General Motors Company (GM) — Q4 2015 Earnings Call Transcript

Thanks, operator. Good morning and thank you for joining us as we review GM's financial results for the fourth quarter and calendar year of 2015. Our press release was issued this morning, and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast on the Internet. Included in the chart set materials published this morning, we have included the key takeaways from each chart in the notes pages in order to provide color on the results. This morning, Mary Barra, General Motors' Chairman and Chief Executive Officer, will provide some brief opening remarks; followed by Chuck Stevens, GM's Executive VP and CFO. And then we'll open the lines for questions from the analyst community. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The contents of our call will be governed by this language. In the room today, we also have Tom Timko, Vice President, Controller and Chief Accounting Officer; and Dhivya Suryadevara, Vice President-Finance and Treasurer, to assist in answering your questions. Now, I'll turn the call over to Mary Barra.

Thanks, Randy, and thanks, everybody, for joining the call. I'm extremely pleased to report that in 2015, GM delivered record net income, record EBIT-adjusted and record EBIT adjusted margins. To give you a few highlights, the fourth quarter revenue was $39.6 billion. EBIT-adjusted of $2.8 billion was up $400 million year-over-year. EBIT-adjusted margin of 7% was up 90 basis points year-over-year. Earnings per share adjusted of $1.39, was up 17% over last year. And for the year, we generated record net income of $9.7 billion and record EBIT-adjusted of $10.8 billion. In fact, our EBIT-adjusted increased 65% to $5.02. Our 27.2% ROIC for 2015 demonstrates that our disciplined capital allocation framework is paying off. Our record operating performance enabled us to return approximately $5.7 billion to our owners during 2015. This significant capital return demonstrates our ongoing commitment to enhance shareholder value over time. I'd like to share a little progress of what we're doing as we lead the transformation of personal mobility and also what we're doing to strengthen our core business. We gained considerable momentum in the fourth quarter and early this year on game changing personal mobility initiatives. First, let's talk about ridesharing. Our announcement with the strategic alliance with Lyft is very significant because we believe, together, we can work and put an autonomous fleet of sharing vehicles available for use quicker than anyone else. We also believe in the short-term the arrangement that we have with Lyft will allow us to capitalize on providing and being a preferred provider for short-term-use vehicles for Lyft drivers that will support not only General Motors' performance, but also Lyft's performance. When we look in China, we've also introduced a carpooling pilot for 700 employees in Shanghai, and this is driven by a mobile app. And if you recall what we talked about in October, having that interface and the connection through a smart device is very important and we continue to build on that capability. As we look at car-sharing programs, we are doing a number of things that are really leveraging our connectivity leadership based on two decades of OnStar technology. First, we created Maven, which brings together many of the pilots that are actually transforming from pilots into projects that we are replicating across different cities that allow us to have a single brand that pulls all that together. We've also made sure that we have the experts not only from ridesharing and car-sharing experiences outside the company, we've brought them in, but also connecting to the individuals in the company that understand the connected car. Acquiring Sidecar's technology and assets is another proof point there as several of its employees have joined the Maven team along with having access to that technology. And on an electrification front, we expanded our EV leadership as we unveiled the Chevrolet Bolt EV at CES. This is a vehicle that we plan on producing by year-end. The second generation, the 2016 Volt won the Green Car Journal of the Year Award and that vehicle will be shipping shortly. And as we look at fuel cells, a longer range technology, we now have a program with the U.S. Army where we're developing an extreme off-road hydrogen fuel cell Chevrolet Colorado that will allow us to test our latest technology in military duty-type cycles. So, again very important. In addition to the work that we're doing in the transformation of personal mobility, we also continue to work on strengthening our core business. Last year, GM posted its third consecutive year of record sales and we were number one in North America, South America, and China, demonstrating our commitment to our brands and our commitment to earning customers for life. In particular, we strengthened our global Chevrolet and Cadillac brands last year. In the U.S., Chevrolet grew retail market share faster than any other full-line brand in the industry, up by 0.4 percentage points. Our full-year global Cadillac sales are up 8%. In China, it was a record 17%. In North America, we continue to be very disciplined in our sales approach, and it's paying off. We had record ATPs and the best retail and total sales since 2007. GM's 2015 retail sales are up 8% over 2014. Our average GM ATPs of more than $34,600 exceed the industry average by $4,000. Our year-end total inventory was down more than 100,000 units or 14%, which is the lowest in four years. And then at 61 days, our 2015 year-end supply was the lowest in six years. We're also very pleased with the early signs and feedback that we're getting on the Chevrolet Malibu, again a very important vehicle that we're launching and January was a very positive signal of how that car is going to be received into the marketplace. In Europe, Opel and Vauxhall saw improved full-year sales and market share for the third straight year. In China, GM posted record sales of 3.6 million vehicles, up 5% year-over-year, and we outpaced the industry with a strong mix of SUVs, MPVs and luxury vehicles. Just a couple data points there: We achieved record overall market share of 14.9%, including more than 50% of the MPV segment. For SUVs, our sales rose 144%, which was led by the Buick Envision and the Baojun 560. At GM Financial, we continue to make strides toward full captive capability. In 2015, one in every three of GM's retail sales was financed by GMF, up from 1 in 10 just a year ago. We are well on our way to achieving the $5.5 billion in cost efficiencies that we talked about and we plan to do this by 2018, expecting these savings to more than offset the additional investments we're making in our brands and in technology. In 2015, we had more than $2 billion in savings in non-raw material and logistics, ahead of the commitment and twice what we achieved in 2014. As we move into 2016, we expect another year of positive performance from a material and logistics standpoint. I also want to add, we're doing it the right way by working and strengthening the relationship with many of our key suppliers. We'll also continue to leverage and drive efficiencies by using our operational excellence, which is built on Six Sigma, our Global Business Services, and the IT transformation. Because of our 2015 performance and our expectations that we will sustain strong margins in the U.S. and China and break even in Europe this year, we already announced just last month that we had increased our projected 2016 earnings per share adjusted to between $5.25 and $5.75. Before I close my initial comments, I want to comment that we know there's been a lot written about the U.S. industry being at peak levels and that a downturn is imminent. We, like many others, do not share this view. Chuck is going to go into a little bit more detail on this, but we believe the industry fundamentals support a continued strong U.S. industry. Having said that, we understand that we are in a cyclical business and it's very difficult for anyone to project the timing of a downturn. While we feel we are very well-positioned to take advantage of the strong market with important new product launches, we also have an intense focus on both costs and capital efficiencies to ensure that we will maximize earnings and cash flow through the cycle and be best prepared for whenever a downturn does occur. In summary, we delivered our 2015 commitment despite a number of unforeseen headwinds. We are on track to achieve our 2016 targets across key financial metrics, and we believe we are well positioned for profitable growth that will continue to drive shareholder value. We are in an industry that is being disruptive and we are aggressively leveraging our technology leadership and our global resources to lead that disruption. We'll continue to strengthen our core business and we'll continue to invest in game changers that are necessary for GM to lead the future of personal mobility. This team is committed to delivering results. We delivered on our commitment in 2014 and 2015, and that is exactly what we plan to do in 2016 and beyond. With that, I'll turn it over to Chuck.

Thanks, Mary. I just wanted to take a few minutes to provide some perspective on the quarter in GM's full-year results. Without a doubt, very strong results were achieved in the fourth quarter that capped an outstanding year for the company. In fact, a number of key financial metrics such as net income, consolidated EBIT-adjusted, consolidated EBIT-adjusted margin, North American EBIT-adjusted, and North American EBIT-adjusted margins established records not only for the fourth quarter, but also for the full-year. From an operating perspective, EBIT-adjusted results for the year grew to a record $10.8 billion, up $1.5 billion versus 2014, adjusting 2014 for the impact of recalls. The EBIT-adjusted margins of 7.1% is up 110 basis points year-over-year on the same basis. Our adjusted earnings per share for 2015 was up 65% to $5.02, another record comparable with 2014 up 22% year-over-year after adjusting 2014 for recalls. The positive results were broad-based with all but one of our automotive regions posting year-over-year profit improvements during the year. Clearly, this team is committed to delivering on improving the company's profitability going forward. The strong earnings growth enabled significant capital returns to our owners as well, $5.7 billion in total between dividends and share repurchases in 2015. Turning to cash flow, cash flow for the quarter and ultimately the year was adversely impacted by cash settlements for various litigation, increased capital spending, and UAW ratification bonuses. With that said, we are still on track for a significant increase in free cash flow in 2016. I'll talk more about 2016 in just a couple of minutes. Although we're very pleased with our overall performance in 2015, we continue to take additional actions to drive efficiency into the business to ensure the positive momentum continues. As Mary mentioned, we expect to drive about $5.5 billion of run rate cost efficiency improvements by 2018 across the entire business. We expect these savings to more than offset incremental investments in engineering, brand building, and technology-related costs. All of these cost efficiencies are underpinned by operational excellence. A corporate initiative which will drive common tools, common processes, but most importantly a continuous improvement mentality throughout our organization. The GM team is very focused on carrying our positive momentum forward across the business. Okay, moving on. Just a few comments on a couple of our regions. First, China. The company sustained strong operating results in 2015, which is consistent with the guidance we provided to you as we progressed through the year. Despite an industry that moderated during much of the year, we generated strong full-year performance, $2.1 billion in equity income and 9.5% net margins. We were able to generate these results specifically because we've been proactively managing the market risks with several actions such as optimizing mix by increasing production of our SUVs to meet demand, aggressively reducing costs by rolling out cost down, efficiency up initiatives, and working proactively with our dealers to manage inventory levels. Although we're encouraged that China has cut the purchase tax, it has provided a tailwind to the industry. Our plan is to continue to proactively manage the market risks as we've been doing to protect the profitability of our business. For the year, we expect the industry in China to grow in the mid-single-digit range, which will support our efforts to sustain our strong operating performance. Regarding North America, clearly, the region posted some impressive numbers for the quarter and the year. For the fourth quarter, EBIT-adjusted and EBIT-adjusted margins of $2.8 billion and 10%, respectively, again, both Q4 records. For the year, we achieved EBIT-adjusted of $11 billion and a corresponding margin of 10.3%, both establishing full-year records for the region. Obviously, achieving the 10% margin was a great accomplishment, especially one year ahead of our long-standing 2016 commitment. The strong performance in North America for GM, as well as the industry in general, has sparked a debate regarding whether the U.S. industry is peaking or plateauing. The bears argue the industry in the U.S. has peaked and is ready to roll over. They often cite the fact that the U.S. auto industry is in its seventh year of expansion, margins are as good as they get, and a recession is right around the corner, similar to scenario seen in 2007. On the other hand, many, including GM, believe the industry is plateauing with many years of strong performance ahead, similar to the 2000 to 2007 timeframe after the industry peaked in 2000. We believe industry fundamentals, such as the age of the vehicle fleet, firm used car pricing, credit availability, and low fuel prices remain supportive, and overall car manufacturers are in much better health, with lower inventory levels, lower breakeven points, and strong capacity utilization. Furthermore, household balance sheets are strong, the labor market continues to improve, and forecasts are calling for the U.S. economy to continue its expansion, albeit at a slow and steady pace. Combining strong industry fundamentals with the positive economic backdrop gives us confidence that the industry can sustain a strong SAAR in the mid-17 million unit range for a number of years. With that said, we are also very aware that downturns are difficult to predict. That is why we are planning and running the business accordingly, essentially, proactively managing the cycle. Over the past years, we have maintained our intense focus on cost efficiency and capital deployment. We've generated significant efficiencies over the past few years, with even more expected in 2016. As I mentioned just a few minutes ago, we are well on our way to drive about $5.5 billion of run rate cost efficiency improvements by 2018, sufficient to more than offset cost headwinds. We've made tough decisions on capital deployment, which includes our downside protection. These decisions include exiting markets where we had no path to viable returns. Our breakeven point in the U.S. has been maintained at an industry level of between 10 million and 11 million units, as we've kept our fixed costs flat over the past several years. And we've refrained from taking volume and share as we focused on profitable retail growth. U.S. dealer inventories have been proactively managed down. As Mary indicated, they're down over 100,000 units or 14% compared with year-end 2014. In addition, and probably an area not mentioned enough, we have a much more flexible workforce, which enables us to react to market dynamics and take costs out more aggressively compared with past cycles. Finally, although keeping costs out of the system and looking for efficiencies are big drivers to protecting profitability in downturns, we are also executing several growth opportunities such as GM Financial, Aftersales, OnStar, and Global Cadillac that are somewhat independent of the vehicle cycle, fundamentally aimed at improving our quality of earnings. Moving on to our outlook for 2016: big picture, we expect to deliver profit growth, margin expansion, and increased free cash flow. This will translate into EPS-adjusted of between $5.25 and $5.75 per share and free cash generation of about $6 billion, consistent with the guidance we provided in mid-January. We'll also expect a similar cadence of earnings as we've seen in the past several years. Q1 will be seasonally weaker, Q2 and Q3 will be stronger, and Q4 will be about average. With that said, it is important to point out that our Q1 results in North America will be impacted by approximately $250 million in restructuring costs. The restructuring is related to the negotiated attrition program with the UAW, which will lead to cost efficiencies going forward. Cash flow should also follow its normal seasonal pattern, with Q1 expected to be generally in line with the first quarter of 2015. To sum it up, we had a great quarter and a great 2015, and we expect to achieve even better results in 2016 based on our current view of the macro environment. That concludes our opening comments. We'll now move on to the question-and-answer portion of the call. Thank you.

Thanks. Good morning, everyone, and congratulations.

Thank you.

Just on the slide, talking about managing through the cycle, certainly we agree with your view on the cycle as well. I'd love to get a sense, given some of the weakness we're seeing just in car segments that's being offset by trucks; how are you seeing that the production incentive discipline in car segments? GM's kept its inventory there pretty low, but what kind of competitive environment are you seeing and modeling for in your outlook for 2016 in those segments?

Well, I think, first and foremost, from a macro perspective, we expect lower for longer gas prices, which will continue to support the strong full-size pick-up, full-size SUV and crossover mix that we've seen, which then gets to the heart of your question, Itay, which is what happens from a passenger car perspective. The key there is really, as you said, to maintain very strong discipline around inventory, aligning supply and demand. I would say the other thing that's important to know is that in 2015, North America posted 10.3% margins with the oldest passenger car and crossover lineup in the industry. Over the next two years, we will cycle through all of those products including the Malibu that we're in the midst of launching, the Cruze, the compact crossovers, the Equinox Terrain and the mid-crossovers. As we've said before, our expectations are the profit of those vehicles will be significantly better than the vehicles that they replace, and it's not all price. A significant portion of that is cost efficiency and probably the $5.5 billion of efficiencies that we're driving.

That's very helpful, Chuck. And then maybe one follow-up strategic question. Looking to get a little bit more color on the Maven launch, particularly how that interplays with GM's investment in Lyft. Do you think overall – when you think about the work you're doing on Level 3 automated vehicles and the Bolt, does that give GM some advantage in pursuing ridesharing more aggressively than others? How do all those factors interplay with what you're doing with Maven and Lyft?

Well, that's a great question. As we look at it, there are going to be ridesharing and car-sharing opportunities. The partnership we have with Lyft is very important from a short-term perspective, as I mentioned, of being able to provide the short-term-use vehicles for Lyft drivers. One of the biggest issues they have in getting drivers is finding drivers that have the appropriate vehicles to participate as a Lyft driver. So that's a clear opportunity that I think will allow us both to grow. When we started talking to Lyft, we believed that together, we share a common view of how autonomy would be enabled. We think it will start in a ridesharing type of application because you can ring-fence it and control the environment. We believe Lyft brings to the partnership a true understanding of the demand cycle from a sharing perspective, and what we can bring from a technical perspective allows us to implement this quickly to the highest standards of safety. So we do think we have a strength there. Clearly, the Bolt plays into it because there's a lot of interest in using electric vehicles to do that. We see a lot of opportunities with both Lyft and Maven testing in North America and globally.

That's very helpful. Thanks so much, everyone.

Okay.

Hi. Good morning. Just a couple of maybe details or housekeeping questions for me. One, Chuck, sorry if I missed it, but usually, in North America, you've given the pricing component for both majors and carryovers. I didn't see that in the slides. Is there any further detail you could provide there?

Yeah. You're speaking specifically to the fourth quarter, Joe?

Yeah. In North America, yes.

Yeah. Pricing in the fourth quarter overall was flat, so we didn't call that out. But I would say, as we talked about for 2015, not a lot of major pricing. We expect to see that obviously in 2016 amp up with all the product launches and fundamentally offsetting carryover. Order of magnitude plus/minus $200 million each way, $200 million on majors to the good, $200 million on carryover to the bad. Calendar year pricing on carryover was very consistent with what we talked about before.

Okay. And then as we think about 2016, because of your new launch cadence, do you think that sort of comes out to a net positive?

Absolutely.

Okay. And then the second question just on China, the net income margins. I think the absolute value of equity income was strong or better than we were looking for. The margins, I guess, down a tick year-over-year. Can you just help us with some of the factors within that? Specifically pricing, which we know has been under pressure there for a while. Has it deteriorated any further? Are we still sort of down that mid-single digits level?

Yeah. Overall, our net income margins in China on a consolidated basis went from 9.8% to 9.5% 2015 versus 2014. There are a multitude of moving pieces involved, including SGMW and SGM. I would say by and large, as we discussed before, maintaining our net income margins between 9% and 10% and tailwinds are clearly volume, mix, and material costs, fundamentally offsetting price headwinds and incremental fixed costs associated with the ramp up, primarily related to D&A as we continue to build our manufacturing capabilities. From a market perspective in 2015, net pricing ended up generally in the range of a negative 5%, again, which we fundamentally offset. I suggest net pricing for planning purposes is still in the 3% to 5% range for 2016.

Okay. Thanks. It's very helpful. Appreciate it.

Good morning. A first question as we think about the guidance going forward as well as share buyback. If you buy back a similar level of shares in 2016 that you did in 2015, which seems reasonably conservative given where the stock is at this point, you're basically looking at about a 7% uptick from a share count shrinking, which gets you to the low end of your guidance range, which indicates you probably have about a 7% core earnings growth to get to the high end of your guidance range. It just seems like you're not assuming anything too heroic on the core earnings power. Could you confirm that and also sort of directionally give us some guidance on the regional earnings for 2016 for the major buckets?

Yeah. To your first question, John, our capital allocation framework is transparent, so it's reasonably easy to figure out what we're going to do. To the extent that we generate available free cash flow in 2016, we'll be buying back shares as expediently as we can, similar to what we did in 2015. I'm not going to confirm the number. You were implying share buybacks of $3.5 billion. We will buy back whatever we can as quickly as we can based on the cash generation of the business. I would say when we looked at our guidance of $5.25 to $5.75, a significant portion of that was driven by operating performance year-over-year, and that's what we're focused on driving. When we gave our guidance, we said to improve overall EBIT and EBIT margins, which implies, in my view, a significant improvement year-over-year. Relative to regions, I would just say we expect to see sustained strong performance in North America that's going to be a key component of that improvement, continuing strong performance in China, and our longstanding commitment to breakeven in Europe.

Okay. That's very helpful. Then just a second question around your cycle discussion. There's a lot of concerns about credit metrics and the idea that credit might be overextended. Doesn't seem to be bearing out in the data, particularly when we look at the 30-day delinquencies you have at GM Financial being down on a year-over-year basis in the fourth quarter. Is there anything else that you are seeing in the credit metrics at GM Financial or broadly in the market that would lead you to believe there is a credit issue that's burgeoning?

There's nothing that we're seeing. Obviously, that's something that we monitor and track on a global basis as well as the U.S. And the credit metrics are stable and performing better than prior to the last downturn. Just thinking about the economic drivers of auto sales, there are seven different key measures that our economic staff tracks, and I'm sure it's not inconsistent with external views. Of the seven factors, we see six out of seven having a positive impact for continued strong growth. Consumer credit flow and auto loan delinquency rates are both positive. We have not seen anything from a fundamentals perspective that would support a significant downturn being imminent either from an industry standpoint or from an overall economic standpoint.

Great. Lastly, as we think about the partnership or investment in Lyft, in the context of some of the investments that have been made in adjacent businesses historically, GM has had a long track record of monetizing these businesses. As you get involved with Lyft and other outside companies, do you envision an exit strategy at some point down the line five to 10 years, or are these really investments going to be core to your operations going forward and going to continue to be held for the long term?

That's a good question, John, and I think it is too early to take a view on that because at the end of the day, it depends on how much is integrated with the business. We talked about OnStar before as being very integral to the business. It's early days with Lyft. We think there's significant opportunity in this alliance going forward, which is why we put the $500 million stake into the company. How that manifests itself five to ten years down the road is unknown. I would suggest the same applies to Maven or some of these other initiatives. We're not yet certain how those models are going to develop but we do see significant opportunity in the future.

Great. Thank you very much.

Yeah.

Good morning. This question may sound a little bit strange, but it seems like your U.S. inventories may be a little bit low. Are you guys experiencing any significant production constraints or was this a planned drawdown of inventory?

Yeah. This is a no-win situation, right? As you put it. I think we're reasonably comfortable with inventory levels kind of across the board. Clearly, at any point in time, on any given product or any given trend level, there could be some constraints. But it is not inhibiting sales. As we were thinking about the business, we proactively took the actions to drive inventory down to make sure that we were well-positioned as a cyclical company when the downturn happens, and it will happen at some point. Very rarely do people predict these things accurately. To size up what that means, from a financial perspective, you know what happens in a downturn; first, inventory is drawn down at a dealer, and then factory unit sales catch up with the SAAR levels. By focusing on efficiency and inventory, taking out several hundred thousand units and maintaining that discipline has provided about $1 billion of downside protection from an earnings and cash flow perspective versus where we were at the end of 2014.

Yeah. That’s super helpful. Then it just seemed a little bit odd that in January, the incentive activity for GM seemed to tick up. Is that an aberration or were there specific programs you can call out?

Yeah. Sure. One month is not a trend and specific to January; we are selling down Cruze, Malibu, SRX, and LaCrosse. This is natural as you transition from one product to another. I would expect to see incentive spend moderate as we go through this quarter. I think the other important thing is we've got a six-year track record of incentive discipline and that carries more weight than a one-month specific sell-downs associated with a new model launch cadence.

Okay. And just one more quick one if I could. On the cost side in North America, if you back out this $300 million – it seemed like it was some reversal of a restructuring charge. It looked like overall costs were up $1 billion or so year-over-year. It's the first time that's kind of outstripped material cost savings. Can you give us any color on kind of what were the main buckets of cost increases, and where do you see these lines in 2016 on a year-over-year basis?

Yeah. Sure. Let's start at ten thousand feet and work our way down to the details. First, 10% margins in the fourth quarter, up significantly year-over-year. Our business is running very efficiently at a total system level. Fixed costs overall in 2015 versus 2014 were relatively flat and consistent with our performance in North America over the last number of years. There'll always be some noise year-over-year on variable fixed costs like incentive compensation. Fundamentally, the core fixed costs are flat year-over-year. Specific to the – I presume you're talking about the $400 million call-out box for others. There are a lot of moving pieces in there. The $300 million kind of reversal of the supplemental unemployment benefit is included in there as well as the absence of a $200 million gain that we had in the fourth quarter of 2014 on a supplier recovery. There are also warranty adjustments associated with base vehicle warranty adjustments. Those are always pluses and minuses in any quarter. There's some incremental D&A and then a lot of miscellaneous items. The big picture, Dan, is our focus on maintaining our fixed cost structure. We did that in 2015, and we expect to do that again in 2016.

Okay. Thanks a lot.

Good morning, everybody. I had a couple of things. One is I was hoping you could give us some additional color on how the 2016 bridge in China may look. In the fourth quarter, you had an earnings up on a 19% increase in wholesales, and I think you said you're expecting 2016 to be something like 4% for the year. If we think about a couple of the buckets like volume and pricing, how does that sort of shake out? And does your commentary about sustained strong performance basically mean you're guiding to maintaining this equity earnings level?

The development of 2016 will — the drivers of profitability will be very consistent with 2015. Volumes are going to be up, assuming the industry performs as we expect. We expect low-single digit growth in the industry year-over-year. That'll be an improvement. Mix will be favorable again as we continue to launch new Cadillacs and new SUVs into the market, in fact, we have 13 new launches of key products not only in SUVs and crossovers but some pretty critical passenger cars. Pricing, as I've mentioned before, is going to be a headwind, in the range of 3% to 5%. Obviously, from a planning perspective, we're taking actions to make sure we're covering the 5%. Material costs will be favorable, and fixed costs will go up because we are bringing two new plants online, so we'll have the full-year impact of that. Net-net, Rod, as we said, we expect to sustain strong equity income performance and strong margins in China, and we generated $2.1 billion in 2015.

Okay. And another question I had was on GM Financial and the credit market trends. There was a senior loan officer survey released yesterday that showed some modest tightening of credit standards. I'm sure you're aware, there's been some evidence of widening spreads in CDS and subprime ABS. Are you, at this point, suggesting that this is not meaningful enough to have any real implications for the market as you’re looking at things? Can you remind us what percentage of your originations nowadays are subprime?

No material implications from our perspective. We expect another year of growth. From GMF perspective, we are now fully responsible for running subvented financing as well as leasing through GMF. Accessibility has been no problem as far as access to capital — we're on plan from that perspective. Our cost of funds is increasing, which we’ll either pass along to customers in higher payments or it'll go back to the North American team from a support perspective, but that has been factored into our thinking and our guidance. Today, about 80% of the originations are prime or near-prime and 20% are subprime. That percentage of total originations, obviously, has been coming down as we've been bridging to the full captive and I expect that percentage to decrease.

Great. Thanks for that. Just one last housekeeping question. I think your North American production was up something like 25,000 units in the quarter. Your wholesales were 64,000. Is the difference rental program units that are being returned? I'm just trying to reconcile the volume benefit with the $600 million of volume — the earnings improvement from volume that you had in the quarter.

Yeah. That would be rental, the difference between that. At the end of the day, you have production plus imports, less exports, and whatever happens from a net rental car impact. The net rental car impact going to auction versus going in is about 50,000 units in the fourth quarter.

Right. It just looked like a big volume — 600 million is a big volume benefit year-over-year if part of that is the rental return accounting?

Remember, the way volume is calculated, it's volume increase at the average variable profit rate, and then obviously, mix is impacted because you're selling more rental car fleets, which are lower profit than the average. You should look at those two in combination.

Oh, okay. So you put that into the mix? Great. Okay, thank you.

Yup.

Thank you very much. Excuse me. I wanted to ask about the incentives as we move into next year. I take your comment on board, Chuck, about GM being pretty disciplined in incentives throughout this cycle and a lot of the increases over the last year were related to the run-out of old product. However, you did — or at least third-party sources suggest that we did see an increase in pickup truck incentives. I'm just trying to think about the arithmetic as we look into next year. Should the natural increase we see in pickup truck incentives not offset the improvements we see in other products?

That's a pretty tough question to answer without being able to have foresight on what happens in the truck industry throughout the year. I would say the following: our trucks performed very well in 2015. Going against some brand new products in the market, we grew share. The 2015 trucks were more profitable than in 2014. We just launched a significantly refreshed truck at the tail end of 2015. Supply and demand, especially our supply position, remains very, very strong. So, I am not foreseeing a significant headwind year-over-year from a truck pricing perspective. Last year we were able to actually take price increases on trucks. I would suspect, sitting here on February 3, that 2016 pricing for trucks will probably be relatively benign year-over-year.

Would you guys be — if you think about pressures in the market in that area, you see Ram running incentives way up in the market. Ford's added capacity on the F-150. Would you be willing to hold tight on share?

The truck industry itself is very, very competitive. Obviously, it's not a place where you want to give up share easily. But I think we would be erring on maintaining share and maintaining profitability instead of chasing incremental share in 2016. Our truck inventory at the end of December was 60 days, which is 20 to 30 days below historical levels.

Thank you. And the last question is just on the incremental improvement in costs in the $5.5 billion number. Where are we in that journey right now?

In 2015, we generated about $2.3 billion from a material cost and I'm talking about commercial performance, not raw materials, and $300 million in logistics, so about $2.3 billion, plus a couple of hundred million dollars in Global Business Services and other SG&A initiatives. So, we're about $2.5 billion against $5.5 billion, a little more than 40% of the way through the year. We expect to make another significant step in 2016. I would also suggest that this was our first run at this. We will continue to look very hard across our entire cost structure, including global benchmarking, manufacturing costs, and SG&A costs with external sources. I wouldn't be surprised if that $5.5 billion doesn't change over time as we work through the next couple of years.

Thank you. I appreciate that.

Great. Thanks for taking my questions. Any color on South America? You were pretty close to breakeven this quarter. How should we think about the cadence as we go into the next year? What are the big savings drivers that we went through the year? Is there any sort of seasonal help in Q4? I don't usually think that's the case.

South America has been and will continue to be, at least through 2016, a very challenging environment; very volatile, very difficult to predict. With that said, the actions we've been taking over the last number of years were done specifically to establish a business foundation that would give us significant opportunities on the upside. I would expect to see some improvement in South America in 2016 versus 2015 based on the run rate savings that we generated in 2015. We reduced the workforce about 20%. We'll continue to take whatever actions are necessary, but it's a very volatile environment.

Is there anything, though, in Q4 that is seasonally positive relative to the rest?

Not really seasonally positive. I think we had strong market performance in the fourth quarter, but it’s a very, very difficult environment to say here’s our outlook for the year and provide a specific bridge. Our objective is to improve our performance in South America in 2016 versus 2015.

Got it. And how about GMIO ex-China? You're still losing money on a consolidated basis. I believe it was March of last year you were targeting getting South America and IO, ex-China, back to breakeven. Do you think you could do that in the short term, and what is the path to profitability there?

Well, talking again about South America first. We are well-positioned in South America, especially Brazil, with the products and the strengths of the product that we have down there. When you talk about the brand, the dealer network, and then overlay on that, the restructuring actions we’ve taken. To me, breakeven in South America ultimately is contingent upon a macro improvement. That’s a little bit different than the challenges we have in consolidated operations in Asia. We are in the midst of executing a number of restructurings, as you know. Reducing our manufacturing presence in Thailand and Indonesia. However, as I've said in the past, one of the challenges we have in consolidated operations in Asia is the product portfolio and the dealer network need to improve. It’s going to be a longer tale to address all of those issues. We’ll only invest where we can make viable returns over time. We are conducting actions to position the business, but I just don't see breakeven in the near-term. That’s more of a longer term issue.

Okay. And just one last question. The results today had the reversal of a valuation allowance associated with Europe. I guess that's a positive sign for the outlook for European profitability. Any color on what it might do to the overall tax rate, though, going forward on a GAAP basis?

No impact on our effective tax rate. We still expect in 2016 for that to be in the mid-20% range.

Okay. All right. Thank you very much.

You're welcome.

Hi. Good morning. Congrats on the quarter.

Thanks, Ryan.

Thank you.

So, I think your practice is to amortize the increased cost of the UAW contract over the contract's life, as opposed to Ford's which is to expense much of it in 4Q. Either approach is accepted and yours seems more consistent with the matching principle, but by not taking a single charge it also makes it a little bit more difficult for us to gauge the actual cost increase. Is there anything you can say now about the cost of the contract? What should we think about putting into our models in 2016 versus 2015? I remember Mary saying at the conference in October that GM wouldn't sign anything that wouldn't allow you to generate 10% margin in North America. Can you cast that in the light of your overall margins in North America? Thanks.

Well. Okay. Going through the last point first. The agreement we have with the UAW most definitely will not impede our 10% margins in North America. Our U.S. hourly workforce costs approximately $5.5 billion. Look at that in the context of the agreement we reached and everything else. You're talking about economics that are a couple of hundred million dollars a year. Clearly, as we think about productivity and other efficiencies we drive through operational excellence and everything else, our expectations are we're going to not only offset but more than offset UAW's agreement, which ultimately means no impact to our 10% margins. Another important thing is we do now have more flexibility associated with the UAW agreement, which improves our downside protection because we can react much quicker to the market. Overall, relatively immaterial economic impact in the context of GM's North American results.

Okay. That's great to hear. My last question is just on China. On slide 27 you talked about increasing market share in China. That compares to the narrative earlier in 2015, right, that the domestic Chinese manufacturers were gaining market share at the expense of foreign JVs, possibly because they had greater availability of Crossover utility vehicles or strength in Tier 4 cities relatively. Can you talk about how you were able to gain share there on a full-year basis, your product cadence in China, overall and specific to utilities? Lastly, still on China, please comment on the sustainability of the current run rate of sales and what your house view is on the strength in 4Q, whether that pulls from 2016 or pulls from 2017 after the tax incentives expire.

Looking backwards, did we pull ahead sales into Q4? Generally, Q4 is a strong sales month for China; they have a lot of promotions. January’s sales data showed the market was up 10% year-over-year and we were up 12% year-over-year based on preliminary numbers. We gained share in China in 2015 because we launched a number of products in segments we were underrepresented, including Crossovers and SUVs both at SGM and SGMW. The Baojun brand grew hundreds of percentage points of sales on a year-over-year basis, selling just under 500,000 units in 2015 versus less than 200,000 in 2014. We have 13 products launching in China in 2016, including Cadillac-locally produced XT5s and other crossovers. Great products, strong brands like Buick and Baojun gives us confidence that we can grow share again in 2016 versus 2015.

Great. Thank you for all that color.

Yes. Good morning. A follow-up on some of the discussion around how you're seeing the passenger car, particularly the small and mid-sedan market developing in the U.S. It seems like consumers are voting against it. I understand that with your product launches you're going to buck the trend in terms of price, but just in terms of capacity production volumes, A), how are you thinking about that market over the next couple of years? Two, with kind of defocusing, at least in 4Q and 1Q January, on rental car sales. Is that related to where you think either your capacity or maybe your just retail mix is going there? Three, just a strategic question. Since the industry has been through several light truck pivoting to passenger car, back to light truck, now back to passenger car, and then back to light truck cycles, how are you thinking about mid-term flexibility, vis- à-vis your manufacturing base? In particular, why aren't there more factories – and it’s not just you, it’s most of the industry – that can flex between the two product lines?

The last question first. It's really hard to flex between passenger cars and trucks because one is a body and the other one is a frame vehicle, and they're completely different manufacturing processes. Over the next number of years, a permanent shift from passenger cars to crossovers is likely.

I mean, light trucks like CUV, sorry.

Okay, well. Again, it’s difficult to flex between passenger cars and trucks. We try to build as much flexibility into manufacturing as possible, but every time you build flexibility, there’s incremental investment. I think again, starting with your initial question, over the next number of years it’s likely that there is more of a permanent shift from passenger cars to crossovers. That’s great for us. We have a very strong portfolio when we think about both compact small and medium crossovers. We're launching new products, which has been factored into our capital deployment and tooling rates in the plants. We've taken several actions over the last years based on the strengths of crossovers to optimize production.

Okay. So are you still comfortable with the $1,500 profit improvement on Malibu and Cruze, or is that sort of the baseline lower now just given some of the headwinds in pricing and the overall sedan marketplace?

I think that's still directionally correct. We're one month into the launch and looking at the track record, we traditionally grow segments here, growing transaction prices, and improve our profitability. We expect to do that with these products.

I see them moving away from daily rental mix as well in those segments?

Certainly. Moving away from daily rental is to optimize our capacity and generate high returns. Those vehicles traditionally have carried heavier weights of daily rentals, so we're focused on retail.

Thank you. I want to thank everyone for joining us this morning and quickly want to reiterate that we are going to continue to execute our plan with discipline, to drive profitable growth, improve our cash generation, and deliver improved returns to our shareholders, while funding the technologies that will drive our future and allow us to execute over the long-term. Again, thanks for your participation today.