Earnings Call: Q1 2013

May 2, 2013

Summary

Q1 revenue was $36.9B and adjusted EBIT was $1.8B, down $400M YoY; global market share rose to 11.4%. Cash flow was pressured by lower earnings and timing items expected to reverse during the year.

Ladies and gentlemen, thank you for standing by. The conference will begin momentarily. We thank you for your patience and ask that you please remain online. Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company first quarter 2013 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded Thursday, May 2nd, 2013. I would now like to turn the conference over to Randy Arickx, Executive Director of Communications and Investor Relations. Please go ahead, sir. Thanks, operator. Good morning, and thank you for joining us as we review the GM financial results for the first quarter of 2013. Our press release was issued earlier this morning, and the conference call materials are available on the investor relations website. We are also broadcasting this call via the internet. 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, Dan Akerson, General Motors Chairman and CEO, will provide opening remarks, followed by a review of the financial results with Dan Ammann, Senior Vice President and CFO. Dan Akerson will then conclude the remarks portion of our call with some brief closing comments. After the presentation portion of the call, we will open the lines for questions from the analyst community. In the room today, we also have Tom Timko, Vice President, Comptroller, and Chief Accounting Officer, Chuck Stevens, CFO of North America, and Jim Davlin, Vice President, Finance, and Treasurer. With that, I'd like to turn the call over to Dan Akerson. Thank you, Randy, and thank you all for joining us. As we do every quarter, I'll review some highlights, and then Dan Ammann will take you through a more detailed presentation on our results. Before I do that, I want to let you know that the segment reporting we are showing today reflects the successful implementation of what we call country of sale financial reporting. What this means is, from now on, our automotive segment revenue and profits will be reported in the geographical regions where the vehicles are sold. This new approach will give us improved visibility into our profit and revenue across the individual markets and product lines, which in turn will help us optimize capital allocations and drive improved results. As we walk through the numbers, you'll see that what we are providing you with an apples-to-apples set of comparisons to prior periods using this new approach. Let's turn to slide 2, which summarizes our performance. Despite the mix of red and green arrows, this was a solid quarter for GM, and we are much more of a formidable competitor now than we have been in more than a generation. We are very much on plan financially as well, despite the competitive landscape, the volatility we have seen in several currency markets, and Europe's ongoing challenges. I won't read the entire slide, but I would like to draw your attention to a few key points. First, we increased our global market share to 11.4%, which is up 0.2 of a point year-over-year. The gains were concentrated in North America, Europe, and international operations. What you're seeing is the result of several new successful product launches. In addition, we are reporting EBIT-adjusted of $1.8 billion, which is down $400 million compared to a year ago. When you look at the regional detail, you can see that Europe actually improved its EBIT-adjusted results year-over-year. North and South America were down slightly, and both GMIO and GM Financial were essentially flat. Market conditions at GMIO outside China continue to be challenging. You can also see on the slide that our adjusted automotive free cash flow was down quite a bit year-over-year, which Dan will cover in more detail. As he'll explain, we are impacted by lower cash earnings and the adverse timing of various items, which we expect to reverse in the balance of this year. Now let's turn to slide 3, which is a summary of other first-quarter highlights. Let's begin by recognizing GM Financial. GM Financial already helps us meet the financing needs of customers and dealers in strategic and underserved markets in North America, all with very good risk-adjusted returns and a smaller balance sheet than other captive automotive finance companies. As we look at our global growth strategy, we saw a significant opportunity for them to help us with cars profitably around the world as well. That's what drove us toward the acquisition of Ally's international operations. We recently completed this acquisition in a majority of markets, and we expect to close the remainder in a timely fashion. Going forward, GM Financial will be able to provide financing in markets that represent roughly 80% of our sales volume. Of course, our customers are the final arbiters of success, and our momentum is building with each new launch. In China, GM and its joint ventures had a record first quarter sales, and March was the second-best month ever. We also began domestic production of the Cadillac XTS in February, which marks the start of our drive targeted to triple Cadillac's annual sales in China to 100,000 units by the end of 2015. In the U.S., meanwhile, Cadillac's 38% year-over-year increase in the first quarter was the largest of any volume brand, and Buick's 28% increase was number 2. The driving force at both brands is great new products like the Cadillac ATS and Buick Encore, which are both in segments where we didn't compete heretofore. Another success story is developing in the U.K., where Vauxhall grew in its first quarter sales by 19% a year ago. The entire U.K. market was up less than half that amount. Strong early sales of Opel Mokka and the Opel Adam also helped drive these results, and both vehicles are off to a strong start in the rest of Europe as well. In fact, we now have more than 100,000 Mokka orders and more than 30,000 Adam orders on the books. Finally, in Brazil, the all-new Chevrolet Onix helped Chevrolet deliver a 3.2% first-quarter sales increase, almost more than double the market. Progress in Brazil helped offset challenges in Venezuela due to geopolitical situation. As we move forward, we're going to keep the pressure on. In China, our 2013 capacity is about 20% higher than last year, and we're introducing redesigns of the Buick Excelle and the Cadillac SRX. Our strength in China offsets weaknesses in our other GMIO consolidated operations. On the other side of the world, the production of the all-new Chevrolet Impala has begun at our Oshawa, Ontario plant. This car is designed to shift our sales mix from roughly 70% fleet to 70% retail over time. At Cadillac, we unveiled our new CTS at the New York Auto Show to rave reviews, and we also unveiled redesigns of the Buick LaCrosse and Regal. These new cars will give Buick an essentially all-new U.S. showroom by the end of this summer. Perhaps our most important product news was the announcement of the Chevrolet Silverado 1500 will launch with carry-over pricing and V8 fuel economy that's 1 MPG better than Ford's EcoBoost V6. Together, the Sierra and Silverado are winning combination that should drive our average transaction prices through a combination of improved series mix and option penetration, along with lower incentives. The crew cab models are in production and will bring other light-duty models online later this summer. Finally, we cemented our global leadership in connected vehicles in February when we announced the automotive industry's largest deployment of 4G LTE mobile broadband. We're going to roll out 4G LTE across all GM brands and regions starting in 2014 in the United States and Canada. What makes our approach so innovative is we'll offer built-in connectivity. In other words, you won't need a tablet or a smartphone to access 4G LTE in a GM product. There are many more examples of GM's progress that I could cite, but I think the message is clear. We're a very healthy company that's getting stronger each quarter, and in the product arena, we're playing offense and competing to win. Now, in the interest of time, I'm going to turn the call over to Dan Ammann, who will review our quarter in detail. After that, I'll return to some closing comments. Thanks. Thanks, Dan. Slide 4 provides a summary of our first quarter GAAP and non-GAAP results. Net revenue for the period was $36.9 billion. The decline from the prior year was partially due to $400 million in unfavorable foreign exchange translation. In addition, while our deliveries to end customers were higher, our wholesales, which drive revenue, were down. Our GAAP operating income was unchanged at $1 billion. Net income to common stockholders declined $100 million to $900 million, and our fully diluted earnings per share came in at $0.58. Our automotive net cash from operating activities was $500 million, a $1.8 billion decrease from the same period in 2012. For our non-GAAP measures, EBIT adjusted was $1.8 billion in the first quarter, and the EBIT-adjusted margin was 4.8%. Our adjusted automotive free cash flow was negative $1.3 billion for the quarter, a decline from 2012 due to lower earnings and timing-related items we will discuss later in the presentation. Slide 5 identifies special items for the first quarter that had an impact on our earnings per share. At the top of the slide, our net income to common stockholders was $900 million, and our fully diluted earnings per share was $0.58. As we advised in our 2012 calendar year earnings announcement, we had a $200 million impact from the devaluation of the Venezuelan bolivar in the first quarter. This charge, plus the net effect of a few smaller items, had a $0.09 unfavorable impact on earnings per share. On slide 6, we remind you of our consolidated EBIT adjusted for the last five quarters. At the bottom of the slide, we list the revenue and margins for the same periods. Our operating income margin for the first quarter of 2013 was 2.6%, which was equal to the same quarter in the prior year. Our EBIT adjusted margin decreased one percentage point to 4.8%. We next display the recent history of our consolidated wholesale vehicle sales, which were 1.6 million vehicles in the first quarter, slightly lower than the prior year. We will discuss our new disclosure of this volume metric momentarily. Our global market share increased 0.2 percentage points to 11.4% for the first quarter. On slide 7, we provide an explanation of the $400 million decrease in year-over-year consolidated EBIT adjusted. We earned $2.2 billion in the first quarter of 2012. Volume was $200 million unfavorable, primarily due to lower wholesale volumes in North America and Europe. Mix was $100 million unfavorable. Price was $200 million unfavorable in GMNA, and total cost was $300 million favorable due to lower expenses in Europe. Other was $300 million unfavorable due to foreign exchange. On the next slide 8, we discuss our transition to country of sale reporting that Dan previously mentioned. Beginning with this quarter's earnings announcement, we will now report revenue and profitability in the automotive segment in which we sell our vehicles to our outside customers. Previously, our segment results included the impact of inter-segment sales and profits. This new approach improves the profit and revenue visibility across our markets, which will be helpful for managerial purposes. Chevrolet Europe financial results will continue to be recorded within the IO segment to be consistent with how we manage the business. This new approach of reporting automotive segment financial performance does not affect our consolidated results. We will also now report wholesale vehicle sales volumes instead of regional production volumes. This change fully aligns our disclosed volumes with our new country of sale reporting. Slide 9 gives a summary of 2012 calendar year revenue and EBIT adjusted on a previously reported and on a country of sale basis. Please note that under our revised methodology, we will generally no longer have revenue recorded in our corporate and eliminations, as the segment results reflect only sales to outside customers. Slide 10 gives a similar comparison of the two methodologies for the first quarter of 2012. The country of sale results for the other quarters of the previous year will be displayed on our upcoming segment charts. Slide 11 gives our year-over-year EBIT adjusted performance by segment on a country of sale basis. North America was down $200 million to $1.4 billion. Europe improved to a $200 million loss. The performance in IO was flat at $500 million, and South America recorded a break-even performance down $200 million for the same period in 2012. GM Financial continued to deliver solid profitability with $200 million in earnings before taxes, and our corporate sector was $100 million expense for a total of $1.8 billion EBIT adjusted for the quarter. We now move on to our segment results with the key performance indicators for GM North America on slide 12. For the first quarter of 2013, our total U.S. market share was 17.7%. Our retail incentive levels on an absolute basis are higher for the prior year period. On a percentage of ATP basis, our incentives for the quarter were 111%. This puts us at 116% of industry average levels for the first quarter of 2013. The increase from the prior year is largely due to increased incentives on full-size trucks as we manage the transition to our all-new Chevy Silverado and GMC Sierra. Turning to slide 13, we show North America's EBIT adjusted for the most recent five quarters. At the bottom of the slide, revenue was $23 billion, down $200 million from the same quarter in 2012. EBIT adjusted margin was 6.2% for the first quarter, down 0.9 percentage points from the prior year. Our U.S. dealer inventory was 744,000 units at the end of the first quarter. The increase from the prior year was primarily due to our recently launched vehicles in new segments. GMNA's wholesale vehicle sales were 829,000 units for the quarter, a 19,000 unit decrease from the prior year due to production downtime we've taken to prepare for upcoming launches. North American market share came in at 17.1%, which was an improvement from both last year and the prior quarter. On slide 14, we provide the explanation of the $200 million year-over-year decline in North America's EBIT adjusted. EBIT adjusted was $1.6 billion for the first quarter of 2012. Volume was $200 million unfavorable due to the lower wholesale vehicle sales. Mix was $100 million favorable due to our recent launches of the Cadillac ATS and XTS. Price was $200 million unfavorable due primarily to higher incentives as we manage our full-size truck transition. Cost had no net impact as $100 million in reduced pension income was offset with $100 million in decreased material and freight costs. This nets to EBIT adjusted of $1.4 billion. On slide 15, GME reported an EBIT adjusted loss of $200 million for the first quarter, a $100 million improvement from the prior year. Revenue was $4.8 billion for the quarter, down from $5.3 billion in the prior year period. EBIT adjusted margin in the segment was negative 3.6%. GME's wholesale vehicle sales for the quarter were 249,000 units, 17,000 less than the first quarter of 2012. Our European market share in the first quarter was 8.3%, a small increase from the prior year. On slide 16, we provide the major components of GME's $100 million year-over-year improvement in EBIT adjusted. Despite the lower number of wholesale vehicle volumes, volume rounded to zero impact. Mix was $100 million unfavorable due to continued vehicle downsizing and unfavorable country mix. There was no impact from price, although we continue to see competitive pressures in the European market. Cost was $300 million favorable due to $100 million in lower depreciation and $200 million of savings between engineering expense and other fixed costs. Other was $100 million unfavorable due to foreign exchange, primarily the weakness of the British pound. This totals to Europe's EBIT adjusted loss of $200 million for the first quarter of 2013. We now move on to GMIO's profitability for the prior five quarters on slide 17. In the first quarter of 2013, EBIT adjusted was $500 million, including equity income from our joint ventures. Approximately equal to our performance from a year ago, as strength in our China JVs offset weakness in consolidated operations. At the bottom of the slide, GMIO's revenue from our consolidated operations was $4.8 billion. The $200 million decline from first quarter 2012 was partially due to $100 million in unfavorable foreign exchange translation. GMIO's EBIT adjusted margin from consolidated operations was a negative 1.4%, down 3.7 percentage points from the prior year. This was due to pricing pressure in Australia related to the devalued yen, a 12% industry decline in India, as well as unfavorable mix and volume in the Middle East. We expect some of these factors to continue to pressure the performance of our IO consolidated operations in coming quarters. Our net income margin from our China JVs was 11.7%, a 1.5 percentage point increase from the prior year. GMIO's wholesale vehicle sales were 243,000 for the consolidated operations and 841,000 for our China JVs. Our market share in the region was 9.6%, a 0.2 percentage point improvement from last year. Our market share in the China market remained a very strong 15.2% for the first quarter. Turning to slide 18, we provide the major components of GMIO's year-over-year performance. Volume had no net impact, and mix was $100 million unfavorable, due primarily to unfavorable country mix. Price was zero because we were able to offset pressure in some markets with increases in Korea. Cost also had no impact as lower material and freight costs offset an increase in depreciation and amortization. The change due to other netted to zero, as the $100 million increase in equity income was offset by unfavorable FX in our consolidated operations. On slide 19, we look at South America's EBIT adjusted for the last five quarters. At the bottom of the slide, revenue was $3.7 billion in the first quarter, a $200 million decrease from 2012, which is more than explained by unfavorable foreign exchange translation. The EBIT adjusted margin in the segment was a negative 1%. GMSA's wholesale vehicle sales were 233,000 units, 4,000 less than the first quarter of 2012. South America market share was 17.2% in the quarter, a 1.1 percentage point decline from the prior year. Although, as Dan mentioned, our market share in our core market of Brazil was favorable year-over-year. On slide 20, we look at the components of the $200 million decline in profitability in our South America segment. The impact due to volume was zero as reductions in wholesale vehicle sales in Venezuela, Colombia, and Argentina were offset by gains in Brazil. Mix was zero as an unfavorable country mix was offset by favorable product mix driven by our new vehicle launches. Price was $100 million favorable as we took action in Argentina and Venezuela to partially offset inflation in those markets. Cost had no impact, and other was $200 million unfavorable due to $100 million unfavorable foreign exchange in Brazil and Argentina in the absence of a gain from a 2012 acquisition. This totals to a break-even performance for South America in the first quarter. Slide 21 provides our walk of adjusted automotive free cash flow for the first quarter. After adjusting for non-controlling interests, preferred dividends, and undistributed earnings allocated to Series B and deducting GM Financial, our automotive income was $1.1 billion for the quarter. We had $200 million in non-cash special items, and our depreciation and amortization was a $1.4 billion expense. Working capital was a billion-dollar use of cash, reflecting typical working capital seasonal trends. The $300 million decline in this category year-over-year is primarily a function of timing impacts of lower production in North America. Pension and OPEB cash payments exceeded expenses by $300 million in the quarter. Other was an $800 million use of cash, a $700 million change from the prior year due to fewer vehicles in service with our rental car customers and the timing of cash payments related to prior quarter incentive accruals. This totals down to automotive net cash provided by operating activities of $500 million. We had $1.9 billion of capital expenditures in the quarter and $100 million true-up contribution related to our 2012 salary pension annuitization deal for a total adjusted automotive free cash flow of negative $1.3 billion. On slide 22, we provide a summary of our key automotive balance sheet items. We finished the first quarter with $24.3 billion in cash and current marketable securities, and $11 billion in available credit facilities for total available liquidity of $35.3 billion. Our book value of debt was $5.2 billion, and the book value of our Series A preferred stock remained at $5.5 billion. Our U.S. qualified pension plans are now underfunded by $13 billion, and our non-U.S. pensions are underfunded by $13.3 billion. Our unfunded OPEB liability was $7.7 billion at the end of the first quarter. Slide 23 provides a summary of our auto financing activities. GM Financial reported their results this morning and will be holding an earnings conference call at noon. Our U.S. subprime penetration in the first quarter came in at 7.7%, modest decline from the prior year and closer to the industry penetration. Our U.S. lease penetration increased eight percentage points to 20.6% in Q1 as we took advantage of our higher residual rates and new Cadillac launches to significantly close the gap to competitive leasing levels. Lease penetration in Canada was at 9.6%, up 0.7 percentage points from the prior year. GM new vehicles as a percentage of GM Financial originations rose to 51%, and GM Financial's percentage of GM's U.S. consumer subprime financing and leasing was 26% in the quarter. GM Financial's annualized net credit losses remained low at 2.6%, and earnings before tax was $180 million for the first quarter, similar to last year. On slide 24, we are updating our estimate of the company's full-year effective tax rate to be closer to the high 30s in percentage terms. Please note we calculate the effective tax rate on an income before taxes and before equity income basis and also exclude the impact of special items. Our effective tax rate was 35% for the first quarter of 2013 and 12% for the prior year period. The rate for the entire 2012 calendar year was 15%. Now I will turn it back to Dan for his closing remarks. Thanks, Dan. We have covered a lot of ground this morning, but I hope you can see that we are systematically and successfully implementing our plan to grow profitably around the world. There is a new vitality here at GM, and it is represented in all of our brands. We are aggressively addressing the issues that have held us back. We have maintained our fortress balance sheet and improved our financial flexibility, and our new products are connecting with customers. With that, turn it back to you, Randy. Okay. Thanks, Dan. Operator, we are ready to start the Q&A. Thank you. Ladies and gentlemen, we will now proceed with the analyst portion of the question and answer session. If you would like to register a question, please press the one followed by the four 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 one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. In the interest of time, one moment, please, for the first question. Our first question comes from the line of Rod Lache with Deutsche Bank. Please go ahead. Good morning, everybody. Can you hear me? Yes. Morning, Rod. A couple things. One is, I was hoping you can talk about Europe a little bit and cost savings. In Detroit, you suggested that you'd have about $600 million of lower depreciations. That's maybe half of the $300 million cost reduction that you had this quarter. You also indicated about $300 million of other restructuring savings. It looks like in this quarter, at least, it was maybe twice that. Any thoughts on the outlook for cost and also related to Europe, just any additional color on how you expect the year to play out as the inventory correction behind you and so forth? Right. Just starting at the end there, we came into the year with the company inventory in pretty good shape, but a little bit heavy on the dealer inventory side. We have worked through a good chunk of that in Q1 here. In terms of the more general trends in the business, I guess what I'd say is that we are very much on plan with the actions and objectives that we laid out back on our third quarter call last year, both in terms of what we're trying to do on the top line as well as on the bottom line. The cost performance in Q1 was quite strong. I'd say that there are some timing items that came into Q1 that amplify the cost savings that you're seeing there, and we'll see some normalization as we move through the year. Everything that we've talked about in terms of our objectives on the cost side and on the product side, we're achieving. Obviously, that's what we control. The things we don't control are the overall market environment and the overall industry there, and that remains quite challenging. Okay. Secondly, if you can talk a little bit about the China JVs. Obviously, they're showing some pretty good profitability at this point, and you talked about some very aggressive growth and spending plans over the course of the quarter. The mix of those two, how does that kind of play out vis-à-vis dividends? Are you able to sustain the historical policy of dividending the prior year's earnings, or will the capital spending acceleration have any impact on that? I'd say as a general matter, we'll be at or near the prior year's earnings going forward. So no fundamental change to that at this point. Okay. One last thing. You still expecting improvement in South America for the full year? Yeah. The first quarter, the story there was really a function of Venezuela and everything that's been going on there. Venezuela, as I think you know, is a profitable market for us and others. We had very little production in Venezuela in Q1 due to geopolitical obstacles, if you like. So that impacted the Q1 result. We see a path to get that back on track. And importantly, the business in Brazil, which is really the biggest market there, obviously has performed well and is picking up a fair amount of the slack there. So bottom line, we expect to build on last year's progress for the region for the year. Great. Thank you. Our next question comes from the line of Adam Jonas with Morgan Stanley. Please go ahead. Hey, thanks everyone. So you called out that your Chinese capacity should be up 20% year-on-year. I was wondering if you could give us a similar figure of how much your capacity will be up in North America year-on-year, and how much it will be down in Europe year-on-year. Yeah. Hey, Adam. Hey, Chuck. From a North American perspective, I guess the biggest driver on any capacity change year-over-year would be what's happening with the truck plants. As we've talked about before, that's going to be relatively flat. I don't see a significant change in capacity. As a matter of fact, if you look at Q1 with some of the downtime that we had in Arlington, our capacity utilization was a bit below 100%. I don't see a fundamental shift in our overall capacity as we go through this year. I'd say on Europe, obviously the main action in terms of installed capacity there will come at the end of next year with Bochum. At the moment we're optimizing shifts and so on to keep demand capacity as opposed to the installed capacity optimized for the volumes that we see. No fundamental change there either. Okay. If I can follow up with a question about the Japanese JPY. The topic came up yesterday in the sales call a little bit, kind of seeing some initial signs of some aggression in terms of discounting and price reductions. I believe, Dan Akerson, you were on the tape earlier today also pointing out that that's an issue. Maybe it was you, Dan Ammann. Can you give a sense of how much your market share may have benefited over the past few years as the JPY has been so strong, and perhaps how much of a headwind this could be as the Japanese either improve their product or the value proposition? I'd say it's really hard to go back and try to. We've sort of gone through the exercise, but it's hard to go back and divine exactly how much market share movement is attributable to what. The way we look at it is, we compete in the marketplace every month in and month out. We have our strategies. We have our vehicle portfolio. We have our launch activity. We have all the things we're doing. We keep a close eye on the competitive dynamics, whether it's currency-driven or something else driven, and adjust course as we need to on a month-to-month basis, at least at the tactical level. We'll keep an eye on what people are doing here. The market share dynamics through the first four months of the year, you've clearly seen them as we have, which have been favorable to us and to some of our domestic competitors. We'll see how people react and how they play it out. It's too soon to make a call, really. Okay. Adam, this is Dan Akerson. I think it varies by market. For example, in the U.S., where some of our Japanese competitors are manufacturing a lot of product here in North America and their supply chain will be, to some extent, and it'll vary by competitor, sourced in North America. Where you see, and where I'm particularly vigilant is how does it impact us into lesser developed countries, emerging market countries, where both U.S. and Japanese competitors are exporting into out of a base that might be in Japan or might be in Korea or China or wherever. As Dan said, it's hard to isolate this and give it a broad brush. It's very specific to by country, by region. Thanks, Dan. Just one quick housekeeping follow-up with your change of your reporting structure of revenues where vehicles are sold rather than produced, can you confirm where you now recognize royalties from the China JVs, the imported cars into China, and spare parts into China? Can you tell us, are those then accounted for outside of the China JVs in the regions, or has that been moving around? Thank you. There's no real change between what's in the China net income or China equity income line versus what's in the balance of the business. Royalties are part of the overall engineering expense that are allocated around the segments based on revenues and so on. Great. No change between China and the rest of the company. Spare parts also in the regions as well. Same story. Thank you. Our next question comes from the line of Chris Ceraso with Credit Suisse. Please go ahead. Thank you. Good morning. I wanted to talk a little bit about price in North America. It was a headwind in Q1, but you mentioned as the new trucks ramp up, you should get some improvement in ATPs. At what point do you think we will see price flip to a tailwind in North America? Yeah. As we talked about back in January, and most recently in March, as we think about 2013, we expect price on carryover products to be a headwind, primarily related to the transition on trucks. I would expect that headwind on carryover products to continue through the sell-down period in Q2. As we start to come out with new products like the Impala, the K2XX, which we're launching, just started production earlier this week, we'd start to see some offset with pricing on new product. I would expect to see some of that rolling in Q2, but really be more second-half weighted. Okay. I guess kind of a related question, if I understood your discussion about the cash flow correctly, the $800 million of other that was a negative was cash going out the door for incentives where you had accrued previously, so it wasn't in the P&L. Are we going to see that effect happen in subsequent quarters as you move trucks off the lot that have these heavier incentives on them, and the cash goes even though they've already been accrued? Yeah, I'd say that the cash flow cadence, some of the $800 million was attributable to what you described. I'd say the cash flow cadence is going to be a little bit back and forth more than usual as we move through this year because of the unusual production cadences. If you look at the Q4 to Q1 to Q2 production cadence, usually it's up and then up again, and this year we've had a different cadence on that. So that moves payables around, it moves receivables around, it moves incentive accruals and cash amounts around. So, there's a fair bit going on in terms of cash flow timing. Okay. I'm sorry, can you run through that again? What is the timing that you expect, and how does it differ from your typical seasonality? Well, typically Q1 is our seasonally weakest quarter for cash flow. That remains the case this year. In fact, it's exacerbated this year due to some of the production cadence timing. Obviously, we had lower earnings in the quarter, so that translates straight through to cash flow, but the biggest chunk of the impact relates to some of these timing items, which we'll reverse during the course of the year. Okay. Just one last item on Europe. I think you mentioned that you drew down inventory. Does that mean you're going to be building some in the future, which helps earnings in subsequent quarters relative to Q1? Or now you feel like you're at a more comfortable level? I think we're about where we'd like to be, and again, obviously, it's a function of what the market does over the coming quarters. Okay. Thank you. Okay. Our next question comes from the line of Patrick Archambault with Goldman Sachs. Please proceed with your question. Yeah, thanks. Good morning. A couple quick ones. First, on North America capacity. Just taking a multiple year view, I think on a straight time basis, IHS has you at about 80%, and I understand that not everybody looks at it on a straight time basis. But starting with that, how are you thinking about the capacity needs as you get to peak volumes? It sounds like you're not looking to add too much in the way of new facilities, but how should we think about that impact on incremental margins as you roll out third shifts over time, that sort of thing, taking sort of a multi-year view? Yeah. Perhaps IHS's capacity utilization was on a three-shift basis. Right now, on a two-shift basis, we're running at about 100%. As we go forward and think about an industry in the U.S. at 16.5 million, 17 million, we would expect to be able to meet that by increasing the number of our facilities on three shifts. Today, we have eight or about 50% of our facilities on three shifts. Obviously, we have the capability to take that up. Our expectations would be to be running at 120% to 130% utilization rate going forward as measured on kind of a two-shift basis or closer to 100% on a three-shift basis. Obviously, that has a significant impact on thinning fixed costs if you can run your facilities on three shifts versus two shifts. I'm not going to provide an estimate of that on a go-forward basis. But that would be clearly what we'd want to do to get more fixed cost utilization going forward. Okay. Then it sounds like there's a lot of variable cost that has to come into the system, obviously, if you're increasing these shifts, but it would be dwarfed by the efficiencies on the fixed side. Is that kind of the right way to think about it? Absolutely. Okay. Then one follow-up, if I can, just really quickly on Europe. The pricing which was flat year-on-year. Can you just give us a little bit more on that? Is that sort of an indication that things may be stabilizing at albeit fairly low pricing levels in the region? Or is there product and other things in there that are helping that? Certainly, there's product in there that's helping that for us. The pricing environment remains quite competitive as you would expect given the situation there. We're working product line by product line, market by market to optimize pricing, taking price where we can, giving it up where we need to in order to optimize. We have much better visibility and much better tools, frankly, to manage some of that now than we've had previously, and that's allowing us to further optimize where we are. Okay, great. Thank you very much. Our next question comes from the line of Colin Langan with UBS. Please go ahead. Oh, great. Thanks for taking my questions. I was just wondering, when you show the walk for North America costs were flat year-over-year, but you do have the K2XX rolling out. Why is that flat, given I would have thought that'd been up given the size of the launch? Should we think of that maybe being a headwind from a cost as we go into Q2 and Q3? Any color into maybe how that launch cost plays out through the year. Yeah. Let's start by talking about the calendar year. Again, consistent with what we talked about back in January, we expect year-over-year fixed costs to be up primarily because of incremental D&A, incremental marketing, some pension income headwinds, and some manufacturing cost pre-production and startup. I would expect most of that to roll through in Q2 and Q3 as we really start to ramp up the K2XX and the plants through the rest of the year and start the marketing activities. Specific to Q1, we had, as Dan mentioned earlier, a $100 million headwind related to pension income. We also had a $100 million headwind from a fixed cost standpoint on manufacturing, primarily related to the downtime in Arlington. Those were offset by favorable performance and variable costs, $100 million in material and freight, and around $100 million in warranty-related costs as the quality and base vehicle warranty gets better for us. Good performance on the variable cost. We still had fixed cost headwinds as we expected, and I would expect the fixed cost headwinds to increase as we go through Q2 and Q3 and hit the real launch cadence. Okay. Thank you for that color. Now looking at Europe, I guess there is an optimism to annualize the Q1 results. How should we think about the cadence? I think you touched on this before, but I think you have mentioned that you expect your losses to be reduced by a third to a half. Is this still the right range to be thinking about, or do you think you are maybe doing a little bit better given how Q1 came in? As I said, I think earlier, we laid out a plan in Q3. We gave some perspective back in January for the year. What we have seen in the first quarter is on plan and consistent with the execution of those objectives, both in terms of the top line and the bottom line. As I mentioned earlier, cost performance was a little stronger, attributable partially due to some timing benefits that came into the first quarter. So I would say we are on track relative to the objectives that we have previously laid out. But this is the first quarter into the year, and there are huge uncertainties, obviously, in relation to the European macroeconomic environment and how that is going to unfold. Where we end up will be a function of the things we do control, which we feel quite good about, and a function of the things that we do not control, which are quite uncertain. Okay, and just two last quick questions. Part of Ally has closed. What is any estimate of the impact that should have and the timing of when we will see that impact? Also in terms of the tax rate, it seems to be in the high 30s for this year based on your new guidance. Is that normal, or should we think when we go past this year, it comes back down again based, I think you said mid-30s in the past? Well, on the Ally piece, the results will roll in consistent with the closing. We closed the biggest chunk of this back on April 1, so that will come into the second quarter results. The overall outlook and run rate that we have talked about previously still holds in relation to that. On the tax rate, we gave the perspective for this year. Obviously, we will see as we move through the year how that evolves and how that rolls into next year. But I would point out importantly, our cash tax rate is essentially unchanged from last year or continue to be in that sort of 10% range from a cash tax point of view, notwithstanding the fact that the accounting GAAP tax rate will be in the upper 30s. Okay. All right. Thank you for your help. Our next question comes from the line of John Murphy with Bank of America Merrill Lynch. Please proceed with your question. Good morning, guys. Morning. Just a first question on the change in the reporting. Presumably, this isn't just a. I'm just trying to understand as you shift to country of sale methodology here, what the shift internally is as far as accountability and targets are for your sales organization and really what this means as far as measuring performance internally and driving the business. Well, the main reason we're doing this is for internal managerial purposes. As you've seen in what we've laid out for you this morning, the external at the segment level, the changes aren't that dramatic between the previous approach and this approach. When you get below that to the country level and to the product line level, we now have dramatically improved visibility by market, by product line from a profitability point of view, and that will allow us to get much more focused on decisions ranging all the way from capital allocation to sales accountability, profitability accountability. So this is a much greater and more significant internal impact than it is externally, and we're seeing significant benefits from the improved visibility already on an internal basis. That's helpful. This is Dan. I would say if you go back a couple of years in time, we weren't quite sure what some of our products were in terms of profitability. I know that may sound a bit strange, but we did not have the clarity, and therefore, we didn't have the accountability that we have now. So this, in my opinion, in terms of managing the company, is a huge step forward. Yeah, it's incredibly encouraging. I appreciate that. Second question just on raw materials in general. If we look back over the last year, there's about a $1,000 drop in raw mats going into a vehicle. Suppliers that we talk to all are pointing their fingers at the automakers as taking the benefit because there's indexing and escalators and all that stuff. I'm just curious what you're seeing on the raw mat front, if you're getting the benefit from that already or when that ultimately should come, and particularly given there's such a severe pullback through the beginning of this year. Yeah, we are seeing the benefit of that. We've taken some of that benefit in Q1. It really depends commodity by commodity, supplier by the supplier, agreement by agreement as to how much is indexed versus how much isn't, what the lag time is and so on. But we certainly had some benefit in Q1. Based on where current spot rates are, we would expect to continue to have some benefit. But commodity prices have proven to be very volatile. I think they're all up again today from where they were. That's a spot-driven, market-driven element where obviously, keep a close eye on it, take the benefits where we can and try to mitigate increases if and when they come. Okay. Lastly, if we look at the current consensus EPS for 2013, it's in the ballpark of $3.35. I'm sure that'll change today. But if we think about really the cash earnings, it's at least $4.35, if not greater. I think one of the confusions around the stock is that it looks like it's trading in north of nine times earnings, but in reality, it's trading south of seven times earnings on a cash EPS basis. Would you ever consider communicating maybe more explicitly a cash earnings number so the multiples would be more comparable to history? Because I think a lot of people are being confused by the simplistic PE and not understanding that the actual cash PE is much cheaper than it looks like. Well, that's something that we would hope that the sophisticated sell side community would help educate the investors on. Hopefully, we've been quite clear about the difference between, and one of the main drivers obviously is the GAAP versus cash tax rate. We've tried to be as explicit as we can in helping people understand that. I would say from our dialogue with our larger investors, we haven't seen a whole lot of confusion on that front. But it's a useful perspective, and we'll take that into account. Great. Thank you very much. Thank you. Our next question comes from the line of Brian Johnson with Barclays. Please go ahead. Yes, good morning. I would like to hear from Dan Akerson on a point he made on the early slide about the 4G connectivity. Basically, I am looking for what is the business case, not just the vision around what you are doing with connected car with that, because at least at first glance, you have other competitors vowing just to use the consumer smartphone as their link into the cloud, and on a kind of cost per vehicle basis, you can certainly see the argument for that. So what is really the business case you see for this move? Well, we think, going forward, that this new demographic coming into the marketplace, please recall, I have children now that. I have grandchildren, I should say, that have only grown up in a world with smartphones. In our estimation, instead of waiting for trends to overwhelm us, try to look over the horizon, having come out of the technology and communications area, the bigger the pipe, the more you are rewarded into the future. So when we look at what we can do with a 4G pipe into a car, you can change the business model almost entirely. You may be able to have a real revenue-generating opportunity into the car with when you come up, for example, what happens if when the logo shows on your screen and all it says, "Brought to you by Allstate," how many times is that going to pop, and how much can you get from Allstate or I do not want to pull out one insurance company. Children, as you take them to school, of course, you got to watch distracted driving, we are very aware of that, but in the back seat, you can literally go from your living room. The children can pick up the same show that was on television or watch anything they want, because this is going to deliver an incredible amount of downloaded capacity in different formats. So at very little marginal cost, we open up what I think are potentially lucrative lines of business that do not exist in kind of a safety and security or what you see that is not integrated into other forms of media that exist in the household and can transition right with the car. So it is a different model, but you have a different demographic that is different than you and I, that is going to, we already see it in some of our market research that put this high on their scale of on their list of what is important in buying a car. And have you made any progress with your former colleagues in telecom on bundled data plans that would include the SIM card in the connected car at Yes modest additional cost? I don't want to get into the contract, but I will tell you, having come out of that industry, the change that we've affected between these two and the modules we'll be putting in these cars, it will be a 4G LTE combination that will allow us to switch our entire fleet overnight. We've never been able to do that. So we have flexibility that allows for our service providers to have to compete for our business, not only in terms of price, but features and functionality. Okay, thanks. Our next question comes from the line of Ryan Brinkman with J.P. Morgan. Please proceed with your question. Hi, good morning. Congrats on the quarter, and thanks for taking my call. There was a question earlier on your strong China JV margin, which at 11.7% looks to be the strongest in a couple of years now. Can you maybe help us a bit more on the drivers of that improvement? Previously, I think, we had been hearing on these calls about modest margin compression on a tougher pricing environment over there. So what accounts for that nice rebound in 1Q, and was there maybe anything lumpy to report in there? Yeah, I'd say first of all, it's one quarter. But second of all, the business continues to grow over there, and as you understand as well as we do, this is a business that has meaningful fixed costs and a fair amount of operating leverage to it. So if you can grow the business and keep some control from a pricing point of view, you do get operating leverage and that's some of what we're seeing. How that market shakes out over the balance of the year, we'll need to watch. Clearly, people are adding capacity, and it's a very competitive marketplace. But we've outgrown the market there for the last little while, and we hope to continue to do that. Okay. On Slide 16, you mentioned that the cost in Europe was a $300 million positive swing, helped just $100 million by the lower D&A. Can you talk about the non-D&A savings there? I know you've taken out a lot of salaried people in Rüsselsheim, et cetera. Is that the primary driver, or are there other structural cost reductions to report? Just second to that, is there anything you can say now in terms of savings from the Bochum closure now that we have a better idea of how that's going to shake out? We're not saying anything about the Bochum closure at this point in time. Other than to refer you back to the overall fixed cost reductions that we've previously talked about. In relation to the first quarter Europe cost performance, some of that, a bit over $100 million of that, is the D&A reduction as a result of the impairment we talked about last time. There is a good chunk of fundamental cost savings in there between engineering and some of the other manufacturing items. As I mentioned earlier, there are some other timing items that fell into this quarter which further help that number. But I'd say more fundamentally, we are in aggressive cost control mode in Europe, frankly, across the whole company, hopefully as you've seen in our results. But in Europe in particular, it's a very tough market environment. Ultimately, we do not totally control the top line, but we do control what is going on cost-wise, and we are staying aggressive on it. Let me just jump in there. First of all, we are pleased with our progress, but we are still losing money in Europe, a lot of it. We have a lot of work to do. Our objective is clearly to break even and then profitability. I think we said from the outset, it is okay. We have to match production with demand, but we also have to reduce cost across the board in everything we do, whether it is in IT, advertising, human resource cost, across the board. We are trying to do that globally, but we are particularly focused on it given the situation in Europe, the uncertainty over the next year or two on a macroeconomic basis. We have to protect the business as much as we can. Although I think this is good progress, we have a lot of work to do yet. Okay, thanks. Then maybe just my last question, it could be much ado about nothing, but it looks like you filed an S-3 last Friday. Is that just a generic shelf? Is there anything you can tell us more about it or what it might imply? Second to it seems that the registration, of course, does not encompass any primary shares, and there would be no proceeds to the company. It does say in one location that proceeds received from the exercise of warrants could be used for general corporate purposes. Can you also sort of maybe remind us on the procedure of warrant exercise here, and whether you could instead use the net share settlement method or otherwise use any cash proceeds from such exercise to repurchase stock as is sometimes the case? Thanks. Yeah. The ability to net share settle the warrants is a function of the individual warrants, and the warrants that are referenced there are those that are held by the selling stockholders. The registration statement more generally, this was a procedural issue. We wanted to put that up, as we said in a press release concurrent with filing that shelf, that we are not aware at this time of any specific plans by any selling shareholder to execute an offering, but we just wanted to take that mechanical step to have that ready. Okay. Congrats again on the better results. Our next question comes from the line of Joe Spak with RBC Capital Markets. Please proceed with your question. Thanks for taking my question. Maybe just one more quick one on Europe. You mentioned that volume was flat despite wholesales down. It looks like they were down 6%. Can you just explain that a little bit? How did that happen? It is because we look at it on a country-by-country basis and aggregate it up that way. While total may be down, it is country by country in terms of the financial impact. Okay. Just one more on Europe. Is it possible to give a days inventory number across all of Europe? It is. I do not have that number right to hand. I guess what I would say to you is that, and I think I mentioned it before, we came in the year in good shape on a company-owned inventory basis, a bit heavy on the dealer inventory side. And I would say we have worked that down so that we feel based on the current market environment at least, that we are in a reasonable place on both. Okay, and then last one for me. Back in Detroit for GMIO, you said EBIT absolute would be up, margin would be down. And just given the change in reporting structure, it looks like GMIO actually had the largest change. So is that still accurate or is there any change to that outlook for the year? Well, we are not updating our outlook specifically here on this call. But I guess what I would say is that we did have some challenges in the consolidated operations in Q1, as evidenced by the result there. In Q1, those were offset by strength in China. We are one quarter into the year. We will need to see how those relative trends shake out over the balance of the year. Excellent. Thank you. Our final question comes from the line of Itay Michaeli with Citigroup. Please proceed with your question. Great. Thank you. Good morning. I wanted to go back to the 4G LTE conversation and hoping you can talk about how OnStar fits into that rollout. Is this an opportunity for you to perhaps significantly grow OnStar's global subscriber base? I know it's done very well in China and here in the U.S. and Canada. Could that be a segment that you may consider eventually disclosing separately, perhaps investors see just a subscriber-based business and potentially high margins there? Quite honestly, hadn't thought about it, because this doesn't happen till end of 2014, but that's a good question. We do want to change this from primarily a safety and security business to one that's much more feature-rich and where we get some real money from it. We've never been properly compensated, in my opinion, having come out of this industry, in terms of what we provide to the carriers. For example, with the new contract, when it kicks in, every time we implement, we get $20. We used to get nothing. We'll actually revenue share in usage on that service. This is a little bit different than the model of just having the carrier plug into your jack in the car. The carrier gets all of it. All of a sudden, we are part of the solution and not just an intermediary where we start to share revenue in different ways with the carrier. We are not in the wireless business, but we are facilitating a customer, and we are facilitating content. So there is a whole new front here for us that I think will have margins that will exceed what you typically see in a manufacturing business. There are no further questions at this time. I will now turn the call back to Randy Arickx. Please continue with your presentation or closing remarks. Thank you, operator, and thank you everyone for joining us this morning.