General Motors Company (GM) — Q2 2020 Earnings Call Transcript

Thanks, Tabitha. Good morning and thank you for joining us as we review GM's financial results for the second quarter of 2020. 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 here today at the GM headquarters by Mary Barra, GM's Chairman and CEO; and Dhivya Suryadevara, GM's Executive Vice President and CFO. 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. Mary?

Rocky, thanks so much, and good morning, everyone. Thanks for joining. I'll begin with the COVID-19 pandemic, which has made this quarter one of the most challenging in our history. COVID-19 has impacted us everywhere we do business. It has changed the way we work, how we sell our products, how we support our customers, and how we care for each other. Many of these changes will influence how we allocate future spending as we move forward. While our years of business transformation actions made the company more resilient, we also took additional proactive steps to help offset these challenges. Dealers stayed connected with customers through our online and contactless Shop-Click-Drive tool that we enhanced. Our customer care and after-sale operations remained open to keep our dealers and customers supplied with the maintenance and repair parts needed. And our employees proudly rallied to build ventilators and personal protective equipment for first responders. We used our early learnings in China and Korea to safely begin restarting our operations in North America and South America, with significant support from our supply chain unions and governments. We continue to collaborate with these stakeholders to ensure the highest levels of confidence in and execution of our extensive safety measures. While we can't predict the trajectory of the virus and its ultimate impact on public health and the economy, we have put all appropriate measures in place to position the company for continued recovery in the third and fourth quarters and beyond. Before I talk about our overall performance, I want to acknowledge another issue: the increasing responsibility of companies like General Motors to take a stand against racial injustice in the U.S. while remaining focused on driving business results. General Motors has a strong track record of diversity by many objective standards, but it's clear we must do more, and we will. During the quarter, we outlined several significant steps we plan to take. These, along with all of our progress across ESG, are detailed in our new sustainability report, which is available on gm.com. Now let's look at the numbers. Net revenue was $16.8 billion. We had an EBIT-adjusted loss of $536 million, EBIT-adjusted margins of negative 3.2%, EPS-diluted adjusted loss of $0.50, adjusted automotive cash flow of negative $9 billion and ROIC adjusted of 6.4% on a trailing 4-quarter basis. In North America, as part of our ongoing transformation, Steve Carlisle was named President of GM North America. Steve demonstrated track record and particular experience of strengthening the Cadillac brand and will accelerate our progress in our very important North America market. We also created an innovation and growth organization that will be led by Alan Wexler, our newly hired Senior Vice President who will report directly to me. Alan is the former Chairman and CEO of Publicis Sapient, a digital business transformation firm, and brings decades of experience leading innovation and customer-driven technology solutions. Another positive development: the U.S. full-size truck and full-size SUV plants are currently operating at 3 shifts. To meet demand, we will add 200 employees in Fort Wayne effective September 1, which will increase our output by 1,000 units per month. We continue to offer customers a choice on how they want to do business with us. This includes using the Shop-Click-Drive tool where visits are up 50% this year, as well as our CLEAN program for those who prefer to physically visit our dealerships. Customers are now taking delivery of the first of our all-new full-size SUVs. Our Chevrolet and GMC dealers are selling every new Tahoe and Yukon they can get, and buyers are praising the new design and outstanding ride quality. The vast majority of initial Yukon sales are the highly profitable Denali. We continue launching new models through the summer, including the Chevrolet Suburban and the GMC Yukon XL. We've also begun building the highly anticipated 2021 Escalade. It's going well, and we anticipate starting regular production early. Among its industry exclusive technologies, Escalade's available Super Cruise offers new enhancements, including lane change on-demand functionality. Cadillac has generated the most consumer interest ever for the new Escalade with over 600 orders already on the books. In addition, the 2021 Chevrolet Trailblazer and Buick Encore GX small SUVs are new market opportunities for both brands. Both are gaining share every month, turning fast at dealers and attracting new and younger buyers. Nearly one-third of Trailblazer's buyers are 35 or younger, and Encore GX has quickly become the brand's highest-volume Buick, surpassing the Encore. In other North America highlights, GM was the highest ranked automaker in the J.D. Power 2020 Initial Quality Study. Our brands led in 6 segments, and 8 other models placed within the top 3. In addition, GM rose 3 spots in the J.D. Power U.S. Automotive Performance, Execution and Layout study or commonly referred to as APEAL. Our brands lead in 3 segments, and 9 other models placed in the top 3. GM Defense won a $214 million production contract to build, field, and sustain the Army's new inventory squad vehicle. It is based off of the 2020 Chevrolet Colorado ZR2 midsize truck architecture and leverages mostly commercial off-the-shelf parts. GM Financial, which performed well in the quarter, achieved 53% share of GM's retail business in the U.S. and has $24 billion in liquidity at quarter end. In June, we released our new OnStar Guardian app to select owners of GM vehicles. This allows them to bring the safety of OnStar outside the vehicle for the first time in its 24-year history and share access to the app with loved ones. So far, we've onboarded more than 7,000 customers and will soon roll it out to our entire GM owner population. Turning to our international operations. The business environment in China is improving. Following the deepest impact of COVID-19 in February, sales have been recovering month-over-month. Luxury, SUV, and MPV segments, we are well-positioned, are showing the greatest recovery. In the recent J.D. Power Initial Quality Study, GM's Yantai, Dong Yue North plant in China, which builds the Buick Envision, was ranked the highest automotive manufacturing facility in the world. Buick deliveries increased nearly 8% year-over-year, strengthening its leadership in the MPV segment with the all-new GL8 Avenir family. Its SUV portfolio will grow with the all-new Envision. Wuling sales grew nearly 10%, sustaining its leading position in commercial vehicles while strengthening its foothold in passenger entry. In South America, all manufacturing sites are operating in line with market demand, which remains below pre-COVID levels. We anticipate gradual recovery over time. To counter the impacts of the pandemic and macroeconomic conditions on our business, including FX, we continue to seek efficiencies, reduce costs, and capitalize on the market success of the new Chevrolet Onix and Tracker. Elsewhere in international operations, restructuring efforts continue. The Korea transformation is progressing to plan with the recent launch of the Trailblazer for export and domestic markets. Domestic sales were up more than 16% in the quarter. All of our Thai dealers have accepted the transition package, and we have reached an agreement with over 90% of our dealers in Australia and New Zealand. Now I'd like to shift and talk about our EV progress. Following our EV Day in the U.S. in March, the team continues to share our EV strategy with media and stakeholders in our global markets about our next-gen platform, Ultium battery technology, and EV portfolio. The positive coverage is encouraging, and we will host a Tech Day next month in China to demonstrate our progress in this important market. The team also showcased our EV technology and design this month during a visit by the U.S. Secretary of Energy. We were pleased to accept a Department of Energy award that will help us develop lighter, stronger, and less expensive battery enclosures. We are also making significant progress on our Ultium sales facility in Lordstown, Ohio with our joint venture partner, LG Chem. Site ground prep began in April, building foundation work started July 1, and crews will begin erecting building steel today. Also on track are the first of our upcoming EVs in North America based on our next-gen EV platform and Ultium battery system. The Cadillac Lyriq luxury electric SUV will be revealed next week; the GMC HUMMER EV, which we'll reveal in Q4; and the Cruise Origin AV that we've already shared. Lyriq scored the highest of any vehicle tested in our vehicle confirmation clinics. It was also the highest-rated in terms of exterior and interior appeal among vehicles, luxury and non-luxury, in the clinic data set. Our EV sales and portfolio are growing in China, with overall year-over-year deliveries in the first half of the year up by more than 25%. New entries with our JV partner include the Chevrolet Menlo, which is in early phases of launch, the all-new Baojun E300 and E300 Plus, which support DC fast charging and charge in an hour, and Wuling's first all-electric models, the Hong Guang electric minivan and the Hong Guang Mini EV. And last week, we launched the Buick Velite 7, Buick's first all-electric SUV. Turning to AVs. Cruise continues to put its test fleet to work, autonomously delivering more than 50,000 meals to people in need in San Francisco as part of the COVID-19 relief efforts. Cruise is making strong technical progress, and we're expecting some exciting updates in the second half of this year.

Thanks, Mary, and good morning, everybody. The second quarter was clearly one of the most challenging quarters in recent times, with production in North America down 8 out of 13 weeks due to COVID-19. Wholesale is down 62%. However, even under these conditions, we were near breakeven EBIT in North America, demonstrating the resilience and flexibility that we've built into the business over the past few years. We view these results as proof points of the strength of the business, specifically North American breakeven levels of 10 million to 11 million of U.S. SAAR, global free cash flow breakeven levels, excluding managed working capital, of 13 million U.S. SAAR. This quarter's performance also highlights our ability to move quickly to preserve liquidity and the importance of having a strong investment-grade balance sheet. Automotive liquidity continues to be very strong at $30.6 billion at the end of the second quarter. Retail sales have recovered from April lows to around 20% below 2019 levels at the end of the second quarter and trending better in July, even amidst a backdrop of limited inventories. We expect inventory levels to steadily recover from current levels, and we remain cautiously optimistic about the continued recovery in U.S. SAAR. Clearly, as you know, it's a fluid situation, and we're watching the infection rates across the country and its impact on auto demand very closely. Let me frame out the quarter's results for you. Q2 results of negative $0.50 in EPS-diluted adjusted includes an $0.08 gain from the PSA revaluation. Adjusted automotive free cash flow in the quarter was negative $9 billion. When you add the benefit of our planned liquidity actions, the total cash burn for the quarter was $7.8 billion, in line with the scenario of the burn of $7 billion to $9 billion that we provided in the last quarter. Let me give you a quick comparison of the drivers of our cash flow against the scenario that we provided. Contribution from vehicle sales, aftersales, and OnStar was $4.5 billion and was better than the scenario that I laid out last quarter. Monthly cash costs of $1.5 billion and CapEx of $1.1 billion were also better than expected. Working capital unwind of $5 billion was higher than expectations since supply chain constraints in Mexico pushed some of our North American production to later in June. Sales allowance unwind of $3 billion was at the high end of the scenario due to better-than-expected retail sales performance. China and GMF dividends of $900 million was in line with expectations. So when you put all of this together, excluding managed working capital, Q2 cash flow was a burn of $1 billion, which aligns with our breakeven scenario that we have talked about. It's important to note that we have implemented significant austerity measures in this extreme environment. And as such, this is not a quarter to run rate on a go-forward basis. Let me touch on the regions, starting with North America. While retail sales performance was down 24% year-over-year, retail market share of full-size pickups improved from 35% to 36.1% despite lean inventories. Our inventory levels remained lean at 480,000 units as of July 25 compared to 810,000 units at the end of Q2 of last year and 418,000 units at our low point in early June. We continue to rebuild our pickup truck inventories, which stood at 120,000 units as of July 25. This compares to 270,000 units last June and 87,000 units at our low point. We continue to take a number of actions to increase production and replenish dealer inventories. We have returned to a normalized run rate in all of our full-size truck plants and are matching supply with demand in our remaining facilities, building inventory where we need it the most. Our dealers are doing a great job of selling deep into their inventory, and there are many initiatives underway to optimize logistics so we can rebuild our inventory faster. We're also disciplined from a go-to-market standpoint with light-duty ATPs up over $1,000 per unit quarter-over-quarter. This is driven by low incentives as well as rich mix. Our full-size SUV launch is going very well, and we're able to take advantage of downtime in May to retool. This has allowed for a smoother transition and the opportunity to produce through the traditional July shutdown. While we're still experiencing ramp-up constraints due to simultaneous SUV launches at the same plant, working through July provided an opportunity to build units that would have otherwise been lost. The customer feedback to the new SUVs has been very strong, and the vehicles have a very quick average turn at the dealer lot, and the trim mix has been very rich as well. Our new heavy-duty trucks are also performing exceptionally well, with ATPs up $4,000 year-over-year and U.S. retail market share of 35%, up 5 percentage points year-over-year. We're also seeing a strong trim mix with Denali and AT4 mix of over 70% for the Sierra and LTZ and High Country mix of near 60% for the Chevrolet. As we mentioned in February, these strong launches will continue to serve as a tailwind to North American profitability. Let's move to GM International. China equity income in Q2 was approximately $200 million as the market showed signs of recovery, and we benefited from our recent launches. We also continued with our cost reduction measures. For H1, we achieved breakeven equity income despite the impact of the virus and the wholesales being down 32% year-over-year. Our sales continue to recover, and we expect to maintain the approximately $200 million quarterly equity income run rate. We expect China earnings to improve over time as we introduce new SUV and luxury models and benefit from an eventual industry recovery. We received $500 million in dividends from China operations in Q2 and expect the remaining dividends in the second half of this year. In South America, we experienced lower production related to the pandemic, and the FX environment has become more challenging. However, we're continuing to strengthen the business and take costs out. Our first 2 vehicles on our new platform, the Onix B car and the Tracker B SUV have been well received by the Brazilian market. These new vehicles have helped increase our segment share and are retail leaders in their respective segments. We're focused on channel mix in South America, taking a close look at entries and channels that do not achieve our margin objectives and redirecting volume towards profitable channels. Furthermore, we're continuing to take price, especially in Brazil, to offset the impact of FX. As an example, year-to-date, we've taken price increases of 10%, and competition is following. So we're really attacking this on the revenue side as well as the cost side, with all the austerity measures we've taken, which will get the business closer to breakeven. Let me make a few comments on GM Financial, Cruise, and Corp segment. At GMF, the actions we've taken to drive dealer traffic led to strong vehicle sales and U.S. penetration of 53%, up from 47% a year ago. GMF's $200 million EBT was lower year-over-year because of higher credit provisions and accelerated depreciation on the lease portfolio due to the pandemic. In Q1, we had talked about a 7% to 10% decline in used vehicle prices. Given the significant recovery in prices starting in the second half of Q2, industry consensus now points to a slightly stronger used vehicle price environment down 6% to 8%. And we continue to expect net charge-offs in the range of 2% to 2.5%, although towards the low end of the range if recent credit performance persists. We received the expected $400 million dividend from GM Financial in Q2. Cruise costs were $200 million for the quarter, consistent with expectations. And Corp segment costs were $200 million, including a $100 million favorable impact from the PSA investment. Quick update on our transformational cost savings initiatives. We achieved $3.8 billion since 2018, including $200 million in Q2, and we expect to achieve our target of $4 billion to $4.5 billion. On the cost front, zero-based budgeting has allowed us the opportunity to reevaluate our spending across the board. A significant majority of the austerity measures will normalize, as you can expect. We do think that some of these efficiencies will stick. It is too soon to put a dollar amount on that, but some examples include efficient marketing spending, reduced event expenses, and reduced travel and facilities expenses. Finally, looking ahead to the second half of 2020, as you know, the environment remains fluid, and it is difficult to provide official guidance in this backdrop. But let me frame up a scenario to dimension our profit and our cash flow. If you assume a 14 million U.S. light vehicle SAAR industry in H2, in which global production is not impacted by plant shutdowns or shift reductions and we do not experience a significant supply disruption and we rebuild dealer inventory to be in the neighborhood of 600,000 units by the end of the year, we can expect second half total company EBIT adjusted to be in the range of $4 billion to $5 billion, with Q3 slightly stronger than Q4 due to holidays in November and December. In this scenario, we expect to generate free cash flow of $7 billion to $9 billion in H2, assuming a working capital and sales allowance rewind of approximately $5 billion and CapEx of approximately $3 billion. The H2 scenario demonstrates the ability to recover a meaningful portion of the H1 cash burn. Keep in mind, this is a scenario, not guidance, and these factors are inherently difficult to predict given the volatility in demand and production timing as well as levels. As you know, there are a number of factors such as inventory build, managed working capital rewind, and austerity measures that will make it difficult to use this scenario to extrapolate into 2021. But we're confident in the fundamentals of the business. And in a normal environment, we would expect the cash flow generation potential of the company to be strong as we keep funding the investments in our future. It is also worth noting that the deferment in CapEx spending this year will lead to retimed spending into 2021. However, over the 2-year period, we expect to still stay within our CapEx target. So in summary, our Q2 results were significantly impacted by the pandemic, but we're demonstrating how well we can perform through a challenging time. Our focus on cash flow and the steps we've taken to improve the breakeven have certainly helped improve the resilience of the business. We continue to be laser-focused on execution and generating strong performance that will position us to win in the future of mobility. This concludes our opening comments, and we'll now move to the Q&A portion of the call.

Dhivya, could you clarify your last comment regarding the EBIT for the second half? Is that related to auto EBIT or total EBIT? Additionally, could you provide more detail on the expected EBIT for North America in the latter part of the year?

So Joe, it is total company EBIT. So it includes auto as well as GMF. I don't want to put a specific North America number to it, but it's safe to assume that, with a 600,000-unit dealer inventory position by year-end, I think that gives you enough data points to model North America in specific.

Okay. You mentioned cash flow in the second half. I recall you mentioning the possibility of repaying the revolver of $60 million. So, with $16 billion, it seems that if that happens, you'd return to net cash balances similar to the second quarter of 2019, before the strike and COVID. Is there anything I'm overlooking? Are there any other factors we should take into account?

I think you're directionally correct. If you think about the first half of the year, we burned $10 billion between Q1 and Q2. And based on the scenario that I provided, in the midpoint of the range of the $7 billion to $9 billion, you can see that we're recovering a bulk of the burn in H1 of the year. So as we build the cash balance back towards our target level, Joe, that's when we would expect to pay back the revolver. Obviously, as you know, there's a ton of uncertainty that's out there. So it's important to note that it's based on the backdrop and all the assumptions that I talked about.

Okay, Mary, you often discuss your electric vehicle and Ultium architecture, and it seems you are quite confident and enthusiastic about it. I know you have a partnership with Honda regarding this. However, we are observing many other companies attempting to enter the electric vehicle market or automate their offerings. I'm curious if you would ever contemplate the idea of evaluating the risks and opportunities of selling kits to potential competitors.

We believe scale is important, and we are very confident and enthusiastic about our Ultium battery platform and cell technology. We are one of only two companies currently producing battery cells in this country for the automotive industry. Additionally, we have a joint development agreement with LG Chem, alongside our research and development efforts. We have indicated that during the early stages of launching our new Ultium platform, we will achieve costs at or below 100. This is just the beginning of our plans to reduce costs in battery cell technology. As mentioned, we have a partnership with Honda to utilize not only our Ultium cells but also our platform, and we assess each of these opportunities on a case-by-case basis. We believe this will be an additive approach that enhances shareholder value without negatively impacting our core business. We will definitely safeguard our truck franchise and will carefully evaluate other key franchises. We remain open to possibilities as we move forward, as we believe we possess leading technology.

Just a first question on the strength in pricing in the quarter. I mean, obviously, with inventory relatively tight, that should have aided that. So I think that, that might be part of it. But just curious how much of that price increase you think is sticky, how much benefit you'll get as the SUVs launch. And then also, if you think about the relatively tight inventory right now and today, you're talking about getting back to 600,000 units, which is still relatively tight through the end of the year, might you consider a leaner inventory level going forward to support pricing?

Yes. In the quarter, both carryover and our major products contributed to positive pricing. On the major product side, we're launching our Trailblazer and Encore GX, which have been well received and are positively impacting our net pricing. On the carryover side, we're seeing this across the board, especially with full-size pickups where we’ve managed to maintain pricing levels. Looking ahead, we will adjust our inventory to match the conditions of the SAAR environment. It’s important to carefully navigate what the competition is doing, our own inventory levels, and the balance between market share and profitability. This is something we oversee on a quarterly basis, and we will continue to do so for the second half of the year and beyond.

That's helpful. I have a second question regarding the $1.5 billion in cost savings for the quarter. If I recall correctly from the press release, this brings your total up to $3.8 billion, which means you are progressing well towards the $4 billion to $4.5 billion target. I'm curious about how much of this savings might be temporary and if there's potentially more to achieve. It raises a question about semantics and timing. As you continue toward the goal of $4 billion to $4.5 billion, I wonder if there will be additional savings down the road. Or are you reaching a limit on how much further you can go with cost reductions? It’s quite impressive, and it seems you might be nearing the limits at this point.

Yes. The $3.8 billion savings mentioned are permanent, part of what we announced in November 2018, and we are progressing towards the $4 billion to $4.5 billion range we discussed. Therefore, I consider these savings to be more permanent. Additionally, the austerity savings implemented in the second quarter due to the pandemic need to be viewed in two categories. Firstly, there will naturally be a normalization as production increases. For instance, the salary deferrals we've recently mentioned are being restored to their original levels; these were temporary. As production normalizes, most of that will return. We are also examining areas like marketing, event expenses, and travel from a zero-based approach to find further efficiencies. While it's hard to assign a specific dollar value, it's clear from our recent quarter performance that we are committed to finding cost efficiencies wherever possible.

Okay. And then just lastly, on the OnStar discussion, I mean, moving it towards an app on the phone that's available outside the vehicle seems like you're taking this more and more in sort of a stand-alone direction. Just curious really what that means, if it's going to be available to folks outside of the GM family. And could this be a precursor to a potential separation at some point down the line?

So John, I think what we're really looking is at leveraging the full power of OnStar and the connectivity we have, the relationship we have with first responders throughout the country, and we think it's a very additive business. There's a lot more that we plan to do, building on OnStar that will be integrated with the vehicle. So we'll look at both paths but have nothing to talk about related to the separation.

So please bear with me on the first question. The General Motors brand has a history of 111 years. Why not change the company's name? General Motors has fulfilled its purpose, but I am curious if it may not align with some of the innovative directions you're pursuing. Why not rename the entire company Ultium? I have a follow-up question as well.

Thank you, Adam, for your input. When considering a name change, we are willing to make necessary adjustments to enhance shareholder value because I have strong faith in our technology and future product plans related to electrification. We evaluate the timing and the factors that will make it significant, and we are confident in our future in electric vehicles.

Thank you, Mary. I have a follow-up question. There's a lot of investor enthusiasm surrounding the fast-growing electric vehicle market, which has a 20% compound annual growth rate, while the traditional automotive sector, experiencing a decline of about 5%, is not generating the same excitement. The valuations of companies focused on the high-growth market are astonishing; for example, Rivian is valued higher than GM despite not having produced a vehicle yet. Considering GM's strong performance and guidance in difficult conditions, it seems the market is not responding positively. From your perspective, what do you think is the main reason for this significant disconnect? You are the CEO of a company many investors see as a great opportunity, myself included. What do you believe is the primary reason for this gap, and what actions can GM take to change this perception dramatically?

And so when I look at all the attention on some of the companies that you mentioned, I think it's a validation of the importance of the electrification strategy. I think as we move forward, people will see all the strengths we bring as it relates to scale manufacturing capability, the technology that we're bringing, leading battery costs. So we've got to keep telling our story. We've got to deliver, and that's exactly what we intend to do. We have the Lyriq announcement next week, which is one of the highest clinic vehicles I've seen in my 40-year career from a customer perspective. We have more to share very shortly on the HUMMER and as I said, the reveal in the fourth quarter. The battery plant is raising steel today. So we're just going to keep delivering and demonstrate that we have products people want to buy.

Dhivya, I think you mentioned this in the outlook commentary, but how much roughly of the working capital and accrued do you expect to recover by year-end, even if we go back to last year's strike?

Yes. We are projecting a recovery of approximately $5 billion in working capital and sales loans. We haven't fully recouped from the cash burn we experienced in the first half concerning working capital, but this will improve as the industry stabilizes. To put it in perspective, at 17 million units, if working capital is roughly neutral and considering the cash burn from the first half of the year, as we approach 17 million units, it will be a gradual return to neutral levels. Additionally, this is influenced by the timing and volume of production.

Great. That's helpful. I'm curious if you're seeing any signs of weakness in retail demand globally, nationally, or by region, considering the recent COVID situation and rising cases.

No, not really, Itay. We're cautiously optimistic as we see month-over-month improvement in China, as we see continued improvement in the United States and North America, and we expect a bit slower recovery due to the severity of COVID in South America.

Okay. And then just lastly, Mary, I know in the past, we spoke about and you've spoken about the opportunity for EVs to deploy them on rideshare networks. And wondering if there's any updated views on that, particularly with one of the rideshare companies in the past few months committing to an all-EV fleet by 2030. Just curious if there's any other updated thoughts around how you might look to deploy EVs on rideshare networks?

I think that's an opportunity for us. And I don't have anything specifically to announce today, but very much an opportunity.

The performance in North America is really impressive. When examining the year-over-year change in EBIT relative to the change in revenue, it appears that the decremental margin is around 19%, with a decline in EBIT of $3.1 billion on $16.7 billion in revenue. In contrast, operating leverage has typically been higher in previous quarters. This situation seems to stem from the $1.4 billion in costs or $1.3 billion in performance in this quarter. Can you provide a breakdown of that cost improvement to help us understand how much of the cost cutting involves expenses that won't need to be reinstated as volume increases versus other cuts that may not be sustainable?

Yes. It's difficult, Ryan, to put a dollar amount on this, but a portion of the cost in the bridge, I would say, is timing, call it, about $500 million or so, which will get retimed into a different time period, maybe H2 or into next year. And I think as you think about margins though, what you're seeing really in North America is quickly being able to flex our cost structure but also the product trend as well that we're seeing. As you think about future margins for North America, we're going to have the launch downtime behind us from both an SUV and heavy-duty perspective. Last 3 years, if you think about it, we've been taking downtime to change over the entire portfolio. So as you go forward here, you think about lack of downtime, whatever sticks from a cost perspective on efficiencies and continued execution of the transformational cost savings. So you see some tailwinds here, and this quarter certainly demonstrates that you're seeing what the earnings power of North America can be.

Okay. Great. And then if you would just sort of add it all together, when you take the, I don't know, learning to be leaner and then the costs that do need to come back and maybe considering also any sort of post-COVID costs such as PPE for your employees or supply chain compression, would you say that your outlook today for long-term GM North America margin of 10% plus is lower, higher or unchanged relative to prior to coronavirus?

I would say it's unchanged. We are focused on safety and providing the right equipment, and I believe we've been able to do that very efficiently along with other COVID-related costs. I anticipate more cost opportunities as we move forward.

So Mary, when you look at the high market valuations and cheap access to capital of some of these electric vehicle companies we spoke about earlier, some established ones, but also many unproven start-ups, can that make you consider spinning off GM's electric vehicle operations and capability into a separate stand-alone entity? There seems to be large investor appetite for such assets as we discussed before. But this cheap access to capital has frankly also become a strong competitive advantage for some of these companies.

Emmanuel, we are evaluating and always evaluate many different scenarios, so I don't have anything further to say other than we are open to looking at and evaluate anything that we think is going to drive long-term shareholder value. So I would say nothing is off the table.

Okay. I guess are there any technology or other sort of impediments or the way sort of like things are integrated together, makes it complicated? Can you just talk a little bit about sort of like the factors that come into consideration?

I'm not sure I heard your question clearly, but I think you asked about any potential challenges. I don't view things as challenges. Instead, I focus on how to maximize value creation. There are several different costs we're considering. It all begins with strong execution and enhancing our technical capabilities, along with our supply chains and manufacturing capabilities. Therefore, I don’t really see any specific challenges.

Okay. And then for Dhivya, I was hoping to put your second half scenario, EBIT scenario in historical context. Obviously, it's a very strong outlook under that scenario. But at the same time, historically, there's been many half years where GM has done as well or better, first half of 2019, first half of '18, second half of '18. But since then, you've taken out a tremendous amount of cost. And yes, the market is much lower, but your truck production is expected to be running all out. The pricing is great for the product that really matters for GM. It feels like there's a lot of upside versus back then. So can you maybe just put into context with puts and takes?

Yes, definitely. In the second half of the year, there will still be some challenges, particularly with wholesales decreasing compared to what might have been a typical adjusted second half last year. This largely depends on where the industry finds itself and our capability to recover production fully. Additionally, GM Financial is forecasting a decline of 6% to 8% in used vehicle prices and an increase in consumer losses. If we hit the more favorable end of that forecast, there could be some opportunities for GM Financial. Although production is currently running at full capacity, it has not yet returned to the levels we experienced before COVID-19, particularly in certain international markets discussed by Mary. We may continue to see production levels that are below pre-COVID times. To sum up, for a normal second half, we would need to avoid downtime, achieve production levels that are back to normal, and see credit losses and used vehicle prices stabilize.

So maybe you could talk about the margin implications for the company as the mix shifts towards EVs in the near and intermediate term. And are there any milestones investors should be monitoring in order to gauge when the shift to EVs will be neutral to your margins? Some milestones in terms of where battery costs may need to be or certain volume of EVs that the company may need to ship?

Well, as I've mentioned, we start rolling out off of our Ultium platform and cell system next year with the HUMMER EV and then continue. And early in that life, we think we're going to get to 100 and below, and then we have a fairly rapid plan to continue to take cost out. So I think it will happen over the life of that program that we'll be able to see the costs and depending on the ICE powertrain, get to a parity point through that generation.

That's helpful. And my follow-up question was around this down 6% to 8% used vehicle pricing that, Dhivya, you had mentioned. Can you talk a little bit more about how GM is coming up with that? I think some of the investors observed used pricing coming in stronger than that more recently. So just some context to how you're thinking about used pricing within that number that you quoted would be helpful.

Yes, that’s a great observation. We are experiencing a strong recovery after reaching a low point in April, and we intend to adopt a more cautious approach. There are a few reasons for this. First, the overall economic environment remains uncertain. Additionally, we typically see seasonal trends in the latter half of the year. There is an increase in off-lease inventory resulting from the lease extensions observed in the first half. Rental car companies are reducing their fleet size. Furthermore, new vehicle inventories are beginning to rise, as previously mentioned. Considering all these factors, we believe it is wise to be conservative. However, if we continue to see robust performance in used vehicle prices like we have in recent months, it would indicate a potential positive variance from my earlier comments.

Dhivya, could you clarify a few points regarding the scenario you presented for the second half? You mentioned EBIT of $4 billion to $5 billion in that period. Considering GM International, GMF, Cruise, and Corporate could be around $1 billion negative, does that suggest North America would contribute $5 billion to $6 billion, accounting for some inventory and a cost structure that excludes temporary expenses? Is that correct? It appears that would include approximately $1.4 billion to $1.5 billion for inventory build-up, leading to around $3.5 billion to $4.5 billion in a market of 14 million units. Does that seem like a reasonable interpretation?

Rod, it's challenging to evaluate this by region due to the complexities involved. However, I believe you’re asking about the potential normalized underlying free cash flow of the company. To put it simply, earlier this year, we anticipated a 17 million SAAR environment and projected $7 billion in free cash flow. Last quarter, we also indicated that a 13 million U.S. SAAR would be our break-even point for free cash flow on a global scale. This provides a framework for understanding free cash flow variations based on demand scenarios. The main point to highlight is that the company’s cash generation potential remains strong, comparable to pre-COVID levels. Keep in mind there may be quarterly volatility tied to production, working capital, or sales allowances. However, when we look at the overall changes since pre-COVID, the business has remained robust, with significant product launches successfully completed. Furthermore, austerity measures, as Mary mentioned, may positively affect the bottom line. Our focus on cash conversion has been ongoing for a couple of years, and we continue to make progress in that area, including increased dividends from GMF. Overall, I would say the business is solid, which should inform your interpretation of the scenario numbers I provided.

Okay. Yes, it's clear that you mentioned a range of $2 billion to $4 billion in the second half, excluding working capital but including some inventory build. How should we approach this given that the macroeconomic environment will be the primary factor in the variance from this year to next year? In terms of items under your control, you've quantified Thailand and Australia at about $400 million. You also suggested that you could bring South America closer to breakeven. How should we consider these factors as we look ahead to next year?

Yes. I'd say, macro aside, the key tailwind will be the product downtime that I mentioned earlier. You saw that in each of the last few years, and we're not going to have that. We're going to have a full year of COVID sales. Adjacencies have been growing, as you've seen, both from an OnStar as well as an aftersales perspective. That's going to continue into 2021. And the GMI restructuring is on track with the actions we've already announced. South America, as I mentioned, we've been inching towards both the breakeven with both the revenue side as well as the cost side. Again, I won't put a timeline on it, but it's all hands on deck from a South America perspective. So from a controllable standpoint, I would say we are on the right side of all of those initiatives in all the regions. And as we look into 2021, from a cash flow standpoint, I think all of those will serve us as our stronghold for next year.

Okay, great. Lastly, could you address the current status of the China business? You noted in your prepared remarks that luxury appears to be recovering, but Cadillac still seems to be underperforming the market based on last quarter's data. What is your perspective on that market right now, and what are your thoughts on the prospects moving forward?

I believe there is an opportunity for us to continue improving that business. While we are facing ongoing pricing pressures, we have a strong schedule of new launches, which I highlighted earlier. We also resolved the issue by adding the 4-cylinder engine options, which I think had limited our progress towards the end of last year. Adding these four cylinders is crucial. Additionally, the region remains very disciplined with costs. Looking at Buick's strength, we've noted progress in Cadillac, and I share your belief that we can achieve more. Therefore, I see potential for growth. This year, we anticipate maintaining approximately $200 million per quarter based on our current trajectory, but I believe there is an opportunity for even greater growth moving forward. Furthermore, considering the recovery of the market and its potential to reach around 30 million units alongside our planned NEV portfolio, I think there is even greater potential for growth and profitability in the medium term.

Yes. A couple of questions. So if we think of a chart you used to put out sort of in the 2012, 2013 period, you showed North America fixed cost base. If I just do the math of subtracting about $10,000 per vehicle of variable contribution from your $11 billion of revenue, I get to sort of $8 billion of cost times 4 is $32 billion. Can you update us on a couple of things? A, is that in the ballpark for your new fixed cost bases in North America? Two, of the cost reduction, how much was the fixed cost and how much was things like supplier price concessions or redesigning the bill of materials and so forth?

Yes, Brian, the figure you mentioned is likely on the higher side; I'd estimate it's lower. This is influenced by the actions we've implemented for transformational cost savings. Looking back to the 2012 and 2013 period you're referencing, we've continually been removing fixed costs from the system. I believe you can adjust your number down since the transformational cost savings are not as significant to reach a lower figure. Regarding your second question, many of the cost-saving measures focused on fixed costs. For instance, marketing expenditures typically categorized as fixed costs were reduced. Additionally, salary deferrals and other pay-related expenses also fall under fixed costs and were lower, along with reductions in travel and miscellaneous expenses, which are usually fixed costs as well. It's less about squeezing out more variable concessions and more about the austerity measures I mentioned. I hope that helps.

And as we kind of go into '21, assuming things somewhat normalize in the world, how much of those fixed costs come back?

That's the challenge, I'd say. The transformational cost savings rely on being permanent, and we will continue to aim for the $4 billion to $4.5 billion range, likely leaning towards the higher end. As we restore activity, regular austerity measures, whether related to salaried or hourly pay, will have to be considered. We also need to evaluate what we can do to ensure those fixed costs remain manageable. When we provide guidance for 2021 and offer more details then, we'll discuss the cost environment further. However, from a numerical perspective, it's just too early to provide a clear picture.

Okay, and then just a final question. Regarding GM Financial, delinquencies are in good shape, but across the consumer finance industry, there are forbearance agreements in place with customers. Can you provide an update on where GM Financial has concluded forbearance and the associated risks to delinquencies as we move further into the fall?

Yes, everything has been progressing well. We noticed a slight increase earlier in the quarter around April. However, in the latter half of the quarter, the numbers began to decrease again. We have been monitoring all these figures closely, including late fees and payment deferrals. Across the board, these metrics are declining from the peak observed in April and moving back towards normal levels by July. We are, of course, taking a cautious approach.

So first, just wanted to ask a question on inventory levels. I know you're saying a target of 600,000 by year-end. But if I look at the 2018, 2019 period, your typical month-end inventory was typically around like 800,000 units. And I know we're not in a 17 million SAAR. But what's a fair rebuild to assume over time beyond year-end? I assume that the 600,000 does reflect production constraints and isn't a target inventory per se.

Yes. So 600,000, to your point, is based on a second half environment of closer to 14 million light vehicle SAAR that I alluded to. So we will calibrate this based on the demand level that we see. And to the extent that the industry is trending stronger, we will look to get back to the levels that are in the range, I would say, of what you just alluded to. Clearly, from a truck standpoint, we will be limited by production capabilities since we're already running all out. And we are taking all the measures we can to increase or add to production levels on trucks as much as possible. And I think if we calibrate it to an appropriate industry level, you will see that 600,000 number start to go back up again.

Okay. Great. As a follow-up, you mentioned reaffirming the North America EBIT breakeven and the SAAR of 10 million to 11 million. You've just achieved total company breakeven with your North America volume down 60%. A SAAR of 7 million, which is down 60%, is significantly better than the 10 million to 11 million you mentioned. So why isn't your breakeven better than the 10 million to 11 million you highlighted? Considering the stability of the mix, is there a possibility to achieve a 10% margin in a SAAR environment below 17 million? Is there something we're overlooking? Is it just related to the EV development expenses coming into play? What are we missing?

In this quarter's results for wholesale in SAAR, wholesales decreased by 62%, indicating a SAAR of around 7 million units. This is significantly better than the anticipated 10 million to 11 million units because we implemented extreme austerity measures as production effectively halted. If the downturn were more typical, we would need to consider how much we could still leverage these measures while production is ongoing, and we believe some would be challenging to implement under normal conditions. The level of austerity we can apply will depend on the nature of the downturn. Additionally, this quarter saw strong pricing performance. With low inventories, both carryover pricing and new vehicle pricing remained robust in this environment. You'll need to share your assumptions about a typical downturn to determine if pricing can sustain at this level. We are committed to reducing our breakeven point and are not settling at the 10 million to 11 million range; we plan to push that down further. However, we are not using this unique situation to formally adjust our breakeven point at this time, although we will strive to do so as much as possible.

Okay. If I could just squeeze in one more on the product side. Can you just talk about your presence in off-road? We're obviously seeing a lot of excitement given the product actions of some of your competitors. So how much of a priority is off-road for you? And what are your plans with AT4? Would you expand AT4 beyond GMC to the Chevy brand?

I think we look at each brand and are continuing to build on our off-road offerings in GMC as well as Chevrolet. And then I think when you look to HUMMER, you'll see a true capability there as well. So we think it's very important. It's important to customers, and we'll continue to expand our offerings.

Fantastic results, everyone, and thank you for the framework for the second half. I have a quick question—one strategic and one numerical. In light of some other discussions on electric vehicles, you have 12 upcoming models. However, many in the industry believe these may represent only minor progress rather than significant breakthroughs, especially in design. We also find it difficult to identify one of these vehicles that could reach sales of over 100,000 units. Can you share your thoughts on GM's chances of launching a successful high-volume electric vehicle program compared to introducing a new product that reflects a broader portfolio approach to electric vehicles?

If you take a moment to consider what we presented at our EV Day in March, you'll see that with our new Ultium cell and platform technology, we have our battery electric truck offerings, our mainstream BEV, and our BEV plus which allows for more expressive vehicles. There is significant sharing among these three platforms that form the foundation of our upcoming portfolio. We have a comprehensive plan to address high-volume segments. Starting with the Cadillac Lyriq and our planned truck portfolio, we intend to participate significantly in the market. You will see our design and technology reflect what customers want and expect, generating excitement.

But Mary, is it fair to say that it's more of a portfolio approach that really no one vehicle is going to lead the charge in terms of a high number of units?

No, I don't think that's correct. I think that we have some entries that are in the sweet spot of key segments that are large segments, and we intend to get our fair share plus more. So it won't be on the fringes. It will be mainstream.

Yes, there are several components to consider. The production of trucks and full-size SUVs will positively impact the mix. I'm uncertain if you're referring to the adjusted or unadjusted '19 numbers due to the labor disruption. However, regarding volume, we expect to see an increase in full-size SUV production, which is favorable for the mix. Additionally, we are observing a strong trend in trim mix, particularly with AT4, Denali, LTZ, and High Country models. When these high-trim options perform well, they usually represent more profitable vehicles, contributing positively to the mix. Therefore, both vehicle mix and trim mix, driven by full-size trucks and SUVs, should generally support favorable mix outcomes in the upcoming quarters.

Again, thanks, everybody, for joining today. We recognize that we're at a critical point for General Motors, our company. We know from an industry perspective and frankly, the world, as you look at the virus. We are committed to leading through the current challenges and into the future to provide a very strong future. We are determined to run the business in a way that creates the value our shareholders deserve and with outstanding vehicles. For those who attended our EV Day, the comments we had on the design and technology coming was very, very strong. We need to continue to share that much more broadly, and we will. And we also are very focused on technology and having customer-centered innovations like Super Cruise, which is an important step as we bring self-driving vehicles to market. I hope you understand we are very focused on our work from an EV and an AV perspective and believe that will deliver not only growth but profitable growth, and ultimately help us achieve our vision of creating a world with zero crashes, zero emissions, and zero congestion. And I know many of you are eagerly awaiting to see more of our EV plan. So in addition to the launch that we have next week on the Lyriq, at 11:00 a.m. today, we are posting a video to our IR and media websites spotlighting the upcoming GMC HUMMER EV. It's not a complete reveal, but it's more information, and we believe it is truly the world's first super truck. So we hope you'll take some time to take a look. And thank you again for your time.