通用汽車 (GM) 2016 Q1 法說會逐字稿

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

During the opening remarks, all participants will be in a listen-only mode.

After the opening remarks, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, today's conference is being recorded Thursday, April 21, 2016.

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

Please go ahead, sir.

Thanks, operator.

Good morning and thank you for joining us as we review GM's financial results for the first quarter of 2016.

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've 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 and Chairman, will provide some brief opening remarks, followed by Chuck Stevens, GM's Executive VP and CFO.

And then we will open the lines 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 and Dhivya Suryadevara, Vice President, Finance and Treasurer to assist in answering your questions.

Now I will turn the call over to Mary Barra.

Thanks, Randy and thanks, everyone, for joining the call.

I'm extremely pleased to report that GM delivered a very strong performance in this quarter.

So let's take a look at the numbers.

The highlights and year-over-year improvements include, first, revenue of $37.3 billion, up $1.6 billion; Q1 record EBIT-adjusted of $2.8 billion, which is up $0.6 billion ; Q1 record EBIT-adjusted margin of 7.1%, up 1.3 percentage points; and Q1 record earnings per share adjusted of $1.26, up 47%.

Our net income was $2 billion.

This is also up $1 billion and in addition, our record 28.5% ROIC on a trailing four-quarter basis demonstrates the positive results of our disciplined capital allocation framework.

If we look, we returned $0.9 billion to shareholders as of March 31 and this really underscores our commitment to enhancing shareholder value over time.

I think it's also important to take note that, in Q1, we saw improved performance in all of our segments led by North America, continued strength in China and breakeven results in Europe.

We've had positive developments for Chevrolet and Cadillac, which are our two global brands.

To start with, in the United States, Chevrolet retail share was up a full point year-over-year to about 11%, Malibu's best Q1 retail sales since 1980 in the US and in March, 85% of Malibu sales were the all-new model.

In addition, we are launching the Cruze and very excited about that reception in the marketplace.

In China, the Malibu XL flagship sedan is also key to growing the brand in China from a Chevrolet perspective and again, this vehicle is getting good reception.

And from a Cadillac perspective, in the first quarter, our ATPs were the highest in North America in our history and we are very excited about the Cadillac CT6 and the XT5 that are now launching in both China and the United States.

From a North America perspective, US retail sales are up 7% year-over-year, largely on Chevrolet and Buick performances.

US retail marketshare grew faster than any other automaker, up 1.1 percentage points to 16.6% and our ATPs of $34,600 exceeded the industry average by about $3,500.

And ending total dealer inventory was down 13% year-over-year.

If we move to China with our joint venture partners, we delivered over 963,000 vehicles, up slightly from Q1 2015 thanks to the growth in SUV and the luxury segment.

The Buick Envision sales more than doubled and when we include the Baojun 560, total SUV sales jumped 148%.

We are also very excited about the new Buick LaCrosse sedan that was introduced that can continue to build on the strength of Buick in China.

And our Cadillac sales continue to rise, up 6.1% in the quarter on top of 17%, which was the full-year increase last year.

In Europe, we broke even in Q1 and we are on plan to break even for the calendar year and this is really driven by Opel's product offensive.

Opel/Vauxhall sales were [309,000], up 8.4% year-over-year, outpacing the industry and this is really on the strength of the Astra, which was named Europe's 2016 Car of the Year.

Marketshare was up in 15 of the 21 markets and the increases are in most of the major markets across Europe.

And we still have two very important product launches in Europe this year, the Astra Sportster and the Mokka X.

In South America, operating performance improved because of our continued work and especially the focus last year on rightsizing the business while protecting the new product pipeline.

And if we look at GM Financial, GM Financial grew its captive presence with GM customers and dealers in all regions with North America increasing its penetration of Good morning retail sales to 37% in the quarter.

This is up from 21% in the first quarter of 2015.

And across the Company, our operational excellence program, which is really driving Six Sigma and continuous improvement in every aspect of the business, is well underway and it's playing a key role in the $5.5 billion cost efficiency challenge that we have outlined and that we expect to achieve by 2018.

The success of the core business has enabled us to make smart investments in shaping the future of personal mobility.

On the autonomous front, we announced our intent to acquire Cruise Automation to further accelerate the development of autonomous vehicle technology and position General Motors in a leadership role.

In car sharing, we introduced Maven, which combines and expands our multiple car sharing program under a single brand, which includes Maven City and Maven+.

Maven City offers cars on demand in key cities driven by OnStar-powered smartphone connectivity that really provides the customers an ownership-like experience and Maven+ is a completely dedicated private fleet for residential communities.

We started this in New York City, as I've talked about in the past.

We are going to soon be adding Chicago and this will give us the potential to reach more than 5,000 residents.

On ride-sharing, as you know, we also announced the strategic partnership with Lyft and it's a four dimensional approach that enables us first to develop an integrated network of on-demand autonomous cars and we also introduced Express Drive, and this is a short-term rental program on the Lyft platform that makes General Motors cars available to Lyft drivers at affordable rates.

It also exposes both passengers and drivers to our products and gets more seats in seats.

We have the first launch, which is in Chicago, and demand is 8 times the supply.

We plan to add hubs in Boston and Baltimore and Washington in the near future.

Another aspect of the alliance and the partnership that we have with Lyft is being able to combine the Lyft experience with our vehicle connectivity leadership and this really provides a better experience for the customer.

And we also see many opportunities to jointly expand both of our business and present cross-marketing opportunities, and you will see us taking advantage of those as we move forward.

From an alternative propulsion perspective, we also revealed the 2017 Chevrolet Bolt EV at the Consumer Electronics show.

It's going to achieve more than 200 miles per charge of all EV range and will cost about $30,000 after government incentives.

Production will begin later this year.

So in summary, our strong first quarter gives as even more confidence that we will deliver the earnings growth we outlined in January.

We delivered Q1 record EBIT-adjusted, EBIT-adjusted margins and EPS-adjusted, along with a record return on invested capital.

Our aggressive product launch cadence and continued cost discipline will help us deliver on our commitments for the year and continue to drive shareholder value.

With that, I will turn it over to Chuck.

Thanks, Mary.

I just wanted to take a couple of minutes to provide some perspective on the quarter.

As Mary said, all reporting segments posted improved results from a year ago, including about $500 million of improvement outside North America.

Clearly, we are on track for another record year in 2016, very much in line with the overview we provided back in January.

Just a few comments on our results by region.

First, let me start with North America.

North America continues to put up impressive numbers.

We continue to see steady, moderate industry growth in the US of approximately 3% and we expect that trend to continue throughout the rest of the year.

EBIT-adjusted of $2.3 billion was a first-quarter record, up over $100 million from a year ago despite over $200 million in restructuring expense and the increased launch-related costs.

The success of our important launches like the Chevrolet Malibu and Cruze, as well as material and cost efficiencies will help more than offset higher D&A marketing and engineering-related costs throughout the year as we continue to invest in our portfolio and brands.

And as we've said before, we expect to maintain 10% plus margins for the calendar year while delivering improved EBIT-adjusted performance compared to 2015.

Shifting to Europe, we are very pleased with the breakeven results in Europe.

More than a $200 million improvement year-over-year and we remain very much on track to deliver breakeven results for the full year.

We continue to see moderate growth in Europe where industry volumes were up about 5% year-over-year in the first quarter and as Mary indicated earlier, Opel/Vauxhall sales outpaced the industry by growing over 8% compared to a year ago.

The success of Opel/Vauxhall's recent launches, such as the Astra and the Corsa, have contributed to increased wholesales and related top-line growth in the region.

We are also very focused on costs where we are utilizing tools such as operational excellence throughout the region in you are seeing some of the results.

In regards to earning cadence for the year, we expect normal seasonality throughout the year while we continue to manage FX challenges in the region.

Moving on to China, another solid quarter with strong equity income of $518 million, about equal to a year ago.

While the industry grew roughly 6% in the quarter, our retail sales were roughly flat year-over-year.

The quarter was impacted by model changeovers.

However, as our launches ramp up, we expect volumes and marketshare to improve.

Our previous guidance, industry growth in the mid-single digit range and our ability to sustain our strong margin performance has not changed and we are very much on track.

We also continue to capitalize on improving mix with our strong SUV and NPV sales, as well as products like the Cadillac CT6 and XT5 while remaining focused on cost efficiencies and driving material cost performance.

Turning to South America, EBIT-adjusted improved this quarter versus a year ago by approximately $150 million in a much more challenging economic environment.

As you are aware, macroeconomic conditions remain challenging with no near-term recovery in sight.

While we are pleased with the developments in Argentina and are seeing positive market signs there, political uncertainty continues in Brazil where industry volumes were down 29% in the first quarter.

However, the results of our restructuring actions over the past year contributed to improved results this quarter versus a year ago.

We will continue to take actions to help mitigate the negative headwinds that are impacting the industry and GM's results in that region as appropriate and we are well-positioned to take advantage of the economic recovery when it materializes.

Finally, GMF.

We continue to execute our captive strategy and are seeing the results.

As Mary mentioned, penetration in the US increased to 37% in the first quarter, up from 21% last year.

Revenue grew by $700 million to $2.1 billion in the first quarter, a record and we earned $225 million in earnings before taxes in the first quarter, another record.

Shifting to our capital allocation framework, we continue to focus on driving shareholder value.

In the first quarter, we returned $900 million to shareholders, including $600 million in dividends and $300 million in share repurchases.

We also remain focused on investing in the business.

And as Mary discussed earlier, our strategic investments in Lyft and Cruise Automation will help us build the foundation for driving further shareholder value in the future.

And as we indicated earlier this year, we also took steps to further derisk the balance sheet by contributing $1.5 billion to our US hourly pension plan during the quarter and just recently finalized another $500 million contribution in April.

As you know, the $2 billion contribution was funded with debt providing the Company greater flexibility by pushing out any required pension contributions further into the future.

As expected and in line with normal seasonality, Q1-adjusted automotive free cash flow was an outflow of $1.5 billion for the quarter, which was a $200 million improvement versus a year ago.

With regard to our total Company outlook for the year, we are very much on plan for improved full-year profit and margin growth versus 2015, which would be another record year for the Company.

And we have even more confidence that we will achieve our EPS-adjusted guidance of $5.25 to $5.75 for the full year and we continue to expect growth in adjusted automotive free cash flow to nearly $6 billion in 2016.

That concludes our opening comments.

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

(Operator Instructions).

John Murphy, Bank of America.

Good morning, guys.

A first question just on the pace of buybacks in the quarter.

It seemed like it was a little bit light.

Obviously, it's a tough working capital quarter, a seasonal quarter for you on cash flow.

I'm just curious as we see cash flow ramp up through the course of the year if you continue to see the buybacks as a significant opportunity here?

Sure.

And at a minimum, what we want to do is complete the committed share buyback program that we announced in the first quarter last year, which was $5 billion through the end of 2016 and per our capital allocation framework, as we generate free cash flow, we are going to buy back shares as expeditiously as possible.

But, as I said, John, at a minimum, we want to complete that first $5 billion on our path to the $9 billion upsize that was approved by the Board earlier this year.

Okay, great.

That's helpful.

And then just a second question as we think of the free cash flow you are showing on slide 23 here.

There's a $500 million benefit from equipment on operating leases and I'm assuming that's the gain on vehicles coming back off lease and the residuals performing better than expected.

I'm just curious if that is correct and if that's something you think will continue through the course of this year.

And what is driving that?

Is that just better market conditions, or is that better residual performance because nameplates and brands are starting to resonate with consumers?

Yes, John, that is essentially related to daily rental fleet and that is related to fewer units being placed into service.

When you look at the impact of daily rental on cash flow, you need to look at both the equipment on operating leases and accrued and other liabilities and inventory.

So it kind of shows up in three different places.

We can provide you with a little bit more specificity around that, but that has nothing to do with lease residuals on vehicles that are being leased through GMF.

Obviously that flows through GMF results.

Okay.

But, with that said, we are seeing -- continue to see positive results on lease terminations from a GMF perspective.

Okay.

That's very helpful.

And then just lastly, it sounds like the Baojun brand is helping out quite a bit in China and it's sort of a great example of a purpose-specified brand in a market.

As we think about potentially the need for a purpose-specified brand in the electrical vehicle market, is there ever a consideration to brand the Bolt or the Volt a different brand and come up with a new angle there because one of the electric-specific companies that's out there has got a good cache in their brand and it does seem like there might be some competitive dynamics that would be solved if you came up with a good new brand there.

From a brand perspective, I think when you look at the Chevrolet Volt to start with a few years back, it's done a lot, I think, to help increase awareness and consideration and positive views on the Chevrolet brand, so we've been building on that.

Chevrolet is a global brand and it's a full range when you look at the electrification, not only just all electric with the Bolt, but extended range electric vehicle with the Volt and even vehicles like the Malibu hybrid.

So I think we look at it and see it as an opportunity -- to a certain extent, Volt and now Bolt EV are starting to have a level all their own and we think it really complements the Chevrolet brand globally.

Okay.

Great.

Thank you very much.

Itay Michaeli, Citi.

Good morning, everyone and congrats.

Just want maybe to start with actually a long-term strategic question.

You've had a busy quarter with Lyft, Cruze, Mobilize REM and Maven.

I was hoping maybe, Mary, you could provide some color on how investors should think about the magnitude of the long-term opportunity that you are pursuing here, particularly maybe in regions where GM has not historically been well-represented.

What's the long-term vision for GM with respect to some of these opportunities that you are pursuing?

Well, I would say it's hard to size them when you look at how many different people are sizing up.

Is autonomous going to cause the industry to grow?

Is it going to shrink it?

I think there's too many unknowns.

But what I would say is we see a significant opportunity and that's why we are moving so aggressively on all fronts.

When you look at the technology that we are putting into cars as it relates to connectivity, when you look at what we are doing from a propulsion perspective, not only dramatically improving our technology from an internal combustion engine perspective, but the investments in the leadership position that we have with the Chevrolet Volt EV to be the first automaker that has the type of range of 200 miles plus at an affordable price of $30,000 after incentives.

Then when you look at autonomous, and we believe that we will see autonomous in the marketplace first in a ride-sharing activity for a whole host of reasons of being able to control and grow and learn and we think that's a huge opportunity across the globe, to your point.

So I can't specifically size it, but I think it's extremely significant.

That's why we are pushing it so aggressively and it builds on top of a strong core business.

So again, I think that will unfold over time, but we see it as significant.

That's very helpful.

And maybe just a follow-up for Chuck.

I know we are still early in the Cruze and Malibu launches, but just how are you feeling, Chuck, around the $1,500 variable profit goal for the year on those metrics?

Yes, we are very much on track with that, Itay, based on the reception so far and our expectations and the launch pricing and the delivery of cost as we launch these products.

So very much on track.

And by the way, continue to be on track along the same dynamic in Europe with the improved profitability on the Corsa and the Astra that we talked about before.

That's very helpful.

Thanks so much, everyone.

Joseph Spak, RBC.

Good morning, everyone.

Thanks for taking my question.

The first one is in North America.

I think, if my notes are right, this is the first time in maybe even two years that the carryover pricing wasn't a drag.

And I guess I just want to sort of confirm what's in that, what's not in that.

So the K2 platforms are now in that and is maybe within the carryover.

Pricing is sort of still okay there, but some of the others a little bit of a drag.

Is that the way to think about it?

Yes, obviously, the K2 has been in carryover pricing since the end of 2013, early 2014 as we move through that launch cycle.

So when I look at carryover pricing, I think there's two dynamics.

A headwind was really the rundown of model changes.

We are getting ready to launch the new Cruze and the new Malibu.

From a carryover pricing perspective, a positive is we continue to see price opportunities on full-size trucks and full-size SUVs that we are taking advantage of.

So as we look at the year, it feels to me that carryover pricing will be perhaps a bit less of a headwind than we've seen in the last couple of years.

Okay.

That's helpful.

And then the second one is just to follow up on South America, which is clearly a challenged environment.

I believe earlier this year you were still looking for improvement there.

I don't know exactly what you are thinking in terms of your political expectations for what's going on down there, if things have changed or not, but given the work you've seen there, are you still on track to see some improvement there and maybe you could just clarify is that from a margin or an absolute dollar perspective?

Well, when we looked at how the year was developing or our expectations for the year in 2016 versus 2015, what we said is we could see a scenario where we would see slight improvement in aggregate on a year-over-year basis depending on how the macro situation developed.

I would say our first-quarter results are certainly encouraging from that perspective.

We improved $150 million on a year-over-year basis in a much worse macro environment and I have to hedge my input or guidance for the rest of the year because it's really difficult to forecast what's going to happen in Brazil.

Down 29% in the first quarter, but the team continues to take action.

We've got a strong product lineup.

We are getting traction on cost and it's a good start to the year, but let's see how the rest of it plays out.

Got it.

So environment worse, but your internal performance better than expected?

At least through the end of the first quarter, yes.

Yes.

Okay.

Thanks a lot.

Pat Archambault, Goldman Sachs.

Thank you.

Good morning.

Maybe just starting on some of the technology stuff, Cruise Automation, obviously there's been a lot made about the amount that was spent on that.

I think it was over $1 billion reported in the press and that was a pretty big premium over the private valuations that were discussed in those same articles.

Two questions to that.

Number one is what are you exactly getting out of that that made it such a sought after asset?

And then maybe more broadly what does it tell you about the nature of innovation?

It seems like part of why it's surprising is a small outfit like that can come up with technology that a large outfit like you guys want.

And so what does that say about the nature of partnerships as we look to go on this very aggressive technology path?

Sure.

Pat, first off, as everyone knows, the transaction hasn't closed and we will provide additional details on the acquisition when the deal closes.

We still expect that that will happen in Q2.

So when you look at that though, there is a lot of technical capability within General Motors and when you look at the specific technologies that are necessary, which there are many and there's still, I will say, critical development on the mainline, the expertise and the work that's already been done by Cruise we saw as something that would really accelerate our ability to lead from an autonomous perspective.

And I think from a shareholder perspective, we are always looking at ways that we can lead and get there more quickly and make the decision of do we partner, do we buy, or do we develop internally.

And as we looked at the capability, we clearly thought, and our vision of the future, again, of where Cruise was headed, we were very much aligned similar to the way we were with Lyft and we saw this as a huge opportunity to really accelerate our performance in autonomous.

And I guess just building on that, within the technology, autonomous driving, cyber security, V2V, are those things that ultimately you want to really have full control of in-house, or do you see yourselves working with partnerships for the foreseeable future just given how fast all of this is evolving?

I think as an OEM and looking at the whole autonomous experience, we want to make sure we control the key areas where we can differentiate the experience for the customer and the entire customer experience.

But within that, there are strong partnerships.

We continue to work with Mobileye along with other partnerships, but I think what you need to -- where we are going to place the emphasis on is controlling the key aspects of the whole value chain.

Got it.

If I can sneak one last one just on leasing.

I know that you said, Chuck, that leasing was -- the residuals were performing well.

The Manheim, of course, has turned a bit.

What are your underlying residual assumptions for your lease book?

Are you assuming some kind of decline in residuals, or how is that working into that?

Yes, certainly, used car pricing has been at all-time highs over the most recent couple years and from a planning perspective, we expect moderation in used car pricing.

That's built into both the auto companies, as well as GMF's expectations and we are seeing that play out kind of as we expected.

So no material exposures, no material risk and as I said, as we anticipated a moderation in used car pricing is built into our baseline plan.

Got it.

All right.

Thanks a lot, guys and congratulations on the quarter.

Rod Lache, Deutsche Bank.

Had a couple questions on North America.

First, I'm trying to just triangulate how pricing and costs may look going forward and maybe just to level-set me, was there roughly a $400 million year-over-year tailwind from the nonoccurrence of the rental sales delays from last year and about a maybe $150 million cost benefit from the pension change this quarter?

That's directionally correct.

Picking out those two specific drivers amongst many, yes.

Okay.

So I guess it's pretty impressive that you are suggesting that pricing actually improves over the course of the year, even as that factor on a year-over-year basis I would expect would fade into the back half.

Well, what's going to help the pricing for the rest of the year, Rod, is obviously new majors, the Malibu, Cruze, XT5, amongst others and that's very consistent with what we guided before that we expected to see an increase in new major pricing over the rest of the year and the full-year impact of the pricing actions we've taken over the last number of months on full-size SUVs and trucks and kind of cycling through some of the support that we've had to provide on passenger cars as we launch these new cars is going to have a benefit from a carryover pricing standpoint.

Okay.

So you are saying it's not really just Malibu and Cruze because it looked like to offset that on an annualized basis you'd need to improve the pricing by like $3,000 on those vehicles.

You are suggesting that there are other vehicles that you've been taking price up on.

Is that right?

Sure.

Yes.

Okay.

And then the North American fixed cost number, you showed in your deck $600 million.

I'm assuming that that includes the $150 million from the pension, so it was like $750 million in the quarter.

Is that a reasonable run rate that we should be thinking about for the rest of this year?

No.

And again, when you look at the puts and takes first quarter this year versus first quarter of last year, clearly we had that fleet loss headwind last year in the first quarter.

This year, we had the SAP program, which we've talked about very clearly, which was in the range of $240 million.

You already brought up the pension, but in addition in the first quarter, we had launch-related costs from both a marketing and a manufacturing perspective in the range of $200 million.

We very clearly talked about an increase in engineering expense in 2016 versus the prior year to support our very aggressive product launch cadence and that obviously has had an impact in Q1.

But as we've talked about in the past, broadly speaking, starting in a company level, Rod, we said that incremental material logistics performance savings and manufacturing in GBS would more than offset increased fixed costs associated with D&A, marketing and engineering as we went through that product launch cadence and that's playing out as we expected from a total company level.

In North America, we cycle through and we are talking to you early next February, I would expect that to be relatively flattish when I think about material cost performance, logistics performance and the net fixed cost increase year-over-year, so nothing fundamentally has changed.

And my last comment would be take this in the context of we will and we are still very much on track to generate 10% plus EBIT margins in North America in 2016 and obviously there will be puts and takes on all the drivers, but I think that's the fundamental message.

Great.

Thank you.

And just one last thing, if you can comment on this, it seems like a number of companies, including GM, are performing really well in Europe, better than expected, but there's a bit of caution maybe partly because of the concerns about Brexit.

Is that something that is sort of characterizing your outlook that just the uncertainty there is affecting your view and do you have any thoughts on what the implications of that might be?

Well, as we sit today, very strong first quarter, significant improvement versus last year.

I would say ahead of plan through the first quarter.

We are still committed to drive that business to breakeven this year, but versus where we were at three or four months ago, I'd say the biggest cloud or headwind out there is the currency environment and what's driving that is the weaker pound sterling, which obviously isn't being helped by the Brexit situation.

And I'd say that's the biggest risk that we have amongst many, but that's the biggest risk that we have right now that we are working to manage through.

Okay, great.

Thank you.

Brian Johnson, Barclays.

Yes, kind of continuing on North America.

Looking at your 10-K, it looks like when you talk about variable profit, it shifted even more to trucks.

It went from 1.6 times the average to 1.7 and cars deteriorated from 40% to 30% and even CUBs deteriorated.

I guess a few questions around that.

One, will the actions in terms of products around Malibu and Cruze, and I assume the Lambda platform, help move this over the next year?

And then second, with some competitors seeing the profit pools in large SUVs and pickup trucks adding capacity over the next couple years, how are you thinking about protecting those profits in the years to come?

Well, certainly, as we go through the launch cadence not only on passenger cars and new entries in the Cadillac portfolio and refreshing the oldest crossover lineup, we would expect to see that profit dynamic shift and obviously improve those profit pools in passenger cars and crossovers, vis-a-vis trucks.

The other thing that's just mathematically impacting that shift from the 2014 K to the 2015 K is we are selling more vehicles in Mexico and obviously, there are more passenger cars there and they are lower priced, lower profit, obviously lower cost and that's having an impact as well.

Relative to trucks, the way you protect your profit pool in trucks and SUVs, great products, great brands, continue to take advantage of that, align supply and demand and continue to drive cost efficiency and our trucks well into their lifecycle continue to perform very well.

We had just under 38% retail share in the first quarter.

We continue to lead in the industry.

We just launched a refreshed truck, which will carry us to the next generation truck and we feel very confident that we will be able to protect those pools because we've got great products.

And just a follow-up on sedans, how -- and we will see GM Financial later in the day -- are you dealing with the fall in residuals on sedan prices?

Is it, A, any noise from the dealers that they need trade-in allowances?

I'll ask GM Financial later on how it's showing up in the lease returns.

And then as you work with your rental car partners, any shift from risk to program cars on that, or -- and are they beginning to ask for lower-priced cars, or are you leaving that for the competitors?

Well, as I mentioned earlier, Brian, overall, the lease portfolio continues to perform well for GMF.

Obviously, trucks and SUVs are performing very well.

Cars are performing not as well as they had been, but at a portfolio level were okay.

We talked about very specifically our strategy to reduce our daily rental fleet sales and that's really focused on repurchase because, at the end of the day, what we are trying to do is reduce our exposure to the used car market, continue to focus on retail deliveries, which drives better residuals ultimately and better owner loyalty.

So that's part of the strategy as well.

Okay, thanks.

Adam Jonas, Morgan Stanley.

Good morning, everyone.

This is Neel Mehta standing in for Adam Jonas.

Mary, the Company has been making a number of investments, both organic and strategic, in shared, electric and autonomous.

These are serious moves that are creating a pretty formidable collection of proprietary high-tech assets and software engineering capability and intellectual property.

Is there any argument that can be made to support this collection of tech along with the existing OnStar infrastructure to exist as an independent entity separate from the parent company to perhaps help maximize value to shareholders?

Well, first, talking about connectivity, I really think when you look at putting the customer at the center of what they want, they want that in today's business.

So it's vital to have integrated into the vehicle from a tech perspective to meet and exceed the wants and desires of customers today.

From an autonomous perspective, I appreciate your comments.

I think we are looking at it very seriously and with the extensive technology capability we have inside the Company, along with scale and understanding how to do and execute vehicles with this type of technology safely, I think it is something that really is an opportunity for us and that's why we are moving so quickly on it.

But I think right now when you look at it, it's looking at how the business is going to evolve and we will look at that over time.

But the technologies I see are -- many are very core to selling vehicles today.

And even on autonomous, that's a journey.

There's an evolutionary path and a revolutionary path and we are working on both.

Understood.

And one follow-up, if I may.

What does management think of the idea of creating a brand that is 100% focused on electric propulsion, whether it be an all new brand or say taking Cadillac and focusing on all further development just on EVs?

Well, I touched on this before, but when you look at it, first of all, we have two global brands, Chevrolet and Cadillac.

And there's also pure EV like we have with the Bolt EV that will be coming out later this year.

We have extended range electric vehicles with the Chevrolet Volt, but then we also have a lot of electrification, the Malibu hybrid and we will be launching over 10 new electrified vehicles in China.

So to us really the electrification is something that we integrated in the portfolio that allows us to build not only our capability and spread it broadly and reach more customers, but also to build those brands so they are viewed appropriately as technology leaders.

And I think we continue to do that, so we see it as core and integrated.

Great.

Thanks.

Colin Langan, UBS.

Thanks for taking my question.

Just first question on the free cash flow.

If you look at working capital and accrued and other liabilities, it looked like it was a $2 billion outflow in the quarter versus just $900 million last year for these two items.

Is there anything unusual and should that be a nice reversal into Q2?

And then could you just remind us on the pension funding, once you do the $2 billion, you are done for the year, so this is essentially just swapping pension for debt?

Yes, again, going back to the comment I made earlier, I think look at working capital separately, which was a $400 million impact versus $600 million at the first quarter of 2015.

When you look at accrued and other liabilities, that's the other line that is impacted by reduced customer deposits associated with daily rentals.

So as we sell less daily rentals, we get less customer deposits.

As we de-fleet, it has an impact on operating leases, so you got to kind of look at those two lines together and net-net, it was a $1.1 billion impact in the first quarter of this year versus $1.5 billion last year, which is a $400 million improvement, broadly speaking.

Oh, got it.

And the pension funding though, once you do the $500 million, it's done for the year?

Well, we borrowed $2 billion.

We will have contributed $2 billion.

We are done.

Obviously, that was, as we talked about it, a risk management approach to push out some of the timing on the liabilities into a 20 and 30-year timeframe and push out mandatory contributions from maybe 2019 and 2020 to the early 2020s, 2022, 2023.

We would expect, as interest rates increase, when they increase, that that will help close the remaining gap at least from a US perspective going forward.

Okay.

From the credit side, you talked earlier, it sounds like you don't see a big impact from used car prices on your lease portfolio.

Any color on subprime risk in terms of how much of GM Financial is subprime, and how are those loans performing?

A lot of concerning headlines about subprime default.

Is the performance within your portfolio pretty consistent though because I think there's probably an industry mix issue out there?

Well, one, our subprime portfolio originations have been relatively constant over the last number of years, so we are not growing that.

That's first.

Two, AmeriCredit, now GMF, subject matter experts in subprime and managing the risk associated with subprime.

Third, our delinquencies and credit losses associated with subprime have been very stable over the last number of years.

We see no incremental risk associated with that.

And then, finally, we are running today originations as we execute our captive strategy.

80% of originations are prime, near prime.

So again very stable levels of subprime activity at GMF.

Great.

Very helpful.

And just one last strategic question.

Some of your competitors are talking about battery pack cost of $190 per kilowatt hour for both the cell and the pack.

Can you match that kind of cost today and does that sound reasonable where the technology is today from your perspective?

Any thoughts there on the EV costs and the competition?

Yes, we've talked about with the Bolt EV and with the strategic work that we do with LG and with some other key suppliers, but we think we are on a path with the Bolt as we launch and get to scale of being in an industry-leading position of $150 and then continuing to improve that down.

So we work very closely on that.

We think it's key and when we -- not that we talk about it specifically with numbers, but we've seen dramatic improvement from the first generation of the Volt to the second generation of the Volt that is carried into the Bolt EV and will continue to drive that down.

And the $150 though, is that for the cell, or is that all in cell and pack?

I believe it's all in, but I think when you say all in, everybody may have a slightly different definition of what they mean when they say all in depending on how they have architected the vehicle.

We can provide more detail on that, but again I think there's some variation in how people are defining that.

Okay.

All right.

Thank you very much.

Ryan Brinkman, JPMorgan.

Thanks for squeezing me in.

Congrats on the great quarter.

Thank you.

Thanks, Ryan.

Okay, so first question is just on China.

Your margin there has been remarkably stable, right, relative to I think investor expectations it would fall given the softer pricing environment.

So can you talk about how you've been able to keep that margin steady despite what looks like 6% type declines versus maybe more normal 3% type price declines, whether that's due to mix, volume, cost, something else given that you don't provide a China-specific walk.

And then what are the drivers going to be going forward for the rest of the year?

Nothing has changed vis-a-vis the China fundamentals versus what we've been talking about for the last year or so.

Fundamentally, price continues to be a challenge.

Last year it was in the range of 4% to 5% negative price headwinds.

On carryover, we expect that same level this year.

That's what we've seen play out so far in the first quarter and we are offsetting that impact through significantly improved mix and you saw some of those results -- the Envision as an SUV, sales up significantly; the Baojun, 560.

We are launching critical new products like the Cadillac CT6 and the XT5.

So mix has been a mitigant to the price headwinds, as well as carryover material performance.

And when I look at those two together, they kind of offset the price headwinds and where you see the benefit, at least on an aggregate equity income or profit perspective, is volume.

And we would expect to see that play out.

Obviously, we continue to focus very much on cost efficiency, both material logistics and fixed costs, but broadly speaking favorable volume, favorable mix as we improve our Cadillac portfolio and launch more crossovers and MPVs, favorable material performance offsetting or more than offsetting price headwinds, as well as fixed cost increases, we bring up new plants.

That's the broad strokes, Ryan.

Okay, great.

Thanks.

And the last one is just a quick question on auto finance given that you've already commented on used car prices and subprime penetration.

Maybe just to round that out, could you talk about what you see as the sustainability of some other trends that have been supportive of SAAR like loan duration and lease penetration?

Well, we expect for us specifically we had pretty strong lease penetration in the first quarter driven by again some of the model wind-down efforts around Malibu, Cruze and the SRX.

We would expect to see that moderate.

We will be somewhat below industry average because trucks don't lease at the same levels and obviously, we are overweight in trucks.

So we would expect to see that continue.

We are taking a number of actions to make sure we optimize residuals.

We talked about the Express Drive rental hubs, anything that you can do -- the factory pre-owned collection -- anything you can do to take that supply out of the auction generally will help residuals over time and clearly that's a focus that we have going forward.

Okay, great.

Thanks.

Congrats again.

Thank you.

I'd now like to turn the call back over to Mary Barra.

Well, thank you very much and thanks, everybody, for joining the call this morning.

I have to say I'm extremely proud of the team for what they were able to accomplish this year, but we know we have more opportunity as we go through the year.

We are going to continue with the discipline and detailed focus on strengthening the core business and the adjacencies, but also taking advantage of growth opportunities and our ability to lead as personal mobility is transformed and redefined.

Thank you.

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.