General Motors Company (GM) — Q4 2018 Earnings Call Transcript

Thanks, Dorothy. Good morning and thank you for joining us as we review GM's financial results for the fourth quarter and calendar year 2018. 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. I'm joined today by Mary Barra, GM's Chairman and CEO; Dhivya Suryadevara, GM's EVP and CFO; and a number of other executives. Before we begin, I'd like to direct your attention to the forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. I will now turn the call over to Mary Barra.

Thanks, Rocky, and good morning everyone and thanks for joining. We delivered very strong results in 2018 despite significant macro headwinds and a year in which we transitioned to our light-duty pickup truck. Our North American performance was very strong as we launched pickup trucks and crossovers. China results were strong despite the market environment and GMF delivered record results. Let's get the full year 2018 numbers. Net revenue was 147 billion, EBIT adjusted was 11.8 billion, EBIT adjusted margins was 8%, our EPS diluted adjusted was $6.54. Our automotive adjusted free cash flow was 4.4 billion and this excludes the 600 million intention and prefunding payments and ROIC adjusted was 24.9% on a trailing four-quarter basis. As we shared in January, we expect to improve 2019 earnings and cash flow as we move into the next phase of our transformation, linear, more agile and better positioned to win. Our favorable outlook is based on a continued robust mix of new products around the globe, continued cost efficiency and our business transformation initiatives. We believe that we will continue to face macro uncertainty, but we expect to manage through it based on current market conditions. Let’s look at our performance in North America where we achieved a strong year including record fourth quarter earnings. In the U.S., we led the industry in pickup sales for the fifth straight year and delivered more than a million crossovers. We will benefit from a full year of sales of our all-new light-duty pickup and the cadence will continue with all-new heavy-duty models. We've revealed the Chevrolet Silverado heavy-duty yesterday in Flint and it will go on sale later this year along with the GMC Sierra heavy-duty. We’re encouraged by the early success of the newly launched Cadillac XT4 SUV which already leads in its segment and we will also see a full year of sales of the new Chevrolet Blazer. I would like to take a minute to update you on the business transformation actions we announced in November. We said we would outline our product portfolio in capacity in North America with changing consumer preferences and transform the workforce to position the Company for long-term success. To date, nearly 950 U.S. hourly employees have been placed in U.S. plants with products in key growth segments. At GM Canada, we are supporting affected employees by working with local colleges on retraining as well as with dealers and more than 20 local employers who have expressed interest in hiring these experienced employees, and we will also provide outplacement services to be impacted salaried employees. Because of the strong business results we delivered last year, eligible hourly employees will share in this success through profit-sharing payments later this month. Moving to our international operations, the actions we announced earlier last year have placed GM Korea on a path to enterprise-level profitability. However, despite improved share in Brazil, the South American business remains a concern because of continued macroeconomic pressures. We are having productive discussions with key stakeholders to generate acceptable returns in the market. In China, we earned 2 billion in equity income last year in an increasingly challenging business environment. While we expect macro issues and flat industry performance will impact our results this year, we remain confident in our long-term position in China. We expect China industry sales to be roughly in line with 2018 levels based on expected GDP growth and our current assessment of market conditions. Last week, the government announced actions to stimulate the economy and the industry, and we look forward to learning more about the details of these initiatives; however, in general, such reports had a positive impact on the auto sector. Our aggressive product cadence continues this year in China with more than 20 new and refreshed models from our Buick, Chevrolet, Cadillac, Baojun and Wuling brands. This includes 7 SUVs and the first of our all-new global family of vehicles. I also want to mention the momentum at Cadillac. Last month, we announced that it will be GM's lead electric brand where we introduced our next-generation EV technology. Through technological innovation and beautiful design, we’re fully committed to restoring Cadillac to the luxury leader it should be. Last year, Cadillac posted another record year of global sales and we expect continued growth as we introduce a new model roughly every six months through 2021, including the XT6 SUV we unveiled last month. Turning to our future mobility initiatives, we made real progress last year toward expanding our leadership in both autonomous and electric vehicles since first announcing our vision of a world with zero crashes, zero emissions, and zero congestion nearly 18 months ago. GM Cruise is deeply resourced to succeed with more than 1,100 employees and 5 billion raised in external capital from Softbank and Honda in 2018. We have demonstrated our willingness to work with partners with common values and where a partnership can improve efficiency, capital spend, and speed of development. For example, our AV collaboration with Honda builds on our existing EV battery and fuel cell work. On the EV front, to encourage greater consumer acceptance of battery electric vehicles, last month, we announced the collaboration with three partners to establish the largest collective EV charging network in the United States. In addition, Cruise continues to focus on the entirety of the autonomous vehicle ecosystem citing the partnership with DoorDash last month. So to recap, we had another year of strong earnings in a volatile environment. We offset macro headwinds with fresh product in the right segments by staying intensely focused on cost and by making sound business decisions throughout the year. So now I will turn the call over to Dhivya.

Thanks, Mary, and good morning everybody. We exceeded our expected 2018 results from both an EPS and adjusted automotive free cash flow perspective. Our performance was driven by strong execution across all of our operating segments including record fourth quarter results in North America and GM Financial. We were able to accelerate the execution of our transformation cost savings and started to see early benefits of these actions in the fourth quarter. With that, let’s review the results in more detail. As Mary mentioned, we generated calendar year results of 147 billion in net revenue, 11.8 billion in EBIT adjusted, 8% margins, 6.54 in EPS diluted adjusted, and 4.4 billion in adjusted automotive free cash flow excluding the impact of pension contribution. In the fourth quarter, we generated 38.4 billion in net revenue, 2.8 billion in EBIT adjusted, 7.4% EBIT adjusted margin, $1.43 in EPS diluted adjusted and 4.2 billion in adjusted automotive free cash flow. Let's turn to North America. In the calendar year, North America generated a 9.5% EBIT adjusted margin despite over 1 billion of commodity headwinds and downtime taken for full site changeover. In Q4, North America delivered record EBIT adjusted results of 3.0 billion and a 10.2% margin, up 20 basis points year-over-year. The performance of our all-new light-duty pickup and strong material cost performance in the quarter more than offset commodity headwinds and the volume impact from downtime. The full-size pickup truck launch has been very strong. We have experienced a smooth ramp up of the new models as well as sell down of the old model. This reduced over 75,000 all-new trucks in Q4 consisting primarily of highly profitable crew cab. This contributed favorably to volume, mix, and price during the quarter. Let’s move to GM International. Full year EBIT adjusted in GMI was down 900 million year-over-year primarily driven by FX headwinds in South America. For the fourth quarter, EBIT adjusted in GMI was down 500 million year-over-year due to South America headwinds as well as lower equity income in China. We still delivered strong full year equity income of 2 billion in China driven by our market position, cost performance, and a richer mix of Cadillac. Equity income for the quarter was 300 million down year-over-year as a result of the industry slowdown, continued pricing pressure, and partially offset by cost efficiencies and Cadillac growth. Important to note that there were some factors specific to Q4 including lower production levels and elevated launch costs that impacted the results for the quarter by $100 million. A few comments on GM Financial, Cruise, and our Corp segments. GM Financial posted all-time record revenue of 14 billion for the year and all-time record EBT adjusted of 1.9 billion. In the fourth quarter, GM Financial generated revenue of 3.6 billion and EBT adjusted of 400 million, both records for the fourth quarter. In October, GM Financial paid a dividend of 375 million. As I mentioned last month, continued dividends from GM Financial provides an opportunity to strengthen our long-term cash generation capability and narrow the gap between earnings and free cash flow. Cruise costs were 700 million for the year and 200 million for Q4. We expect to spend approximately 1 billion in the GM Cruise segment in 2019. Corp segment costs for the full year were 600 million including approximately 250 million combined favorable impact from PSA warrants and revaluation of our list investment. We expect to spend the Corp segment to be about a billion in 2019. In the fourth quarter, Corp sector costs were impacted by unfavorable performance in PSA warrants and were $400 million negative for the quarter. Before I close, I wanted to reiterate our outlook for the calendar year. As I mentioned last month, we expect strong EPS diluted adjusted in the range of $6.50 to $7 and adjusted automotive free cash flow in the range of $4.5 to $6 billion. Catching up on the headwinds, we will take downtime to the tune of 25,000 units as we prepare for the launch of our all-new full-size SUV. We expect China equity income to be down moderately year-over-year. We expect to see headwinds year-over-year from commodities and tariffs to the tune of 1 billion. Finally, headwinds from depreciation and pension income are expected to be approximately 1 billion, and as a reminder, since these are non-cash items, they will compress the gap between earnings and free cash flow. Offsetting these are a number of tailwinds specific to GM. The full year benefit of our truck launch will provide tailwinds in volume, mix, and price in 2019. We expect a meaningful benefit from a full year of XT4 and Blazer, the launch of Cadillac XT6 as Mary mentioned, and the rollout of our global family of vehicles. We also expect year-over-year growth in high-margin adjacencies like aftersales and OnStar. When you layer on top of that, the transformational cost savings of 2 billion to 2.5 billion through 2019, we expect these tailwinds to more than offset the headwinds, assuming a similar macro-environment. It is also important to understand this year’s quarterly cadence; we expect the first quarter to be the weakest since most of our SUV downtime will be taken in the first quarter. In addition, we will have lower volumes in China, given continued industry pressure while staying disciplined by reducing our inventory levels. As we progress through the year, we expect to see improvements in China equity income following these inventory actions and with a strong product launch cadence later in the year. As a reminder, Q1 is typically our weakest cash flow quarter due to working capital seasonality. In addition, this year, given the SUV downtime that I just mentioned, Q1 cash flow is expected to be meaningfully below our historical averages. For the full year, however, we expect cash flow to improve after Q1 and our full year free cash flow, as I mentioned earlier, will be in the range of $4.5 billion to $6 billion. In summary, we had a solid finish to 2018 and we will continue to stay focused on execution in 2019, and as I mentioned in January, we had three key financial priorities including improving our free cash flow and cash conversion, a best-in-class cost structure, and efficient capital deployment. That concludes our opening comments and we will now move to the Q&A portion of the call.

I'm curious if you could explain the timeline for the truck launches. It seems you have 75,000 light-duty trucks planned for the fourth quarter, but that's significantly lower than what you'd expect for a new truck. When will the heavy-duty trucks start to contribute meaningfully after their ramp-up and launch, and when will the SUVs be incorporated? Could you provide some insight on the standard operating procedures for these and when we can expect to see the full benefits from each of the three categories of trucks?

Sure, John. So, if you look at Fort Wayne, we’re already up and running in full volume and that transition is over. So, if you switch over to Silao, which is where we have taken our downtime in the fourth quarter, we’re now up to full line rate production for our light-duty pickup. As of January, we’re up to full level of production. So light duties, we’re pretty much finished with our transition. If you switch over to heavy-duty, most of the changeover we have been working on in 2018 and through the second quarter of 2019, we will see transition. And after that, starting in Q3 of 2019 is when you will see the full production ramping up for heavy-duty. For SUVs, we’re going to take the 25,000 downtime for the year that will be mostly in Q1 of 2019 and the SOP for that will be in 2020 and we will have more to talk about that later.

Just a second question, if you could update us on what’s going on with Cruise? I mean, obviously, there was some talk about getting launched with a fleet, commercial fleet this year, something that might get a little bit delayed. And also maybe Mary, if you could talk about what’s going on to DOT petition on the fourth gen Cruise? And if there's any word on that whatsoever?

There is currently no update on the petition for our level four, track four vehicle, but we are fully capable of launching with the truck three model. I believe we are well positioned. As we have consistently stated, safety will remain the critical metric for Cruise. We have hired 1,100 people, and we have the right team focused on our goals, which reflects our commitment to our efforts in working on both the ecosystem and the technology. We are making significant progress with our technology, as demonstrated by the video we released last month, showcasing our vehicle's ability to manage situations where others are facing challenges. We feel we are in a very strong position, possibly even a leading one. We will continue to advance rapidly and ensure we meet all safety thresholds we have set for ourselves, along with regulatory requirements. This year is crucial for us, and we will keep you updated on our progress, but overall, things are moving forward positively.

And then just lastly, just one sort of housekeeping, when we think about the GMF dividends, I think it was 434 in '18. So what is the progression as the balance sheet and the earnings growth at GMF? And how should we think about sort of the addition of cash flow in 19 and 20 and beyond?

So, John, you're absolutely right. The dividend in GMF is now at a level which is lower than what would be our steady state potential. If you look at our long-term earnings before tax expectation for GMF that's in the range of about $2 billion, and we expect that once we reach full captive, and that's going to be likely in early 2020, we would be able to dividend the earnings before that will after taxes, net income I would say about to be apparent. The curve between there and now would be determined by our average ratio along the way. And we have our managerial target of a 10 times leverage ratio of GMF. And if we've seen potential for the dividends, we will take that but we will ultimately be governed by maintaining an appropriate leverage ratio and our communications to the rating agencies and how much of dividends we take out of fin-co where we will assume in our outlook for 2019 is that a level that's comparable to 2018 from a dividend perspective. And if we see anything above that, that would be upside. But we will post you that from there as we move forward with how the leverage ratio developed.

But simply, it's fair to say 1.5 billion potential upside run rate to free cash flow as GMF normalizes into its size that you want to get it to?

Thanks, John.

Couple of questions. One is this fourth quarter margin in North America obviously was really strong, it was up year-over-year despite the higher D&A, the commodity inflation, all those headwinds, and obviously you're so kind of early in the truck launch. I was hoping you may be able to just address one aspect of how we should be thinking about the truck positivity from where we are right now into 2019? At one point, you talked about, I think it was a $2 billion revenue opportunity for you, as you convert your average transaction prices between where you were on the old trucks and where you expect to be. What is your updated view on that? Are you tracking towards that? Is that something we should see in 2019?

Sure. Before we go into the numbers, I want to express our excitement about the new generation of trucks and our strong leadership position over the years, which we expect to maintain with these new launches. We previously discussed releasing a number of constraints that limited our older truck platforms, particularly regarding crew cab capacity, which we have now addressed with the current generation. Additionally, we offer a wider range of vehicles featuring high content and value, allowing us to cater to a broader market. In Q4, you have already started to notice the effects of pricing and mix in our new trucks. Looking ahead to 2019, you can base expectations on the Q4 results, and we won't face the volume challenges we experienced in 2018 during the transition of light-duty trucks. For light-duty vehicles, we anticipate an increase in volume, a favorable mix, and continued pricing support. The heavy-duty segment is expected to show similar trends in the second half of the year, providing a half-year benefit, while SUVs are moving through a transition year. Therefore, a straightforward approach would be to take the Q4 outcomes for light-duty trucks and project them into 2019.

I was also hoping that you can address the non-China part of GMI? Looks like it was about a $1.6 billion drag last year. What are your high-level expectations for this going forward? Obviously, there is some Korea improvement and is the rest of it contingent on macro in South America? Or are there some other things that you would expect to be big drivers?

Yes, if you look at our South American business, over the last several, we've taken a number of actions to right size the cost structure and set the business up for future profitability. In fact, in Q4 of 2017, the business did breakeven and turned a profit. What happened in 2018 was, as you will know, the FX story there with the Brazilian real and the Argentine peso. What we've done since then is to start working with a number of our stakeholders, as you know in South America, and we will have more to say as we make more progress there. But it is important to note a couple of factors specific to 2019. One is, we are going to have a full-year impact of pricing in South America because price tends to lag FX there. So last year as we were experiencing headwinds in FX, we were pricing for them but on a lagged basis. So you are going to see a full-year impact of that in 2019. And the second aspect is, towards the end of the year, we're going to start to see the impact of our global family of vehicles, and this is the portfolio that we shared more in detail about in last month's Capital Markets Day. That portfolio is a new architecture that replaces the number of legacy architectures. So, the cost profile and the margin profile of the portfolio is different as well as the footprints to the portfolio where we are more hedged from an FX perspective. So, you're going to start to see the impact of that. So, year-over-year in 2019 based on everything in South America and the actions we've taken in Korea as well, we expect to see improvement from a profitability perspective with GMI.

And just my last question. You've talked about 4.5 billion to 6 billion of free cash flow, but 6 billion to 6.5 billion excluding the timing differences, which were I think largely related to the supplier payment days. If we were to think about the underlying free cash flow of the business in 2019, to kind of use as you for bridging purposes to understand where your free cash flow generative power is as a Company. Is it really closer to the 6 billion and the 6.5 billion just on a go-forward basis?

Yes, I believe the timing you mentioned is related to supplier payments and production timing along with our changeover. As we look beyond 2019, excluding the impact of timing, you will see the remaining cost savings come through, which we projected to be 4.5 billion in total. In 2019, we expect to realize about half of that, while the remaining benefits of the cost savings will appear in 2020. Additionally, considering our CapEx savings, we noted that our current 8.5 billion run rate will decrease to 7 billion by 2020. You will also see the effects of that in 2020. However, all of this is in the context of the current macro-environment, and my insights assume that nothing else changes, though there are favorable factors working for us in 2020.

Just a first question on China, given the recent challenges in the last few quarters, how you're now thinking about normalized China margins for GM say over the next couple of years?

I think if you look at, there is kind of puts and takes there from a Cadillac perspective and launching more crossovers, we think there is an opportunity to continue to grow and improve their margins. Clearly, as we transitioned to more electrified vehicles as we gain scale, that will be lower and then we move higher. So, we're still focused on having strong margins, and China will go through a bit of transition with the EVs. So, we think that specifically the growth of Cadillac and some of our larger SUVs will help to offset that.

And then, I think you've mentioned a $1 billion still assumed for commodities and tariffs. Love to get your thoughts on the tariffs component in terms of what you're assuming and just some of the scenarios that we should be thinking about Section 232 and some of the other items that are still outstanding out there?

It's a volatile environment, so I prefer not to provide specific figures for individual components. We've seen some reductions in steel and aluminum prices, while palladium prices fluctuate daily. Therefore, I won't break that down into separate parts. The 301 tariffs are included in our overall outlook for the year, which is reflected in our $1 billion estimate. As mentioned last year, since we primarily source steel and aluminum locally, we don't expect significant tariff impacts; instead, we're more concerned about the movement of spot prices, which usually lag by a couple of months. So consider the broader $1 billion figure, and as we demonstrated in 2018, we'll continue to offset that with matured cost efficiencies and other improvements, which will be consistent in 2019.

Just one quick question and I think Rod alluded to this. The higher D&A in North America, it looks like I think some of that was accelerated depreciation related to some of the actions you took in North America. Was that actually backed out then the accelerated part from the adjusted results?

That's right. The accelerated depreciation as a part of the overall charge for transformation which is treated as special for EBIT adjusted. The one that Rod was talking about in the form of additional D&A, that is our normal cadence of our D&A normalizing to our capital level, and we saw a good portion of that flow through in the fixed component of our EBIT walk. For the fourth quarter as well as the calendar year, it impacted results. And as I said in 2019, that will continue to impact results as well. So, that's the normal D&A, Joe. The accelerated one is not counted in that.

Okay. So of the 1.5 roughly in America, that includes the accelerated portion, so on an apples-to-apples basis, it was up a couple of hundred million year-over-year?

I would say from the transformation perspective, we took a charge of about 1.3 billion for the year that included D&A of about 300 million or so with the 1.3 billion charge. So, that's the transformation portion. And on the normalized basis, if you look at our calendar year EBIT walk, the fixed component had a year-over-year increase, a vast majority of that. If not all of it, I would say it would be attributed to D&A.

The real point in going down this path is as we think. You showed the free cash flow walks on Slide 13, as we think about that CapEx less depreciation for '19. Does that gap further narrow relative to your $8 billion, $9 billion CapEx guidance for the year?

Yes, the way I would think about that bridges in 2019, you are going to have 1 billion of additional depreciation and pension income which are non-cash, so you will see the compression in the first two bars coming from that. And in 2020, you are going to see additional depreciation and pension and a decline in 1 billion of capital. So that should be on top of the pension and depreciation number that I would think about. And as John asked earlier about GMF, that's the other component of when that dividend starts to come in, that will be on top of these first two components.

There is obviously a lot of pushback on the plans to close some plans. I mean, how much of that 4.5 billion is at risk, if the unions don’t allow those the concessions or closing? And do you see that as a risk?

I think obviously it's important, we announced that the plans are unallocated and as part of our UAW negotiations, this year we need to finalize the status. But I think when you look at the fact of the 2,800 workers that are impacted, 1,200 of them are retirement eligible, and we have about 2,700 jobs available, as I mentioned already 950 people have been placed. I think as we work through and address the concerns from a workforce perspective, that will go a long way to allowing us to make this transition. And obviously, we have work to do, but when we look at what we need to do from a market perspective, we can't run at a 70% utilization, we had to improve that and that will work to accomplish. So, that's the way I look at, and I don’t see risks, especially with the ability that we have to move people to places where we're hiring. And we just announced yesterday that we have 1,000 jobs available in Flint. So, I think it's the transition we have to go through, it's what we have to do and we will problem solve with the UAW.

And when we look at your '19 guidance, what is the assumption on pickup? I mean, do expect to end up more about the new product taking pricing? Some of the recent data showed some market share shift, but it's followed month-to-month. I mean, are you optimistic that you're going to gain share with the new truck? Or is it more about them?

I would say as volume mix price all of the above, we expect the truck penetration to hover around the ranges that it has booked in the recent past, which is in the low 20s. We expect that to continue going forward. The crew cab makes us an important component of all of this. As I mentioned earlier, in the second half of the year while we release the constraint on crew cab with Fort Wayne, we saw the tailwind associated with that and we are going to see in the full year, calendar year, a full impact of both Fort Wayne and Silao still out running at full crew cab capacity.

Got it. So with the recent market share changes that are showing up, those are not expected until next year, I guess, would be the short answer?

Yes, I wouldn't extrapolate from one data point, Colin.

Got it. And just lastly, any information on your inventory situation in China? There is a lot of concern about high inventory levels across the industry.

Yes, I would say we've taken actions in Q4 to right-size our overall production levels. We took out about 250,000 units of production in China in Q4. If you look at the overall inventory picture, we target to be typically around 40 to 45 days of inventory. SGM, which operates more in the tier 1 to 2 cities, is a touch above that, and we're working on that further in Q1 of 2019. SGMW is at a level that is higher than we would like, and again that's action that we have to continue to take in Q1 as well. So when I talk about the cadence in my remarks, and I alluded to Q1 being the seasonal low in China as well, it factors the inventory right-sizing actions within that.

Got it. All right. Thank you very much for taking my question.

Sure.

Let's focus on China for now. It seems your joint venture income is likely to decrease from the $300 million run rate in the fourth quarter and the first quarter due to your inventory management and production shutdowns in wholesales. However, you anticipate a sequential improvement throughout the year. Can you clarify what the main driver of this expected recovery will be, especially as you aim to normalize wholesale shipments?

Yes. Firstly, I would not assume that it would take a step down from Q4. I would say similar to Q4 we're taking inventory actions. We took them in Q4, from a production perspective and we're going to continue to take them in Q1 as well. And I think it's important to note, the 20 new launches that we talked about earlier, they are in Q2, Q3, and Q4. So actions that are specific to us, I would say, really start to take effect in the latter half of the year. So from a cadence perspective in China, I would say, Q1, expect similar-ish levels to Q4 and then pick up after that. But obviously with an eye overall on the macro environment as well as the sales picture over there.

Got it. That's helpful, Dhivya. And then from a Cruise perspective, the spend, well below your billion target for the year. Is there anything to read into that? Are you signaling anything here? I kind of want to understand that if there was a tone-shift earlier, another analyst asked a question, it wasn't necessarily answered or not, if we should expect a later deployment in 2019. It seemed a little bit more squishy, if I can use that term. But on the back of that one tone-shift question; two, should that spend in 2019 ramp toward at $1 billion that you were looking for? And then what type of increased spend are you really contemplating at deployment for your operations, as well as customer acquisition costs with getting people into an AV ride-hailing network?

David, we are firm in our plan for autonomous vehicles at Cruise. One reason our spending was lower in 2018 is that Kyle Vogt is a skilled leader who manages expenses as if they were his own money. GM Cruise has excellent cost controls in place, and as you can see, we expect to maintain our spending this year. This reflects good cost discipline. As I mentioned, this is one of the significant technical challenges of our time, but we are well-positioned. We are dedicated to this project and have all the resources we need. If our team requests more resources, we are prepared to provide them. Our funding situation is strong, and we are progressing well with development. We will keep you updated throughout the year. We are on track concerning the performance we have discussed, and as highlighted in the video, our vehicles are continually improving. We will also continue to work on regulatory matters and will adhere to the safety standards we have established. We are committed and are making rapid progress.

Okay. And just within that, maybe I'm missing it, you did about $700 million of spend this year, your target was $1 billion for 2018, you came in $300 million low, I understand some cost saves. Are you expecting a similar level, $700 million in your 2019 guidance, just…?

Our guidance for 2019 for GM Cruise is approximately $1 billion.

Two quick questions. First, when do you think GM can sell EVs for a positive EBIT margin roughly?

So Adam, we've talked to you about the fact that with our next generation of development, we want to make sure we have obtainable, profitable, desirable, and with the appropriate range. And so that is the work that we're doing. We benefit from the fact that we have a strong position in China, and as you know, the regulatory situation will drive there. Also, I think it's important to note that we have a partnership with Honda to leverage the technology as well. So I think we're in a good position, driving our cell costs down, also from a quality perspective, and that is our stated goal when we launch that next family of vehicles.

Okay. So I'm interpreting that as kind of post 2020, maybe 2021, correct me if I'm wrong. Second, question for either Mary, you or for Mark if he is on, what do you think of an all-electric pickup truck and when will GM sell an E-Silverado?

So, I think you said, correct, if you're wrong. I would say early next decade, but I wouldn't put any more specificity on EV profitability than that. And I'll say on your second question is, we believe in an all EV future. So you'll have to stay tuned.

I thought to ask on GM International restructuring progress outside of China that is. So can you provide us with an update on the Korea restructuring announced in the 1Q call last year, and how you would rate your progress there since that time? Also, I think there were two international plants included in the restructuring announcement back in November. These were unnamed, but slated to close sometime in 2019, presumably they are outside Korea, perhaps South America. Any update you can provide on how investors should think about the cadence of those savings, as 2019 progresses?

I would take a broader look at GMI, excluding China, and Dhivya has already discussed South America. I can confirm that the restructuring in Korea is progressing as planned, and we are seeing an increase in our market share there. It has been a challenging period, but we are continuing with the measures we outlined last year. We are still working on right-sizing the business in that region, and we have a solid profitability plan in place that is in motion. I don’t have any further specifics to share at this time, but the updates regarding the two plants are certainly on schedule. Dhivya, do you have any additional insights to provide?

I would just say that the cost savings that we have outlined for 2019, contemplate the right cadence for these plants as well. So it's all baked in.

And then lastly, but sticking with GMI. It looks like currency continues to be a fairly large headwind, $300 million in the quarter. Seemingly the Argentine peso and the real, biggest drivers there. Based on the prevailing spot prices, any hedges that you might have? And then your localization plans with regard to the GEM platform, how should we think about this trend as 2019 progresses?

Yes, there has been some stabilization in Brazil following the elections from the perspective of the Brazilian real, although it remains high compared to historical averages. We are able to adjust our pricing in Brazil to align with inflation, while in Argentina, we typically pass on foreign exchange challenges over time. While there may be a delay in Argentina, I advise considering the recent foreign exchange pressures when planning future pricing. We do not rely on hedges or forward contracts in these situations; instead, I would focus on pricing and localization as our main strategies for managing foreign exchange impacts. The upcoming generation of vehicles will be more localized. Our goal is to break even and achieve profitability, even in extreme foreign exchange conditions, and we are actively working toward that.

Yes, I want to ask a few questions around GM Financial. First, if I look at full year 2018 over 2017, ROA seemed to expand from 140 bps to 195 bps. Could you maybe dimension how much of that was due to lease residual performance versus credit performance versus other factors like net interest margin or cost saves?

Yes, I would say, if you look at overall year-over-year GMF EBT bridge, if you will, half it from an increase in volumes as they continue to grow to full captive levels. So just their penetration getting higher and their overall volumes getting higher and the other half coming from the fact that, residual values were flat in 2018 versus 2017, so take the delta, Brian and divide that by two.

Okay. So the main factor of the ROA increase would have been the residuals. Which gets to the second question, you've talked about a mature run rate of about $2 billion EBIT, full year 2019 was $1.9 billion and fourth quarter would kind of be right in line with that. Are you implying that it's sort of going to be flattish, as perhaps residual gains come down, given your used car pricing forecasts or even down next year?

I'd say 2019 flat to 2018, we're expecting a 4% to 6% decline in residual values, which we expect will be offset by the growth in volume that I mentioned and our continued penetration. And the other aspect longer term as well, Brian, as the business matures, you're able to spread the OpEx over a larger asset base. So we should see OpEx efficiencies as we move forward.

Okay. And the need to grow the asset base is why you're not committing to upping the payout ratio to the full 100% just yet?

That's correct. Our current asset base is over $95 billion. We expect that in the next few years it will likely decrease to around $120 million. The equity we currently hold in the financial company is intended to support that anticipated growth.

The final question is about your GM Financial joint venture in China. Retail penetration reached 44% in the third quarter, which is quite impressive. I have a couple of strategic questions: How much potential is there to leverage this to counter some challenges in the Chinese market? Additionally, as you consider the vehicle mix in China, do you believe you can better reach the upper segments of the market, such as Cadillac and Buick, with this support compared to the lower end, considering the credit profile of the buyers?

I'd say to you, first question, there's certainly room from a growth perspective for the SAIC-GMAC joint venture. We are still in the early stages of, I would say, penetration over there on financing and also the leasing portfolio which is in its infancy, so more growth to be had longer term. And across the board, I would say, in China, adjacencies are at their early stages of development across the board, whether it's the aftersales, GMF, and others. So, we will continue growing those. And from a vehicle mix perspective, perhaps more tilted toward the tier 1 to tier 2 market than the tier 3 to tier 4 market. But I wouldn't specifically draw trends on Cadillac versus other brands.

I would like to ask about the timeline for the benefits from your restructuring efforts. I assume that when you discuss the earnings cadence for this year, you are also referring to when we might see some of these benefits, potentially beyond the first quarter. Could you elaborate on the $2 billion to $2.5 billion benefit expected for this year and how we should view its progression throughout the year?

Yes, I'd say we're off to a pretty good start. As I mentioned in my comments, Q4, we already started to see early signs of these savings starting to flow through. And if you look at calendar year 2019, the savings will be tilted more toward the earlier part of the year. So we will be off to a pretty good start here after Q1. So I'd say Q1 is when we implemented, and from Q2 onwards, you will start to see the benefits.

I understand. For my second question, I didn't notice much emphasis on the Capital Markets Day, but I'm interested in your perspective on the possibility of buybacks this year. If you meet your guidance of $4.5 billion to $6 billion, even after accounting for financing, restructuring, and the common dividend, it seems there might be some flexibility for buybacks. Is this a priority, or is 2019 seen more as a transitional year, with buybacks planned for the future?

Yes, we're going to stay very committed to our capital allocation framework of looking at opportunities to continue to invest in the business to generate a greater than 20% return, as well as maintaining an investment grade balance sheet. And then, as we get to that point, there is opportunity that will be returned to shareholders. So I don't have anything specific to say other than we're going to follow our process.

Okay. And then I guess, finally, just curious what you're seeing in terms of latest data and trends in China. Obviously, you're assuming a fairly flat market for the year, which I think when the guidance was given, may have been perhaps seen as optimistic. Now the most recent data point throughout January seemed to think there is going to be a little bit of stabilization. Are you seeing any of that or is it sort of like too early to say, in terms of the Chinese market?

No. I think we're seeing improvements from Q4. I mean it's early days, but we're optimistic, not only from what we've seen in the month of January, but also, what the government has announced, because we've seen that have a positive impact. And again, the team there is very focused on costs and improving mix, etc. So with the new launches, we see a lot of opportunity from an industry perspective, with the signs we saw in January and we also have a lot of, I'll say, GM-specific opportunity.

And just to wrap up on China, how should we interpret your guidance for a slight decline in equity income? It seems like you’re indicating that Q1 won’t be any worse than Q4, so I would expect that beyond this, you could benefit from some new products and possibly some market stabilization. Is it primarily that you're comparing against particularly strong quarters from last year, or are there other headwinds we should anticipate throughout the year?

I wouldn't say there are challenges to anticipate beyond what we discussed at Capital Markets Day. It's important to highlight that when we mention moderately lower equity income, we are considering all of these factors, and our goal is to achieve a strong overall performance for the calendar year. There will be fluctuations in different regions, including North America and China, but we aim to maintain a positive outlook. As Mary pointed out, there are company-specific factors that will assist us. Ultimately, it's a volatile market, and I don't want to elaborate further on that.

Hi. First time caller, as they say, so appreciate getting on the call. Maybe I can attack this cadence on the North American EBIT just in a slightly different way. I think you guys have been clear that Q1 is low, we have production shutdowns, and the cadence of the cost saves across the year. I think some of the questions investors may have are around in the second half. Is there any extraordinary cost that we should think about, given the launch of the heavy-duty and the SUVs? Because if not, you would think that sort of cadence beats the Q4 as another peak. So is there any sort of offset to the benefit that you've laid out, that should get better across the year?

I don't think there was any specific launch-related costs or anything we haven't already talked about, that's going to weigh on North American results. We had talked about depreciation and pension income going down and commodity headwinds, that does impact North America, but that should even through the whole year, depending on how commodities behave in the next several quarters here. But I'd just say, beyond what you talked about on Q1 with the downtime and all the factors that I mentioned, that should positively impact the second half of the year. There is nothing that we haven't already discussed.

And just one follow-up on actually the timing of commodities and tariffs, I mean obviously, the $1 billion we are still annualizing some of the costs from last year, so it would make sense that those hits are greatest in the first half. It sort of surprised me a little bit, when you talked about some of the spot prices of the quarter being a lag of quarters, I know sometimes with hedges, could be anywhere from four to six quarters. Is it possible that if we see these spot levels continue over the first six months, that there actually could be some benefit by, let's call it the end of the year, as you know, obviously you've had to project out for the full year?

Yes, the lag I mentioned is related to our indexed commodities. We usually see a three-month lag between when the actual impact appears on our income statement and when the spot prices fluctuate. It's challenging to predict the exact timing of this effect, as it changes every quarter and tends to be evenly distributed throughout the year. We're closely monitoring the 301 tariffs since they will have an impact, and it's also important to consider which commodities are increasing or decreasing in price. Therefore, it's tough to offer more specific details on a topic that is inherently volatile.

Thank you all for joining us today. As we enter the next stage of our transformation, I want to emphasize our commitment to strengthening our core business while accelerating our efforts to lead in the future of personal mobility. We are restructuring the company from one that attempted to cater to everyone in all markets to a more strategic, agile, and profitable entity. We believe we occupy a distinct position compared to many competitors in this industry. Our goal is to reinvent personal transportation and seize the $1 trillion opportunity to make the world safer, better, and more sustainable. In 2019, we plan to fulfill the commitments we've made to you, our shareholders, by leveraging our strong global vehicle portfolio and adjacent businesses while focusing on driving profitable growth to create long-term value. This transformation will be dynamic, but you have our assurance that we will act with speed, discipline, and integrity to drive the business performance necessary to succeed today and in the future. Thank you again for your time.