通用汽車 (GM) 2013 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the General Motors Company first quarter 2013 earnings conference call.

  • During the presentation all participants will be at a listen-only mode.

  • Afterwards we will conduct a question-and-answer session.

  • (Operator Instructions).

  • As a reminder, this conference is being recorded Thursday, May 2, 2013.

  • I would now like to turn the conference over to Randy Arickx, Executive Director of Communications and Investor Relations.

  • Please go ahead, sir.

  • Randy Arickx - Executive Director of Communications and IR

  • Thanks, operator.

  • Good morning.

  • And thank you for joining us as we review the GM financial results for the first quarter of 2013.

  • Our press release was issued earlier this morning and the conference call materials are available on the investor relations website.

  • We are also broadcasting this call via the Internet.

  • Before we begin I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set.

  • The content of our call will be governed by this language.

  • This morning Dan Akerson, General Motors Chairman and CEO, will provide opening remarks followed by a review of the financial results with Dan Ammann, Senior Vice President and CFO.

  • Dan Akerson will then conclude the remarks portion of our call with some brief closing comments.

  • After the presentation portion of the call, we will open the lines for questions from the analyst community.

  • In the room today we also have Tom Timko, Vice President, Controller and Chief Accounting Officer; Chuck Stevens, CFO of North America; and Jim Davlin, Vice President, Finance and Treasurer.

  • With that, I would like to turn the call over to Dan Akerson.

  • Dan Akerson - Chairman and CEO

  • Thank you, Randy, and thank you all for joining us.

  • As we do every quarter, I will review some highlights and then Dan Ammann will take you through a more detailed presentation on our results.

  • Before I do that, I want to let you know that the segment reporting we are showing today reflects the successful implementation of what we call country of sale financial reporting.

  • What this means is from now on our automotive segment revenue and profits will be reported in the geographical regions where the vehicles are sold.

  • This new approach will give us improved visibility into our profit and revenue across the individual markets and product lines which, in turn, will help us optimize capital allocations and drive improved results.

  • As we walk through the numbers, you will see that what we are providing you with a -- apples to apples set of comparisons to prior periods using this new approach.

  • Let's turn to slide 2, which summarizes our performance.

  • Despite the mix of red and green arrows, this was a solid quarter for GM and we are much more of a formidable competitor now than we have been in more than a generation.

  • We are very much on plan financially as well.

  • Despite the competitive landscape, the volatility we have seen in several currency markets and Europe's ongoing challenges.

  • I won't read the entire slide, but I would like to draw your attention to a few key points.

  • First, we increased our global market share to 11.4%, which is up 0.2 points year-over-year.

  • The gains were concentrated in North America, Europe and international operations.

  • And what you're seeing is the result of several new successful product launches.

  • In addition, we are reported reporting EBIT adjusted of $1.8 billion, which is down $400 million compared to year ago.

  • When you look at the regional detail, you can see that Europe actually improved it EBIT adjusted results year-over-year.

  • North and South America were down slightly, and both GMIO and GM Financial were essentially flat.

  • Market conditions at GMIO outside China continue to be challenging.

  • You can also see on the slide that our adjusted automotive free cash flow was down quite a bit year-over-year, which Dan will cover in more detail.

  • As he will explain, we were impacted by lower cash earnings and the adverse timing of various items which we expect to reverse in the balance of this year.

  • Now let's turn to slide 3, which is a summary of other first quarter highlights.

  • Let's begin by recognizing GM Financial.

  • GM Financial already helps us meet the financing needs of customers and dealers in strategic and underserved markets in North America, all with very good risk-adjusted returns and a smaller balance sheet than other captive automotive finance companies.

  • As we look at our global growth strategy, we saw significant opportunity for them to help us with cars profitably around the world as well.

  • That is what drove us toward the acquisition of Ally's international operations.

  • We recently completed this acquisition in a majority of markets and we expect to close the remainder in a timely fashion.

  • Going forward, GM Financial will be able to provide finance -- financing in markets that represent roughly 80% of our sales volume.

  • Of course, our customers are the final arbiters of success and our momentum is building with each new launch.

  • In China, GM and its joint ventures had a record first-quarter sales, and March was the second best month ever.

  • We also began domestic production of the Cadillac XTS in February, which marks the start of our drive targeted to triple Cadillac's annual sales in China to 100,000 units by the end of 2015.

  • In the United States, meanwhile, Cadillac's 38% year-over-year increase in the first quarter was the largest of any volume brand, and Buick's 28% increase was number two.

  • The driving force at both brands is great new products like the Cadillac ATS and Buick Encore, which are both in segments where we didn't compete heretofore.

  • Another success story is developing in the United Kingdom, where Vauxhall grew in its first-quarter sales by 19% a year ago.

  • The entire UK market was up less than half that amount.

  • Strong early sales of Opel Mokka and the Opel Adam also helped drive these results, and both vehicles are off to a strong start in the rest of Europe as well.

  • In fact, we now have more than 100,000 Mokka orders and more than 30,000 Adam orders on the books.

  • Finally, in Brazil, the new -- all new -- Chevrolet Onix helped Chevrolet delivered a 3.2% first-quarter sales increase, almost more than double the market.

  • Progress in Brazil helped offset challenges in Venezuela due to geopolitical situation.

  • As we move forward, we are going to keep the pressure on.

  • In China our 2013 capacity is about 20% higher than last year.

  • And we are introducing redesigns of the Buick Excelle and the Cadillac SRX.

  • Our strength in China offsets weaknesses in our other GMIO consolidated operations.

  • On the other side of the world, the production of the all-new Chevrolet Impala has begun at our Oshawa, Ontario plant.

  • This car is designed to shift our sales mix from roughly 70% fleet to 70% retail over time.

  • At Cadillac we unveiled our new CTS at the New York Auto Show to rave reviews.

  • And we also unveiled redesigns of the Buick LaCrosse and Regal.

  • These new cars will give the Buick an essentially all-new US showroom by the end of this summer.

  • Perhaps our most important product news was the announcement of the Chevrolet Silverado 1500 will launch with carryover pricing and V8 fuel economy that is 1 mpg better than Ford's EcoBoost V6.

  • Together the Sierra and Silverado are winning combinations that should drive our average transaction prices through a combination of improved series mix and option penetration, along with lower incentives.

  • The crew cab models are in production and we'll bring other light-duty models online later this summer.

  • Finally, we cemented our global leadership in connected vehicles in February when we announced the automotive industry's largest deployment of 4G LTE mobile broadband.

  • We are going to roll out 4G LTE across all GM brands and regions starting in 2014 in the United States and Canada.

  • What makes our approach so innovative is we will offer built-in connectivity.

  • In other words, you will need a tablet or a smartphone to access 4G LTE in a GM product.

  • There are many more examples of GM's progress that I could cite, but I think the message is clear.

  • We are a very healthy Company that is getting stronger each quarter.

  • And in the product arena, we're playing offense and competing to win.

  • Now in the interest of time I'm going to turn the call over to Dan Ammann, who will review our quarter in detail.

  • After that I will return with some closing comments.

  • Thanks.

  • Dan Ammann - SVP, CFO

  • Thanks, Dan.

  • Slide 4 provides a summary of our first-quarter GAAP and non-GAAP results.

  • Net revenue for the period was $36.9 billion.

  • The decline from the prior year was partially due to $400 million in unfavorable foreign exchange translation.

  • In addition, while our deliveries to end customers were higher, our wholesales, which drive revenue, were down.

  • Our GAAP operating income was unchanged at $1 billion.

  • Net income to common stockholders declined $100 million to $900 million, and our fully diluted earnings per share came in at $0.58.

  • Our automotive net cash from operating activities was $500 million, a $1.8 billion decrease from the same period in 2012.

  • For our non-GAAP measures, EBIT adjusted was $1.8 billion in the first quarter and the EBIT adjusted margin was 4.8%.

  • Our adjusted automotive free cash flow was negative $1.3 billion for the quarter, a decline from 2012 due to lower earnings and timing-related items we will discuss later in the presentation.

  • Slide 5 identifies special items for the first quarter that had an impact on our earnings per share.

  • At the top of the slide, our net income to common stockholders was $900 million and our fully diluted earnings per share was $0.58.

  • As we advised in our 2012 calendar year earnings announcement, we had a $200 million impact from the devaluation of the Venezuelan bolivar and the first quarter.

  • This charge, plus the net effect of a few smaller items, had a $0.09 unfavorable impact on earnings per share.

  • On slide 6 we remind you of our consolidated EBIT adjusted for the last five quarter.

  • At the bottom of the slide, we list the revenue and margins for the same periods.

  • Our operating income margin for the first quarter of 2013 was 2.6%, which was equal to the same quarter in the prior year.

  • Our EBIT adjusted margin decreased 1 percentage point to 4.8%.

  • We next display the recent history of our consolidated wholesale vehicle sales, which were 1.6 million vehicles in the first quarter, slightly lower than the prior year.

  • We will discuss our new disclosure of this volume metric momentarily.

  • Our global market share increased 0.2 percentage points to 11.4% for the first quarter.

  • On slide 7 we provide an explanation of the $400 million decrease in year-over-year consolidated EBIT adjusted.

  • We earned $2.2 billion in the first quarter of 2012.

  • Volume was $200 million unfavorable primarily due to lower wholesale volumes in North America and Europe.

  • Mix was $100 million unfavorable.

  • Price was $200 million unfavorable in GMNA and total costs were $300 million favorable due to lower expenses in Europe.

  • Other was $300 million unfavorable due to foreign exchange.

  • On the next slide, slide 8, we discuss our transition to country of sale reporting that Dan previously mentioned.

  • Beginning with this quarter's earnings announcement, we will now report revenue and profitability in the automotive segment in which we sell our vehicles to our outside customers.

  • Previously our segment results included the impact of intersegment sales and profits.

  • This new approach improves the profit and revenue visibility across our markets, which will be helpful for managerial purposes.

  • Chevrolet Europe financial results will continue to be recorded within the IO segment to be consistent with how we manage the business.

  • This new approach of reporting automotive segment financial performance does not affect our consolidated results.

  • We will also now report wholesale vehicle sales volumes instead of regional production volumes.

  • This change fully aligns our disclosed volumes with our new country of sale reporting.

  • Slide 9 gives a summary of 2012 calendar year revenue and EBIT adjusted on a previously reported and on a country of sale basis.

  • Please note that under our revised methodology, we will generally no longer have revenue recorded in our Corporate and Eliminations, as our segment results reflect only sales to outside customers.

  • Slide 10 gives a similar comparison of the two methodologies for the first quarter of 2012.

  • The country of sale results for the other quarters of the previous year will be displayed on our upcoming segment charts.

  • Slide 11 gives our year-over-year EBIT adjusted performance by segment on a country of sale basis.

  • North America was down $200 million to $1.4 billion.

  • Europe improved to a $200 million loss.

  • The performance in IO was flat at $500 million, and South America recorded a breakeven performance, down $200 million for the same period in 2012.

  • GM Financial continued to deliver solid profitability with $200 million in earnings before taxes and our Corporate sector was $100 million expense for a total of $1.8 billion EBIT adjusted for the quarter.

  • We now move on to our segment results with the key performance indicators for GM North America on slide 12.

  • For the first quarter of 2013 our total US market share was 17.7%.

  • Our retail incentive levels on an absolute basis are higher for the prior year period.

  • On a percentage of ATP basis, our incentives for the quarter were 111%.

  • This puts us at 116% of industry average levels for the first quarter of 2013.

  • The increase from the prior year is largely due to increased incentives on full-sized trucks as we manage the transition to our all-new Chevy Silverado and GMC Sierra.

  • Turning to slide 13, we show North America's EBIT adjusted for the most recent five quarters.

  • At the bottom of the slide, revenue was $23 billion, down $200 million from the same quarter in 2012.

  • EBIT adjusted margin was 6.2% for the first quarter, down 0.9 percentage points from the prior year.

  • Our US dealer inventory was 744,000 units at the end of the first quarter.

  • The increase from the prior year was primarily due to our recently launched vehicles in new segments.

  • GMNA's wholesale vehicle sales were 829,000 units for the quarter, a 19,000 unit decrease from the prior year, due to production downtime we have taken to prepare for upcoming launches.

  • North American market share came in at 17.1%, which was an improvement from both last year and the prior quarter.

  • On slide 14 we provide the explanation of the $200 million year-over-year decline in North America's EBIT adjusted.

  • EBIT adjusted was $1.6 billion for the first quarter of 2012.

  • Volume was $200 million unfavorable due to the lower wholesale vehicle sales.

  • Mix was $100 million favorable due to our recent launches of the Cadillac ATS and XTS.

  • Price was $200 million unfavorable due primarily to higher incentives as we manage our full-sized truck transition.

  • Cost had no net impact as $100 million in reduced pension income was offset with $100 million in decreased material and freight costs.

  • This nets to EBIT adjusted of $1.4 billion.

  • On slide 15, GME reported an EBIT adjusted loss of $200 million for the first quarter, $100 million improvement from the prior year.

  • Revenue was $4.8 billion for the quarter, down from $5.3 billion in the prior year period.

  • The EBIT adjusted margin in the segment was negative 3.6%.

  • GME's wholesale vehicle sales for the quarter were 249,000 units, 17,000 less than the first quarter of 2012.

  • Our European market share in the first quarter was 8.3%, a small increase from the prior year.

  • On slide 16 we provide the major component of GME's $100 million year-over-year improvement in EBIT adjusted.

  • Despite the lower number of wholesale vehicle volumes -- volume rounded to zero impact.

  • Mix was $100 million unfavorable due to continued vehicle downsizing and unfavorable country mix.

  • There was no impact from price, although we continue to see competitive pressures in the European market.

  • Cost was $300 million favorable due to $100 million in lower depreciation and $200 million of savings between engineering expense and other fixed costs.

  • Other was $100 million unfavorable due to foreign exchange, primarily the weakness of the British pound.

  • This totals to Europe's EBIT adjusted loss of $200 million for the first quarter of 2013.

  • We now move on to GMIO's profitability for the prior five quarters on slide 17.

  • In the first quarter of 2013, EBIT adjusted was $500 million including equity income from our joint ventures.

  • Approximately equal to our performance from a year ago, as strength in our China JVs offset weakness in consolidated operations.

  • At the bottom of the slide GMIO's revenue from our consolidated operations was $4.8 billion.

  • The $200 million decline from first quarter 2012 was partially due to $100 million in unfavorable foreign exchange translation.

  • GMIO's EBIT adjusted margin from consolidated operations was a negative 1.4%, down 3.7 percentage points from the prior year.

  • This was due to pricing pressure in Australia related to the devalued yen, the 12% industry decline in India, as well as unfavorable mix and volume in the Middle East.

  • We expect some of these factors to continue to pressure performance of our IO consolidated operations in coming quarters.

  • Our net income margin from our China JVs was 11.7%, a 1.5 percentage point increase from the prior year.

  • GMIO's wholesale vehicle sales were 243,000 for the consolidated operations and 841,000 for our China JVs.

  • Our market share in the region was 9.6%, a 0.2 percentage point improvement from last year.

  • Our market share in the China market remained a very strong 15.2% for the first quarter.

  • Turning to slide 18, we provide the major components of the GMIO's year-over-year performance.

  • Volume had no net impact and mix was $100 million unfavorable, due primarily to unfavorable country mix.

  • Price was zero, because we were able to offset pressure in some markets with increases in Korea.

  • Cost also had no impact, as lower material and freight costs offset an increase in depreciation and amortization.

  • The change due to other netted to zero, as the $100 million increase in equity income was offset by unfavorable FX in our consolidated operations.

  • On slide 19 we look at South America's EBIT adjusted for the last five quarters.

  • At the bottom of the slide, revenue was $3.7 billion in the first quarter, a $200 million decrease from 2012, which is more than explained by unfavorable foreign exchange translation.

  • The EBIT adjusted margin in the segment was a negative 1%.

  • GMSA's wholesale vehicle sales were 233,000 units, 4000 less than the first quarter of 2012.

  • South America market share was 17.2% in the quarter, a 1.1 percentage point decline from their prior year, although, as Dan mentioned, our market share in our core market of Brazil was favorable year-over-year.

  • On slide 20 we look at the components of the $200 million decline in profitability in our South America segment.

  • The impact due to volume was zero, as reductions in wholesale vehicle sales in Venezuela, Colombia and Argentina were offset by gains in Brazil.

  • Mix was zero, as an unfavorable country mix was offset by favorable product mix driven by our new vehicle launches.

  • Price was $100 million favorable as we take action in Argentina and Venezuela to partially offset inflation in those markets.

  • Cost had no impact and other was $200 million unfavorable due to $100 million unfavorable foreign exchange in Brazil and Argentina, and the absence of a gain from a 2012 acquisition.

  • This totals to a breakeven performance for South America in the first quarter.

  • Slide 21 provides our walk of adjusted automotive free cash flow for the first quarter.

  • After adjusting for noncontrolling interest, preferred dividends and undistributed earnings allocated to Series B, and deducting GM Financial, our automotive income was $1.1 billion for the quarter.

  • We had $200 million in non-cash special items, and our depreciation and amortization was a $1.4 billion expense.

  • Working capital was a $1 billion use of cash, reflecting typical working capital seasonal trends.

  • The $300 million decline in this category year-over-year is primarily a function of timing impacts of lower production in North America.

  • Pension and OPEB cash payments exceeded expenses by $300 million in the quarter.

  • Other was an $800 million use of cash, a $700 million change from the prior year, due to fewer vehicles in service with our rental car customers and the timing of cash payments related to prior quarter incentive accruals.

  • This totals down to automotive net cash provided by operating activities of $500 million.

  • We had $1.9 billion of capital expenditures in the quarter and a $100 million true-up contribution related to or 2012 salary pension annuitization deal, for a total adjusted automotive free cash flow of negative $1.3 billion.

  • On slide 22, we provide a summary of our key automotive balance sheet items.

  • We finished the first quarter with $24.3 billion in cash and current marketable securities, and $11 billion in available credit facilities, for a total available liquidity of $35.3 billion.

  • Our book value of debt was $5.2 billion and the book value of our Series A preferred stock remained at $5.5 billion.

  • Our US qualified pension plans are now underfunded by $13 billion and our non-US pensions are underfunded by $13.3 billion.

  • Our unfunded OPEB liability was $7.7 billion at the end of the first quarter.

  • Slide 23 provides a summary of our auto financing activities.

  • GM Financial reported their results this morning and will be holding an earnings conference call at noon.

  • Our US subprime penetration in the first quarter came in at 7.7%, modest decline from their prior year and closer to the industry penetration.

  • Our US leased penetration increase 8 percentage points to 20.6% in Q1, as we took advantage of our higher residual rates and new Cadillac launches to significantly close the gap to competitive leasing levels.

  • Lease penetration in Canada was at 9.6%, up 0.7 percentage points from the prior year.

  • GM new vehicles as a percentage of GM Financial originations rose to 51%, and GM Financial's percentage of GM's US consumer subprime financing and leasing was 26% in the quarter.

  • GM Financial's annualized net credit losses remained low at 2.6%, and earnings before tax was $180 million for the first quarter, similar to last year.

  • On slide 24 we are updating our estimate of the Company's full year effective tax rate to be closer to the high 30s in percentage terms.

  • Please note we calculate the effective tax rate on income before taxes and before equity income basis, and also exclude the impact of special items.

  • Our effective tax rate was 35% for the first quarter of 2013 and 12% for the prior year period.

  • The rate for the entire 2012 calendar year was 15%.

  • Now I will turn it back to Dan for his closing remarks.

  • Dan Akerson - Chairman and CEO

  • Thanks, Dan.

  • We have covered a lot of ground this morning.

  • But I hope you can see that we are systematically and successfully implementing our plan to grow profitably around the world.

  • There is a new vitality here at GM and it is represented in all of our brands.

  • We are aggressively addressing issues that have held us back.

  • We have maintained our fortress balance sheet and improved our financial flexibility, and our new products are connecting with customers.

  • With that, turn it back to you, Randy.

  • Randy Arickx - Executive Director of Communications and IR

  • Okay, thanks, Dan.

  • Operator, we are ready to start the Q&A.

  • Operator

  • (Operator Instructions).

  • Rod Lache, Deutsche Bank.

  • Rod Lache - Analyst

  • A couple of things, one is -- was hoping you can talk about Europe a little bit, and cost savings.

  • In Detroit you suggested you would have about $600 million of lower depreciation.

  • So that is maybe half of the $300 million cost reduction that you had this quarter, but you also indicated about $300 million of other restructuring savings.

  • It looks like in this quarter at least, it was maybe twice that.

  • So, any thoughts on the outlook for cost?

  • And also related to Europe, just any additional color on how you expect the year to play out as the inventory correction behind you and so forth.

  • Dan Ammann - SVP, CFO

  • Right, so just starting at the end there, we came into the year with the Company inventory in pretty good shape, but a little bit heavy on the dealer inventory side.

  • So we have worked through a good chunk of that in Q1 here.

  • And in terms of the more general trends in the business, I guess what I would say is that we are very much on plan with the actions and objectives that we laid out back on our third-quarter call last year, both in terms of what we are trying to do on the top line as well as on the bottom line.

  • The cost performance in Q1 was quite strong.

  • I would say that there are some timing items that came into Q1 that amplify the cost savings that you're seeing there, and we will see some normalization as we move through the year.

  • But everything that we have talked about in terms of our objectives on the cost side and on the product side, we are achieving.

  • Obviously, that is what we control.

  • The things we don't control are the overall market environment and the overall industry there, and that remains quite challenged.

  • Rod Lache - Analyst

  • Okay, and just secondly, if you could talk a little bit about -- the China JVs obviously are showing some pretty good profitability at this point.

  • And you talked about some very aggressive growth and spending plans over the course of the quarter.

  • Does that -- the mix of those two, how does that play out vis-a-vis dividends?

  • Are you able to sustain the historical policy of dividending the prior year's earnings?

  • Or will the capital spending acceleration have any impact on that?

  • Dan Ammann - SVP, CFO

  • I would say as a general matter we will be at or near the prior year's earnings going forward, so no fundamental change to that at this point.

  • Rod Lache - Analyst

  • Okay, and just one last thing.

  • You're still expecting improvement in South America for the full year?

  • Dan Ammann - SVP, CFO

  • Yes, the first quarter -- the story there was really a function of Venezuela and everything that has been going on there.

  • Venezuela, as I think you know, is a profitable market for us and others.

  • We had very little production in Venezuela in Q1 due to geopolitical obstacles, if you like.

  • So that impacted the Q1 results.

  • We see a path to get that back on track.

  • And, importantly, the business in Brazil, which is really the biggest market there, obviously, has performed well and is picking up a fair amount of the slack there.

  • So, bottom line, we expect to build, as we have said before, build on last year's progress for the region for the year.

  • Rod Lache - Analyst

  • Great, thank you.

  • Operator

  • Adam Jonas, Morgan Stanley.

  • Adam Jonas - Analyst

  • So you called out that your Chinese capacity should be up 20% year-on-year.

  • Was wondering if you could give us a similar figure of how much your capacity will be up in North America year-on-year, and how much it will be down in Europe year-on-year?

  • Chuck Stevens - CFO GM North America and GM South America

  • From a North American perspective, I guess the biggest driver on any capacity change year-over-year would be what is happening with the truck plants.

  • And as we have talked about before, that is going to be relatively flat.

  • So I don't see a significant change in capacity.

  • As a matter of fact, if you look at Q1 with some of the downtime that we had in Arlington, our capacity utilization was a bit below 100%.

  • So I don't see a fundamental shift in our overall capacity as we go through this year.

  • Dan Ammann - SVP, CFO

  • And I would say on Europe, obviously, the main action in terms of installed capacity there will come at the end of next year with Bochum.

  • At the moment we are optimizing shifts and so on to keep demand capacity, as opposed to the installed capacity, optimized for the volumes that we see.

  • So, no fundamental change there either.

  • Adam Jonas - Analyst

  • Okay, and if I can follow up on that question about the Japanese yen, the topic came up yesterday on the sales call a little bit, kind of seeing some initial signs of some aggression in terms of discounting and price reductions.

  • I believe Dan Akerson, you were on the tape earlier today also pointing out that that is an issue.

  • Maybe it was you, Dan Ammann.

  • Can you give a sense of how much your market share may have benefited over the past few years as the yen has been so strong, and, perhaps, how much of a head wind this could be as the Japanese either improve their product or the value proposition?

  • Dan Ammann - SVP, CFO

  • I would say it is really hard to go back and try to -- we have gone through the exercise, but it is hard to go back and divine exactly how much market share movement is attributable to what.

  • So the way we look at it is we compete in the marketplace every month -- month in and month out.

  • We obviously keep an eye -- we have our strategies.

  • We have our vehicle portfolio.

  • We have our launch activity.

  • We have all the things we are doing.

  • We keep a close eye on the competitive dynamics, whether it is currency driven or something else driven, and adjust course as we need to on a month-to-month basis, at least at the tactical level.

  • So we will keep an eye on what people are doing here.

  • The market share dynamics through the first four months of the year, you have clearly seen them as we have, which have been favorable to us and to some of our domestic competitors.

  • We will see how people react and how they play it out.

  • So it is just too soon to make a call, really.

  • Dan Akerson - Chairman and CEO

  • Adam, this is Dan Akerson.

  • I think it varies by a market.

  • For example, in the US where some of our Japanese competitors are manufacturing a lot of product here in North America, would be -- and their supply chain will be, to some extent, and it will vary by competitor, sourced in North America.

  • And where you see, and where I am particularly vigilant, is where does -- how does it impact us into lesser developed countries, emerging market countries where both US and Japanese competitors are exporting into, out of a base that might be in Japan or might be in Korea or China or wherever.

  • So, as Dan said, it is hard to isolate this and give it a broad brush.

  • It is very specific to -- by country by region.

  • Adam Jonas - Analyst

  • Thanks, Dan.

  • And just one quick housekeeping follow-up.

  • With your change of your reporting structure of revenues where vehicles are sold, rather than produced, can you confirm where you now recognize royalties from the China JVs, the imported cars into China and spare parts into China, can you tell us are those then accounted for outside of the China JVs in the regions?

  • Or are they -- has that been moving around?

  • Thank you.

  • Dan Ammann - SVP, CFO

  • There is no real change between what is in the China net income or China equity income line versus what is in the balance of the business.

  • Royalties are part of the overall engineering expense that are allocated around the segments, based on revenues and so on.

  • So, no change between China and the rest of the Company.

  • Adam Jonas - Analyst

  • And spare parts, also, in the regions as well?

  • Dan Ammann - SVP, CFO

  • Same story.

  • Adam Jonas - Analyst

  • Thank you.

  • Operator

  • Chris Ceraso, Credit Suisse.

  • Chris Ceraso - Analyst

  • I wanted to talk a little bit about price in North America.

  • It was a head wind in Q1, but you mentioned as the new truck ramp up you should get some improvement in ATPs.

  • At what point do you think we will see price flip to a tailwind in North America?

  • Chuck Stevens - CFO GM North America and GM South America

  • Yes, as we talked about back in January and most recently in March, as we think about 2013, we expect price on carryover products to be a headwind primarily related to the transition on truck.

  • So I would expect that headwind on carryover products to continue through the sell down period in Q2.

  • But as we start to come out with new products like the Impala, the K2, which we are launching to start a production earlier this week, we would start to see some offset with pricing on new product.

  • And I would expect to see some of that rolling in in Q2 but really be more second half weighted.

  • Chris Ceraso - Analyst

  • Okay.

  • And then, I guess, a related question, if I understood your discussion about the cash flow correctly, the $800 million of other that was a negative was cash going out the door for incentives, where you had accrued previously.

  • So wasn't in the P&L.

  • Are we going to see that effect happen in subsequent quarters as you move trucks off the lot that have these heavier incentives on them, and the cash goes even though they have already been accrued?

  • Dan Ammann - SVP, CFO

  • Yes, I would say that the cash flow cadence, some of the $800 million was attributable to what you described.

  • I would say the cash flow cadence is going to be a little bit back and forth, more than usual, as we move through this year because of the unusual production cadences.

  • If you looked at the Q4 to Q1 to Q2 production cadence, usually it is up and then up again.

  • And this year we have had a different cadence on that.

  • So that moves payables around.

  • It moves receivables around.

  • It moves incentive accruals and cash amounts around.

  • So there is a fair bit going on in terms of cash flow timing.

  • Chris Ceraso - Analyst

  • Okay, I am sorry.

  • Can you run through that again?

  • What is the timing that you expect and how does it differ from your typical seasonality?

  • Dan Ammann - SVP, CFO

  • Well, typically, Q1 is our seasonally weakest quarter for cash flow.

  • That remains the case this year.

  • In fact, it is exacerbated this year due to some of the production cadence timing.

  • Obviously, we had lower earnings in the quarter, so that translates straight through to cash flow.

  • But the biggest chunk of the impact relates to some of these timing items which will reverse during the course of the year.

  • Chris Ceraso - Analyst

  • Okay.

  • And then just one last item on Europe.

  • I think you mentioned that you drew down inventory.

  • Does that mean you're going to be building some in the future, which helps earnings in subsequent quarters relative to Q1, or now you feel like you're at a more comfortable level?

  • Dan Ammann - SVP, CFO

  • I think we are about where we'd like to be, and again, obviously, it is a function of what the market does over the coming quarters.

  • Chris Ceraso - Analyst

  • Okay, thank you.

  • Operator

  • Patrick Archambault, Goldman Sachs.

  • Patrick Archambault - Analyst

  • A couple of quick ones.

  • First, on North America capacity, just taking a multiple year view, I think on a straight time basis IHS has you at about 80%.

  • And I understand that not everybody looks at it on the straight time basis.

  • But starting with that, how are you thinking about the capacity needs as you get to peak volumes?

  • It sounds like you're not looking at too much in the way of new facilities.

  • But how should we think about that impact on incremental margins as you rollout third shifts over time, that sort of thing, taking a multiyear view?

  • Chuck Stevens - CFO GM North America and GM South America

  • Perhaps IHS's capacity utilization was on a three-shift basis.

  • Right now, on a two-shift basis, we are running at about 100%.

  • As we go forward and think about industry in the US at [16.5 million, 17 million], we would expect to be able to meet that by increasing the number of our facilities on three shifts.

  • Today we have eight or about 50% of our facilities on three shifts.

  • Obviously we have the capability to take that up.

  • Our expectations would be to be running at 120% to 130% utilization rate going forward as measured on a two-shift basis or closer to 100% on a three-shift basis.

  • Obviously, that has a significant impact on thinning fixed costs, if you can run your facilities on three shifts versus two shifts.

  • I'm not going to provide an estimate of that on a go forward basis, but that would be clearly what we would want to do to get more fixed cost utilization going forward.

  • Patrick Archambault - Analyst

  • Okay, and then it sounds like there is a lot of variable cost that has to come into the system, obviously, if you are increasing these shifts, but it would be dwarfed by the efficiencies on the fixed side.

  • Is that the right way to think about it?

  • Chuck Stevens - CFO GM North America and GM South America

  • Absolutely.

  • Patrick Archambault - Analyst

  • Okay.

  • And then one follow-up, if I can, just really quickly.

  • On Europe, the pricing, which was flat year-on-year, can you just give us a little bit more on that?

  • Is that an indication that things may be stabilizing at albeit fairly low pricing levels in the region?

  • Or is there product and other things in there that are helping that?

  • Dan Ammann - SVP, CFO

  • Certainly there is product in there that is helping that for us.

  • The pricing environment remains quite competitive, as you would expect given the situation there.

  • We are working product line by product line, market by market, to optimize our pricing -- taking price where we can, giving it up where we need to, in order to optimize.

  • We have much better visibility and much better tools, frankly, to manage some of that now than we've had previously, and that is allowing us to further optimize where we are.

  • Patrick Archambault - Analyst

  • Okay, great.

  • Thank you very much.

  • Operator

  • Colin Langan, UBS.

  • Colin Langan - Analyst

  • I was just wondering when you show the walk for North America, costs were flat year-over-year.

  • But you do have the K2XX rolling out.

  • Why is that flat, given I would have thought that would have been up, given the size of the launch?

  • And should we think of that, maybe, being a headwind from a cost as we go into Q2 and Q3?

  • So, any color into maybe how that launch cost played out through the year?

  • Chuck Stevens - CFO GM North America and GM South America

  • Let's start by talking about the calendar year.

  • Again, consistent with what we talked about back in January, we expect year-over-year fixed costs to be up primarily because of incremental D&A, incremental marketing, some pension income headwinds, and some manufacturing cost preproduction and startup.

  • I would expect most of that to roll through in Q2 and Q3 as we really start to ramp up the K2XX and the plants through the rest of the year and start the marketing activities.

  • Specific to Q1, we had, as Dan mentioned earlier, a $100 million headwind related to pension income.

  • We also had $100 million headwind from a fixed cost standpoint on manufacturing, primarily related to the downtime in Arlington.

  • Those were offset by favorable performance in variable cost, $100 million in material and freight, and on the round $100 million in warranty related costs as the quality and base vehicle warranty gets better for us.

  • So, good performance on the variable cost.

  • We still had fixed cost headwinds, as we expected, and I would expect the fixed cost headwinds to increase as we go through Q2 and Q3 and hit the real launch cadence.

  • Colin Langan - Analyst

  • Okay, thank you for that color.

  • And looking at Europe, I guess there is an optimism to annualize the Q1 results.

  • How should we think about the cadence?

  • I think you touched on this before, but I think you mentioned that you expect Europe losses to be reduced by a third to a half.

  • Is this still the right range to be thinking about?

  • Or do you think or maybe doing a little bit better given how Q1 came in?

  • Dan Ammann - SVP, CFO

  • As I said, I think, earlier, we laid out a plan in Q3.

  • We gave some perspective back in January for the year.

  • What we have seen in the first quarter is on plan and consistent with the execution of those objectives both in terms of the topline and the bottom line.

  • As I mentioned earlier, cost performance was a little stronger, attributable partially due to some timing benefits that came into the first quarter.

  • So I would say we are on track relative to the objectives that we have previously laid out.

  • But this is the first quarter into year and there are huge uncertainties, obviously, it in relation to the European macroeconomic environment and how that is going to unfold.

  • So where we end up will be a function of the things we do control, which we feel quite good about, and a function of the things that we don't control, which are quite uncertain.

  • Colin Langan - Analyst

  • Okay, and just two last quick questions.

  • Where will the -- part of Ally has closed.

  • What is the -- any estimate of the impact that should have and the timing of when we will see that impact?

  • And, also, in terms of the tax rate, it seems to be in the high 30%'s for this year based on your guidance.

  • Is that normal?

  • Or should we think when we go past this year, it comes back down again based, I think, you said mid-30%'s in the past.

  • Dan Ammann - SVP, CFO

  • On the Ally piece the results will roll in consistent with the closing.

  • So we closed the biggest chunk of this back on April 1, so that will come into the second quarter results.

  • The overall outlook and run rate that we have talked about previously still holds in relation to that.

  • On the tax rate, we gave the perspective for this year.

  • Obviously we will see as we move through the year how that evolves and how that rolls into next year.

  • But I would point out, importantly, our cash tax rate was unchanged from -- essentially unchanged from last year and will continue to be in that 10%-ish range from a cash tax point of view, notwithstanding the fact that the accounting GAAP tax rate will be in the upper 30%'s.

  • Colin Langan - Analyst

  • Okay, all right.

  • Thank you for your help.

  • Operator

  • John Murphy, Bank of America Merrill Lynch.

  • John Murphy - Analyst

  • Just a first question on the change in the reporting.

  • Presumably this isn't just an accounting exercise.

  • I'm just trying to understand, as you shift to the country of sales methodology here, what the shift internally is, as far as accountability and targets are for your sales organization, and really what this means as far as measuring performance internally and driving the business.

  • Dan Ammann - SVP, CFO

  • The main reason we are doing this is for internal managerial purposes.

  • As you have seen in what we have laid out for you this morning, the external -- at the segment level, the changes aren't that dramatic between the previous approach and this approach.

  • When you get below that to the country level and to the product line level, we now have dramatically improved visibility by market, by product line from a profitability point of view.

  • And that will allow us to get much more focused on decisions ranging all the way from capital allocation to sales accountability, profitability accountability.

  • So this is a much greater and more significant internal impact than it is externally, and we are seeing significant benefits from the improved visibility already on an internal basis.

  • John Murphy - Analyst

  • That is helpful.

  • Dan Akerson - Chairman and CEO

  • This is Dan.

  • I would say if you go back a couple years in time, we weren't quite sure what some of our products were in terms of profitability.

  • I know that may sound a bit strange, but we did not have the clarity.

  • And therefore we didn't have the accountability that we have now.

  • So this, in my opinion, in terms of managing the Company is a huge step forward.

  • John Murphy - Analyst

  • It is incredibly encouraging.

  • I appreciate that.

  • Second question, just on raw materials in general, if we look back over the last year there is about $1000 drop in raw mats going into a vehicle.

  • Suppliers that we talked to all are pointing their fingers at the automakers as taking the benefit, because there is indexing and escalators and all that stuff.

  • I'm just curious what you're seeing on the raw mat front, if you are getting the benefit from that already, or when that ultimately should come.

  • And particularly given there is such a severe pullback through the beginning of this year.

  • Dan Ammann - SVP, CFO

  • Yes, we are seeing the benefit of that.

  • We have taken some of that benefit in Q1.

  • It really depends commodity by commodity, supplier by the supplier, agreement by agreement as to how much is indexed versus how much isn't, what the lag time is and so on.

  • But we certainly had some benefit in Q1, and based on what current spot rates are, we would expect to continue to have some benefit.

  • But commodity prices have proven to be very volatile.

  • I think they are all up again today from where they were.

  • So that is a spot driven, market driven element.

  • We obviously keep a close eye on it, take the benefits where we can and try to mitigate increases if and when they come.

  • John Murphy - Analyst

  • Okay, and then just lastly, if we look at the current consensus EPS for 2013, it is in the ballpark of [$3.35].

  • I am sure that will change today.

  • But then if we think about really the cash earnings, it is at least [$4.35], if not greater.

  • I think one of the confusions around the stock is that it looks like it is trading in north of 9 times earnings, but in reality it is trading south of 7 times earnings on a cash EPS basis.

  • Would you ever consider communicating maybe more explicitly, a cash earnings number, so the multiples would be more comparable to history, because I think a lot of people are being confused by the simplistic P/E and not understanding of the actual cash P/E is much cheaper than it is -- than it looks like?

  • Dan Ammann - SVP, CFO

  • That is something that we would hope that the sophisticated sell-side community would help educate the investors on.

  • But, hopefully, we have been quite clear about the difference between -- and one of the main drivers, obviously, is the GAAP versus cash tax rate.

  • We have tried to be as explicit as we can in helping people understand that.

  • I would say from our dialogue with our -- your larger investors -- we haven't seen a lot of confusion on that front.

  • But it is a useful perspective and we will take that into account.

  • John Murphy - Analyst

  • Great, thank you very much.

  • Operator

  • Brian Johnson, Barclays.

  • Brian Johnson - Analyst

  • I would like to hear from Dan Akerson on a point he made on the early slide about the 4G connectivity.

  • Basically I'm looking for what is the business case, not just the vision around what you're doing with connected car with that.

  • Because at least at first glance, you have other competitors vowing just use the consumer smartphone as their link into the cloud.

  • And on a cost per vehicle basis, you can certainly see the argument for that.

  • So what is really the business case you see for this move?

  • Dan Akerson - Chairman and CEO

  • We think going forward that this new demographic coming into the marketplace -- please recall, I have children now that -- I have grandchildren, I should say, that have only grown up in a world with smartphones.

  • In our estimation, instead of waiting for trends to overwhelm us, try to look over the horizon.

  • Having come out of the technology and communications area, the bigger the pipe, the more you are rewarded into the future.

  • So when we look at what we can do with a 4G pipe into a car, you can change the business model almost entirely.

  • You may be able to have a real revenue-generating opportunity into the car with -- when you come up, for example, what happens if -- when the logo shows on your screen and it says brought to you by Allstate.

  • How many times is that going to pop?

  • And how much can you get from Allstate or -- I don't want to pull out one insurance company.

  • Children, as you take them to school, of course, you got to watch distracted driving.

  • We are very aware of that.

  • But in the backseat you can literally go from your living room -- the children can pick up the same show that was on television or watch anything they want, because this is going to deliver incredible amount of downloaded capacity in different formats.

  • So, at very little marginal cost, we open up what I think are potentially lucrative lines of business that don't exist in a safety and security, or what you see on a -- that is not integrated into other forms of media that exist in the household that can transition right with the car.

  • So (multiple speakers) it is a different model, but you have a different demographic that is different than you and I, that is going to -- we already see it in some of our market research -- that put this high on their scale of -- on their list of what is important in buying a car.

  • Brian Johnson - Analyst

  • And have you made any progress with your former colleagues in telecom on bundled data plans that would include SIM card in the connected car (multiple speakers) at modest additional cost?

  • Dan Akerson - Chairman and CEO

  • I don't want to get into the contract.

  • But I will tell you, having come out of that industry, the change that we have affected between these two and the modules we will be putting into these cars, it will affect -- it will be a 4G LTE combination that will allow us to switch our entire fleet overnight.

  • We've never been able to do that.

  • So we have flexibility that allows for our service providers to have to compete for our business, not only in terms of price but features and functionality.

  • Brian Johnson - Analyst

  • Okay, thanks.

  • Operator

  • Ryan Brinkman, JPMorgan.

  • Ryan Brinkman - Analyst

  • Congrats on the quarter and thanks for taking my call.

  • There was a question earlier on your strong China JV margin, which 11.7% looks to be the strongest in a couple of years now.

  • But can you maybe help us a bit more on the drivers of that improvement, because previously I think we have been hearing on these calls about modest margin compression on a tougher pricing environment over there.

  • So what accounts for that nice rebound in 1Q?

  • And was there maybe anything lumpy to report in there?

  • Dan Ammann - SVP, CFO

  • Yes, I would say, first of all, it is one quarter.

  • But, second of all, the business continues to grow over there.

  • And as you understand as well as we do, this is a business that has meaningful fixed costs and a fair amount of operating leverage to it, so if you could grow the business and keep some control from a pricing point of view, you do get operating leverage.

  • And that is some of what we have seen.

  • How that market shakes out over the balance of the year, we will need to watch.

  • Clearly people are adding capacity and it is a very competitive marketplace, but we have grown -- we have outgrown the market there for the last little while and we hope to continue to do that.

  • Ryan Brinkman - Analyst

  • Okay, then on slide 16, you mentioned that the cost in Europe was a $300 million positive swing, helped just $100 million by the lower D&A.

  • So can you talk about the non-D&A savings there?

  • I know you have taken out a lot of salaried people in [Russe Le Sheim] et cetera.

  • Is that the primary driver?

  • Or are there other structural cost reductions to report?

  • And then just second to that, is there anything you can say now in terms of savings from the Bochum closure, now that we have a better idea of how that is going to shake out?

  • Dan Ammann - SVP, CFO

  • We are not saying anything about the Bochum closure at this point in time, other than to refer you back to the overall fixed cost reductions that we have previously talked about.

  • In relation to the first quarter Europe cost performance, some of that, a bit over $100 million of that is the D&A reduction as a result of the impairment we talked about last time.

  • There is a good chunk of fundamental cost savings in there between engineering and some of the other manufacturing items.

  • As I mentioned earlier, there are some other timing items that fell into this quarter which would further help that number.

  • But I would say more fundamentally we are in aggressive cost control mode in Europe, frankly across the whole Company, hopefully as you have seen in our results.

  • But in Europe in particular it's a very tough market environment.

  • Ultimately we don't totally control the topline, but we do control what is going on cost wise and we are staying aggressive on it.

  • Dan Akerson - Chairman and CEO

  • Let me just jump in there.

  • First of all, we are pleased with our progress, but we are still losing money in Europe.

  • A lot of it.

  • And so we have a lot of work to do.

  • Our objective is clearly to break even and then profitability.

  • But I think we said from the outset, it is -- okay, we have to match production with demand.

  • But we also have to reduce cost across the board in everything we do, whether it is in IT, advertising, human resource cost, across the board.

  • And that is -- we are trying to do that globally, but we are particularly focused on it given the situation in Europe, the uncertainty over the next year or two on a macroeconomic basis.

  • We have to protect the business as much as we can.

  • So, although, I think this is good progress, we have a lot of work to do yet.

  • Ryan Brinkman - Analyst

  • Okay, thanks.

  • Then maybe just my last question could be much ado about nothing, but it looks like you filed an S-3 last Friday.

  • Is that just a generic shelf, or is there anything you can tell us more about it or what it might imply?

  • And then second to it, it seems that the registration, of course, does not encompass any primary shares and there would be no proceeds to the Company.

  • But it does say in one location that proceeds received from the exercise of warrants could be used for general corporate purposes.

  • So can you also maybe remind us on the procedure of warrant exercise here and whether you could instead use the net share settlement method, or otherwise use any cash proceeds from such exercise to repurchase stock, as is sometimes the case?

  • Thanks.

  • Dan Ammann - SVP, CFO

  • Yes, the ability to net share settle the warrants is a function of the individual warrants, and the warrants that are referenced there are those that are held by the selling stockholders.

  • And so the Registration Statement more generally, this was a procedural issue.

  • We wanted to put that up, as we said, in a press release concurrent with filing that shelf, that we are not aware at this time of any specific plans by any selling shareholder to execute an offering.

  • But we just wanted to take that mechanical step to have it ready.

  • Ryan Brinkman - Analyst

  • Okay, congrats again on the better results.

  • Operator

  • Joe Spak, RBC Capital Markets.

  • Joe Spak - Analyst

  • Maybe just one more quick one on Europe.

  • You mentioned the volume was flat despite wholesale is down.

  • It looks like they were down 6%.

  • Can you just explain that a little bit, what exactly -- how did that happen?

  • Dan Ammann - SVP, CFO

  • It is because we look at it on a country by country basis and aggregate it up that way.

  • So, while total may be down, it's country by country in terms of the financial impact.

  • Joe Spak - Analyst

  • Okay, and then just one more on Europe.

  • Is it possible to give a days inventory number of cross all of Europe?

  • Dan Ammann - SVP, CFO

  • It is.

  • I don't have that number right at hand.

  • I guess what I would say to you is that -- and I think I mentioned it before -- we came in here in good shape on a Company-owned inventory basis, a bit heavy on the dealer inventory side.

  • And I would say we have worked that down so that we feel, based on the current market environment at least, that we are in a reasonable place on both.

  • Joe Spak - Analyst

  • Okay, and then last one from me.

  • Back in Detroit for GMIO you said EBIT absolute would be up, margin would be down.

  • And just given the change in your reporting structure, it looks like GMIO actually had the largest change.

  • Is that still accurate?

  • Or is there any change to that outlook for the year?

  • Dan Ammann - SVP, CFO

  • We are not updating our outlook specifically here on this call.

  • But I guess what I would say is that we did have some challenges in the consolidated operations in Q1 as evidenced by the result there in Q1.

  • Those were offset by our strength in China.

  • We are one quarter into the year.

  • We will need to see how those relative trends shakeout over the balance of the year.

  • Joe Spak - Analyst

  • Okay, excellent.

  • Operator

  • Itay Michaeli, Citigroup.

  • Itay Michaeli - Analyst

  • So, wanted to go back to the 4G LTE conversation and hope we can talk about how OnStar fits into that rollout.

  • Is this an opportunity for you to perhaps, significantly, grow OnStar's global subscriber base?

  • I know it has gone very, very well in China and here in the US and Canada.

  • And could that be a segment that you may consider eventually disclosing separately?

  • Perhaps investors see just a subscriber-based business and potentially high margins there.

  • Dan Akerson - Chairman and CEO

  • Quite honestly, I hadn't thought about it, because this doesn't happen until end of 2014, but that is a good question.

  • We do want to change this from primarily a safety and security business to one that is much more feature-rich and where we get -- we get some real money from it.

  • We have never been properly compensated, in my opinion, having come out of this industry, in terms of what we provide to the carriers.

  • For example, with the new contract when it kicks in, every time we implement we get $20.

  • We used to get nothing.

  • And we will actually revenue share in usage on that service.

  • So this is a little bit different than the model of just having the carrier plug into your jack in the car.

  • The carrier gets all of it.

  • All of a sudden we are part of the solution and not just an intermediary, where we start to share revenue in different ways with the carrier.

  • So we are not in the wireless business, but we are facilitating a customer and we are facilitating content, so there is a whole new frontier for us that I think will have margins that will exceed what you have typically seen in the manufacturing business.

  • Operator

  • There are no further questions at this time.

  • I will now turn the call back to Randy Arickx.

  • Please continue with your presentation or closing remarks.

  • Randy Arickx - Executive Director of Communications and IR

  • Thank you, operator, and thank you everyone for joining us this morning.

  • Operator

  • Ladies and gentlemen, that does conclude the conference call for today.

  • We thank you for your participation and ask that you please disconnect your line.