year, it impacted results. And as I said in 2019, that will continue to impact results as well. So that's the normal D and A, Joe. The accelerated one is not counted in that.
Okay. So of the $1,500,000 roughly in North America, that includes the accelerated portion. So it was up so on an apples to apples basis, it was up a couple of $100,000,000 year over year?
The are you talking about the accelerated portion or the normal?
No, just like just on an adjusted basis, like how much higher was D and A year over year?
I'd say from a transformation perspective, we took a charge of about $1,300,000,000 for the year. That included D and A of about $300,000,000 or so within the $1,300,000,000 charge. So that's the transformation portion. And on a normalized basis, if you look at our calendar year EBIT walk, the fixed component had a year over year increase, a vast majority of that, if not all of it, I would say, would be attributed to D and A.
Okay. And then so the real, I guess, point in going down this path is as we think, you show the free cash flow walks on Slide 13. As we think about that CapEx less depreciation for 2019, does that gap further narrow relative to your $8,000,000,000 $9,000,000,000 CapEx guidance for the year?
Yes. The way I would think about that bridge is in 2019, you're going to have $1,000,000,000 of additional depreciation and pension income, which are non cash. So you'll see the compression in the first two bars coming from that. And in 2020, you're going to see additional depreciation and pension and a decline in $1,000,000,000 of capital. So that should be on top of the pension and depreciation number that I would think about.
And as John asked earlier about GMF, that's the other component of when that dividend starts to come in that will be on top of this first two
components. Our next question comes from the line of Colin Langan with UBS.
Thanks for taking my question. There's obviously a lot of pushback on the plans to close some plans. I mean, how much of that 4 $500,000,000 is at risk if the unions don't allow those the concessions are closing? And do you see that as a
risk? I think, obviously, it's important we announced that the plants are unallocated. And as part of our UAW negotiations this year, we need to finalize the status. But I think when you look at the fact that of the 2,800 workers that are impacted, 1200 of them are retirement eligible and we have about 2,700 jobs available. As I mentioned, already 9.50 people have been placed.
I think as we work through and address the concerns from a workforce perspective, that will go a long way to allowing us to make this transition. And so I'm, yes, obviously we have work to do, but when we look at what we need to do from a market perspective, we can't run at a 70% utilization. We had to improve that, and that's what we'll work to accomplish. So that's the way I look at it. And I don't see risks from especially with the ability that we have to move the people to places where we're hiring.
I mean, we just announced yesterday that we have 1,000 jobs available in Flint. So I think it's a transition we have to go through. It's work we have to do and problem solve with UAW.
Got it. And when we look at your 2019 guidance, I mean, what is the assumption on pickup? I mean, do you expect to I mean, is it more about the new product taking pricing? Some of the recent data showed some market share shift, obviously, it's volatile month to month. But I mean, are you optimistic that you're going to gain share with the new truck?
Or is it more about pricing?
I would say it's volume, mix, price, all of the above. We expect the truck penetration to hover around the ranges that it has in the recent past, which is in the low 20s. We expect that to continue going forward. The crew cab mix is an important component of all of this. As I mentioned earlier in the second half of the year, when we released the constraint on crew cabs with Fort Wayne, We saw the tailwind associated with that.
And we're going to see in the full year calendar year a full impact of both Fort Wayne and Silao running at full crew cab
capacity. Got it. So the recent market share changes that are showing up, they're not concerning to you, I guess, short answer?
Yes. I wouldn't extrapolate from one data point, Collyn.
Got it. And just lastly, any color on where your inventory in China is? There's a lot of concern that there's still high inventories, I guess, across the industry.
Yes. I would say we've taken actions in Q4 to right size our overall production levels. We took out about 250,000 units of production in China in Q4. If you look at the overall inventory picture, we target to be typically around 40 to 45 days of inventory. SGM, which operates more in the Tier 1 to 2 cities is a touch above that, and we're working on that further in Q1 of 2019.
SGMW is at a level that is higher than we would like. And again, that's action that we have to continue to take in Q1 as well. So when I talked about cadence in my remarks and I alluded to Q1 being, the seasonal low in China as well, it factors the inventory rightsizing actions within that.
Got it. All right. Thank you very much for taking my question.
Sure. Sir.
Our next question comes from the line of David Tamberrino with Goldman Sachs.
Great. Let's stay in China for the moment. Trying to read the tea leaves on your comments. Does it sound like your JV income should take a step down from the $300,000,000 run rate from the Q4 and the Q1 as you take some of these inventory actions and shut down production in wholesales, but then you're expecting it to improve sequentially throughout the year and outside getting the normalized wholesale shipments and just wondering what's the main driver there?
Yes. Firstly, I would not assume that it would take a step down from Q4. I would say similar to Q4, we're taking inventory actions. We took them in Q4 from a production perspective and we're going to continue to take them in Q1 as well. And I think it's important to note 20 new launches that we talked about earlier, they are in Q2, Q3 and Q4.
So actions that are specific to us, I would say, really start to take effect in the latter half of the year. So from a cadence perspective in China, I would say, Q1, expect similar ish levels to Q4 and then a pickup after that. But obviously, with an eye overall on the macro environment as well as the sales picture over there.
Got it. That's helpful, Dhivya. And then from a cruise perspective, the spend well below your $1,000,000,000 target for the year. Is there anything to read into that? Are you signaling anything here?
I kind of want to understand if there was a tone shift earlier, another analyst asked a question, it wasn't necessarily answered or not, if we should expect a later deployment in 2019. It seemed a little bit more squishy, if I can use that term. But on the back of that one tone shift question, 2, should that spend in 2019 ramp towards that $1,000,000,000 that you were looking for? And then what type of increased spend are you really contemplating at deployment for your operations as well as customer acquisition costs with getting people into AV ride hailing network?
Well, David, we're not squishy at all on our plan for AV for Cruise. I would say one of the reasons the spend is lower, turned out to be lower in 2018 is Kyle Vogt is an excellent leader and manager and he spends every dollar like it's his own. So there's incredibly good cost controls in cruise in GM cruise. So that's and you saw what we expect to spend this year. So I think that's just good cost discipline.
As I said that this is a one of the biggest technical challenges of our time, but I think we're really well positioned. We're committed. We have every resource we need. And if they come forward and say they need additional resources, we stand ready to provide those. So I think it's in a strong position from funding.
I think it's in a strong position as we continue to do the development. And so we're going to keep you posted throughout the year, but we're on track from the performance that we've talked about. And I think, again, reference the video that what the vehicle is now able to do. We're going to continue to work on the regulatory front as well, and we will hold ourselves to the safety standards that we've set. But we're committed and we're moving at a very aggressive pace.
Okay. And just within that, maybe I'm expecting a similar level $700,000,000 in your 2019 guidance or share?
Our guidance for 2019 for GM Cruise is approximately $1,000,000,000
Our next question comes from the line of Adam Jonas with Morgan Stanley.
Thanks, everybody. Two quick questions. First, when do you think GM can sell EVs for a positive EBIT margin roughly?
So, Adam, we've talked about the fact that with our next generation of development that we want to make sure we have obtainable, profitable, desirable and with the appropriate range. And so that is the work that we're doing. We benefit from the fact that we have a strong position in China. And as you know, regulatory the regulatory situation will drive there. Also, I think important to note that we have the partnership with Honda to leverage the technology as well.
So think we're in a good position driving our sell costs down also from a quality perspective and that is our stated goal when we launch that next family of vehicles. Okay.
So I'm interpreting that as kind of post 2020, maybe 2021. Correct me if I'm wrong. Second question for either Mary, you or for Mark if he's on. What do you think of an all electric pickup truck? And when will GM sell an E Silverado?
So, I think just you said correct me if you're wrong, I would say early next decade, but I wouldn't put any more specificity on EV profitability than that. And all I'll say on your second question is we believe in an all EV future. So you'll have to stay tuned.
We will. Thank you.
Our next question comes
I thought to ask on GM International restructuring progress outside of China, that is. So can you provide us with an update on the Korea restructuring announced on the 1Q call last year and how you would rate your progress there since that time? Also, I think there were 2 international plants included in the restructuring announcement back in November. These were unnamed, but slated to close sometime in 2019. Presumably, they're outside Korea, perhaps South America.
Any update you can provide on how investors should think about the cadence of those savings as 2019 progresses?
I mean, I would step back and look more broadly at GMI, not including China and Divya has already addressed South America. I would say the Korea restructuring is on track and we're also seeing a pickup in our share there. Obviously, that was a difficult period of time. So we continue to implement all of the actions that we announced last year. I would say there's still work that we're doing around that region to rightsize the business, drive have a solid plan to profitability and that work is underway.
So I don't have anything more specific to add, but we're what we announced with the 2 plants is definitely on track. And I don't know, Dhivya, if you have any additional color you want to add there?
I would just say that the cost savings that we have outlined for 2019 contemplate the right cadence for these plants as well. So it's all baked in.
Great. Thanks. And then lastly, but sticking with GMI, it looks like currency continues to be a fairly large headwind, dollars 300,000,000 in the quarter, seemingly the Argentine peso and the real biggest drivers there. Based on the prevailing spot prices, any hedges that you might have and then your localization plans with regard to the JEM platform, how should we think about this trend as 2019 progresses?
Yes, I would say that there's been some stabilization post the elections in Brazil from a Brazilian real perspective. But obviously remains elevated relative to historical averages. I think the way to think about Brazil and Argentina is we're able to price in line with inflation in Brazil and we typically pass through the FX headwinds in Argentina. There might be a lag Ryan, but I wouldn't think of Argentina as anything other than you take a last few months of FX headwinds and kind of factor that into your future pricing ability. So I wouldn't think of it as hedges and we don't use forwards necessarily in these areas.
I would look at pricing and localization as the 2 primary levers we have from an FX management perspective. And on localization, the next generation of vehicles that I mentioned earlier will be more localized. But with all the actions we're taking, it is our objective to be able to breakeven and turn a profit at even more extreme levels of FX. So we're continuing to work on it.
Thanks a lot.
Our next question comes from the line of Brian Johnson with Barclays.
Yes. I want to ask a few questions around GM Financial. First, if I look at full year 2018 over 2017, ROA seemed to expand from 140 bps to 195 bps. Could you maybe dimension how much of that was due to lease residual performance versus credit performance versus other factors like net interest margin or cost saves?
Yes. I would say if you look at overall year over year GMF EBT bridge, if you will, half of it from increase in volumes as they continue to grow to full captive levels. So just their penetration getting higher and their overall volumes getting higher. And the other half coming from the fact that residual values were flat in 2018 versus 2017. So take the delta, Brian, and divide that by
2. Okay. So the main factor of the ROA increase would have been the residuals, which gets to the second question. You've talked about a mature run rate of about $2,000,000,000 EBIT. Full year 2019 was $1,900,000,000 and 4th quarter would kind of be right in line with that.
Are you implying that it's sort of going to be flattish as perhaps residual gains come down given your used car pricing forecast or even down next year?
I'd say 2019 flat to 2018. We're expecting a 4% to 6% decline in residual values, which we expect will be offset by the growth in volume that I mentioned and our continued penetration. And the other aspect longer term as well, Brian, is as the business matures, you're able to spread the OpEx over a larger asset base. So we should see OpEx efficiencies as well as we move forward.
Okay. And the need to grow the asset base is why you're not committing to upping the payout ratio to the full 100% just yet?
That's correct. So our current asset base is around north of $95,000,000,000 We would see in the next several years that, that would tail off probably in the 1 $20,000,000 range. So the amount of equity that we're holding in the FinCo now is to support that remaining growth.
And final question is around your GM Financial JV in China. At least the 3Q is up to 44% retail penetration, which seems impressive. A few just more strategic questions. To what extent is there further room to use that to offset some of the headwinds in the Chinese market? And then second, as you kind of think about the mix vehicle mix in China, are you better able to penetrate the upper Cadillac Buick end of the market with that support versus the lower end given the credit profile of the buyers?
I'd say to your first question, there's certainly room from a growth perspective for SAIC GMAC joint venture. We are still in the early stages of, I would say, penetration over there on financing and also the leasing portfolio, which is in its infancy. So more growth to be had longer term. And across the board, I would say in China, adjacencies are at its early stages of development across the board, whether it's after sales, GMFs and others. So we'll continue growing those.
And from a vehicle mix perspective, perhaps more tilted towards the Tier 1 to 2 markets than the Tier 3 to 4 market, but I wouldn't specifically draw trends on Cadillac versus other brands.
Okay. Thank you.
Our next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Hi. Good morning, everybody.
Good morning.
I wanted to ask you about the expected cadence of some of the benefits from your restructuring actions. I assume that as part of your comments on the cadence for the earnings this year, some of it is also when some of these benefits hit and maybe beyond the Q1. So can you maybe talk to us about that $2,000,000,000 to $2,500,000,000 benefit expected for this year? How should we think about it in terms of
these savings starting to flow through. And if you look at the of these savings starting to flow through. And if you look at calendar year 2019, the savings will be tilted more towards the earlier part of the year. So we'll be off to a pretty good start here after Q1. So I'd say Q1 is when we implemented Q2 onwards, you'll start to see the benefits.
Okay, understood. And I guess second question, I don't think there was a big focus on the Capital Markets Day, but I was curious about your thoughts around the opportunity to do some or the priority around doing some buybacks this year. It feels like if you achieve your $4,500,000,000 to $6,000,000,000 guidance even after financing, restructuring and the common dividend, it feels like there could be some room depending on where you shake out for some buyback. Is that a priority? Or is it 2019 view that's more a transition year and then it would come in future years?
Yes. We're going to stay very committed to our capital allocation framework of looking at opportunities to continue to invest in the business to generate a greater than 20% return, as well as maintaining, an investment grade balance sheet. And then as as we get to that point, there's opportunity, that will be returned to shareholders. So don't have anything specific to say other than we're going to follow our process.
Okay. And then I guess finally, just curious what you're seeing in terms of latest data and trends in China? Obviously, you're assuming a fairly fast market for the year, which I think when the guidance was given may have been perhaps seen as optimistic. Now the most recent data point throughout January seemed to suggest maybe a little bit of stabilization. Are you seeing any of that or is it sort of like too early to say in terms of in the Chinese market?
No, I think we're seeing improvements from Q4. I mean it's early days, but we're optimistic not only from what seen in the month of January, but also what the government has announced because we've seen that have a positive impact. And then again, the team there is very focused on cost and improving mix, etcetera. So with the new launches, we see a lot of we see opportunity from an industry perspective with the signs we saw in January, and we also have a lot of, I'll say, GM specific opportunity.
And just very finally, I guess, still on China. So how should we think about your guidance for a modest decline in equity income? I mean, it seems like you're speaking about Q1 not necessarily any worse than Q4. Then I would assume beyond that, you sort of have the benefit from some of the new products and then potentially some stabilization in the market. So is it really just mathematically, you're lapping some very strong quarters last year?
Or is there anything else that's sort of like a headwind to expect throughout the year?
I wouldn't say there's headwinds to expect beyond what we
shared at moderately moderately lower equity income, we're factoring all these in and it's our intent. There will be puts and takes in different regions and between North America, China and so on. It's still our intent to post a strong calendar year results from a company perspective. So I wouldn't overtrain on one versus the other. We do expect that, as Mary mentioned, there's company specific factors that's going to help us.
It is a volatile market. At the end of the day, I wouldn't get any more specific on that.
Great. Thank you.
Our last question comes from the line of Chris McNally with Evercore.
Hi, team. First time caller, as they say, so appreciate getting on the call. Maybe I can attack this cadence on the North American EBIT just in a slightly different way. I think you guys been clear that Q1 is the low, we have production shutdown, the cadence of the cost saves across the year. I think some of the questions investors may have are around in the second half.
Is there any extraordinary cost that we should think about given the launch of the heavy duty and the SUVs? Because if not, you would think that sort of cadence leads to sort of Q4 as another peak. So is there any sort of offsets to the benefits that you've laid out that should get better across the year?
Yes. I don't think there's any specific launch related costs or anything we haven't already talked about that's going to weigh on North American results. We had talked about depreciation and pension income going down and commodity headwinds that does impact North America, but that should be even through the whole year depending on how commodities behave in the next several quarters here. But I'd just say beyond what you talked about on Q1 with the downtime and all the factors that I've mentioned that should
Great. And just one follow-up on actually the timing of commodities and tariffs. I mean, obviously, the $1,000,000,000 we're still annualizing some of the costs from last year. So it would make sense that those hits are greatest in the first half.
It sort of surprised
me a little bit when you talked about some of the spot prices of the quarter of being a lag of quarters. I know sometimes with hedges, it could be anywhere
from 4 to 6 quarters. Is it possible that
if we see these some benefit by, let's call it, the end of the year as obviously you've had to project out for the full year?
Yes. The lag that I talked about is in our index commodities. We typically experience a 3 month lag in when the actual impact shows up on our income statement versus when the spot prices go up or down. And I would say, it's really difficult to call the specific cadence of it. As you well know, this moves up and down every quarter.
I'd say evenly distributed through the entire year. We're obviously watching the 301 tariffs very closely because that will have an impact. And within the current market environment, I'd say you also need to look at the mix of which commodities are going up and down as well. So it's difficult to provide any more specificity on a topic that is inherently pretty volatile.
Okay. Thank you very much.
Thank you. I'd now like to turn the call over to Mary Barra for her closing comments.
Thank you. Well, thanks everybody for participating today. As we begin the next phase of our transformation, I want you to know that we are committed continuing to strengthen the core business as well as continue to accelerate our work to lead in the future of personal mobility. We are really repositioning this company from one that was trying to be all things to all people in all markets to a very strategic, agile and profitable company. And we believe we're in a very differentiated position than many of the competitors in this industry.
We are intent on reinventing personal transportation, capitalizing on a $1,000,000,000,000 opportunity while making the world safer, better and more sustainable. In 2019, we'll continue to deliver on our commitments that we've made to you, our owners, by capitalizing on our strong global vehicle portfolio, our adjacent businesses and we will stay focused on driving profitable growth across the business to create value in the short term and long term for our shareholders. This transformation will be very dynamic and but you have our commitment that we'll continue to act with speed, with discipline and with integrity to drive the