Earnings Call: Q3 2014

Oct 23, 2014

Summary

Q3 revenue was $39.3B and adjusted EBIT was $2.3B, while recall outlays and working capital drove negative adjusted automotive free cash flow. Strong North American and China performance partly offset pressure in Europe and South America.

Ladies and gentlemen, thank you for standing by, and welcome to the General Motors Company third quarter 2014 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session for analysts. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, October 23rd, 2014. I would now like to turn the conference over to Randy Arickx, Executive Director, Investor Relations and Communications. Please go ahead, sir. Thanks, operator. Good morning, and thank you for joining us as we review the GM financial results for the third quarter of 2014. Our press release was issued this morning, and the conference call materials are available on the investor relations website. 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. This morning, Mary Barra, General Motors' Chief Executive Officer, will provide opening remarks, followed by a review of the financial results with Chuck Stevens, Executive Vice President and CFO. After the presentation portion of the call, we will open the line for questions from the analyst community. Mary Barra will then conclude the call with some closing comments. In the room today, we also have Tom Timko, Vice President, Controller, and Chief Accounting Officer, and Niharika Ramdev, Vice President, Finance and Treasurer, to answer some questions. Now, I'd like to turn the call over to Mary Barra. Thanks, Randy. I want to open today's call by thanking everyone who attended our Global Business Conference just three weeks ago. It was an important meeting because it was our first chance to talk to you about where we're going as a company. Together, we stated our clear purpose to earn customers for life and to become the most valued automaker. We reaffirmed our near-term financial targets, and we said we are targeting 9%-10% margins on an EBIT-adjusted basis by early next decade. We believe in our capabilities. We have the talent, the technology, and the resources to deliver products and experiences that people love. We have huge upside potential in our brands and with GM Financial, and we expect to deliver significant core operating efficiencies, especially in product development and purchasing. I know there's a show-me attitude out there, and believe me, it's a powerful motivator for me personally and for our team. We understand we have real work to do, and we are on it. We are changing behaviors to truly value every interaction with our customers and to build much stronger relationships with our suppliers, our dealers, and our other stakeholders across all of General Motors. This kind of change happens person to person, one day at a time, but it is beginning to happen. Our journey continues from a solid base. As you can see on slide 2, we delivered 2.4 million units in the quarter, up slightly from a year ago. In the U.S., sales increased 8% in the third quarter compared to a year ago. Sales in China, our largest market, were up 14%. Looking at market share, our global share was 11.5%, and we earned 17.3% of the market in the U.S. and 15.2% in China. On a revenue basis, we improved nearly $300 million, thanks to improvements in North America and GM Financial, which offsets declines in markets like Russia and Brazil, where the entire industry is facing headwinds. Turning to the bottom line, net income to common stockholders was $1.4 billion or $0.81 per diluted share, which includes a net loss from special items of $300 million or $0.16 per share. Looking next at cash. Net cash from our automotive operations activities was $700 million, compared with $3.3 billion in the prior year. The decrease was primarily driven by one extra regularly scheduled payment to suppliers in the quarter compared to a year ago and cash payments to suppliers and dealers to pay for recall repairs. Next, let's look at non-GAAP results. On an EBIT-adjusted basis, GM earned $2.3 billion, which is in line with our expectations. As you can see on the chart, North America earned $2.5 billion in EBIT-adjusted, which is up about $300 million from a year ago. Europe continues to show operational improvements despite the headwinds in Russia. Losses increased due to incremental restructuring expense, but overall results were ahead of expectations. In GM South America, we essentially broke even despite the difficult macroeconomic environment in Brazil and Argentina and the ongoing challenges in Venezuela. In China, we earned an equity income of $500 million from our joint ventures, which is up 14% from a year ago. At GMIO, including China and all other markets, and at GM Financial, results were about equal to a year ago. Finally, our adjusted automotive free cash flow was negative $800 million, compared with $1.3 billion a year ago. Chuck Stevens will provide additional details on all of this in just a few minutes. If you turn now to slide 3, we have summarized some of our key accomplishments from the quarter. They are organized around the 2016 financial targets and strategic opportunities that we presented at the Global Business Conference. So it is clear to see how accomplishments are driving the business forward. Starting in North America, we had an outstanding quarter with record ATPs and an EBIT-adjusted margin of 9.5%. That's an improvement of 0.2% compared with a year ago, and it marks our fifth consecutive quarter of year-over-year improvements. Our performance was well-balanced across different vehicle segments, but it was especially strong in pickups and SUVs. For example, our retail share of the large SUV segment is about 80% through the first nine months of the year. Also, GM estimated share of the retail market for large pickups has now increased sequentially for three quarters in a row. We expect to build even more truck momentum as availability of the Chevrolet Colorado and the GMC Canyon grows during the fourth quarter. We are very excited about these launches. The trucks are getting great reviews in the press. To meet expected demand, we have already announced plans for a third production shift at our Wentzville, Missouri plant. We expect it to come online in March. Sales of smaller vehicles have also been strong. In fact, our compact cars are having their best sales year since 2005. The new Buick Encore small crossover has been the best-selling vehicle in its segment for six months in a row through September. Looking next at China, we had record sales in the third quarter and during the first nine months of the year. Our margins continue to remain strong at 9.6%. Our market share in the quarter was 15.2%, up eight-tenths of a point from a year ago. For the year, we are up two-tenths of a point to 14.7% on the strength of new products at all of our brands, especially Chevrolet and Cadillac. We also passed a major milestone in September: 20 million cumulative vehicle sales. As we said at the Global Business Conference, we aim to grow faster than the market over time. Our China joint ventures are planning to invest significantly from 2014 through 2018 to open five new manufacturing plants. This will give us the ability to support sales of just under 5 million vehicles annually. During the third quarter, we added capacity for 300,000 vehicles and 450,000 engines. In Europe, we made several strategic moves during the quarter, which we expect will help us return to profitability in 2016. To better manage through the difficult market in Russia and position ourselves for future success, we have strengthened our leadership team, we are speeding up supplier localization at our St. Petersburg plant, and we have adjusted manpower. In Spain, we began building the Opel Mokka at our Zaragoza plant, which we believe will help us meet market demand and improve profitability. At the Paris Auto Show, we unveiled four new products and powertrains that we expect will help drive revenue and share growth. The biggest reveal was the fifth generation Opel Corsa. It's the car's first major redesign in eight years, and we are expecting an improvement of variable profit of about $900 per unit. The new Astra, which will follow next year, is expected to deliver an even larger variable profit improvement of about $1,250 per unit. Together, these models will represent about half of Opel Vauxhall's volume. Turning to slide 4, let's next talk about Cadillac, where we have a new leadership team led by Johan de Nysschen that lives and breathes the luxury business and is prepared to make bold moves to accelerate the brand's global growth. The opportunity is enormous. The global luxury segment is expected to grow by 36% by 2020. In September, Johan, Dan Ammann, and I met with our Cadillac dealers and shared the framework of a plan to elevate the brand so its value in the marketplace matches the strength of its award-winning new vehicles. This includes investing in every customer touchpoint and expanding Cadillac's portfolio with vehicles like the ATS Coupe, the ATS-L in China, and the CT6, which will be the most technologically advanced Cadillac ever built. One of the CT6's most important innovations will be the new lightweight body construction technique that helps reduce fuel consumption, enhances driving dynamics, and improves safety. It's an important statement about our intent to lead the industry in technology and innovation, but it's not the only one. For example, this quarter, we launched Powermat wireless smartphone charging in the Cadillac ATS Coupe, and we continue to roll out 4G LTE and high-speed mobile broadband across our brands in the U.S. We also announced that in 2017, the Cadillac CTS will be GM's first car, and we believe the first in North America, with vehicle-to-vehicle connectivity, which can help mitigate or avoid up to 80% of crashes involving unimpaired drivers. We also confirmed that Cadillac will introduce a technology called Super Cruise in that same timeframe. This feature will allow drivers to safely travel highways without touching the steering wheel or the pedals for extended periods in both stop-and-go traffic and at speed. This is just a glimpse of how we will use technology to make driving more fun, safer, and more convenient. There is a lot more coming. Another piece of good news came when the S&P upgraded GM and GM Financial investment-grade status on the strength of our fortress balance sheet, our cash flow, and our operating performance. The biggest impact of the upgrade will be felt at GM Financial, which will be able to raise capital at a lower cost. That in turn will help us sell more vehicles and build customer loyalty. Before I turn the call over to Chuck, I'd like to give you a quick recall update. As we have discussed before, we have worked very closely with our suppliers to accelerate the production and the shipment of repair parts for the vehicles we have recalled this year, and our dealers have done an exceptional job of fixing vehicles as quickly as possible. With respect specifically to the ignition switch recalls that we announced in the spring, our dealers have repaired more than 1.2 million vehicles, which is more than half of the population still on the road. We now have enough parts and kits available to repair all of the impacted vehicles, so we are stepping up our proactive outreach to customers who have not yet brought their vehicles in for a repair. Finally, the GM Ignition Compensation Claims Resolution Facility, which is being administered by Ken Feinberg, began accepting claims on August 1 and will continue to accept claims until December 31. Let's now move to a more detailed review of the quarter with Chuck Stevens, then we will take your questions. Chuck? Thanks, Mary. Now on slide five, I will start with a summary of our financial results for the quarter. Net revenue for the period was $39.3 billion, compared to $39 billion in the prior year period. The $300 million increase includes an unfavorable $800 million associated with 93,000 lower wholesale volumes and an unfavorable $300 million, primarily related to foreign exchange translation in GM South America and GM North America. These factors were partially offset by $600 million favorable impact from net pricing, primarily in GM North America, favorable mix of $400 million across several regions, and $400 million of growth at GM Financial. Net income to common stockholders was $1.4 billion for the quarter, a nearly $700 million increase from the prior year. This was driven primarily by the absence of the $800 million reduction from the redemption of a portion of the Series A preferred shares during the third quarter of 2013, partially offset by $300 million in special charges this quarter, which I will cover later. Diluted earnings per share came in at $0.81, and our automotive net cash from operating activities was $700 million, down $2.5 billion on a rounded basis compared to 2013. The decrease was driven by one extra weekly payment cycle to suppliers in this quarter compared to the same quarter a year ago, and cash payments related to repairing recalled vehicles, including costs to expedite parts to dealers. For our non-GAAP measures, EBIT-adjusted was $2.3 billion in the third quarter, and EBIT-adjusted margin declined to 5.8%. The decrease from the prior year was primarily due to incremental restructuring expenses in GM Europe, incremental recall-related expenses, and unfavorable foreign exchange. Adjusted automotive free cash flow was a negative $800 million for the third quarter, a decrease of $2.2 billion on a rounded basis. The decrease was driven primarily by one extra regularly scheduled payment to suppliers in the quarter compared to a year ago and cash payments to suppliers and dealers to pay for recall repairs. For the first nine months of the year, we generated $1.3 billion in adjusted free cash flow, despite the higher recall-related calls on cash. This would equate to about $2.3 billion of adjusted free cash flow for the first nine months, excluding recall-related cash payments. Slide six lists the special items for the quarter. Again, net income to common stockholders was $1.4 billion, and our fully diluted earnings per share was $0.81. Net income was reduced $100 million related to flood damage sustained at our technical center in Warren, Michigan, and $200 million of asset impairments related to our Russian subsidiaries. These charges had a $0.16 unfavorable impact on diluted earnings per share. On slide seven, we show our consolidated EBIT-adjusted for the prior five periods. At the bottom of the slide, we list the revenue, wholesale volumes, and margins for the same periods. Our EBIT-adjusted was $2.3 billion, and our EBIT-adjusted margin was 5.8% for the quarter, down one percentage point from the prior year period. This includes $200 million of incremental recall-related expense. Our consolidated wholesale vehicle sales were 1.5 million in the third quarter, a 6% decrease from the prior year, primarily attributable to challenging market conditions in South America and GM International Operations, and our global market share decreased one-tenth of a percentage point to 11.5%. Turning to slide 8, we explain the $400 million year-over-year decrease in our consolidated EBIT-adjusted. As I just covered, global wholesales were down in total. However, the EBIT-adjusted impact of increased wholesales in North America offset the impact of lower wholesales in the rest of the regions. Mix was also flat compared to the prior year. Price was $600 million favorable, primarily due to recently launched vehicles in North America, like the new full-size SUVs, full-size trucks in the Middle East, and price actions to offset foreign exchange and inflation impacts in South America. Cost was $800 million unfavorable, primarily due to $700 million in material costs associated with recently launched products, incremental restructuring expense of $100 million, recall-related expense of $200 million, partially offset by $200 million in material cost performance. Other was $100 million unfavorable, primarily related to $200 million of unfavorable foreign exchange, partially offset with $100 million of incremental equity income. Slide 9 gives our year-over-year EBIT-adjusted performance by segment. GM North America increased $300 million to $2.5 billion, including approximately $100 million of incremental recall expense. GM Europe decreased $100 million on a rounded basis, driven by higher restructuring expense. GM International Operations was flat compared to the prior year period, as China growth was offset by challenging conditions in consolidated operations. The South American segment essentially broke even, despite an increasingly challenging macro environment. GM Financial recorded $200 million in adjusted earnings before taxes, flat year over year. Our corporate sector was a $200 million loss, including recall-related legal expenses of approximately $100 million. I'll now review the key performance indicators for North America on slide 10. For the third quarter of 2014, our total U.S. market share was 17.3%, and our retail share was 15.5%. The success of our recently launched full-size SUVs have driven retail share in the segment to 78% year to date, a nine percentage point improvement. And a nearly 15 percentage point increase in our share of the large luxury SUV segment. Our incentives for the quarter were 11.4% of average transaction price, which put us at 110% of the industry average. This compares to incentives of 10.9% of average transaction price and 114% of the industry average in the prior year period. The incentive growth was far less than our domestic competitors and less than the overall industry. Average transaction prices is an all-time high for GM in the month of September. Slide 11 shows GM North America's EBIT-adjusted for the most recent five quarters. At the bottom of the slide, revenue increased $2.3 billion to $25.8 billion, driven by a wholesale volume increase of 59,000 units and strong pricing. North America's EBIT-adjusted margin was 9.5% for the third quarter. This represents the fifth consecutive quarter of sequential year-over-year improvement in EBIT-adjusted margins, excluding recalls. Our U.S. dealer inventory increased to 754,000 vehicles, up from a year ago, but down about 45,000 units from the second quarter. This is equivalent of 81 days supply, and at the end of September, one day less than the prior year period. GMNA wholesale vehicle sales were 834,000 units, 59,000 units higher than the prior year. North American market share was 16.8% in the quarter, which was a tenth of a percentage point increase from the prior year period. The primary drivers of the $300 million increase in North America's EBIT-adjusted are on slide 12. Volume was $500 million favorable due to an increase of 59,000 units in wholesale vehicle sales, driven primarily by full-size pickups and full-size SUVs. Mix was $100 million unfavorable, primarily due to country mix, as a larger proportion of sales were attributable to Canada and Mexico this quarter compared to the prior year. Price was $400 million favorable, as the $800 million in favorable pricing from our recently launched vehicles was partially offset by $400 million in unfavorable pricing from our carryover products. There were no material incentive stack adjustments or related impacts in price this quarter. Cost was $700 million unfavorable, primarily due to $600 million in increased material costs associated with recently launched products and $100 million of other, primarily due to incremental recall-related costs, including higher freight expense as we expedited shipping of recall replacement parts. This was partially offset with $100 million in material cost performance associated with carryover products. Other was $100 million favorable due to foreign exchange. Turning to slide 13. Europe reported an EBIT-adjusted loss of $400 million for the quarter. On a rounded basis, $100 million increase from the prior year. Revenue decreased to $5.2 billion for the quarter, primarily due to lower volume and foreign exchange, primarily driven by Russia. Europe's wholesale vehicle sales for the quarter decreased 14,000 units to 273,000 units. Opel Vauxhall wholesales were up about 4%, which was more than offset by lower sales in Russia. European market share decreased to 6.5% as we wind down the Chevrolet brand and deal with market declines in Russia. However, Opel Vauxhall brand experienced market share increases in 12 countries on a year-over-year basis. On slide 14, we provide the major components of Europe's $100 million decrease in EBIT-adjusted. Volume was flat. Mix was $100 million favorable, driven primarily by the Opel Mokka. Price was flat. Cost was $100 million unfavorable, driven by $200 million in incremental restructuring expense, partially offset by $100 million in material cost performance on carryover products. Other was $100 million unfavorable due to foreign exchange, primarily the Russian ruble against the U.S. dollar. We now move on to GMIO's profitability for the prior five quarters on slide 15. EBIT-adjusted was $300 million, including $500 million in equity income from our joint ventures. At the bottom of the slide, GMIO's revenue from consolidated operations was $3.7 billion. The $1.1 billion decline from the third quarter of 2013 is primarily due to lower wholesale vehicle sales of 74,000 units associated with the wind down of the Chevrolet brand in Europe and lower volume in ASEAN and India. The net income margin from our China JVs came in strong at 9.6%. GMIO had wholesale vehicle sales of 159,000 for its consolidated operations and 868,000 for the China JVs. GM market share improved to 10.4%, driven entirely by share growth in China, which finished Q3 at 15.2% share. On slide 16, we provide the major components of GMIO's year-over-year performance. Volume was $300 million unfavorable, driven by reduced wholesale vehicle sales in our consolidated operations. Mix was $100 million favorable, primarily attributable to lower proportion of Chevrolet Europe sales. Price was $100 million favorable due to full-size SUVs and full-size pickups in the Middle East, and cost was essentially flat year-over-year. Other was $100 million favorable, driven by increased equity income in China. Slide 17 provides a look at GM South America's performance in recent quarters. Despite a very challenging environment in South America, we have delivered sequential improvements in EBIT-adjusted as the year has progressed, and we expect this trend to continue in the fourth quarter. At the bottom of the page, revenue decreased $1.2 billion year-over-year to $3.2 billion. This is due to $900 million in lower wholesale volumes, primarily in Brazil, Venezuela, and Argentina, as well as $300 million unfavorable impact, primarily from foreign exchange. GM South America's wholesale vehicle sales were 218,000 units, a 64,000 unit decrease from the prior year period, and our market share in the region declined to 16.4%. On slide 18, we'll look at the drivers of the $300 million decrease in EBIT-adjusted. Volume was $200 million unfavorable, driven by 64,000 lower wholesale volumes. Mix was $100 million unfavorable, due primarily to lower sales in Venezuela. Price was $100 million favorable due to actions we've taken in Argentina to partially offset inflationary and foreign exchange pressures. Cost was $100 million favorable, and other was a $200 million headwind due to foreign exchange in Argentina and Venezuela. This totals to essentially break even EBIT-adjusted in South America in the third quarter. Slide 19 provides our walk of adjusted automotive free cash flow for the third quarter. From our net income to common of $1.4 billion, we add back the impact of non-controlling interests and preferred dividends, and then deduct GM Financial earnings to arrive at an automotive income of $1.3 billion. We had $300 million in non-cash special items, and our depreciation and amortization was $1.4 billion. Working capital was a $2.7 billion use of cash, driven primarily by an extra weekly payment cycle to suppliers during the quarter compared to the prior year period, along with increased inventory related to rental cars. Pension and OPEB cash payments exceeded expenses by $300 million in the quarter. Other was an $800 million source of cash, a $200 million increase from the prior year, primarily driven by an increase in joint venture dividends, partially offset by deferred income taxes. This totals to automotive net cash provided by operating activities of $700 million, which also included approximately $700 million in recall-related cash payments associated with the large accruals we made earlier this year. We expect similar levels of recall-related cash payments in the fourth quarter, with the remainder of the recall-related cash payments falling into 2015. We had $1.6 billion of capital expenditures in the quarter, giving us an adjusted automotive free cash flow of negative $800 million. We expect adjusted automotive free cash flow to be positive in the fourth quarter, as much of the negativity in the quarter was due to timing of working capital components. Our liquidity position on slide 20 decreased to $36.6 billion, including $26.1 billion in cash and marketable securities. Debt decreased to $7.3 billion, and we continue to have $3.1 billion in Series A preferred stock. As we look at a roll-forward of our pension plans, primarily including updates to service costs, payments, and foreign exchange, the U.S. qualified and non-qualified pension plans ended the quarter underfunded by $6.8 billion. Our non-U.S. pensions were underfunded by $11.5 billion, and our unfunded OPEB liability remained flat at $6.2 billion. Slide 21 provides a brief summary of our auto financing activities. GM Financial released their results this morning and will hold their earnings conference call at noon. Our U.S. subprime penetration in the third quarter declined 0.2 of a percentage point to 7.6%. Our U.S. lease penetration increased to 22.3% in the third quarter, which is just a few points below industry average. Lease penetration in Canada improved 7.8 percentage points to 15.9%. GM as a percentage of GM Financial loan and lease originations rose to 74%, and GM Financial's percentage of GM's U.S. consumer subprime financing and leasing was 33% in the quarter. GM Financial's annualized net credit losses remain consistent at 2%, and their adjusted earnings before tax were $205 million for the third quarter. Finally, on slide 22, we reiterate our focus as we begin to close out the year. We need to continue to execute our recent and upcoming launches, and this includes ramping up availability of our all-important midsize trucks here in North America. We will continue to drive improved core operating performance across the regions as we execute action plans to address challenging environments in places like South America and Russia. We are confident we are currently on or ahead of the plan to deliver the results we promised earlier this year, excluding the effects of recalls. We continue to believe that second half EBIT-adjusted and EBIT margins will be higher than the first half of the year, excluding recalls. The first half EBIT-adjusted and margins were $4.3 billion and 5.6%, respectively, excluding recalls. In Q3, we delivered another $2.5 billion EBIT-adjusted and margins of 6.4%, excluding incremental recall-related expenses. Our third quarter results further validates that we are consistently delivering on our plan. Mary and I will take your questions. After which, Mary will have some closing remarks. Thanks. Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Rod Lache with Deutsche Bank. Please go ahead, sir. Buddy. Couple things. One is, I was hoping you might be able to just talk a little bit about within North America, the price and mix versus the contribution costs. If you add it all together for new products and carryover, it's about negative $200 million. You did mention at your investor meeting that you're expecting that to get better going forward, I think partly on some moderation of carryover pricing and partly on cost. Can you just give us a sense of when we would start to see that, some of the major drivers of that improvement going forward? Yeah, sure, Rod. As we indicated back on October 1st, when we looked into 2015 and beyond, we expect to accelerate material performance on carryover, generally in the range of $800 million-$900 million of performance next year, which would be up $300 million or $400 million on a year-over-year basis. As we cycle through, especially on a year-over-year compare, the incentive increases in full-size pickups, we would expect that to moderate as well next year, driven by a number of factors, as we mentioned, competitive launches at a couple of our competitors. Those will be the big drivers. Early next year, you would expect to see some moderation? That's our expectation to see it through the year as we indicated on October 1st. Yes. Okay. I noticed in the J.D. Power PIN data that there was something of an uptick in incentive spending in large pickup trucks recently, like September and October. Is that just sort of tactical moves, or is there some deterioration happening there? I was hoping you can also maybe touch on just China kind of broadly. Obviously, there's been some slowdown broadly in that market. Some players are suggesting that inventories have risen and obviously you've got some capacity growth. Any update on the outlook for that region? Yeah. Talking about the truck incentives first. Overall incentives for us in September were up versus where we've been running in July and August. As you noted, it was very much a tactical move. We wanted to start and aggressively sell down model year 2014s to make room for model year 2015s. If you look at overall Q3, our increase was below our domestic competition in Q3 versus Q2, and generally in line with the industry. On a calendar year to date basis, we're generally in line with spending levels as a percent of transaction price versus last year. So in no way a departure from incentive discipline and aligning supply and demand. It was very much a tactical move in the month of September. I would expect incentive spending to moderate and come down as we go through the fourth quarter. Relative to China, growth has slowed in the last couple of months, but year to date, still up between 9% and 10% on a year-over-year basis. We're still expecting something just short of 10% industry growth to somewhere around 24 million versus just over 22 million in 2013. Would expect to see that kind of level of growth maybe somewhat muted going into 2015 as well. Okay. Thank you. Yep. Our next question comes from the line of Brian Johnson with Barclays. Proceed with your question. Sure. A couple questions, sort of a housekeeping in North America, then sort of Russia and helping us understand what part of Russia's in GMIO versus Europe. In North America, your wholesales seem to match your retails roughly year-over-year. But if we look at sequentially, they weren't kind of in line. Can you kind of maybe go back and recap for us the kind of wholesale-retail mismatch last quarter versus this quarter, and then how to think about that going forward? Yeah. On that specific question, Brian, we'll get back to you on those details between second quarter and third quarter retail versus wholesale. Remember, you start with production imports, and we import a fair few units, less exports, and then we end up with factory unit sales, and then we adjust for whatever happens from a daily rental perspective, whether we are buying. So I would suggest that taking wholesales and the movement in dealer inventory should roughly triangulate with the changes in deliveries, but we can provide that detail to you later. Okay. Second question around North America. I think in the past, you'd said the same thing about North American margin that you said about global EBIT-adjusted margin, that it would improve second half over first half recalls. Is that still out there, or is it just because we're waiting to see it in the end of the deck here? Yeah. I would suggest that EBIT margins in North America are going to be higher in the second half than they were in the first half. They will be higher in the second half versus the second half last year. They will be higher in the fourth quarter versus the fourth quarter last year. Okay. Finally, could you provide some more color on Russia? What was the headwind in 3Q? Maybe where does it show up between GME and the wind-down of Chevy in GMIO? Is there any inter-region we ought to be aware of there? Then how should we think about that going forward, both the currency effect, which might just show up in a special item, and then just the ongoing pressures there. All right. First, all of Russia results are reported in GM Europe. Chevrolet Europe, which is Western Europe results, are reported in international operations. So, again, all of Russia is within the GM Europe segment. When you think about Russia on a go-forward basis, I think you need to size the operation. We are selling today roughly 125,000 to 130,000 units, significantly down year-over-year because of the industry. Locally, we have about a quarter of a billion dollars in country of local fixed costs. So when I think about where the challenges or where the headwinds could materialize on a go-forward basis, clearly it would be in foreign exchange, depending on what happens with the ruble and our ability to price for that, and offset it. Number two would be in volumes and how much further does the industry drop on a go-forward basis. But I think the key message is overall exposure, overall magnitude of the business in Russia, compared to the rest of GM Europe, is relatively small. Okay. Is your PP&E base fully depreciated yet? If you were to mark it down due to either business prospects or currency or both, I assume that would be a special item. We impaired the Russian assets in the third quarter, a $200 million charge as a special item. Okay, thanks. Yep. Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question. Good morning. Just a first question on average transaction prices, which are running better than I think most people had expected despite the fears. One of the big supports is that three to four-year-old residuals are running about 5% higher than normal for the industry. I was just curious if you can comment on where GM's three to four-year-old residuals are running relative to current pricing, and just trying to understand that versus where the industry stands right now, because it's a big support for price. Just broad strokes, John, our residuals generally, compared to where the industry's at in the U.S., we have a gap of roughly 200 basis points to the industry on average across our portfolio. So you could apply whatever numbers you have for the industry, and we're about 200 basis points less than that on average from a residual perspective. You'd expect that gap to close as new products are launched over the next one to three years? As I've talked about before in my former role, that's one of the key initiatives that we have on a go-forward basis, was to close that residual gap. If you size up that opportunity, from a business model leverage, improving the overall output of the business, that's a $150 million to $200 million opportunity. Especially, it manifests itself from a lease perspective and lower lease costs. That is very helpful. A second question, as we look at slide 19 and the working capital hit of $2.7 billion, I know you guys are citing this extra week of payments to suppliers. Is that really basically $2.6 billion, Chuck, or is that a little bit less than that? Just trying to understand the magnitude. Yeah. Broad strokes, that extra payment is worth about roughly $2 billion. Then there is an inventory impact that makes up the rest, and a big portion of that inventory impact is the timing of a rental repurchase. We buy them back, and we did not send them to the auction in Q3. Frankly, a certain part of that delay was we had to hold until they were repaired because of recall issues. So I would expect to see that unwind, not necessarily all in Q4. We will be opportunistic depending on used car values, typically better in Q1 than Q4, but I would expect that to unwind over the next six months or so. The working capital should unwind in the fourth quarter? A good portion of that supplier payment, that extra payment should unwind. So start at $2 billion. That will be driven largely by the level of production that we have on a comparable basis. But certainly, we would expect a good portion of that to unwind in the fourth quarter, yes. Okay. On the European comments, it is very much focused on profitability in 2016. Bochum is going to be closed at the end of this year, and it sounds like the Corsa and Astra launches will be fairly helpful next year. I was just curious if you could talk about sort of the interim step in 2015. Could that be a break-even year in Europe just based on the cost saves and the product launches? I would only go this far and stay tuned for January. We would expect to see significant improvement year-over-year in Europe versus this year. Okay. Just lastly, it looks like you guys bought back about $168 million worth of shares in the quarter. What was that? I thought we were not looking at any share buybacks here, but it looks like you executed share buybacks in the quarter. Yeah, this is just any dilutive share buyback related to our incentive compensation program. Okay. But you do have the ability to buy back shares if so desired, and to offset options? That's fundamentally what we did in the quarter, yes. For the year, what we intended to do was make sure that our incentive compensation program did not dilute shares. Yeah, we don't have options, by the way. Okay, gotcha. Thank you very much. Yep. Our next question comes from the line of Colin Langan with UBS. Please proceed with your question. Oh, great. Thanks for taking my questions. Any update on the restructuring costs for the year? I think in starting the year, you said it would be about $1.1 billion. There's only $700 million year to date. Does that imply a big hit in Q4? Is that number likely going to come in lower? I would expect overall restructuring expenses to come in somewhat less than $1.1 billion, but I would also suggest that Q4 will be slightly higher than Q3 from a restructuring perspective. Two drivers to that, Colin. Number one, Europe will be down slightly quarter to quarter, but we're also now starting to ramp up the restructuring costs associated with the Australian manufacturing. So, the combination of those two, a little bit lower in Europe, higher in IO, the net result will be slightly higher restructuring costs in Q4 versus Q3. But overall, I think we're going to end up closer to $1 billion than we will $1.1 billion when we get all said and done. A lot of that's dependent upon the timing of employee acceptances of separation programs, et cetera, but that's our best thinking at this point. Looking at GMIO ex China, it looks like it continued to decline about another $100 million. Is there any restructuring plans there? I assume this year there was going to be some actions given the changes to the Chevy Europe strategy. Is there anything we should be anticipating coming down the line there to get those losses to turn around? Yeah, we continue to execute a number of plans. I just mentioned the Australian manufacturing. That's going to be one big driver over time that will drive improved performance. There's been a number of actions taken by Stefan Jacoby and his team in all of the markets there to improve the results and right-size the business model. In fact, we're ahead of our plan there from a restructuring and a performance perspective. Again, similar to Europe, without providing too much specific guidance on 2015, we would expect to see continued improvement in consolidated operations on a year-over-year basis. A lot of that, obviously, will be absence of losses associated with Chevrolet Europe, which is also factored into the IO results. I would just add, Chuck, there are two components of that. There is the, I will say, shorter term of just driving the efficiencies and making sure we are managing the business effectively, and then there is longer term of making sure we have the right portfolio, understand the customer, and are going to market with the right product lineup that will have a little longer horizon. Okay. Just one last question. The tax rate was pretty low in the quarter. How should we be thinking about that going forward for the full year? Yeah, for the full year, I would say low 20% range. Okay. All right. Thank you very much. Yep. Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question. Hi. Good morning. Thanks for taking my call. Obviously, a lot of moving pieces in Europe these days. Some better sales and share in Western Europe, sharply lower sales and share in Russia. You've got currency, sanctions, plant closure, Chevrolet exit, all that stuff. I'm wondering, is there anything you can tell us about the profitability of your underlying core Opel Vauxhall operations outside of Russia, outside of COCOM, so that we can better gauge the progress of your underlying continuing results without smoking the lights? Okay. Broad strokes. We lost overall Europe $300 million in the first quarter, $300 million in the second quarter, $400 million in the third quarter. The restructuring in each of those was roughly $200 million. The core overall European operation, about $100 million loss in the first quarter, the second quarter, $200 million in the third quarter. A chunk of that really was related to the Corsa ramp down and the Corsa launch. The core European business was running close to $100 million loss, and that includes a fairly significant year-over-year headwind from Russia. My takeaway and the way I think about it, Ryan, is the core operations in Opel Vauxhall performing reasonably well if you strip out the restructuring and factor in some of the headwinds we're facing from Russia. Okay, great. Housekeeping item on North America. Chuck, you called out some higher freight expense related to the recall parts. Can you quantify that? It does say on slide 12 there's $100 million of non-material costs called out. Is all of that freight? That would be 40 basis points. Yeah. No, all in on around about $100 million of incremental recall-related expense. A significant portion of it is premium freight and just expediting the shipment of recall parts. As you know, not only the ignition switch, but other recalls. We've got 25-plus million vehicles we're trying to repair and take care of the customers as expeditiously as possible. We're also doing significant outreach to a number of these customers above and beyond what we had done in the past to try to encourage them to bring their cars in and get them repaired, which is a factor. Overall, from a warranty adjustment perspective, there were adjustments in warranty, but nothing material. Okay. Taken all together, it kind of adds to on around $100 million or so. I guess what I'm hearing is that fully adjusted for recall, you ran at 9.9% in the third quarter, which is typically a softer quarter, relative to your 2016 goal of 10.0. I would say that your math is correct. In the third quarter, ex the impact of recalls, we ran at about 9.9%. Okay, great. Just a complete last question. On the break-even result in South America, probably the biggest surprise today, I would say. If you look at appendix slide 4, though, it doesn't look like you're taking much restructuring down there. You've talked about São José, those comps, but nothing that doesn't round down to zero. If it's not restructuring, then is it product cadence, which is, of course, a good thing, but that maybe means it's a little bit more cyclical as opposed to structural restructuring. Can you just tell us about the sources and sustainability of those better results? Thanks. Yeah, I think what you're fundamentally seeing is the impact on the cost structure of all the actions that we've been taking over the last two years. This just wasn't a one-time item. Starting back in late 2011, 2012, we've been consistently driving improved localization, material performance, logistics savings. We've been working on manufacturing efficiency, including plant closures and other actions. A more economic labor agreement, three-year labor agreement at lower than industry average economics, for instance. What we're seeing is the impact of a much lower cost structure and our ability to deal with the volatility in the market. It's not a one initiative thing. It's a combination of everything the team's been executing over the last number of years. Great. Thanks for the color. Our next question comes from the line of Adam Jonas with Morgan Stanley. Please proceed with your question. Hi, thanks and good morning, everybody. A couple questions for Mary. Mary, at Ford Motor Company's recent Capital Markets Day, a couple days before yours, they showed a slide called Automotive Industry Trends, and part of the slide included technologies that would have a disruptive impact on the business model of automakers. At the top of the list was new mobility and car sharing. I would love to hear your views on how GM views the threat or opportunity of car sharing and ride sharing things, business models like Uber, Lyft, and you guys have RelayRides on your business, and what you're doing and how much of a focus it is. Well, Adam, as I said at the Global Business Conference, we think that there's going to be more change in the next 5 to 10 years than there has been in the last 50, with a lot of different aspects, as it relates to technology, consumer preferences, what is happening from an environmental perspective, from a regulatory perspective. And although we're not announcing specific things, we are working in all those areas because they drive change, but they also drive opportunity and to strengthen the business. And at the end of the day, there's going to be a point where people still need to get from point A to point B, and we want to participate strongly in that in a number of different models, because I don't think it will be the same across the globe. We're working on a number of different initiatives, specifically across what we deem or call urban mobility. We do see those changes coming, and we see them as opportunities. Great. And then just a final question for Mary. A lot of the topics and goals of your business conference through 2016 and then, of course, beyond through the architecture consolidation period well in the next decade involve a very large dependence on China, on Cadillac, on your global architectures, which would, of course, I imagine, involve your most important strategic partner, Shanghai Auto. I guess the question is, as you get more intertwined with Shanghai Auto or SAIC, is the current structure enough to kind of handle and nurture that codependency that you have? You're obviously hugely important to them; they're important to you. But as you kind of become more and more codependent, not less, is there an opportunity or is there a discussion to kind of more formalize that, perhaps through, let's say, a strategic alliance or cross-shareholding or something more, or is the current structure satisfactory to you? Thank you. I would say the current structure is satisfactory. I think what's more important than even the structure, though, is the strength that we have in the partnership, the respect, how well we work together, how we look at the business and are driving it and looking at opportunities across the marketplace. We have complete alignment in the importance of the three brands that we have from a Cadillac, a Buick, and a Chevrolet, and then from the specific, as you look at the Wuling partnership with Baojun and the Wuling brand. So very well thought out strategies have looked at the opportunity. Cadillac provides a great opportunity. So again, I think the structure is fine, and I think it's the strength of the JVs is the way that we work together and look at how the market's going to progress and how we're going to participate in it. Thank you, Mary. Sure. Our next question comes from the line of Lipi Kelly with Citi. Please proceed with your question. Great, thanks. Good morning. Just a couple follow-up questions. Chuck, I think back to South America. You mentioned you expect to see continued momentum into the fourth quarter. Do you expect you might be profitable in South America in the fourth quarter? What I indicated was continued improvement in the fourth quarter. We lost $32 million, specifically in the third quarter, essentially break even. I would expect to see that improve. A couple of drivers of that. That's always with the caveat that we see no further decay from a macro perspective. Based on the work that we have been doing with the Venezuelan government, we were able to get currency releases back in the second quarter. Not a huge amount, but enough to enable us to order and produce a low level of vehicles in the fourth quarter. That will, all other things being equal, really be the tailwind in Q4 versus Q3, going from essentially zero production to some level of production, assuming all works out. That's the biggest driver, again, with the caveat that there's no further deterioration from a macro perspective. Great. Just to clarify, I think you mentioned, Chuck, in your remarks that you are at or ahead of the original expectations for 2014. Were you specifically referring to the original outlook for total EBIT-adjusted to be modestly improved 2014 versus 2013? Yeah, I was generally talking about the guidance that we provided back in January, and based on the performance that we've seen calendar year to date, we're certainly, from an overall company perspective, very much on plan and in certain areas ahead of plan. For instance, Europe versus what we expected earlier this year is performing ahead of plan. International operations, both China and our consolidated operations are performing a bit ahead of plan. North America is very much on plan. South America, clearly is not performing as we expected given the macro conditions. As we look through the fourth quarter, if we achieve our objectives and what we expect to in the fourth quarter, I think that at the end of the day, we're going to be very much on or potentially ahead of that plan. That's very helpful, Chuck. Just lastly, CapEx in the quarter looked a little bit light. I think you're running at least lower than that $7 billion-$8 billion. Any thoughts there and expectations into the fourth quarter, how we should think about just CapEx going forward here? Yeah, that's cash CapEx, not accrual CapEx. A lot of that has to do with when you make the commitments and then depending on the milestones. On a year-over-year basis, last year we were at $1.9 billion in the third quarter on cash CapEx. This year, $1.6 billion. I would expect the cash CapEx to go up in the fourth quarter. You can almost look at the cash CapEx to be at or slightly delayed from when you actually launch the products because you go through PPAP and all the milestones, and once everything's running, we start to pay the suppliers. So I would expect, as we indicated earlier, to spend in the $7.5 billion range of this year's, and I would expect Q4 cash CapEx to go up versus Q3. Terrific. That's very helpful. Thanks so much. Yep. Our next question comes from the line of Daniel Galvez with Credit Suisse. Please proceed with your question. Good morning. Thanks. Thanks for the additional disclosure on majors versus carryover pricing. In North America, is there any way you can give us a rough estimate of what percentage of shipments were new products versus carryover in the quarter? We can get that information for you, but I don't have it off the top of my head. When you think about the new products that we're selling right now, that would be part of that calculation. Full-size SUVs, heavy-duty pickup trucks, to the extent that we sold mid-size pickup trucks in the quarter. I would think that would be a relatively low percentage of our overall sales, but obviously fairly big impact when you think about the price impact on full-size SUVs and heavy-duty pickups. Okay. Got it. What products, if you can go into any detail, are driving the negative pricing on a year-over-year basis on the carryover? Yeah. Largely full-size pickups. Again, as you launch through last year's launch cadence, in the third quarter last year, we were still in our launch cadences. We started in April with Fort Wayne with one series of trucks and moved through the launch cadence. I would say largely that's attributable to full-size pickups. Not entirely, but at least the majority of that $400 million negative net price is associated with large pickups. Basically the large pickups that you're selling this year that are GMT900s versus- No. The new pickups because we cycled out of the launch, right? Got it. Okay. I see. Okay. Then just one other question on GMIO. If you could talk about the trajectory. Were you exporting K2XX products into that region in Q3? And more on a long-term basis, can you give us an update on now that Chevrolet Europe, they're getting no production from Korea anymore. What's the cap utilization situation in Korea and anything you can tell us on plans to address that? Yeah. All right. First on the K2, yes, we do produce and ship to the Middle East, and as we indicated, as we thought about second half and next year, the growth of that and the performance of that in the Middle East we thought was going to be a tailwind, and it's starting to prove out to be that. We had favorable mix or price in the third quarter associated with the launch of those products, and we expect that to continue going forward. Relative to Korea and Chevrolet Europe, and we've talked about this before. Clearly, taking roughly 200,000 units out of the manufacturing build in Korea has created a capacity situation, and we're aggressively and actively working to deal with that over time. So that's part of the actions that we're taking in international operations to ensure that we've got the right industrialization and structure around this. The demand capabilities in the region. Korea is certainly an area that we continue to focus and work on. Okay, appreciate it. Thanks. Yep. Our last question today comes from the line of Patrick Archambault with Goldman Sachs. Please proceed with your question. All right. Made it in under the wire. Just two last ones from me. Number one is the impact of, well, you've seen the Manheim come off a little bit, not dramatically, but there has been some moderation in used prices. Can we understand how that impacts you from a leasing perspective? Is that strictly kind of a GMF thing, or is there a lease sharing or residual risk-sharing arrangement that impacts North America as well? Okay. First, we execute leases today through GM Financial, Ally, and U.S. Bank, our three partners. There's no residual risk sharing, so the residual exposure stays with the finance company, whether it's GMF, Ally, or U.S. Bank. Clearly, depending on industry moves and what happens with our residuals vis-a-vis the competition, the current at-the-market costs can manifest themselves primarily in the OEM as we need to hit competitive payment points. So that gets back to that residual gap that I was talking about before. But I would suggest from a residual risk perspective, and I can speak specifically to GM Financial, we monitor that very closely. We mark to market on a quarter-to-quarter basis. We look at the developments in the used car market and where we think those prices are going versus the ALG, Automotive Lease Guide, which is how we establish the reserves to start with. We're, at least in our view, fully reserved and in good shape as of Q3 at GM Financial. Okay, that's helpful. Then, just one last clarification on the, I guess it's slide 12, GMNA. There are indeed a lot of moving pieces here, but just as we kind of think about the makeup of the profit tailwind you're expecting in 2015 and ultimately in 2016. You gave a number of pieces. Clearly, there's the cost saves of, I guess, $400 million year on year that you highlighted that's beneficial that potentially get that $700 million cost block down. Now, you did say incentives on carryovers, could they be less of a drag next year based on anniversarying some of those hard headwinds on the trucks? I'm just trying to get a sense, really, is the profit increase really driven by volume with these two things canceling out? Or could we be in a situation where price and cost all in is also positive year on year? Yeah. On a carryover basis, as we indicated from a pricing standpoint, in 2013-2014, we've been running roughly negative 1% net price, maybe a little bit more this year. We expect that to moderate next year from a net pricing perspective. So year-over-year carryover pricing will be a tailwind. We expect material costs, year-over-year material performance to be a tailwind, consistent with what we said October 1st. Obviously, volume will be a benefit overall as we were bridging to 2016. We're working to manage to a flat fixed cost kind of environment. Then our next generation products as we launch the next generation Cruze, Malibu, Equinox, we expect those vehicles to be more profitable, not only from carryover material costs, but just material cost performance in the vehicles as well as improved pricing versus the vehicles that they're replacing. So those were the big drivers. Oh, okay. It does sound, there's a lot of opportunity there. It sounds like the net of pricing and costs could be positive on a year-on-year basis. I would think so, yes. Okay. All right. Thanks a lot, guys. There are no further questions at this time. Turn the conference back over to you. Great. Thank you, operator. We have covered a lot of ground today, so I am going to keep my remarks brief. In the last 10 months that this leadership team has been together, we have spent a significant amount of time defining our goals for the future of GM and developing an integrated holistic plan. At the Global Business Conference, we shared some of our key initiatives, including a product development strategy where we expect to deliver class-leading vehicles and core operating efficiencies. Today, we shared solid results that underscore our strong position in the U.S. and China, and we also showed resilience in the face of headwinds in other markets. Taken together, all of the ingredients are there for GM to create significant value for customers and shareholders over time. Clearly, we have a lot of work ahead of us, but I expect to meet all of our goals for two reasons. First, our integrated approach is designed to systematically and methodically build a more profitable General Motors. We recognize it will take time, but we are confident we are on the right path. Second, we have never been more aligned as a leadership team or more focused as a company. I believe that is exactly what you need for long-term success, and I look forward to the next opportunity to update you on our progress. I appreciate your time today. Thanks. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.