Earnings Call: Q4 2017

Feb 6, 2018

Summary

FY 2017 adjusted EBIT matched the record at $12.8B, with record 8.8% margins and $6.62 adjusted EPS despite volume and commodity headwinds. 2018 guidance calls for mid-$6 adjusted EPS and North America margins above 10%, alongside major truck, EV and autonomy investment.

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company Fourth Quarter and Full Year 2017 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. To ask a question, press star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. As a reminder, this conference is being recorded Tuesday, February 6, 2018. I would now like to turn the conference over to Dhivya Suryadevara, Vice President of Corporate Finance. Please go ahead, ma'am. Thanks, operator. Good morning, and thank you for joining us as we review GM's financial results for the fourth quarter of 2017. Our press release was issued this morning, and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast. Included in the chart set materials published this morning, we have the key takeaways from each chart in the notes pages in order to provide color on the results. This morning, Mary Barra, GM's Chairman and CEO, will provide some brief opening remarks, followed by Chuck Stevens, GM's Executive VP and CFO. We will then open the line for questions from the analyst community. 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. In the room today, we also have Tom Timko, Vice President, Global Business Solutions, Controller and Chief Accounting Officer, and Rick Westenberg, Vice President and Treasurer, to assist in answering your questions. I will now turn the call over to Mary Barra. Thanks, Divya. Good morning, everybody, and thanks for joining. 2017 was a transformative year for GM. The very strong results we reported this morning demonstrate the earnings power of our core business and extend our track record of meeting our commitments. Let's look at the full-year results. Our EBIT adjusted of $12.8 billion repeats 2016's record performance. We had a record EBIT adjusted margin of 8.8% and record EPS diluted adjusted of $6.62. We returned $6.7 billion in cash to shareholders, and our return on invested capital adjusted was 28% on a trailing four-quarter basis. GM begins this year as a stronger, more resilient company because of the decisive actions we have taken in the past few years to first reshape our business, second to focus on higher return opportunities, and third invest in technologies that enable our vision of a future with zero crashes, zero emissions, and zero congestion. We plan to continue our momentum in 2018 and position the company to accelerate further in 2019. This year, we expect continued strength in North America, where in 2017 we achieved a record EBIT adjusted margin. We expect improved results in GM International, where we saw strong equity income in China and return to profitability in South America. We expect momentum from a full-year sales of new crossovers and later our all-new full-size pickups. We expect improved performance by adjacent businesses, including GM Financial. Of course, we will maintain a very strong cost efficiency focus across the entire business. Chuck Stevens will share additional details in a few minutes. In the core business, a strong mix of winning vehicles helped drive another outstanding year in 2017. In the U.S. specifically, GM was the pickup truck sales leader for the fourth year in a row. Chevrolet grew retail shares for the third consecutive year, and we became the fastest-growing crossover company in the industry, with retail share up 1.6 percentage points. Building on the success of our refreshed crossovers will be the 2019 Chevrolet Silverado and the GMC Sierra full-size pickups, which go on sale later this year. Also the global launch of the Cadillac XT4 luxury compact crossover. With GM International, GM China delivered a year of record sales led by Buick and Baojun and our luxury brand, Cadillac, which grew 51%. To continue this momentum, GM China will introduce 15 new or refreshed models, including seven SUVs and crossovers this year. Finally, in South America, Chevrolet continued its market leadership, where sales rose 13.8% last year. In addition to great products, we are strengthening our performance through cost efficiencies that offset incremental investments in the business. We are on track for our commitment to achieve $6.5 billion in efficiencies by the end of this year on a 2014 baseline, and we will continue that focus on costs beyond 2018. In addition, we are making remarkable progress in advancing our vision for the future of personal mobility. This year, we expect to increase our investment in transportation as a service initiative to $1 billion. Last month, we filed a safety report that is available on gm.com and a safety petition with the U.S. Department of Transportation to allow us to safely deploy our fourth generation self-driving Cruise AV. It is the first production-ready vehicle built to operate safely with no driver, no steering wheel, no pedals, or manual controls. The Cruise AV is another milestone on our path to deploying self-driving vehicles in a ride-sharing environment in 2019. To advance our vision of a zero-emissions world, we also announced that General Motors Company will introduce at least 20 new all-electric models by 2023. As we continue to make meaningful progress in lowering battery costs, we are confident that our next generation EV architecture will be desirable, attainable, and profitable with a range that our customers want. We will begin unveiling these vehicles in 2021. Now I would like to turn the call over to Chuck Stevens to share additional details. Thanks, Mary. I would like to give some perspective on the quarter and provide additional insights into our 2018 outlook. Our strong fourth quarter results capped another record year of earnings as we met our commitments for the fourth year in a row. EBIT adjusted for the year of more than $12.8 billion repeats 2016 record performance, and we delivered a record margin of 8.8%, despite significant volume and commodity headwinds. We also achieved a record $6.62 in EPS diluted adjusted. Net revenue was $145.6 billion, down 2.4% from 2016, as we right-sized dealer inventories in the U.S. Our strong results for the year were driven by a record North American margin of 10.7%. This was achieved even with wholesales being down more than 10% versus 2016 and flat versus 2015. In addition to the record margin in North America, GM Financial generated record earnings before taxes. Within GM International, China sustained its strong equity income, and we have returned to profitability in South America. Turning to the fourth quarter, we generated $37.7 billion in net revenue, a record $3.1 billion in EBIT adjusted, and delivered $1.65 in EPS diluted adjusted. In the fourth quarter, North America generated $2.9 billion of EBIT adjusted, a Q4 record, and an increase of $200 million year-over-year. We generated these strong earnings off $28.8 billion of revenue, resulting in another quarter of 10-plus percent margins for North America and leading to our third straight year of 10% or higher margins. Volume continued to be a headwind in the fourth quarter, with wholesales down 135,000 units on a year-over-year basis, as we reduced our U.S. dealer inventory as planned. We ended the year with 63 days supply and 753,000 units of dealer inventory, down eight days and 92,000 units from the end of 2017, both far surpassing the targets we committed to early last year. We generated the record results in North America despite the decline in volume and an increase in raw material costs of about $200 million in the fourth quarter through improved mix, pricing, and cost performance. Both our fourth quarter and calendar year performance demonstrate the resiliency of our North American business. For the calendar year, the North America team delivered EBIT adjusted of $11.9 billion with a record 10.7% margin, even with a 447,000-unit decline in wholesales and $600 million of commodity headwinds. Pricing remains strong. Our U.S. average transaction prices continue to grow despite increased industry-wide incentive spend and a slightly weaker industry volume. Our fourth quarter ATPs of about $37,000 were $1,500 higher than the fourth quarter of 2016. The underlying strength of our business continues to improve as actions we have taken to reduce our fleet sales, improve residual values, and drive cost performance are playing out favorably in our results. Moving to GM International. This is the first quarter for our new reporting segment, which combines the former GMIO region with the former GM South America region. Overall, EBIT adjusted for the segment improved $200 million year-over-year, driven by cost and price improvements. South America continued to improve. The fourth quarter was the second straight profitable quarter, resulting in break even for the year. We anticipate continued improvement in 2018. China continues to deliver solid results, with equity income of $2 billion for the full year, about equal to 2016. A few comments on GM Financial and our corp segment. As we continue to progress towards full captive, GM Financial posted record revenue of $3.3 billion and record earnings before tax adjusted of $300 million in the fourth quarter. Earnings assets grew 25% to about $86 billion, supporting expected future earnings growth. We anticipate continued earnings growth in 2018. In the corporate segment, costs were about $500 million for the fourth quarter and about $1.5 billion for the full year. This was in line with our expected costs for the year. As discussed at the Deutsche Bank conference, spend on Transportation as a Service is expected to increase about $400 million in 2018 versus 2017 as we prepare to deploy self-driving vehicles in a rideshare environment in 2019. As a result, we expect the corporate sector quarterly cost to run in the $500 million to $600 million range for 2018. Turning to cash flow and capital allocation, Q4 adjusted automotive free cash flow improved by $1.7 billion year-over-year, primarily due to favorable working capital as a result of normalization of production from the third quarter of 2017, partially offset by the impact of reduced dealer inventory. Adjusted automotive free cash flow for the full year of 2017 was $5.2 billion, down $3 billion year-over-year, primarily due to lower automotive EBIT adjusted of $400 million and movements in dealer inventory levels and the resulting impact on sales incentives of $2.2 billion. As Mary mentioned, we returned $6.7 billion to our shareholders through $2.2 billion in dividends and $4.5 billion in stock repurchases through 2017. As a result of our strategic sale of Opel Vauxhall, we were able to reduce our cash target by $2 billion. This is reflected in our year-end cash balance, which is $2 billion lower than the 2016 year-end cash balance. Now I want to share more details on our 2018 outlook. As we outlined last month, we expect to deliver full-year 2018 EPS diluted adjusted in the mid $6 range. We expect core EBIT adjusted and core automotive adjusted free cash flow to be largely in line with core business performance in 2017. Core results consist of all operations excluding our autonomous vehicle operations, including Cruise Automation, Maven, and our investment in Lyft. Core automotive free cash flow will likely remain flat in 2018 as GM North America production levels and ending dealer inventory are expected to be relatively flat. Capital spending, as I said last month, will be about $8.5 billion for 2018, and we expect our annual run rate to decline as we get past our next-generation truck launch. Looking at 2018 cadence, we expect Q1 and Q4 to be the weakest quarters, driven by typical seasonality as well as our retooling downtime related to our new full-size pickup trucks. We expect Q2 and Q3 to be the strongest. North America will be impacted in Q1 by an approximately 60,000 unit volume decline, primarily due to truck downtime. As a reminder, Q1 is typically our weakest cash flow quarter due to working capital seasonality. Given the anticipated lower production I just mentioned, as well as CapEx spend to support the truck launch, Q1 cash flow is expected to be meaningfully below our historical averages. Our pace of buybacks for 2018 will be dependent on our free cash flow generation, our quarterly dividend, which will remain at $0.38, and any additional calls on cash throughout the year. In North America, we expect to sustain an EBIT adjusted margin of 10% plus, primarily due to continued strength of the U.S. industry, favorable mix due to a full year of new crossovers, the launch of our all-new full-size trucks, and a continued focus on overall cost savings. In GM International, we see improvement in 2018, driven primarily by the continued strengthening of our business in South America. In China, we see a similar dynamic as in 2017 and the past few years. Continued pricing pressure offset by a richer mix of crossovers and anchored by strong sales from Buick and growing sales from Baojun and Cadillac, resulting in another year of strong equity income. In Korea, we've had recent discussions with key stakeholders regarding the need to improve Korea's financial and operational performance. As we strategically assess our performance, additional restructuring and rationalization actions may be required. More to come on this topic as we move through the year. We see a significant opportunity for growth in adjacencies in 2018. Specifically GM Financial, where we expect to once again improve earnings. Globally, while we expect a continued increase in raw material prices, we currently expect to largely mitigate through other cost performance. To sum it up, a record fourth quarter, another record year of profit margins and EPS diluted adjusted in 2017 in the face of significant volume declines and commodity headwinds. Our organization is focused on meeting our commitments again in 2018, as we've done for the last four years. That concludes our opening comments. We'll now move to the question and answer portion of the call. At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. Your first question comes from the line of Joseph Spak with RBC Capital Markets. Thanks for taking the question. I guess just to start, just to level set everyone, for core EBIT and core free cash flow, in which you're saying flat in 2018, those metrics are about $13.5 billion and just a shade under $6 billion on free cash flow? That would be the math when you look at what we delivered in 2017 and adjust for the investment in AV. Okay, thanks. The $300 million increase in AV and mobility that you are pointing to in 2018, is that the level that you think gets you ready to launch at scale in the first quarter of 2019, or should we expect a step-up in the quarter you actually go live? Yeah, I would say it is $400 million roughly, from $600 million to $1 billion on AV itself, $700 million to $1.1 billion overall in the TAS segment when you factor in Maven and some of the other activities. But specific to AV, it is $600 million to $1 billion, Joe. That is the run rate for 2018. That is what we think we need to spend in order to continue on that path, and we will have more to say about 2019 as we exit through 2018. Okay, and last one then, just because you mentioned some of the adjacency growth in GM Financial, and clearly I know there is a lot of economic factors that go into the forecast, but there has been a more recent focus on rates. Do you feel confident with that on a reasonable range of rate outcomes for 2018? Well, clearly our expectations for, or maybe not so, but I'll make it clear now. Our expectations for 2018 were based on a set of assumptions from a macro perspective. Here, specific in the U.S., it was an environment where there were going to be moderate increases in interest, 75 basis points, moderate inflation, moderate wage growth, continued GDP growth, and an industry that was going to be in the low 17 millions. Under that construct, we would expect the growth in GM Financial as indicated, as well as another strong year in North America with 10-plus percent margins. That's our baseline assumption, and that's what we're executing to at this point. Thanks. Your next question comes from the line of Emmanuel Rosner with Guggenheim. Hi, good morning, everybody. Good morning. Could you give a little more color around the puts and takes for your GM North America EBIT in 2018? I guess if we are to maybe refer to the typical buckets that you are reporting it in the slides, how should we think about those puts and takes for this year? You are looking for an EBIT bridge, Emmanuel. I will give you a high-level view because we kind of painted the macro backdrop. The way I think about it, and going back to the Deutsche Bank conference, look at it from a tailwinds and a headwinds perspective. Clearly, as we think about 2018 headwinds, and it is global, but obviously a big component in North America, commodity prices are going to increase. Pricing is going to continue to be challenging in the carryover space. We expect a lower industry. Then we have got the added specific issue in North America, as we talked about, of the incremental truck downtime, roughly 60,000 units. To generate 10% margins in North America and offset some of those tailwinds or headwinds, we have the full year impact of our crossover launches, specifically the mid-crossovers, Traverse, Enclave, and Equinox, and we think that is going to be a pretty significant tailwind from a pricing perspective. We expect volume to be relatively flat year-over-year, but mix will be a headwind because of the lower truck production. We expect cost performance to be favorable as we have demonstrated over the last couple of years with commercial and technical savings in GPSC and further SG&A efficiencies more than offsetting the incremental impact of commodities and launch-related costs. That is kind of the broad buckets. Obviously, as we have done over the last number of years, that is the baseline plan. As we go through the year, we will make adjustments and course correct in order to continue to execute towards that objective. Again, contextually within the macro environment that I described earlier. That's helpful. I guess specifically within GMNA pricing, do you see any risk of increased competitive conditions on the truck side? I understand on the crossover side, you have new product, but I guess on the pickup truck side, it seems like conditions are getting extremely competitive. I guess, what is the directional assumption in your guidance for that? Yeah, I would say broadly speaking, we'll have favorable pricing on new major, primarily driven by the full year of the crossovers and then the launch of the new truck later in the year. There'll be a headwind, as we've seen over the last few years on carryover pricing as incentive spend continues to amp up. I would say in that context, we still think truck pricing is going to be reasonably constructive. Just one data point, if you look at truck pricing, transaction prices, say Q4 versus Q3 in 2017, from a segment perspective, they were up another $1,000 a unit from a transaction pricing perspective. We were down slightly given the age of our truck, and we've built that into our plan as we go through 2018. So on balance, we feel reasonably good about truck pricing. Certainly, we're looking forward to the next generation truck, which we think is going to be a significant tailwind for us. Great. Thank you for the comment. Your next question comes from the line of Itai S. Michaeli with Citi. Great. Thanks. Good morning, everyone, and congratulations. Thank you. Maybe a question on the strength of the pickup truck franchise, but I will ask it in a different way. Chuck, if I look at your guidance of kind of mid-$6 EPS, and I remove the $1 billion of Cruise AV investments, would it be fair to say that kind of all else equal, GM could still earn $6-plus in a, you will call it high 15 million light vehicle SAAR? How can you think about the sensitivity now to the SAAR given what we have seen in terms of the pickup truck variable profits for yourselves and the industry? Good question, Itay. The basic math would be if we're in a 16 million industry versus 17 million, our wholesales are going to come down roughly 200,000 units. 200,000 units at our average variable profit. The math would suggest that we would be north of $6 EPS in that environment for sure. It's a reasonably easy math exercise. I think the key is how that develops, and how that 17 million to 16 million industry develops because there's other factors that would come in play. What's the pricing environment as you're going down in aggregate? What's the mix? But I would say that that's how we're trying to position this business. I've always talked about GM North America EBIT margins of 10% and building a business model that would sustain that in a mid 15 million to low 16 million range. That's what we've been progressing to, and I would say the resilience of the business model last year would suggest that. We were kind of wholesaling or producing at a SAAR level that was less than 17.6 when you look at our year-over-year volume decline. That's very helpful. Just my follow-up on the $1.5 billion of adjacent profit growth, I think for 2021. Can you just share the cadence around that? How much might you be seeing this year, and how much might that be contributing to your expectation of earnings improvement in 2019? Yeah, I would say that, without providing specifics over that kind of direction, where we're going to see, and what we said back in January was a significant improvement in 2018, primarily GM Financial as we continue on the captive. Then we'll leg in the benefits in after-sales and OnStar as we go through kind of the 2019 to 2021 timeframe. The after-sales will be driven by continued growth in the car park after we bottomed out kind of in 2016, troughed out, and then continued to increase our service loyalty. OnStar is just continuing the growth of 4G LTE and some of the other related opportunities for revenue growth from that perspective. Long answer. Simple answer is most of the improvement is going to come in GMF in 2018, and then between the three of them, kind of leg that in 2019 to 2021. That's very helpful. Thanks so much. Your next question comes from the line of Colin Langan with UBS. Oh, great. Thanks for taking my questions, and congrats on a good quarter. Thank you. Any color, you've talked in the past about small cars losing money. Any update there in terms of maybe turning those around? That seems to be the only area that is underperforming, I guess. Is it still losing money? Last year, we had a focus, and we took several actions to improve the overall performance across our car portfolio. Although as you saw the shifts in the market, significant pressure on cars, especially in the U.S. So we continue to look for opportunities. We are well-positioned, though, when you look at the fact that it was in the 2015 timeframe when we invested in and launched the compact and the midsize with the Chevrolet Cruze and the Malibu. So we're well-positioned with those being very robust architectures to continue to respond to the marketplace with very little capital investment as we move forward. I'd also say, if you look broader globally from a car perspective, when we start to launch GEM in the 2019 timeframe, I think that sets us up very well, especially in emerging markets, Mexico, China, and South America, to have a very strong car platform and really reach into the marketplace, where customers are focused. Got it. Any color on the size of the raw material headwinds that are faced in your guidance in terms of number? Yeah, just to put it in perspective, last year, when we look at it in aggregate on a year-over-year basis, it was in the $700 million ZIP code. I think our baseline planning assumption is something a little bit less than that in 2018. Roughly speaking, call it $400 million to $500 million. But I think the important point is, as we see that develop, obviously, we were able to offset that impact last year through really strong performance across all other cost drivers, and we will react as we see how this develops during the year. But again, for baseline planning assumptions, call it in the ZIP code of a half a billion or so. Got it. And just one last question. How should we think about the use of free cash flow this year? I think you indicated in your comments that it would be about flat year over year. Do you think the majority of the excess cash will be used for repurchases? Or should we model it in that way, or do you need some more deleveraging? Any thoughts there? Well, I think that our capital allocation framework is relatively transparent. We've been executing to it with discipline over the last number of years. Our guidance is flat free cash flow year over year in the core business. So call it roughly ex TAS $6 billion, with TAS roughly $5 billion, and we pay dividends, so that'll be $2.2 billion. That'll leave $2.8 billion for other actions. Other actions being M&A. Not that I'm suggesting there's anything on the radar, but that's what that's for, and/or restructuring and/or share buybacks. And I would say, as we go through the year, you would start with a $2.8 billion kind of opportunity for share buybacks, and we'll see what develops. But to the extent that we have free cash flow available, that's what we're going to do. We're going to buy back shares. Got it. All right. Thank you very much for taking my question. Your next question comes from the line of John Murphy with Bank of America. Good morning, guys. Great. I hate to beat a dead horse here, just kind of stay on North America for a second, but when we look at it, the performance in the second half of the year has been pretty remarkable with volumes down and margins incredibly strong and actually in the fourth quarter up. I'm just curious, as you look at the market, the two levers that you've been able to pull is product launches and strong mix, and the second one is cost cutting. So I'm just thinking, as you look at sort of your product cadence going forward, do you think there's an opportunity to upsell consumers into products that are better for them at higher prices and higher variable margins? Do you think you could kind of clip off another 5-point move towards crossovers? Just kind of how you're thinking about that upselling opportunity. How much further you have to go on cost cutting in North America to potentially offset any weakness or create just absolute upside to earnings going forward. Yeah. Let me focus on trucks, John, because we spent a fair amount of time talking about that at the Deutsche Bank conference. While we've done very well with the current truck franchise, we think there's significant upside with the next generation because we've released a number of constraints that we've had that will allow us to drive richer mix. The Silverado, we will have eight very distinct models that will cover the breadth of the portfolio, including up level where the current truck has really underperformed. We've also eliminated the constraint on crew cab mix that we've had. We underperformed versus the market on crew cab mix, and I think we talked about, in general, a $2 billion opportunity for revenue growth, just by releasing those constraints. That's an example of something that we're executing with the next generation truck. I'd also say that as we think about the overall truck, not only are we releasing some of these constraints and have a broader product offering, there's going to be significant differentiation between the Silverado and the very premium Sierra. And we're going to continue to focus on that, and we think that's going to provide upside as well as the Denali mix that has been very favorable to us. And I think you'll continue to see that focus on differentiation when we launch the HDs as well as the SUV. So very purposefully as we did the full-size truck pickup, we were trying to address some of the challenges we've had over the number of years to really drive the best possible mix and profitability. And I think we've solved that with this truck that we're going to start launching later in 2018. Chuck, just to clarify, the $2 billion revenue opportunity, that does not include the HDs or does that include the HDs as well? That was on LDs, just looking at crew cab mix. Okay. High level number, John. If you just look at our penetration or our average transaction prices versus kind of the segment leader and that opportunity, we think that we can close 75% of that just by releasing the constraint on crew cab mix. I got to imagine that's got pretty high variable margins. It does. Yeah. Then a second question, Mary. I think a lot of us here in New York, and even the investment community, are looking at the potential launch of a test fleet of Cruise vehicles here in New York City this year. I'm just curious where that stands as far as the launch and what we should be looking forward to, hopefully, for an investor event around it. We are on track and proceeding to be able to launch in a geo-fenced, ride-sharing environment of autonomous vehicles in the 2019 timeframe. Clearly, the focus continues to be on the development we are doing in San Francisco because of the complexity of that environment and the learnings that we get and the speed of learnings that we get from San Francisco. We are in the process of mapping New York, and I do not have anything specific to share of when we will actually have a fleet deployed, but we are on that path as we announced last year and will continue. I would say the primary focus is on San Francisco. Okay. Then just lastly, real quick, Chuck, when we look at the GMF dividend, it looks like it went in reverse from the parent co to GMF, $600 million in the fourth quarter. What is going on there and when can we expect to see sort of the more traditional dividend up from the finco to the parent co develop and when will that occur? Should we be looking at a billion-dollar size out in 2019 or 2020 when GMF matures? Yeah. The dividend came from GMF to the parent in 2017, was not included in our free cash flow numbers. It was related to the transaction of divesting our finco in Europe. As you looked at the proceeds and leverage ratios and everything else, they had the capacity to dividend about half of the proceeds to us, which we did. Again, that is not captured in the free cash flow number for 2017. Okay Obviously, and liquidity. Relative to long-term, I think good question, John, and I think I would think about in the context of our view on long-term cash generation capabilities of the company. Clearly, where we sit right now, pretty heavy CapEx load with the next generation truck, incremental investment in AV. We are in the ZIP code of $5 billion-$6 billion of free cash flow. As you think beyond the next couple of years, in this kind of environment, we think our cash generation capability increases significantly. A couple of drivers to that. One, we will be cycling past our high capital spend, and as we have indicated, we expect capital spend to come down. Two, we are going to, at some point in time, start to get the benefit of dividends from GM Financial, and I would say stay tuned on that. We'll have more to say as we get closer to that, but that is certainly part of our go-forward kind of plan relative to cash and cash flow and enhancing the overall cash generation of the business. Great. Thank you very much. Yep. Your next question comes from the line of Adam Jonas with Morgan Stanley. Hi, thanks. Just two questions. First, you've made some really bold moves, your team, on rationalizing and exiting businesses where the chances of generating a positive return on capital were really remote. Obviously, Europe being the biggest and most significant of that. So as you assess the portfolio today, are there still some either product areas or regions, and I guess, I'm thinking Korea, although I won't say Korea, the areas where really you maybe couldn't justify being in long term? If you look at it, I think we have a track record of demonstrating that we're going to look at, to your point, both segments and regions and/or countries, and look at our ability to generate the right returns over a long period of time. Clearly, Korea is a challenge for us. We have a strong presence there. We've grown market share. The Chevrolet brand has done well, but the current cost structure has become challenging, and we're going to have to take actions going forward to have a viable business. We've already begun conversations with the key stakeholders in GM Korea, including our minority owners and the union, and being very clear that we need to improve the financial and operating performance. We're right in the middle of having those conversations. We know within Korea, and there's a few other countries where we have to look at that we're going to take the steps necessary to have the right franchise going forward. That may result in some rationalization actions or restructuring that potentially could have a material impact on our results, but it's too soon to tell right now. We're right in the middle of the conversations to make sure everybody, all the stakeholders understand the steps we need to take. Thanks, Mary. You mentioned a few other countries. Any of these countries outside of Asia, or could you be more specific? I would say primarily in our GMI operations, but I would say Korea is the one that we're most focused on. Okay. The others, I think would be less significant. Fine. All right, then my second and final question on the robotaxi fleet. A bit of round numbers are helpful here. How many level 4, level 5 vehicles does GM have on the road in their testing fleet right now? How many would you expect by year-end and maybe an order of magnitude for 2019? I ask that question because it's important for us to put to your guidance and your transparency on the amount of money you're putting towards it to try to think of it on a unit basis to have an understanding of the size of your footprint. If you could help us with it, that would be appreciated. Well, right now we have about 100 vehicles that are driving primarily gen 2, gen 3. That's where our focus. That will be growing through the course of this year. Remember where we talked about when we were together in the fall, getting to a point where we're collecting 1 million miles per month. We're on that path to get there throughout this year. Beyond that, we haven't sized it, and that is something that we'll share more as we get through this year and into the 2019 timeframe. Thanks, Mary. Your next question comes from the line of Ryan Brinkman with J.P. Morgan. Hi. Good morning. Congrats on the quarter. Thanks. Thank you. You mentioned in the slides that you have now achieved, by the end of 2017, $5.5 billion of the $6.5 billion cumulative cost saves targeted through 2018. These savings, I think they started in 2015, so I guess, 75% of the savings period has elapsed, and you have now realized 85% of the targeted savings. Is the takeaway that the cost savings continue, but at accelerated pace? Or maybe that, if history is any guidance, you have increased the number a couple of times, there could be some upside in 2018 to that $6.5 billion number. Do you think if there is some incremental pressures in 2018, like higher than anticipated commodity prices, that you might be able to push a little bit further on cost to try to offset that? Well, I'd say first, when we first rolled out this objective, it was at $5.5 billion, and as we overachieved it last year, early last year is when we raised it to $6.5 billion. Importantly, just to level set, this is primarily commercial savings, SG&A, and manufacturing, which we've said would more than offset the incremental investment in marketing, engineering, and D&A. What we like to do is achieve the commitments that we make and then move from there. Clearly, we are very focused on achieving the $6.5 billion that we committed to back in 2015. Clearly, we believe there's opportunities above and beyond that we're going to continue to pursue. Once we hit the $6.5 billion, we will set the next objective for ourselves, because I do believe there is, and so does Mary, further opportunities beyond that. I'd also say, Ryan, that if you look at last year, and look at the EBIT bridges that we sent, you'll see pretty significant across the board cost performance outside of these buckets as well. We had significant improvement in warranty, driven by improved quality, reduced recalls, all the things that we talked about back in 2014. We are really focused on that. More to come, but first, we're going to get the $6.5 billion commitment in the bag, and then I'm quite sure that we'll have more to say on above and beyond that. Okay. That's helpful. Thanks. Then, Chuck, I think I heard you say that there would be a 60,000 unit headwind in truck volume in the first quarter due to the changeover to the new pickups, which I think was a little surprising because the launch doesn't, I think, take place until Q3. All along, you've been approaching this launch a little bit differently than in the past, even taking some downtime in 2017, for example, to prepare for a 2018 launch. Maybe could you just talk about some of the efforts that you've already taken and then are going to take in Q1 to help to prepare for this smoother than typical launch in the back half of the year? I think it might be helpful because consensus is below your forecast currently, and I think a primary reason for that is that the Street is maybe not fully understanding why your profits can maintain at such a strong level while launching a new truck. Because typically, in the past, both GM and Ford have seen at least temporarily lower profits in the year that they launch a new truck. Yeah. Specific to this truck, again, start at a high level, Ryan. This is an all-new architecture. Our last three generations of truck were fundamentally off the same architecture with changes in sheet metal. This is an absolute all-new architecture, which requires all-new body shops. When we take downtime at certain facilities, it's because we're either converting or constructing new body shops to facilitate this launch. We've been opportunistic around doing that around holiday periods so that you can get extra time to make these transitions without a full impact on downtime. Again, taking advantage of Christmas time and leading into Q1, we've taken that opportunity with this transition. As I said back in January, we expect the unmitigated impact of launch on volume for the next generation truck in 2018 to be about 130,000 units. We've tried to lay that in over the 2017-2018 timeframe by taking, again, opportunistic downtime to do the work that we needed to do at the facilities. In addition, we will be launching this year, and we're in process right now of building what we call the Oshawa shuttle, where we're taking bodies from Fort Wayne through the old body shop, shipping those to Canada, and painting and assembling trucks there, which will fill about half of that gap. That's a mitigating action to take a pretty significant headwind of 130,000 units and, in essence, mitigate half of it. We're quite confident that's going to turn out to be a benefit for us in 2018. Again, this is a massive level of change in our four facilities with an all-new architecture, and we're going to have to manage this and execute this flawlessly over the next couple of years. So far, so good. Very helpful. Thank you. Your next question comes from the line of David Tamberrino with Goldman Sachs. Great. Thanks for taking our questions here. I want to talk a little bit about the solid results this year with free cash flow coming down. Obviously, from 2017 to 2018, you're going to have that be flat year over year again. But as we head into 2019, is there any reason to think that we can't get back up to that pro forma $8 billion that you laid out for 2016? I think 2019 might be a little bit premature for that, David. Again, this is early days. But going back to what I talked about earlier, what's going to drive kind of moving off the run rate that we're at right now into what we talked about before, it's going to be as we cycle through our heavy CapEx cycle. We're launching and starting the launch of the light duties in the T1 this year. Next year, we still have HDs and then the full-size SUVs, and we're launching GEM as well in 2019. So I would say that we need to cycle through 2018, 2019 capital spending, and then we'll start to see a meaningful decrease in that beyond the 2019 timeframe. I think that would be kind of the trigger point to see that inflection. Again, very early days, and all premised on kind of the environment we're operating in right now. Yeah, that's fair. Just kind of picking through the results and thinking about some of the positives from an adjusted EBIT perspective, things like warranty expense. Just trying to understand what's going to drop through that could maybe give you better free cash flow than what you're guiding to for 2018 and certainly picking up into 2019. Yeah. Let's talk about warranty for just a second. Clearly a good tailwind in 2017 from a P&L perspective. The drivers of that, half of that was kind of an absence of reserve adjustments that we took in 2016, and half of it was what we were seeing come through in base warranty, extended warranty experience, which resulted in an adjustment to our reserves, but then on the go forward accrual. I think the cash impact of that bleeds in over time because you're adjusting reserves and the repairs. Obviously, warranties extend for three to five years. So that would be another area that we would expect to see an improvement in the cash associated with that, but probably beyond 2018. Got it. Then just following up on a line of questioning earlier, I think Mary, you were saying generating about 1 million miles per month with the test fleet that you have. How much are you augmenting that real-world mileage with simulated miles? Does that grow over time, and how much incremental expense does that really weigh on the P&L and CapEx for the autonomous development? So just to be clear, we have about 100 vehicles. We'll be growing that fleet of the gen 2, gen 3, getting to 1 million miles a month. Not there yet. I just wanted to be clear on that. But we are absolutely supplementing and doing quite a bit of simulation both here and in San Francisco using the experiences that we have or the miles that we're capturing and the work that we've done in that space. So I can't give you the specific number of simulated miles that we've done, but I will tell you it's very significant. Okay. Is there any rule of thumb or ratio we should be thinking about? I know, I'd say one of your larger competitors, it's a very scale number, but they were doing maybe 3 million miles overnight with some of their compute power. Any color you can kind of give us there from a ratio of what you would think you need on simulated miles versus real-world miles could be useful. I don't have the specifics on that. We can look into that. I don't know if we've come out and said exactly how much we're doing from a simulations perspective. I would say, I think when you look at the real performance that's happening, look at the rate of improvement, and there was just a study that came out where the substantial rate of improvement we had from disengagements and also the number of miles we traveled, I think is pretty significant. I think all of that comes together with the real measures of what we're seeing in, again, in a very complex urban environment. We saw a 63% reduction in disengagements from 2016 to 2017. Also the average monthly miles per disengagement improved over 2,500%. Very significant when you look at what we're doing with the miles we're collecting or we're experiencing and learning from in San Francisco, added with the simulation. I think it all comes together in those numbers, which I think is probably a better thing to look at. Understood. Thank you. Your next question comes from the line of Rod Lache with Deutsche Bank. Good morning, everybody. Hi, Rod. I had a couple questions remaining. One is, could you clarify what the Korea losses are running at right now within GMI? We don't report country-level profitability, Rod, so sorry. Okay. Maybe just switching gears to North America, obviously pretty impressive pricing and ATPs. I'm wondering if you can clarify, you've given us some of the components, but when you think about the net outlook for 2018, you said components were crossovers positive, obviously some weakness in the carryover, and it sounded like you're assuming higher subvention for a higher rate environment. The unusual thing this year is that you've got pretty tight inventories on the trucks, which I presume could help mitigate some of the normal incentives that you have on the run out. Any thoughts on how we should be thinking about your positioning for net price? I think overall, net price will be positive in 2018 versus 2017. The benefit, the tailwinds will be crossover pricing, a full year of that. And really cycling off a pretty low transaction price at pretty low, pretty tough pricing environment for us given the age of those products into the new products. So that'll be a tailwind, and the new truck will be a tailwind. I think, it's February 6th, but those combined will be greater than carryover headwinds. You bring up a good point. Clearly, we ended the year very lean from a truck inventory perspective, and our production is going to be lower this year versus last year, so we expect to continue to run pretty lean inventories on a go-forward basis. And that will help mitigate some of the truck challenges as we kind of run through that. But net overall positive with new being greater than carryover headwind. You've incorporated some rate subvention associated with that 75 basis points you plotted. Is that correct? Well, we certainly built that into our baseline set of assumptions, a 75 basis point increase in rates, as well as a continuation of what we've seen over the last number of years as incentive spend as a percentage of transaction price. We've seen 60 to 100 basis points on a year-over-year basis increase in that. So that's the environment we're assuming is going to continue, a tough pricing environment in the U.S. Great. Just lastly, you've given in the past a really helpful analysis that basically helped us bridge to break even at like an 11 million SAAR. Could you remind us what some of the cost elements are in your downside scenario? What are the levers that you can pull from a fixed cost perspective? Maybe Tier 2, ad budgets, things like that? Yeah, sure. Again, this will be a very detailed assessment that we would have to go through. But if you look at our workforce today, in the U.S. specifically, much more variable than it was in the past. We've got roughly 25% Tier 2, and a few percentage points of temporary, so call it 30% overall. Through 2019, we have no caps. We expected that to grow closer to 40% to 50%. So in theory, at a system level, if there was a 10% or 15% reduction in volume, we should be able to take 10% to 15% of the labor related costs out over a relatively short period of time. So that's one fundamental driver. Our manufacturing cost for modeling purposes would come out at the same pace as volume. Number two, we would obviously reduce marketing expense. Marketing expense over a baseline level is highly variable, right? If you just tag that to a percent in net sales, if there is a 20% reduction in volume, you could reduce marketing expense by at least 20%. Clearly, another significant component would be our compensation structure, which is largely variable. If we are making less money, we are paying less variable compensation. Those three items in combination, and obviously there would be opportunities on the margin, not insignificant, but opportunities on the margin. Those three will drive $3 billion-$4 billion roughly of fixed cost opportunity or cost opportunity in a typical downturn, and that is what is built into our U.S. breakeven, our North American breakeven at a U.S. industry level of 10 million to 11 million units. Great. Thanks. That is real helpful. Thank you. Our last question comes from the line of Brian Johnson with Barclays. A couple of questions, one managerial and one more around housekeeping on accounting. The managerial one is, with the cost reduction efforts, both for material and employee related, you have not made a big deal of, unlike some other firms that are reducing costs of big high-level programs that smell of consultants and program offices. Could you give us a sense of how the material cost saves and how the employee cost saves show up in terms of managerial action steps? Are there ongoing targets? What are the key areas? How do you balance getting the costs out without going back to the old bean-counting reputation of GM? Yeah, sure. This all started back in 2013, 2014. I think we laid that out at the Deutsche Bank conference, the journey we have been on, when we looked at the business and looked at the opportunities for the business and where it should be. We did a lot of benchmarking. We did benchmarking around our material cost and the GM penalty we were carrying. We did benchmarking around Harbour manufacturing cost, benchmarking around world-class levels of SG&A. We established benchmarks for all of the leads in those areas. We have fundamentally been executing to those benchmark areas since 2014. Beyond that, we enabled the achievement of some of these benchmarks through a couple of important initiatives that we have launched, Operational Excellence and Global Business Solutions. Between the two of those, one, with GBS, it has taken in a significant amount of work globally in the SG&A space that was very fragmented and not optimal and efficient and brought it under one roof, common processes, common systems end-to-end, and drove significant savings in the more transactional side of the business. Operational Excellence is the way we do business now. When you look at a cost challenge or a business challenge, an at-the-market challenge, we use Operational Excellence tools, Six Sigma, Lean, the whole toolbox to really, at an enterprise level, drive from where we are today to a target. I think we do this in a very disciplined way. It gets a lot of visibility, the $6.5 billion, by key driver. We review it with the management team and Mary on a regular basis. We review it with the board of directors. I think that as opposed to a consulting/bean-counting exercise, you are seeing it show up in the bottom-line results as we continue to generate strong performance in an environment that is tougher than what we expected over the last couple of years. We are going to continue to do that. Yeah, I would just add to that, it is really driving a culture of everyone understanding that we need to continuously improve processes. Also when we see challenges, we have got to figure out ways to overcome them. So that is the mindset that Chuck is talking about. When there is a challenge or a target, we need to make sure we have a plan to address it. Every employee has the out-of-structure tools like Six Sigma to go after those. It's more of an ongoing culture than a one-time consultant exercise. Absolutely. And the $6.5 billion that we set up a few years ago and talked about, purposefully, Mary and I talked about that externally to put the stake in the ground so that we would hold ourselves accountable to it and be transparent around that commitment. And I would expect that, as I said earlier, once we cycle to that, there'll be a next round that we want to be held accountable to and that people should be able to track to the P&L. We wanted cost savings that would roll through to the P&L. And again, we're seeing that. Okay. Couple of accounting questions. One, any impact of the FASB accounting rule change around net periodic pension costs in terms of North America EBIT, where you're generating pension income? And second, around the $9 billion write-down of deferred tax assets, you still have about $24 billion left. Can you give us a sense of when you, given your business plan, would likely flip to becoming a U.S. cash taxpayer? Yeah. Sure. On the first question, no impact on North American EBIT. It's just geography, both above the EBIT line, so no impact. I don't know where the $9 billion came from, but it was like $7 billion for the impact of tax reform going from the statutory rate of 35% to 21% on our deferred tax assets. We have about $23 billion left after that adjustment, and I would expect that we would remain a very low cash tax paying in a position for the foreseeable future, 2022, 2023 timeframe. Okay. Any impact of tax reform on cash taxes would be well after that. In the meantime, you are not a significant U.S. cash taxpayer. Yeah, the way I would think about it is absent that, beyond 2022, 2023, we would start to move up into closer to a 35% range or 28% range, and now it is a longer-term benefit for us from a cash tax paying standpoint. Right. Despite the GAAP adjustments. Yep. Okay, thanks. Yep. Thank you. I'd now like to turn the call over to Mary Barra for her closing comments. I'd like to thank everybody for participating today. I hope you see that GM is a stronger, more focused company than we were just a few years ago, and we have much more work to do. In fact, just last week, we had our senior leadership team together, so everybody is perfectly aligned on what we need to accomplish in 2018 and beyond. We recognize that our industry is changing rapidly, and with that, there are opportunities and there are also challenges. But as you look at the strategy that we've been executing, we believe that we will continue to capitalize on those opportunities, minimize the challenges, and drive long-term shareholder value. That's what we come to work for every day. So thank you all for participating. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.