通用汽車 (GM) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Motors Company First Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, April 26, 2018.

I would now like to turn the conference over to Dhivya Suryadevara, Vice President of Corporate Finance.

Please go ahead, ma'am.

Thanks, operator.

Good morning, and thank you for joining us as we review GM's financial results for the first quarter of 2018.

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

We're also broadcasting this call via webcast.

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

This morning, Mary Barra, GM's Chairman and CEO, will provide some brief opening remarks; followed by Chuck Stevens, GM's Executive VP and CFO.

We will then open the line for questions from the analyst community.

Before we begin, I'd like to direct your attention to the 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, VP, Global Business Solutions and Chief Accounting Officer; and Rick Westenberg, VP, Treasurer, to assist in answering your questions.

I will now turn the call over to Mary Barra.

Thanks, Divya, and good morning, everybody and thanks for joining.

We generated results in line with our expectations in the first quarter, managing through the challenges related to restructuring in South Korea, planned downtime in North America and elevated investments in future products, including our full-size pickups and GEM vehicles.

If we look at the numbers, our net revenue was $36.1 billion.

We had EBIT adjusted of $2.6 billion, EBIT adjusted margin of 7.2% and EPS diluted adjusted of $1.43.

Our ROIC adjusted was 26% on a trailing 4-quarter basis.

And as expected, our adjusted automotive free cash flow was negative $3.5 billion, higher than the typical seasonal pattern due to planned lower full-size truck production and incremental capital spending to support our new truck launches and GEM vehicles.

The actions we are taking in 2018 include the transition to the new Chevrolet Silverado and GMC Sierra pickup, key contributors to our $65 billion truck business; also, our GM Korea restructuring, and this will set the stage for stronger performance as we move through the year and into 2019.

In Korea, we have negotiated on a historic labor agreement, which was ratified early this morning by union members.

Our employees and management have taken decisive actions to set a foundation for viability in the future.

Combined with reducing the manufacturing capacity, these actions will enable GM to be profitable at an enterprise level from vehicles produced in Korea.

As part of this deal, the Korean Development Bank will be investing $750 million into GM Korea.

The deal is subject to a binding agreement between the KDB and GM Korea, and we expect to finalize this in the coming days.

Chuck will get into a bit more of the details in his remarks in a few minutes.

If you look at GM across the board, we are solidly profitable in all core operating segments, including GM Financial, where we achieved record EBIT adjusted of $443 million, and we are on track to achieve the full year guidance we announced in January.

Globally, we are growing and improving the returns in our core business by focusing on the right mix of products in the popular crossover, SUV and truck segments, by playing to win in every market where we compete and by working relentlessly to reduce costs.

We are halfway through our most aggressive product portfolio renewal ever.

As expected, our newest crossovers and SUVs are driving growth.

Deliveries of GM's newest crossovers in the U.S. and China doubled year-over-year in the first quarter, led by the GMC Terrain, the Chevrolet Traverse and Equinox and the Baojun 510 and 530.

In the U.S., year-over-year total crossover sales rose 23% across all brands, and Cadillac Escalade sales were up 8% despite new competition in the segment.

So let's take a closer look at Cadillac, where we recently appointed a new leader, Steve Carlisle, to further accelerate the brand's progress.

Our global Q1 sales rose 22.5% year-over-year, led by continued growth in China.

We have an opportunity to improve our performance in the U.S. luxury market with the Cadillac XT4 SUV that we will launch later this year.

The Cadillac XT4 began the cadence of new models, averaging one new vehicle every 6 months through 2021.

And as Cadillac volume increases, we expect to see profit double over the next 4 years.

GM China is outpacing last year's record performance with strong equity income and record sales in the quarter.

Regarding U.S.-China trade, we have more than 2 decades of positive experience with our joint venture partners, and we believe both countries value and understand the interdependence between the world's 2 largest automotive markets.

Baojun, our fastest -- our fast-growing domestic brand in China, is on track to sell 1 million vehicles in 2018, just 10 years after it was created.

Last month it launched the 530 compact SUV, and sales have already surpassed 10,000 units.

China is very important to our global strategy for an all-electric future.

Buick will add the VELITE 6 plug-in hybrid electric vehicle and the VELITE 6 EV to its China portfolio to capitalize on demand for new energy vehicles.

In addition, we continue to invest in technology and innovation to enhance the customer experience, redefine future -- the future of mobility and achieve our vision of a world with 0 crashes, 0 emissions and 0 congestion.

We announced we will build production version of the Cruise AV, leveraging our deep hardware and software integration.

Having all AV -- our capabilities under one roof gives us a competitive advantage in this space.

We're making progress on achieving commercialization at scale in a dense urban environment in 2019.

And safety has been, and will continue to be paramount in our commercialization effort.

We are also expanding the partnership using our embedded 4G LTE connectivity and our vehicle data platform to offer convenient commerce options to our customers and to generate new revenue.

Using Marketplace, owners of eligible 2017 model-year vehicles across all of our brands can use their in-car touchscreen to pay and save when they fuel up at Shell stations, eliminating the need to swipe a credit card or use a mobile device.

This week, we introduced Amazon Key In-car delivery, a service enabled by OnStar that delivers Amazon Prime packages directly to more than 7 million GM vehicles in the U.S. at no extra cost.

And finally, I'm extremely pleased to welcome Devin Wenig, the eBay President and CEO to our board.

His wealth of experience in technology, global operations and digital marketplaces, all with a focus on the customer, will be an important addition to our board.

So now I'd like to turn it over to Chuck.

Thanks, Mary.

We delivered solid, on-plan performance in the first quarter with all core operating segments reporting profitable results.

As expected, we faced some headwinds to start the year driven by the traditionally weak Q1 seasonality, coupled with retooling downtime as we prepare to launch our all-new, full-size pickup trucks.

In total, we generated $36.1 billion in revenue, $2.6 billion in EBIT adjusted, 7.2% margins and $1.43 in EPS to diluted adjusted at the enterprise level in the first quarter.

The Q1 cash burn of $3.5 billion reflects the impact of lower earnings, working capital timing and increased capital spending to support the new full-size pickup truck and GEM program launches.

It's important to note that free cash flow results are in line with what we had expected going into the quarter.

North America generated solid results with $2.2 billion of EBIT adjusted and 8% margins.

These are more typical results for Q1 versus the results posted in the first quarter of 2017, when we had a significant inventory build ahead of product launches.

Q1 was down $1.2 billion year-over-year, primarily driven by planned downtime in our truck facilities and absence of dealer inventory build in the first quarter of 2017.

Our U.S. transaction prices, which are net of incentives, continue to grow in the first quarter.

Our first quarter ATPs of almost $35,000 were $600 higher than the first quarter of 2017.

We expect continued strong pricing performance driven by our new crossovers and the launch of our new trucks later in the year.

Importantly, we expect to sustain a full year EBIT adjusted margin of 10%, primarily due to continued strength in the U.S. industry, benefits from a full year of new crossovers, the launch of our all-new, full-size trucks and continued focus on overall cost efficiency.

Moving to GM International.

As a reminder, GMI is now a combined reporting segment consisting of the former GMIO region and the former GM South America region.

Overall, EBIT adjusted performance for this segment was flat year-over-year with strength in China and improvement in South America as the market continues to strengthen, offset by weak volume in Korea driven by the current dynamics in that market.

China continues to deliver strong results, with record equity income of $600 million for the quarter.

Pricing pressure remains a challenge, but was more than offset by the richer mix of crossovers, strong sales from Buick, continued growth from Baojun and Cadillac and focus on cost efficiencies.

In Korea, as Mary said, we have reached a conditional agreement with the labor union, Korean government and the Korea Development Bank.

This is a landmark achievement.

GM Korea expects to realize $400 million to $500 million in annual cost reductions through plant closure, labor and other efficiencies, which will lead to profitability in 2019.

In addition, through these savings, efficiencies and strong new product programs, we expect to generate 10% to 20% return on invested capital in the medium term.

And as part of the agreement, GM Korea will receive a total of $750 million for future investment from the Korean Development Bank.

A few comments on GM Financial and our corp segment.

As we continue to progress towards full captive, GM Financial posted record revenue of $3.4 billion and record earnings before tax adjusted of almost $450 million in the first quarter.

Earning assets grew $13.2 billion to $88.1 billion, supporting expected future earnings growth.

For the full year, we expect to see a meaningful improvement in GM Financial earnings versus 2017.

In the Corporate segment, costs were $300 million for Q1, reflecting lighter spending from a quarterly cadence perspective driven by timing of expenses.

We continue to expect the corp segment quarterly costs to be about $500 million for 2018, including $1.1 billion in transportation-as-a-service spending for the year.

Turning to cash flow and capital allocation.

As I mentioned earlier, our cash burn in Q1 was, as expected, $3.5 billion, down versus 2017 and down versus a typically weak Q1 run rate of about $1.5 billion.

This was driven by factors specific to Q1: downtime for truck changeover, elevated capital spending and working capital timing.

We are on track with our 2018 free cash flow expectation of approximately $5 billion, which we will generate through strong EBIT performance for the balance of the year; working capital rewind; our annual China dividend payment; and reduced capital spending on a run-rate basis.

During the quarter, we returned $600 million to our shareholders through $500 million in dividends and $100 million in stock repurchases through our participation in Aviva trust sale.

Our pace of buybacks for 2018 will be dependent on our free cash flow generation and any additional calls on cash throughout the year, such as the Korea restructuring payments.

We would expect share buybacks to be weighted to the second half of the year.

With regard to our total company outlook for the full year.

As I mentioned, Q1 was in line with our expectations, and we are on track to deliver on the guidance we outlined at the beginning of the year.

We expect core EBIT adjusted and core automotive adjusted free cash flow to be generally in line with the core business performance in 2017.

With regard to commodities, we anticipate a continued increase in raw material prices, which we expect to largely mitigate through cost performance, similar to what we did in the first quarter.

We expect the incremental impact from tariffs will be minimal, given that most of our steel and aluminum is domestically sourced and we have long-term supply contracts in place.

Reiterating the cadence of earnings for the rest of the year.

We continue to expect Q2 and Q3 to be strong and Q4 to be weaker on a relative basis.

The relative weakness in Q4 is driven by additional downtime in preparation for the new truck launch.

As mentioned, we expect significant year-over-year profit growth at GM Financial and at least $2 billion of equity income in China as well as a meaningful improvement in our South American markets in GMI.

To sum it up, the first quarter performance came in as expected with all core operating segments reporting profitable results.

The full-size truck launch is on plan and will support earnings growth later in the year and in 2019.

And while the environment is more challenging than just a few months ago, the entire team is focused on meeting our commitments in 2018, just as we have done for the past 4 years.

That concludes our opening comments.

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

(Operator Instructions) Your first question comes from the line of John Murphy with Bank of America Merrill Lynch.

Just a first question.

Now that you're almost through the issues in Korea, just curious what is next on your list to address.

Because you seem to be ticking through these things after GM Europe, Korea, and there must be something else next in your list.

Just curious if it's South America, or if we'll ever get to a point where the segments might include GM trucks, Cadillac, GM Financial and mobility.

And we might not be thinking about things the same way as we're thinking about them now as far as segments.

First, I would for say we think we have an exceptionally strong franchise in South America.

When you look at the market share leadership position, we have #1 selling product with Onix, and the fact that we took our breakeven point in South America down 40%, we are now really well positioned to -- and we are seeing that opportunity as that market starts to grow.

And then when you look at the new product that we'll have coming with our GEM set of vehicles, it really positions us very strongly in South America.

So that's not somewhere we're going next.

That's a franchise we think is a strength at General Motors, and we'll see that demonstrate and contribute to the bottom line as we move forward.

I would say, Korea, as we talked about in the past, was very important country because it's so important because of the supply base there, because of the very talented engineering resources that we have there.

So this is historical agreement that we are very close to closing, but is on track and with the labor agreement ratified, really positions us nicely there.

I would say there's a couple other countries where we need -- we have work to do, not to exit, but to improve the profitability.

And we're on that.

And then if you look at -- as we've looked across the segments of our vehicles, investing and seeing the success in crossovers, and very optimistic about our full-size truck family of vehicles.

The launch is going well.

The truck is building exceptionally well.

The customer feedback we're getting is very strong.

And so it was really -- if you, I'm sure have looked at both the Silverado and the Sierra, have really been customer-focused as we made improvements to features, functionalities for those trucks.

So we're very excited about that.

So strong investment in full-size trucks and crossovers.

And then leveraging the investments we made in '15 and '16 from a U.S. perspective in cars allows us to not to continue to invest, but to have some strong offerings in the marketplace.

Because although there are several car segments that are shrinking, they're -- they still are large, and they're -- that's an opportunity.

So I would say with Korea, we've really done the major areas that we need to address, and now it's just continuing to strengthen and improve the profitability with the right products and going there to win.

As it relates to how we might segment report going forward, I think the segment reporting we have right now is appropriate.

And that's something that we always evaluate and look to see what's going to provide the right transparency to demonstrate the growth and the potential that we have going forward.

Got you.

That's helpful.

And then just a second question around potential for changes in ownership structure, JV requirements in China.

I mean, you've had some pretty strong performance over there, a strong partner with SAIC.

Just curious how you think about this.

If we really do get the change and you get -- operate sort of as a fully-owned, stand-alone company over there, would you make that change?

Or do these JV partners really give you an advantage in the market that are -- that you might not have otherwise on your own?

We think we have an outstanding partner in SAIC.

We've been working together for more than 20 years.

So we think having a partner that understands the environment, whether from a governance perspective, regulatory perspective, overall policy and then deep customer insights as well, is an advantage.

And if you look what we've been able to accomplish in the leadership position that we have in China, I think that reinforces it.

We've also been able to drive efficiencies by sharing development that -- especially if you look at electric vehicles that allows us to leverage that around the world.

So we'll continue to look at what's in the best interest of our shareholders.

But right now, we strongly believe that the JV is -- has provided tremendous benefit and will continue to.

Okay.

And then just lastly real quick on raws.

You were sharing -- or you were absorbing, I should say, a larger portion of the raw mat complex than you were prior to the downturn as you sort of helped out a lot of suppliers.

I'm just curious as we see raws rise, is there an opportunity to potentially share that risk or increase or decrease with the rest of the value chain a little bit more directly?

I mean, it's understandable that you might want to hold onto sort of the key component of steel and aluminum or some of the metals.

But the rest of the complex seems like it might be the purview -- or better served to be the purview of suppliers.

Just curious if there's any thought there or changes that might be afoot in sharing that risk of across the value chain.

Yes, I -- John, let me answer that question in a couple of dimensions.

First, we buy about $16 billion of raw material on an annual basis.

Only 1/3 of that is indexed, which means we're exposed to fluctuations in commodities on about 1/3 of that are roughly $5 billion to $6 billion a year.

So you can do the math.

A 5% movement in commodities will impact us $300 million to $400 million.

Obviously, there's always a lag associated with that.

The rest of the commodities are bought or long-term contract.

Ultimately, they'll be subject to negotiation, but I'm just talking about near term moves in commodities.

So we feel like we're in reasonably good shape there.

Second, as we engage with suppliers, we engage with suppliers across the entire value chain, looking at opportunities for efficiency, productivity and cost sharing or cost savings opportunities.

And we've been engaging with them on a strategic basis over the last number of years.

So we will look at commodities.

We will look at foreign exchange.

We will look at footprint opportunities.

We'll look at opportunities for technical savings in productivity.

And we've been pretty successful over the last number of years of really driving some benefit to the bottom line as part of our $6.5 billion cost-efficiency target, of which we've generated $5.7 billion through the first quarter.

Big chunk of that is commercial and technical savings, which we have used to mitigate any of the headwinds that we've seen in commodities.

And again, in the first quarter, if you look at commodity headwinds year-over-year, there were a couple hundred million dollars, and we offset it with commercial and technical savings.

And I would say we're on track to do that for the year.

So I don't know if that answers your question.

I think it's -- you got to look at it holistically across the entire value chain.

Your next question comes from the line of Ryan Brinkman with JPMorgan.

You guys have been very proactive in recent years about exiting under earning or loss-making geographies, and I think have been rightly given a lot of credit relative to some of your competitors in this respect.

With that said, yesterday, Ford announced that they would drop all but 2 passenger cars from the North American lineup.

It looks like the Chevrolet brand offers 9 passenger cars versus 6 trucks, crossovers, utilities, maybe depending on how you count.

Of course, you have more at Buick, et cetera, and you have several plants, including Lordstown now, with just one shift; but also with, I think, Fairfax or Kansas City, I forgot, or Orient Township I'm trying to consider, that seem mostly or entirely focused on passenger cars.

So it would seem that -- maybe you tell me, is there an even greater opportunity to improve margin by rationalizing passenger car lineup at GM given your greater number of offerings, greater complexity?

So what are your thoughts on this opportunity?

And over what period of time could investors expect to see such changes?

Well, I think already, when you look at -- as I mentioned before, in '15 and '16, we launched new very efficient architectures in the mid-sized (inaudible) compact.

And that is proving well is a good platform to go forward with fairly minor changes.

We're -- we have new offerings coming that are very focused on features and styling that customers want in these segments.

I think we're going to see the benefit of that.

And the segments, as I mentioned before, are still significant enough that we think there's an opportunity, because we've made the investment, don't need to deploy

(technical difficulty)

to no capital as we move forward.

So we see it as an opportunity.

We're always looking for how do we make sure we're customer-focused and then drive that as efficiently as possible.

We have worked on each of our car lines over the last year to make sure that we're driving efficiencies across all areas of the business that support those.

So -- and I think what you're going to see us do is very efficiently play in a segment, that although is declining, there still is opportunity.

And then if you look around the globe, the GEM family of products that we are going to be starting to launch next year from China, that still has a significant car market as well from not only Chevrolet, but also Buick, and then you look at South America, that has a very strong car portfolio and the GEM family will support that, I think we're well positioned in cars.

We're always looking for efficiencies, and we'll be responsive to the marketplace, as you saw with the shift change that we made at Lordstown.

And if I could just add to that, Ryan, and to Mary's comments.

A lot of the questions seem to be focused on the U.S. market, rightfully so.

And as Mary mentioned, we think we're reasonably well positioned with the investments that we made.

But I think you should take a step back and look at -- and you mentioned it upfront, some of the actions and the tough decisions we made over the last number of years, which were largely in passenger car markets.

Chevrolet Russia; the Opel/Vauxhall sale; India; South Africa; what we just did tackling Korea; and to South America specifically, largely a passenger car market, we've reduced the breakeven point by 40%.

All of those address inherent passenger car profitability issues.

And then with -- as Mary mentioned, with the GEM launch, we're replacing a number of legacy architectures with a profitable architecture that will go across both passenger cars and crossovers.

So I think it's been very, very systematic over the last number of years.

And I -- frankly, I think you're seeing the results flow through the bottom line, although -- as we've grown margins by over 300 basis points since 2015.

And just lastly for me.

GM International profits are better than I'd expected.

I know you don't break out South America separately any longer.

But if you could maybe speak directionally to the performance of the different geographies that comprise GM International?

We can see from the equity income, China's doing fantastic.

But any update on what you used to call Consolidated International Operations?

We like to sort of track how you were reducing your losses there.

And then South America, I imagine you're continuing to do quite a bit better than your peers.

But if you could speak directionally to your performance there.

And what you're expecting for the remainder of the year.

Yes.

What I said earlier today -- and again, this is one segment.

But clearly, China equity income was up in the consolidated piece of this.

We had some challenges in Korea.

And frankly, the domestic market pulled back significantly, and probably not a surprise to anybody given the dynamics that we engaged in with the plant closure and everything else and concerns about whether we are going to be there long term.

I would say we continue to make progress in South America.

The industry continues to improve.

And I'd say on a year-over-year basis, we're continuing to improve our performance overall in that segment.

So kind of the puts and takes would be weaker kind of Korea; stronger South America; China, equity income.

That's the way I would think about it.

Your next question comes from the line of Brian Johnson with Barclays.

It's no secret, because you put it in your 10-K, that trucks account -- have much higher profit margins than crossovers or cars.

We've talked about cars.

Crossover had been declining in terms of its percentage of the margin.

Your crossovers were aging, but they're relaunching.

So I guess, kind of 2 questions: As you go, what kind of improvement in the crossover profitability due to the Traverse, Equinox at all are we going to be seeing this year?

And then second, as we roll out towards 2020, with the moves of competitors to add more crossover capacity, more crossover model offerings, both -- we heard that from Ford and of course, we need the Fiat Chrysler, Jeep plants, kind of how do think about maintaining your profitability going into 2020 in crossovers as you face that new competition with older platforms?

And then, of course, in big truck as 1 of the other 3 launches their new truck around that time frame?

Yes.

I think it's a pretty broad-based question, Brian.

First, when we think about 2018, we very specifically, in the path to 10% margins in North America, we said we were going to have about a $900 million headwind, roughly speaking, related to the truck launch and the reduced production.

We said the gap fill on that, it was going to be about a $0.5 billion of improved profitability in crossovers.

And we're very, very much on track with that.

So that's kind of -- we're seeing the full year benefit.

And clearly, our 2017 results and the profit erosion on crossovers was driven largely on the selldown of the old crossovers.

So I would say that very, very much on track.

Looking forward, clearly, continued improvement in crossover profitability is critical and front and center with us.

I think that's going to be driven by 2 dynamics: One is we'll continue to launch new crossovers in the segments we're not participating.

Later this year, we'll launch the XT4, for instance, in Cadillac.

And I think you're going to continue to see new entries, which will drive our overall presence and aggregate profitability in crossovers.

And we also are very, very focused at the enterprise level on operational excellence.

And we were talking about passenger cars earlier, but what we do, sponsored by a senior leader of the organization, is on a weekly basis, look at these car lines and look at very specific actions on how we can drive, continue to drive performance improvement, largely from a cost standpoint.

We got a lot of traction with that.

We'll continue to do that with crossovers.

So it's not lost on us that crossovers are going to be more competitive.

What we're going to do is run real hard to stay out in front of that, both with new entries and continuing to drive cost efficiency in the entries that we have.

Okay.

And just to follow up from that.

In terms of some these restructuring activities in international as well as recovering macro, when do we think about, dare we say, normalized margins in places like South America or Asia Pacific, China and kind of -- well, that, especially in a specific ex China, would be off of a lower revenue base?

Yes.

Back in the day, when we reported South America separately, we said we were on the path to mid-single-digit EBIT margins there as we work through the breakeven and launch of the GEM product, and I'd say largely on track.

I think somehow, the message isn't getting through.

We just landed a deal in Korea that will generate $0.5 billion a year of savings.

That's $0.5 billion, which goes right to the bottom line, and it will start to accrue as we move through Q2 through the rest of the year.

That's a big step towards improving the overall GMI segment on a go-forward basis.

So between those 2 things, I think there's a meaningful uplift in our GMI profitability ex China, continue in '18 and then through '19 and '20.

And we talked before that we wanted the whole GMI segment to be profitable in 2019.

And that is still very much our objective and what we're driving to.

Your next question comes from the line of Adam Jonas with Morgan Stanley.

Just 2 questions.

The first is economic and policy related.

I've been asking the CEOs across town the same question.

Mary, would you support an increase in the U.S. federal gasoline tax if the proceeds went to rebuilding our U.S. infrastructure?

Well, Adam, I think in general -- and it's a little more complicated than a yes, no answer.

What I would say is, first of all, we are in full agreement that the infrastructure needs to be addressed and improved substantially and quickly.

We need to do that in a way where we focus on the customer and make sure that we're looking at their affordability and their overall cost of ownership.

And I think there's multiple solutions, whether it's road use, whether it's gas tax.

But then I think we also have to look at the changes that are going to occur over time from an EV perspective and look at how do we take multiple ways to fund the infrastructure that supports where we're headed with the changes in transportation and mobility, making sure that we comprehend EV charging, for example, or write the right Vita-infrastructure type of solution in that.

So we very much want to be part of the solution.

We think that municipalities and the government at all levels need to come together.

A gas tax can be a part of it, but I think we need to look at this much more holistically in much -- overall much longer term.

Okay, appreciate that.

Just a follow-up.

Mary, last question on GM and Amazon.

So I find the agreement with Amazon from yesterday or the day before just fascinating.

I mean, they have 100 million Prime subs.

You have 100 million cars on the road more or less.

It's nice round numbers.

But Amazon's going to spend about $60 billion this year on shipping and fulfillment, and you can really help them solve a major pain point for them and their customers in logistics.

So 2 parts to this question, Mary: First, is this not just the tip of the iceberg on the ways that GM can work with Amazon on logistics and customer experience, content delivery?

I mean, this can be a lot more than just Amazon putting their junk in GM's trunk, right, Mary?

And then the second thing -- the second is just how does GM get paid for this?

Because you could be saving Amazon billions of dollars.

Can you walk us through the revenue?

Like, do you get paid per delivery per car, per month?

How does GM get paid because you're doing all the work?

Well, I'd say I'm not going to go into the details of the sizing, but I will just say it's on a kind of a use-based model of how we get paid.

So I -- first of all, I agree.

I don't know if I'd call it junk in the trunk, because I think being customer-focused...

Packages.

We provide things that they want and -- but the security, the peace of mind that we give them, one, something not being dropped at their door but being in a locked vehicle.

The convenience of that, the knowing when it's going to get there, et cetera, I think this is a huge customer value.

And I think we are just, no pun intended, unlocking the value that we have from having the base of vehicles that are connected.

So I agree there, I think there's much more opportunity with Amazon and others.

And I think we're working aggressively as we go forward to do that.

We have a good relationship with Amazon.

And on this, I think as we move forward, we'll see that it benefits our customers.

It definitely provides an opportunity for General Motors to generate revenue and profitability, and it's a more efficient way for Amazon to get, as you call it, that last mile.

Okay.

Well, any added transparency on just that revenue?

Because these initiatives are getting announced, but the OEMs are doing a pretty poor job, I think, of just explaining -- like at a micro level.

You press on an app.

Amazon gives you an option to put it in a GM vehicle.

How does GM get compensated?

So just some feedback, when it's appropriate, that would make a big difference.

Adam, just one point on that.

There -- so as I said, it is kind of a per-transaction type of opportunity with Amazon.

So I think you'll -- we'll see and discuss it more as we go forward.

But if you look at Marketplace, which is also -- we're getting the ability to get paid, not only just on impressions of the opportunity that another company's product is positioned very appropriately and safely in the vehicle at the right time and on demand.

So it's impressions as well as transactions.

So as this grows, I think it's going to be meaningful, and we will share more.

Your next question comes from the line of Rod Lache with Deutsche Bank.

I had a couple of questions.

One, could you talk a little bit about the management changes at Cadillac?

And just from everyone's comments, it sounds like you wanted to see things done faster or differently.

How exactly is that going to be executed?

And can you just remind us of what your targets are there?

So Rod, appreciate the question.

And we -- this is not a right turn from a Cadillac strategy perspective.

We have a, we think, a very strong product cadence with -- starting with the XT4, having a new vehicle -- a new product coming out on average every 6 months.

We see a huge opportunity to grow our volume, grow our profitability.

We also -- I believe, longer term, there's a huge opportunity for Cadillac to really redefine luxury when you look at how aggressively we're pursuing electric vehicles as well as autonomous.

And so this is really an acceleration.

And looking to make sure that as we are setting the strategy for the future and really have a huge opportunity, both in the U.S., China and then in many other markets, that we're also executing on -- today in the key markets that we participate in.

So this is not a right or left turn.

We will still stay in New York with this team, and it's a move to accelerate.

And relative to the objectives, Rod, that we talked about before -- and this kind of goes back to the foundation in 2016.

We wanted to double Cadillac sales by kind of the 2020-ish time frame.

So think about something north of 0.5 million units globally, that would include China; and to improve our profitability by roughly $1 billion.

And that would largely be on consolidated operations and largely driven by the U.S. And that's the path that we're executing to, as Mary mentioned.

And you're on that path currently, that improvement of $1 billion?

We're certainly building the foundation and filling out the product portfolio to get us there.

Obviously, we're going to work very hard to accelerate that.

Okay.

Just switching gears in the North American auto business.

Can you frame how we should be thinking about structural and contribution costs now as you pick up the pace of product launches and particularly these trucks?

Presumably the upsize from mix and price should be very positive.

But just help us think about the other side of it.

Are you -- what's your time frame, the balance of the year?

Yes.

As we look out this year and then into next -- or to the extent you can give us a sense of this.

Are -- should we be thinking structural costs are flat or do they go up?

And how should we be thinking about the -- with all the content coming in, the contribution cost side of things.

Yes.

I would say the following, and let's kind of launch off 8% and keep this at a reasonably macro level.

Now we generated 8% in the first quarter.

We expect full year margins at 10%.

What's going to drive that is improvements in mix, as you talked about, with the increased production of full-size trucks and utilities versus the first quarter.

I think interestingly, and perhaps not as transparent, we will also significantly improve our mix of crew cabs.

Crew cab mix was kind of 58% of total pickup in the first quarter.

We had downtime in crew cabs.

Rest of the year, that's going to be closer to 74% of truck production, and that's a significant driver of profitability in trucks.

We expect material cost performance to largely offset commodity, so that cost factor's going to be relatively flat.

And we would expect to see an improvement on a run-rate basis rest of the year in fixed costs largely as we cycle through manufacturing launch costs and continue to drive efficiency in the organization.

That's kind of the broad strokes for 2018.

As I think about kind of the future, there's going to be 2 increases, I would say, in fixed cost as we think about it: One would be D&A, and we've been talking about that for a long time as obviously, the investment in the new truck is going to carry with it increased D&A.

I'd also expect some increased marketing expense as we cycle through this year into next year to support this launch.

This is the franchise, so we expect that expense to go up.

And we will endeavor to drive efficiency.

But broadly speaking, we'd expect to see some increase in fixed cost on a go-forward basis, largely related to launch timing, marketing associated with these.

And we talked before, as we cycle through the truck and these crossover launches, we expected to see engineering expense come down.

That's kind of beyond 2019.

So not sure I'm answering the question, Rod, clearly.

But I would say material cost is going to be relatively flat with performance offsetting commodities.

Price on majors will offset -- or more than offset material on majors.

We'll get some mix improvement.

And I think fixed costs are going to inch up a little bit, at least in the near to medium term.

Great.

That's perfect.

And just lastly, any quick color on progress on AV development?

What are the milestones that we should be looking for?

We are still on track for a launching in a ridesharing environment in 2019, so hitting the milestones.

I think the filing that we did with NYCTA is -- was important to do in that process.

And so of all the key areas, we're on track, knowing where we're going to build the vehicles, et cetera.

So I don't have any specific milestones other than that we proceed to the ramp that we have -- we shared when we talked about this last year.

And we -- we'll be gated by safety.

But I think when you look at the -- all aspects of safety and the fact that we have it under one roof, that we have deep integration.

And when we talked about it in the past that we changed or modified 40% of the subsystems in the vehicle for AV, that shows the extent of the work we're doing deep in the vehicle to make sure we have the right redundancy and safety overall.

In the AV, I'll say, brain of the vehicle itself, we also have gone through great lengths to make sure we have the right redundancies.

So safety will gate us, but we're on track.

Your next question comes from the line of David Tamberrino with Goldman Sachs.

Building off of that comment, Mary, can you maybe let us know what the update is for your testing and mapping and potential employee-only service in New York?

And then from there, there was a Waymo announcement during the quarter they're now going to have Chrysler Pacifica as well as the electric I-Pace, a little bit more of an upscale vehicle.

How do you think about that potential competition level?

And then your offerings of your AV rideshare relative just to electric Bolt that you have?

Well, first, from a New York perspective, we have done significant mapping of that area.

And we're going to be working with the, I'll say, city and state from a regulatory perspective to enable us to do that.

We are focused on -- have a lot of focus on San Francisco, but that work is going on in parallel.

It's a different environment, both from the actual environment of the streets, the roads, et cetera, and how people drive, but also from a regulatory perspective.

So we're working that in parallel.

And then I can't comment about Waymo's strategy.

I would say I don't have anything further to announce in what vehicle that we'll be doing beyond the Bolt EV.

But I think when you look at the Bolt EV, it's really perfect for ridesharing in its functionality, sizing.

It's quite spacious for a B-size segment.

So I think we have the right product.

And I would also again say we are the only person that is working aggressively in the AV market that has everything under one roof and is doing the deep integration of redundancy to make sure we can deliver safely.

Understood.

And then one question for you, Chuck.

On the free cash flow and kind of your net cash balance, can you give us a little bit of color on when you think the timing of the working capital recovery in the China dividend is going to hit 2Q, 3Q of this year?

It sounds like 4Q might be a little bit more messy from a working capital perspective with some incremental downtime.

And then as I think about net cash, a year or 2 ago, GM was sitting around $10 billion, $11 billion.

Today, it's around $2 billion.

Where do you think the right amount of net cash level is for the business?

Yes.

Speaking on the cadence, clearly, we're going to rewind.

Let me start at a little bit higher level first.

When you think about cash generation balance of the year, it's going to be driven by 3 or 4 major factors.

One is, we're going to generate a significant amount of EBIT-based cash, so think about EBITDA in the range of $12 billion plus.

Number two, we'll get the China dividend, so that's going to be a tailwind versus kind of the cash in the first quarter.

Third, I talked about the CapEx run rate.

We're going to be spending at a lower run rate on a go-forward basis versus the first quarter run rate.

And then the working capital rewind.

When you look at those big drivers, it's pretty easy to kind of get yourself to a path of the $5 billion that we talked about.

Clearly, the second quarter is going to be important from a free cash flow generation perspective.

And I'd expect to see a pretty significant step-up there.

Q3, typically, with the downtime, we have a tendency not to be as strong.

And I would expect Q4 to be strong just from a cadence perspective, from a cash flow perspective.

Within our capital allocation framework, we have talked about liquidity of $30 billion to $35 billion and debt.

And when -- I talk about debt as external debt plus underfunded pensions of $25 billion to $30 billion.

We've been purposely working that down over time on the debt side of it and ended last year just over $26 billion.

Obviously, we like to continue to get some run rate on pensions on a go-forward basis and continue to drive that down.

So I would say that, setting aside the pension piece of it, somewhere in the zip code of $5 billion or so of net cash feels about right.

$18 billion target cash and somewhere in the $13 billion to $14 billion debt, that's something that we could handle and absorb within our capital allocation framework and our balance sheet directionally.

Your next question comes from the line of Itay Michaeli with Citi.

Just have one financial and one strategic question.

On the financial, Chuck, can you just clarify of the Korea savings, how much hits in 2018 versus 2019?

And then more broadly around 2019, how are you feeling around the prior outlook for further earnings acceleration in 2019 just given some of the macro developments in the first quarter?

Yes.

I would say that from Korean perspective, we'll start to get the benefit of a significant portion of that in the second half of the year primarily related to the Gunsan plant closure and some of the other headcount reductions.

Some of -- and I don't want to get into a lot of specifics on the labor agreement.

But some of those opportunities from a labor agreement perspective will start to accrue in the second half.

But the run rate will be through 2018.

Again, when I think about the $0.5 billion, about half of it is related to the Gunsan closure, and the other half is related to some of the agreements that we got with the union.

So we're going to see it in second half of the year and then the full year impact next year.

Relative to 2019, I mean, I step back and look at this, at least from my perspective, nothing has changed versus our view that 2019's going to be stronger than 2018.

We will be through a significant portion of the full-size truck launch, at least for light duties.

And they'll be up and running, which is going to be a significant benefit for us.

We'll have another year of adjacency growth, primarily through GM Financial, but also Customer Care and Aftersales and OnStar.

We're really encouraged by China and the start that we've had in China this year.

And if that market continues to perform, I think that's a potential tailwind.

Again, I circle back to the Korea deal.

That's a $0.5 billion improvement that really wasn't factored into our thinking back when we were talking about 2019.

So I think that's another significant opportunity.

And we expect to see further opportunities within GMI, going back to the discussion we had about recovery in Brazil as an example.

So we're still, I mean, early days.

It's April, and who knows if the environment's a little bit more unsettled now than it was 4 months ago.

But I don't think there's anything that's changed our view.

Yes.

That's very helpful, Chuck.

And then maybe for Mary on the strategic side, going back to autonomous and as you get ready for the 2019 expected launch of the Cruise AV network.

Any updated thinking around building your own network alone relative to partnership?

And maybe one thing to bring up, of course, is what's been going on with Uber and then their unfortunate predicament there.

Whether that potentially changes the thinking for GM to perhaps pursue partnerships or even a codeshare agreement with them or other partners as you kind of think about going to market next year?

I don't have anything specific to announce.

As we said, we will -- we are positioned to go on our own, to partner with one or partner with more.

So we are still open to those opportunities, but we are also very much working and on track to be able to launch on our own with the Cruise app that we have.

So that still is opportunity as we move forward between now and then.

Your next question comes from the line of Emmanuel Rosner with Guggenheim.

Just one follow-up on China.

So there was a nice positive surprise in the quarter with earnings up.

And then margins seem to be -- they're not quite flat but stabilizing.

So is that something that you view as potentially sustainable?

What sort of like drove that in the quarter?

And how do we think about it going forward?

I think if you listened closely to my comments, I said at least $2 billion.

So that would be a signal that we feel like there's some upside on what we had guided to before.

I think what drove Q1, a couple of factors, and we've got to be very watchful and mindful of this.

One, pricing moderated in Q1.

The price headwind moderated in Q1 and was roughly 4% to 4.5% as opposed to the 5% to 6% headwind we've been facing.

And we got to see how that continues to play out.

Two, the luxury market was very good for us in the first quarter in China, and there are some launches as we go through the rest of the year that could dilute some of that run rate that we got in the first quarter.

With that said, I was in China a month or so ago.

Mary and Dan have obviously communicated our expectations that we continue to get momentum in the first quarter, and it feels pretty good.

The market's developing kind of as expected, pricing a little bit more moderate.

We've got a very, very strong launch cadence.

Cadillac continues to perform well.

The new Baojun products are performing well.

So I'd say we're a little bit more bullish.

And obviously, we continue to stay very, very focused on cost efficiencies, like we have the last 3 or 4 years, which is helping to stabilize that margin dynamic that you talked about, Emmanuel.

Okay, that's helpful.

And then a follow-up on the autonomous rollouts.

I guess, when you kindly invited us in San Francisco last year November, the display was impressive, but the cars weren't quite fully ready in some cases.

I'm just curious, from a technology point of view, have you seen sort of an exponential improvement in sort of like the ability of the cars to deal with different situations?

And what sort of like gives you confidence in terms of the 2019 time line?

That opportunity kind of was, I would say, historic in its own right, because I think it's the first time this company's ever let somebody in a vehicle that early, so -- which I think was very important.

So understanding that those were really development vehicles that you had the opportunity or some had the opportunity to experience.

We have a very well-defined development path there as improvements and changes that are happening almost on a daily basis as we continue to develop the software.

So there's a well-defined track of what we need to accomplish to be able to launch in 2019, and we are on that path.

Your next question comes from the line of Joseph Spak with RBC Capital Markets.

Mary, I know you've talked about your global electrification strategy, and I think it's 20 vehicles by 2023.

I was wondering if you could put a little bit of a finer point on how that's going to look within China.

And maybe you like what percent of sales by that time frame you expect to be electric?

And also, just to remind us in terms of how that technology transfer works with the partners.

Or do you license it to the JV?

Let me start with the last question.

There are some things that are licensed and that have been developed by General Motors.

There's some parts of the vehicle that we will co-develop.

There's certain technologies that we consider very important from a General Motors IP perspective, and we take special care on to how we manage those.

So it's really a combination as we look, and in some cases, working more closely with Chinese suppliers, in some cases, others.

So it's not a simple one answer there, but I think it's a very well thought through of where the IP ownership is and then where the synergy is to be able to efficiently develop the electric vehicle.

We have said that we'll have at least 20 by 2023.

Two, actually, we'll be launching next year.

We see -- and we have stated that a significant part of the volume will be in China because of the regulatory environment that is driving that, but we see opportunity to grow.

I'm not going to put out specific numbers because I think, especially in some of the other markets, it will be very dependent on where fuel price is and what's the regulatory environment.

But we remain on track that development is going very well.

And we believe that we're going to be able to deliver affordable, desirable and range-appropriate vehicles into the marketplace.

Okay.

And then, Chuck, maybe really just a clarification.

I thought you said on the corporate side, to still expect a $500 million a quarter run rate over the rest of the year, which would bring you, I think, slightly below the $2 billion that I think was the prior indication.

So was that a change?

Or actually, is there a step-up to still -- over the rest of the year to still get to that $2 billion number?

I would say, for modeling purposes, if you just put $2 billion in your model for corporate spending, I think you'll be reasonably close for the year.

I was trying to imply that on average, we expected to spend $500 million a quarter, of which $1.1 billion would be transportation as a service.

So there's certainly some expectations of some re-timing of some of the benefit that we saw in Q1.

And a lot of that was corporate staff, legal staff, legal timing, some security and derivative kind of mark-to-market.

We will certainly work towards getting that to be sticky, some of those savings and re-timing as we go through the year.

But I think, again, for modeling purposes, $2 billion feels like about the right number for the year.

Your final question comes from the line of Colin Langan with UBS.

You mentioned in the presentation that commodities have increased.

I think in the past, you said it's $500 million.

What is sort of the impact that you're seeing now?

Just any color there.

Yes.

As I look back, and obviously, this is a moving issue.

We started the year back in January and maybe even updated it when we did the annual earnings.

We thought commodity headwinds, on a year-over-year basis, would be about $0.5 billion, roughly speaking.

I would say, if I was to put a number on it right now, that would be somewhere closer to $800 million, maybe a little bit north of that.

So somewhere in the $300 million or $400 million headwind versus what we thought.

And obviously, not insignificant, but we have expectations and continue to work to mitigate that.

And I think if you look at the last 3 or 4 years, we've got a track record of being able to offset some of these headwinds that developed during the year, whether it was exchange or commodity or in -- we're reasonably confident we'll be able to do that as well.

Hence, no change in our overall guidance for the year.

Got it.

And the GEM platform, when is that expected to launch?

And any color on when we actually start seeing the savings?

Is that more of a 2019 help?

Or it'll actually hit second half?

Launching in '19 on, I think, the latter part and so yes.

Yes, starts in 2019.

And this is a big platform, 2 million vehicles, and there'll be a rolling launch of a number of different entries off this architecture, both in China and South America.

But I would say the latter part of '19, and you'll see the full kind of benefits of that by the latter part of '20, early '21.

Got it.

And just lastly, I think you said in the past, 70,000 is the expected sort of decline in pickup production.

Is that still on track?

Is that still the number we should be thinking?

Yes.

Largely when we were looking at the downtime related to the current-generation truck, the K2, it was -- just the downtime was 120,000, 130,000 units.

And the [Ashiwa] shuttle was going to fill about half of that gap.

That's going to obviously play out.

We launched it in the first quarter and play out as we go through the rest of the year.

I think that's generally online or consistent with what we talked about before.

I would now like to turn the call over to Mary Barra for her closing comments.

Thank you.

And everybody, thanks for participating today.

I hope to you see that our results continue to demonstrate this team's focused and disciplined approach to how we run the business while we're positioning ourselves for the future.

I'm very proud of the team around the globe for what they've been able to achieve.

And also, I'm proud of our track record of meeting our commitments always with integrity.

So we're going to continue to execute our plan.

And if you look at our plan, we have built strong franchises and continue to strengthen them or build them in the core and adjacencies and in the transformative areas.

We've talked a lot about what we've been able to achieve with crossovers, and what we're going to continue to do there.

And we're seeing the results in this first quarter.

We are well underway for our full-size truck family of products that we're very enthused about.

They're building well, and so that will start to roll in the second part of this year, and then very importantly, through '19 and '20.

We have worked hard and made the tough decisions, that we have a strong franchise in South America and have very significant improvements in GMI as well as exiting some of the business where we didn't see a path to generate the right return.

We believe we're well positioned in China in opportunities for growth, and again, seeing that build in a strong first quarter.

GMF is on plan as well as the opportunities we have in adjacencies, like CCA.

In OnStar, we are seeing growth in the number of customers utilizing OnStar services.

And we have much more to do to deliver services to our customers that will generate revenue and profitability as we leverage the connectivity and then the ability to monetize data, both in the vehicles and carrying it with other companies.

And that's on the way to -- as we look at the transformative area of really creating an all-EV future with profitable, desirable, attainable and appropriate range of electric vehicles and the autonomous vehicle business that is largely accretive.

So when we look at where we're at as a company, I'm very pleased with what we've done, where we're going.

I think there's significant opportunities to strengthen the business and grow it, and while doing that, deliver value to our shareholders.

So thank you very much for participating, and we'll say goodbye.

Ladies and gentlemen, that does conclude the conference call for today, we thank you for your participation, and ask that you please disconnect your line.