General Motors Company (GM) — Q3 2020 Earnings Call Transcript

Thanks, Erica. Good morning, and thank you for joining us as we review GM's financial results for the third quarter of 2020. Our press release was issued this morning, and the conference call materials are available on the GM Investor Relations website. We're also broadcasting this call via webcast. I'm joined here today at GM's Tech Center by Mary Barra, GM's Chairman and CEO; John Stapleton, GM's acting CFO. And on the line, we have Dan Berce, President and CEO of GM Financial. Before we begin, I'd like to direct your attention to our usual forward-looking statements on the first page of the chart set. The content of the call will be governed by this language. I'll now turn the call over to Mary Barra.

Thanks, Rocky, and thanks, everybody, for joining the call today. This morning, I'll cover a few key areas of the business. I'll start with a brief snapshot of our record third quarter earnings, and then I'll follow with a more in-depth look at the rapid progress we're making in electrification. I'll wrap up by touching on our regional businesses, and then John will provide a deeper look at the numbers before we go to your questions. But before I do that, I know everyone on the call is closely watching and waiting for the final vote count in the U.S. presidential election. From our perspective, General Motors is ready to work with whichever candidate is certified as the winner, along with their administration and the new Congress. We will continue to invest in our U.S. operations and pursue our growth initiatives, especially in the areas of electrification and autonomous vehicles. I also want to take a moment to recognize the tireless efforts of our employees around the world. Whether working remotely or in the workplace, they are keeping our programs fully on track, building every vehicle they can safely and with quality. In addition, our suppliers are moving mountains to keep their operations open so we can keep production going, and our dealers are embracing creative new ways to interact safely with our customers for service parts and sales. That has truly been remarkable and inspiring to see how everyone has come together to safely restart our operations with the health and safety of our teams and our customers as the number one priority. Our multilayered approach to COVID-19 safety has proven effective in preventing the spread of disease around all of our facilities. Where our protocols are followed, they are working. This is an extraordinary effort, and our continued focus on employee health and safety has been important as economies begin to recover around the world. Finally, I'm very pleased to share that GM Canada and Unifor have reached a tentative agreement on our new labor contract, which is very good news for our team, our customers, our dealers and our investors. As you know, we have been operating our full-size pickup plants around the clock to meet exceptionally robust demand for the Chevrolet Silverado and the GMC Sierra in the United States and Canada. The fact is we simply can't build enough. Because we expect demand to remain strong, we must increase our capacity. That is why, subject to ratification, GM plans to invest approximately CAD 1 billion to bring full-size pickup production back to the Oshawa assembly plant while making new investments at St. Catharines propulsion plant and the Woodstock parts operation. We will move very quickly. We expect construction to begin on the new body shop and flexible assembly module at Oshawa immediately upon ratification. When the plant comes back online in early 2022, we will see a significant increase in our full-size pickup production capacity. We look forward to sharing more details about this plant after ratification, which should occur over the next several days. Now let's turn to our Q3 results, which were driven primarily by the success of our safety protocols around the world; a stronger and faster-than-expected industry recovery in the U.S. and China; strong U.S. retail sales and market share, especially for pickups, with higher pricing and disciplined incentives; and the successful launch of our all-new full-size Chevrolet, GMC and Cadillac SUVs. We also clearly benefited from austerity measures we implemented in response to the pandemic and the ongoing transformational-related cost reductions. Looking at the numbers. We delivered net revenue of $35.5 billion, EBIT-adjusted of $5.3 billion, EBIT-adjusted margin of 14.9%, EPS diluted adjusted of $2.83, adjusted automotive free cash flow of $9.1 billion and a ROIC adjusted of 9.7% on a trailing 4-quarter basis. These results are providing capital for our EV and our AV growth initiatives, and they demonstrate the underlying strength and resiliency of our business. This year and this quarter, in particular, you can clearly see how we are rapidly transforming our company to lead in EVs by leveraging our iconic brands, technological innovation, manufacturing capability and scale in a way that will change the way customers and our investors view our company. The foundation is our flexible and highly scalable Ultium architecture, battery and propulsion system, which have empowered our designers and given them free rein to reimagine our approach to interior and exterior design. You can see this in the powerful, distinctive and beautifully executed vehicles like the GMC Hummer EV and the Cadillac Lyriq. The simplicity of Ultium and the use of virtual engineering have made us more agile. From inception to production, the Hummer EV represents the fastest vehicle development program in GM's recent history. We took reservations during its reveal, and demand exceeded our expectations. Our manufacturing strategy is also coming into sharper focus. Construction of the Ultium Cells LLC manufacturing facility in Lordstown, Ohio, where we will make battery cells with our JV partner, LG Chem, is ahead of schedule. We've begun the hiring process and will add a total of 1,100 jobs to the local economy. We have also announced plans to have 3 plants producing EVs, Factory ZERO in Detroit-Hamtramck, Orion Assembly in Michigan and Spring Hill assembly in Tennessee. During the quarter, we shared even more detail about our road map to deliver EV costs comparable to internal combustion engine vehicles. For example, all of our future EVs will draw from a family of 5 interchangeable drive units and 3 motors known collectively as Ultium Drive. We will be the first automaker to use a wireless battery management system for production of electric vehicles, with expanded over-the-air updates provided by GM's all-new vehicle intelligent platform. The system will be upgraded over time with new software-based features via smartphone-like updates. The system also reduces the cost and weight of wiring. Looking ahead, we'll continue investing in advanced battery chemistry to drive even greater range at a lower cost for our customers. We look forward to sharing even more details about our EV portfolio and competitive advantages at the Barclays Global Automotive Conference on November 19. Among the strategies that will help us move quickly are the partnerships we have forged with companies like Honda and EVgo. In September, we signed a nonbinding memorandum of understanding with Honda to collaborate on several vehicle segments as well as on purchasing, research and development and connected services. These efficiencies will help both companies fund future mobility innovations. And to address the entire EV ecosystem for our customers, we will collaborate with EVgo to build more than 2,700 public fast chargers over the next 5 years. Before we move on, I'd like to provide a comment about Nikola. As you're aware, we've been in ongoing discussions with Nikola about a commercial transaction. The transaction has not yet closed, and we will provide further updates at the appropriate time. We are exploring all opportunities to commercialize our Ultium battery system as well as the Hydrotec hydrogen fuel cells we have developed with Honda. We have invested heavily in developing and manufacturing fuel cells. Commercialization of our Ultium battery system and hydrogen fuel cells reflects that commitment and our commitment to a zero emissions future. Cruise, our majority-owned self-driving subsidiary, continues to make progress with its technology and the launch of the Cruise Origin shared autonomous vehicle, which will be built at Factory ZERO. We've begun testing the Origins' Ultium battery system at our Milford Proving Ground, with preproduction vehicles coming next year. By the end of the year, Cruise AVs will be tested in San Francisco without backup drivers after receiving the go-ahead from the California Department of Motor Vehicles. This is a significant milestone because Cruise will be the first company to test autonomous vehicles with no backup driver in a dense and complex urban driving environment. In the coming months, GM and Cruise intend to file an exemption petition with NHTSA to deploy Origin vehicles without steering wheels or pedals. We have withdrawn an earlier exemption petition that was limited to earlier-generation Cruise AVs derived from the Chevrolet Bolt platform. The Cruise team is working with a Harvard-trained epidemiologist and using research from various health organizations to identify measures that may help maintain a healthy ride environment. Now let's take a look at our regional businesses. In North America, we gained retail market share and drove higher average transaction prices with lower incentives. Our truck and full-size SUV plants are safely operating on three shifts, building every vehicle possible. Our dealers are doing a great job of maximizing sales and share despite tight supply. They are using GM-developed software that helps them order the highest-demand, fastest-turning vehicle build configurations. Customers' response to our all-new full-size SUVs continues to be enthusiastic. Combined average transaction prices for the Chevrolet Tahoe and Suburban, the GMC Yukon and Yukon XL are 14% higher than outgoing models and the three closest competitors. Media reaction to the 2021 Cadillac Escalade, which is now arriving at dealerships, has been outstanding, with journalists citing its craftsmanship, comfort and technology, including its 38-inch OLED display. And like all of our full-size SUVs, we're selling every Escalade we can build. This is Cadillac's first Escalade with available Super Cruise technology. For the second time, it decisively led all other active driver assistance systems in recent consumer reports testing. Over the next three years, Super Cruise will be available in 20 models across our brands. GM Financial delivered record results in the quarter. Since its inception 10 years ago, GM Financial continues to grow its share of the financing business for both dealers and retail customers with very high levels of customer satisfaction. Moving to our international operations. In China, the industry continues its recovery from the impact of COVID. GM China deliveries in the quarter grew 12% year-over-year. It is the first sales increase in 2 years and in line with overall growth we're seeing in the industry's passenger vehicle market. The luxury, mid-size and large SUV and multipurpose vehicle segments, where our launches have been focused, experienced the strongest growth. Importantly, year-to-date sales of our new energy vehicle portfolio have more than doubled compared to last year. The Wuling Hong Guang mini EV became the best-selling EV in China during the quarter. In the next five years, more than 40% of our new launches in China will be new energy vehicles. And before I turn it over to John, I have two more things to share. First, if our current recovery continues, we anticipate reinstating a dividend at the appropriate level that balances various capital allocation priorities, including our investments to accelerate EV. We know this is a high priority for our shareholders, and we're looking at timing around mid-2021. And finally, I want to welcome Paul Jacobson, our new CFO, who is joining us from Delta, on December 1. Paul will be a great addition to the GM senior team. At Delta, Paul led a global finance organization that is widely recognized as the best in the airline business. He and his team helped the company build a strong culture of teamwork and inclusion and deliver best-in-class customer experience, operational and financial excellence and disciplined capital allocation. Paul is committed to transforming this company. His experience and insights will help us accelerate our momentum, rapidly build scale for our vehicle electrification and autonomous technologies, and position GM to deliver a world with zero crashes, zero emissions, and zero congestion. I also just want to personally thank John for all the work he's done as he did double duty for General Motors being the CFO for North America as well as the Corporate CFO. He did an outstanding job and should take full credit for the results in the quarter. I am grateful for his strong leadership, and I know he's anxious to return to operations and to continue to drive the strong performance in North America. So John, thank you very much. And now I'll turn it over to you.

Okay. Thank you, Mary, and good morning, everybody. The third quarter was very strong, resulting in $35.5 billion in net revenue, $5.3 billion in EBIT-adjusted, 14.9% margins, $2.83 in EPS diluted adjusted, and $9.1 billion in adjusted automotive free cash flow. The $2.83 EPS diluted adjusted includes a $0.05 gain from the revaluation of our investment in PSA. Automotive liquidity remained strong at $37.8 billion at the end of Q3, demonstrating the resilience and flexibility we have built into the business over the past few years and our ability to manage through downturns and other disruptions. In Q3, we repaid $5.2 billion of the corporate revolver draw and paid an additional $3.9 billion in October. We expect to pay the balance by the end of the year while remaining at or above our target average automotive cash balance. We remain focused on our investment-grade balance sheet as well as our capital framework targets. Retail sales have continued to recover, with Q3 industry and GM results down less than 5% year-over-year despite limited inventories. Let's take a closer look at North America. North America delivered Q3 EBIT-adjusted of $4.4 billion, up $1.3 billion year-over-year and a 15% margin driven by strong full-size SUV and pickup truck performance, disciplined pricing, benefits from our cost actions, and the nonrecurrence of the $1 billion strike impact in Q3 of 2019. The launch of our all-new full-size SUVs is going extremely well and contributed favorably to the price during the quarter. Our new full-size SUVs are designed to keep GM the clear leader in a market we have dominated. During the quarter, GMC and Chevrolet combined had a 65% share of the retail segment, and we are trending up in both share and ATPs as availability of the new models increases. Dealers and customers truly appreciate the safety features, advanced towing technology, and new independent rear suspension that dramatically improves passenger comfort and cargo space. Like we did with our full-size pickups, we are expanding model choice and trim options. This includes adding new higher-spec trims, like the AT4 package for the GMC Yukon and an exclusive interior for top-of-the-range Denali models. Similarly, we now have 6 distinctive models and have doubled the trim lineup for the 2021 Tahoe and Suburban, including the Z71 off-road package. All new SUVs also have our new vehicle intelligence platform, VIP, which is on 9 models now and will be on a total of almost 30 by 2023. With an expanded capacity for smartphone-like over-the-air software updates, the VIP system enables the adoption of functionality upgrades throughout the life of the vehicle. Like our pickups, our SUVs command high ATPs, and we intentionally planned our rollout to include a rich mix of completely redesigned full-size SUVs with a goal to drive profitability and enhance our segment-leading market share. We started deliveries of our SUVs in Q2. Since the launch, we have gained approximately 3 percentage points of market share. Retail market share of our large pickups is also strong, up approximately 2 percentage points year-to-date through the third quarter, with Sierra, the fastest-growing nameplate in the segment. Let's move to GM International. For the third quarter, EBIT-adjusted in GMI was up $100 million year-over-year, driven by favorable price and mix, continued benefits from our transformation actions and austerity measures, partially offset by weaker FX in South America. China equity income in Q3 was flat year-over-year and slightly above our $200 million expected run rate. We saw benefits from volume as the market continues to recover from H1 lows; improved mix from recent launches, including Cadillac XT6, CT4, CT5, Buick Enclave, and Chevrolet Blazer; and cost discipline. The benefits were offset by continued pricing pressure. We received $500 million in dividends from our China JV in Q2 and expect the remaining $500 million to be paid in Q4. In South America, all plants are operating in line with market demand, and the team has been reducing cost to lessen the effects of the pandemic while continuing to optimize mix and aggressively take industry-leading price. These cost measures include voluntary and involuntary staff reductions, salary reductions, and delayed investments. Our strong Chevrolet brand has led the market for 18 consecutive years led by Onix. The Tracker has also led its segment since its launch earlier this year. The success of both entries highlights the strength of our new global family of vehicle platform, which now represents about 2/3 of South America volume and meaningful progress in terms of profitability and localization. A few comments on GM Financial, Cruise, and our corp segment. GM Financial posted quarterly revenue of $3.4 billion in the third quarter and EBT adjusted of $1.2 billion, primarily as a result of high used vehicle prices contributing to gain on sale of off-lease vehicles, reduced provision expense due to stable credit performance and lower interest expense as a result of a decline in interest rates. Cruise costs were $200 million for the quarter, in line with expectations, and corp segment costs for the third quarter were $100 million, better than run rate due to the PSA revaluation and other one-time items. We achieved our transformational cost savings target of $4 billion since 2018, including $200 million in Q3. We expect to continue making progress on the target range of $4 billion to $4.5 billion through the end of the year. Finally, let me update you on the EBIT and cash flow scenario that we provided last quarter. Going into the second half, we anticipated U.S. light vehicle industry SAAR to be in the 14 million unit range. It has been tracking much stronger, and we are now anticipating light vehicle SAAR in the mid to high 15 million unit range in H2, with pickup truck demand specifically exceeding original expectations. We have been selling vehicles within a few days of arriving at dealerships, leading to slower inventory rebuild than anticipated. As a result, our inventory levels will likely not reach our previous scenario of 600,000 units by year-end. We continue to carefully monitor and adjust to the macro environment, which remains volatile given the evolving pandemic that is still impacting the economy. This may adversely affect demand and production timing and levels. However, with our stronger-than-anticipated Q3 performance driven by strength in pickup trucks, full-size SUVs and crossovers, and the unanticipated benefits from GM Financial due to the Brazilian credit performance and high used vehicle prices, we expect our H2 EBIT and free cash flow to be well above the scenario provided on our Q2 earnings call. Given the strong performance and assuming no unforeseen production disruptions, our updated H2 scenario for total company EBIT is in the $8.5 billion to $9 billion range, with Q4 weaker than Q3 due to seasonality and free cash flow levels in H2 to be in the $11.5 billion to $12.5 billion range. I would caution against extrapolating our H2 performance going forward as we will reintroduce engineering, manufacturing and advertising costs as operations normalize. To help you frame 2021, I would like to provide some early thoughts with our more detailed level of guidance to be provided in early February during our Q4 earnings call. At a high level, comparing 2021 to 2020 in an environment where 2020 was not impacted by the pandemic, EBIT performance expectations are fairly similar, with some puts and takes. Headwinds for 2021 compared to a normalized 2020 include increased spending as we invest in our EV rollout and potential commodity headwinds, particularly around platinum group metals. Opportunities in 2021 include an entire year of full-size SUV production, inventory build remains an opportunity but will be dependent on market demand and modest ongoing cost savings from COVID austerity learnings. Specific to free cash flow, as mentioned previously, the permanent CapEx this year will lead to retimed spend in 2021. We previously communicated a CapEx run rate of $7 billion per year. As a result of this retimed 2020 spending and a strategic decision to accelerate investments in our all-electric future, we expect that our annual CapEx will exceed $7 billion through at least 2023. As Mary mentioned, we will communicate a more detailed EV strategy on November 19. In summary, our Q3 results demonstrate the strength and flexibility of the business and our ability to recover quickly from a significant disruption. We have continued our focus on launch performance, cash flow and improving the overall resilience of the business. We are laser-focused on execution and setting GM up 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.

Congrats.

Thanks, Itay.

John, I appreciate the insights for 2021. Could we take a closer look at North America? Specifically, I'd like to discuss the company's earnings potential in North America compared to pre-COVID expectations, and explore the factors influencing that, especially in light of this year's strong truck franchise performance.

What we're observing in the industry is significantly stronger now compared to what we experienced during COVID. Our cost savings, excluding warranty, amount to about $700 million quarter-on-quarter. Regarding what might be sustainable going forward, a large portion of the savings is tied to the austerity measures we implemented in Q2, which have continued into Q3. As our operations normalize and our plants ramp up production, we will begin to reintegrate some of those costs in Q4 and afterward.

Just to clarify, John, I guess, the 2021 comparison, should we think about the 2020 as sort of on a more normalized ex COVID? And if so, could you kind of quantify what that sort of comparability should look like?

Sure. I indicated that our performance in 2021 is likely to align more closely with pre-COVID levels, similar to what we discussed at Capital Markets Day in February. There are both positives and negatives to consider. We talked about increased spending on electric vehicles and potential challenges related to commodities, particularly in platinum group metals. On the positive side, we have a full year of production from our full-size SUVs and opportunities to build inventory, as well as possible cost savings from COVID. In terms of EBIT, it’s quite similar to what we presented at Capital Markets Day. However, on the cash front, there is a difference. We delayed $2 billion of capital expenditure this year, which will now be deferred to next year. Due to our strategic choice to accelerate investments, some of this will contribute positively in 2021 as well.

Just lastly, maybe for Mary, strategically. One of the announcements that you made throughout the quarter was the relationship with Uber to deploy EVs on rideshare networks is something we've talked about in the past. Curious if you can kind of comment on where this relationship could potentially progress over the next couple of years.

Well, I think you're seeing rideshare companies want to do their part from a zero emissions perspective, and so providing the drivers the opportunity to have an EV that's within reach. The Chevrolet Bolt EV is an excellent vehicle. We deployed it in past in the rideshare environment. It did very well. It's very functional from that perspective. So we think it's a good offering, and we're going to continue to make that available and see how we can grow that business.

I was just hoping, first, John, I apologize for my confusion, but I didn't quite understand what you were guiding towards for 2021. Did you say it would be similar to the approximately $10.5 billion EBIT you are expecting this year, which includes the gains from GM Financial and also COVID? Or did you make adjustments to exclude the impact of COVID from that?

Before COVID, at Capital Markets Day, we projected a diluted adjusted EPS of about $6.5, roughly between $5.75 and $6.25. You can use that to estimate our EBIT. Looking ahead to 2021, we believe we could reach that level. Our aim would be for the various factors to balance each other, but much will depend on how we navigate this unpredictable environment.

Okay. That's clear. And any color on what you're expecting for GMI ex China? Obviously, that's still a pretty significant drag. Is there a reason to be a bit optimistic about that as you look out to next year?

As we look to next year, it's still a difficult environment. I think everybody can see that. I think your question, is there any possible upside? I think some of the upside that we see is we'll have a full year of our Tracker, which is the SUV, we'll have a full year next year. And really, Rod, we've taken quite a bit of price this year, and that price will carry into next year, which will be a tailwind for us. I think those are the two positives that we can point to for next year in South America.

Yes. The only thing I would add, Rod, is also in addition to what John said, the team has just done an excellent job of continuing to take cost out of the business. So the team is very hungry to deliver positive results. And so they're committed and working day and night on that.

Okay. And just lastly, Mary, so much has happened in the market over the past year, particularly regarding electrification. I was hoping you could share some updated thoughts on strategy and whether it has evolved or changed since the March EV Day. Any insights on accelerating the growth trajectory in EV? Is the Oshawa expansion related to EVs or any changes to the distribution strategy?

We will provide more details about our EV strategy at the Barclays conference later this month. Since the March EV Day, we have made significant progress, particularly in battery technology development, and we are very pleased with our current status. From the Ultium perspective, we announced Ultium Drive, which offers us considerable flexibility and scale, along with our wireless battery management system. There is substantial technological progress to ensure we have leading-edge technology. Our reveals of the Cadillac Lyriq and the GMC Hummer EV went exceptionally well, with strong customer feedback for both. Additionally, we announced a $2 billion investment in Factory ZERO in Detroit-Hamtramck, which will be an all-EV plant. Our Ultium Cells LLC in Lordstown is ahead of schedule, and we are actively hiring. The Spring Hill announcement also involves a $2 billion investment. When you consider GM's potential in the EV market, we can leverage our iconic brands and their established customer relationships both nationally and globally. We have a highly capable team ready to deploy our manufacturing facilities rapidly to achieve quick scalability in both components and assembly. Our main objective is to ensure we maintain a leading position in bringing new vehicles to market. Ultium will enable us to produce profitable electric vehicles. Bringing these vehicles to market while leveraging our brands is crucial. We are also collaborating closely with our dealers, who are undergoing significant transformation. We understand that some customers prefer to handle everything online, while others still enjoy the traditional experience. The new systems we are implementing are aiding this transition. We are also enhancing how dealers can order their most popular and profitable vehicles, improving their operations. Together with our dealers, we aim to transform the customer experience. A clear example is the GMC Hummer EV, where customers can make a deposit with just four steps and gain pricing transparency, eliminating incentives, discounts, and haggling. This progress is achieved in collaboration with our dealers, and I am excited about the excellent work we are doing together.

One more question on the EV strategy. I really appreciate all the color today. So today, NIO's market gap has officially surpassed GM's. That's the latest example of high market valuations and cheap access to capital for this electric vehicle company. I was hoping to get your latest thoughts on what the best way is to unlock shareholder value from your technology. Last quarter, you said nothing is off the table, but I'm certainly getting a strong vibe from all the announcements on the EV side that things seem to be being kept all together. So just your latest thoughts what's the best way to unlock shareholder value.

Well, Emmanuel, as I've always said, we're committed to and have taken many steps in our EV business as well as our autonomous business to maximize the ability to unlock long-term shareholder value, not something that's going to necessarily cause a quick pop. When you look at all of the assets that we bring to that and recognize that EV is a propulsion system, there are many other parts of the vehicle, and we're focused on speed and what's going to drive the business and growth over the long term. We'll talk more about it at the Barclays conference, but our focus is absolutely on unlocking shareholder value and speed to market.

Understood. And then a second question, could you talk a little bit more about the benefits from the alliance with Honda in North America? I'm just curious if you could maybe detail a timeline, magnitude of expected benefits, and what sort of product lines are even being considered, just anything that helps us understand the opportunity here.

As we mentioned in September, we announced a nonbinding memorandum of understanding. We are continuing discussions and making significant progress toward a definitive agreement. The areas we are focusing on include platform sharing, research and development collaboration, connectivity solutions, and purchasing. These initiatives have the potential to generate significant cost savings. We will provide more details once we reach a definitive agreement, but this gives a broad overview of how we can work together to enhance efficiency and offer leading technology in electric vehicles and platforms in the market.

And just timing-wise, any sense when the earliest benefits could be realized?

I think probably need to let us get the definitive agreement before I start quantifying and timing them, Emmanuel, if that's okay.

I wanted to point out Slide 17 in the supplemental section of the deck. I have data extending back more than 30 years, and the $4.4 billion EBIT for North America is a record, and quite a strong one at that. Although there are some factors influencing this performance, it's not exactly the best time in North America. That makes it even more impressive. I don't think we should underestimate this achievement. John, you mentioned that some of the cost savings may not be repeatable. However, you indicated that you reached $200 million of the $4 billion goal already, and now you’re aiming for $4.5 billion. If we consider $800 million may not be repeatable and we account for market conditions that could impact pricing, you’re still achieving well over a 10% EBIT margin. I'm curious if that reasoning resonates with you and why, considering your strategy and product offering, you might struggle to maintain some of that pricing and cost moving forward. You're being quite modest about your success in North America.

I have a few comments to make. Looking ahead, we have put significant effort into achieving the $4 billion to $4.5 billion target. We are carefully considering what we can maintain from an austerity standpoint. We are experiencing some favorable conditions with our new full-size SUVs across three brands. Over the past few years, we have been actively launching our T1 platform, the Silverado, Sierra, and the SUVs, and now that the launches are behind us, we plan to leverage that strength moving forward. We have discussed achieving 10% margins in North America and have shown in the last five years that we can reach or exceed that in most years and even in some quarters. However, part of that will need to be allocated to accelerate our electric vehicle initiatives going forward. Mary mentioned that we are committed to this effort, and there will be more updates at Barclays in the middle of the month.

But I think it's a really good point, John, that our North America business, especially the strength of our full-size truck platform and the franchise there, full-size SUVs, gives us excellent opportunity to self-fund our growth in EVs and then leverage all the assets we bring, whether it's manufacturing, engineering, technology. So I think we have to focus in on what it takes to really put vehicles on the road that are long-term durable and high quality, also that customers want. Frankly, that's been a little bit underappreciated. But when you look at the earnings potential, even with the adjustments that you made in North America, we're going to go hard at EVs and demonstrate the assets that we're going to bring to it. And the North America performance that John is being a bit modest about allows us to do that.

Okay. That's helpful. I still think you're being quite modest, but I have a second question about electric vehicles. I understand you'll discuss this further in the coming days. You've made comments about utilizing the Ultium powertrain and mentioned shorter cycle times. Could you clarify the EV Ultium strategy regarding whether levels of outsourcing or insourcing will be similar to or different from the historical approach with internal combustion engine vehicles? Also, Mary, you mentioned faster cycle times in the press release, so let's address that here. What do faster product cycle times mean for electric vehicles?

I appreciate your question and would like to highlight a few key points. From the Ultium perspective, we have a solid roadmap for reducing costs and capitalizing on the scale and opportunities present in the North American and Chinese markets, among others. There is significant potential for growth in our EV business. Regarding cycle times, the GMC Hummer EV represents the quickest vehicle development we've undertaken. We are utilizing new technologies and tools. The Ultium platform's modular design facilitates engineering reuse, which accelerates the process. By starting with an EV-focused platform rather than retrofitting an internal combustion engine platform, we gain considerable design freedom and flexibility. This is evident in vehicles like the LYRIQ and the GMC Hummer, with more models to follow. These developments will enable us to expedite our global vehicle development process for getting vehicles to market. We are also focused on establishing milestones and rapidly reducing battery costs, as the battery is crucial in determining EV costs. We are implementing changes at General Motors in how we manage EVs compared to internal combustion engine vehicles, particularly through joint ventures in cell manufacturing. We are re-evaluating every aspect of the business to ensure we can achieve faster results and maintain a cost structure that allows us to introduce profitable EVs across various market segments, which presents a significant growth opportunity ahead.

Could this mean that mid-cycle majors are a thing of the past?

Well, I think we have to look at that, that it will be customer-driven. Because I think if you step back and you go 5, 6 years ago, mid-cycle enhancements are all about the exterior. Now not only do you have changes you can make to the exterior possibly faster, but also what you can do internally. With our vehicle intelligence platform and the ability to do over-the-air updates, whether it's something new that you're going to put out on a model or something that you can upgrade in a previous model to, that's all new business for us in the services side of it. So don't underestimate the fact that I think John said we're going to have VIP on about 33 vehicles, was it, John, by 2023. And of course, that will be driving our EV vehicles as well.

Yes, there is nothing left on GMF, and the 500 remaining units from China will be in Q4.

I want to go back to the electrification question. I mean you've clearly shown you've done a great job managing through the past year plus, I guess, with the strike and the pandemic. You showed resilience. We've seen the return to solid cash flow. And I know historically that's been a big part of your goal and investment thesis, improving that conversion. But you're also clearly talking about here accelerating investment in electrification. So given what's going on in the industry and the capital markets, I think you could probably build the case that it's better for you to not theorize robust free cash flow as maybe you were sort of talking about a year or so ago. I wanted to get your thoughts on that. And it sounds like, with these accelerated EV investments, maybe you could just help us a little bit about how we should think about the return on that. You talked about improved speed to market, but does this actually mean you can pull forward bringing some of that product to market faster than initially thought?

Absolutely. We will definitely be bringing EVs to market faster than what the plan was a year ago. We've learned a lot in the last year. The speed at which we're developing the Lyriq and the Hummer, I think, are evidence of that. So we definitely will have vehicles in market more quickly with our new strategy.

The HUMMER EV looks impressive, and while you mentioned it will be profitable, it's still a costly vehicle. Considering Tesla's strategy to use high-priced vehicles to reduce technology costs and expand their market reach, it's important to note that their initial Model S was also in the $100,000 range. My question is about your plans with the Hummer, Lyriq, and Cadillac products, which are also premium vehicles. Is your approach similar? I know you have the Bolt EUV, but how do you plan to use these high-end models and their technology to transition towards more affordable passenger cars? Or are you focused on maintaining your core segments of trucks and possibly some luxury vehicles?

The trajectory that we have for the Ultium battery technology will enable us to offer vehicles in high-volume segments during this initial rollout. We definitely plan to have options across our brands and segments, particularly in affordable high-volume markets, focusing on where Chevy is positioned in the core value segment.

I have a couple of quick questions. The first is regarding Ultium LLC. You're rapidly enhancing this business's capabilities at a time when it seems there is a shortage of those skateboards in that type of system with many entrants, both established and new, looking to enter the market. Clearly, the core function of Ultium is to provide GM with improved time to market and flexibility, while also offering an appealing opportunity for third-party partnerships. In addition to Honda, which you've confirmed as a potential customer, can you share any updates on discussions regarding third-party supply from Ultium to other manufacturers? Are there ongoing discussions, even if you can't provide specific details?

Adam, Honda is not a possibility; it’s already confirmed that they will be using our Ultium platform for two vehicles. There's more potential as we continue to collaborate with them. While I can't share specific details about other manufacturers at the moment, I can say that there are ongoing conversations.

Thank you, Mary. To follow up on cash return, if we consider the period before COVID, the strategy was clearly outlined: invest in the business, maintain a strong balance sheet, achieve profitable growth, and then return any excess to shareholders. Before COVID, you returned approximately $20 billion through share buybacks, which was money taken out of the business at the request of investors. Am I correct in thinking that post-COVID, the situation has really changed? While you still retain the right to define what constitutes excess cash, given the growth opportunities ahead and the likely increased focus on a strong balance sheet, am I correct in saying that this is less about cash returns now and more about a focus on growth? Is that the right way to understand the current emphasis?

Adam, I think we're going to still follow our capital allocation strategy, which means reinvest in the business to generate appropriate returns, a blended return on invested capital of 20%. We're going to maintain an investor-grade balance sheet. And then the third pillar, as you suggest, was returning to shareholders. I think what you hear us saying is we do believe that there are a number of very important programs and services that we can deploy that are going to lead to growth of General Motors. I can't talk about the rest of the world, but we see a huge growth opportunity for General Motors. That's why we're accelerating EVs, putting the focus on services with the addition of Alan Wexler joining the organization. We see a growth opportunity that focus on that first pillar. We'll still maintain it because we want to do the right thing for all of our investors. But we will be heavily focused on the growth opportunity, and that's facilitated by the first pillar.

Congrats on the quarter. Maybe starting with a follow-up on the GMNA profitability questions earlier. Are you able to sort of parse out how much of the $1.0 billion of year-over-year contribution from lower cost in 3Q, as shown on Slide 17, is related to more temporal factors such as austerity-related cost savings that might reverse versus how much stems from savings that are more structural in nature? How should we think about the cost line specifically tracking in GMNA going forward as austerity savings normalize, but structural savings continue? And I think you might also combine in this driver the higher cost of the content on new launches, such as the SUVs, which you've suggested before might need to be netted against pricing. Any sort of disaggregation that you might be able to provide with regard to all of the different factors in 3Q that went into the cost driver for GMNA would be very helpful.

The way I would look at it, Ryan, is clearly, there were austerity measures that are more related to the pandemic. As the business resumes manufacturing, et cetera, there will be costs that we incur. There will be savings as well as we demonstrated through the transformation. What you also hear us saying is we're going to accelerate EV. Some of that savings will go against that. Significantly improving the rollout of EV is going to take both engineering and capital. As you look forward and try to map into '21, you have to factor in, yes, we've made permanent savings in the way we do business, but we're now accelerating other parts of the business. Some of that savings will fund that. Some of the austerity will stick, and we'll provide more clarity around that when we get to talking about '21 in the February timeframe when we roll out fourth quarter earnings.

Okay. And then lastly, I think I heard John say that you expect a mid to high 15 million range of U.S. light vehicle SAAR in the back half of the year. Looking at July through October, I think it's running at about 15.6 million so far and the last couple of months at 16.4 million. So just curious if you're seeing or anticipating any kind of a slowdown here in November and December or perhaps are just being cautious. I think your guidance, which is based on wholesale, is derisked relative to the near-term trend in sales, just given your ability to replenish inventories going forward. But still, I'd be curious to know how you're feeling about the market, if you think it's likely to continue to hold strong like in September and October in the 16s or if you're concerned about, I don't know, any sort of risks around uncertainty due to the election or higher COVID cases or something else.

No, we didn't factor COVID uncertainty into our SAAR projection. However, we are observing very strong performance on the retail side, particularly. The retail SAAR for the second half of the year is nearly in line with last year's. Last year, we had a total of 17.5 million units. The decrease in the second half is more related to fleet and daily rental companies as they have scaled back a bit. However, unless a major COVID event occurs, we anticipate continued strong retail SAAR for the second half and into the fourth quarter.

Obviously we'll have a chance in a couple of weeks to talk about the EV strategy, and appreciate the advertising for it. But I do want to ask when people think about the leading EV company, it's not just the EV propulsion system, it's the digital cockpit, vehicle update capability, the frequent kind of mid-cycle refreshes, if you will, that's delivered by software updates. So can you give us a sense and also you mentioned Alan Wexler, the kind of digital transformation outside of EV propulsion that we could expect to see either in the electric vehicles themselves or, frankly, in a broader lineup to keep them fresh and relevant for modern buyers?

Yes, Brian, I hear a lot of static from your line, but I believe I understood your question about digital transformation. We see the vehicle as a digital platform. Over the last five years, we have brought almost all software management in-house. This allows us improved control, better integration, and faster implementation of new offerings. We certainly recognize the opportunity for over-the-air updates, not only for electric vehicles but for all our vehicles, including internal combustion engine models, to enhance service opportunities. We can build on our existing OnStar infrastructure, taking into account the number of already connected vehicles. This presents a significant growth opportunity for both electric and internal combustion engine vehicles.

Okay. And in terms of when those types of products could be seen in the showroom on non-EVs, when would we sort of see a different cockpit, much more connected, showing up in showrooms?

If you look at the Cadillac Escalade right now, you can see that there are already 9 vehicles that have our vehicle intelligence platform, and that number is growing. This foundation allows us to build further. I believe the number of vehicles equipped with that capability will continue to increase. Additionally, we have a team currently working on expanding our services. By 2023, we aim to have 30 vehicles equipped with the VIP, with more models being added as rapidly as possible. This will enable us to capitalize on service opportunities and utilize the digital platform effectively.

I just wanted to start first on the commentary on the dealer stock. So you're not going to get to 600,000, I think, which is well understood. But the question is, like, you need to continue rebuilding your inventory into 2021. We've now seen a couple of months of SAAR north of 16 million, which basically normalized. In the 2018/'19 period, you were running at roughly 800,000 units of gross stock on a monthly basis. Is that 800,000 a reasonable target that we should expect you to rebuild toward? Or are you going to try to play it maybe a little more conservatively?

I believe that number was quite high. We were coming off product launches and aimed to build some inventory as we entered the second half of last year. Currently, with our focused ordering strategy with dealers, they are learning to operate at much lower inventory levels, which helps reduce costs for both sides. I don't anticipate seeing the 800,000 level moving forward; we expect a lower figure instead.

We should consider being a bit more streamlined with dealer stock levels moving forward. Additionally, Mary, could you provide some clarity on the Honda MOU? While you mentioned the timing is to be determined, could you contextualize your current spending on combustion platforms? How significant is that portion of the budget, and how much of it can be allocated to Honda? I'm trying to gain a better understanding of the scale of product or content that is less valuable or more commoditized, which may not be receiving much credit, but can be shared with Honda, allowing for reinvestment into EV initiatives.

First of all, it's important to note that we are already sharing EV platforms with Honda. While it's difficult to quantify this, I can assure you that a significant portion of our capital and engineering resources is now focused on EVs. As I mentioned, we are collaborating with Honda in this area. I believe there are substantial cost savings to be realized as we standardize platforms, and we have begun this process from an EV standpoint. There's additional potential for efficiency gains, which enhances our operations.

And is it possible to bring other automakers into the fold on the combustion sharing side?

I would say anything is possible. We have to look for what makes the most sense and how, I'll say, new program schedules align. But we're open to look for ways to drive efficiency across the industry. We're very open to that.

I was hoping to ask more on Cruise and the news about getting the approval to do testing with no drivers in San Francisco. Maybe you can help us better understand what are the key factors that are needed from here in order to get to commercial deployments. Is it just a matter of time and seeing how these driverless vehicles are performing and that gives you enough confidence as you get more data to be able to deploy? Or do you think there's further technical or regulatory hurdles that will need to be cleared in order to get to commercial deployment?

If you think about commercialization, we're going to continue our development and testing work that we're already engaged in and then the discussions with regulators to ensure that both from a technology and a regulatory perspective we're in a position to operate commercially. When you think about what we've announced with what we're going to do yet this year in San Francisco with the testing without a safety driver in the vehicle, I think that that's just another level of milestones that we need to achieve. We'll be the first doing it in a complex urban environment. Why that's so important is, if you think about even today's ride-sharing, the opportunity for profitability is in dense urban environments. Being able to deploy the technology there instead of in a suburban environment gives us a faster pathway to commercialization and profitability. The vehicle capability will only continue, and that means then the area, the geofence area that the vehicles can operate in grows as well. So both will go together.

Okay. That's helpful. And then a question on cash flow. Kind of within that scenario, the company was discussing a relatively flattish SAAR on a sequential basis going forward. What would that imply for working capital as either a headwind or tailwind for 4Q and perhaps into 2021 as well?

For Q2, we burned $9 billion, so we had a huge unwind. Q3, it was almost dollar-for-dollar rewind. We generated $9.1 billion of free cash flow. As we look forward, Q4 and beyond, we're really more toward the normalized levels now, not as big or hardly any impact on a managed working capital. It's already happened in Q3.

Well, thanks, everyone. I really appreciate everybody's interest, especially in our EV transformation. But to sum up the quarter, it was a very strong quarter. Very proud of the team for the great results that were delivered. I think it demonstrates that we're fully maximizing our strong new vehicle portfolio both in crossovers, full-size trucks and full-size SUVs, obviously being helped by a recovering market. We also greatly accelerated our EV and our AV progress. We've talked a lot about that this morning, and we have more to announce very soon. It does, I think, start to outline a very significant growth opportunity for General Motors. Overall, the team has worked very hard to build an agile and resilient business. I think we've demonstrated that over the second and the third quarter. We are committed to not only continuing to run a strong business with all of our franchise, but also focus on growth opportunities that will create long-term value for our shareholders. So I want to thank everybody again for participating. And please stay safe, stay healthy, wear your mask.