Earnings Call: Q3 2015

Oct 21, 2015

Summary

Q3 adjusted EBIT rose to $3.1B and adjusted EPS increased 55% YoY, led by record North America results. FY adjusted EBIT is expected above $10B, while Brazil weakness and slower China growth remain headwinds.

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company third quarter 2015 earnings conference call. During the opening remarks, all participants will be in 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 Wednesday, October 21st, 2015. I would now like to turn the conference over to Randy Arickx, Executive Director of Corporate Communications and Investor Relations. Please go ahead, sir. Thanks, operator. Good morning, and thank you for joining us as we review GM's financial results for the third quarter 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' 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 call 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, Comptroller, and Chief Accounting Officer, to assist in answering any questions. Now, I'll turn the call over to Mary Barra. Thanks, Randy, and welcome everyone. I'm glad you could join the call today. I'm very pleased to share with you that we continue to drive strong performance and shareholder value in Q3. Let me give you some of the financial highlights. First, our revenue was $38.8 billion. Our EBIT adjusted of $3.1 billion was up $800 million year-over-year. Our EBIT adjusted margin of 8% was up 2.2 percentage points from a year ago. Earnings per share adjusted of $1.50 was up 55% from last year. Adjusted automotive free cash flow of $0.8 billion reflects seasonality and the settlement of several uncertainties. Our 26% return on invested capital, based on a trailing four-quarter average, demonstrates that our disciplined capital allocation is paying off. Our strong year-over-year performance in the quarter was led by North America. They had $3.3 billion in EBIT adjusted with an 11.8% EBIT adjusted margin. These are both records for North America. Regarding China, you will recall that last quarter, Chuck and I discussed with you the slowing growth in the China market. But we shared our plan for sustaining our margin in the second half based on our strong product mix and the ongoing work to drive cost efficiencies. So in the quarter, we maintained strong performance. Our equity income was a half a billion, and we achieved a 9.8% net income margin, which is up from a year ago. Overall, strong performance in cash generation enabled us to return $4.6 billion to our owners as of October 19, through both share buybacks and dividends. In addition to the strong performance in the quarter, I want to provide a couple updates on the progress we are making on our strategic priorities. As we indicated in our Global Business Conference, we intend to lead and win in the future of personal mobility and create new revenue streams that will drive shareholder value. We are leveraging our connectivity leadership to enhance our relationship with the customer, both inside and outside of the vehicle. One of the announcements we made was the Let's Drive NYC. This is a car-sharing program that uses our GM platform and app to connect Ritz Plaza tenants to GM vehicles and to Icon Parking, and we have gotten good response. We have also announced that we plan to launch a citywide car-sharing service in the U.S. in the first quarter of next year. Both of these are built on the work that we have done in the past, and the success of the Opel CarUnity car-sharing app, as well as the learnings from our Google car-sharing pilot. In addition, let me talk about autonomous for a minute. We announced that we will implement a fleet of autonomous 2015 Chevrolet Volts at the Warren Tech Center next year. Not only will this accelerate our autonomous technical learnings, but it will also have us learn from an ecosystem perspective. This builds on top of our previous autonomous announcements with the launching of Super Cruise and V2V that will both be on Cadillacs next year 2017 models. We are strengthening our relationship with the customer inside the vehicle as well. OnStar is now on four continents, North America, Europe, South America, and China. We have more customers connected to their vehicles than the rest of the industry combined. By year-end, brands on three continents will have 4G LTE technology, Cadillac in China, Chevrolet, Buick, Cadillac, and GMC in North America, and Opel and Vauxhall in Europe. Let us turn to a minute for the markets. First, in North America. Clearly, trucks, crossovers, and SUVs drove strong sales gains. U.S. retail market share in Q3 was up nearly a percentage point from a year ago, 16.5% compared to 15.6% in 2014. GM's share of the entire retail full-size pickup segment is approximately 40%, up two percentage points from a year ago. In the midsize pickup segment, our new Chevrolet Colorado and the GMC Canyon pickups are already earning 40% of the retail share. We have more coming from our three-truck strategy with the redesigned 2016 Chevrolet Silverado and GMC Sierra. Not only will we have greater availability of the eight-speed transmission, we will also have new safety features, including lane keep assist and forward collision alert, as well as enabling Apple CarPlay and Android Auto. Moving to Europe, we are very excited about the all-new Opel Astra, and when we launched it, we had 30,000 presale orders. The Astra has segment-leading active safety technologies and connectivity with OnStar and 4G LTE, and Apple CarPlay and Android Auto are also enabled. In China, we had record sales of 2.5 million vehicles through Q3, driven by the strength of SUVs, MPVs, and Cadillacs. GM's year-over-year SUV sales were up 171% in September, led by the Buick Envision and the Baojun 560, and Cadillac is up 12.4% year-to-date. At GM Financial, progress toward full captive capability is accelerating. Our North America retail penetration of 32% is up 21 percentage points versus a year ago. Looking ahead, we also announced in the quarter that we plan to invest $5 billion through 2019 to enhance the Chevrolet brand in key markets of China, Brazil, Mexico, and India. This really represents a new way of addressing these markets. It represents about a 2 million vehicle opportunity annually, and what we are doing is replacing multiple legacy products with an all-new vehicle family that will have leading design and the right technology and the right value for those customers. We are leveraging our scale across the value chain to develop this new vehicle family that will require less capital, generate more volume, and drive more profitability. As we look at cost efficiencies, we continue working across the entire value chain to make sure that we are as efficient as possible so we can enhance the customer experience and also drive shareholder value. As we talked about in the Global Business Conference, we have identified $5.5 billion in savings from the 2015 to 2018 time frame, and that is from purchasing initiatives, manufacturing, driving for efficiencies, and reducing administration expenses. These savings more than offset the additional brand and technology investments that we are making. We also continue to work on the right partnerships. We announced the Navistar partnership that will allow us to provide a Chevrolet medium-duty truck in the U.S. in 2018. Not only is this a segment we are not in right now, but on the commercial side, it also will help us drive adjacent sales. We also continue to have a very productive partnership with Honda focused on fuel cells. We are developing not only the next-generation hydrogen stack and storage system, but we are looking for other opportunities, and the fuel cell work should be in the 2020 time frame, is what we are targeting. As strong as the third quarter performance was, though, we do understand and we are working to mitigate the headwinds that are in several areas around the globe. South America continues to be very challenging. The Brazil market is down 27% in the third quarter versus a year ago, and there is really no clear economic recovery in sight. As we talk about China, it is quickly maturing, and we now expect average annual industry growth to be about 3%-5% for the next few years. The China slowdown is not only affecting our business in China, but also in the other international operation markets outside of China, because these economies are so dependent on China. This means growth will remain slow. But as I have said, as we look at the global auto industry, there will always be headwinds across the globe, and we are committing to achieving our targets. As we said in January, for this calendar year, we fully expect EBIT adjusted and EBIT adjusted margins to be higher. We continue to be confident on our trajectory toward the 2016 goals that we've outlined. Quickly, they are in North America. Again, we're expecting to achieve the 10% margins this year ahead of schedule and plan to continue and sustain that performance into 2016. In Europe, we expect to be profitable in 2016, and we will earn that by capitalizing on the success of the Astra and Corsa launches that have higher variable profit. Despite the slower growth, there is still significant growth potential for China. Much of the growth will be in the Tier 2 to 4 cities, and that currently represents 85% of GM's volume. We will continue to focus on sustaining strong margins between 9% and 10% through the sales growth that is afforded by MPVs, SUVs, and Cadillac. We also have other drivers that we've outlined of continuing to drive cost efficiencies, increasing our after-sales, growing captive finance, and generating OnStar and connectivity revenue. We are also taking proactive steps to manage the volatility in South America until there is a recovery. Our progress or our work there started in 2011 to really drive efficiencies, and we continue with several additional rounds, and we'll be doing that as we move forward. Despite challenges in some markets, we capitalized on the strengths for a record-setting third quarter, and I'm very proud of the team. This performance increases our confidence in our plan to drive shareholder value. With that, I'll now 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 results for the first nine months of the year. In addition to the record results that we posted in Q3, we've also put up some very strong results year to date. EBIT adjusted results through September grew to $8 billion, up $1.3 billion year-over-year when you adjust 2014 for the impact of recalls. EBIT adjusted margins are at 7.1%, up 130 basis points again year-over-year after adjusting for the impact of recalls. Important to note that these results are very much on plan that we laid out earlier this year. Our adjusted earnings per share for the year-to-date period nearly doubled to $3.63 compared with last year. As you step back and look at the results, they were broad-based on a year-over-year basis with all but one of our automotive regions posting year-over-year profit improvement during the first nine months of the year. Clearly we're on track for a very strong 2015, as we committed to deliver earlier this year. Although we're very pleased with our performance year-to-date, we will continue to take additional actions to drive efficiencies into the business. As I covered at the Global Business Conference and Mary just mentioned, we expect to drive $5.5 billion of run rate efficiency improvements by 2018 across the entire business. These efficiencies will more than offset economics, increased investments in brand building, increased depreciation and amortization, and technology costs during that timeframe. All of these costs and cost efficiencies are underpinned by operational excellence, which is our corporate initiative to drive common tools, common processes, but really most importantly, a continuous improvement mentality throughout our organization. We are getting significant traction on that, even in 2015. The GM team is very focused on finishing the year strong and really carrying that positive momentum forward into 2016 and beyond. Just a few comments on a couple of our regions. First, China. As Mary mentioned, the company sustained strong operating results in Q3, which is consistent with the guidance that we provided you back in July. Although it is clear the industry has moderated, I think it is also clear that the region has not fallen off a cliff as some observers predicted. In fact, as we talked about after our Q2 earnings, industry sales began to improve sequentially as the third quarter progressed, and we continue to see improved performance thus far in October. Despite the moderating industry, we generated strong performance for the first nine months of the year, $1.5 billion in equity income and 10% net margins. As we have talked about on a number of occasions, we have been able to generate these results specifically because the team in China has been proactively managing the market risks with several actions such as optimizing mix, and you saw the results with the September sales being up significantly from an SUV perspective, aggressively reducing cost by rolling out cost-down, efficiency-up initiatives, and really working to manage our inventory levels and ensure that we are aligning supply and demand. We are encouraged by China's cut in the purchase tax, and we are encouraged that it will provide a tailwind to the industry for the rest of the year and into 2016. Our plan is to continue to proactively manage the market risks as we have been doing to protect the profitability of the business. Our previous guidance growth in the low single-digit range and our ability to sustain our strong margin performance has not changed. Our guidance for Q3 is consistent with the guidance that we provided after our Q2 earnings. Moving closer to home, clearly North America has put up some impressive numbers for the quarter. Again, record EBIT adjusted and EBIT adjusted margins of $3.3 billion and 11.8%. Importantly, year-to-date, we have achieved EBIT adjusted of $8.3 billion and a corresponding margin of 10.5%. Despite typical seasonality in Q4, increased launch costs, and other seasonal impacts like lower production due to the holidays, we are very much on track to achieve a 10% margin in the region in 2015. Importantly, that is an accomplishment that we are going to deliver ahead of our longstanding 2016 commitment. We are in the process of finalizing our 2016 planning assumptions, and we will provide you with additional color in January on what to expect for 2016. As Mary said, we certainly plan to deliver 10% margins again in 2016. With regard to our outlook for the remainder of this year, as I said, we are very much on plan for improved full-year profit and margin growth versus 2014. This will translate into EBIT adjusted from a total company basis north of $10 billion for the year. South America remains challenging, and there really is no near-term macroeconomic recovery in sight, but we will continue to take actions to help mitigate the negative headwinds that are impacting the industry and our results in that region. I would just emphasize that our view is that we are highly leveraged to the recovery when it comes in South America because of the actions we've taken over the last number of years. With specific regard to capital spending and free cash flow, I'd like to provide an update. First, on the capital spending front, due to the timing of cash payments versus the accrual of our obligations, our revised cash CapEx forecast for the year is now $8 billion compared to our previous guidance of $9 billion. We continue to expect that our capital spending accruals will be in the range of $9 billion this year. This is just a timing issue. Although we're still finalizing next year's planning assumptions, I would not expect this change in timing to materially impact our prior guidance that cash capital expenditures would be approximately 5%-5.5% of revenue on an ongoing basis. As I said earlier, we will provide more specific guidance in January, but from a general planning perspective, the 5%-5.5% still applies. Although we're expecting a lower amount of capital spending this year from a cash perspective, our free cash flow forecast is still expected to be about flat compared with 2014. The cash outlays associated with our recent legal settlements will offset the lower capital spending amount, enabling us to maintain that outlook that we provided after the second quarter earnings. We also remain very committed to enhancing shareholder value over time, as evidenced by the $4.6 billion of capital return to our owners thus far this year, and we will continue to execute to our transparent capital allocation framework. That concludes our opening comments. We'll now move to the question and answer portion of the call. Ladies and gentlemen, if you'd 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, and congrats, everybody. Thank you. Thanks, Itay. Thanks. Chuck, I was hoping you can just maybe kind of quantify the rental impact this quarter in North America on variable profits. I would say that the impact of rental in wholesales, if you look at the wholesales on a quarter-over-quarter basis, up about 100,000. About two-thirds of that was related to rental auctions. From a pricing perspective, the Q3 pricing, roughly $100 million of that was associated with the rental auction issue as we cycle through that. Great. I know it's a little early to talk about 2016, but I'll give it a shot. Congrats, of course, on reaching or expecting to reach a 10% target this year. As we think about some of the product cycle tailwinds next year on new products, is it fair to say that margin expansion next year is a fair early assessment for the year versus 2015? Itay, I am absolutely surprised that somebody would ask that question about 2016. We will provide specific guidance on that in January. Our objective, our commitment, and what Alan talked about on October 1st at the Global Business Conference is to drive this business to sustain 10% margins through the cycle. As we evaluate how the industry is shaping up and everything else for next year, we'll come back and talk about that in January. We reached the first milestone. We expect to generate 10% for this year, and then clearly our objective is to make sure we build this business to sustain that again throughout the cycle. Great. Just one last quick housekeeping. Of the $5.5 billion of efficiencies through 2018, Chuck, can you just remind us how much is left for the 2016 through 2018 period? I know you're realizing some of that this year. Yeah. I will provide a further input on that in January as well. But if you look, just one of the components of that this year, we have talked about non-raw material performance of $2 billion. We are very much on track to deliver that. Broadly speaking, it would be $5.5 billion less that, I mean, generally, so about $3.5 billion left to go. Terrific. Thank you very much, and congrats again to everyone. Yep. Thank you. Our next question comes from the line of Rod Lache with Deutsche Bank. Good morning, everybody. Congratulations. Thanks, Rod. Had a couple questions. I was hoping first you might be able to give us a little bit more color on the China earnings bridge. Obviously, you had a 4% decline in wholesales, and I'm assuming that you experienced, I think you were talking about a 5% decline in price on your Q2 call. If we were to construct a bridge year-over-year from 3Q to 3Q, what would the dollar impacts be if we thought about some of the buckets that you usually provide, like volume, price, mix, and cost? Yeah. I'll give you the breakdown from a driver perspective base, Rod, but not the specifics on the EBIT bridge. Clearly, volume would be down, and price would be down, largely offset by mix and improved cost performance. I mean, fundamentally in the cost performance is largely material cost performance. We've talked before around kind of the pricing headwind year-over-year on a quarter-over-quarter basis, and it's been running generally about $100 million. I mean, that's what that equates to from that bridge perspective. So volume down, price down, largely offset by improved mix. Again, you've seen that in the sales results with SUVs and Cadillac sales being up and material cost efficiency. You are targeting flat IO for the year, which implies a little bit of a drop in the fourth quarter. Should we be thinking that China starts to look a little bit better from a volume perspective given the stimulus and that it is the consolidated IO that is coming off? Could you just give us a little bit more of a feel for what you are expecting there? Yeah. As we talked about in the second quarter, and we are maintaining here, we expected to sustain China performance in the second half of the year similar to the first half of the year. So we earned about $1 billion of equity income in China in the first half. We expect to earn in that range in the second. So we are $1.5 billion in so far, so you can do the subtraction. What we said about GMIO in total, including China, is relatively comparable results year-over-year. Again, I would suggest that we are very much on plan from a China perspective. GMIO, if you look at last year, the results there or even year to date, the results that we have generated there, a loss in the range of $500 million to $600 million is what would, for the year, what would generally be consistent on a comparable basis. Okay. Just lastly, two quick ones. If we were to add up all these actions that you are taking in South America, could you give us a total of what you are anticipating as the cost savings? On North America, you mentioned expecting pricing flat to down. Is that a change versus what you had been anticipating previously? For the latter question, no. If you go back to the discussion we had back in January, I remember a chart that I showed that showed carryover pricing in 2015 versus 2014 from a North America perspective was going to be down. I would say what we are seeing in North America is the general pricing dynamic on a year-over-year basis is consistent with our prior guidance. Retail pricing is going to be relatively flat, and most of the year-over-year deterioration is due to the rental car issue that we were dealing with. As I think about a go-forward basis or just the fundamental market dynamics, I think stronger retail performance, but generally overall pricing in line with what we talked about before. Relative to the South America question, where do you want me to go back to? 2011 or 2012, or just this year on a run rate basis? Well, we see what the profitability is there, right? How do things improve from the run rate that you are at right now if we were to add all these actions together? Yes, assuming consistent macro conditions in 2016 versus 2015, and we are not really assuming anything different. I am not trying to give guidance for 2016 yet, but we took out 20% of the workforce down there, both hourly and salary. That is 4,000 to 5,000 people. That action in and of itself on a run rate basis is worth a couple of hundred million USD a year. But there are other puts and takes, Rod, that I do not think you can just directly translate that into a guidance for 2016. Economics is pretty significant. We have productivity, we have other actions that we will take to improve mix. Relative to specifics for 2016, we will have more to say in January. Okay, great. Thank you. Yep, thank you. Our next question comes from the line of Dan Galves with Credit Suisse. Okay, thanks. First question, back to kind of the pricing in China. Have you seen any sort of improvement in pricing as inventories appear to come down for the industry throughout Q3? I would say that the pricing dynamic is developing as we anticipated, at least through Q3. Obviously, we'll continue to monitor that as we go through Q4. As we talked about before, we expected Q4 to be better from an industry performance driven by seasonality and product launches. The product launches could change the dynamic from a pricing perspective, but I'd say generally consistent and too early to tell if that's changing as dealer inventories are getting more in line at an industry level. Okay, got it. I had a couple questions related to the issues that Volkswagen's having in Europe. Number one is, have you seen any industry-wide impact to demand overall or to demand for diesel vehicles yet, or is it still too early to tell? Also, I am not asking you to comment, but some of the numbers being thrown around for impact to Volkswagen are very high. Does that change General Motors Company's thinking at all in terms of the minimum cash required to protect against any kind of catastrophes? Well, let me start by saying, right now our outlook for diesel remains unchanged. I think it is too early to look and make any judgments on that. Related to, again, we are not going to comment on the VW, but I think as we have gone through and looked at the very robust planning that we did last year as we put together the capital allocation framework, we remain committed to the $20 billion. Let us not forget, Dan, that we also have a revolver. The revolver is an emergency backstop, and total liquidity is at $32 billion. I do not think that you can really plan your cash balance around a potential, and I am just using this in a general term. I am not speaking specifically to Volkswagen, but a company type event. So just not a good use of shareholder capital. Okay. Makes sense. Thanks very much. Our next question comes from the line of John Murphy with Bank of America Merrill Lynch. Good morning, guys. Morning. Just a first question on North America. Obviously, there's a lot of strength here, and it seems like mix and price were actually a little bit of a negative. Just curious, how we should think about the contribution new products are playing to the profitability in North America. I know you kind of talked about $1,500 per copy on the new products, but obviously a lot of people are very skeptical about that, but it seems to be coming through. Just kind of understanding what role those new products are playing and what we should expect really in the fourth quarter and maybe even going into 2016. Well, first, mix is unfavorable largely because of the rental auction vehicles, right? Volume was favorable, $400 million roughly, mix unfavorable, largely offsetting that due primarily to the impact of those vehicles. We are committed on the next generation vehicles as we roll through the launch cadence being more profitable than the vehicles that they replace. I just think about it broadly speaking, if you look at the Cruze, the Malibu, the next generation compact SUVs, Equinox, Terrain, and then the next generation mid crossovers. In total, that volume is more than the entire K2XX platform. And we delivered with the K2XX platform an improvement of profitability, as we talked about way back in 2012, of over $1,000 a vehicle. And that's generally the perspective that we're going to see in what we've talked about relative to the next product launches. That's going to help us. Specific to your Q4 question on pricing. This is typically what happens in Q4 sequentially as you launch the new model years and everything else. I think it will be a slight favorable overall pricing environment. Retail will be up and partially offset by fleet, and that would just be the typical fleet cadence as we roll through the rental auctions. Okay. A large part of that retail price favorability in Q4 will be associated with the launch of the new Malibu. Okay. Just as we think forward, I am not asking for 2016 guidance, but you are talking about 10% margins for North America. You did 10.5% year-to-date as we look at the LTM. You are kind of in that range or maybe even a little bit better on an adjusted basis. Is there some sort of negative factor that you are looking at into 2016 that is going to suppress numbers or something that is not going to repeat in 2016? Or is this really just an initial guide and we should revisit this in January? Yeah. First, we are at 10.5% calendar year-to-date, and if you go back and look at Q4 from a seasonal perspective, that is typically one of the weak quarters from a margin perspective due to everything that we understand, Thanksgiving holiday, Christmas holiday, a lot of marketing spend around football, and in our case this year, some launch products. I would say for 2015, we are very confident that we are going to generate 10% margins. As we talked about before, we are going to continue to invest in marketing to build our brands. We are going to continue to spend engineering associated with our product launch cadence and next-generation products so that we can sustain 10% margins throughout the cycle. We will have more specific guidance around that. But the real way to think about this, John, is we are at 10% in 2015, a year early. We're going to run the business to sustain that 10% kind of margin on an ongoing basis. Makes a lot of sense. Then just on GM Financial, revenue was up 36%, EBIT up 13%. I know that's a potential area for structural improvement in EBIT over the next couple of years. When do we see sort of a linear or sort of parallel step-up in EBIT along with just the growth in revenue and loan book there? Just curious. It just seems like at some point, we're going to see a real step-up. Is that 2016, 2017, or 2018? Yeah, I think it'll be beyond 2016 as we continue to ramp up both the operations but also, you're taking on debt in advance of the assets. I think the real lever point will be beyond 2016, John. Got it. Just lastly on buybacks. You've clearly gotten a lot of stuff out of the way here on the DOJ fine. A lot of the ignition switch settlements are pretty much wrapped up. You're looking at a pretty strong 2016. When do you think you could reconsider more buybacks? Is that late this year, or is that sometimes in 2016 when you get better visibility on year-end balance sheet liquidity and 2016 results? We did extinguish some risks. We still have a handful of open items that we will work to resolve as timely as we can but done in the right way. We will be ready to talk about that in January of next year, of where we are at from a capital allocation perspective. Mary, what are those specific hurdles or items that still need to get resolved? There is still a couple of investigations with the Federal Trade Commission and the SEC. There is also parts of the multi-district litigation. There are still some state attorney claims, and there is also the economic loss. Great. Thank you very much. Thanks, John. Our next question comes from the line of Emmanuel Rosner with CLSA. Hi, good morning, everybody. Good morning. Hi. First question on the pricing in North America. The retail pricing was somewhat negative. Can you maybe give a little bit of color on where specifically on retail you saw sort of like these pricing pressure either segments or vehicles and how does that reflect on some of the U.S. market dynamics right now? Well, let me just start at 10,000 feet, Emmanuel Rosner, 11.8% margins. That is what we generated in the third quarter. Just very strong, outstanding performance. Within that, there was carryover price headwinds, which is typical in the third quarter as you work through and sell down your prior model year products. When you think about where we are in the launch cadence, it is no surprise that some of our vehicles are getting longer in the tooth, and we continue to support those products. But I think you need to look at it in the context of 11.8% margins. We already talked about Q4, and we talked about the calendar year from a pricing perspective. Overall, the dynamics in the industry remain reasonably rational. Overall incentive spending and incentive spending as a percent of transaction price is up slightly on a year-over-year basis. Our incentive spend as a percentage compared to the industry average ran at 110%, which is consistent with last year. We feel reasonably good about the competitive dynamics, but we are really feeling pretty constructive on our launch cadence and the products that we will be bringing to the market next year, which will come with favorable pricing. Okay. Well, that does get to hear. Then just on GMIO ex China, maybe I am just nitpicking here, but it seemed like a slight deterioration in the last, maybe versus the past few quarters. When can we expect this region to turn to breakeven ex China, ex other unusual items? Yeah. We will talk more about that in January as we go through the planning. I would say that the viewpoint should be that we continue to aggressively look at all of our operations, all of our countries where we're currently not generating a return to drive efficiency, to drive structural change, to position the business for future success. We were making good progress in GMIO. The current macro situation there with the slowdown in China that Mary talked about is having an impact. But we will continue to take those actions, and we'll provide an update on that on a go-forward basis. Again, thinking about the broad context from a company perspective, $3.1 billion in EBIT and 8% margins. I think the real opportunity is once we get the rest of the regions operating very well, that'll even be more accretive to what was a very strong, actually a record quarter. No, I agree. Thank you very much. Thanks. Our next question comes from the line of Max Warburton with SIG. Thank you very much. I was just wondering if we could go back into the North America accounting issue with the rental car fleet. If I heard you correctly, Chuck, you had indicated that most of the excess of wholesale versus production was related to the rental car volumes. Is that correct? That is correct. You had mentioned the pricing was $100 million. Is there a bigger impact on the profit side? Because if I look at the incremental operating leverage in North America, the 50%, it seemed awfully strong. I know there is a lot of good things going on, but that just seemed like a really strong incremental operating leverage. Well, one of the things that we talked about, and if you look at the share performance year-to-date, is our real focus on shifting our volumes out of fleet and into retail because retail is more profitable than fleet. Part of that, as you are seeing with these higher rental vehicles going through auction, as we sell less, then obviously we are going to be sending more into the auction. Generally, at 10,000 fleet, the fleet business is profitable, especially commercial and government. Daily rental, pretty close to breakeven when you look throughout the whole value chain impact on that. But clearly, our objective is to drive more into retail, which is more profitable. Okay. The second question is if we look at the IO results ex China, you've announced restructuring actions in Australia, Indonesia, and Thailand. When should we expect to see the impact of those actions in the financial results based on the execution of the restructurings? Yeah. More to come on that again in January. We're still working through the Australia actions, and those won't be completed until 2017. We're still working through the Thailand actions and ultimately the shift of moving to fundamentally a truck SUV platform there will happen through 2017. So these are ongoing. I would suggest that in a more historical macro environment versus some of the headwinds we're facing there this year, slowing growth in Southeast Asia, a very weak Aussie dollar, some of the other challenges related to China, we would be seeing year-over-year improvement already. Okay. Thank you. Appreciate it. Yep. Our next question comes from the line of Brian Johnson with Barclays. Hi, good morning. Three questions around commodities, around Europe, and then a kind of broader one around self-driving cars. First, commodities. You mentioned the material benefit in GMNA as well as globally. To what extent was that driven by the whole commodity complex being lower versus supplier value engineering efforts? If it is mostly from the latter, working with suppliers, as some of your commodity contracts renew, can we expect a tailwind from commodities going forward? Yeah. The overall impact in the quarter from commodity pricing was minimal. It was largely driven by commercial performance and logistics performance. On a go-forward basis, just to provide a sensitivity on commodities, when we look at the year, I would say year-to-date, the year-over-year impact is a couple of hundred million bucks, and we would expect that to be kind of the calendar year impact. Overall, our APV or our annual purchase value of commodities is about $28 billion. About 30% of that or so is indexed, which means we take the risk. A 5% movement in commodities is worth $400 million-$500 million on an annual basis, all other things being equal. As we look at 2016 versus 2015 of current commodity prices continue, I would think it would be a tailwind, but again, that we will continue to work through our planning for 2016 and provide more guidance on that in January. Second question, around Europe, two questions. You saw pricing firming in 3Q. What impact do you see on pricing from Volkswagen's issues? Is it on the one hand they could potentially become desperate and pull the price down? Or on the other hand, can you get paid for some of the value you can to drivers? The pricing strength in Q3 specific to General Motors Company and Opel Vauxhall was the launch of new products and new product pricing. Our new products are getting traction, and that's good, and we would expect to see that continue as we work through the launch cadence. It is really too early to tell and too early to speculate on what could happen with the competitive dynamics in Europe. Our focus is to launch our products, deliver great products at a compelling value, continue to drive improvements in the Opel brand, which in general, under any circumstance, will provide pricing power vis-a-vis where we're at today. The overall environment could change, but at least, on a relative basis, by executing our plan, we should have better pricing power than we have today. If the consumer comes into the showroom and on the margin goes more for gas engines than diesel engines, do you have the gas engine plant capacity to satisfy their demand? Yes. From an industry perspective, in Europe we're underweight diesels versus the competition. Our diesels run at about 40%, and the rest of the industry, somewhere between 60% and 70%. We certainly have the flexibility. Okay, great. The final question around self-driving cars. We had a new entrant automaker roll out what they're calling Autopilot last week. Can you remind us of the timing of the Cadillac Super Cruise? Then just more broadly, how do you think about how fast to get these things to market versus making sure that they run effectively and you're not, folks in Silicon Valley would say, throw stuff out there and let the users beta test it. Just your philosophy on that technologically. Well, I think first of all, with the tremendous experience that General Motors Company has as we look at safety and we look at integrating, and one of the reasons we announced that by the end of next year, we'll have 2017 Chevrolet Volts, an autonomous fleet at our tech center, is to not only advance the technology but also to understand it in the ecosystem. Also, have tremendous exposure to our engineering team at that site. All of those things will, I think, will point to advance the work we're doing, accelerate it from a technical and from all of the other aspects that you need to have come together from an autonomous perspective. The way I look at autonomous in general is that there's two paths, and we're working on both. There's the path that we're on where if you look at especially a Cadillac today, there's tremendous technology around it that is on the road to full autonomous with all the safety features and all the warning and the ability to have forward collision braking, et cetera. When you look at Super Cruise and the V2V communication, those will both be on 2017 Cadillacs, but they'll be in the marketplace next year. We all have also announced a strong partnership and the work we continue to do with Mobileye. We were their first customer, we're their largest customer. We continue to work closely with them, and we're also exploring some other opportunities. So I look at it as there's the evolutionary path where you're putting the technology on and customers get the opportunity to experience it. Then there's the revolutionary path where you go full autonomous. We're executing both, but I assure you that we're doing it with a huge focus on safety as we go forward. Okay, thanks. Our next question comes from the line of Colin Langan with UBS. Oh, great. Thanks for taking my question and congrats on a great quarter. Thank you. Can you remind us about the impact that rental pricing has had year-to-date? Because despite your 10%, 10.5% year-to-date margin, that was actually a pretty big headwind. Is that going to go away next year, or is that still going to be a residual risk next year, or is that actually going to be a pretty large tailwind? I would again think about pricing in an overall broad context. I think our guidance for the year is that pricing is going to be consistent with what we talked about back in January, which was more of a headwind in 2015 versus prior years. Year to date, the fleet alone impact is roughly $700 million to $800 million of negative net price. As you recall, it was a $400 million in Q1, a couple of hundred million dollars in Q2, and then $100 million in Q3. We aren't ready to provide guidance on pricing going into 2016 yet. Although I would say that overall, we would expect a net favorable positive pricing environment really being driven by the launch of our new products. Can you give any color on what you're seeing in initial demand following the stimulus in China? Because you kind of said that you think now 3% to 5% is the long-term outlook. Is this having a big help in the near term, though? I didn't catch the beginning of your question. I'm sorry, Colin, I couldn't hear. Oh, sorry. Any color on the near-term impact from the stimulus? Have you seen a spike in demand following the announcement in China? Not yet. They are obviously something that we continue to closely monitor. What we have seen so far in October is our retail sales are up over 10% on a year-over-year basis. It is early days in October. The industry is up, but we expected that as well. We are dealing with, in China right now, it is holiday season, so there is some specific nuances from a market perspective. That is something we are going to continue to monitor. Remember, this program runs through the end of 2016. Typically with any of these kinds of things, maybe you will get some rollover from the tail end of September into October, but the real big bump will be near the end of next year, depending on what the government does if they announce that they are not going to extend it, or if they decide to extend it. We will have to see how it plays out. Got it. Any color on Europe? Can you give any status of the Russia wind down, the Chevy wind down, and any color on what kind of headwind those were within this year's results? Well, I am not going to talk about specific country-level profitability or share of Europe, but we talked about before that Russia was a fairly significant headwind, and that as we moved through the year, that impact would diminish. It has from an overall GM Europe perspective. We are very much through the Chevy Europe wind down, and as a matter of fact, both the Chevy Europe wind down and the Russia restructuring plans have went very much according to plan. Specific to Chevy Europe, the bright spot is the vast majority of the dealers that were impacted by that have opted to move to Opel based on the opportunities presented there. And part of the strategy with the new Karl, which is doing very well, was to help fill some of the void that was created when we provided some of that clean air with the Chevy Europe exit. So both of those going very well and on a go-forward basis, clearly will provide an opportunity in Europe. Okay. All right, thanks for taking my question. Yep. Our next question comes from the line of Ryan Brinkman with J.P. Morgan. Hi, good morning. Congrats on another great quarter. Thanks, Ryan. First question on mix in China. I think your performance in China this quarter was better than investors expected. Our channel checks suggest enhanced pricing pressures in the country, although your margin notably rose year-over-year. Can you talk about the drivers of that margin strength? How much is being driven by mix, by the new models, SUV, CUV mix, traction of Cadillac brand? How was that mix improvement accomplished, and how should we think about it tracking going forward, given there seems to be a consensus that sales in China will move more toward the less wealthy Tier 3, Tier 4 cities in the interior relative to the richer coastal cities? Yeah. First, we kind of covered the mix question earlier that mix and material cost performance offset kind of the volume and price headwinds. Again, if you look at the sales results, September as an example, SUV sales up 171% year-over-year. SUVs as a percent of total China sales were at 17% versus 6% in the year earlier period. Cadillac up 12%. That's all very beneficial. On a go-forward basis, Matt talked about at the Global Business Conference, Matt Tsien, where the market was going to develop and the real growth was going to come in SUVs, MPVs, and luxury on a go-forward basis. They were going to over-index. That's why we believe that there's a significant opportunity from a mix perspective going forward. I would also suggest that in the Tier 2 to Tier 4 cities, the launch of the Baojun brand and the expansion into SUVs provide us with a unique opportunity to take advantage of not only SUVs in the Chevrolet, Buick, and Cadillac channel, but also SUVs in the Baojun brand as growth increases in Tier 2 to 4 cities. Our perspective is mix is going to continue to be a favorable tailwind for us going forward. Okay, that's helpful. Thanks. Just for my last question, let me try to approach, I guess, what some are calling Dieselgate from a different perspective as I focus on what it means for your previously communicated strategy. One of your Drive 2022 goals for Europe is to improve the perception of, and therefore the pricing of your vehicles. We met with Michael Lohscheller in Rüsselsheim earlier in the year. It seemed the team there was already focused on the opportunity to improve Opel pricing relative to VW even before the emergence of this issue, just by building better product. As you know, though, from your work on Cadillac in the U.S., sometimes you can build much better product, but then there's sometimes a time lag between when you field the better product and when you get fully rewarded for it, because you also have to change the consumer mind. Does the VW situation chip away at all at this consumer perception, in Europe at least, of engineering superiority associated with that brand, and therefore play into the look again fee relative to Opel? Well, I think, if you look at the plan that we've been on to not only have a winning product into the marketplace for Opel and Vauxhall, but also build the brand, there's been tremendous work done by Tina Müller, our Head of Marketing for Opel and Vauxhall, of doing just that, and the metrics prove out that we have changed minds and there's more favorability around the Opel brand. When you look at the strong products that we have, the Corsa, the Karl, and when you look at the Astra. The Astra not only is a great vehicle from a styling and I'll say a fundamentals perspective, but it has safety features that are industry-leading. It has connectivity that's not available across, and also some features that are generally only available in luxury. As we look at the strength of Corsa, Karl, and the whole portfolio there is the youngest. It's everything, I think, approximately 4 years or less. We feel that we're very well positioned going into the market with these launches, and we're going to work hard to earn every sale. Okay, that's helpful. Thanks. Congrats again. Thank you. Thanks. Our next question comes from the line of Patrick Archambault with Goldman Sachs. Hi. Yeah, good morning, and thanks for taking my questions. I guess my first one is just on the implied margin for the fourth quarter in North America. I guess I would just frame this question as not being nitpicky. It's more of a function of just third quarter being so good that when you back into the fourth quarter based on a 10% margin for the year, it implies somewhere close to 9%, which would be slightly better than what you did last year, maybe 30 basis points or so, but certainly short of the 200 basis points of margin improvement year-on-year that you saw this quarter. Is a lot of that just the incremental launch costs? I think you mentioned 16 vehicles basically ramping up. I wanted a little bit more color on that first. Yeah, sure. Clearly, as you continue to drive the business towards a 10% sustainable margin, the year-over-year comparisons are going to get more and more challenging. We've had nine straight quarters of margin expansion. You can do the math. We're at 10.5% year to date, so it's not hard to figure out the floor for Q4 in order to hit 10% or something better than that for the year. I would say, this year, we do have some incremental launch costs in the fourth quarter associated with the Malibu and a number of other products, and it's both manufacturing and marketing, that are going to be somewhat of a headwind. But again, I would say as we continue to rotate through the next number of quarters, the year-over-year comparisons for margin expansion aren't going to be as strong as they have been when we've been driving from a 7% margin to a 10% margin. But I think, broadly speaking, Patrick, your math is kind of correct. It's not a hard math exercise to solve. All right. Well, thank you. No, that's helpful color on the reasons for it. I guess a lot of my questions were answered, but one that I was curious about, just on the V2V product, which I think that's going to be fitted on the Cadillac in, I think, 2017. It seems like you guys are going ahead of the NHTSA mandate on this, right? They are working on rules to make this required, and you'll be ahead of that. I just wanted to understand what benefits you get from that technology, because it seems like there needs to be a certain critical mass for it to work, especially if it's based off of communicating with other vehicles. So just wanted your opinion on that. Well, I think the biggest benefit is getting it into the marketplace, getting the learnings. Clearly, to your point, you need everyone to play. But someone's got to start and take the leadership role. We do work in a very strong fashion with NHTSA, our regulator, and looking at what we're doing, how we're driving it, and how the regulations and the rules around this will be. But we think it's very important to get it into the marketplace to drive the learnings, to drive the scale. Because with any new technology, there's always something you learn when you get it into the marketplace. So that's our look at that. The same thing with Super Cruise. Super Cruise, first of all, is built on the embedded connectivity capability that we have. But getting that in the marketplace, having customers get to experience it, is very important steps along the journey. Because we're working hard to be in a leadership position with autonomous as we move forward, but in a very responsible way, aligned with our goals to be industry leaders in safety. Got it. Understood. Thanks for the color and congrats on the quarter. Thank you. Thank you. And our final question comes from the line of Joseph Spak with RBC Capital Markets. Hey, thanks for squeezing me in here. Just one quick one, a little bit bigger picture. I appreciate the color on your relative less dependence on diesel in Europe, but clearly diesel was still part of the plan towards hitting 95 grams per kilometer of CO2. So I guess what my question is, are you drawing up contingency plans? Do you need to sort of double down on electrification or other alternative powertrains just in case either something from a consumer demand or regulatory perspective happens? Well, if you step back, and Chuck mentioned it, that we have a lower diesel impact than some other OEMs, just if you look at it from a global perspective. But we do have both capability in diesels as well as we're driving a lot of improvements in the internal combustion engine, again, from an electrification perspective, not only the second generation Volt that has been not only improving the power density, but also driving cost efficiencies. Then you look at the Bolt. We talked about where we will be with our kilowatt per hour targets as we launch the Bolt, and then how we'll further take that cost down. In addition to that, I mentioned briefly in my opening remarks what we have working with Honda from a fuel cell perspective. So we've always believed in kind of a propulsion diversity strategy. I think we've got very good work going on in each of those areas. So again, we think it's too soon to tell, but we have tremendous flexibility across the portfolio, across the globe, as we look at all of our propulsion strategies. Okay, thanks very much. Thank you. I'd now like to turn the call back over to Mary Barra. Thank you. Well, again, I appreciate everybody being on the call. Our overall results again demonstrate the very strong earnings potential of General Motors. Our results through the third quarter lay the foundation for achieving our commitments for the remainder of 2015 and 2016. We are working extremely hard to make sure we deliver on what we say we're going to do. As we move forward, we intend to execute our plan with discipline, and that includes the capital allocation framework, and we are confident that we will drive profitable growth, strong returns on invested capital, and shareholder value. Again, thank you all for participating 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 line.