Ladies and gentlemen, welcome to the General Motors Company Third Quarter 2019 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 Tuesday, October 29, 2019. I would now like to turn the conference over to Rocky Gupta, Treasurer 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 Q3 of 2019. 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 Mary Barra, GM's Chairman and CEO Divya 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 contents of our call will be governed by this language. I will now turn the call over to Miri Barra.
Thanks, Rocky, and good morning, everybody, and thank you for joining. As you know, we have a ratified labor agreement, and I am very glad that our highly skilled employees are back to work building weighing cars, trucks, crossovers and components. From the outset, our goal was to reach an agreement that works for our shareholders, our employees and our company as we confront the realities of a rapidly transforming industry. Our contract does the right thing for our employees without compromising competitiveness or flexibility. It includes an improved path forward for our in progression and temporary workers that will create more engagement and a motivated team.
This is foundational for improving job satisfaction, health and safety, quality and productivity, all of which will strengthen the future of this company and create shareholder value. The contract also affirms our commitment to a strong U. S. Manufacturing base with planned investments totaling $7,700,000,000 We'll secure the future of our Detroit Hamtramck assembly plant with an all new electric pickup truck that builds on our established truck leadership. We're also moving forward on an opportunity to bring battery cell production to the Mahoney Valley in Ohio, which would create a 1,000 manufacturing jobs.
Before I continue, I want to thank our dedicated suppliers. They were in constant contact with us throughout the work stoppage and ensuring us they would be ready for a prompt, safe restart once the new contract was ratified. And I'd also like to thank our dealers who helped us sustain our momentum in the marketplace and they work very hard to minimize inconvenience to our customers caused by our limited ability to ship service and repair parts. To speed up recovery and get parts flowing to dealerships, comprehensive plans are in place to allow the network to recover as quickly as the lost profits from the work stoppage were significant. In a as the lost profits from the work stoppage were significant.
In a few minutes, Dhivya will talk about the financial impact of the strike and our full year outlook. Overall, in the Q3, we delivered net revenue of $35,500,000,000 EBIT adjusted of $3,000,000,000 EBIT adjusted margin of 8.4%, EPS diluted adjusted of $1.72 Automotive adjusted free cash flow of $3,800,000,000 and ROIC adjusted of $21,900,000 on a trailing 4 quarter basis. Looking at North America, we delivered strong business performance in the quarter, which was unfavorably impacted by the strike in the United States and increased warranty and retail costs related to our previous generation full size pickup trucks and full size SUV. Overall retail deliveries rose 6% year over year led by double digit gains in light duty Chevrolet Silverado and GMC Sierra pickups and strong demand for our all new heavy duty pickup trucks. Cadillac continues to capitalize on its expanding crossover portfolio in the United States and China.
In the U. S, Cadillac crossover deliveries increased by 67% in the quarter, led by the segment leading XT4 and the all new XT6, which is gaining momentum in the market. In China, the XT4 and the new XT5 helped drive deliveries up 11% amid slower industry sales. With the XT6 joining the lineup, we expect Cadillac will further strengthen its position in China's growing luxury SUV segment. Our luxury sedan portfolio updates continue with the launch of the all new CT5 midsize luxury sedan in China this quarter, followed early next year by the U.
S. Built CT5 and CT4 in North America. Finally, as we look at meeting customer demand, our U. S. Dealerships finished the 3rd quarter with a healthy level of inventory.
As the strike continued, our teams worked tirelessly to ensure we could ship as many vehicles as possible to our dealers. However, with no additional vehicles in the pipeline for many weeks, our dealer inventories will be temporarily leaner than we'd like. The team is doing everything in its power to restore our supply of vehicles back to normal levels. Regarding our international operations, in China, the business environment remains challenging and volatile. Year over year industry vehicle sales declined nearly 11% in the quarter.
We underperformed relative to the industry mostly because of segment shifts and lower demand for outgoing models, partially offset by growth in Cadillac delivery. In addition to taking appropriate cost actions, we are improving our product mix. We've launched 7 new models in 3rd quarter with plans to launch 5 new and refreshed models in the 4th quarter. In addition, the team continues to focus on accelerating cost reduction initiatives to improve performance given the business environment. In South America, we continue to take steps to improve the business and protect our strong franchise, while navigating FX and other macro challenges.
In September, we launched the all new 2020 Chevrolet Onyx Plus in Brazil. It is the 1st model in South America from our new global family of vehicles and carries a 5 star safety rating. During its initial month on sale, customer demand greatly outpaced available supply and we are doubling our production this month. The On X hatchback follows next month and together we believe these new vehicles will further strengthen our Chevy brand leadership and On X position as the region's best selling vehicle. As we execute our turnaround plan for international operations, we continue to take decisive steps to achieve sustainable profitability in every market we participate and cease operations that are not.
Earlier this week, we announced our intent to cease selling Chevrolet vehicles in Indonesia over the coming quarters. Turning to our EV progress, Chevrolet is launching the 2020 Bolt EV with battery improvements that enable an EPA estimated 259 miles of all electric range on a full charge at the same price. The more powerful battery pack is the same size and weight as previous year's models, but its greater energy density delivers 21 additional miles of range and that's more value to customers. It builds on our industry leadership in improving battery range and reducing battery cell cost per kilowatt hour and we expect this progress to continue. The 2020 Volt also retains what our customers love about this vehicle, instant torque, excellent ride and handling and a 0 to 60 time of just 6.5 seconds.
And on the AV front, Cruise increased its testing and validation miles during the quarter and increased its community engagement and relationship building. In addition to Cruise, GM and Honda continue their joint development of a new purpose built shared autonomous vehicle. So to recap, our strong operating performance in the quarter was supported by our robust sales of trucks and crossovers in the United States. We've also made significant progress at our transformational cost initiatives. GM has achieved $2,400,000,000 in transformation cost savings since 2018 and is on track to realize our 2019 target.
Because of additional planned investments in U. S. Manufacturing, we will revise our year end 2020 cost savings target to a range between $4,000,000,000 $4,500,000,000 We will take all of the necessary steps to achieve as much as possible to our original savings target. The strike did have a big impact on our Q3 EBIT adjusted results and will also significantly impact our Q4 results. Most of our 2019 strike related production losses will not be recovered in 2019 because of capacity constraints.
Therefore, we are revising our 2019 EPS diluted adjusted and automotive adjusted automotive free cash flow guidance. Our full year updated EPS diluted adjusted outlook is now in the range of $4.50 to 4 point $8.0 and our new adjusted automotive free cash flow guidance is $0,000,000,000 to $1,000,000,000 I have asked the GM team to find every offset now that production has resumed, and I am confident they will find many opportunities. So with that, I will turn it over to Divya.
Thanks, Mary, and good morning, everybody. Today, I want to discuss our performance for the quarter, the impact of the strike, the labor agreement and finally, our outlook for the year. In the Q3, we generated $35,500,000,000 in net revenues, dollars 3,000,000,000 in EBIT adjusted, 8.4 percent margins, dollars 1.72 in EPS diluted adjusted and $3,800,000,000 in adjusted automotive free cash flow. The EBIT adjusted impact of the strike in the 3rd quarter was $1,300,000,000 on a gross basis. This reflects lost production of a richer product mix as we launched our high content, high margin heavy duty crew cabs as well as the impact of lost aftermarket sales.
This impact was partially offset by approximately $300,000,000 in strike related favorable timing items. Net of these timing items, the EPS during the quarter was lower by approximately $0.52 and the adjusted automotive free cash flow was lower by approximately $400,000,000 due to the strike. Adjusting for the impact of the strike, EPS would have been $2.24 an all time quarterly record. The 1.72 dollars EPS diluted adjusted also includes a $0.15 loss from Lyft and PSA revaluations. Now let's take a closer look at North America.
North America delivered EBIT adjusted of $3,000,000,000 up $200,000,000 year over year and 10.8% by the impact of the strike, warranty costs and lower pension income. Our newly launched heavy duty trucks contributed favorably to volume, mix and price during the quarter. Market share for our large pickup trucks continues to improve, up 5 percentage points in Q3 year over year. We started deliveries of our heavy duties in Q2, and we have gained 6 percentage points in market share since the launch. Our light duty pickup trucks improved 6.8% at retail in Q3 year over year to over 40% as we rolled out diesel and other cab variants.
We will have the same launch cadence strategy for the heavy duty as we did for the light duty with the rollout of double cabs next followed by regular cabs. Switching to crossovers, U. S. Deliveries grew 29% year over year with the Chevrolet Blazer and Cadillac XT6 providing strong contributions to our results. Let's move to GM International.
For the Q3, EBIT adjusted in GMI was down $200,000,000 year over year driven by lower equity income in China. Continued industry weakness and pricing pressure resulted in Q3 equity income down $200,000,000 year over year from record Q3 2018 levels. We did see slight benefits from improved mix, partially due to our recently launched vehicles. A few comments on GM Financial, Cruise and our Corp segment. GM Financial posted record quarterly revenue of $3,700,000,000 in the 3rd quarter and record EBT adjusted of $700,000,000 primarily as a result of portfolio growth.
Cruise costs were $300,000,000 for the quarter, on track with approximately $1,000,000,000 communicated previously for the full year as we increase our headcount. Corp segment costs in the 3rd year sorry, 3rd quarter were $500,000,000 unfavorable $400,000,000 year over year, primarily due to net loss of $280,000,000 from Lyft and PSA investments in the 3rd quarter of this year compared to $170,000,000 gain from our PSA investment in the Q3 of last year. We have made significant progress on our transformational cost savings initiatives with $2,400,000,000 achieved since 2018. We're on track with our 2019 target of $2,000,000,000 to $2,500,000,000 achieving $1,900,000,000 year to date and $800,000,000 in the 3rd Let me update you on our outlook for the calendar year. The recent strike has obviously had a negative impact on our financial performance in Q3 and more so in Q4.
We estimate the calendar year EPS diluted adjusted impact to be approximately $2 per share and adjusted automotive free cash flow impact to be approximately $5,500,000,000 including the impact of working capital unwind. The $2 in EPS reflects lost production of a richer mix, lost aftermarket sales, start up and ramp costs and as net of higher U. S. Tax rate on lost earnings. While we continue to work on strike recovery efforts, we anticipate that only a small portion of the losses sustained during the strike can be recovered this year due to capacity constraints.
Factoring in all of this, our updated 2019 EPS diluted adjusted outlook is in the range of $4.50 to $4.80 Touching on CapEx, We expect 2019 CapEx of approximately $7,500,000,000 this year due to timing and early achievement of commitments. Updating for this and the impact of the strike, we expect adjusted automotive free cash flow guidance in the range of $0,000,000,000 to $1,000,000,000 I would like to provide some additional perspective around this guidance. The underlying EPS and free cash flow guidance is consistent with the range given in January. We have experienced a highly unusual situation with the shutdown of our North American operations for 6 weeks. We are restarting our operations very close to year end and the speed of production ramp and timing factors are very difficult to predict at this point.
We have provided the best estimated outlook given the information that we have today. Next, I want to briefly talk about the impact of our new labor agreement. The new agreement preserves our competitiveness, manufacturing flexibility and balance sheet strength without compromising earnings power. We have maintained the mix of our North American manufacturing footprint, maintained ability to adjust our workforce in response to changing industry levels, protected the balance sheet with no increase to defined benefit pension obligations and no payments or increased obligations to retirees. We maintained breakeven levels in the 10,000,000 to 11,000,000 unit range in the U.
S. And therefore preserved our ability to navigate through a downturn. It is important to note that while this labor agreement is inflationary, we expect to offset incremental economics over the contract period with productivity initiatives. Finally, I want to briefly touch on 2020. While we will provide full guidance in February, let me help frame the year by outlining a number of puts and takes.
Headwinds for 2020 include likely lower industry volumes, downtime and ramp up for the launch of our full size SUVs, higher depreciation and continued volatility in China and in South America. Opportunities in 2020 include full year of heavy duty truck production, transformational cost savings and product launches, including the Corvette, Encore GX, Trailblazer and our global family of vehicles. The ability to recover lost production during the strike in 2020 will depend on industry performance and our capacity availability as we already run our full size truck plants at maximum three shift capacity. Lastly, as a result of our decision to invest in our Detroit Hamtramck plant, we will incur operating costs that were outside the scope of our original transformation plan. While this slightly and our long term financial trajectory, including 10% core EBIT adjusted margins and improving our free cash flow conversion.
In summary, the underlying business remains strong and our guidance competitiveness and flexibility, and we expect to offset economics over the contract period with productivity. The environment is more challenging than just a few months ago, but the entire team is focused on our execution, both over the short and the long term. This concludes our opening comments, and we'll now move to the Q and A portion of the call.
Your first question comes from the line of Joseph Spak with RBC Capital Markets.
Good question. Just to start on maybe some of the cash flow dynamics. You mentioned the CapEx lowered this year, and that seems part on timing and then early achievement. Can you can we get some color on each factor? I guess I want to gauge how much of that timing could impact 2020 on free cash flow?
I know you said on average 7,000,000,000 dollars per year, but it seems like maybe 2020 might be a little bit higher than that. And then also related to free cash, with the working capital unwind in the Q4, how much should we expect to recover into 2020?
Yes. Joe, I would say from a CapEx standpoint, the early achievement of the CapEx commitments in 2019 does not impact our commitment to achieve $7,000,000 in 2020. So that commitment remains intact. From a timing perspective, even though we pull forward in 2019, we still think we can achieve that. To your question on free cash flow impact, obviously, there's a flow through from the profit impact into free cash flow.
In addition to that, we see working capital and sales allowance and policy and warranty and so on timing items are driving the remaining amount there. So the 5.5% comprises of the lost profit and the working capital unwind, CapEx remains intact, and that's the math to get to the 5.5%.
Okay. And then I know, Dhivya, you said recovery of volume next year is dependent on the market. And as you noted, you're running all out on the trucks. But if we assume an environment in 2020 similar to 2019, like just back of the envelope, I was sort of just looking at the calendar and counting days and making some assumptions. It seems like you might be able to get back 50% to 60% of it.
Is that reasonable?
I think it's really hard to call that now, Joe, partially because you also need to figure out what the truck industry is going to be like, I. E, the segment share within the industry. And to your point, we are running those all out. It's difficult to add overtime on top of overtime. So we will recover every unit that we possibly can.
It's just difficult to predict now at this point what that would look like.
Okay. Thank you very much.
Your next question comes from the line of Rod Lache with Wolfe Research.
Good morning, everybody.
Good morning. Good morning.
I had a couple of questions. First, looks like the adjusted free cash flow with the adjustments you're making would have put this year's free cash flow at $5,500,000,000 to $6,000,000,000 if it wasn't for the strike. And it appears that you've got another $1,000,000,000 to $1,500,000,000 of savings for next year. The original number was closer to $2,000,000,000 and it sounds like the variance there was Hamtramck. So what's evolved in your thinking on Hamtramck since earlier in the year?
So when we made the transformation announcement last year, although we had a battery electric truck in our plan, as we continue to evolve that and look at the full range of what we can do there to really maintain our truck leadership position and grow that into battery electric trucks. We looked at Detroit Hamtramck as a great opportunity and counting on getting an appropriate labor agreement there. And so we think this is a good investment and positions us well to lead in battery electric trucks as well as internal combustion trucks. And so that's as that portfolio as we further planned it, it became clear that we could be more efficient doing that work there.
Okay. Thank you. On North America and GM Financial looked like they were very strong this quarter. Obviously, there's unusual items that affect both of those right now. Could you just talk a little bit about those aside from just the things like launch?
But did you make any adjustments to pre existing warranties in North America? And how should we be thinking about the cadence for GM Financial going forward and what that might may mean for releasing cash from that business?
Sure. From a North American standpoint, yes, it was a very strong quarter. The cadence of our heavy duty launch helped a lot from a mix standpoint since we're rolling out crew cabs for the most part, and that will normalize as we roll out the other variants as well. To your question on warranty, we had $700,000,000 year over year unfavorable and that was primarily driven by the K2 warranty costs that Mary mentioned in her remarks, as well as the there was a onetime favorable item in 2018 of last year, which does not repeat in 2019. So from a year over year delta perspective, that impacts as well.
And in Q3, I'd say, Rod, that we go through a normal true up process from a warranty perspective, and there were some top ups relative to that as well, but that was on the smaller side of things. That should capture that. From a GM Financial perspective, the biggest item I would point to is the fact that residual values have been coming in stronger than what had previously accounted for. So as you go forward there, you may want to think about some kind of a normalization there. The offset to that would be the continued growth in the size of the book as they move closer towards full captive.
Those are the normalizing items from a GM Financial perspective.
And just to clarify, in North America, I was asking about the incentive accruals. You had over 700,000 units of inventory. And I would have presumed that you'd make some adjustments just given the prospects for declining inventory, but was there anything unusual there? And can you tell us what your expectation is for Q4 production at this point?
Yes. I'd say nothing specifically on the incentive side. We'll obviously be it'll be vehicle by vehicle and it'll be driven by market dynamics and nothing specifically to point out there from a true up or whatever perspective. From a Q4 production, we are now back up and running, and all of our plants are running all out. And like we said, we're going to take the opportunity to get any extra units that we can, and that's all we can comment on at this time.
And we'll since we're still in ramp up and we're trying to maximize the number of units, we'll have more to share about that when we report Q4.
Okay, great. Thank you.
Your next question comes from the line of John Murphy with Bank of America.
Good morning, guys. Good morning, Andy. A first question, just around the labor agreement, and the special attrition buyout program, it looks like it's only targeting about 2,000 workers. But based on sort of what I've been able to dig up, it seems like half of your workers are senior, meaning they're getting defined benefit pensions and natural attrition on an annual basis is about 2,000 workers. So just curious why the special attrition program of that buyout might not target more workers.
And then over time in the next 3 years before the next contract, would that impact sort of natural attrition, meaning would we still expect to see 2,000 per year? So first, just why isn't it a larger program? And second, what kind of impact would it have on natural attrition over time?
I think a couple of things you have to think about is, first of all, one big component of the special attrition program was to give people choices. Although we have jobs for everybody that was impacted by the unallocation of the 3 plants, We wanted to give them options and so there's a target there from that perspective. And the other thing is you can we think that again people wait and look to see if there's going to be a special attrition program, but then we also do see the natural attrition over the course of the agreement. So, I would expect that to continue. And that's how we size what we thought this SAP should be.
Okay. And Mary, when we think about those attritions, whether it be special or natural over the next few years, what is your plan as far as backfilling for those workers? I mean, would they be replaced one for 1 within progression workers or entry level workers? Or could they be folks that then get hired out in California to work on crews? Just trying to understand sort of the thought process of what how to size the labor force going forward?
Well, I think there's many different components of the labor force. There's a crude labor force, there's our salaried workforce and then there's our representative workforce. And I think your question is directed at the represented workforce. We're going to continue to work on productivity and we have opportunity there. We also have a lot of opportunity to continue to improve our manufacturing processes.
We've done a lot of work this year on complexity optimization and we're driving that in from a design for manufacturability perspective into how we design vehicles. We've also been able to find more and more opportunities for reuse without impacting a customer's view of the vehicle as being all new, especially when you look at some of the architectural components. We also have a program we've been working on for many years called built in quality level 4. And by the end of the year, virtually all of our plants will have achieved built in quality 4 built in quality level 4, which leads to first better health and safety and better quality as measured by 2 months 12 months warranty performance. So we see, I'll say, traditional productivity improvements.
We see efficiencies on how we design vehicles and components, from a DFMEA perspective. And then we see the results coming from our built in quality level 4. All of those things are going to help us make sure we optimize the workforce and optimize our manufacturing costs. As we need to hire additional workers, we'll utilize both temps and I'm very proud of the fact that we provided an appropriate path to permanent employment for our temporary workforce and then also maintain the in progression flow. So we'll utilize both of those depending on the plan and the situation at that plan.
Got you. That's helpful. Then just on the SUV launch, is there any change in timing for next year on the SUV launch given what's happened with the strike?
We haven't specifically said when those launches. They will occur and we'll roll out all three versions next year. And of course, the team is working to do everything possible to make sure we have successful high quality launches with minimizing the impact of the acceleration curve. So those we still will get all those done next year and I'm not going to give any more specifics on timing.
Okay. And then just lastly, there's been a lot of negative comments on pricing and some came from one of your cross town rivals, but also sort of in the press. Yet the quarter on your majors, you put up a $400,000,000 positive, but more importantly, you put up a $200,000,000 positive on your carryovers. I mean, what are you seeing in the pricing, sort of the competitive landscape for pricing? I mean, is that $200,000,000 positive from carryovers, was that benefited by some shortages during the strike?
Or are you actually seeing some real net positive price on carryovers?
Yes. From a majors perspective, I'd say it's mainly driven by our heavy duty and the variance of the light duties that we've recently launched. So those were strong and that's really the truck franchise that's driving that. On the carryover side, the outgoing models from a car perspective, we reduced our incentives on that quite a bit. From a crossover standpoint, we were disciplined as well.
So overall, I would say positive carryover net price. That's going to be quarter to quarter, John. It's going to vary based on seasonality and so on and so forth. But it's our intent to stay disciplined. And as you can see in the quarter, with the net majors that I just talked about, we have grown share for both light duties as well as heavy duties.
We plan on continuing on that path of being disciplined.
And Divya, in the competitive environment, have you seen any deterioration there? I mean, I understand you guys are pretty disciplined, but I mean, are you seeing sort of any kind of warning signs out there?
I think there's definitely months where you see some competitive activity and then it normalizes and so on. But we're launching we're going with our cadence and we're the strength of the products that we put out is driving our market share gains this time.
Great. Thank you very much.
Thank you.
Your next question comes from the line of Itay Michaeli with Citi.
Great. Thank you. Good morning, everyone.
Good morning, Itau.
Just the first question, with inventory now being leaner, can you talk about opportunities you might have in Q4 and beyond to optimize for mix and pricing? Should we expect trend mix to get richer over the next several months as you try to kind of manage the inventory situation?
We're going to try and build everything that we can get, Itay. From a mix perspective, we will from a mix perspective, we will
continue down the path of
rolling out the richer mix from an HD standpoint. LD as well, we will try and maximize the trim mixes that are most profitable as we go forward. So we're going to be opportunistic as we go along. And the other aspect is obviously from a country mix standpoint, there's places where we that are more profitable and there's places that are less profitable and we're going to direct the amount of inventory that we have towards the more profitable places as well. So, opportunistic.
It's hard to obviously size that at this time, and we will provide more detail in Q4.
That's helpful. And then just secondly, Dhivya, on the 2020 puts and takes. I think you mentioned lower industry volume as a headwind.
Can you give us a
little bit more detail about what you're thinking regionally and globally? Does that include that the truck franchise because pickup truck industry sales are still been strong throughout 2019? Any additional color would be helpful there. Yes.
I think we still have another couple of months here to go to see what happens here. But in 2020, we do think that China will remain volatile, South America will remain volatile. And here in the United States, with the economic growth moderating here in the recent past and in the next year or so we're anticipating, we're still planning for a lower industry, still healthy industry, but a lower industry in 2020. And we're going to have to as we move forward here in the next few months before we give guidance, we'll put more specificity around that. But any more than that, it's too early to tell.
Great. And then just lastly on Cruise. I think back in July, Cruise mentioned that they would accelerate testing and validation in the balance of 2019. Any update there that you can share in terms of miles driven or is the overall activity that Cruise is undergoing in the second half?
I would say I'm not going to give you a specific mileage, but they are doing exactly what they indicated they would do in the summer time frame. I would say it's going really well as they meet their milestones and as they continue to develop the autonomous technology. So very much on track. And not only on the technology, but also the work that they're doing in San Francisco and the community to make sure that the consumer is ready, understands the technology and trust the technology. So both of those plans are perfectly on track.
That's very helpful. Thanks so much.
Thank you.
Your next question comes from the line of Adam Jonas with Morgan Stanley.
Thanks everybody. Mary, over the next 5 years, will GM spend more R and D and CapEx dollars on EVs or internal combustion vehicles?
I believe it will be EVs.
Thank you. And do you think that do EVs require less labor than internal combustion vehicles, all else equal?
I mean, I think you have to look at the entire vehicle. Clearly, from an electrification perspective, it's simpler from a component perspective than it is from an internal combustion engine. But one of the key things that we've done is work on light weighting because light weighting is so important across every component. And from a body structures perspective, that light weighting generally requires a little bit more labor. So overall, I think it's somewhat less, but I think you've got to look at the whole vehicle, not just the propulsion system.
Thanks, Mary. And just, I wanted to have a couple of questions on Corvette. And I know Mark is not on the call here, so, maybe we can follow-up with him. But Mary, what do you think of a Corvette SUV?
Well, I appreciate that you think our Corvette franchise is very strong. I'm not going to talk about future. Thank you. I can't wait for the world to be able to drive the C8 because it's an outstanding vehicle and the value, the performance is I think just sets a new bar. And then the affordability, I think, is something we're really proud of and is very true to the Chevrolet brand.
So I will just share with you, we look at a variety of things as we move forward, but we recognize the strength of the Corvette brand. Right now, we're focused on getting the CA out and then the other variants, including the convertible. So very excited about that product and what it
will be for
the company.
I appreciate that. And I won't ask about an electric Corvette either right now. We can save that for later. Finally then, just you mentioned on China, I think when you were talking about 2020, you expected China to be a headwind. Can you elaborate a little bit more there on what was the market what was the volume assumption or mix or price assumption within that?
Any other color on the China headwind comment, if I got that correctly for 2020 versus 2019?
Yes. Adam, I think it's a little early to call it. I mean, there's so much going on right now as you look at the volatility in China. Look at where we're still in the middle of really trying to understand where the trade talks are going to land and how that's going to impact the overall economy. So we are seeing a very volatile environment and we're also seeing a lot of pricing pressures.
And then as we look forward, as we roll out more EVs, initially, we're going to see some margin headwind there. So I think when you look at all those things in 'twenty, we'll have more color for that as we do the February earnings call for Q4.
But those
are the things that seeing right now that we think will carry into 2020.
Great. Thanks team. Appreciate it, Mary.
Thank you.
Your next question comes from the line of Ryan Brinkman with JPMorgan.
Hi, good morning. Thanks for taking my call. Could you provide an update in terms of the impact of the new labor accord on your downturn resiliency in North America? Can you remind us of your latest estimate of North America breakeven expressed in terms of U. S.
Light vehicle SAAR and whether the contract changes that breakeven level?
Yes, Ryan, what we have previously talked about is the breakeven level of 10,000,000 to 11,000,000 units for the U. S. This contract will not change that. And why that is, is basically the comment that Mary made about productivity and other efficiencies offsetting the economics of the contract will certainly play into that. And in addition to that, from a flexibility standpoint, what we have modeled in our downturn assumptions is the ability to adjust the level of workforce based on what's happening in the industry and certain levels of supplemental unemployment benefits that go with that.
And that does not change based on this contract, which is primarily the driver of maintaining the downturn assumptions the way they are.
Okay, that's helpful. And I was encouraged in the release that you attributed the softer than industry sales in China to demand to lower demand for your outgoing products. Could you please provide us an update on the incoming product in China? Earlier in the year, you were relatively optimistic about the sales and product potential from new launches, including the first half of, I think, the so called gem architecture. Can you talk about how the sales and costs of the launch vehicles have trended relative to your expectation in China?
And then finally, it would be great too if you could update us with regards to the extent to which you have or have not detected any perceived bias against U. S.-based brands in the aftermath of trade or other tensions in that market? Thanks.
Sure, sure. And Ryan, first off, we haven't really seen and we monitor on a weekly basis, we really haven't seen any negative sentiment. So we think that's very positive. And we are in the middle of the launches for the year. We had 11 majors including the Buick Elite, which is a battery electric vehicle, the Buick Encore, Buick Encore GX, the Chevrolet Onyx, the Chevrolet Trailblazer and Tracker, and then the Cadillac XT6, and then some Baozun products as well.
And then there were several very important MCMs with across Buick for the LaCrosse and the Verano as well as the Chevrolet Monza and the Cadillac XT5. So I think as you look at all of those vehicles into a market with the uncertainty and the economic issues or the macro issues in China, I would say they're all on track. You were correct to note that we did have our first of the Chevrolet Onyx, which is the global family. It's one of many launches in China and it is on track. However, we did mention in my remarks that it is doing exceptionally well in South America because it's at the heart of the market and the biggest segment.
So I think we need to see these vehicles get into the marketplace. And I think a lot we'll see as we get into next year as well. But the launches are on track. I do think though, and some of them, as we did see a more significant drop off than we thought we would with the outgoing vehicle.
Okay. Thank you.
Your next question comes from the line of Brian Johnson with Barclays.
Yes. Hi, good morning, Tim. This Steven Hempel on for Brian Johnson. Just wanted to drill back down on the potential recoup some of the lost production, particularly on the T1 pickup truck side into 2020. I guess assuming kind of an overall stable large pickup market into 2020, is it fair to say that GM is already running at max capacity and that from a production schedule standpoint, tentatively, as we think about 2020, there's really no potential to make up that lost production, especially if we get upside in the large pickup market?
Or is there any kind of scope for some weekend work as we think through 4Q and into 2020?
Yes, I would say that your assumption is correct in an industry level and truck penetration level that's similar to what we have today. We already have scheduled weekend time and a lot of other over time on a regular basis, we have these plants working max over time. So the ability to add additional days is limited. We will obviously try and find any voluntary opportunities to do over time beyond that, but it's not something I would call my baseline at this
point. Understood. Thanks for the clarification. And then in terms of the revised UEW contract impact, we outside and kind of got to about $150,000,000 gross labor inflationary impact in 2020, ramping up to about 350,000,000 in 2023. Just wondering if that's kind of ballpark correct?
And then also can you quantify the buckets of the dollar savings offset from attrition buyouts, absenteeism and other productivity initiatives?
Yes. I think what Divya said more broadly is that we really believe the inflationary elements of the contract or the economics that we can offset with productivity and there's plans well established. We don't know yet exactly how the special attrition program is going to play out. People have till the end of the year to sign up for that. So, I think what you hear from us though is a team that is committed to finding the right offsets to go forward and maintain and improve our competitiveness.
Okay. Just in terms of the gross inflationary labor cost impact, was that is that ballpark directionally correct in terms of $100,000,000 in 2020 ramping up to $350,000,000 in 2023?
Well, I mean, I think if you look at there's some parts of the contract that are easy to do the math on. And but I think there's others that we'll look to see how it plays out. And some of it depends on the workforce, depends on how many people take the special attrition program, depends on the industry as we go forward. So I'm not going to put projections that far out.
Okay. And then just a last clarifying question. In terms of the revised transformational restructuring savings of $4,000,000 to $4,500,000,000 does that include the productive initiatives you outlined? Or would that potentially provide some upside to get back to the original target of 4.5?
I think first we're going to work to offset and then we're going to keep going. We won't stop when we get there. So I think over time there's upside, especially on the broader elements we've talked about, how we continue to improve, how we design vehicles that affects the manufacturing cost and our ability to continue to build quality and station and improve our quality system. So all of those things are going to contribute. And although we revised it based on the decision we made largely related to Detroit Hamtramck, we're going to continue to push the organization to continue to find cost opportunities.
And I would say that's the goal we set for the end of 2020. It's not like after that we stop. At that point, we'll evaluate the business the
perspective. Okay. Thanks for taking our question.
Sure.
Your next question comes from the line of Dan Levy with Credit Suisse.
Hi, good morning. Thanks. Just wanted to follow-up on the question on this productivity gains. Could you just give us some color on what initiatives you might be able to pursue or timing? And more specifically, you've obviously been pretty successful with cost saves in the past.
I think that's probably one of the reasons why your earnings level has been rather elevated. Just wondering how much the low hanging fruit may already be exhausted and so you're
going to just have to dig in
a little harder and it's not going to be as easy to find some of these gains?
Well, I think when we look at our comparison that Harbor or I guess if Oliver Wyman now does from a productivity, we still have opportunities to improve. And it's not just on minutes per hour of the and the way we design a job. It's much broader than that. And I think we have a lot of opportunities to still tap into as we really optimize our complexity and we leverage reuse. And so those are things that I'm very pleased that the organization has taken to a new level this year and that will play out over multiple years because a lot of it is if you design the vehicle for a design for manufacturability, doing that now will play out in years when we actually launch the vehicle, be it 2, 3, 4 years from now.
And don't underestimate the work that we've been doing on built in and quality level 4 because for the plants that are already there, we definitely see just the fact that more vehicles are built in station means they spend no time in repair and that's savings as well. So I believe, although I'm very proud of the manufacturing team of what they've already accomplished and working across with the engineering organization, I think there's still much more to tap into and that's what we do.
Great. And then just as a second question, one that's more existential and sort of touching on one of the prior questions. Obviously, one of your publicly stated goals is a 0 emissions future, and that probably requires a smaller footprint than what you have in place today. So first of all, does A, does this current agreement have any limitations on specifying limitations on what you can build for EVs? And then just more broadly with your 0 emissions future goal, how aligned is your labor partner with you on this goal?
Would they ever serve as partners with you along this transition sort of similar to what we see in Europe and Germany to address in the future? Or is the answer simply, look, this is a 4 year agreement and once it expires, then we'll deal with the future as it
comes? Well, I think in this 4 year agreement, we are dealing with the future. If you look at from an EV perspective, we already build the Chevrolet Bolt's EV in our Orion plant in Michigan. Very significant discussions that we had as it relates to the battery electric truck with our the UAW as it relates to what we're going to do at Detroit Hamtramck. So I think what we're trying to do is and first of all, there is no limitations.
I want to make that very, very clear. But we are committed to the United States and committed to manufacturing in the United States. We see a huge opportunity in electrification and that's why we're investing and I think in among the leaders in the EV space. I think we our technology roadmaps that we have for cell development are going to well position us and with the commitments we've made for the better our next generation or architecture, which we call the BEV III. So this was all part of the discussions and I think it signifies that what we're doing in Orion and what we'll be doing in Detroit Hamtramck.
I guess more specifically you have other engine and transmission plants out there that presumably in an in an EV world are deemed unnecessary. Have there been any sort of discussions with the union in the future on how to deal with these plants could potentially be unnecessary?
Yes. I think that's over a very long horizon. We still see even when you look at the multitude of projections by 2,030, is it 15%, is it 30% all EVs? That means the balance of the vehicles being sold in the country are internal combustion engine vehicles. We're well positioned because we've renewed all those architectures and we've invested in very efficient internal combustion engine technology that will continue to improve.
So I think this is going to play out over a number of years and there are components in the DRIVE unit from an EV perspective that need to be built somewhere. So I think we're looking to do the right thing from a company perspective to drive shareholder value to lead in EVs and do the right thing for our manufacturing footprint and for our employees.
Great. Thank you.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Good morning, everybody.
Good
morning. Good morning.
I was hoping you can provide a little bit more color on your underlying performance this year, excluding the strike to the extent that's possible. Your the revised guidance, and then you add back sort of the strike impact seems to be $650,000,000 to $680,000,000 maybe the lower end of the sort of like original guidance. Is there anything are there any like specific factors that you that are playing out maybe on the softer end of what you would have expected before? I mean, again, excluding strike, is it at the international level? Is it in China?
Is there anything you're seeing in the U. S. That would account for that? And as part of that question, also just trying to understand better the tax rate impact. The new guidance is at a lower tax rate.
Is that correct?
Yes. So a number of questions there. So let me address them 1 by 1. The new guidance, 4.5 $0 to $4.80 you're correct, we subtracted the $2 and arrived at so it's the original guidance we gave in January less $2 On the upper end, we clipped it by $0.20 As you've seen, it's been quite a volatile environment in China as well as the macroeconomic volatility we're seeing in South America as well. The FX environment that we saw earlier in the year when we gave our guidance is very different from the FX picture that we have today, which is offsetting some of that as well.
So I would say that the weakness is predominantly more in the international front, the volatility that we're seeing. And from a North America perspective, as you've seen the performance quarter after quarter, it continues to be strong. From a just from a cost tax rate perspective, the revised tax rate is primarily because the strike impact is you got to apply the U. S. Tax rate to that strike impact, which is about 25% effective tax rate that we're applying there.
So if you take our original tax guidance, subtract out the higher tax rate that's applicable on our strike impact, you get to your new and revised tax guidance. So it's consistent. It's just that you're applying a different tax rate than the weighted average tax rate on the strike impact.
Okay. That's great color. And then just I was hoping you can give a little bit more color on the puts and takes for 2020 and in particular a few discrete items. You're talking about downtime and ramp up for the full size SUV and I think you're able to quantify in terms of specifically downtime there. And then you did not mention raw materials as a potential tailwind.
I was curious if you can give an update on what is represent this year and then how to think about it for next year? And then the 3rd discrete item would be warranty, obviously a fairly big charge, which you explained for the quarter. How does that have a carryover impact as we move into next year?
So on the 2020 side, the puts and takes that I gave predominantly a lot of industry uncertainty around the globe. That's what I would characterize as a primary headwind. From a downtime standpoint, this is a complicated SUV, full size SUV launch. There is a significant amount of change that's happening from the current generation to the next generation. So from a downtime perspective as well as more importantly the line rate ramp up post the downtime, we're anticipating an additional headwind year over year for full size SUVs.
I don't want to quantify that now since we're still working on how we can optimize the number of units that we're going to be able to put out in 2020. So I will quantify that further in February. But it is safe to assume that there will be a year over year headwind from a full size SUV perspective. There will also be higher depreciation. That's something I've depreciation catches up to our CapEx levels.
We've been seeing a secular increase every single year and that's going to continue into 2020 as well. And obviously, that's non cash as you well know. From a raw material and tariff perspective to your point, I've said this before in prior quarters, there's puts and takes. It's hard to look at just one number and paint it all with the same brush. But steel and aluminum, we've seen tailwinds, offset by precious metals, tariffs as well as fuel costs, which impacts our logistics spend.
So net net, we are still at 500,000,000 dollars year over year headwind from a 2019 standpoint. We don't see that moderating necessarily into 2020 since the headwinds that I mentioned are likely to continue into 2020. And it's obviously hard to predict the tariff environment that we're going to be in. So that's generally the headwind side. Tailwinds, the remaining cost savings so far, we've achieved close to $2,400,000,000 of cost savings and the remaining cost savings are going to be realized over a period of time according to our revised guidance.
You're going to have a full year of heavy duty trucks and the product launches that I talked about. Hopefully, that gives you some color. And finally, on the warranty question that you had, we do see that as specific to Q3 of this year. I don't see a tail event into 2020 on that.
Our last question comes from the line of Chris McNally with Evercore.
Thanks so much team. I just wanted to jump in on maybe the impact from a working capital standpoint on the change in the free cash flow guide. So just really quick, of the $5,500,000 it looks like $2,800,000,000 was worse from just the operations. You back out the CapEx. It looks like it's something like a $3,500,000,000 or 4,000,000,000 dollars drain on working capital.
Can you just confirm that it was all working capital and there's not any other sort of one time drivers for cash outflow because we're trying to think about the reversal next year?
Yes, I would say that your EBIT impact seems to be on the low end. Maybe you're talking about the net income impact. So from an EBIT perspective,
you got to
set up for yes, you got to talk about gross number there. That plus the working capital unwind constitutes most of the $5,500,000 There's no other like one time item or whatever else that's out there. But the profit impact that you talked about is that sounds a little understated, but it's potentially because of tax rate.
Okay, perfect. And then if we could talk about the without giving numbers, like when we think about the reversal at some time in the first half, I know you don't want to give guidance, but could you just sort of walk through the timing of how that would play out from an inventory standpoint?
Are you talking about the reversal of working capital or the recovery of profits or both?
The reverse of working capital.
So reversal of working capital, we think that the low point is probably to be sometime in November, as we cycle through the rest of the unwind in payables and receivables will start back up 15 days after we start shipping. That cadence will continue. So we do anticipate that you'll see part of the recovery in the second half of November and into December. And Q1, as you know, it tends to be a negative cash quarter because of our shutdown and the reversal after that. But what you would see from a cash balance standpoint is the recovery starting in the Q2 of next year into the rest of 20 20.
Okay, that's perfect on the timing. And then, Dhivya, this is more like from a communications standpoint. I mean, 2020 was already supposed to be sort of a better free cash flow year. I think we've asked that question a couple of different times on the call. But you're already getting the improvement of CapEx, the reduction of pension from cash flow to income statement and then the FinCo dividend.
If we get this working capital benefit in 2020, is it the type of thing that you will actually be able to call out, so that we can start to understand what is the true because working capital wasn't one of the working one of the benefits that we were expecting in 2020 2021, which likely will now be sort of in core operations. So is that something that you could back out for The Street as we go into 2020 2021?
Yes. We will be very clear about how much of our 2020 free cash flow guidance comes from the working capital rewind. And we will also be clear about how much is the cash based earnings, I. E, the operating cash flow, if you will, and what that is year over year. So from a communication standpoint, we'll certainly be clear about that.
And beyond that, you're right, we don't want to talk much more about magnitude of that until February.
Perfect. Thank you so much.
Thank you. I would now like to turn the call over to Mary Barrow for her closing comments.
Thank you very much, and thanks everybody for participating this morning. If you look for several years, the team at General Motors has been making tough decisions to make our business more resilient and more agile. This discipline will help us overcome the impact of the strike as we continue our heavy duty trucks, the new Cadillac Sedans and as we move forward the upcoming launches such as the mid engine Corvette and the next generation of full size SUV. This leadership team has a proven track record of successfully navigating complex business issues, confronting headwinds and capitalizing on opportunities. And I believe we have the best employees in the industry across the board.
They want to work and they come to work every day to do their best. And they want General Motors to succeed and they want to be part of that successful future. So as we move forward together, we're going to continue to build on the strong foundation we've laid and share and allow them to share in the future success of the company. But let me be clear, we're also working hard to lead in both the core and the EV and AV world and create significant shareholder value. And before I close, I want to let you know that we will host our Capital Markets Day in New York on February 5, 2020.
This year, in addition to providing our 2020 outlook, it will include our Q4 and our full year 2019 earning results and we'll share additional details about that Capital Markets Day in the near future. So thanks everybody very much. I appreciate your time.
Ladies and gentlemen, that concludes the conference call for today. Thank you for joining.