Earnings Call: Q4 2015

Feb 3, 2016

Summary

2015 set records for net income, adjusted EBIT, and adjusted EPS, with $5.7B returned to shareholders. 2016 guidance targets adjusted EPS of $5.25–$5.75 and ~$6B in free cash generation, while cost efficiencies and disciplined investment support growth.

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company fourth quarter and full year 2015 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 one on your telephone keypad. To withdraw a question, press the pound key. As a reminder, this conference call is being recorded today, Wednesday, February 3, 2016. I would now like to turn the conference over to Randy Arickx. Please go ahead, sir. Thanks, operator. Good morning, and thank you for joining us as we review GM's financial results for the fourth quarter and calendar year of 2015. 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 on the internet. Included in the chart set materials published this morning, we have included the key takeaways from each chart in the notes pages in order to provide color on the results. This morning, Mary Barra, General Motors Chairman and Chief Executive Officer, will provide some brief opening remarks, followed by Chuck Stevens, GM's Executive VP and CFO, and then we will open the line for questions from the analyst community. Before we begin, I would like to direct your attention to the legend regarding 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, Controller, and Chief Accounting Officer, and Dhivya Suryadevara, Vice President, Finance, and Treasurer, to assist in answering your questions. Now, I will turn the call over to Mary Barra. Thanks, Randy, and thanks everybody for joining the call. I am extremely pleased to report that in 2015, GM delivered record net income, record EBIT adjusted, and record EBIT adjusted margins. To give you a few highlights, the fourth quarter revenue was $39.6 billion. EBIT adjusted of 2.8 was up $400 million year-over-year. EBIT adjusted margin of 7% was up 90 basis points year-over-year. Earnings per share adjusted of $1.39 was up 17% over last year. For the year, we generated record net income of $9.7 billion and record EBIT adjusted of $10.8 billion. In fact, our EBIT adjusted increased 65% to $5.02. Our 27.2% ROIC for 2015 demonstrates that our disciplined capital allocation framework is paying off. Our record operating performance enabled us to return approximately $5.7 billion to our owners during 2015. This significant capital return demonstrates our ongoing commitment to enhance shareholder value over time. I'd like to share a little progress of what we're doing as we lead the transformation of personal mobility and also what we're doing to strengthen our core business. We gained considerable momentum in the fourth quarter and early this year on game-changing personal mobility initiatives. First, let's talk about ride-sharing. Our announcement with the strategic alliance with Lyft is very significant because we believe together we can work and put an autonomous fleet of sharing vehicles available for use quicker than anyone else. We also believe in the short term, the arrangement that we have with Lyft will allow us to capitalize on providing and being a preferred provider for short-term use vehicles for Lyft drivers that will support not only General Motors' performance, but also Lyft's performance. When we look in China, we've also introduced a carpooling pilot for 700 employees in Shanghai, and this is driven by a mobile app. If we recall what we talked about in October, having that interface and the connection through a smart device is very important, and we can continue to build on that capability. As we look at car-sharing programs, we are doing a number of things that are really leveraging our connectivity leadership based on two decades of OnStar technology. First, we created Maven, and that really brings together many of the pilots that are actually transforming from pilots into projects that we are replicating across different cities that allows us to have a single brand that would pull all that together. We've also made sure that we have the experts not only from ride-sharing and car-sharing experiences outside the company, we've brought them in, but also connecting to the individuals in the company that understand the connected car. Acquiring Sidecar's technology and assets is another proof point there, as several of its employees have joined the Maven team, along with having access to that technology. On an electrification front, we expanded our EV leadership as we unveiled the Chevrolet Bolt EV at CES. This is a vehicle that we plan on producing by year-end. For the second generation, the 2016 Volt won the Green Car Journal's Green Car of the Year award, and that vehicle will be shipping shortly. As we look at fuel cells, a longer-range technology, we now have a program with the U.S. Army where we're developing an extreme off-road hydrogen fuel cell Chevrolet Colorado that will allow us to test our latest technology in military duty type cycles. Again, very important. In addition to the work that we're doing in the transformation of personal mobility, we also continue to work on strengthening our core business. Last year, GM posted its third consecutive year of record sales, and we were number one in North America, South America, and China, demonstrating our commitment to our brands and our commitment to earning customers for life. In particular, we strengthened our global Chevrolet and Cadillac brands last year. In the U.S., Chevrolet grew retail market share faster than any other full-line brand in the industry, up by 0.4 percentage points. Our full-year global Cadillac sales are up 8%, and in China, it was a record 17%. In North America, we continue to be very disciplined in our sales approach, and it is paying off. We had record ATPs and the best retail and total sales since 2007. GM's 2015 retail sales are up 8% over 2014. Our average GM ATPs of more than $34,600 exceed the industry average by $4,000. Our year-end total inventory was down more than 100,000 units or 14%, which is the lowest in four years. At 61 days, our 2015 year-end supply was the lowest in six years. We are also very pleased with the early signs and feedback that we are getting on the Chevrolet Malibu, again, a very important vehicle that we are launching, and January was a very positive signal of how that car is going to be received into the marketplace. In Europe, Opel and Vauxhall saw improved full-year sales and market share for the third straight year. In China, GM posted record sales of 3.6 million vehicles, up 5% year-over-year, and we outpaced the industry on the strong mix of SUVs, MPVs, and luxury vehicles. Just a couple data points there. We achieved record overall market share of 14.9%, including more than 50% of the MPV segment. For SUVs, our sales rose 144%, which was led by the Buick Envision and the Baojun 560. At GM Financial, we continue to make strides toward full captive capability. In 2015, one in every three of GM's retail sales was financed by GMF, and this was up from one in 10 just a year ago. We are well on our way of achieving the $5.5 billion in cost efficiencies also that we talked about, and we plan to do this by 2018. We expect that these savings will more than offset the additional investments we are making in our brands and in the technologies that we need to not only be compliant, but to lead in the industry. In 2015, we had more than $2 billion in savings in non-raw material and logistics ahead of the commitment and twice of what we achieved in 2014. As we move into 2016, we expect another year of positive performance from material and logistics standpoint. I also want to add, we are doing it the right way with working and strengthening the relationship with many of our key suppliers. We will also continue to leverage and drive efficiencies through using our operational excellence, which is built on Six Sigma, our global business services, and the IT transformation. Because of our 2015 performance and our expectations that we will sustain strong margins in the U.S. and China and break even in Europe this year, we already announced just last month that we had increased our projected 2016 earnings per share adjusted to between $5.25 and $5.75. Before I close my initial comments, I also want to comment that we know there has been a lot written about the U.S. industry being at peak levels and that a downturn is imminent. We, like many others, do not share this view. Chuck Stevens is going to go into a little bit more detail on this, but we believe the industry fundamentals support a continued strong U.S. industry. Having said that, we understand that we are in a cyclical business, and it's very difficult for anyone to predict the timing of a downturn. While we feel we are very well positioned to take advantage of the strong market with important new product launches, we also have an intense focus on both cost and capital efficiencies to ensure that we will maximize earnings and cash flow through the cycle and are best prepared for whenever a downturn does occur. In summary, we delivered our 2015 commitments despite a number of unforeseen headwinds, and we are on track to achieve our 2016 targets across key financial metrics, and we believe we are well positioned for profitable growth that will continue to drive shareholder value. We know we are in the midst of an industry that is being disrupted, and we are aggressively leveraging our technology leadership and our global resources to lead that disruption. We'll continue to strengthen our core business, and we'll also continue to invest in game changers that are necessary for GM to lead the future of personal mobility. This team is committed to delivering results. We delivered on our commitment in 2014 and 2015, and that is exactly what we plan to do in 2016 and beyond. With that, I'll turn it over to Chuck. Thanks, Mary. I just wanted to take a few minutes to provide some perspective on the quarter and GM's full-year results. Without a doubt, the very strong results achieved in the fourth quarter capped an outstanding year for the company. In fact, a number of key financial metrics such as net income, consolidated EBIT adjusted, consolidated EBIT adjusted margin, North American EBIT adjusted, and North American EBIT adjusted margins established records not only for the fourth quarter but also for the full year. From an operating perspective, EBIT adjusted results for the year grew to a record $10.8 billion, up $1.5 billion versus 2014, adjusting 2014 for the impact of recalls. The EBIT adjusted margins of 7.1% is up 110 basis points year-over-year on the same basis. Our adjusted earnings per share for 2015 was up 65% to $5.02, another record compared with 2014, or up 22% year-over-year after adjusting 2014 for recalls. The positive results were broad-based, with all but one of our automotive regions posting year-over-year profit improvements during the year. Clearly, this team is committed to delivering on improving the company's profitability going forward. The strong earnings growth enabled significant capital returns to our owners as well. $5.7 billion in total between dividends and share repurchases in 2015. Turning to cash flow. Cash flow for the quarter and ultimately the year was adversely impacted by cash settlements for various litigation settlements, increased capital spending, and UAW ratification bonuses. With that said, we are still very much on track for a significant increase in free cash flow in 2016. I'll talk more about 2016 in just a couple of minutes. Although we are very pleased with our overall performance in 2015, we continue to take additional actions to drive efficiencies into the business to ensure the positive momentum continues. As Mary mentioned, we expect to drive about $5.5 billion of run rate cost efficiency improvements by 2018 across the entire business. We expect these savings will more than offset incremental investments in engineering, brand building, and technology-related costs. All these cost efficiencies are underpinned by operational excellence, a corporate initiative which will drive common tools, common processes, but most importantly, a continuous improvement mentality throughout our organization. The GM team is very focused on carrying our positive momentum forward across the business. Okay, moving on. Just a few comments on a couple of our regions. First, China. The company sustained strong operating results in 2015, which is consistent with the guidance we provided to you as we progressed through the year. Despite an industry that moderated during much of the year, we generated strong full-year performance, $2.1 billion in equity income and 9.5% net margins. We were able to generate these results specifically because we had been proactively managing the market risks with several actions, such as optimizing mix by increasing production of our SUVs to meet demand, aggressively reducing costs by rolling out cost down, efficiency up initiatives, and working proactively with our dealers to manage inventory levels. Although we are encouraged that China's cut in the purchase tax has provided a tailwind to the industry, our plan is to continue to proactively manage the market risks as we have been doing to protect the profitability of our business. For the year, we expect the industry in China to grow in the mid-single digit range, which will support our efforts to sustain our strong operating performance. With regard to North America, clearly the region posted some impressive numbers for the quarter and the year. For the fourth quarter, EBIT adjusted and an EBIT adjusted margins of $2.8 billion and 10%, respectively. Again, both Q4 records. For the year, we achieved EBIT adjusted of $11 billion and a corresponding margin of 10.3%, both establishing full-year records for the region. Obviously, achieving the 10% margin was a great accomplishment, especially one year ahead of our longstanding 2016 commitment. The strong performance in North America for GM, as well as the industry in general, has sparked a debate whether the U.S. industry is peaking or plateauing. The bears argue the industry in the U.S. has peaked and is ready to roll over. They often cite the fact that the U.S. auto industry is in its seventh year of expansion, margins are as good as they get, and a recession is right around the corner. Really more akin to a scenario that we saw in 2007. On the other hand, a number of people, including GM, believe the industry is plateauing with many years of strong performance ahead, similar to the 2000 to 2007 timeframe after the industry peaked in 2000. We believe industry fundamentals such as the age of the vehicle fleet, firm used car pricing, credit availability, and low fuel prices remain supportive. And overall car manufacturers are in much better health. Lower inventory levels, lower break-even points, strong capacity utilization. In addition, household balance sheets are strong, the labor market continues to improve, and forecasts are calling for the U.S. economy to continue its expansion, albeit at a slow and steady pace. Combining strong industry fundamentals with the positive economic backdrop gives us confidence the industry can sustain a strong SAAR in the mid 17 million unit range for a number of years. With that said, we are also very aware that downturns are difficult to predict. That is why we are planning and running the business accordingly. In essence, proactively managing the cycle. What have we done? Over the past number of years, we have maintained our intense focus on cost efficiency and capital deployment. We have generated significant efficiencies over the past number of years, with even more expected in 2016. As I mentioned just a few minutes ago, we are well on our way to drive about $5.5 billion of run rate cost efficiency improvements by 2018, more than offsetting cost headwinds. We have made tough decisions on capital deployment, which improves our downside protection. These decisions included exiting markets where we had no path to viable returns. Our break-even point in the U.S. has been maintained at an industry level of between 10 million and 11 million units as we have kept our fixed costs flat over the past number of years. We have refrained from chasing volume and share as we focus on profitable retail growth. U.S. dealer inventories have been proactively managed down. As Mary indicated, they are down over 100,000 units or 14% compared with year-end 2014. In addition, and probably an area not mentioned enough, we have a much more flexible workforce, enabling us to react to market dynamics and take cost out more aggressively compared with past cycles. Finally, although keeping cost out of the system and looking for efficiencies are big drivers to protecting profitability in downturns, we are also executing several growth opportunities, such as GM Financial, aftersales, OnStar, and Global Cadillac that are somewhat independent of the vehicle cycle, fundamentally to improve our quality of earnings peak to trough. We believe execution of our proactive downturn planning will enable sustained performance through the cycle. Moving on to our outlook for 2016. Big picture, we expect to deliver profit growth, margin expansion, and an increased free cash flow. This will translate into EPS adjusted of between $5.25 and $5.75 per share, and free cash generation of about $6 billion, all consistent with the guidance we provided in mid-January. We would also expect a similar cadence of earnings as we have seen in the past several years. Q1 will be seasonably weaker, Q2 and Q3 stronger, and Q4 about average. With that said, important to point out that our Q1 results in North America will be impacted by approximately $250 million in restructuring costs. The restructuring is related to the negotiated attrition program with the UAW, which will lead to cost efficiencies going forward. Cash flow should also follow its normal seasonality pattern, with Q1 expected to be generally in line with the first quarter of 2015. To sum it up, we had a great quarter, a great 2015, and we expect to achieve even better results in 2016 based on our current view of the macro environment. That concludes our opening comments. We will now move on to the question and answer portion of the call. Thank you. Ladies and gentlemen, if you would like to ask a question, press star then one on your telephone keypad. To withdraw a question, press the pound key. We will pause for a moment to compile the Q&A roster. Our first question comes from the line of Itay Michaeli with Citi. Thanks. Good morning, everyone, and congratulations. Thank you. So just on the slide talking about managing through the cycle, certainly we agree with your view on the cycle as well. I'd love to get a sense, given some of the weakness we're seeing just in car segment that's being offset by trucks, how are you seeing the production incentive discipline in car segments? I know GM's kept its inventory there pretty low, but what kind of competitive environment are you seeing and kind of modeling for in your outlook for 2016 in those segments? Well, I think, first and foremost, from a macro perspective, we expect lower for longer gas prices, which will continue to support obviously the strong full-size pickup, full-size SUV, and crossover mix that we've seen, which then gets to the heart of your question, Itay, which is what happens from a passenger car perspective. I think the key there is really, as you said, to maintain very strong discipline around inventory, aligning supply and demand. I would say the other thing that's important to note, in 2015, North America, 10.3% margins with the oldest passenger car and crossover lineup in the industry. Over the next 2 years, we will cycle through all of those products, including the Malibu that we're in the midst of launching, the Cruze, the compact crossovers, Equinox, Terrain, and the mid crossovers. As we've said before, our expectations are the profitability of those vehicles will be significantly better than the vehicles that they replace, and it's not all price. A significant portion of that is cost efficiency and part of the $5.5 billion of efficiencies that we're driving. I think that, yes, it's a more difficult dynamic for passenger cars, but with our launch cadence, we think that that is still going to be a tailwind for earnings in '16 and '17. That's very helpful, Chuck. Maybe one follow-up kind of strategic question. I'd love to just get a little bit more color on the Maven launch and particularly how that interplays with GM's investment in Lyft. Do you think overall when you think about the work you're doing on level 3 automated vehicles and the Bolt, does that give GM some advantage in terms of pursuing ride sharing more aggressively than others? Just kind of how all those factors into play with what you're doing with Maven and Lyft? Well, great question. As we look at it, there's going to be ride-sharing and car-sharing opportunities. The partnership we have with Lyft is very important from a short-term, as I mentioned, of being able to provide the short-term use vehicles for Lyft drivers. One of the biggest issues they have is in getting drivers, it's drivers that have the appropriate vehicles to participate as a Lyft driver. So that's a clear opportunity that I think will allow us both to grow. When we started talking to Lyft, we believe that together we first share a common view of how autonomous will be enabled, and we think it will start in a ride-sharing type of application because you can ring-fence it and really control the environment that you're doing that. We believe that what Lyft brings to the party with really understanding the demand cycle from a sharing perspective and what we can bring from a technical perspective, that we can do that quickly and also do it to our standards of the highest levels of safety as we implement this new technology into the marketplace, but do it in a controlled fashion. So we do think that we have an opportunity there. Clearly, the Volt plays into it because there's a lot of interest in using electric vehicles to do that. So we think we have strength there. As it relates to Maven, as we've talked about in the past, we had several pilots of Let's Drive NYC, which we actually saw very strong acceptance to the effect that we're going to be expanding that. As we've mentioned also, launching into a city. We see these as additional opportunities that not only are, again, we're piloting in North America, but something that will have global appeal, also have a car-sharing activity going on with CarUnity in Europe, and then what we announced in China as well. So when you take all this collective learning and the sharing space, it's allowing us to really create a platform that is going to allow us to have a relationship with the customer, however they want to ride-share, car-share, or still very much supportive of the owner/driver model. So we do think the aggressive pace that we're working on, both with Lyft and with our Maven activities, is going to allow us to lead. That's very helpful. Thanks so much, everyone. Your next question will come from the line of Joe Spak with RBC Capital Markets. Hi, good morning. Just a couple of maybe details or housekeeping questions for me. One, Chuck, sorry if I missed this, but usually in North America, you've given the pricing component for both majors and carryovers. I didn't see that in the slide. Is there any further detail you could provide there? You're speaking specifically to the fourth quarter, Joe? Yeah, in North America, yes. Yeah. Pricing in the fourth quarter overall was flat, so we didn't call that out. But I would say, as we talked about for 2015, not a lot of major pricing. We expect to see that obviously in 2016 amp up with all the product launches and fundamentally offsetting carryover. Order of magnitude, plus or minus $200 million each way, $200 million on majors to the good, $200 million on carryover to the bad. Calendar year pricing on carryover, very consistent with what we talked about before. Okay. As we think about 2016, because of your new launch cadence, you think that sort of comes out to a net positive? Absolutely. Okay. The second question, just on China, the net income margins. I think the absolute value of equity income was strong, a little better than we were looking for. The margins, I guess, down a tick year-over-year. Can you just help us with a little bit of some of the factors within that, specifically pricing, which we know has been under pressure there for a while. Has it deteriorated any further, or are we still sort of down that mid-single digits level? Yeah. Overall, our net income margins in China on a consolidated basis went from 9.8% to 9.5%, 2015 versus 2014. There are a vast majority of a number of moving pieces in there, including SGMW and SGM. I would say by and large, as we talked about before, maintaining our net income margins between 9% and 10%, the tailwinds, clearly volume, mix, and material costs fundamentally offsetting price headwinds and incremental fixed costs associated with the ramp-up, primarily related to D&A as we continue to build our manufacturing capability. From a market perspective in 2015, net price ended up generally in the range of a negative 5%, again, which we fundamentally offset. I would suggest net pricing, at least from a planning perspective, in the 3%-5% range in 2016. Okay, thanks. That is very helpful. I appreciate it. Your next question will come from the line of John Murphy with Bank of America Merrill Lynch. Good morning. Just a first question, as we think about the guidance going forward and sort of as well as share buybacks. If you buy back a similar level of shares in 2016 you did in 2015, which seems reasonably conservative given where the stock is at this point, you are basically looking at about a 7% uptick from the share count shrinking, which gets you to sort of the low end of your guidance range, which indicates you probably have about 7% sort of core earnings growth to get to the high end of your guidance range. It just seems like you are not assuming anything too heroic on the core earnings power. I was just curious if you could maybe kind of confirm that and also sort of directionally give us some guidance on the regional earnings for 2016 for the major buckets. Yeah. To your first question, John, our capital allocation framework is transparent, so it is reasonably easy to figure out what we are going to do. To the extent that we generate available free cash flow in 2016, we will be buying shares as expeditiously as possible, similar to what we did in 2015. I am not going to confirm the number. You were implying share buybacks of $3.5 billion. We will buy back whatever we can as quickly as we can based on the cash generation of the business. I would say when we looked at our guidance of 525 to 575, a significant portion of that was being driven by operating performance on a year-over-year basis. That is what we are focused on driving. When we gave our guidance, we said improved overall EBIT, improved overall EBIT margins, which implies, in my view, a significant improvement year over year. Relative to regions, I would just say the following. Again, in the context of company guidance on improved profitability, improved margins, and improved EPS that we would expect to see sustained strong performance in North America. Clearly, that's going to be a key component of that improvement and continuing strong performance. Sustained strong performance in China and our long-standing commitment of breakeven in Europe. Okay. That's very helpful. Then just a second question around your cycle discussion. Obviously, there's a lot of concerns around credit metrics and the idea that credit might be overextended. Doesn't seem to be bearing out in the data, particularly when we look at the 30-day delinquencies you have at GM Financial being down on a year-over-year basis in the fourth quarter. Is there anything else that you're seeing in the credit metrics at GM Financial or broadly in the market that would lead you to believe there's a credit issue that's burgeoning? There's nothing that we're seeing. Obviously, that's something that we monitor and track on a global basis as well as the U.S., and the credit metrics are stable and performing, frankly, better than prior to the last downturn. Just thinking about the economic drivers of auto sales. There are seven different key measures that our economic staff tracks, and I'm sure it's not inconsistent with external. Of the seven factors, we are viewing the impact, six out of seven is positive for continued strong growth. At the end of the day, consumer credit flow and auto loan delinquency rates are both positive. So we're just not seeing anything from a fundamentals perspective that would support that a significant downturn is imminent, either from an industry standpoint or from an overall economic standpoint. Great. Then just lastly, as we think as the partnership or investment in Lyft relative to some of the investments that have been made in adjacent businesses historically, GM's had a long track record of monetizing these businesses historically. As you get involved with Lyft and other outside companies, do you envision an exit strategy at some point down the line, five to 10 years, or are these really investments that are going to be core to your operations going forward and going to continue to be held for the long term? Yeah. That's a good question, John, and I think it is too early to take a view on that because at the end of the day, it depends on how much it's integrated with the business. We've talked about OnStar before as being very integral to the business. It's early days with Lyft. We think there's significant opportunity in this alliance going forward. That's why we put the $500 million stake into the company. How that manifests itself five, 10 years down the road, don't know. I would suggest that same would apply for Maven or some of these other things. We just don't know how those business models are going to develop, but we do think that there's significant opportunity in the future. Great. Thank you very much. Yep. Your next question comes from the line of Dan Galves with Credit Suisse. Good morning. This question may sound a little bit strange, but it seems like your U.S. inventories may be a little bit lower or a little bit too low. Are you guys experiencing any significant production constraints, or was this kind of a planned drawdown of inventory? Yeah, this is a no-win situation, right? Dan, how did you put it? I think we're reasonably comfortable with inventory levels across the board. Clearly, at any point in time on any given product or any given trim level, there could be some constraints, but it is not inhibiting sales. Frankly, as we were thinking about the business, we proactively took the actions to drive the inventory down to make sure that we were well-positioned as a cyclical company for when the downturn happens, and it will happen at some point. We're certainly not foreseeing it, but very rarely do people predict these things accurately. Just to size up what that means from a financial perspective, you know what happens in a downturn. First thing is inventory is drawn down at a dealer, then the factory unit sales kind of catch up with the SAAR levels. By really focusing on efficiency and inventory and taking these 100,000 units out and maintaining that discipline, that's worth about $1 billion of downside protection from an earnings and cash flow perspective versus where we were at the end of 2014. So another example of a proactive action that we've taken. Yeah, that's super helpful. Then it just seemed a little bit odd that in January, the incentive activity for GM seemed to tick up. Is that an aberration, or was there specific programs you can call out? Yeah, sure. One month is not a trend. Specific to January, we are selling down Cruze, we're selling down Malibu, we're selling down SRX, we're selling down LaCrosse. This is natural as you transition from one product to another, and I would expect to see incentive spend moderate as we go through the quarter. I think the other important thing is we've got a six-year track record of incentive discipline, and I think that carries more weight than a one-month, very specific sell-down associated with a new model launch cadence. Okay. Just one more quick one, if I could. On the cost side in North America, if you back out this $300 million, it seemed like it was some reversal of a restructuring charge. It looked like overall costs were up $1 billion or so year-over-year. It is the first time that is kind of outstripped the material cost savings. Can you give us any color on what were the main buckets of cost increases and where do you see these lines in 2016 on a year-over-year basis? Yeah, sure. I think let us start at 10,000 feet and work our way down to the details. First, 10% margins in the fourth quarter, up significantly year-over-year. So obviously the business is running very efficiently at a total system level. Fixed cost overall in 2015 versus 2014, are relatively flat and very consistent with what we have done in North America over the last number of years. There will always be noise year-over-year on variable type fixed costs like incentive compensation and things like that, but fundamentally, the core fixed cost flat year-over-year. Specific to the, and I presume that you are talking about the $400 million call-out box for other, there are a lot of moving pieces in there. First, the $300 million kind of reversal of the supplemental unemployment benefit is included in there, as well as the absence of a $200 million gain that we had in the fourth quarter of 2014 on a supplier recovery. There is also a negative $100 million associated with the lump sums that we paid to retirees based on the UAW agreement. There are some warranty adjustments associated with base vehicle warranty adjustments, and those are always pluses and minuses in any quarter. There is some incremental VNA and then a lot of miscellaneous items. But I think the big picture is, Dan, is very focused on maintaining our fixed cost structure. We did that in 2015, and we expect to do that again in 2016. Okay, thanks a lot. Your next question will come from the line of Rod Lache with Deutsche Bank. Morning, everybody. Just had a couple things. One is, I was hoping you can give us some additional color on how the 2016 bridge in China may look. In the fourth quarter, you had earnings up on a 19% increase in wholesales, and I think you said you're expecting 2016 to be something like 4% for the year. So if we think about a couple of the buckets like volume and pricing, how does that sort of shake out? Does your commentary about sustained strong performance basically mean you're guiding to maintaining this equity earnings level? Yeah. I think the development of 2016, the kind of the drivers of the profitability will be very consistent with 2015. Volume's going to be up. Assuming the industry performs as we expect, we expect low single digit, call it 3%-4% growth in industry year-over-year. So that'll be an improvement. Mix will be favorable again, as we continue to launch new Cadillacs and new SUVs into the market. As a matter of fact, we have 13 new launches of key products, not only in SUVs and crossovers, but some pretty critical passenger cars. Price, as I mentioned before, is going to be a headwind directionally in the range of 3%-5%. Obviously, from a planning perspective, we're taking action to make sure we're covering the 5%. Material costs will be favorable and fixed costs will go up because we're bringing two new plants online. We'll have the full year impact of that. Net net, Rod, as we said, we expect to sustain strong equity income performance and strong margins in China. We generated $2.1 billion in 2015. So that kind of gives you the floor. Okay. And another question I had was on GM Financial and the credit market trends. There was a senior loan officer survey released yesterday that showed some modest tightening of credit standards. As I'm sure you're aware, there's been some evidence of widening spreads in CDS and subprime ABS. Are you at this point suggesting that this is not meaningful enough to have any real implications for the market as far as you're looking at things? Can you remind us what percentage of your originations nowadays are subprime? Yeah. To your first question, Rod, what specifically are you asking for input on relative to access to capital, cost of capital? Well, benchmarks are up and spreads are up a bit, right? Yes. I'm sure you guys are paying attention to that. Correct. When you look at that and you think about what the implications are for the market, for your own originations and for the market's originations, are there any as far as you can tell? No material implications from our perspective. We obviously expect another year of growth from a GMF perspective. We are now fully 100% responsible for or running subvented financing as well as leasing through GMF. Thus far, availability has been no problem as far as access to capital. So very much on plan from that perspective. Obviously, our cost of funds and some of that is increasing, which we will either pass along to customers and higher payments, or it will go back to the North American team from a support perspective. But again, that is factored into our thinking and our guidance. When you look at the GMF business today, about 80% of the originations are prime or near prime and 20% are subprime. That percentage of total originations obviously has been coming down as we have been bridging to the full captive, and I would expect that percentage to go down on a go-forward basis. Great. Thanks for that. Just one last housekeeping question. I think your North American production was up something like 25,000 units in the quarter. Your wholesales were 64,000. Is the difference rental program units that are being returned? I am just trying to reconcile- Yeah the volume benefit with the $600 million of volume or the earnings improvement from volume that you had in the quarter. Yeah, that would be rental, the difference between that. Obviously, at the end of the day, you have production plus imports, less exports, and then whatever happens from a net rental car impact. The net rental car impact going to auction versus going in because we've been winding that, obviously, with sales down is about 50,000 units in the fourth quarter. Right. It just looked like a big volume, $600 million is a big volume benefit year-over-year if a part of that is the rental return accounting. Yeah, but remember the way volume's calculated, it's volume increase at the average variable profit rate, and then obviously mix is impacted because you're selling more rental car fleets, which are lower profit than the average. So you got to kind of always look at those two in combination. Oh, okay. So you put that into the mix. Great. Okay. Thank you. Yep. Your next question will come from the line of Matt Stover with SIG. Thank you very much. Excuse me. I wanted to ask about the incentives as we move into next year. I take your comment on board, Chuck, about GM being pretty disciplined in incentives throughout the cycle, and a lot of the increases over the last year related to run out of old product. However, you did, or at least third-party sources suggest that we did see an increase in pickup truck incentives. I am just trying to think about the arithmetic as we look into next year. Should the natural increase that we see in pickup truck incentives not offset the improvements that we see in the other products? That is a pretty tough question to answer without being able to have foresight on what happens in the truck industry through the whole year. I would say the following, Matt. Our trucks performed very well in 2015. Going against some brand-new products in the market, we grew share. The 2015 trucks were more profitable than in 2014. We just launched a significantly refreshed truck at the tail end of 2015, and supply and demand, and especially our supply position, remains very strong. So I am not foreseeing a significant headwind year-over-year from a truck pricing perspective. As a matter of fact, last year, we were able to actually take price increases on trucks. So I think that sitting here February 3rd, the 2016 pricing for trucks will probably be relatively benign year-over-year. If you think about pressures in the market in that area, you see Ram running incentives way up in the market. Ford's added capacity on the F-150. Would you be willing, in the context of that, to hold tight on share? The truck industry itself, very competitive. Obviously, it's not a place where you want to give up share easily, but I think we would be erring on maintaining share and maintaining profitability as opposed to chasing incremental share in 2016. Especially, because we are running at a very tight level of supply and demand right now from a truck standpoint. Our truck inventory, I wouldn't use January 31st day supply because of the low sales rate, but our truck inventory Yeah at the end of December was 60 days, which is like Yeah 20 or 30 days below historical levels. Thank you. The last question is just on the incremental improvement in costs in the $5.5 billion number. Where are we in that journey right now? In 2015, we generated about $2.3 billion from a material cost, I am talking about commercial performance, not raw material, and $300 million in logistics, so about $2.3 billion. We also picked up a couple of hundred million dollars in global business services and other SG&A initiatives. So we are about, I don't know, $2.5 billion against $5.5 billion, a little bit more than 40% of the way through the year, and we expect to make another significant step in 2016. I would also suggest that was our first run at this. We continue to look very hard across our entire cost structure, including globally benchmarking manufacturing costs, SG&A costs with external sources. So, I wouldn't be surprised if that $5.5 billion doesn't change over time as we work our way through the next couple of years. Thank you. I appreciate that. Your next question will come from the line of Colin Langan with UBS. Oh, great. Thanks for taking my question. Any color on South America? You were pretty close to breakeven this quarter. How should we think about the cadence as we go into the next year, and what are the big saving drivers that we went through the year? Is there any sort of seasonal help in Q4? I don't usually think that's the case. South America has been and will continue to be, at least through 2016, a very challenging environment, very volatile, very difficult to predict. With that said, the actions that we've been taking over the last number of years was done specifically to establish a business foundation that would give us significant opportunities on the upside going forward. I would expect to see some improvement in South America in 2016 versus 2015 based on the run rate savings that we've generated in 2015. We reduced the workforce about 20%. We'll continue to take whatever actions are necessary, but very difficult to predict because it's a very volatile environment in South America. Is there anything, though, in Q4 that's seasonally positive relative to the rest? No, not really seasonally positive. I think we had strong market performance in the fourth quarter. Would suggest that so far, at least one month is in January, we continue to have strong performance. But I just think it's really a very difficult environment to sit there and say, "Hey, here's our outlook for the year," and provide a specific bridge. Our objective is to improve our performance in South America in 2016 versus 2015. That's our objective. Got it. How about GMIO ex China? You are still losing money on a consolidated basis. I believe it was March of last year, you were targeting getting South America and IO ex China back to breakeven. Do you think you could do that in the short term and what is the path to profitability there? Well, talking again to South America first, I think we are very well-positioned in South America, especially Brazil. When you talk about the products and the strength of the products that we have down there, they are performing very well. When you talk about the brand and when you talk about the dealer network, then overlay on that the restructuring and other actions we have taken, to me, South America breakeven, ultimately profitability there is totally contingent upon a macro improvement. I think that is a little bit different than the challenges that we have in consolidated operations in Asia. We are in the midst of executing a number of restructurings. As you know, Australia manufacturing, reducing our manufacturing presence in Thailand and Indonesia. But as I have said in the past, one of the challenges that we have in consolidated operations in Asia is the product portfolio, the brand health, and the dealer network need to also improve. So that was going to be a longer tail to address all of those issues. Clearly, we are going to invest only where we can make a viable return over time. We are taking the actions in consolidated operations to position the business for that. I just do not see breakeven in the near term. That is more of a longer-term issue in those operations that we are participating in and those markets that we are participating in. Okay, just one last question. The results today had the reversal of a valuation allowance associated with Europe. I guess that is a positive sign for the outlook for European profitability. Any color on what it might do to the overall tax rate, though, going forward on a GAAP base? No impact on our effective tax rate from a GAAP basis, and we still expect in 2016 for that to be in the mid-20s range. Okay. All right. Thank you very much. You're welcome. Your next question will come from the line of Ryan Brinkman with JP Morgan. Hi, good morning. Congrats on the quarter. Thanks, Ryan. I think your practice is to amortize the increased cost of the UAW contract over the contract's life as opposed to Ford's, which is to expense much of it in 4Q. Either approach is accepted, and yours seems more consistent with the matching principle. By not taking a single charge, it also makes it a little bit more difficult for us to gauge the actual cost increase. Is there anything you can say now about the cost of the contract and what we should think about putting in our models in 2016 versus 2015? Finally, I remember Mary saying at the conference in October that GM wouldn't sign anything that wouldn't allow you to generate 10% margin in North America. Maybe just kind of cast it in the light of your overall margins in North America. Thanks. Well, okay. Going to the last point first, the agreement that we have with UAW most definitely will not impede our 10% margins in North America. Again, step back and think about our U.S. hourly workforce cost in the U.S., it's $5.5 billion. Look at that in the context of the agreement that we reached and everything else. You're talking about economics that are a couple of hundred million dollars a year. Clearly, as we think about productivity, other efficiencies that we're driving through operations excellence and everything else, our expectations are that we're going to not only offset, I would suggest, work to more than offset the incremental impact of the UAW agreement, which at the end of the day means no impact to our 10% margins. The other important thing is, we do have more flexibility associated with the UAW agreement, which improves our downside protection going forward because we can react much quicker to the market. Overall, relatively immaterial economic impact in the context of the overall GM North American results. Okay. That's great to hear. My last question is just on China. On slide 27, you talked about increasing market share in China. That compares to the narrative earlier in 2015, that the domestic Chinese manufacturers were gaining market share at the expense of some of the foreign JVs, maybe because they had greater availability of CUVs or strength in Tier 4 cities relatively. Can you talk about how you were able to gain share there on a full-year basis, your product cadence in China overall and specific to utilities? Then just lastly, still on China, but comment a bit, please, on the sustainability of the current run rate of sales and what your house view is on the strength in Q4, whether that pulls from 2016 or whether it pulls from 2017 after the tax incentives expire. Thanks a lot. Well, again, going backwards. January, just to answer the last question, did we pull ahead sales into Q4? Generally, Q4 is a pretty strong sales month for China. That's seasonally, there's a lot of launches, as we said. There's a lot of promotions in Q4. If you look at the margins in China, not just for us, but the industry over the last three years, Q4, they have a tendency to moderate a bit, just because of that. With that said, January sales, the industry was up 10% year over year, and we were up 12% year over year based on preliminary numbers. So it appears that we're starting the year off reasonably well, given the slower growth in China. We grew share in China in 2015 because we launched a number of great products, especially in segments that we had been underrepresented. That includes crossovers and SUVs, both at SGM and SGMW. The Baojun brand grew hundreds of percentage points of sales on a year-over-year basis. If memory serves, we sold just under 500,000 in 2015 versus something less than 200,000 in 2014. We have 13 products that we're launching across China in 2016, including Cadillac locally produced XT5s, and other crossovers. So, great products, strong brands, especially Buick, Wuling, growing brands like Baojun and Cadillac gives us confidence that we'll be able to grow share again in 2016 versus 2015. Great. Thank you for all that color. Our final question comes from the line of Brian Johnson with Barclays. Yes, good morning. Follow up on some of the discussion around how you're seeing the passenger car, particularly the small and mid-sedan market developing in the U.S. It seems like consumers are voting against it. I certainly understand that with your product launches, you're going to buck the trend a bit in terms of price. Just in terms of capacity, production volumes, A, how are you thinking about that market over the next couple of years? Two, with kind of defocusing, at least in 4Q and 1Q, January on rental car sales, is that kind of related to where you think either your capacity or maybe your just retail mix is going there? Then three, just a strategic question, since the industry's been through several light truck pivoting to passenger car back to light truck, now back to passenger car, and then back to light truck cycles. How are you thinking about midterm flexibility vis-à-vis your manufacturing base? In particular, why aren't there more factories, and it's not just you, it's most of the industry, that can flex between the two product lines? Well, to the last question first, and I'll try to remember all the other two or four. It's really hard to flex between passenger cars and trucks because one is a body and the other one is a frame vehicle, and they're completely different manufacturing processes. I mean trucks like CUVs, sorry. Pardon? I mean like CUVs versus sedans in the same plant. Okay. Well, again, different manufacturing processes. Clearly, we try to build as much flexibility as possible into manufacturing, but every time you build flexibility, there's incremental investment to do that from a tooling perspective. So you want to do that as efficiently as possible. I think, again, starting with your initial question, over the next number of years, it's likely that there is more of a permanent shift from passenger cars to crossovers. That's great for us. We have very strong portfolio and a very strong franchise when you think about both compact, small, and importantly, medium crossovers. We're going through an entire launch cadence on that. That has been factored into our thinking. It's factored into our thinking when we deploy capital. It's factored into our tooling rates in the plants and everything else. We have taken a number of actions when you think about the current strength of crossovers to get incremental production. For instance, with the Equinox and Terrain for the last 2 or 3 years, we started a flex activity in Spring Hill, in Oshawa to support our production in CAMI. So we're constantly looking at the optimization of our production footprint vis-a-vis where the market's going over a long period of time. But I think you're right that ultimately there will be a permanent shift just because crossovers and SUVs are exactly what the name implies, much more utility than the traditional passenger cars. Okay. Are you still comfortable with the $1,500 profit improvement on Malibu and Cruze, or is that sort of the baseline lower now, or kind of just given some of the headwinds in pricing in the overall sedan marketplace? No, I think that's still directionally correct. I mean, we're one month into the launch. I think, again, looking at the track record of what we've done when we've launched new products that are significantly better than the vehicles that they replace, and clearly the Malibu and the Cruze are significantly better than the vehicles that they're replacing. We have a tendency to have a track record of growing segment share, growing transaction prices, and improving our profitability. We would expect to do that with these products. I assume moving away from daily rental mix as well on those segments. Well, certainly. I mean, one of the objectives of moving away from daily rental is make sure you're optimizing your capacity and generating as higher return as possible. And those vehicles traditionally have carried a bit heavier weight of daily rentals. So we're very focused on retail. Okay, thanks. Thank you. I'd now like to turn the call back over to Mary Barra. Thank you. Again, I want to thank everybody for joining us this morning. Just quickly want to reiterate that we are going to continue to execute our plan with discipline to drive profitable growth, to improve our cash generation, and deliver improved returns to our shareholders while funding the technologies that will drive our future and allow us to do that over the long term. Again, thanks for your participation today. 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.