通用汽車 (GM) 2015 Q3 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 third-quarter 2015 earnings conference call.

  • (Operator Instructions).

  • As a reminder, this conference call is being recorded Wednesday, October 21, 2015.

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

  • Please go ahead, sir.

  • Randy Arickx - Executive Director of IR

  • Thanks, operator.

  • Good morning and thank you for joining us as we review GM's financial results for the third quarter of 2015.

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

  • We are also broadcasting this call via webcast on the Internet.

  • Included in the chart set materials published this morning, we have included the key takeaways from each chart in the notes pages in order to provide color on the results.

  • This morning Mary Barra, General Motors Chief Executive Officer, will provide some brief opening remarks followed by Chuck Stevens, GM's Executive VP and CFO.

  • And then we will open the call for questions from the analyst community.

  • 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.

  • In the room today we also have Tom Timko, Vice President, Controller and Chief Accounting Officer, to assist in answering any questions.

  • Now I will turn the call over to Mary Barra.

  • Mary Barra - CEO

  • Thanks, Randy and welcome, everyone.

  • I am glad you could join the call today and I am very pleased to share with you that we continue to drive strong performance in shareholder value in Q3.

  • Let me give you some of the financial highlights.

  • First, our revenue was $38.8 billion.

  • Our EBIT-adjusted of $3.1 billion was up $800 million year-over-year.

  • Our EBIT-adjusted margin of 8% was up 2.2 percentage points from a year ago.

  • Earnings per share of adjusted of $1.50 was up 55% from last year.

  • Adjusted automotive free cash flow of $0.8 billion reflects seasonality and the settlement of several uncertainties.

  • And our 26% return on invested capital based on a trailing four-quarter average demonstrates that our disciplined capital allocation is paying off.

  • Our strong year-over-year performance in the quarter was led by North America.

  • They had $3.3 billion in EBIT-adjusted with an 11.8% EBIT-adjusted margin.

  • These are both records for North America.

  • Regarding China, you will recall that last quarter Chuck and I discussed with you the slowing growth in the China market but we shared our plan for sustaining our margin in the second half based on our strong product mix and the ongoing work to drive cost efficiencies.

  • So in the quarter, we maintained strong performance.

  • Our equity income was $0.5 billion and we achieved a 9.8% net income margin which is up from a year ago.

  • Overall, strong performance in cash generation enabled us to return $4.6 billion to our owners as of October 19 through both share buybacks and dividends.

  • In addition to the strong performance in the quarter, I want to provide a couple of updates on the progress we're making on our strategic priorities.

  • As we indicated in our global business conference, we intend to lead and win in the future of personal mobility and create new revenue streams that will drive shareholder value.

  • We are leveraging our connectivity leadership to enhance our relationship with the customer, both inside and outside of the vehicle.

  • One of the announcements we made was the Let's Drive New York City.

  • This is a car-sharing program that uses our GM platform and app to connect Ritz Plaza tenants to GM vehicles and to Icon Parking and we have gotten good response.

  • We have also announced that we plan to launch a citywide car-sharing service in the US in the first quarter of next year.

  • Both of these are built on the work that we have done in the past and the success of the Opel car unity car-sharing app as well as the learnings from our Google car-sharing pilot.

  • In addition, let me talk about autonomous for a minute.

  • We announced that we will implement a fleet of autonomous 2015 Chevrolet Volts at the Warren Tech Center next year.

  • Not only will this accelerate our autonomous technical learnings but it will also have us learn from an ecosystem perspective and this builds on top of our previous autonomous announcements with the launching of Super Cruise and V2V that will be on Cadillacs next year 2017 models.

  • We are strengthening our relationship with the customer inside the vehicle as well.

  • OnStar is now on four continents, North America, Europe, South America and China.

  • We have more customers connected to their vehicles than the rest of the industry combined.

  • By year-end, brands on three continents will have 4G LTE technology, Cadillac in China, Chevrolet Buick Cadillac and GMC in North America and Opel and Vauxhall in Europe.

  • Let's turn to a minute for the markets.

  • First in North America; clearly trucks, crossovers and SUVs drove strong sales gains.

  • US retail market share in Q3 was up nearly 1 percentage point from a year ago, 16.5% compared to 15.6% in 2014.

  • GM's share of the entire retail full-size pickup segment is approximately 40%, up 2 percentage points from a year ago.

  • And in the midsize pickup segment, our new Chevrolet Colorado and the GMC Canyon pickups are already earning 40% of the retail share.

  • We have more coming from our three truck strategy with the redesigned 2016 Chevrolet Silverado and GMC Sierra.

  • Not only will we have greater availability of the 8-speed transmission, we will also have new safety features including lane keep assist and forward collision alert as well as enabling Apple CarPlay and Android Auto.

  • Moving to Europe, we are very excited about the all new Opel Astra and when we launched it we had 30,000 presale orders.

  • The Astra has segment-leading active safety technologies and connectivity with OnStar and 4G LTE and also Apple CarPlay and Android Auto are also enabled.

  • In China, we had record sales of 2.5 million vehicles through Q3 driven by the strength of SUVs, MPVs and Cadillac.

  • GM's year-over-year SUV sales were up 171% in September led by the Buick Envision and the Baojun 560.

  • Cadillac is up 12.4% year to date.

  • At GM Financial, progress towards full captive capability is accelerating.

  • Our North America retail penetration of 32% is up 21 percentage points versus a year ago.

  • And looking ahead we also announced in the quarter that we plan to invest $5 billion through 2019 to enhance the Chevrolet brand in key markets of China, Brazil, Mexico and India.

  • This really represents a new way of addressing these markets.

  • It represents about a 2 million vehicle opportunity annually and what we are doing is replacing multiple legacy products with an all-new vehicle family that will have leading design and the right technology and the right value for those customers.

  • We are leveraging our scale across the value chain to develop this new vehicle family that will require less capital, generate more volume and drive more profitability.

  • As we look at cost efficiencies, we continue working across the entire value chain to make sure that we are as efficient as possible so we can enhance the customer experience and also drive shareholder value.

  • As we talked about in the global business conference, we have identified $5.5 billion in savings from the 2015 to 2018 timeframe and that is from purchasing initiatives, manufacturing, driving for efficiencies and reducing administration expenses.

  • These savings more than offset the additional brand and technology investments that we are making.

  • And we also continue to work on the right partnerships.

  • We announced think Navistar partnership that will allow us to provide a Chevrolet medium-duty truck in the US in 2018 and not only is this a segment we are not in right now but on the commercial side, it is also will help us drive adjacent sales.

  • We also continue to have a very productive partnership with Honda focused on fuel cells.

  • We are developing not only the next generation hydrogen stack and storage system but we are looking for other opportunities and the fuel cell work should be in the 2020 timeframe is what we are targeting.

  • As strong as the third quarter performance was though, we do understand and we are working to mitigate the headwinds that are in several areas around the globe.

  • South America continues to be very challenging.

  • The Brazil market is down 27% in the third quarter versus a year ago and there is really no clear economic recovery in sight.

  • As we talk about China, it is quickly maturing and we now expect average annual industry growth to be about 3% to 5% for the next few years and the China slowdown is not only affecting our business in China but also in the other international operation markets outside of China because these economies are so dependent on China.

  • This means growth will remain slow.

  • But as I have said as we look at the global auto industry, there will always be headwinds across the globe and we are committing to achieving our targets.

  • As we said in January for this calendar year, we fully expect EBIT-adjusted and EBIT-adjusted margins to be higher and we continue to be confident on our trajectory toward the 2016 goals that we have outlined.

  • Quickly, they are in North America and again, we are expecting to achieve the 10% margins this year ahead of schedule and plan to continue and sustain that performance into 2016.

  • In Europe, we expect to be profitable in 2016 and we will earn that by capitalizing on the success of the Astra and Corsa launches that have higher variable profit.

  • Despite the slower growth, there is still significant growth potential for China.

  • Much of the growth will be in the Tier 2 to 4 cities and that currently represents 85% of GM's volume.

  • We will continue to focus on sustaining strong margins between 9% and 10% through the sales growth that is afforded by MPVs, SUVs and Cadillac.

  • We also have other drivers that we have outlined of continuing to drive cost efficiencies, increasing our after sales, growing captive finance, and generating OnStar and connectivity revenue.

  • We are also taking proactive steps to manage the volatility in South America until there is a recovery.

  • Our progress or our work there started in 2011 to really drive efficiencies and we continue with several additional rounds and we will be doing that as we move forward.

  • So despite challenges in some markets, we capitalized on the strengths for a record-setting third quarter and I am very proud of the team.

  • This performance increases our confidence in our plan to drive shareholder value.

  • With that I will now turn it over to Chuck.

  • Chuck Stevens - EVP and CFO

  • Thanks, Mary.

  • I just wanted to take a few minutes to provide some perspective on the quarter and GM's results for the first nine months of the year.

  • In addition to the record results that we posted in Q3, we have also put up some very strong results year to date.

  • EBIT-adjusted results through September grew to $8 billion, up $1.3 billion year-over-year when you adjust 2014 for the impact of recalls.

  • EBIT-adjusted margins are at 7.1%, up 130 basis points again year-over-year after adjusting for the impact of recalls.

  • Important to note that these results are very much on plan that we laid out earlier this year.

  • Our adjusted earnings per share for the year to date period nearly doubled the $3.63 compared with last year and as you step back and look at the results, they were broad-based on a year-over-year basis with all but one of our automotive regions posting year-over-year profit improvement during the first nine months of the year.

  • So clearly we are on track for a very strong 2015 as we committed to deliver earlier this year.

  • Although we are very pleased with our performance year to date, we will continue to take additional actions to drive efficiencies into the business.

  • As I covered at the global business conference and Mary just mentioned, we expect to drive $5.5 billion of run rate efficiency improvements by 2018 across the entire business.

  • These efficiencies will more than offset economics, increase investments in brand building, increase depreciation and amortization and technology costs during that timeframe.

  • All of these costs and cost efficiencies are underpinned by operational excellence which is our corporate initiative to drive common tools, common processes but really most importantly, a continuous improvement mentality throughout our organization and we are getting significant traction on that even in 2015.

  • So the GM team is very focused on finishing the year strong and really carrying that positive momentum forward into 2016 and beyond.

  • Just a few comments on a couple of our regions.

  • First, China.

  • As Mary mentioned, the Company sustained strong operating results in Q3 which is consistent with the guidance that we provided you back in July.

  • Although it is clear the industry has moderated, I think it is also clear that the region has not fallen off a cliff as some observers predicted.

  • In fact, as we talked about after our Q2 earnings, industry sales began to improve sequentially as the third quarter progressed and we continue to see improved performance thus far in October.

  • Despite the moderating industry, we generated strong performance for the first nine months of the year, $1.5 billion in equity income and 10% net margins.

  • As we have talked about on a number of occasions, we have been able to generate these results specifically because the team in China has been proactively managing the market risks with several actions such as optimizing mix and you saw the results with the September sales being up significantly from an SUV perspective; aggressively reducing costs by rolling out cost down efficiency up initiatives and really working to manage our inventory levels and ensure that we are aligning supply and demand.

  • We are encouraged by China's cut in the purchase tax and we are encouraged that it will provide a tailwind to the industry for the rest of the year and into 2016.

  • But our plan is to continue to proactively manage the market risks as we have been doing to protect the profitability of the business.

  • So our previous guidance, growth in the low single digit range and our ability to sustain our strong margin performance has not changed.

  • Our guidance for Q3 is consistent with the guidance that we provided after our Q2 earnings.

  • Moving closer to home, clearly North America has put up some impressive numbers for the quarter again record EBIT-adjusted and EBIT-adjusted margins of $3.3 billion and 11.8%.

  • Importantly year-to-date we have achieved EBIT-adjusted of $8.3 billion and a corresponding margin of 10.5%.

  • Despite typical seasonality in Q4, increased launch costs and other seasonal impacts like lower production due to the holidays, we are very much on track to achieve a 10% margin in the region in 2015.

  • And importantly, that is an accomplishment that we are going to deliver ahead of our long-standing 2016 commitment.

  • We are in the process of finalizing our 2016 planning assumptions and will provide you with additional color in January on what to expect for 2016.

  • But as Mary said, we certainly plan to deliver 10% margins again in 2016.

  • With regard to our outlook for the remainder of this year, as I said we are very much on plan for improved full-year profit and margin growth versus 2014.

  • This will translate into EBIT-adjusted from a total Company basis north of $10 billion for the year.

  • South America remains challenging and there really is no near-term macroeconomic recovery in sight but we will continue to take actions to help mitigate the negative headwinds that are impacting the industry and our results in that region.

  • And I would just emphasize that our view is that we are highly leveraged to the recovery when it comes in South America because of the actions we have taken over the last number of years.

  • With specific regard to capital spending and free cash flow, I would like to provide an update.

  • First on the capital spending front due to the timing of cash payments versus the accrual of our obligations, our revised cash CapEx forecast for the year is now $8 billion compared to our previous guidance of $9 billion.

  • We continue to expect that our capital spending accruals will be in the range of $9 billion this year so this is just a timing issue.

  • Although we are still finalizing next year's planning assumptions, I would not expect this change in timing to materially impact our prior guidance that cash capital expenditures would be approximately 5% to 5.5% of revenue on an ongoing basis.

  • As I said earlier, we will provide more specific guidance in January but from a general planning perspective, the 5% to 5.5% still applies.

  • Although we are expecting a lower amount of capital spending this year from a cash perspective, our free cash flow forecast is still expected to be about flat compared with 2014.

  • The cash outlays associated with our recent legal settlements will offset the lower capital spending amount enabling us to maintain that outlook that we provided after the second-quarter earnings.

  • We also remain very committed to enhancing shareholder value over time as evidence by the $4.6 billion of capital returned to our owners thus far this year and we will continue to execute to our transparent capital allocation framework.

  • So that concludes our opening comments.

  • We will now move to the question-and-answer portion of the call.

  • Operator

  • (Operator Instructions).

  • Itay Michaeli, Citi.

  • Itay Michaeli - Analyst

  • Thanks, good morning and congrats, everybody.

  • Chuck, I was hoping you could maybe just kind of quantify the rental impact this quarter in North America on variable profits?

  • Chuck Stevens - EVP and CFO

  • I would say that the impact of rental in wholesales if you look at the wholesales on a quarter-over-quarter basis up about 100,000, about two-thirds of that was related to rental options.

  • And then I'm not going to give you specific input on the variable profit itself but from a pricing perspective, the Q3 pricing roughly $100 million of that was associated with the rental auction issue as we cycle through that.

  • Itay Michaeli - Analyst

  • Great.

  • I know it is a little early to talk about 2016 but I will give it a shot and congrats of course on reaching or expecting to reach a 10% target this year.

  • But as we think about some of the product cycle tailwinds next year on new products, is it fair to say that margin expansion next year is a fair early assessment for the year versus 2015?

  • Chuck Stevens - EVP and CFO

  • Itay, I am absolutely surprised that somebody would ask that question about 2016 and we will provide specific guidance on that in January.

  • Our objective, our commitment and what Alan talked about on October 1 at the global business conference is to drive this business to sustained 10% margins through the cycle.

  • So as we evaluate how the industry is shaping up and everything else for next year, we will come back and talk about that in January.

  • We reached the first milestone, we expect to generate 10% for this year and then clearly our objective is to make sure we build this business to sustain that again throughout the cycle.

  • Itay Michaeli - Analyst

  • Great.

  • Just one last quick housekeeping.

  • Of the $5.5 billion of efficiencies through 2018, Chuck, just remind us how much is left for the 2016 through 2018 period?

  • I know you are realizing some of that this year.

  • Chuck Stevens - EVP and CFO

  • I will provide a further input on that in January as well.

  • But if you look just one of the components of that this year we have talked about non raw material performance of $2 billion.

  • We are very, very much on track to deliver that so broadly speaking it would be $5.5 billion less that, I mean generally so about $3.5 billion left to go.

  • Itay Michaeli - Analyst

  • Terrific.

  • Thank you very much and congrats again.

  • Operator

  • Rod Lache, Deutsche Bank.

  • Rod Lache - Analyst

  • Good morning, everybody.

  • Congratulations.

  • I had a couple of questions, I was hoping first you might be able to give us a little bit more color on the China earnings bridge.

  • Obviously you had a 4% decline in wholesales and I am assuming that you experienced this -- I think you were talking about a 5% decline in price on your Q2 call.

  • So if we were to construct a bridge year-over-year from 3Q to 3Q, what with the dollar impact be if we thought about some of the buckets that you usually provide like volume, price, mix and cost?

  • Chuck Stevens - EVP and CFO

  • I will give you the breakdown from a driver perspective base, Rod, but not the specifics on the EBIT bridge.

  • Clearly volume would be down and price would be down largely offset by mix and improved cost performance.

  • I mean fundamentally in the cost performance is largely material cost performance.

  • We have talked before around kind of the pricing headwind year-over-year on a quarter-over-quarter basis and it has been running generally about $100 million.

  • That is what that equates to from that bridge perspective.

  • So volume down, price down, largely offset by improved mix and again you have seen that in the sales results with SUVs and Cadillac sales being up and material cost efficiency.

  • Rod Lache - Analyst

  • You are targeting flat I/O for the year which implies a little bit of a drop in the fourth quarter.

  • Should we be thinking that China starts to look a little bit better from a volume perspective given the stimulus or -- and that it is the consolidated I/O that is coming off?

  • Could you just give us a little bit more of a feel for what you are expecting there?

  • Chuck Stevens - EVP and CFO

  • As we talked about in the second quarter and we are maintaining here, we expected to sustain China performance in the second half of the year similar to the first half of the year.

  • So we earned about $1 billion of equity income in China in the first half, we would expect to earn in that range in the second.

  • So we are $1.5 billion in so far so you can do the subtraction.

  • What we said about GM I/O in total including China is relatively comparable results year-over-year and again, I would suggest that we are very, very much on plan from a China perspective.

  • GM I/O, if you look at last year, the results there or even year to date the results that we have generated there a loss in the range of $500 million to $600 million is what would -- for the year what would generally be consistent on a comparable basis.

  • Rod Lache - Analyst

  • Okay.

  • Lastly, two quick ones.

  • If we were to add up all these actions that you are taking in South America, could you give us a total of what you are anticipating as the cost savings?

  • And on North America you mentioned you are expecting pricing flat to down, is that a change versus what you had been anticipating previously?

  • Chuck Stevens - EVP and CFO

  • For the latter question, no.

  • If you go back to the discussion we had back in January, I remember a chart that I showed that showed carryover pricing in 2015 versus 2014 from a North America perspective was going to be down.

  • I would say what we are seeing in North America is the general pricing dynamic on a year-over-year basis is consistent with our prior guidance.

  • Retail pricing is going to be relatively flat and most of the year-over-year deterioration is due to the rental car issue that we were dealing with.

  • So as I think about a go-forward basis for just the fundamental market dynamics, I think stronger retail performance but generally overall pricing in line with what we talked about before.

  • Relative to the South America question, where do you want me to go back to?

  • 2011 or 2012 or just this year on a run rate basis?

  • Rod Lache - Analyst

  • We see what the profitability is there, right, so how do things improve from the run rate that you are at right now if we were to add all these actions together?

  • Chuck Stevens - EVP and CFO

  • Assuming consistent macro conditions in 2016 versus 2015 and we are not really assuming anything different and I'm not trying to give guidance for 2016 yet but we took out 20% of the workforce down there both hourly and salaried.

  • That is 4000 to 5000 people.

  • That action in and of itself on a run rate basis is worth a couple of hundred million dollars a year.

  • But there is other puts and takes, Rod, that I don't think you can just directly translate that into a guidance for 2015 economics is pretty significant.

  • We have productivity, we have other actions that we will take to improve mix.

  • Relative to specifics for 2016, we will have more to say in January.

  • Rod Lache - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Dan Galves, Credit Suisse.

  • Dan Galves - Analyst

  • Okay, thanks.

  • First question -- and back to kind of the pricing in China, have you seen any sort of improvement in pricing as inventories appeared to come down for the industry throughout Q3?

  • Chuck Stevens - EVP and CFO

  • I would say that the pricing dynamic is developing as we anticipated at least through Q3.

  • Obviously we will continue to monitor that as we go through Q4.

  • As we talked about before, we expected Q4 to be better from an industry performance driven by seasonality and product launches.

  • The product launches could change the dynamic from a pricing perspective.

  • But I would say generally consistent and too early to tell if that is changing as dealer inventories are getting kind of more in line at an industry level.

  • Dan Galves - Analyst

  • Okay got it.

  • Then I had a couple of questions related to the issues that Volkswagen is having in Europe.

  • Number one is, have you seen any industry-wide impact to demand overall or to demand for diesel vehicles yet?

  • Or is it still too early to tell?

  • And also I mean not asking to comment but some of the numbers being thrown around for impact of Volkswagen are very high.

  • Does that change your GM's thinking at all in terms of the minimum cash required to protect against any kind of catastrophes?

  • Mary Barra - CEO

  • Let me start by saying right now our outlook for diesel remains unchanged.

  • I think it is too early to look and make any judgments on that.

  • Related to again, we are not going to comment on the VW but I think as we've gone through and looked at the very robust planning that we did last year as we put together the capital allocation framework, we remain committed to the 20 billion.

  • Chuck Stevens - EVP and CFO

  • Let's not forget, Dan, that we also have a revolver and the revolver is an emergency backstop and total liquidity is at $32 billion and I don't think that you can really plan your cash balance around a potential -- and I'm just using this is in a general term, I'm not speaking specifically to Volkswagen -- but a company type event.

  • Just not a good use of shareholder capital.

  • Dan Galves - Analyst

  • Okay, makes sense.

  • Thanks very much.

  • Operator

  • John Murphy, Bank of America Merrill Lynch.

  • John Murphy - Analyst

  • Good morning, guys.

  • Just a first question on North America.

  • I mean obviously there is a lot of strength here and it seems like mix and price were actually a little bit of a negative.

  • So just curious how we should think about the contribution new products are playing to the profitability in North America?

  • I know you kind of talked about $1500 per copy on the new products but obviously a lot of people are very skeptical about that.

  • But it seems to be coming through.

  • Just kind of understanding what role those new products are playing and what we should expect really in the fourth quarter and maybe even going into 2016?

  • Chuck Stevens - EVP and CFO

  • First, mix is unfavorable largely because of the rental auction vehicles.

  • I mean volume was favorable 400 million roughly, mix unfavorable, largely offsetting that due primarily to the impact of those vehicles.

  • We are committed on the next-generation vehicles as we roll through the launch cadence being more profitable than the vehicles that they replaced.

  • I just think about it broadly speaking, if you look at the Cruz, the Malibu, the next-generation compact SUVs, Equinox, Terrain and then the next-generation mid-crossovers, in total that volume is more than the entire K2XX platform and we delivered with the K2XX platform an improvement in profitability as we talked about way back in 2012 of over $1000 a vehicle.

  • And that is generally the perspective that we are going to see and what we have talked about relative to the next product launches so that is going to help us.

  • Specific to your Q4 question on pricing, I think and this is typically what happens in Q4 sequentially as you launch the new model years and everything else, I think it will be a slight favorable overall pricing environment.

  • Retail will be up and partially offset by fleet and that would just be the typical fleet cadence as we roll through the rental auctions.

  • A large part of that retail price favorability in Q4 will be associated with the relaunch of the new Malibu.

  • John Murphy - Analyst

  • Okay.

  • Just as we think forward and I am not asking for 2016 guidance but you talked about 10% margins for North America.

  • You did 10.5% year to date as we look at the LTM.

  • You are kind of in that range or maybe even a little bit better on an adjusted basis.

  • Is there some sort of negative factor that you are looking at into 2016 that is going to suppress numbers or something that is not going to repeat in 2016 or is this really just an initial guide and we should revisit this in January?

  • Chuck Stevens - EVP and CFO

  • First, we are 10.5% calendar year to date and if you go back and look at Q4 from a seasonal perspective, that is typically one of the weak quarters from a margin perspective due to everything that we understand, the Thanksgiving holiday, Christmas holiday, a lot of marketing spend around football and in our case this year, some launch products.

  • So I would say for 2015 we are very confident that we are going to generate 10% margins.

  • As we talked about before, we are going to continue to invest in marketing to build our brands.

  • We are going to continue to spend engineering associated with our product launch cadence and next-generation products so that we can sustain 10% margins throughout the cycle.

  • And we will have more specific guidance around that.

  • But the real way to think about this, John, is we are at 10% in 2015 a year early, we are going to run the business to sustain that 10% kind of margin on an ongoing basis.

  • John Murphy - Analyst

  • Makes a lot of sense.

  • Then just on GM Financial, revenue was up 36%, EBIT up 13%.

  • I know that is a potential area for structural improvement in EBIT over the next couple of years.

  • When do we see a linear or parallel step up in EBIT along with just the growth in revenue and loan book there?

  • Just curious it just seems like at some point we are going to see a real step up, is that 2016, 2017 or 2018?

  • Chuck Stevens - EVP and CFO

  • Yes, I think it will be beyond 2016 as we continue to ramp up both the operations but also you are taking on debt in advance of the assets.

  • I think the real lever point will be beyond 2016, John.

  • John Murphy - Analyst

  • Got it.

  • Just lastly on buybacks, you have clearly gotten a lot of stuff out of the way here in the DOJ fine, a lot of the ignition switch settlements pretty much wrapped up.

  • You are looking at a pretty strong 2016.

  • When do you think you could reconsider more buybacks?

  • I mean is that late this year or is that sometime in 2016 when you get better visibility on year-end balance sheet and liquidity and 2016 results?

  • Mary Barra - CEO

  • So we did extinguish some risk.

  • We still have a handful of open items that we will work to resolve as timely as we can but done in the right way.

  • And we will be ready to talk about that in January of next year of where we are at from a capital allocation perspective.

  • John Murphy - Analyst

  • Mary, what are those specific hurdles or items that still need to get resolved?

  • Mary Barra - CEO

  • There is still a couple of investigations with the Federal Trade Commission and the SEC.

  • Then there is also parts of the multi-district litigation, there are still some state attorney claims and there is also the economic loss.

  • John Murphy - Analyst

  • Great, thank you very much.

  • Operator

  • Emmanuel Rosner, CLSA.

  • Emmanuel Rosner - Analyst

  • Good morning, everybody.

  • First question on the pricing in North America.

  • So the retail pricing was somewhat negative.

  • Can you maybe give a little bit of color on where specifically on retail you saw this pricing pressure either segments or vehicles and how does that reflect or not some of the US market dynamics right now?

  • Chuck Stevens - EVP and CFO

  • Let me just start at 10,000 feet, Emmanuel.

  • 11.8% margins, so that is what we generated in the third quarter so just very, very strong outstanding performance.

  • Within that, there was carryover price headwinds which is typical in the third quarter as you work through and sell down your prior model year products.

  • And when you think about as where we are in the launch cadence, it is no surprise that some of our vehicles are getting longer in the tooth and we continue to support those products.

  • But I think you need to look at it in the context of 11.8% margins.

  • We already talked about Q4 and we talked about the calendar year from a pricing perspective.

  • Overall, the dynamics in the industry remain reasonably rational.

  • Overall incentive spending and incentive spending as a percent of transaction price is up slightly on a year-over-year basis.

  • Our incentive spend as a percentage compared to the industry average ran at 110% which is consistent with last year.

  • So we feel reasonably good about the competitive dynamics but we are really feeling pretty constructive on our launch cadence and the products that we will be bringing to the market next year which will come with favorable pricing.

  • Emmanuel Rosner - Analyst

  • Okay, that is good to hear.

  • And then just on GM I/O ex China, maybe I am just nitpicking here but it seemed like a slight deterioration in the loss maybe versus the past few quarters.

  • When can we expect I guess this region to break even ex China, ex other unusual items?

  • Chuck Stevens - EVP and CFO

  • Yes, we will talk more about that in January as we go through the planning.

  • I would say that the viewpoint should be that we continue to aggressively look at all of our operations, all of our countries where we are currently not generating a return to drive efficiency, to drive structural change, to position the business for future success.

  • We were making good progress in GM I/O.

  • The current macro situation there with the slowdown in China that Mary talked about is having an impact but we will continue to take those actions and we will provide an update on that on a go-forward basis.

  • Again thinking about the broad context from a Company perspective, $3.1 billion in EBIT and 8% margins and I think the real opportunity is once we get the rest of the regions operating very well that will even be more accretive to what was a very strong actually a record quarter.

  • Emmanuel Rosner - Analyst

  • I agree.

  • Thank you very much.

  • Operator

  • Mike Stover, SIG.

  • Mike Stover - Analyst

  • Thank you very much.

  • I was just wondering if we could go back into the North America accounting issue with the rental car fleet.

  • If I heard you correctly, Chuck, you had indicated that most of the excess of wholesale versus production was related to the rental car volumes.

  • Is that correct?

  • Chuck Stevens - EVP and CFO

  • That is correct.

  • Mike Stover - Analyst

  • And then you had mentioned the pricing was $100 million.

  • Is there a bigger impact on the profit side because if I look at the incremental operating leverage in North America, the 50%, it seemed awfully strong.

  • I know there's a lot of good things going on but that just seemed like a really strong incremental operating leverage.

  • Chuck Stevens - EVP and CFO

  • One of the things that we talked about and if you look at the share performance year to date is our real focus on shifting our volumes out of fleet and into retail because retail is more profitable than fleet.

  • And part of that as you are seeing with these higher rental vehicles going through auction is we sell less than obviously we are going to be sending more into the auction.

  • Generally at 10,000 feet, the fleet business is profitable especially commercial and government, daily rental pretty close to breakeven when you look throughout the whole value chain impact on that.

  • But clearly our objective is to drive more into retail which is more profitable.

  • Mike Stover - Analyst

  • Okay.

  • The second question is if we look at the I/O results ex China, you've announce restructuring actions in Australia, Indonesia and Thailand.

  • When should we expect to see the impact of those actions in the financial results based on the execution of the restructurings?

  • Chuck Stevens - EVP and CFO

  • More to come on that.

  • Again in January, we were still working through the Australia actions and those won't be completed until 2017.

  • We are still working through the Thailand actions and ultimately the shift of moving to fundamentally a truck SUV platform there will happen through 2017.

  • So these are ongoing.

  • I would suggest that in a more historical macro environment versus some of the headwinds we are facing there this year, slowing growth in Southeast Asia, a very weak Aussie dollar, some of the other challenges related to China, we would be seeing year-over-year improvement already.

  • Mike Stover - Analyst

  • Thank you.

  • Appreciate it.

  • Operator

  • Brian Johnson, Barclays.

  • Brian Johnson - Analyst

  • Good morning.

  • Three questions around commodities around Europe and then kind of a broader one around self driving cars.

  • First, commodities, you mentioned the material benefit in GM-NA as well as globally.

  • To what extent was that driven by the whole commodity complex being lower versus supplier value engineering efforts?

  • And if it is mostly from the latter working with suppliers as some of your commodity contracts renew, can we expect a tailwind from commodities going forward?

  • Chuck Stevens - EVP and CFO

  • Yes, the overall impact in the quarter from commodity pricing was minimal.

  • It was largely driven by commercial performance and logistics performance.

  • On a go-forward basis, just to provide sensitivity on commodity when we look at the year, I would say year-to-date that the year-over-year impact is a couple of hundred million dollars and we would expect that to be kind of the calendar year impact.

  • Overall our APV or our annual purchase value of commodities is about $28 billion.

  • About 30% of that or so is indexed which means we take the risk.

  • A 5% movement in commodities is worth $400 million to $500 million on an annual basis all other things being equal.

  • And as we look at 2016 versus 2015 if current commodity prices continue, I would think it would be a tailwind but again that will continue to will work through our planning for 2016 and provide more guidance on that in January.

  • Brian Johnson - Analyst

  • Second question, around Europe, two questions.

  • Are you seeing -- you saw pricing firming in 3Q.

  • What impact do you see on pricing from Volkswagen's issues?

  • Is it on the one hand they could potentially become desperate and pull the price down or on the other hand can you get paid for some of the value you can add to drivers?

  • Chuck Stevens - EVP and CFO

  • The pricing strength in Q3 specific to General Motors and Opel Vauxhall was the launch of new products and new product pricing.

  • So our new products are getting traction and that is good and we would expect to see that continue as we work through the launch cadence.

  • It is really too early to tell and too early to speculate on what could happen with the competitive dynamics in Europe.

  • Our focus is to launch our products, deliver great products at a compelling value, continue to drive improvements in the Opel brand which in general under any circumstance will provide pricing power vis-a-vis where we are at today.

  • The overall environment could change but at least on a relative basis by executing our plan, we should have better pricing power than we have today.

  • Brian Johnson - Analyst

  • And if the consumer comes into the showroom and on the margin goes more for gas engines than diesel engines do you have the gas engine planned capacity to satisfy their demand?

  • Chuck Stevens - EVP and CFO

  • Yes.

  • From an industry perspective in Europe, we are underweight diesels versus the competition.

  • Our diesels run at about 40% and the rest of the industry somewhere between 16% and 17% and we certainly have the flexibility.

  • Brian Johnson - Analyst

  • Okay, great.

  • A the final question kind of around self-driving cars.

  • We had a new entrant automaker roll out what they are calling autopilot last week.

  • Can you remind us of the timing of the Cadillac Super Cruise?

  • And then just more broadly, how do you think about how fast to get these things to market versus making sure that they run effectively and you are not sort of -- folks in Silicon Valley would say throw stuff out there and let the users beta test it.

  • Just your philosophy on that technologically?

  • Mary Barra - CEO

  • I think first of all with the tremendous experience that General Motors has as we look at safety and we look at integrating and one of the reasons we announced that by the end of next year we will have 2017 Chevrolet Volts, an autonomous fleet at our tech center is to not only advance the technology but also to understand it in the ecosystem, also have tremendous exposure to our engineering team at that site.

  • And all of those things will I think will point to advance the work we are doing accelerate it from a technical and from all of the other aspects that you need to have come together from an autonomous perspective.

  • And the way I look at autonomous in general is there are two paths and we are working on both.

  • I mean there is the path that we are on where if you look at especially at a Cadillac today, there is tremendous technology around it that is on the road to full autonomous with all the safety features and all the warning and the ability to have some forward collision, braking, etc.

  • When you look at Super Cruise and the V2V communication, those will both be on 2017 Cadillacs but they will be in the marketplace next year.

  • And then we will have also announced a strong partnership and the work we continue to do with Mobileye.

  • We were their first customer, we are their largest customer.

  • We continue to work closely with them and we are also exploring some other opportunities.

  • So I look at it as there is the evolutionary path where you are putting the technology on and customers get the opportunity to experience it and then there is the revolutionary path where you go full autonomous.

  • We are executing both.

  • But I assure you that we are doing it with a huge focus on safety as we go forward.

  • Brian Johnson - Analyst

  • Okay, thanks.

  • Operator

  • Colin Langan, UBS.

  • Colin Langan - Analyst

  • Great.

  • Thanks for taking my question and congrats on a great quarter.

  • Can you remind us about the impact that rental pricing had year to date despite your 10% -- 10.5% year to date margin.

  • That was actually a pretty big headwind and is that going to go away next year or is that still going to be a residual risk next year or is that actually going to be a pretty large tailwind?

  • Chuck Stevens - EVP and CFO

  • I would again think about pricing in an overall broad context.

  • I think our guidance for the year is that pricing is going to be consistent with what we talked about back in January which was more of a headwind in 2015 versus prior years.

  • Year-to-date kind of the fleet alone impact is roughly $700 million to $800 million of negative net price.

  • As you recall, it was $400 million in Q1, a couple hundred million dollars in Q2 and then $100 million in Q3.

  • We are not ready to provide guidance on pricing going into 2016 yet although I would say that overall we would expect a net favorable positive pricing environment really being driven by the launch of our new products.

  • Colin Langan - Analyst

  • Can you give any color on what you are seeing in initial demand following the (technical difficulty) China.

  • I guess you kind of said that you think now 3 to 5 is the long-term outlook.

  • Is this having a big help in the near-term though?

  • Chuck Stevens - EVP and CFO

  • I didn't catch the beginning of your question.

  • I'm sorry, Colin, I couldn't hear.

  • Colin Langan - Analyst

  • Any color on the near-term impact from the stimulus, have you seen a spike in demand following the announcements in China?

  • Chuck Stevens - EVP and CFO

  • Not yet and obviously something that we continue to closely monitor.

  • What we have seen so far in October is our retail sales are up over 10% on a year-over-year basis.

  • It is early days in October.

  • The industry is up but we expected that as well.

  • We are dealing with in China right now is holiday season so there is some specific nuances from a market perspective but that is something we are going to continue to monitor.

  • And remember this program runs through the end of 2016 so typically with any of these kinds of things, maybe you will get some rollover from the tail end of September into October but the real big bump will be near the end of next year depending on what the government does if they announce they are not going to extend it or if they decide to extend it.

  • So we will have to see how it plays out.

  • Colin Langan - Analyst

  • Any color on Europe.

  • Can you give a status of the Russia wind down, the Chevy wind down -- and any color on what kind of headwind those were within this year's results?

  • Chuck Stevens - EVP and CFO

  • I'm not going to talk about specific country level profitability or Chevy Europe but we talked about before that Russia was a fairly significant headwind and that as we move through the year that impact would diminish and it has from an overall GM Europe perspective.

  • We are very much through the Chevy Europe wind down and that has went very much -- as a matter of fact both the Chevy Europe wind down and kind of the Russia restructuring plans have went very, very much according to plan.

  • And specific to Chevy Europe, the bright spot is the vast majority of the dealers that were impacted by that have opted to move to Opel based on the opportunities presented there and part of the strategy with the new Karl, which is doing very, very well was to help fill some of the void that was created when we provided some of that Clean Air with the Chevrolet Europe exit.

  • Both of those going very well and on a go forward basis clearly we will provide an opportunity in Europe.

  • Colin Langan - Analyst

  • Okay.

  • Thanks for taking my questions.

  • Operator

  • Ryan Brinkman, JPMorgan.

  • Ryan Brinkman - Analyst

  • Good morning.

  • Congrats on another great quarter.

  • First question on mix in China, I think your performance in China this quarter was better than investors expected.

  • So our channel check suggests enhance pricing pressures in the country although your margin notably rose year-over-year.

  • Can you talk about the drivers of that margin strength, how much is being driven by mix by the new models SUV, CUV mix, traction of Cadillac brand?

  • And then how was that mix improvement accomplished and how should we think about it tracking going forward given there seems to be a consensus that sales in China will move more toward the less volatile Tier 3, Tier 4 cities in the interior relative to the richer coastal cities?

  • Chuck Stevens - EVP and CFO

  • First, we kind of covered the mix question earlier.

  • That mix and material cost performance offset kind of the volume and price headwinds and again if you look at the sales results September as an example, SUV sales up 171% year-over-year, SUVs as a percent of total, China sales were at 17% versus 6% in the year earlier period.

  • Cadillac up 12% so that is all very beneficial.

  • On a go forward basis, Matt talked about at the global business conference, Matt Chen, where the market was going to develop and the real growth was going to come in SUVs, MPVs and luxury on a go-forward basis.

  • They were going to over index and that is why we believe that there is a significant opportunity from a mix perspective going forward.

  • I would also suggest that in the Tier 2 to Tier 4 cities, the launch of the Baojun brand and the expansion into SUVs provide us with a unique opportunity to take advantage of not only SUVs in the Chevrolet, Buick and Cadillac channel but also SUVs in the Baojun brand as growth increases in Tier 2 to Tier 4 cities.

  • So our perspective is mix is going to continue to be a favorable tailwind for us going forward.

  • Ryan Brinkman - Analyst

  • Okay, that is helpful.

  • Thanks.

  • And then just for my last question let me try to approach what some are calling Diesel Gate from a different perspective as I focus on what it means for your previously communicated strategy.

  • So one of your drive 2022 goals for Europe is to improve the perception of and therefore the pricing of your vehicles and we met with Michael Lohscheller in (inaudible) earlier in the year.

  • It seemed the team there was already focused on the opportunity to improve overall pricing relative to VW even before the emergence of this issue just by building better product.

  • As you know though from your work on Cadillac in the US, sometimes you can build much better product then there is sometimes a time lag between when you field the better product and when you get fully rewarded for it because you also have to change the consumer mind.

  • So does the VW situation chip away at all at this consumer perception in Europe at least of engineering superiority associated with that brand and so therefore play into the look again theme relative to Opel?

  • Mary Barra - CEO

  • I think if you look at the plan that we have been on to not only have winning product in the marketplace for Opel and Vauxhall but also build the brand and there has been tremendous work done by Tina Miller, our Head of Marketing for Opel and Vauxhall of doing just that and the metrics prove out that we have changed minds and there is more favorability around the Opel brand.

  • And then when you look at the strong products that we have the Corsa, the Karl and then when you look at the Astra and the Astra not only is a great vehicle from a styling and I will say a fundamentals perspective but it has safety features that are industry leading.

  • It has connectivity that is not available across and also some features that are generally only available in luxury.

  • So as we look at the strength of Corsa, Karl and the whole portfolio there is the youngest -- is everything I think approximately 4 years or less.

  • So we feel that we are very well-positioned going into the market with these launches and we are going to work hard to earn every sale.

  • Ryan Brinkman - Analyst

  • Okay, that is helpful.

  • Thanks.

  • Congrats again.

  • Operator

  • Patrick Archambault, Goldman Sachs.

  • Patrick Archambault - Analyst

  • Good morning and thanks for taking my questions.

  • I guess my first one is just on the implied margin for the fourth quarter in North America and I guess I would just frame this question as not being nitpicky.

  • It is more of a function of just third-quarter being so good that when you back into the fourth quarter based on a 10% margin for the year it implies somewhere close to 9% which would be slightly better than what you did last year, maybe 30 basis points or so but certainly short of the 200 basis points of margin improvement year-on-year that you saw this quarter.

  • So is a lot of at just the incremental launch costs?

  • I think you mentioned 16 vehicles basically ramping up so wanted a little bit more color on that first.

  • Chuck Stevens - EVP and CFO

  • Sure.

  • Clearly as you continue to drive the business towards a 10% sustainable margin, the year-over-year comparisons are going to get more and more challenging.

  • We've had nine straight quarters of margin expansion.

  • You can do the math We are at 10.5% year to date so it is not hard to figure out kind of the floor for Q4 in order to hit 10% or something better than that for the year.

  • I would say this year we do have some incremental launch costs in the fourth quarter associated with the Malibu and a number of other products and it is both manufacturing and marketing that are going to be somewhat of a headwind.

  • But again, I would say as we continue to rotate through the next number of quarters, the year-over-year comparisons for margin expansion are not going to be as strong as they have been when we have been driving from a 7% margin to a 10% margin.

  • But I think broadly speaking, Patrick, your math is kind of correct.

  • It is not a hard math exercise to solve.

  • Patrick Archambault - Analyst

  • All right, thank you.

  • That is helpful color on the reasons for it.

  • I guess my other, a lot of my questions were answered but one that I was curious about just on the V2V product which I think is the Cadillac that is going to be fitted on the Cadillac in I think 2017.

  • It seems like you guys are going ahead of the NHTSA mandate on this.

  • They are working on rules to make this required and you will be ahead of that.

  • And just wanted to understand what benefits you get from that technology because it seems like there needs to be a certain critical mass for it to work especially if it is based off of communicating with other vehicles.

  • Just wanted your opinion on that.

  • Mary Barra - CEO

  • I think the biggest benefit is getting it into the marketplace, getting the learnings.

  • Clearly to your point, you do need the communication -- you need everyone to play but someone has got to start and take the leadership role.

  • We do work in a very strong fashion with NHTSA, our regulator, and looking at what we are doing, how we are driving it at how the regulations and the rules around this will be.

  • But we think it is very important to get it into the marketplace to drive the learnings, to drive the scale because with any new technology there is always something you learn when you get it into the marketplace.

  • So that is our look at that and again the same thing with Super Cruise.

  • Super Cruise first of all is built on the embedded connectivity capability that we have but getting that in the marketplace, having customers get to experience it is very important steps along the journey because we are working hard to be in a leadership position with autonomous as we move forward but in a very responsible way aligned with our goals to be industry leaders in safety.

  • Patrick Archambault - Analyst

  • Got it, understood.

  • Thanks for the color and congrats on the quarter.

  • Operator

  • Joseph Spak, RBC Capital Markets.

  • Joseph Spak - Analyst

  • Just one quick one, a little bit bigger picture.

  • I appreciate the color on your relative less dependence on diesel in Europe.

  • But clearly diesel was still part of the plan toward hitting 95 grams per kilometer of CO2.

  • So I guess my question is are you drawing up contingency plans, do you need to sort of double down on electrification or other alternative powertrains just in case there is something from a consumer demand or regulatory perspective happens?

  • Mary Barra - CEO

  • So if you step back and Chuck mentioned it, we have a lower diesel impact than some other OEMs if you look at it from a global perspective.

  • But we do have both capability in diesels as well as we are driving a lot of improvements in the internal combustion engine again from an electrification perspective not only the second generation Volt that has been not only improving the power density but also driving cost efficiencies.

  • And then you look at the Bolt and we talked about where we will be with our kilowatt per hour targets as we launch the Bolt and then how we will further take that cost down.

  • And in addition to that, I mentioned briefly in my opening remarks what we have working with Honda from a fuel-cell perspective.

  • So we have always believed in a propulsion diversity strategy.

  • I think we've got very good work going on in each of those areas and so again, we think it is too soon to tell but we have tremendous flexibility across the portfolio, across the globe as we look at all of our propulsion strategies.

  • Joseph Spak - Analyst

  • Okay, thanks very much.

  • Operator

  • I would now like to turn the call back over to Mary Barra.

  • Mary Barra - CEO

  • Thank you.

  • Again I appreciate everybody being on the call.

  • Our overall results again demonstrate a very strong earnings potential of General Motors.

  • Our results through the third quarter lay the foundation for achieving our commitments for the remainder of 2015 and 2016.

  • We are working extremely hard to make sure we deliver on what we say we are going to do.

  • As we move forward, we intend to execute our plan with discipline and that includes the capital allocation framework and we are confident that we will drive profitable growth, strong returns in invested capital and shareholder value.

  • So again thank you all for participating today.

  • 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 lines.