Q3 2019 Earnings Call
Ladies and gentlemen, welcome to the General Motors Company third quarter 2019 earnings conference call during.
During the opening remarks, all participants will be in listen only mode.
After the opening remarks, we will conduct a question and answer session.
To ask a question press Star then that number one our north telephone keypad to withdraw your question press the pound [laughter] as a reminder, this conference call is being recorded Tuesday October 29, 2019, I would now went to turn the conference over to Rocky group to Treasurer, and Vice President of Investor Relations.
Thanks, Dorothy good morning, and thank you for joining us as we interviewed James financial results for the third quarter of 2019.
Yes release was issued this morning, and the conference calls materials are available on the G.M. Investor Relations website or ultra broadcasting this coal via webcast.
Joined today by Mary Barra, Jim's Chairman and CEO Davis, who are they wrote Jim's executive Vice President and CFO in a number of other executives.
Before we begin I would like to direct your attention to the forward looking statements on the for speed up the trucks. It the contents of a coal will be governed by this language well now turn the call over to Mary Barra makes rocky and good morning, everybody and thank you for joining as.
As you know we have a ratified labor agreement and I'm very glad that are highly skilled employees are back to where they'll be winning cars trucks crossovers and compelling.
From the outside our goal was to reach an agreement that works for our shareholders our employees and our company as we confront the realities of a rapidly transforming industry.
Contract has the right thing for our employees without compromising competitiveness or flexibility.
Clinton improve path forward for in progression in temporary workers that will create more engagement at a motivated team.
This is foundational for improving job satisfaction health and safety quality and productivity all of which will strengthen the future of this company and create shareholder value.
Contract also affirms our commitment to a strong U.S. manufacturing base with planned investments totaling $7.7 billion will secure secure the future of already trade Hamtramck Assembly plant with an all new electric pickup truck builds on our established truck leadership.
We're also moving forward on an opportunity to bring battery cell production to the Mahoney Valley in Ohio, which would create a thousand manufacturing Josh.
Before I continue I want to thank our dedicated suppliers. They were in constant contact with us throughout the work stoppage and sure enough they would be ready for a prompt safe restart once the new contract was ratified.
And I'd also like to take or dealers, who helped us a state or momentum in the marketplace and they worked very hard to minimize the inconvenience to our customers caused by our limited ability to ship service and repair parts.
To speed up recovery and get perks flowing into dealerships comprehensive plans are in place to allow the network to recover as quickly as possible.
So now we are moving forward as one team.
However, we have a lot of work to do in many areas as the lost profit trying to work stoppage were significant.
In a few minutes it'd be a we'll talk about the financial impact of the strike and our full year outlook.
Overall in the third quarter, we delivered net revenue of $35.5 billion EBIT adjusted of $3 billion, even adjusted margin of 8.4% E that E. P. S diluted adjusted of $1.72 automotive adjusted free cash flow of $3.8 billion at a ROIC adjusted up 21.9 on a trip.
I mean for quarter basis.
Looking at North America, we delivered strong business performance in the quarter, which was unfavorably impacted by the strike in the United States and increased warranty Enrico cost related to our previous generation full size pickup trucks and sold side actually be.
Overall retail deliveries rose, 6% year over year led by double digit gains and light duty Chevrolet Silverado, and GMC syrup pickups and strong demand for all new heavy duty pickup trucks.
Cadillac continues to capitalize on its expanding crossover portfolio in the United States in China.
In the U.S. satellite crossover deliveries increased by 67% in the quarter led by the segment, leading X T. Four in the all New X T six which is gaining momentum in the market.
In China, the X C and the new XT five helped drive deliveries up 11% a bit slower industry sales with the X T. Six joining the light up we expect catalog will further strengthened its position in China's growing luxury she'd be segment.
Luxury sedan portfolio updates continue with the launch of the all new Cici I've midsize luxury sedan in China This quarter.
Early next year by the U.S. built C.T. five in C.G. for in North America.
Finally, as we look at meeting customer demand our U.S. dealerships finished the third quarter with a healthy level of inventory at the strike continued our teams worked tirelessly to ensure we could shift as many vehicles as possible to our dealers.
However, with no additional vehicles in the pipeline for many weeks our dealer inventories will be temporary leaner than we'd like team is doing everything that's power to restore our supply of vehicles back to normal levels.
Regarding our international operations in China, the business environment remains challenging and volatile.
Year over year industry vehicle sales declined nearly 11% in the quarter.
We underperformed relative to the industry, mostly because the segment shift and lower demand for outgoing models, partially offset by growth in Cadillac delivery.
In addition to taking appropriate cost actions, we are improving our product mix, we'd watch seven new models in third quarter with plans to launch five new and refresh models in the fourth quarter.
In addition, the team continues to focus on accelerating cost reduction initiatives to improve performance given the business environment.
In South America, we continue to take steps to improve the business and protect our strong franchise, while navigating FX and other macro challenges in September we launched the all new 2020 Chevrolet Onyx plus in Brazil. It is the first model in South America from our new global family of vehicles and carries a five star safety rating.
During its initial month on sale customer demand greatly outpaced available supply and we are doubling our production this month.
The Onyx catch back follows next month and together we believe these new vehicles will further strengthen our Chevy brand leadership and Onyx position as the region the best selling vehicles.
As we execute our turnaround plan for international operations, we continue to take decisive steps to achieve sustainable profitability in every market. We participate in cease operations that are now.
Earlier this week, we announced our intend to see selling Chevrolet vehicles in Indonesia over the coming quarters.
Turning to our E. B progress Chevrolet is launching the 2020 Bowl TV with battery improvements that enable an EPA estimated 259 miles of all electric range on a full charge at the same price.
The more powerful battery pack is the same size and weight as previous years models, but its greater energy density delivers 21 additional miles of range and that's more value to our customers. It builds on our industry leadership in improving battery range and reducing battery sell costs per kilowatt hour and we expect this progress to continue its.
2020, but also retains what our customers love about this vehicle instant torque excellent writing handling and a zero to 60 time of just 6.5 seconds.
And on the front cruise increased its testing and validation miles during the quarter increased its community engagement and relationship building.
In addition to crews GM and Honda continue their joint development of a new purpose built shared economists vehicle.
So to recap our strong operating performance in the quarter was supported by our robust sales of trucks and crossovers in the United States.
We've also made significant progress at our transformational cost initiatives GM has achieved 2.4 billion in transformation cost saving since 2018, and it's on track to realize our 2019 target.
Because of additional planned investments in U.S. manufacturing, we will revise our year end 2020 cost savings target to a range between four and four and a half billion. We will take all of the necessary steps to achieve as much as possible to our original savings target.
The strike didn't have a big impact on our Q3 EBIT adjusted results and will also significantly impact our Q4 results. Most of our 2019 strike related production losses will not be recovered in 2019 because of capacity constraints.
Therefore, we are revising our 2019 EPS diluted adjusted automotive adjusted automotive free cash flow guidance.
Full year updated EPS diluted adjusted outlook is now in the range at $4.50 to $4, an 80 cents at our new adjusted automotive free cash flow guidance is zero to $1 billion.
I have asked the G.M. team to find every offset now that production has resumed and I'm confident they will find many opportunities.
With that I will turn it over to Dave Yeah.
Thanks, Mary and good morning, everybody today, I want to disclose or performance for the quarter the impact to the strike the labor agreement and finally, our outlook for the year.
In the third quarter, we generated 35.5 billion a net revenues 3 billion, an EBIT adjusted 8.4% margins $1.72 and as Joe noted adjusted and 3.8 billion and adjusted automotive free cash flow.
The EBIT adjusted impact to the strike in the third quarter was 1.3 billion on a gross basis.
This reflects lost production of would richer product mix as we launched our high content high margin heavy duty crew cats as well as the impact of loft aftermarket sales.
This impact was partially offset by approximately 300 million and strike related favorable timing items.
Net of these timing items the p. as during the quarter was lower by approximately 52 cents.
The adjusted automotive free cash flow was lower by approximately 400 million due to the strike.
Adjusting for the impact of the strike EPS would have been $2.24, an all time quarterly record.
The dollar 72 ERP is generated adjusted also includes a 15 cents loss from lift and PS say revaluation.
Now, let's take a closer look at North America.
North America delivered EBIT, adjusted a 3 billion up 200 million year over year, and 10.8% margin driven by our heavy duty truck performance, a crossover performance and the benefits from our cost actions.
This was partially offset by the impact of the strike warranty costs and lower pension income.
Our newly launched heavy duty trucks contributed favorably to volume mix and price during the quarter.
Market share for large pickup trucks continues to improve up five percentage points in Q3 year over year.
We started deliveries of our heavy duty in Q2, and we have gained six percentage points in market share since the launch.
Our light duty pickup trucks improved 6.8% at retail in Q3 year over year to over 40% as we rolled out diesel and other cab periods.
We will have the same launch cadence strategy for the heavy duty as we did for the light duty was the rollout of double cabs next followed by a regular cats.
Switching to crossovers U.S. deliveries grew 29% year over year with the Chevrolet Blazer.
And catalog 66, providing strong contributions to our results.
Let's move to GM international for the third quarter EBIT adjusted NGL I was down 200 million year over year, driven by lower equity income in China.
Tenured industry weakness and pricing pressure resulted in Q3 equity income down 200 million year over year from record Q3 2018 levels.
We did see slide benefited from improved mix.
Finally, due to a recently launch vehicles.
A few comments on GM financial Corp. segment.
GM financial posted record quarterly revenue of 3.7 billion in the third quarter and record EBITDA adjusted 700 million, primarily as a result to portfolio growth.
Cruise costs were 300 million for the quarter on track with approximately 1 billion communicated previously for the full year as we increase our head count.
Core segment called quote costs 30, or sorry, it took quarter were 500 million unfavorable 400 million year over year, primarily due to net loss of 280 million from lift MPS say investments in the third quarter of this year compared to 170 million gain from our PPSA investment in the quarter last year.
Yes.
We have made significant progress on our transformational cost savings initiatives with 2.4 billion achieved since 2018, we're on track with our 2019 target of 2 billion to 2.5 billion, achieving 1.9 billion year to date and 800 million into third quarter.
Let me update you on our outlook for the calendar year.
The recent strike is obviously had a negative impact on financial performance in Q3 and more so in Q4.
We estimate the calendar your EPS diluted adjusted impact to be approximately $2 per share and adjusted automotive free cash flow impact to be approximately 5.5 billion, including the impact of for working capital unwind.
The $2 and EPS reflects lost production of literature mix last aftermarket sales startup and ramp costs and as net of a higher U.S. tax rate on lost earnings.
While we continue to work on strike recovery efforts, we anticipate that only a small portion of the losses sustained during the strike can be recovered this year due to capacity constraints.
Factoring in all of this our updated 2019 EPS diluted adjusted outlook isn't the range of $4 in 50 cents to $4 than 80 cents.
Touching on Capex, we expect 2019 Capex of approximately 7.5 billion this year due to timing and early achievement just commitments.
Updating for this and the impact of the strike, we expect adjusted automotive free cash flow guidance in the range of zero to $1 billion.
I would like to provide some additional perspective around this guidance.
The underlying EPS and free cash flow guidance is consistent with the range given in January we experienced a highly unusual situation with the shutdown for North American operations for six weeks.
We are restarting our operations very close to year end and the speed of production ramp and timing factors are very difficult to predict at this point, we have provided the best estimated outlook given the information that we have today.
Next I want to briefly talk about the impact of our new Labour agreement.
The new agreement preserves our competitiveness manufacturing flexibility and balance sheets trend without compromising earnings power.
We have maintained that mix, so far north American manufacturing footprint maintained ability to adjust your workforce in response to changing industry levels protected the balance sheet with no increase to defined benefit pension obligation and no payments or increased obligations to retirees.
We maintain breakeven levels in the 10 to 11 million unit range in the U.S. and therefore preserved our ability to navigate to a downturn.
It is important to note that while this labor agreement is inflationary, we expect to offset incremental economics over the contract period with productivity initiatives.
Finally, I want to briefly touch on 2020, while we will provide full guidance in February let me help frame the or by outlining a number of puts and takes.
Headwind for 2020 include likely lower industry volumes.
Downtime and ramp up for the launch of four full size as heelys higher depreciation and continued volatility in China and South America.
Opportunities in 2020 include full year of heavy duty truck production transformational cost savings and product launches, including the Corbett Encore Gx trailblazer, and our global family of vehicles.
The ability to lock that recover lost production during the strike in 2020 will depend on end industry performance in our capacity availability as we already run our full size truck plants at maximum three shifts capacity.
Lastly, as a result of our decision to invest in our Detroit Hamtramck glad we will incur operating costs of were outside the scope of auto digital transformation plan.
Well I was just slightly devices, our year end cost savings target to four to four and a half billion. We will work to find every opportunity to maximize the cost savings potential.
We're committed to our capital plan of approximately 7 billion annually and our long term financial trajectory, including 10% core EBITDA adjusted margins and improving our cash free cash flow conversion.
In summary, the underlying business remains strong and our guidance is consistent with the range given a January excluding the impact of the strike we have a labor agreement that preserves our competitiveness and flexibility and we expect to offset economics over the contract period with productivity the environment is more challenging than.
Just a few months ago, but the entire team is focused on our execution both over the short and long term. This concludes our opening comments and we'll now move to the Q when a portion of the call.
As a reminder to ask a question press Star then the number one on your telephone keypad, we'll pause for just a moment to compiled acuity roster.
Well first question comes from a line of Joseph Spak with RBC capital markets.
And the question.
Just to start on.
Maybe some of the cash flow dynamics, you mentioned the capex lowered this year, perhaps use part on timing and an early achievement can you.
We get some color on the on each factor I guess, I guess I want to gauge how much.
Of that timing could impact 2020 on free cash I know you said on average 7 billion per year, but it seems like maybe 2020 might be a little bit higher than that and then also related to free cash.
With that working capital on wind in the fourth quarter, how much should we expect to recover into 2020.
Yeah, Joe I would say from a capex standpoint, the early achievement of the Capex commitments in 2019 does not impact our commitment to achieve $7 billion in 2020, so that commitment remains intact from a timing perspective, even though we pull forward in 2019, we still think we can.
Achieved that to your question on free cash flow impact obviously, there was the flow through from the profit impact into free cash flow. In addition to that we see working capital and sales of our dividend.
Policy and warranty and so on timing.
Items are driving the remaining.
There so the five and a half comprises of the lost profit and the working capital unwind Capex remains intact and that's the map to get to the five and Uh huh.
Okay, and then I I know Debbie said.
Recovery of volume next year is dependent on on the market and.
As you noted you're running all out on the trucks, but if we assume an environment.
In 2020 similar to 19.
Like just back of the envelope I sort of just look into calendar and counting days and make some should decide assumptions. It seems like you might be able to get back 50% to 60% of it is that reasonable.
[laughter] I think it's really hard to call that now Joe partially because you also need to figure out what the truck industry is going to be like I either segment share within the industry and to your point, we are running those all out it's difficult to add overtime on top of overtime. So we will recover every unit that we possibly can it's.
Just difficult to predict now at this point what that would look like.
Okay. Thank you very much.
Your next question comes from the line of Rod Lache with Wolfe Research.
Good morning, everybody.
Good morning, I had a couple questions first looks like the adjusted free cash flow with the adjustments you're making.
Would have put this year's free cash flow at five and a half the 6 billion.
Wasn't for the strike and.
It appears that you've got another billion to billion and a half of savings for next year.
Yeah. The the original number was closer to 2 billion, then and it sounds like that the variance there was hamtramck so whats involved.
In your thinking on Hamtramck since.
Earlier in the year.
So when we made good transformation announcement last year, although we had a battery electric truck in our plan as we continue to evolve that and looked at on the full range of what we can do there to really maintain our truck leadership position and grow that into battery electric trucks.
We look at Detroit Hamtramck is a great opportunity and Oh counting on getting inappropriate labor agreement there and so we think this is a good investment positions us well to lead and battery electric trucks as well as internal combustion trucks and so that is that portfolio as we further planted.
It became clear that we could be more efficient doing that work there.
Okay. Thank you.
North America, and GM financial looked like they were very strong this quarter, obviously, there's unusual items that affect both of those right now could you just talk a little bit about those.
Aside from just that the things like launch, but did you make any adjustments to pre existing warranties in North America, and how should we be thinking about the cadence for GM financial going forward and what that might mean for releasing cash from that business.
Sure from a north American standpoint, yes, it was a very strong quarter the cadence of for heavy duty launch helped a lot from a mix standpoint, since we're rolling out cool cats for the most board and that will normalize as we roll out the other variance as well.
To your question on no warranty, we had a 700 million year over year unfavorable and that was primarily driven by the key to a warranty costs at Mary mentioned in her remarks.
As well as the there was a onetime favorable item in 2018 of last year, which does not to repeat in 2019, so from a year over year Delta perspective that impacts as well and in Q3 I'd say the we go through a normal true up process from a warranty perspective, and there were some top ups relative to that.
As well, but that was though not on the smaller side of things that should capture that from a GM financial perspective.
The biggest item I'd point to is the fact that residual values have been coming in stronger than what we had previously accounted for so as you go forward. There you may want to think about some kind of a normalization there the offset to that would be the continued growth in the size of the book as they move closer towards full captive.
Those are the normalizing items from the GM financial perspective, okay. Thanks, So just to clarify in North America.
I was asking about the incentive accruals, yet over 700000 units of inventory and.
I would presume that you'd make some adjustments is given the prospects for declining inventory was there anything unusual there and can you tell us what your expectation is for Q4 production at this point.
Yeah, I'd say nothing specifically on the incentive side. It will obviously be it'll be vehicle by vehicle and will be driven by market dynamics and nothing specifically to point out there from a true up or whatever perspective from a Q4 production. We are now that come up and running and all of our play.
Rents are running all out and like we said, we're going to take the opportunity to get any extra units that we can and that's all we can comment on at this time and wheels since we're still and ramp up and we're trying to maximize the number of units will have more to share about that when we report Q4.
Great. Thank you.
Your next question comes from a line of John Murphy with Bank of America.
Good morning, guys.
Marty.
The first question just around the labor agreement and the special attrition buyout program looks like it's only targeting about 2000 workers, but based on sort of what I'd be able to dig up it seems like half of your workers are senior meaning they're getting defined benefit pensions and natural attrition on an annual.
Hi. This is about 2000 workers. So just curious why that you don't especial attrition program that buyout might not targeted more workers and then over time in the next three years before the next contract with that.
The impact sort of natural attrition, meaning would we still expect see 2000 per year. So first just why isn't it a larger program and second what kind of impact would it have all natural attrition over time.
I think a couple of things you have to think about his first our one big component of the special attrition program was to give people choices. Although we have jobs for everybody that was the impact that I was impacted by the on allocation of the three plants.
We wanted to give them options and so there's a target there from that perspective.
And the other thing is you can on we think that again people wait and look at not look to see if there's going to be a special attrition program. But then we also do see the natural attrition over the course of the agreement so I.
I would expect that can do you expect that to continue.
And that's how we size what we thought this that they pay should be.
Okay and marry it when we think about the those attritions, whether it be special or sort of natural over the next few years. What is your plan as far as Backfilling for those workers I mean would it would they be replaced one for one within progression workers are entry level workers or could they be folks that they get hired out in California to work on crude and trying to understand.
For the thought process, what how to size the labor force going forward.
Well I thinking.
There's many different components of the Labor Force a you know there's accrues labor force.
There is our salaried workforce and then there's I represent of your workforce and I think your question is directed at that represented workforce on you know we're going to continue to work on productivity and we have opportunity. There. We also have a lot of opportunity continue to improve our manufacturing processes. We've done a lot of work this year and complexity optimization and.
We are driving that in from a design for Manufacturability perspective into how we design vehicles. We've also been able to find more and more opportunities for reuse without opt out impacting a customers view of the vehicle is being all new especially when you look at some of the architectural components. We also have a program we've been working on for many years called built in.
All the level four and by the ended the year virtually all of our plants will have achieved belton quality floor.
I was in quality level for which leads to first better health and safety and better quality as measured by two months in 12 months a warranty performance. So we see no I'll say traditional productivity improvements, we see efficiencies on how we design vehicles and components from a de if that the if any a perspective and then.
We see the the results coming from our built in quality level for all those things are going to help us.
Make sure we optimize the workforce.
And optimize our manufacturing costs as we need to hire additional workers will utilize both camps and I'm very proud of the fact that we provided an appropriate path to permanent employment for our temporary workforce and then also maintained the in progression of flow. So we'll utilize both of those depending on the plane in the situation.
At that plant.
Got you Thats helpful. Then just on you guys TV launch is there any change in timing.
For next year on year CV launch given what's happened with the strike.
Yeah, we haven't specifically said when those launches they will occur in will will rollout all three versions next year.
Of course, the team is working to do everything possible to make sure. We have successful high quality launches with that minimizing the impact of the acceleration curve. So those we still will get all those got next year and I'm not going to give any more specifics on timing.
Okay, and then just lastly, there's been a lot of negative.
Comments on on pricing and some came from one of your crosstown rivals, but also sort of in the press you had the quarter on your major as you put up a $400 million positive, but more importantly, you put up about $200 million positive on your on your Carryovers what are you seeing the.
Pricing.
Certainly dependent landscape for pricing, meaning that in is that 200 million dollar positive from Carryovers was that benefited by some shortages during the strike or you actually seeing some real net positive price on carryovers.
Yes from a majors perspective, I'd say, it's mainly driven by our heavy duty and the variants of the light duty said, we recently launched so they are those were strong and.
That's a that's really to the truck franchise, that's driving that on the carryover side. The outgoing models from a car perspective, we produce or incentives on that quite a bit from a crossover standpoint, we were disciplined as well. So overall I would say positive.
Gary over net price, that's going to be quarter to quarter. John It's got no vary based on seasonality and so on a go forward, what our its or intend to stay disciplined and as you can see in the quarter with good net majors that I just talked about we have grown share for both light duties as well as heavy duty.
We plan on continuing on that path of being disciplined.
And give you and the competitive environment have you seen any deterioration there I mean I understand you guys are pretty disciplined but I mean are you seeing sort of any kind of warning sign signs out there.
I think there's definitely months, where you'll see some competitive activity and then it normalizes insulin but were we're launching we're going with our cadence and were the strength of the products that we put out is driving our market share gains to this time.
Great. Thank you very much.
Thank you.
Your next question comes from a line of Tommy Collie with Citi.
Great. Thank you I'll get good morning, everyone.
Okay.
The first up first question with inventory now being a leaner can talk about opportunities you might have in Q4 and beyond to optimize for mix and pricing how should we expect trend mix to get richer over the next.
Several months as you try to manage inventory situation.
We're going to.
Try and build everything that we can get to each I from a.
Mix perspective, we will continue down the path of rolling out the.
True mix from an HD standpoint, LDS well we will.
Try and maximize the trail mixes that our most profitable as we go forward. So we're going to be opportunistic as we as we go along and the other aspect is obviously from a country mix standpoint, there's some places where we.
That are more profitable and there's places that are less profitable and we're going to direct the amount of inventory that we have towards the more profitable places as well. So we will be opportunistic. It's so hard to obviously size that at this time and we will provide more detail in Q4.
That's helpful. Then just like we did beyond the 2020 puts and takes I think you mentioned lower industry volume as a headwind you for more detail, but what you're thinking about regionally and globally does that include that the truck franchise because pickup truck industry sales are still did not see strong throughout 2019.
Any additional color would be helpful. There.
Yeah, I think we still have another.
Couple of months here to go to see what happens here, but in 2020, we do think that China will remain volatile.
South America little remain volatile and here in the United States with the economic growth or the moderating here in the recent past and the next two a year or so we're anticipating.
We're still planning for a lower industry still healthy industry, but a lower industry in 2020, and though we're gonna have to as we move forward here in the next few months before we give guidance, we'll put more specificity around that but anymore than that it's too early to tell.
And just lastly on crews I think back in July crews mentioned that they would accelerate testing and validation in the balance of 2019 any update there that you can share in terms of miles driven or the overall activity.
That does crews is undergoing a second half.
I would say, we I'm not going to give you specific mileage, but they are doing exactly what they indicated they would do in in the summer timeframe.
I would say, it's going really well as they meet their milestones and if they continue to develop a yeah. The economist technology, so very much on track and not only on the technology, but also the work that they're doing in San Francisco in the community to make sure that the consumer is ready understands the technology and trust the technology. So both of those plans are.
Our perfectly on track.
Thats very helpful. Thanks, so much.
Thank you.
Your next question comes from a line of Adam Jonas with Morgan Stanley .
Thanks, everybody Mary over the next five years will GM spend more.
R&D and Capex dollars on ease or internal combustion vehicles.
I believe it will be easy.
Thank you and do you think that do evenings require less labor and internal combustion vehicles all else equal.
I think you have to look at the entire vehicle a you know clearly from an electrification perspective, it's a simpler from a compelling perspective that it is from an internal combustion engine.
He things that we've done is worked out lightweighting because lightweighting is so important across every component and from a body structures perspective that lightweighting generally requires a little bit more labor. So overall I think it somewhat last but I think you've gotta look at the whole vehicle not just the propulsion system.
Thanks Mary.
And just.
I wanted to have a couple of questions on encore VAT and.
And I know mark not on the call here. So maybe we can follow up with them, but Mary what do you think of a corvette FCB.
Well I appreciate that you think are corvette franchise is very strong on.
I'm not going to doing about future I. Thank you I'd I can't wait for the world to be able to drive the C. Eight because it's an outstanding vehicle and the value on the performance is is I think just sets a new bar a and then the affordability I think it's something we're really proud of and is very treated Chevrolet brand on so I will just show.
Everything we look at a variety of things as we move forward, but we recognize the strength of of the corvette brand right now we're focused on getting to see a out and then the other variance, including the convertible so very excited about that product and what it will okay married company.
I appreciate that and I won't ask about electric car that either right now we can save that for later finally, Ben just you mentioned on China.
I think when you were talking about 2020, you expected China to be a headwind can you elaborate a little bit more there on.
What was the market what was the volume assumption or mix or price assumption within that any any other color on the China headwind, Tom and if I, if I got that correctly for 2020 versus 29 getting thanks everybody.
Yes, Adam I think it's a little early to call. It I mean, there's so much going on right now as you look at the volatility in China I look at where we're still in the middle of really trying to understand where the trade talks are going to land and how that's going to impact.
The overall economy. So we're seeing a very volatile environment and we're also seeing a lot of pricing pressures and then as we look forward as we rollout more NVS initially we're going to see some margin headwind there.
So I think when you look at all those things and 20, we'll have more color for for that as we do the February our earnings call for Q4, but those are the things that we're seeing right now that we think will carry into 2020.
Great. Thanks team appreciate it.
Thank you.
Your next question comes from a line of Ryan Brinkman with JP Morgan.
Hi, good morning, Thanks for taking my call.
Could you provide an update in terms of the impact at the new Labour record on your downturn resiliency in North America can you remind us of your latest estimate of North America breakeven expressed in terms of U.S. light vehicle Saar and whether the contract changes that breakeven level.
Yeah Ryan.
We have previously talked about as a breakeven level of 10 to 11 million units for the U.S.
This contract will not change that and how well why that is basically the.
The commented Mary made about productivity and other efficiencies offsetting the economics of the contract will certainly play into that in addition to that from a flexibility standpoint, we've modeled in our downturn assumptions is the.
Everybody to adjust the level of workforce based on what's happening in the industry and a certain levels of a supplemental unemployment benefits that go with that and that does not change based on this contract, which is primarily the driver of maintaining the downturn assumptions the way they are.
Okay. That's helpful and I was encouraged in the release that you attributed the softer in the softer than industry sales in China to demand to lower demand for your outgoing products could you. Please provide us.
An update on the incoming product in China earlier in the year, you were relatively optimistic about the sales and profit potential from new launches, including the first off I think the so called Gem architecture can you talk about how the sales and cost of the launch vehicles has trended relative to expectation in China, and then finally would be great too if you could update us.
With regards to the extent to which you have or have not detected any perceived bias against us based brands and the aftermath of trade or other tensions in that market. Thanks.
Sure sure and ranked first off we haven't really seen and we monitor and a weekly basis, we really haven't seen any negative sentiment on so we think that's very positive and we are in the middle of the launches for the year, we had a 11 majors, including including that view at the lease which is a battery electric vehicles. If you look encore.
Okay, cardiac Chevrolet Onyx, the Chevrolet Trailblazer, and tracker and then the catalog XT six a and then some baozun products as well and then there were several very important MC ends with a crossview it for the cross in the Verano as well as the Chevrolet bonds on the Cadillac Xtfive. So I think as you look at all of those vehicles into them.
But with the uncertainty on ended you know the.
The economic issues or the macro issues in China, I would say, they're all on track on Youre correct to knows that we did have our US first oh, the Chevrolet Onyx, which is the global family. It's one of many launches in China and it is on track. However, I you know what we get mentioned in my remarks that it is doing exceptionally well.
Well in South America, because it's at the heart of the market in the biggest segment. So.
Thank you.
We need to see these via these vehicles get into the marketplace.
I think a lot we'll see as we get into next year as well, but the watches are on track I do think though in some of them.
As we did see a more significant significant drop off than we thought we would with the outgoing vehicle.
Okay. Thank you.
Your next question comes from the line of Brian Johnson with Barclays.
Hi, Good morning, Tim This is even up lots of Brian Johnson.
Just wanted to drill down on the potential reconsider the lost production took on the T. one pickup truck side into 2020.
I guess, assuming kind of an overall stable large pick up a market ended 2020 is it fair to say that the GM is already running.
At Max capacity in that.
From a production schedules standpoint tenant leaves and think about 2020, it's there's really no potential to to make up that lost production, especially if we get upside as large pick up market.
Is there any kind of scope for some we can work as we think through Fourq human deploying point.
Yeah, I would say that your assumption is correct in a industry level at a truck penetration level, that's similar to what we have today.
We already have scheduled weaken time and a lot of other overtime on a regular basis. We have these plants working Max overtime. So the ability to add additional days is limited we will obviously try and find any a voluntary opportunities to do overtime beyond that but.
It's a it's not something I would call my baseline at this point.
Understood. Thanks for the clarification and then in terms of the revised you w. contract impact.
We outside in kind of got to about $150 million gross labor inflationary impact in 2020 ramping up to about 350 in 2023 I'm just wondering if that's kind of ballpark.
Correct and then also can you quantify the buckets of the.
Dollar savings offset.
Attrition buyouts absenteeism and other productivity initiatives.
Yes, I think if we will give you said more broadly is that we really believe the inflationary elements of the contractor the economics that we can offset with with productivity and there's plans well established.
Yes, we don't know yet exactly how the special attention program is going to play out people have until the ended the year to sign up for that so.
I think what you hear from US, though is the team that is committed to finding the right off that's a two.
To go for it in and maintain and improve our competitiveness.
Okay. Just in terms of the on the gross inflationary labor cost and that was that is that ballpark directionally correct in terms of 100 million in 2020 ramping up to.
350 in 2023.
Well I mean, I think if you look at that you know there's some parts of the contract they're easy to do the math on and but I think there's others that we'll look to see how it plays out and some of it depends on the workforce depends on how many people take especial attrition program depends on the industry. As we go forward, so I'm not going to put projections that far out.
Okay, and then just a last clarification.
Second question in terms of the revised.
Transformational restructuring savings of four to four ethylene.
Does that include the productivity initiatives you outlined over that potentially provide some upside to get back in the original target of 4.5.
Hi, I think first we're going to work to offset and then we're going to keep going we won't stop when we get there. So I think overtime, there's upside, especially on the broader elements. We've talked about how we continue to improve that we design vehicles that affect the demand your manufacturing cost in our ability to continue to build quality and station.
Improve our quality system. So all those things are going to contribute and although we revised it based on the decision we made a largely related to Detroit Hamtramck, we're going to continue to push the organization to continue to find cost opportunities and I would say that's the goal we set for the end of 2020, it's not like after that we stop we know at that point, we'll evaluate.
<unk> business and look for the next round of crop cost savings that we can drive into the business and and commit to from a improving shareholder value perspective.
Okay. Thanks for taking my question.
Sure.
Your next question comes from a line of Dan Levy with.
With credit Suisse.
Hi, Good morning, Thanks, Tom just wanted to follow up on the question on this productivity gains could you give us some color on what initiatives you might be able to pursue or timing and more specifically, you've obviously been pretty successful with cost saves in the past I think probably one of the reasons why you're.
Earnings level has been rather elevated just wondering how much the low hanging fruit may already be exhausted things you're going to just have to dig in a little harder and it's not going to be as either.
Some of these gains.
Well I think when we look at our comparison that harbor or I guess, if Oliver Wyman now guys from a productivity, we still have opportunities to improve and it's not just on a you know minutes per hour of a of the and the way we design a job it's much broader than that and I think we have a lot of opportunity is still tap into as we reach.
Early optimize our complexity and we leverage reuse and so those are things that I'm very pleased with the organization has taken to a new level. This year and that will play out over multiple years, because a lot of it is if you design the vehicle for a design for Manufacturability I'm doing that now will play out in.
When we actually launch the vehicles be it 234 years from now and it and don't underestimate the work that we've been doing on Hilton and quality level for because for the plants that are already there. We definitely see just the fact that more more vehicles are built in station means they spend you know no time and repair and.
That's that's savings as well so I believe although at very proud of the manufacturing team of what they've already accomplished and working across with the engineering organization I think there's still much more to tap into and that's what we do.
Great. Thank you and then just as a second question, one that's more existential and sort of touching on.
One of the prior questions I'm, obviously, one of your publicly stated goal zero emissions future.
And that's probably requires a smaller footprint than what you have in place today. So first of all those eight does this current agreement have any limitations on specifying limitations on what you can build for ease and then just more broadly with your zero emissions future goal. How aligned is your labor partner with you on this.
School would they ever service partners with you along this transition sort of similar to what we see in Europe in Germany.
To address in the future or his answer simply it look this is a four year agreement and once it expires then we'll deal with a future as it comes.
Well I think we're in this for your agreement we are dealing with the future. If you look at from an easy perspective, we already build the Chevrolet bolt CV and our oriented plant in Michigan, a very significant discussions that we had as it relates to the battery electric truck with our the way w. as it relates to what we're going to do it to trade Hamtramck. So I think what we're trying to do.
In first of all there is no limitations they want to make that very very clear but.
We are committed to the United States and committed to manufactured in the United States, We see a huge opportunity and electrification and that's why we're investing and I think in you know among the leaders in the space I think we are technology roadmaps that we have for cell development work on a well positioned us and with the commitments. We made for the better are you.
Next generation or architecture, which we call that that three so on this was all part of the discussions and I think you know as signified, but what we're doing oriented what will be doing in Detroit Hamtramck.
I guess more more specifically you have other engine transmission plants out there that presumably in the Navy world there.
And on necessary have there been any sort of discussions with the union in the future on how to deal with these these plants that could potentially be unnecessary.
Yeah, I think that's over a very long horizon, we still see you know even when you look at the multitude of projections by 2030, you know if it is it 15% is at 30% Ali the that means the balance of of the vehicles being sold in the country arch internal combustion engine vehicles, we're well positioned because we've renewed all those architect.
Pictures and we've invested in very efficient internal combustion engine technology that will continue to improve so I think this is going to play out over a number of years and there are components in the drive units from an easy perspective, a that need to be built somewhere so I think we're looking to do the right thing from a company perspective to drive.
Shareholder value to lead and ease and do the right thing for our manufacturing footprint for our employees.
Great. Thank you.
Your next question comes from a line of Emmanuel Rosner with Deutsche Bank.
Good morning, everybody.
Good morning Marine.
I was hoping can provide a little bit more color on your underlying performance. This year, excluding distract you to extend that so that's possible.
Youre the revised guidance.
I, just and then you add back so if the strike impact seems to be 650 to seek CD, maybe the lower end of the sort of like original guidance is there anything are there any like specific factors that you see that are playing out maybe on the softer end of what you would have expected before I mean again, excluding strike is it at the international levels in China is nearing.
Yes, and you're seeing in the U.S. that would account for that and as part of that's question also just trying to some better the the tax rate impact at the new guidance is at the lower tax rate is that correct.
Yes.
Number of questions. There. So let me address them one by one the new guidance $4 in 50 cents or $4, an 80 cents, you're correct, we subtract to the $2 and arrived.
And so the original guidance, we gave in January less $2 on the upper end, we clipped at about 20 cents as you've seen.
Weve, it's been I didn't quite a volatile environment in China as well as to the macroeconomic volatility we're seeing in South America as well the FX environment that we saw earlier in the year. When we gave our guidance is very different from the FX picture that we have today, which is offsetting some of that as well so I would say that the we.
This is predominantly more on the international front the volatility that we're seeing and from a North America perspective, as you've seen the performance quarter after quarter. It continues to be strong from a.
Just from a.
Cost attach rate perspective, the the device tax rate is primarily because the strike impact is you got to apply the U.S. tax rate to that strike impact, which is about 25% effective tax rate. We're applying there. So if you take our original tax guidance subtract out the higher tag.
That's right that's applicable on our strike impact you get to your new and revised tax guidance. So its consistent it's just that you're applying a different tax rate than the weighted average tax rate on the strike impact.
Okay. That's a that's great color and then just was hoping can give a little bit more colour on the puts and takes for 2020 and in particular, a few a few discreet items you are.
You are talking about downtime.
Ramp up for the full size as heavy into say you're able to quantify in terms of specifically you know downtime. There and then you did not to mention raw materials as a potential tailwind I was curious if you can give an update on in the what is were present. This year and then how to think about it. So next year and then the sort of discrete item would be warranty.
Obviously, a fairly big no charge would you explain to you know for the quarter, how does that have a carryover impact as we move into next year.
So on the 2020 side they the puts and takes that I gave a predominantly a lot of industry uncertainty around the globe, that's what I would characterize as a primary headwind.
From a downturn downtime standpoint.
This is a complicated as to the full size as he will be launched there's a significant amount of change that's happening from the current generation to the next generation. So from a downtime perspective as well as more importantly, the line rate ramp up post the downtime, we're anticipating an additional headwind year over year for full.
That's at least I don't want to quantify that now since we're still working on how we can optimize the number of units that were going to be able to put out in 2020. So I won't quantify that further in February but it is safe to assume that they will be a year over year headwind from a full size has to be perspective.
There will also be higher depreciation that's something I've been consistent within the past several quarters as our depreciation catches up to our capex levels and we've been seeing a secular increase every single year and that's going to continue into 2020 as well and obviously that's noncash as he will now from.
They are all material Antero perspective to your point I've said this before in prior quarters, there's puts and takes its hard to look at just one number and painted over the same brush, but ceiling aluminum we've seen no tailwinds offset by a precious metals terrorists as well as fuel costs, which is.
Next our logistics spend so net net we are still at 500 million year over year headwind from a 2019 standpoint, we don't see that moderating necessarily into 2020 since the headwinds that I mentioned are likely to continue into 2020.
And it's obviously hard to predict the tariff environment that we're going to be and so thats generally to the headwinds side tailwinds the remaining cost savings so far.
We've achieved close to a $2.4 billion of cost savings and the remaining cost savings are going to be realized over a period of time. According to our revised guidance you're going to have a full year of heavy duty trucks and the product launches that I talked about hopefully that gives you some color and finally on the warranty.
Question that you had we do see that is specific to Q3 of this here I don't see a tale of into into 2020 on that.
Perfect. Thanks for the phone.
Our last question comes from a line of Chris Mcnally with Evercore.
Thanks, so much team.
Just wanted to jump in on on maybe that the the impact from a working capital standpoint on the change in that free cash flow guide so.
It's really quick.
Five and a half it looks like 2.8 was worse from just the operations you back out the capex. It looks like it's something like a three and a half of 4 billion drain on on working capital. It can you just confirmed that it was all working capital and there's not any other sort of onetime drivers for the for the cash outflow because we're trying to think about the reversal.
Next year.
Yeah, I would say that to your EBIT impact seems to be on the low end, maybe you're talking what the net income impact so from an EBIT perspective set up for yeah, you got to talk about gross number there.
That Clos the working capital on why and constitutes most of the five and a half there's no other like onetime item or whatever else that's out there, but the profit him, but did you talked about us a that sounds a little under shaded, but it's potentially because of tax rate.
Okay, Perfect and then and then if we could talk about the without giving numbers like when we think about from the first of all at sometime in the in the first half I know you want to give give guidance.
Could you just sort of walk through the timing of how that would play out.
From a from an inventory standpoint.
Are you talking about the reversal of working capital or the recovery, if a profit or both.
The reversal of working capital.
So reversal of working capital, we think that the low point is probably going to be sometime in November .
As we cycled through the rest of the unwind and payables and receivables will start back up 15 days after we start shipping.
That cadence will continue so we do anticipate that you see part of the recovery in the second half of November and into December .
And Q1 as you know it to put it tends to be a negative cash quarter because of far shutdown and the reversal after that but what do you would see from a cash balance standpoint, as the recovery starting in the second quarter of next year into the rest of 2020.
Because thats perfect on on on the timing and then maybe this is more like a <unk> for a remote communications standpoint, I mean 2020 was already supposed to be sort of a better on free cash for a year I think we've asked my question a couple different times on on the call, but you are already getting improvement of Capex the reduction of pension from a cash flow to income statement.
Then you know the Finco dividend, if we get this working capital benefit in 2020 is it the type of thing that you will actually be able to call out. So that we can start to understand what is the true because working capital wasn't one of the the work each one of the benefit that we were expecting in 2020, and 2021, which likely will now be sort of in.
Core cooperation so was that something that you could back out.
For the Street as we go into 2020 and 2021.
We will be very clear about how much of 420 20 free cash flow guidance comes from the working capital Rewind and we will also be clear about how much is the cash based earnings I.E. The operating cash flow. If you will end up what that is so year over year, so from a communication standpoint.
Well certainly be clear about that and beyond that you're right. We don't want to talk much more about magnitude of that until February .
Perfect. Thank you so much.
Thank you I'd now like to turn the call I want to marry bar [laughter] comments.
Thank you very much and thanks, everybody for participating this morning.
If you look for several years the team at General Motors has it making tough decisions to make our business more resilient and more agile.
This discipline will help us overcome the impact at the strike as we continue launching our heavy duty trucks that new Cadillac sedans, and as we move forward the upcoming launches such as the mid engine corvette and the next generation a full size FCB.
This leadership team has a proven track record of successfully navigating complex business issues confronting headwinds and capitalizing on opportunities.
And I believe we have the best employees in the industry across the board they want to work and they come to work every day to do their best and they want general motors to succeed and they want to be part of that successful for future. So as we move forward together, we're going to continue to build on the strong foundation, we've laid and share and allow them to share in the future.
Except as a company, but let me be clear. We're also working hard to lead in both the core and the easy and 80 world and create significant shareholder value.
And before I close I want to let you know that we will host our capital markets day in New York on February 5th 2020.
This year in addition to providing our 2020 outlook. It will link include our Q4 and our full year 2019, earning results and will share additional details about that capital markets day in the near in the near future. So thanks, everybody very much I appreciate your time.
Ladies and gentlemen that concludes the conference call for today. Thank you for joining.
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