通用汽車 (GM) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Motors Company second-quarter 2013 earnings conference call.

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

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

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, July 25, 2013.

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

Please go ahead, sir.

Thanks, operator.

Good morning and thank you for joining us as we review the GM financial results for the second quarter of 2013.

Our press release was issued this morning and the conference call materials are available on the Investor Relations website.

We are also broadcasting this call on the web.

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, Executive Vice President and CFO.

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

After the presentation portion of the call we will open the line for questions from the analyst community.

Also joining us today are Tom Timko, Vice President, Controller, and Chief Accounting Officer; Chuck Stevens, CFO North America; and Jim Davlin, Vice President, Finance and Treasurer.

Let me turn the call over to Dan Akerson.

Thank you, Randy, and thank you to everyone joining the call today.

Once again, General Motors has delivered a strong quarter driven by our ongoing success in North America and China, progress in Europe, and some very well-received new vehicle launches around the globe.

As you can see on slide two, we increased our second-quarter global deliveries by about 4% from a year ago.

Our net revenue increased by $1.5 billion.

EBIT adjusted was up 7% to a robust $2.3 billion and adjusted automotive free cash flow was $2.6 billion.

For the remainder of the year we will continue to focus on delivering great value to our customers, executing flawless vehicle launches, and addressing business challenges head on.

Looking deeper into the quarter, our aggressive rollout of new products in North America is continuing to drive improved results, especially for Chevrolet and Cadillac.

In Europe, lower costs, higher volumes in the United Kingdom, and strong new vehicles, like the Opel/Vauxhall Mokka, helped narrow our year-over-year loss.

But a demand-driven recovery isn't insight yet, so we have to keep working on cost, complexity, and brand building.

In China our joint venture has delivered record sales and our results have been particularly strong in the midsized, upper medium, and luxury and SUV segments.

Finally, GM Financial continues to grow side-by-side with our core vehicle business and deliver very good risk-adjusted returns.

Strong results in these businesses are helping to offset difficult conditions in other parts of the world, especially in GMIO outside China and GMSA outside of Brazil.

Dan Ammann will go in more detail on these issues, but I will see we are working hard to improve the things we can control, just like we are doing in Europe.

For example, Holden has introduced a redesign of its flagship VF Commodore sedan, which sets a new class standard for performance and refinement, and Chevrolet is launching the Spin crossover Indonesia, Thailand, and other ASEAN markets.

We are working to improve the competitive position in GM Korea, which is under pressure because of the higher cost and the strength of the won versus the Japanese yen.

The launches of our redesigned large SUVs in early 2014 will improve our competitive position in the Middle East region.

And in South America we are working to offset the impact of currency declines through pricing.

Now let's turn to slide three, which summarizes some other highlights for the quarter.

I want to start with our quality, because it is the report card that matters most to our customers.

The good news is third-party data shows that we are right on track.

For example, in 27 years no American company has earned the top spot in the J.D. Power Initial Quality Study.

Let me repeat that, no American company has earned the top spot in the J.D. Power Initial Quality Study until this year when GM took top honors.

In fact, the GMC and Chevrolet were the highest-ranked non-premium brands in the study.

Just yesterday Buick Encore and three Chevrolets -- the Volt, Sonic, and Avalanche -- each earned awards in the J.D. Power Appeal Study, which measures what customers like about their new vehicles.

Chevrolet actually had more segment winners than any other brand.

Just today Consumer Reports announced that the all new 2014 Chevrolet Impala was their highest-rated sedan with a score of 95 points.

That puts the Impala on par with cars like the Tesla Model S and fully competitive with the Audi A6.

Results like these are changing perceptions about our brands for the better and you can see that trend reflected in our sales results.

For example, Chevrolet had record global sales in the second quarter and for the first half of the year.

That makes 11 straight quarters of higher year-over-year sales.

Chevrolet's performance is a broad-based, both geographically and from a product mix standpoint.

Deliveries in the United States and China, the brand's two largest markets, were up about 6% through June.

And we have seen strong sales of the SAIL, Cruze, Malibu, and Captiva, which account for about 25% of Chevrolet's global volume.

Keeping this momentum going and making sure we deliver a consistent brand experience around the world drove the recent appointment of Alan Batey as the Global Head of Chevrolet.

As Alan can tell you, there is plenty of headroom for Chevrolet to keep growing on the strength of these new products alone.

For example, this year we will launch the Chevrolet Tracker small crossover in Brazil.

We are continuing to rollout the all new Chevrolet Silverado in North America.

The launch of the Silverado and the GMC Sierra has gone well so far and things couldn't be better thanks to the nascent US housing recovery.

The new crew cab models were the first to reach the market earlier this summer.

The quality and craftsmanship has been outstanding and the reaction from our dealers and customers has been very good.

The demand drivers are equal parts of value, fuel economy, capability, refinement, with a healthy dose of pent-up demand.

The next all new models in our launch cadence are the extended cab models which began shipping to dealers this week.

Cadillac's year-over-year growth has been good thanks to the all new ATS and XTS.

These two products made Cadillac the industry's fastest-growing brand in the first half of the year with sales up more than 33%.

But Cadillac's opportunity is no longer limited to just the United States.

There is a proverb that says the best time to plant a tree was 20 years ago and the second-best time is now.

This perfectly captured the opportunity we see for Cadillac in China.

This year we began local production of the XTS which helped drive a 35% first-half sales increase for the brand in the Chinese market.

And just last month we broke ground on a new Cadillac assembly plant in Shanghai.

This plant is a linchpin of our strategy to triple Cadillac volumes by 2015 and achieve 10% share in the Chinese luxury segment by the end of the decade.

This will give us much-needed scale and further diversify our earnings base.

As we put these growth plans in place we are taking great pains to make sure the Company's internal systems, processes, and controls are robust.

For example, we dedicated an all-new GM-owned datacenter this quarter and we broke ground on a second mirrored, fully redundant facility that will go online in 2014.

This will allow us to continue winding down 23 leased data centers, facilities if you will, around the globe.

Between April and June GM Financial completed the acquisition of Ally Financial European operations.

We also created an all-new Global Business Services Group to streamline our back office processes including finance, HR, facilities, real estate, and indirect purchasing.

We benchmarked some of the world's best companies as part of this effort, so we fully expect that we will meaningfully reduce our overhead costs.

These are just a few examples of our progress, but I chose them because they show that GM is an inherently stronger company than it was even a year ago, both operationally and on the showroom floor.

That will become clearer as Dan Ammann walks you through our detailed results over the next few minutes.

With that, Dan, the floor is yours.

Thanks, Dan.

On slide four we again remind you of the results for the quarter.

Net revenue for the period was $39.1 billion.

The $1.5 billion, or 4%, increase from the prior year includes a $400 million unfavorable impact from foreign exchange.

Our GAAP operating income was unchanged at $1.8 billion.

Net income to common stockholders declined $300 million to $1.2 billion and our fully diluted earnings per share came in at $0.75.

Net income from the quarter includes an increase in tax expense of $0.5 billion, or $0.29 per share, compared with the second quarter of 2012.

Automotive net cash from operating activities was $4.5 billion, a $700 million increase from the same period in 2012.

For our non-GAAP measures EBIT adjusted was $2.3 billion in the second quarter and the EBIT adjusted margin was 5.8%, up from a year ago.

Adjusted automotive free cash flow increased $900 million to $2.6 billion for the second quarter.

On slide five we disclose the special items that impacted earnings per share.

Net income to common stockholders was $1.2 billion and our fully diluted earnings per share was $0.75.

Impacting these numbers was a $200 million loss related to the acquisition of GM Korea preferred shares.

This charge had a $0.09 unfavorable impact on earnings per share.

I would also like to point out that due to a recent increase in our common stock price we now use the if-converted method to calculate EPS.

More information on this change in methodology is available in our supplemental slides.

On slide six we show our consolidated EBITDA adjusted for the prior five quarters.

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

Our GAAP operating income margin for the second quarter was 4.5%, slightly lower than the prior-year period and our EBIT adjusted margin increased 0.2 percentage points to 5.8%.

Our consolidated wholesale vehicle sales were 1.6 million vehicles in the second quarter, a slight increase from the prior year, and our global market share decreased 0.1 percentage points to 11.5%.

On slide seven we explain the $200 million increase in year-over-year consolidated EBIT adjusted.

Volume was $300 million favorable, due primarily to higher wholesale volumes in GM North America.

Mix was $500 million unfavorable spread across North America, Europe, and GMIO.

Price was $400 million favorable due to strong performance in North America and in South America.

Costs were $200 million unfavorable as we maintained tight cost control and Other was $100 million favorable.

Slide eight gives our year-over-year EBIT adjusted performance by segment.

GM North America increased $100 million to $2 billion.

GM Europe had a much improved performance, but still recorded a $100 million loss.

The performance in GMIO deteriorated by $400 million to $200 million, driven by consolidated operations.

And our South American business had a slightly improved EBIT adjustment of $100 million.

GM Financial improved $300 million in earnings before taxes and our Corporate sector was $100 million, for a total EBIT adjusted of $2.3 billion in the second quarter.

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

For the second quarter of 2013 our total US market share was 18%.

Our retail incentives on an absolute basis were higher than the prior-year period, but slightly lower than the prior quarter.

Our incentives for the quarter were 11.2% of ATP, which puts us at 114% of the industry average.

We expect further improvement in these numbers through the balance of the year.

Slide 10 shows GMNA's EBIT adjusted for the most recent five quarters.

At the bottom of the slide revenue was $23.5 billion, up $1.9 billion from the same quarter in 2012.

EBIT adjusted margin was 8.4% for the second quarter, a slight decline from the prior year.

Our US dealer inventory declined sequentially to 708,000 vehicles, approximately flat to a year ago despite higher sales.

GMNA's wholesale vehicle sales were 809,000 units, 49,000 higher than the prior year.

North America market share came in at 17.3%, which is a 0.1 percentage point decline from the prior-year period but higher than the previous three quarters.

On slide 11 we provide the explanation of the $100 million year-over-year increase in GMNA's EBIT adjusted.

Volume was 400 million favorable because of increased wholesale volumes, driven by growing industry and our successful vehicle launches in new segments including the Buick Encore and Cadillac ATS.

Mix was $200 million unfavorable due to our recent entrance into the small crossover and mini segments and lower sports car production as we prepare for the launch of the 2014 Corvette Stingray.

Price was $300 million favorable on the strength of our recently launched vehicles including the Chevy Impala.

Cost was $400 million unfavorable, primarily due to fixed cost increases related to manufacturing launch costs, reduced pension income, and increased depreciation and amortization.

On slide 12 GME reported an EBIT adjusted loss of $100 million for the second quarter and $300 million improvement from the prior year.

Revenue decline 7% to $5.2 billion for the quarter; however, the EBIT adjusted margin in the segment improve 5 percentage points to a negative 2.1%.

GME's wholesale vehicle sales for the quarter were 276,000 units, 14,000 less than the prior year.

And our European market share was 8.5%, down 0.3 percentage points from the prior year but a small increase from the prior two quarters.

On slide 13 we provide the major components of GME's $300 million increase in EBIT adjusted.

Volume was $100 million unfavorable due to a declining industry.

Mix was a $100 million headwind because of negative car line mix and price was $100 million unfavorable due to continued competitive pressure in the industry.

Cost was $400 million favorable due to $200 million in lower depreciation and amortization and $200 million savings and other fixed costs, including engineering costs and other ongoing initiatives to transform the business.

Other was $100 million favorable due to foreign exchange.

This totals to GME's EBIT adjusted loss of $100 million for the second quarter of 2013.

Although we are pleased with the favorable year-over-year performance, we expect financial performance in GME results to exhibit some seasonal decline in the second half of the year.

We now move on to GMIO's profitability for the prior five quarters on slide 14.

Second-quarter performance was affected by strength in China, volume price mix pressures in the consolidated operations, and the impact of several warranty and recall campaigns.

EBIT adjusted was $200 million, including $400 million in equity income from our joint ventures.

At the bottom of the slide GMIO's revenue from consolidated operations was $5.3 billion.

The $600 million decline from last year reflects the challenges in our consolidated operations where our EBIT adjusted margin was a negative 3.6%, down significantly from the prior year.

Our net income margin from our China JVs remains strong at 9.4%, approximately flat year over year.

Region's wholesale vehicle sales were 268,000 units for the consolidated business, 772,000 units for our China JVs.

Our market share in the Asia-Pacific region was 9.3%, a small improvement from last year due to the growth in our China sales.

On slide 15 we provide the major components of GMIO's year-over-year performance.

Volume was $100 million unfavorable due to a 27,000 unit decline in wholesale volumes in our consolidated operations.

Mix was $200 million unfavorable due primarily to country and product mix.

And price was $100 million unfavorable as the devalued yen continued to drive competitive pressures across multiple markets in the region.

Cost was a $100 million headwind and Other improved $100 million because of the higher equity income from our China JVs.

Going forward, we expect our China business to continue to be strong.

In regard to consolidated operations, we should see the benefit of important launches in the region in the second half, and we are developing and implementing actions to adjust the ongoing challenges in the marketplace.

Slide 16 provides a look at GM South America's performance in recent quarters.

Revenue improved $200 million to $4.3 billion despite a $400 million headwind from foreign exchange.

EBIT adjusted margin in the segment was 1.3%, nearly a full percentage point higher than the prior year.

South America's wholesale vehicle sales were 278,000 units, up 13,000 from the prior year.

South American market share declined slightly to 17.1% in the quarter, although our deliveries were greater than the prior year.

In the six months ended June 30 we had the number one market share in South America with 17.2%.

On slide 17 we look at the change in year-over-year EBIT adjusted which rounded to zero.

Volume and mix had no impact.

Price was $200 million favorable due to actions we are taking in Venezuela and Argentina in response to inflationary and FX pressures.

Cost had no impact and Other had a $200 million adverse impact due to unfavorable foreign exchange in Brazil, Argentina, and Venezuela.

This totals to $100 million EBIT adjusted in South America for the second quarter.

Slide 18 provides our [walk] of adjusted automotive free cash flow for the second quarter.

As a reminder, our net income to stockholders was $1.2 billion.

After adjusting for non-controlling interests and Series A preferred dividends and deducting GM Financial earnings, our automotive income was $1.2 billion.

We had $200 million in non-cash special items and our G&A expense was $1.5 billion.

Working capital was a $300 million source of cash.

The variance from the prior year is due to production scheduling differences and a reduction in inventory as we continue to drive working capital efficiency.

Pension and OPEB cash payments exceeded expense by $100 million in the quarter and Other was a $1.3 billion source of cash, $400 million decline from the prior year.

This totals to automotive net cash from operating activities of $4.5 billion.

We had $1.9 billion of capital expenditures in the quarter, giving us an adjusted automotive free cash flow of $2.6 billion.

On slide 19 we provide a summary of our key automotive balance sheet items.

We finished the second quarter with $24.2 billion in cash and current marketable securities and $10.6 billion in available credit facilities for a total available liquidity of $34.8 billion.

Our debt was $4 billion.

The decline from the prior quarter was due to the redemption of GM Korea preferred stock and the elimination of $700 million of GM wholesale financing upon the consolidation of the Ally international operations.

Series A preferred stock obligation remained at $5.5 billion.

And on a reported basis, our US qualified pension plans were underfunded by $12.9 billion and our non-US pension plans were underfunded by $13.1 billion.

Our unfunded OPEB liability was $7.6 billion in the second quarter.

Slide 20 provides a brief summary of our auto financing activities.

GM Financial has already released their results and will hold their earnings conference call at noon.

Our US subprime penetration in the second quarter was 8.6%, about flat to the prior year.

Our US lease penetration increased further, 4.6 percentage points, to 20% in Q2 as we continue to leverage our financing relationships and capabilities and improve residual values to drive toward industry competitive levels in keys segments.

Lease penetration in Canada was at 9.2%, up slightly from the prior year.

GM new vehicles, as a percentage of GM Financial originations, rose to 68% in the quarter with the closing of a portion of the Ally/IO transaction.

And GM Financial's percentage of GM's US consumer subprime financing and leasing was 25% in the quarter.

GM Financial's annualized net credit losses remained low at 1.4% and earnings before tax was $254 million for the second quarter, reflecting both continued strong performance in the North American business and the acquisition of the IO business in the quarter.

Finally, on slide 21, I would like to emphasize several initiatives we are focusing on in the second half of 2013.

We must continue to successfully execute the launch of our new vehicles with design and performance that will consistently exceed customer expectations.

We will be focusing on reducing cost and complexity of the business to ensure we can deliver winning vehicles at a price that works for the customer and a cost that works for us.

We will build on the momentum we have received with our recent IQS award from J.D. Power, and we will develop and execute initiatives to improve our performance in the consolidated operations of GMIO.

Now here again is Dan Akerson with a few closing remarks.

Thanks, Dan.

Quickly, as you can see from the quarter, strengthening our brands, improving quality, and streamlining the organization is starting to pay off.

Not only are GM products the best in memory, our business is much more resilient in the face of economic headwinds.

I say resilient, not immune.

There will always be currency shifts, recessions, or unrest somewhere in the world that we have to manage through, but at GM the short term challenges are no longer the tail wagging the dog.

That is the benefit of our fortress balance sheet, an aggressive new product program, and our systemic attack on the issues that hold us back including complexity and cost.

With that said, we are now happy to take any questions you might have.

(Operator Instructions) John Murphy, Bank of America.

Good morning, guys.

First question on Europe, given the great performance there.

Is there any consideration in moving forward your target from 2015 to 2014 on your breakeven there?

Because everything you are doing is real self-help.

You are not getting a lot of help from the market itself; you are really creating this performance on your own.

I'm just curious what your thoughts are there.

John, we don't have an updated target at this point in time.

We are a few quarters into our plan and executing to our plan.

The market environment remains quite challenging, as you are well aware, so we are pleased with the year-over-year improvement we have shown through the first half of the year.

We do typically have, as you know, some seasonal challenge more in the second half so we are going to work to -- going to work our way through that.

But we are pleased with performance so far, but still a long way to go particularly in the macroeconomic environment.

John, we are pleased, not satisfied.

We are going to continue to push, both play offense and defense.

The new product rollouts will help on offense, but we are going to continue to focus on taking cost out of the business.

It has been great so far.

Second question, Chuck, maybe on pickup pricing.

It has been much stronger than expected.

I know on the new truck versus the old truck you are keeping MSRP's flat, but obviously that is not the full story on average transaction prices.

I am just curious; is there the possibility that you might get even better pricing than you initially expected on the new truck in the back half of the year, because the pricing on the outgoing truck has been better than expected?

Yes, John, I think it is too early to make predictions about whether we are going to have upside or not on the new truck.

We have just launched it in the month of July.

About 20% of our sales will be the new truck; it is just the crew cab.

I would say that what we have seen in the market over the last three or four months with the stronger segment share, our performance with the outgoing GMC 900, and the reduction in incentives would give us some cautious optimism that the pricing will hold up and we may have an opportunity.

But it is really too early to tell on that truck.

Then, Dan, just on the pension on slide 19, the $12.9 billion underfunding for the US plan.

Does that include a remeasurement for discount rates or any other actions that have been taken year-to-date?

No, it does not.

Okay, good.

Then just lastly, Dan Akerson, I mean you talked about in your opening comments the Global Business Services Group.

And it sounds like it's a great idea and it sounds like it's at the early stages.

I am just curious; as you work through that process is that going to be more of a cost-saving exercise or is that going to create more efficiency through the organization?

I'm just trying to understand really what the true aim of that is and what we can expect out of it.

I have seen this done when I was on the Board at American Express.

We benchmarked off them, we benchmarked off of P&G.

What you do is you consolidate your back-office systems and try to get more efficient and take costs out, and it does have organizational implications.

Okay.

And the timeframe for that, is there targets?

We just started in earnest.

We are really in the early stages of it, but over the next year or two we hope to take -- well, I don't want to give a number, but we have strong ambitions, strong targets to reduce our cost.

Okay.

Thank you very much.

Adam Jonas, Morgan Stanley.

Just a first question on GMIO.

Can I ask kindly to give a bit more detail about where the execution issues are, maybe between India or Australia or other factors?

And also within that question, has the change in the segment reporting shifted a little bit of profit out of GMIO and -- into GMIO from the GM Korea ops?

Has that also been an impact here that you would like to quantify?

Yes, so let me address the second piece and then I will go back to the first piece.

The short answer to the second piece is, no, there is no impact on the year-over-year comparisons because last year is represented on the same basis.

Back to the first question, there is really three aspects to this that I identify.

One is there are a couple of markets that underperformed from a volume point of view, the overall market.

So think about the softness in India as an example; Russia to some extent.

The second dynamic is more sort of Southeast Asia, including Australia, where we have a lot of our competition from the Japanese manufacturers who are sourcing to those markets out of Japan.

Whereas we are sourcing more out of Korea, so there has been a currency impact there.

Then the third element, more on the cost side, is we have had a handful of our warranty and recall items hit us in the second quarter.

So the way to think about this going forward is we will continue to have some impact from all of those things probably rolling into Q3, but as we exit the year we do have some important launches ahead of us in the second quarter.

We do hope that the warranty recall-related items will fall away and obviously we will need to address whatever the competitive dynamic is in the market from a currency perspective as we go.

(multiple speakers)

So the warranty recall seems to more fall on execution and the others are more market conditions and competition.

Can you quantify the warranty recall?

Is it $100 million or $200 million, order of magnitude?

I would say it's the -- more than half of the impact is market related and less than half is the warranty and other expense related.

Okay, that is great.

The question on North America; would you describe big picture that the truck change year on year in the quarter was a net positive, negative, or neutral when you factor in benefits on pricing versus kind of the delta year on year with the changeover?

Knowing that you were also doing some changeover preproduction and deferred maintenance last year as well.

What was the balance of the truck isolating, if you could, directionally?

From a financial perspective, net slightly negative in the quarter impact.

There was $300 million of manufacturing, preproduction, and start up.

We only produced about 50,000 K2s, so I would say from that aspect slight negative.

Overall truck performance in the quarter quite positive from a share standpoint.

Our Retail segment share; primarily on the strength of the GMT900, Retail was up 140 basis points year-to-date.

So I would say that had a benefit and help from a pricing perspective as well on the GMT900.

That is very helpful, thanks.

Last question, just on GM Financial credit losses.

Would the credit losses still have improved year on year even excluding the Ally/IO addition?

Thanks.

Yes is the short answer to that.

Great.

Take care, guys.

Colin Langan, UBS.

Great, thanks for taking my questions.

Can you just give an update on your guidance for North America?

Do you still expect the second half to be stronger?

I think you started the year saying that the percentage margins should be flat year over year.

Then I guess sort of related to the question on the K2XX; the $300 million in preproduction costs will that go away in the second half or do you expect similar costs there?

On the first question, I don't think we are really changing our guidance.

Our guidance was aggregate EBIT would be up year over year with the cadence more back-end weighted, and I think the plan is being executed to that and nothing has changed versus that.

From a preproduction startup perspective, relative specifically to the K2XX in Q3, we are going through the same launch process we went through with in [Sallal] in Q2.

So those costs will be present in Q3 and I would expect them to start to mitigate a little bit going into Q4 with the launch of the heavy duties and full-size SUV in Q1 next year.

Okay.

You had very good cash flow in the quarter.

Any thoughts on dividends for common shareholders?

What factors would sort of drive that decision to add a dividend?

We have no decision on dividends at this point in time.

What we have outlined from a capital allocation point of view is, first and foremost, we are going to be reinvesting in product and the product portfolio.

And you have seen us do that over the last year or two.

We are obviously looking to preserve our fortress balance sheet.

We took some action in the quarter along those lines retiring some expensive debt that we had internationally, which is obviously accretive to the bottom line.

And as we look out over the next 12, 18 months we do have a significant opportunity later next year to redeem the very expensive preferred that we have outstanding to the VEBA Trust, so that is something that we will want to address.

And balancing with all of that is returns to shareholders.

We obviously took an aggressive move at the end of last year with a significant stock repurchase to help facilitate the U.S. Treasury exit.

And we are going to look to keep a balanced approach between those three buckets -- between reinvesting in the business, strengthening the balance sheet, and returning cash to shareholders.

That balanced approach that you have seen so far will continue.

Okay.

Just lastly, any update on your partnership with Peugeot?

I know there was some media reports I guess a month or so ago claiming it that you may be interested in increasing your stake.

Any thoughts on that would be helpful.

Our focus right now is on executing the alliance that we have discussed over the last year-plus.

We have product programs that are being actively worked on, logistics work that is being done, purchasing work that is being done, and that is really where the focus is right now.

Okay.

Thank you for your help.

Brian Johnson, Barclays.

Good morning.

Vis-a-vis South America we did see improvement yesterday from one of your competitors there.

I don't think we have seen the Fiat numbers yet.

But just what is the path to sort of getting back the 2%, 3% profits there?

And since you are in a product rollout, why aren't we seeing some of the benefits?

Or are we just seeing that swamped by currency or things in other regions?

I would say there is really a couple dynamics.

As you point out, we do have essentially a brand-new product portfolio in Brazil, which is clearly the biggest market.

And that is performing the way that we want it to and we are in the marketplace getting the results that we are looking for.

There has really been two dynamics that have impacted us to date this year that were not fully baked into the plan, if you like, from the outset.

The first being the just political unrest that we are seeing in Venezuela which has disrupted our operations on multiple occasions through the year.

That is an important market from a profitability point of view for us.

The second component is there has obviously been some very substantial moves on an FX basis.

While we are significantly localized in the market from a production point of view, we still have some meaningful amount of imported components and so on into the market, and so when we have the Brazilian currency, for example, devaluing in the way that it has been does cause an impact to us.

So portfolio working well, Venezuela disruption making an impact, and FX making an impact.

Last year we asked a similar question and you talked about the process to localize component sourcing.

Is that underway and is there a flip over point in model years or anything we can look forward to, or is it just going to be very gradual?

That is going to be a sort of component-by-component activity.

It is underway, but further to go on that.

Okay, thanks.

Rob Lache, Deutsche Bank.

Good morning, everybody.

Just first to follow up on that last question.

As far as the outlook for Latin America in the back half, are there any factors, maybe product related, that could offset a bit of a weaker macro environment?

Obviously, we will be looking at what is going on in the marketplace from a pricing point of view as to what we can recover on the FX side there, so we will pay close attention to that.

Then the Venezuela situation will be a variable.

But from a product point of view, we are finishing up the launch activity through the first half so it wasn't all -- we didn't come into the year with the whole portfolio launched, but we are getting close to that point now.

So we will get a little bit of tailwind from that in the second half.

Okay.

But relative to what we see in Q2 it might accelerate a little bit, is that fair?

Yes, there is a possibility.

Again, it is going to be a function of Venezuela situation and currency and what we can offset in the marketplace.

Can you pass along any thoughts on China?

What is the impact of a bit more moderate GDP growth and the Shibor issues there?

Is there sort of a range of expectations that you might have if GDP growth there has a six handle instead of an eight handle?

Any kind of broad macro thoughts on that market for you?

Our industry view is still to see the industry up high single digits for the year, 7% to 9%.

We are obviously participating nicely in that, both from a share point of view and margin management point of view.

So our outlook remains reasonably favorable, but obviously we are keeping a close eye on the short term dynamics, credit markets, and all those things.

All right.

Then just lastly, pretty impressive number for Europe in terms of the cost savings.

Is this the run rate that we should be thinking of going forward?

Are there elements here, whether it is restructuring that takes a while to get implemented or the PSA cost savings that actually continue to -- it would be accretive to this?

Well, remember a piece of this is obviously the D&A savings that we talked about at some length so that will roll through.

Beyond that it is really just what you are seeing is the result of just day-to-day blocking and tackling and driving hard on the business.

We have got a terrific team on the ground there that is really executing, but we have still got a long way to go to get to where we want to get to.

We will see as we go along some restructuring items come through as we make progress on some of our rationalizations, but we are driving very hard to continue to deliver good year-over-year improvement.

Okay, great.

Thank you.

Congratulations.

Ryan Brinkman, JPMorgan.

Thanks for taking my call.

Just on pension, I am curious if the rise in interest rates changes in any way you think about the pension.

Does the rise in interest rates, does it make strategic actions less imperative?

Or could it, in fact, be the opposite that an improvement in the funded status might mean that you could take that improvement and reinvest it in strategic actions that increase the underfunding but decrease the overall liability and risk, such as the transaction that you did with Prudential?

I would say that as the plans get more fully funded it gives us, ultimately, more flexibility.

We have been on a long journey now for the last few years and we have talked about it at great length of derisking and having the plans get more fully funded.

I think we have made some very significant strides so far.

I think everybody has been anticipating at some point that interest rates would increase.

We have seen, obviously, a piece of that happen so far.

Rates can also go down just as easily as they have gone up here.

But as and if we get more fully funded, I think it gives us more, rather than less, flexibility.

Okay.

Then just lastly, obviously you continue to have very strong results in China overall.

I know that your 1Q performance there was unusually strong and those margins were unlikely to continue at that rate.

I think it was indicated a few months back.

But I am curious just that given that your wholesales in China were up something like 11% why there was not much resulting operating leverage there with the net income margin rising only 10 bps year over year.

Is this about the pricing pressures that we often read about, or is it maybe something else, like lumpiness of reinvesting in the business or something?

Thanks.

I think it is a reasonable representation of where we are from a run rate point of view.

So the business grew, but it is a competitive market; but we were able to within that competitive market not only hold margins, but increase them slightly.

So we think that is a solid result and we are going to, obviously, be continuing to try to work that going forward.

Okay, thanks.

Congrats on the quarter.

Patrick Archambault, Goldman Sachs.

Thank you very much.

Good morning.

A follow-up question on the pension front.

The sensitivities, if just going off of what is in the K, on the US plan I think it is something like $2.2 billion for every 25 basis points in rates.

Of course, it has sort of been well-publicized that your allocation to fixed income is now a lot higher, at about 60% I believe, so clearly there would be some offset from the decline in your bond portfolio.

Can you help us think about how we might put together a net sensitivity, either in dollar terms or how we think about the duration of your asset portfolio?

I would say the simplest way to think about that is to half the sensitivity that we have put out there.

So take the liability side and multiply it by half and you get the result.

Another way of saying that the effective asset allocation approximately half on the asset side of fixed income.

Right, like $1.1 billion negative for every 25 bps?

Yes.

Okay, that is straightforward enough.

I had a follow-up question on Brazil.

Just with some of the social unrest that you have seen there and people sort of broadly starting to take down or continuing to take down, I should say, their GDP expectations, how are you guys thinking about the end-market demand for that region and Brazil specifically?

Are you starting to see that show up in slower showroom traffic or has it been fairly resilient?

I wouldn't say we have seen anything really tangible yet, although obviously it creates a little bit of a risk element for the market in the second half of the year.

But like I said, no real signs at this point.

Okay, great.

Thank you very much.

Matthew Stover, Guggenheim.

Most of my questions have been addressed; I guess just sort of a big picture question.

There has been a lot of discussion about the housing market and pickup trucks.

With the snap up in rates and the adjustments that we have seen in mortgage rates and the adjustments that we are seeing in some of the housing stocks right now is that causing you folks to change your view of how the pickup truck market could or should develop over the course of the next year?

I wouldn't say that there is a fundamental change.

I mean we are quite focused on what is driving the underlying demand of the business and the role that interest rates play in that either directly or indirectly through the housing market.

So we are -- we will be keeping, obviously, a close eye on that.

But it is more than just the housing market that is driving the truck business at this point in time.

We have got, obviously, our product cadence.

A lot of pent-up demand just generally.

Thanks very much.

Itay Michaeli, Citigroup.

Great, thanks.

Good morning.

Just one clarification on cash.

Free cash flow was at $2.6 billion, but it looks like the cash balance, the automotive cash balance was flat sequentially.

Can you just help us walk through that?

There is a couple components or really three main ones and some other cats and dogs.

The first one is we invested $1.3 billion in the quarter into GM Financial to facilitate the Ally international acquisition, the first part of that.

Remember when we announced that deal last year we said there could be a $2 billion capital contribution from GM into GMF, so you saw the first leg of that this quarter.

Then we spent about $700 million to redeem the remaining portion of the GM Korea preferred, which shows up as a debt instrument on the balance sheet.

So that is a 7% coupon instrument that we are able to redeem as we viewed that as expensive.

Then the final piece is we have our preferred dividend that we pay every quarter that rolls through below or after the cash flow measurement line.

So those would be the main components.

That is helpful.

Then going back to Europe.

Last year you identified about $500 million of fixed cost savings between 2013 and 2015.

Can you update us on how much of that $500 million are you realizing this year, roughly?

We are getting into a reasonable chunk of it and we are not constraining ourselves obviously to $500 million.

We are going after everything that we can find.

But, as you know, the first dollars on those kind of exercises are the easiest ones to get.

We have made some good progress, but we have still got a fair amount of work to do.

Great.

Then just lastly, Chuck, you may have mentioned it in the past question, but did you quantify how much, if any, positive pricing you saw in the wholesales for K2XX in the second quarter?

I did not indicate that specifically.

I would say, generally, when we looked at Q2 pricing the overall impact of new in majors, including the K2 Impalas and other vehicles, net-net was about $600 million of a tailwind in Q2 with carryover products, primarily the GMT900, at $300 million headwind.

Perfect, that is helpful.

Thanks so much, guys.

Joseph Spak, RBC Capital Markets.

Thanks for taking my question.

The first one is just a point of clarification on Europe and you talked about the tougher second half seasonally.

You are still counting on improved performance on a year-over-year basis, that was just versus the first half?

Yes, that is correct.

We are driving obviously for year-over-year improvement, but if you go back and look at the last two, three years you will see clearly a seasonal decline in the second half.

Okay.

Then maybe if you could just give us some color -- we could listen to the fixed income call later I guess -- but what the impact of rising rates has been so far and whether you have really seen the consumer rates move up in tandem with rates?

Or whether you guys internally and maybe some of the independents have been eating some of that interest rate increase?

We haven't really seen it at all in terms of the consumer rates in a meaningful way.

Because remember, again, we are more operating from that perspective at the shorter end of the curve and so the short answer is no meaningful impact at this point.

Okay.

Thanks a lot, guys.

Mr. Arickx, I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Thank you, operator, and thank you, everyone, for joining us today.

Appreciate it.

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

Have a great day, everyone.