General Motors Company (GM) — Q1 2023 Earnings Call Transcript

Thanks, Julie, and good morning, everyone. We appreciate you joining us as we review GM's financial results for the first quarter of 2023. Our conference call materials were issued this morning and are available on GM's Investor Relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM's Chair and CEO; Paul Jacobson, GM's Executive Vice President and CFO; and Kyle Vogt, CEO of Cruise. Dan Berce, President and CEO of GM Financial, will also join us for the Q&A portion of the call. Before we begin, I'd like to direct your attention to the forward-looking statements on the first page of our presentation. The content of our call will be governed by this language. And with that, I'm delighted to turn the call over to Mary.

Thanks, Ashish, and good morning, everyone. Thank you for joining us. Paul, Kyle, Dan, and I are glad to have this opportunity to discuss our first quarter results with you. Once again, we delivered strong earnings, and I appreciate the efforts of everyone involved, including the GM team, our dealers, our suppliers, and our unions that all helped us meet strong customer demand for our products. Highlights include our international markets outside of China, which had a record quarter, and North America, where we earned 10.9% EBIT-adjusted margins. In the U.S., we are the market leader in retail and fleet sales, including commercial sales. We earned the largest year-over-year increase in U.S. market share of any automaker, and we did it with strong production and inventory discipline as well as consistent pricing. We delivered more than 20,000 EVs in the U.S. in the quarter, on the strength of record Bolt EV and EUV sales and rising Cadillac LYRIQ deliveries. This moves us up to the second market position and increased our EV market share by 800 basis points. We also continue to sell more trucks in the U.S. than anyone by a wide margin. In addition, the $2 billion of fixed cost reductions we are targeting will flow to the bottom line faster than we originally expected. And the enterprise value of these fixed cost reductions will have even greater than $2 billion of value because we're strengthening our culture, which has consistently delivered strong results; we're reducing our executive ranks by more than 15% through voluntary separations, which will help reduce bureaucracy; and we are empowering our leaders to structure their teams to be faster and more agile. In addition, we are prioritizing programs and projects that have the highest revenue and cost impact. We understand the bar continues to be raised, so we're holding ourselves accountable to drive improvements every single day. As we look at the performance of the business and the opportunity ahead of us with new ICE and EV launches, we're able to raise our full year 2023 earnings guidance to a range of $11 billion to $13 billion. The new ICE products we are launching around the world will build on this momentum and support strong mix, pricing, and EBIT. In GMI, the new Chevrolet Trax is off to a very fast start in Korea with more than 13,000 orders placed in the first week of sale. In Brazil, the new Chevrolet Montana pickup saw more than 10,000 orders out of the gate. And demand for our new midsize and heavy-duty pickups in North America is growing, especially at the high end. Over the last years, we've evolved our premium truck offerings from a niche to a franchise. And we did it through manufacturing investments, design, demonstrated capability, and technologies like Super Cruise. Our customers are responding. 60% of dealer and customer orders for the new Chevrolet Colorado are for our high-end Z71, ZR2, and Trail Boss models. Last year, it was 42%. 75% of the GMC Canyon orders are for higher-end AT4 and Denali models. Last year, it was 45%. 52% of Chevrolet Silverado HD orders are for the top-of-the-line high-country model. And 30% of the GMC Sierra heavy-duty orders are for the new Denali Ultimate, which is a brand-new model that didn't exist a year ago. Our profitable growth opportunities extend into other segments as well. For example, the Chevrolet Trax and Trailblazer and the Buick Encore GX and Envista will help us win new customers from brands that walked away from affordable vehicles or scaled-back customer choice. All 4 of these small SUVs are beautifully designed, packed with technology, and include a long list of standard active safety and driver assistance technologies, yet they all have starting MSRPs below $30,000, with the Trax starting below $25,000. As a measure of just how good these vehicles are, the Trax earned a 63% lease residual. That's 24 points above the previous generation and the best we've ever done in this segment. As for the Envista, one auto writer said its gorgeous styling resembles the Lamborghini and another said, as far as rivals go, the 2024 Envista might be playing in the sandbox alone because it's both premium and affordable. At the same time, our EV volumes and market share are growing as cell production rises and our teams master new hardware, software, and manufacturing technologies that we are deploying. As Paul and I have shared, we plan to produce 400,000 EVs over the course of '22, '23, and the first half of 2024, including 50,000 EVs in North America in the first half of this year and double that in the second half. So far this year, we've built more than 2,000 Cadillac LYRIQs, and production will continue to rise to help us meet pent-up demand. Both GMC HUMMER EV models are shipping from Factory Zero, and production is scaling. Our production ramp is carefully cadenced as we add additional trim series to the HUMMER EV pickup and began production of EDITION 1 SUV. The team at CAMI has now built more than 500 BrightDrop Zevo 600 vans, and the Zevo 400 begins production in the second half of the year, and we've added Purolator and Ryder as customers. We already have 340 fleet customers for the Silverado EV, and the team at Ramos Arizpe is making great progress preparing for the launches of the Blazer EV and the Equinox EV in the second half of the year. All of this is enabled by rising production at Ultium cells in Ohio, which we expect to reach full capacity at the end of the year. Everything we learned in Ohio will be applied to our next-use Ultium cell plants, including in Tennessee, where we will begin hiring and training production workers in a matter of weeks. Work also continues to transform our assembly plant in Orient Township, Michigan to build the GMC Sierra EV and the Chevrolet Silverado EV. We have progressed so far, that it's now time to plan to end the Chevrolet Bolt EV and EUV production, which will happen at the very end of the year. When Orient EV assembly reopens in 2024 and reaches full production, employment will nearly triple, and we'll have a company-wide capacity to build 600,000 electric trucks annually. We'll need this capacity because our trucks more than measure up to our customers' expectations, and we'll demonstrate that work and EV range are not mutually exclusive terms for Chevrolet and GMC trucks. So stay tuned. As we scale EVs, we will lower fixed costs and continue to drive margin improvements outlined at Investor Day. This includes optimizing our pouch cells for energy density, range, and cost using new approaches pioneered at our Wallace Battery Center and by our technology partners. And we announced this morning that we're also working with Samsung SDI to add cylindrical and prismatic cells to our portfolio. Having multiple strong cell partners will allow us to expand into new segments more quickly, grow our annual EV assembly capacity in North America significantly above 1 million units, and integrate cells directly into battery packs to reduce weight, complexity, and cost. Reducing vehicle complexity and expanding the use of shared subsystems between ICE and EV programs is another priority. For example, we are reducing the overall complexity of our software configurations and related hardware on all future ICE and EV products. One important part of our efforts includes the reduction of infotainment screen configurations by 60% across our entire portfolio. By reducing complexity, we can focus on delivering new and improved digital experiences much more quickly. We also expect that our supply chain will be an even bigger competitive advantage starting in '26 and '27 because of the direct investments we've made in lithium, nickel, and other commodities as well as CAM, which will allow us to purchase significant quantities of material on favorable commercial terms. All of this is coming together in a way that will fundamentally change the narrative that traditional automakers can't deliver competitive EV margins. We have a lot of work to do, but we have the right trajectory, and I believe we can get there much faster than people think. Now before I turn the call over to Paul, I would like to invite Kyle to share an update on Cruise, which continues to expand the scale and scope of its operations. Kyle, over to you.

Thanks, Mary. I'd like to give a brief update on our progress. Since last quarter, our driverless fleet has increased by 86% from 130 to 242 concurrently operating AVs. We've completed over 1.5 million driverless miles, and the pace continues to accelerate. Our first million miles took us about 15 months to complete, while the next million miles will likely take less than 3. We're also regularly completing over 1,000 driverless trips with passengers every day, and we're seeing strong retention from our early users. This is significant quarter-over-quarter growth in our service, well liked, but we've had limits on when and where it operates. But today, I'm excited to share that right now, a small portion of our fleet is now serving driverless rides 24 hours a day across all of San Francisco. For us, this is a milestone years in the making and represents that our driverless fleet has real commercial value. We're completing the work needed to roll it out to the rest of our driverless fleet as soon as we can. Another key part of rapid scaling is a readily available supply of vehicles. Fortunately, our purpose-built and cost-optimized AV, the Cruise Origin, will be testing in Austin soon. This vehicle has been validated almost entirely in simulation, reducing our historical reliance on expensive and time-consuming supervised test-mile collection. The launch of the Origin is a critical step on our path to profitability as well and towards hitting $1 billion in revenue in 2025. We remain on track and slightly ahead as of today. Thanks, Mary. Back to you.

Well, thanks, Kyle. And now I'm going to turn it over to Paul for a deeper dive into the quarter.

Thank you, Mary, and thank you, Kyle, and good morning, everyone. Thank you for joining us today. I'm pleased to report a strong start to the year as the team continues to execute on our transformation. We're strategically transitioning the business while at the same time leveraging our important ICE portfolio with new and refreshed products, driving continued robust demand for our vehicles while pricing has remained stable. We're also excited to bring on incremental EV volumes, particularly in the second half of the year, as we increase battery cell production at Ultium cells. And as Mary mentioned, we took initial steps in Q1 towards implementing our $2 billion cost initiative, of which we now expect to realize about 50% in 2023, with the majority of this benefit occurring in the back half of the year. The performance-based exits in roughly 5,000 individuals, who participated in the voluntary severance program, will drive approximately $1 billion towards this target. But people cost is just one of several areas we're focusing on. The remaining $1 billion will come from the following initiatives: actions to reduce complexity across the portfolio and throughout the business, in everything we do from vehicle design to engineering and manufacturing. Prioritizing our growth initiatives. We simply cannot do everything. We're focusing on projects like Cruise, BrightDrop, and software-defined vehicles, which offer the biggest returns on revenue and margin. Lastly, we're being tactical on overhead and discretionary costs, including corporate travel, IT costs, and marketing spend. These actions will have a near-term impact on costs, but we also outlined a number of additional medium- to long-term opportunities at our Investor Day in November last year, which we are aggressively pursuing. For example, we are developing a fully integrated battery ecosystem and taking a portfolio approach to battery raw materials. We will source from a mix of established and early-stage miners, giving us both security of supply and lower pricing volatility. These are meaningful advantages as we scale into the back half of the decade. The Treasury Department's recent guidance on the clean energy consumer purchase incentive also validated our battery supply chain work with our entire fleet of EVs under the MSRP cap qualifying for the full $7,500 incentive this year. Now let's discuss another important topic, dealer inventory. As we mentioned on the last earnings call, our plan is to balance supply with demand, and that's exactly what we did this quarter. Early in the year, production improved as supply constraints started to ease and began to outpace still healthy and growing demand. As a result, we proactively planned some downtime, which allowed us to end the quarter with U.S. dealer stock flat compared to December, while we gained 1.3 points of share and increased volumes by 4% year-over-year. These production actions were contemplated in our 2023 guidance metrics laid out at the beginning of the year. We are still planning to a 15 million unit SAR and targeting to end 2023 with 50 to 60 days of total dealer inventory. Although seasonality, production schedules, and timing of fleet deliveries may take us out of this range from time to time. Now let's get into the Q1 results. Revenue was $40 billion, up 11% year-over-year. We achieved $3.8 billion in EBIT-adjusted, 9.5% EBIT-adjusted margins and $2.21 in EPS diluted adjusted. Total company results were down only $200 million year-over-year, despite a combined $800 million headwind from lower pension income and lower GM financial earnings, providing more evidence that the underlying business remains quite strong. Adjusted auto free cash flow was essentially flat year-over-year, driven by higher capital expenditures related to our EV investments, seasonal working capital headwinds, and GM Financial dividend timing. However, we used our strong balance sheet to repurchase $365 million of stock in Q1, retiring 9 million shares and early retiring $1.5 billion in debt maturing later this year. Given the strong Q1 results and our current outlook, we are increasing our full year guidance to EBIT-adjusted in the $11 billion to $13 billion range, EPS diluted adjusted to the $6.35 to $7.35 range and adjusted automotive free cash flow in the $5.5 billion to $7.5 billion range. I'll provide more details on this after I cover the regional results. North America delivered Q1 EBIT-adjusted of $3.6 billion, up $400 million year-over-year, and EBIT-adjusted margins of 10.9%. Results were primarily driven by higher pricing and volume, partially offset by mix, lower pension income, warranty reserve adjustments, and higher commodity and logistics costs. We saw a $1.3 billion pricing tailwind year-over-year in the quarter, driven largely by the price increases in 2022 carrying into 2023. We expect this year-over-year pricing benefit to moderate as we progress through the year. However, we anticipate pricing performance on our all-new midsize pickups and refreshed HD pickups to partially offset this headwind. Demand for our full-size pickups remain strong, with increased year-over-year total sales of our Silverado and Sierra full-size pickups up 3%. We also gained 0.3 percentage points of total market share to continue our #1 position in full-size pickup sales. Encouragingly, April-to-date performance is also trending well as demand remains healthy, inventory levels are essentially flat, pricing has been consistent, and we're seeing a steady increase in industry volume. GM International delivered Q1 EBIT-adjusted of $350 million, largely flat year-over-year, despite the fact that equity income in China was down $150 million due to lower volume and pricing pressure, partially offset by cost actions. The environment in China has been very challenging as the industry navigates continued COVID-related impacts, regulatory changes for both EV and ICE vehicles, and greater-than-expected competitive pricing actions. The China team is taking aggressive actions to offset. However, we don't expect an improvement in equity income until the second half of the year. EBIT-adjusted in GM International, excluding China equity income, was $250 million, up over $150 million versus last year. The successful turnaround the team has executed over the past few years continued with another record quarter. The results were driven by higher pricing, volume, and mix, partially offset by commodity and logistics costs and foreign currency headwinds. For the full year, we expect pricing to be up on a year-over-year basis, leveraging the strength of the portfolio and more than covering FX headwinds. For GM International, we anticipate moderately improved full year 2023 results relative to '22. The strong results and momentum for the rest of GM International are anticipated to more than offset continued headwinds in China. GM Financial delivered first quarter EBT adjusted of over $750 million, down $500 million year-over-year, as expected, primarily due to the expected decrease in net leased vehicle income, driven by lower lease sales mix as a result of reduced new vehicle production since Q3 2021 and lower net gains on lease terminations. Also, while higher cost of funds impacted results versus 2022, it was partially offset by higher effective yields on new originations and growth in the loan portfolio. GM Financial's key metrics, balance sheet, and liquidity remained strong, providing them the ability to support the GM enterprise across economic cycles. We've seen no material impact due to the recent banking crisis. In fact, earlier this month, we were able to renew our $16 billion revolving credit facilities while also receiving a ratings upgrade of GM and GM Financial bonds from Moody's. This upgrade should improve credit spreads on future bond issuances and improve cost of funds as their debt portfolio reprices. GM Financial also paid a $450 million dividend to GM in Q1. Our full year GM Financial expectations of EBT adjusted in the mid-$2 billion range and dividends similar to 2022 have not changed. Corporate expenses were $300 million in the quarter, down slightly year-over-year as we continue to invest in growth initiatives. Cruise expenses were $550 million in the quarter, up $250 million year-over-year, driven by an increase in operating spend as well as by the inclusion of stock-based compensation expense this quarter versus Q1 2022. As we look forward to the rest of the year, our goal is to remain agile and adapt to the dynamic macro environment. Our updated guidance assumes that the pricing benefit we saw in Q1 is neutralized over the rest of the year as we cycle price increases taken in 2022 and incentives gradually increase. Commodity and logistics costs have been stickier than originally estimated, primarily due to higher steel prices on market index contracts. For the full year, we now expect commodity and logistic costs to be essentially flat year-over-year versus our prior expectation for a modest tailwind. Our expectation to realize at least $300 million EBIT-adjusted benefit in 2023 from the clean energy production tax credits is unchanged. And while we continue to experience parts availability and logistics challenges as we did in Q1, we expect these issues to gradually improve over the next few quarters and are, therefore, still expecting 2023 year-over-year wholesale volume to increase by 5% to 10%. As Mary mentioned, we are making great progress towards our goal of 1 million units of North America EV capacity in 2025. As we scale and launch multiple high-volume EVs in strategically important segments, we will see the benefits of the Ultium platform expand and help us deliver margins in the low to mid-single digits by 2025. In closing, I also want to say how proud and thankful I am for all of our amazing team members for their tireless efforts. They've executed quarter after quarter and delivered two consecutive years of record profits despite many external challenges. Needless to say, my optimism for GM's long-term potential remains very high.

I wanted to ask you, Paul, you mentioned that the pricing from the first quarter would reverse over the year, which seems close to neutral. However, it appears that there have been lessons learned over the past couple of years about creating a favorable mix and price upside while managing the business for greater profitability over time. I'm interested in hearing about the lessons learned and the products being launched. It seems like you're focusing on a higher mix with the mid-pickups and the HD refresh. Yet, Mary mentioned four crossovers priced below $30,000, which seems to take a different approach. How do you plan to manage this moving forward? Do you believe the current price level is something you could sustain, even if you give back what you gained in the first quarter, especially considering the growing competition from Tesla, which is aggressively lowering prices in the market?

Yes. Thanks for kicking us off today. I think there's a lot to unpack in your question. I'll just start by saying we need to be very conscious of the macro environment around us. And as we said, going into the year, we were planning somewhat conservatively in recognition of that macro. So about a 15 million units SAR with some normalization of incentives and pricing to a little bit lower demand. We certainly hadn't seen that in Q1. And despite that forecast, we're still comfortable taking up our guidance because I think we've reflected some of that in the back half. And certainly, if we see demand hold up, I would expect that we can outperform these results across the board. But we want to make sure that we're very conscious of the macro. When you ask about lessons learned, I think we certainly have really focused on vehicle margins. One of the important steps this quarter, that I'm not sure that the market digested all that well, was when we took down capacity for a couple of weeks at a plant to balance production to demand. When you look back on that decision to have inventories flat while we gained share and increased volumes over the time period, I think is one of those valuable lessons learned for the future. So on the trim side, clearly, what we are seeing is strong demand for the higher-end trims. Mary mentioned in her remarks the demand for the Denali Ultimate. This is a trim level that didn't exist a year ago, yet customers were asking for it, and you see they've responded with their orders. So I think there's lots to look at and lots of encouraging signs for how we think about the business going forward.

Yes, I would just add that it's essential to have the right portfolio for the market. We're performing exceptionally well at the high end, particularly in trucks that Paul mentioned. However, we have also successfully introduced the Trax and the Buick Envista at affordable price points, achieving profitability by reducing complexity and leveraging component scale across our vehicles. For example, the Trax utilizes only one powertrain. When considering market mix, it's important to cater to what consumers can afford while minimizing complexity, which has been a significant lesson learned. We will continue to implement this strategy across both our internal combustion engine and electric vehicle portfolios.

Could you provide a follow-up? The capacity utilization of 96% in North America mentioned in the financial data was calculated based on a two-shift schedule. Given the current absolute lines, that figure is actually higher than I expected. To maintain that level, we will need to add additional shifts. How do you plan to do that? And how do you balance this potential increase in volume that may occur later this year? Will you implement third shifts? It seems that while you're currently managing the business very effectively, an increase in volume could complicate things and make operations less optimal as you add third shifts, especially with the 96% capacity utilization figure.

Yes. So John, it obviously varies by vehicle type and where we are, and we've been running pretty much as flat out as we can on full-size SUVs and pickup trucks over time. So there's a little bit of the margins, but that's something that we've got to manage aggressively across the board. There are opportunities to be able to do that. Should we see demand pick up, I think you'll see us do that. Opportunities to make up for it are really centered around making sure that we've got those shift capacities as well as the parts and components and logistics to be able to move the inventory when it's finished too.

But fair to say that's all variable cost that comes in?

Absolutely.

Congratulations. I have two questions. First, Paul, could you share your thoughts on the earnings trajectory for North America for the remainder of the year, especially considering the strong start in April and any production increases planned for the trucks? Secondly, Mary and Kyle, congratulations on achieving 1.5 million driverless miles. Could you provide some insights on the safety and performance metrics for those miles compared to expectations? Additionally, how is this experience guiding your future scaling plans for Cruise?

Yes, thanks for the question. So on the cadence side, I think we alluded to on the full year guidance. The original guidance was that we thought the second half was going to be more challenging. So as we lap the price increases of last year, as well as building in a little bit of time, if there are any downturns in demand, that's where we kind of see it. I would say it's a little bit of a first half, second half story. We still got time to manage the second half. April has been very strong for us as well and has continued to be strong. So I would say that the risk still lies in the second half, but it's one that even with that out there, we felt comfortable raising our guidance today.

And Kyle, do you want to take the question on Cruise scaling?

Sure. Yes, I can do that. So we are in this rapid scaling phase right now. And on the safety side, our performance is strong. We're very happy with how that's going. We'll have some more to share on that soon. But for scaling, we've almost doubled our fleet size just in the last quarter, and we expect that kind of rate of improvement to continue. As we do that, it surfaces just one bottleneck after another that we continuously burn down and move out of the way so we can keep scaling up the fleet.

It's great to hear the comments about changing the EV margin narrative. I'm hoping you can maybe just broadly address the developments that we're seeing in North America and China in the EV market. It does look like competition is pretty aggressive in both areas. So I was wondering if anything that you're seeing is surprising to you? And are there strategic adjustments that you are making as you kind of observe the market dynamics in both markets, North America and China? Maybe you could just provide a little color on how you adjust strategy in real time.

Thank you for the question. Let's start with China. As Paul mentioned, the industry is quite challenging at the moment, still recovering from COVID. Pricing is very competitive. In terms of industry fundamentals in China, capacity utilization sits at 50%, with over 100 brands competing, which is not a sustainable situation. However, looking at the longer-term potential from a country perspective, there is still significant growth ahead, and I believe the market can remain strong with notable profitability potential. For GM, we are currently launching the right electric vehicles based on the Ultium platform. The years 2024 and 2025 will be crucial for us as we introduce competitive EV products priced well for profitability while also pursuing structural cost improvements in our operations in China. Given the current state of the industry and the high number of competitors facing pricing challenges, I believe we will navigate through this successfully. We have valuable brands in the country, and we will provide a strong EV portfolio there. Additionally, our internal combustion engine (ICE) portfolio is robust, which helps us manage pricing challenges. In the U.S., our main focus involves two key areas. First, we are working on getting our EVs into the market. We're launching battery plants, modules, assembly, and the vehicles themselves concurrently. From a Cadillac LYRIQ perspective, it marks the first vehicle utilizing Altify. We are in a well-structured ramp-up phase, with the battery cell plant operating efficiently, allowing us to concentrate on modules and packs. As we noted at the start of the year, the second half should see significant acceleration in our progress, and we are on track for that. We're committed to ensuring we get these vehicles into customers' hands, as we believe we have set attractive price points. The LYRIQ starts around $60,000, the Equinox is approximately $30,000, and the Blazer is in the mid-40s. These price levels are critical. The styling and technology of these vehicles are also promising. While we strive to launch these vehicles due to favorable customer response, we are also focused on cost management. The $2 billion structural cost reduction initiative is progressing well, and we will continue to seek out opportunities for savings. We are also looking for ways to improve margins for both ICE and EVs. There is a great deal of work happening in these areas. Our priority is to get the vehicles out and ensure we maintain the right pricing to cover costs. This remains our current focus, and it is essential for this year. As Paul and I mentioned, despite challenges with commodities and pricing pressures, we still believe we are well positioned to reach low to mid-single-digit margins by 2025.

Great. And just kind of keying off of the comment on costs, can you talk a little bit about the components of that $1 billion cost increase that we saw in North America? And obviously, over time, just given the amount of spending on growth initiatives, your structural costs are going to go up, certainly through mid-decade. Can you just provide some thoughts on how we should be thinking about the trajectory of that and the extent to which that changes breakeven points in the business?

Yes. Thanks, Rod. A couple of things. On costs in North America, obviously, we had lower pension income, a little bit higher commodities and logistics costs in particular. We also saw a bit of an uptick in warranty costs. I think that's probably a bit of an anomaly and won't repeat throughout the year across the board. We're still getting early traction on the $2 billion controllable fixed cost reduction, as we talked about, the biggest placeholder on that being the voluntary program. The $1 billion of savings will begin to accrue savings really probably late second quarter and then really start to get into bulk in the second half of the year. So that was a really good way to kick start that program, and we're grateful to the employees who chose to take that package. The other side is a lot of grinding around overhead, a lot of discretionary spend. We've got teams that are focused on getting savings in discretionary spend, IT-related costs, marketing-related costs across the board. We think that we can get traction on those things pretty quickly as well. So that's where we feel confident getting to about 50% this year, with the remainder accruing into 2024. This is important, not just for offsetting some of the near-term pressures, but some more of those competitive dynamics that we've talked about for the long term in an effort to continue to improve the margin trajectory of the company.

Just any color, Paul, on the kind of intermediate term outlook for structural costs? Is that something that you think can be sort of held at this level with the amount of capital that you're spending and the growth initiatives, you would think that there'd be some uplift to that.

Yes. We are experiencing some pressure in depreciation and amortization, but we discussed the $2 billion program that will help offset that and lead to savings. That is our goal. It may present some challenges, but we are confident that we can achieve it.

First, I wanted to ask about the share buybacks. It's interesting to see that you did share buybacks in the quarter. I assume that reflects your confidence in your liquidity profile. However, as you need to increase spending for growth and considering the uncertainty regarding the type of cycle normalization we're entering, how will you approach share buybacks?

In the first quarter, our cash generation exhibited cyclicality as the year progresses, but we are adhering to our capital allocation strategy, starting with reinvesting in the business. We believe we have optimized our offerings to include the right products, both internal combustion engine and electric vehicle, as we undergo this transformation. Additionally, we are concentrating on growth businesses like BrightDrop and Cruise, which we anticipate will lead to significant growth and margin expansion. With that said, we have decided to proceed with the share buyback and will continue to assess this on a quarterly basis throughout the year. We felt confident in our decision to raise guidance and are assured of our cash position to explore these opportunities further.

Great. For the second question, I understand you have set a 2025 target for low- to mid-single-digit EV margins. One of your competitors has been more open about their current EV status. Are you able to share more details regarding your contribution margins or absolute EBIT? If possible, that would be helpful. Additionally, considering the current market conditions, which relates to Rod's question, you have a target of 400,000 EVs. With the ongoing cost dynamics, will you remain flexible with that target, balancing profitability and volume, or will it strictly depend on supply, ensuring you stick to the 400,000 target?

Yes. So Dan, I'll start with that. Mary can jump in. I think in the early stages, we're going to be very firm with those targets across the board. Because when you look at the EV profitability, and we're not going to give a lot of details right now just because the numbers aren't that meaningful, when you look at the infrastructure investment that we've made already starting to depreciate that, not fully utilizing as we ramp up, et cetera, that will start to become more clear. So we need to be able to ramp up the capacity to realize the scale benefits and get to the pricing efficiency or the cost efficiency that we're targeting to be able to drive those margins going forward. It's one that we've got to make sure that we look to where the demand is. But as we look at the order books and the indications of interest for the vehicles that we've announced and the ones that we've taken orders for, we feel very confident about the demand there for the 400,000 and ramping up to the 1 million, and we'll continue to balance that. But structurally, we obviously have a lot of work to do on costs. We've talked about that. We've got a lot of work to do on scaling, and all of that is coming together and, as you can see, picking up speed pretty quickly as we get into the middle and back part of this year.

Paul, you said it well.

I want to follow up on Dan and Rod's question in a different way, and I apologize for that. You expect to achieve low- to mid-single-digit EBIT-adjusted margins in the EV portfolio starting in 2025, excluding the impacts of clean energy credits. Based on my calculations, this could result in margins that are higher than Tesla's. However, if you had to choose between reaching the 1 million production target or achieving the mid-single-digit margin and could not do both, my understanding of your comments is that you would prioritize volume. Is that the message you're conveying regarding the potential trade-off in economics?

Yes, Adam, I believe we are aiming for profitable growth. I'm not going to commit to specific outcomes in the second, third, or fourth quarter of 2025 as it will depend on the circumstances. Our portfolio is designed to be effective without duplicating our internal combustion engine offerings. We are intentionally selecting the right vehicles across various price points. Achieving high EV sales in the U.S. requires us to address customer affordability while being mindful of competition. I know you've mentioned this in your notes. We will be strategic in maintaining our brand, vehicle, and residual value. With our portfolio, we anticipate being well positioned to reach 1 million units with the desired profit margins. We plan to be agile, and we will create our own opportunities with the right products and ongoing cost reductions.

Yes. Thanks for the question. I mean, as we march towards profitability, which is a big focus for us, we've been looking for a lot of ways to do more with less and run really efficiently. Similar to what Paul mentioned across the board in terms of some of the structuring and streamlining inside of GM, we're doing those types of activities in Cruise as well and seeing some good results there. But really for us, the focus is on rapid scaling and therefore, getting incrementally closer to profitability.

So what would you say has been the biggest surprise this quarter on the positive? Something where either from a production perspective, cost, or even efficiency from development and specific on the EV side, especially given the transformation that's happening?

Great question. I've been extremely pleased with how our organization continues to find ways to drive efficiency. For instance, our screen configurations have been reduced by 60%, which helps streamline complexity for electric vehicles, and it also benefits internal combustion engine vehicles. We are focusing on ensuring we have the right models with the right features while taking full advantage of our software platform with Ultium and Altify. I'm proud of the team's accomplishments. I knew we had a strong product lineup, but the positive feedback from customers and dealers regarding our electric vehicle offerings boosts my confidence in our execution. Despite being in a year with a high number of launches, more than we’ve had in over a decade, our team remains committed to reducing costs. We've achieved significant reductions in our leadership structure and are continually optimizing operations to reduce complexity and increase agility. It’s not only about having the right products and minimizing complexity; we also have a culture focused on continuous improvement in terms of cost efficiency. Dan, those are the two aspects I’m most proud of.

My first question, Paul, I was hoping you could put maybe a little bit of a finer point in terms of what are the puts and takes you're assuming for the balance of the year in terms of, I guess, revenue and cost. I mean, it seems, based on your previous comments, maybe an assumption of some moderation in pricing in North America. But then I think your costs should be going down as a result of some of the headcount reduction. Is that directionally the right way? Are there any other important pieces?

Yes. We anticipate some adjustments in pricing. In North America, pricing contributed about $1.3 billion to our results last quarter. As we move past last year's price increases, we are planning for a return of some of that benefit, aiming to be net flat for the year, whether through incentives or pricing adjustments. There will be some giveback for the remainder of the year, most of which is expected to occur later on. If demand remains strong, we may exceed our current expectations. On the cost front, we are seeing some moderation compared to before. Initially, we expected year-over-year declines in commodities and logistics, but now we see those costs remaining flat. We've experienced some pressure in steel and logistics overall. Therefore, we project production growth of 5% to 10%, with pricing stabilizing for the year, forming the basis for our midpoint projections.

Okay. And then I guess as we're trying to figure out your progress towards some of the EV margin targets, and I understand you're not prepared to share some of the current economics. Are you able to tell us, I guess, what portion of the company's CapEx and engineering is currently spent on EV? And what would be the targets for that EV share of CapEx and engineering maybe by mid-decade?

Yes. So right now, we've said it's about 3/4 is on EV when you look at capital and engineering expense, we still have some mid-cycle vehicles that we're doing on the ICE side. But largely, the engineering and the capital is going into the EV side. That will obviously, as we work through the transformation, go to 100% over the next few years.

Can you clarify how the structural cost savings range is now trending for this year relative to the $2 billion GM's targeting to be achieved by the end of next year. And then just how should we be thinking about the associated cash costs tied to this effort for this year?

So fair question. As we said, when we launched the program last quarter, 30% to 50%, we expected to get in the first year. We're now guiding to the high end of that range. I think we'll come in about 50%. That ultimately is going to offset some of the pressures that we've seen. So we may not see a full $1 billion come off of structural costs, but certainly, we'll get the savings from where we were going forward. The biggest component of that is obviously the voluntary severance program. We disclosed about a $900 million cash charge associated with that. That will largely be spent this year. The rest of the things that we identified, whether it's travel, IT, marketing, or some of the complexity, we don't expect will have significant cash costs associated with it.

Understood. That's useful. Considering the fleet mix and the general trend in the U.S. automotive industry, the fleet channels have lacked product for nearly three years. Could this be contributing to the profitability of your fleet mix and the industry's fleet mix for this year, based on that situation?

Yes, it's a fair question. Obviously, we're seeing gains in fleet. I think the historical view of fleet as a discount chain to drive volume isn't really there anymore. We're seeing really strong pricing on the fleet side. We expect that business is going to continue to grow and be a contributor to our margins.

And thanks too for the earlier comments on China. I do want to ask a bit more around your operations there, though, just because, on the one hand, it seems like less of a needle mover for total company profits than it used to be with North America more profitable than before and consolidated IO flipping from loss-making to profitable. But on the other hand, the equity income there was the lowest in some time, apart from a couple of quarters impacted by COVID closures. So can you talk about any one-time disruptions you might have incurred there in the quarter, such as paradoxically maybe around COVID reopenings as the virus spread or any other one-time factor? And then what is it that you need to do now to restore profitability to where you want it to be? You're strong at the low end of the EV market. I'm guessing that's probably a more well-rounded higher-end EV lineup that you see the most opportunity to close the gap. So along those lines, can you help us in terms of like what that comment in the shareholder letter around 400,000, I think, Ultium EVs produced over '22 and '23 with 50,000 in the first half in the U.S., doubling in the back half? What does that kind of squeeze to for your anticipated Ultium ramp in China? And then how are you thinking about the profitability impact to your operations in China once those EVs do launch, maybe in light of some of the recent EV pricing actions in that market?

Great question. From a perspective of China, COVID certainly had an impact, particularly in Shanghai, which affected our business. However, it's essential for us to build on the success we've had with the Hong Guang Mini EV at the low end. We're repositioning the Baojun brand with SGMW to ensure it embodies the right characteristics for EVs, which is crucial for our execution within the SGM Wuling joint venture. In that venture, we need to launch the Ultium vehicles in-country, as they have already received a positive reception. We recently conducted a launch, and the market reaction was very encouraging. Our focus is on scaling these vehicles and getting them into the market. We believe that since they are new and well-received, we can achieve our intended pricing. We plan to remain adaptable. In addition to launching the Ultium EVs in China, we must also continue to implement aggressive measures to reduce structural costs, and we already have plans in place for that, which we will update on moving forward.

Okay. Great. Lastly, regarding the reiterated low to mid-single-digit EV margin target for 2025, I find it encouraging given the recent pricing developments. This target does not take into account any benefits from the energy tax credit related to the Inflation Reduction Act. When you announced the 2025 target at the EV Investor Day last November, it was based on the assumption that the act was not yet law, and there were uncertainties about whether the credit would be refundable against manufacturing costs or only applicable to taxable income. Additionally, you may not have finalized negotiations with your joint venture battery partner, LG Energy Solution, on how those credits would be distributed. Now that we have the details and the act has been passed into law, do you have any updated insights on how much those credits could enhance the low to mid-single-digit margin? Also, regarding the new joint venture with Samsung, you entered that partnership with the knowledge of the IRA. Have you determined how the credits would be allocated in relation to the joint venture? Did this consideration influence your decision to engage an additional partner?

So Ryan, I'll take a shot at that. I think when you look at the guidance that we gave around EVs back in November, yes, we drew sort of 2 lines around it, just to help show you where we're going. So the first was the low to mid-single digits without any tax credits. That's to make sure that we're focused on the vehicle profitability. We've obviously are in this for the long term, and we've got to make sure that we're hitting goals for the long term, assuming that we get a normal world where there aren't EV tax credits. The vehicle program is one thing. The second piece of it, on the tax credits themselves. We did say that about $3,500 to $5,500 per vehicle is what our estimate is. We said about $300 million this year that we would expect to get out of that. We're not going to comment specifically on any deals, how that might be shared, etc., across the board. Again, we feel confident about the tax credits in the short term, helping us to narrow that gap between that low to mid-single-digit vehicle profitability on the vehicle and getting it to ICE parity faster than we originally thought. So those are the ways that we're thinking about how we go to it. But longer term, the vehicles have got to stand by themselves.

GM seems to be leading in sort of securing the raw material supply. Curious what your thoughts are on the 2032 EPA targets that will require about 67% of vehicles to be EV by 2032. Do you think there's enough lithium to hit the targets? Do you think you could get enough lithium by then in the industry? And do you think we have enough capacity in place to get there, I guess, considering you've been pretty good about getting capacity so far.

I'll let Paul discuss lithium specifically. Regarding the EPA targets from 2027 to 2032, we are still analyzing them to understand their implications, and we will provide feedback as needed. We support efforts to combat climate change, but we need to delve into the details to ensure that this initiative is driven by customer demand, as anything else would not be effective. Paul, you can go ahead and talk about the lithium details.

Yes. So Colin, obviously, we've been doing a lot of work with multiple partners across the entire battery raw material spectrum. We think that's the prudent thing to do, both from a scarcity perspective while also making sure we get to a security of supply for our longer-term ambitions. We're not just looking at procurement contracts for this year or that year. We're looking at forming big long-term partnerships. Whether it's the work we did with Lithium Americas, the joint venture that we've done with POSCO, you see these relationships getting set up as structural. That's where we're really focused to do that because we've got the 1 million vehicle target in 2025. We said we're targeting 50% by 2030 and then ultimately, all electric vehicle production in 2035. So building that infrastructure now is where I think we're securing an advantage.

Got it. You're ahead of your $2 billion annual target for the next 2 years. I just wanted to check, does that incorporate the potential changes in the UAW contract, because that could sort of add some costs? And also, does the guidance contemplate things like the signing bonus and stuff like that in terms of cash flow that might occur this year from the UAW contract?

We aren't at the negotiation stage yet, and we do not plan to discuss negotiations publicly. Our focus is on building a strong relationship with the new leadership, understanding their challenges, and collaborating to address these issues for a positive outcome. We will not provide further comments on this matter. Historically, we have shown our ability to enhance efficiencies, and we will continue to do so. I appreciate all the questions today, and to reiterate what I expressed at the start of the call, I am confident that we have the right products and strategies to achieve solid results. There is a lot of work ahead, especially as we ramp up our electric vehicles, but I believe GM excels in execution, and we will proceed with that at a pace that may surprise many. Additionally, this year is significant for Cruise as they grow their commercial activities. With the upcoming electric vehicles, I see this as a breakout year for Ultium. I look forward to providing updates and thank you for your time today. Wishing everyone a great day.