Q2 2020 General Motors Co Earnings Call
Second quarter 2020, <unk> earnings conference call.
During the opening remarks, all participants will be no listen only mode.
After the opening remarks, we will conduct a question and answer session <unk>.
You asked a question press Star then one Neutrolin keypad.
To withdraw your question Mr pounds key.
As a reminder, this conference is being recorded Wednesday July 29 2020.
I would now let's turn the conference ever to Rocky cooked <unk>, Treasurer, and Vice President Investor Relations.
Thanks.
Good morning, and thank you for joining us as we reviewed James financial results for the second quarter 2020.
A press release was issued this morning, and the conference call me too are available on the German Investor Relations website.
Oh for broadcasting this call via webcast.
I'm joined here to be other GM headquarters by Mary Barra, Jim's, Chairman and CEO and Big that's who would be era, Jim's executive Vice question in Seattle.
Before we begin I'd like to direct your attention to the forward looking statements on the fourth grader could trucks it.
I wanted if a coal will be going but this language.
Turning the call over to marry there.
Okay. Thanks, so much and good morning, everyone. Thanks for joining I'll begin with the Cobank 19, pandemic, which has made this quarter what are the most challenging in our history.
19 has impacted us everywhere, we do better gets changed the way we work we sell our products are we support our customers and how we care for each other many of these changes will import how we allocate feature spending and as we move forward.
Well our years of business transformation actions made the company more resilient. We also took additional proactive steps to haul help offset these challenges dealer stayed connected with customers with ER I'm, writing contactless shot quick dried tool that we enhance our customer care and after so operations remain open to keep our dealer.
And our customer supplied with the maintenance and repair parts needed and our employees proudly rally to build ventilators and personal protective equipment for first responders.
We used to early learnings in China, and Korea to safely began restarting our operations in North America in South America was significant support from our supply chain unions and governments.
We continue to collaborate with these stakeholders to ensure the highest levels of competent and execution of our extensive safety measures.
Well, we can't predict the trajectory of the virus and its ultimate impact on public health in the economy, we have put all appropriate measures in place to position. The company for continued recovery in the third and fourth quarters and beyond.
Before I talk about our overall performance I want to acknowledge another issue the increasing responsibility of companies like General Motors to take a stand against racial and justice in the U.S., while remaining focused on driving business results.
General Motors has a strong track record of diversity by many objective standards, but it's clear we must be more and we will.
During the quarter, we outlined several significant steps we plan to take these along with all of our progress across E.S.G. are detailed in our new sustainability report, which is available on G. M Dot com.
Now, let's look at the numbers net revenue was 16.8 billion, we had an EBIT adjusted loss of 536 million.
EBIT adjusted margins of negative 3.28.
S diluted adjusted loss at 50 cents.
Adjusted automotive free cash flow of 9 billion negative and ROIC adjusted at 6.4 out of trailing four quarter basis.
In North America as part of our ongoing transformation. He Carlyle was named President of GM North America.
Steve demonstrated track record in particular experience of strengthening the Cadillac brand will accelerate our progress in our very important north American market.
We also created in innovation and growth organization that will be led by Ellen Wexler, a newly hired senior Vice President who will report directly to me.
Alan is the former chairman and CEO, what people said VPN digital business transformation from and brings decades of experience, leading innovation and customer driven technology solution.
Another positive developments the U.S. full size truck and full size actually be plants are currently operating at three shifts.
Meet demand, we will add 200 employees in Fort Wayne effective September one, which will increase our output by a thousand units per mark.
We continue to offer customers a choice and how they want to do business with US. This includes using a shot quick drive tool. We're visits are up 50% this year as well as our clean program for those who prefer to physically visit or dealership.
Customers are now taking delivery of the first of our all new full size actually these are separately and GMC dealers are showing selling every new tahoe and you kind of they can get and buyers are praising the new design and outstanding right quality. The vast majority of initial you kind of sales or the highly profitable denali.
We continue watching new model to this summer, including the Shepherd waste Bergen and the GMC Yukon XL.
We also began building being highly anticipated 2021, escalate, it's going well and we anticipate starting a regular production early.
Among its industry exclusive technologies Escalades avail available Super cruise offers new enhancements, including lean change on demand functionality.
Cadillac has generated the most consumer interest ever for the new escalate with 600 plus orders already on the books.
In addition, the 2021 Chevrolet Trailblazer, and Buick Encore Gx small actually these are new market opportunities for both brands. Both are gaining share every month, turning fast it dealers and attracting new and younger buyers nearly one third of trailblazers buyers are 35 or younger an anchor GE Act has quickly become the brands.
Hi, its volume Buick, surpassing the encore.
In other North America highlights GM was highest what's the highest ranked automaker in the JD power 2020 initial quality study our brands why didn't six segments and eight other models placed within the top three.
In addition, GM rose three spots and the JD power U.S. automotive performance execution and lay out study work often referred to as appeal.
Brands led in three segments and nine other models placed in the top three.
GM defense, one or 214 million dollar production contract could build field and sustain the army's new infant infantry squad vehicle. It is based off of the 2020 Chevrolet, Colorado VR to midsize truck architecture, and Leverages, mostly commercial off the shelf Park.
GM financial which performed well in the quarter achieve 53% share of James retail business in the U.S. and has 24 billion in liquidity at quarter end.
In June we released our new Onstar Guardian apt to select owners of G.M. vehicles. This allows them to bring the safety of onstar outside the vehicle for the first time in its 24 year history ensure access to the app with loved ones. So far we've onboarded more than 7000 customers and will soon roll it out to our entire GM owner population.
Turning to our international operations the business environment in China is improving.
Following the deepest impact of Cobank team in February sales have been recovering month over month.
Oh, Sri FCB and NPV segments, we're well positioned are showing the greatest recovery.
In the recent JD power initial quality study G.M. Xian tied down your way north plant in China, which builds the beauty condition was ranked the highest automotive manufacturing facility in the world.
Do you look deliveries increased nearly 8% year over year strengthening its leadership in the M. PV segment with the all new GE L. eight Evan your family, it's actually the portfolio will grow with the all new envision.
Well, then sales grew nearly 10% sustaining its leading position in commercial vehicles, while strengthening its foothold in passenger entry.
In South America, all manufacturing sites are operating in line with market demand, which remains below pre cobot levels, we anticipate gradual recovery overtime.
To counter the impacts of the pandemic and macroeconomic conditions on our business, including FX, we continue to seek efficiencies reduce cost and capitalize on the market success of the new Chevrolet Onyx and tracker.
Elsewhere in international Operation restructuring efforts continue.
The Korea transformation is progressing to plan with the recent launch of the trailblazer for export and domestic market.
Domestic sales were up more than 16% in the quarter.
All of our tie dealers have accepted the transition package and we have reached agreement with over 90% of our dealers and Australia and New Zealand.
Now I'd like to shift and talk about our you'd be progress.
Following our EBITDA in the U.S. in March the team continues to share our E B strategy with media and stakeholders in our global markets about her nexgen platform LTM battery technology and easy plot portfolio.
The positive coverage is encouraging and we will host detecting next month in China to demonstrate our progress in this important market.
Showcased our easy technology and designed this month during a visit by the U.S. Secretary of Energy. We were pleased to accepted Department of Energy Award that will help us develop lighter stronger and less expensive battery and closures.
We're also making significant progress on our old himself facility and Lordstown, Ohio with our joint venture partner LG Chem.
Hi, Graham Prep scanning April building Foundation work started July one and crews will begin erecting building steel today.
Also on track or the first of our upcoming babies in North America based on our next Gen EDI platform and LTM battery system.
The Cadillac lyric luxury electric S. UBI will be revealed next week.
The GNC Hammer, <unk>, which will reveal in Q4 and the cruise origin AB that we've already shared.
Lyric scored the highest it any vehicle tested and our vehicle confirmation clinics. It was also the highest rated in terms of exterior and interior appeal among vehicles luxury and non luxury in the clinic dataset.
Or easy sales and portfolio are growing in China with overall year over year deliveries in the first half up for that.
For the first half a year by more than 25%.
New entries with our JV partner include the Chevrolet menu, which isn't early phases of launch the all new Baozun E 300, and Athree hundred plus which support DC fast charging and charge in an hour.
And we'll Lngs first all electric models, the wrong Guan electric minivan, and the honk long mini E beam.
And last week, we launched abuse elite seven Butte first all electric S. UBI.
Turning to babies crews continues to put it has lead to work autonomy autonomy mislead delivering more than 50000 meals to people in named in San Francisco as part of the Cobot 19 relief efforts cruises, making strong technical progress and we're expecting some exciting updates in the second half of this year.
With that I'll turn the call over to divvy up.
Thanks, Mary and good morning, everybody.
Second quarter was clearly one of the most challenging quarters in recent times with production in North America down eight out of 13 weeks due to cope with 19 wholesales down 62%.
However, even under these conditions, we were new breakeven EBIT in North America, demonstrating the resilience and flexibility that we built into the business over the past few years.
We view these results is proof points of the strength of the business, specifically North American breakeven levels of 10 to 11 million Oculus SAR.
Global free cash flow breakeven level, excluding managed working capital of 13 million you with sorry.
This quarter's performance also highlights our ability to move quickly to preserve liquidity and the importance of having a strong investment grade balance sheet.
Automotive liquidity continues to be very strong at 30.6 billion at the end of second quarter.
Retail sales of Republic from April to around 20% below 2019 levels at the end of the second quarter and trending better in July even amidst the backdrop of limited inventory.
We expect inventory levels to steadily to recover from current levels.
We remain cautiously optimistic about the continued recovery in U.S. sorry.
We really have you know with the fluid situation and we're watching the infection rates across the country and its impact on the auto demand very closely.
Let me frame up the quarter's results for you.
Q2 results of negative 50 cents, an easy as Joe noted adjusted includes an eats and gain from the PSC revaluation.
Adjusted automotive free cash flow in the quarter was negative 9 billion.
When you add the benefit of our plan liquidity actions. The total cash burn for the quarter was 7.8 billion inline with the scenario of the burden of seven to 9 billion, but we provided in the last quarter.
Let me give you a quick comparison of the drivers of our cash flow against the scenario that we provided.
Contribution from vehicle sales Aftersales onstar, well, it's four and a half billion and was better than the scenario that I laid out last quarter.
Monthly cash costs of 1.5 billion and Catholics of 1.1 billion, we're also better than expected.
Working capital Unwind, a 5 billion goes higher than expectations since supply chain constraints in Mexico push some of our North American production to later in June.
Sales alone to unwind of 3 billion wasn't the high end of this scenario due to better than expected retail sales performance.
China and GE left dividends of 900 million was inline with expectations. So when you put all this together excluding managed working capital Q2 cash flow was a burn 1 billion, which aligns with our breakeven scenario that we have talked about.
It's important to note because weve implemented significant austerity measures and this extreme environment and as such this is not a quarter to run rate on a go forward basis.
Let me touch on the region, starting with North America was retail sales performance was down 24% year over year retail market share of full size pickups improved from 35% to 36.1% despite lean inventories.
Our inventory levels remain mean that 480000 units as of July 20 cents.
Compared to 810000 units at the end of Q2 of last year and 418000 units at our low point in the early June.
We continue to rebuild our pickup truck inventories, which stood at 120000 units as of July 25th.
This compares to 270000 units last June and 87000 units that are no point.
We continue to take a number of actions to increase production and replenish dealer inventory. We've returned to normalized <unk> run rate in all of our full size truck plans and our matching supply with demand in our remaining facility building inventory, where we needed to most.
Our dealers are doing a great job of selling deep into their inventory and there are many initiatives underway to optimize logistics. So we can rebuild our inventory faster.
We're also discipline from a go to market standpoint, with light duty ATP, Applewood pals and dollars per unit quarter over quarter.
This is driven by low incentives as well as rich mix.
Oh I see we launch is going very well and were able to take advantage of downtime and me to retool.
This has allowed for a smooth transition and the opportunity to produce through the traditional July shutdown.
Well, we're still experiencing ramp up constrains due to time opinions I see we launch is at the same planned.
Working through July provided an opportunity to both units that would've otherwise been lost.
The customer feedback to the new as he leaves had been very strong and the vehicles have a very quick average churn at the dealer lot and to try to make something very good as well.
Our new heavy duty trucks are also performing exceptionally well with 80 piece of $4000 year over year, and U.S. retail market share of 35%, Oh five percentage points year over year.
We're also seeing its strong trim mix with Denali, an 84 mix over 70% for this hero and LTV and hi country mix of near 60% of the Chevrolet.
As we mentioned in February these strong launches will continue to serve as a tailwind to north American profitability.
Let's move to Jim International.
China equity income in Q2 was approximately 200 million as the market showed signs of recovery and we benefited from a recent launches.
We also continue without cost reduction measures.
For each one we achieve breakeven equity income despite the impact to buyers and the wholesale being down 32% year over year.
Our sales continue to recover and we expect to maintain the approximately 200 million quarterly equity income from that.
We expect to China learnings to improve overtime as we introduce new s., you'll be in luxury models and benefited from an eventual industry recovery.
We didn't see 500 million and dividends from China operations in Q2, and expect the remaining dividends in the second half of this year.
In South America, we experienced lower production related to the pandemic, Andy FX environment has become more challenging however, we're continuing to strengthen the business and take cost out.
Our first two vehicles and our new platform, the onyx be car and the track or be a few we have been well just seeing but the Brazilian market.
These new vehicles have helping cruiser segment share and or retail leaders in their respective setting them.
We're focused on channel mix in South America, taking a closer look at entries and channel the do not achieve a margin objectives and redirecting volume towards profitable channel.
Furthermore, we're continuing to take price, especially in Brazil to offset the impact of ethics.
As an example year to date, we've taken price increases of 10% and competition is following.
So we're really attacking this on the revenue side as well as the cost side when all the austerity measures, we've taken which will get the listens closer to breakeven.
Let me make a few comments on GM financial crews and the Coke segment.
GFT actions, we've taken to drive dealer traffic noted strong vehicle sales and you lift penetration of 53% up from 47% a year ago.
Jim That's 200 million E. B T was lower year over year, because of higher credit pollution and accelerated depreciation on the lease portfolio due to the pandemic.
In Q1, we had talked about a 7% to 10% decline and used vehicle prices.
Given the significant recovery in prices starting in second half of Q2 industry consensus no points to a slightly stronger used vehicle price environment down 6% to 8%.
And we continue to expect net charge offs in the range of 22.5% although towards the low end of the range. If recent credit performance persist.
We will see the expected 400 million dividend from GM financial in Q2.
<unk> costs were 200 million for the quarter consistent with expectations and Coke segment costs were 200 million, including 100 million favorable impact from the PSC investment.
Quick update on our transformational cost savings initiatives.
We achieved 3.8 billion since 2018, including 200 million in Q2, and we expect to achieve our target of four to four and a half billion.
On the cost from zero based budgeting has allowed us the opportunity to reevaluate our spending across the board.
Significant majority of the austerity measures will normalize as you can expect we do think that some of these efficiencies looks tick. It is too soon to put a dollar amount on that but some examples include pushing marketing spending who used to vent expenses and reduced travel into some of these expenses.
Finally, looking ahead to the second half of 2020 as you know the environment remain fluid and it is difficult to provide an official guidance in this backdrop.
But let me frame up with scenario to dimensional profit an all cash flow.
If you assume a 14 million you with light vehicle Saar industry in each too.
English global production is not impacted by plant shutdown or shift reductions.
And we do not experienced a significant supply disruption.
Reboot dealer inventory to be in the neighborhood of 600000 units they ended the year.
We can expect second half total company EBIT adjusted to be in the range of four to four and a hub for excuse me four to 5 billion with Q3 slightly stronger than Q4 due to holidays in November and December.
In this scenario, we expect to generate free cash flow seven to 9 billion, an age to assuming a working capital and sales allowance rewind of approximately 5 billion and Capex of approximately 3 billion.
The H. do scenario demonstrates the ability to recover a meaningful portion of the H one cash burn.
Keep in mind. This is a scenario not a guidance and these factors that inherently difficult to predict given the volatility in demand and production timing as well as levels.
As you know there are number of factors such as inventory build managed working capital rewind austerity measures that will make a difficult to use a scenario to extrapolate into 2021.
And we're confident in the fundamentals of the business and in a normal environment. We would expect a cash flow generation potential of the company to be strong as we keep funding the investments in our future.
And it's also worth noting that the deferment in Capex spending this year will lead to lead times spending into 2021, however over the two year period, we expect it still stay within our Capex target.
So in summary, our Q2 results were significantly impacted by the pandemic, we're demonstrating how will we can perform to a challenging time.
Our focus on cash flow and the steps we've taken to improve the breakeven has certainly helped improve the resilience of the business.
We continue to be laser focused on execution and generating strong performance, that's will position us to win in the future of mobility. This concludes our opening comments and we'll now move to the Kuni pushing typical.
It does today I'd like to ask a question simply press star one on your telephone keypad to withdraw your question press the pound key.
Your first question comes from Atlanta, Justice back with RBC capital markets.
Okay.
Thanks, very much everyone.
Yeah, maybe just to.
Clarify that last comment on the back half EBIT was that.
Auto EBIT.
Or a totally bid and maybe.
If you could probably little bit more color or what the implied North America EBIT would be in the back half.
So Joe It is total company, but so it includes auto as well those gms.
I don't want to put a specific north America number two it but it's safe to assume that with a 600000 units dealer inventory position by year end I think that gives you enough data points to model North American specific.
Okay, and then you talked about the cash flow in the back half I think in some other comments you've talked about potentially paying back the revolver of 60 million show, a 16, but I'm sorry, if I'm doing the math right sort of seems that if that occurs you're back to net cash balances almost equal.
Two.
Let's call. It second quarter of 19 levels are pretty straight pretty Colgate am I missing any thing there are there under any other puts and takes we should be considering.
I think you Directionally correct. If you think about the first half of the year. We've learned 10 billion between Q1 in Q2 and based on the scenario that I provided in the midpoint of the range of the seven to 9 billion you can see that were recovering the bulk of the burn in each one of the year. So as we build the cash.
Cash bounce back towards our target level, Joe that's when we would.
Thank you pay back the revolver, obviously as you know there's a ton of uncertainty that's out there. So it's important to know that it's based on the backdrop and all the assumptions that I talked about.
Okay, and maybe one for for Mary.
You talked a lot about your Ian LTM architecture, and it sounds like you're very comfortable and excited about it.
I know you have an agreement with Honda for that as well, but we're also seeing as a lot more companies I guess trying to.
Maybe break into electric vehicles, or auto making them Im wondering if you would ever consider or how you in sort of validate the risks and opportunities I guess on selling.
Catch to some of the.
Would be computers.
Yes, we think at scale does matter and we are very confident and excited about our LTM battery platform and our cell technology.
We are the only wanted to that are building battery cells. In this comfort in this country from an auto perspective, and we also have a joint development agreement with LG Chem, along with the R&D work that we have.
Yeah, We stated that as we early in the early days of launching off of our new LTM platform, we will be at or below 100, and that's just the start of the cost down plans that we have from a battery Sal technology perspective. So we as you mentioned how does at a rate.
Arrangement with a Honda to provide and leveraged not only I'll turn cells, but our platform and we evaluate each one of these opportunities on an individual basis. So you know we think it's going to be something at the additive and generate shareholder holder value, but doesn't have a negative impact on on the core business. We we definitely will.
Correct, our truck franchise and and other key franchises, we will we will evaluate so we remain open as we move forward because we think we have leading technology.
Thank you.
Your next question comes on line of John Murphy with Bank of America.
Good morning, guys. Just first question on the strength in pricing in the quarter and obviously with inventory relatively tight that should have 80 that so as you get that might be part of its just curious how much of that price increase you think is is sticky how much benefit you'll get as yes.
You. These launch and then also if you think about the relatively tight inventory right now and give you you're talking about going back to 600000 units, which is still relatively tight through the ended the year you might you consider a leaner inventory.
Level going forward to support pricing.
Yes, John I'd say on it in the quarter. It was both carryover as well as our majors that contributed to positive pricing on the major side as you know, we're launching our trailblazer and encore gx, which have been well see really well and that's helping us from me.
Net price perspective on the carryover side, it's across the board, but particularly in full size pickup that we're able to maintain the.
The pricing and levels there and as we go forward you know to your point, we will calibrate the right level of inventory to cloud based on what the Saar environment is like.
As you know, what's a needle that you gotta thread watching what the competition is doing our own inventory levels and those the appropriate trade off between market share as well as profitability and that's something that we manage on the quarter to quarter basis, and we'll continue to do that in the second half of the and beyond.
Okay.
That's helpful. In interest second question on the doing in half and cost fees in the quarter I mean, I think in the press release, you're seeing it that teach up to 3.8 billion. So youre.
Before all along the way you're getting four to four and a half billion. So im just curious how much of that was somewhat temporary eat into quarter and there might be more to go and I guess, it's pitcher just a question semantics and timing.
And as you kind of shutdown this route of.
Crossing the finish line afford a 41 billion if there is potentially more.
Look down the line or are you guys just running so efficiently you're kind of reaching sort of an S problem at all on how far do you go on cost I mean, it's pretty impressive.
It seems like you might be bumping up against limits here at this point.
Yes, so from a from a 3.8 billion that you alluded to John I'd say those are permanent savings in that.
They were part of will be announced in November of 2018, and we've been making progress getting to the four to four and a half million range that we've talked about so I would categorize those is more permanent savings in addition to that.
The austerity savings that we put in place.
In the second quarter given depend then they can what's going on that's where you gotta look at it in two categories.
First category naturally there will be a normalization of that with the production going back up. So for example to the extent their salary deferrals that we have announced recently that we were.
The store and goes to the original levels those were temporary so we we went back to the original levels. There so with with the normalization you will see significant majority of that I'm going back, but what we're also working on is whether it's a marketing spend or then to expenses.
His son travel as you can imagine as low facilities and other areas. We're looking at every single one of them from a zero based budgeting perspective to up to do more there. So.
As I said I, it's difficult to put a dollar amount, but do you know it's safe to say you've seen the performance in the quarter from a cost standpoint, if there's cost efficiency efficiencies to be had we will get it.
Okay, and then just lastly on the Onstar discussion I mean, moving towards an app on the phone it's available outside the vehicle seems like you're taking as more and more in sort of standalone direction.
Just curious your really what that means it's going to be available to folks outside of CGM GM family and could just be a precursor to a potential separation.
Some point down the line.
So again I think what we're really looking is at leveraging the pool full power of onstar in that connectivity. We have the relationship we have with first responders throughout the country and we think it's a very additive business.
There's a lot more that we plan to do on building on onstar that will be integrated with the vehicle. So we'll look at both path, but have nothing to talk about related to the separation.
Okay. Thank you very much guys.
Your next question comes on line of Adam Jonas Morgan Stanley.
Hi, everybody so bear with me on the first question.
General matter General Motors brand I think goes back a 111 years.
All.
What do you think why not just change the name of the company I.
I mean, if it's done if it's just the general Motors brand is done its job but.
Hi, I'm wondering if it might be out of trucks from some of the really interesting directions, you're taking the business why not call the company only on the entire company.
A follow up.
So Adam I appreciate your input and you know when I look at a name change on and you know we're going to make any changes necessary to drive the shareholder value because I'm. So strongly believe in the technology and our future product plans as it relates to electrification I live so thats something that we have value.
A wait and look at when's, the right time, and what are the proof points that everybody looks at it makes it real and so we we believe strongly in our easy future.
Okay. Appreciate that Mary just a follow up then.
Because as you realize there's so much investor enthusiasm around.
The higher you know the 20% CAGR business known as the reason and not so much.
I've been around the negative 5% or so cagar business thats, the melting ice cube so to speak.
And the valuations or somebody other companies.
That are going after the higher growth business or just so sensational I mean people talk about revealing worth more than 10 GM and.
And they never made Oh vehicle.
So I'm just thinking from GM and Georgia grew your peers can you know alone.
No as you look at what today's results, but you know really really good results under tough circumstances.
Decent set a guidance under tough circumstances.
The market doesn't seem to care from your seat what is the biggest reason for this gap.
It's a pretty big gap again, I'm not saying when you out specifically when you are the CEO of this company that many investors see as a real opportunity here and I want to and I'm one of that back that group, what's what's the Green biggest reason your mind for the gap or what is Jim need to do to radically change that perception. Thanks.
And so when I look at on all the attention on some of the companies that you mentioned I think it's a validation of the importance of the electrification strategy I think on as we move forward people will see all this strength, we bring as it relates to scale manufacturing capability technology technology that we're bringing leading battery.
The cost so we've got to keep telling our story, we've got to deliver and that's exactly what we intend to do we have the the lyric announcement next week, which is one of the highest clinical vehicles I've seen in my 40 year career off from a customer perspective.
We have more to share very shortly on on the hummer in a and as I said the reveal in fourth quarter.
The battery plant is is raising steel today. So we're just going to keep delivering and demonstrate that we have products people want to buy.
Thank you Mary.
Your next question comes phone line of each time Mccalley with Citi.
Great. Thanks, good morning, everyone.
Did I think you mentioned this and the outlook commentary, but how much what roughly of the working capital crude do you expect to recover by year end, even if we go back to last year strike.
Yes, so we're assuming you try and the outlook.
I would recovery of about 5 billion from a working capital and feel salons perspective, So we're not.
All the way back from a recovery of of the cash flow into we experienced in poor chef as it relates to working capital and that will happen as the industry continues to normalize so.
Way to think about it is a 17 million units, if you're roughly neutral working capital and Oh, we saw the born in first half of the of the year as it gets closer to 17, it's it's almost like a linear way of thinking about of getting back to to the a neutral levels and as you know it's also based on time.
Winding up production and and the levels of production schedule.
Great. That's helpful. And then just Tom you mentioned.
The scope situation than in the rise in cases, and just curious if you're seeing any signs whether it's all globally nationally or even by region of any recent signs of retail demand weakness just in light of the recent events.
No not really UK on you know, we're we're cautiously optimistic on as we see month over month over month improvement in in China. As we see continued improvement in the United States in North America, and we expect a bit for recovery due to the severity of Covidien South America.
And just lastly, up maybe I don't know coffee, we spoke about and you've spoken about the opportunity.
Used to deploy them on rideshare networks and wonder if there's any updated views on that particularly with one of the larger companies in the past few months committing to.
2030, just curious if there's any other.
Thoughts about how you might look at the point.
Sure networks.
I I think that's an opportunity for us and I don't have anything specifically to announce today, but very much an opportunity.
Great. Thank you very much.
Your next question comes on line of Ryan Brinkman with JP Morgan.
Question.
The performance in North America really stands out as very impressive just looking at your change in EBIT divided by the year over year changing revenue it would seem to decremental margin track somewhere in the order of 19% 3.1 billion declining EBIT on 16.7 in revenue versus in most other quarters I think operating leverage has been quite a bit higher so clearly.
It seems a result of the 1.4 going up cost or 1.3 drilling performance other in the quarter or are you able to sort of breakdown that cost improvements for us to help US you know maybe better understand how much of that cost cutting represents expenses that you have found maybe don't need to be added back as volume returns versus I don't know other costs, which are maybe less sustainable.
Yeah, it's difficult line due to put a dollar amount on on this but.
A portion of the cost in the bridge I would say is timing call at about 500 million or so which will bid we turned into.
Into a different time period under the age jeweler or into next year.
And I think if you think about margins, though what you're seeing really in North America as quickly being able to flexible cost structure, but also.
The the product's trend this little bit we're seeing.
As you think about future margins for North America, we're going to have.
The launch downtime behind us from both in CV and heavy duty perspective last three years. If you think about it we've been we've been taking downtime to change over the entire portfolio. So as you go forward here you think about lack of downtime whatever it takes from a cost perspective on and efficiencies and continue.
The execution of the transformational cost savings so you'll see some tailwinds here and this quarter certainly demonstrates that you're seeing what do you any thought of North America can be.
Okay, great. Thanks, and then if you were just sort of add it all together when you take that I don't know learning to be leaner and the cost they do need to come back.
It may be considering also any sort of post coded costs, such as P for your employees or supply chain compression.
Would you say that your outlook today for long term GM, North America margin of 10% losses, lower higher or unchanged relative to prior to Corona virus.
I would say it's unchanged I think the you know, we obviously are focused on safety and providing to write equipment, but I think we'd be able to do that very efficiently along with other other koby cost and I see [noise] excuse me more cost opportunity as we move forward.
Excellent great here. Thanks, so much.
Your next question comes on line of Emmanuel Rosner with Deutsche Bank.
Hi, good morning.
So when you look at the high market valuations and cheap access to capital.
One of these electric vehicle equal companies, we spoke about earlier some establish linesmen in so many improving startups and that makes you consider spinning off gems electric vehicle operations and capability into separate Standalone entity. This seems to be large investor appetite for such assets as we discussed before but this.
Cheap access to capital as frankly on should become a strain competitive advantage for some of this company.
I mean youre on we are evaluating and always evaluate many different scenarios. So I don't have anything further to say other than we are open to looking.
Looking at and evaluate or anything that we think it's got excuse me is going to drive.
Long term shareholder value. So I would say nothing is off the table.
Okay and can I guess.
Are there any.
Technology or others through impediments, <unk> or do we sort of like things integrated together makes it complicates it just spoke a little bit of Bucks and reflect.
The factors that come into consideration.
I'm not sure right. Your your question, it's hard to hear you, but I think you asked is there what are any potential impediments and I don't I don't look at things as impediments I look at what is going to be the way to maximize the value creation. So I think you know there's many different path that we are looking at that we could.
Take ill start so with strong execution and building on the technical capability, we have as well as our supply chains and our manufacturing capabilities. So I don't really see any specific impediment.
Okay. Thank you and then for.
Yeah, I was hoping to boots Youre second half scenario you did scenario in historical context, obviously, some very strong outlook in under that scenario, but did the same gone historically visiting many half years, where Jim has them as well or a better.
First half of 2019 first half of it seems like an apple they seem but since then you stick on taking out a tremendous amount of cost and you have to the market is much lower but your truck production is expected to be running all out the pricing is great for the product that's really matter for Jim you feels like there's a lot of.
Upside versus back then so can you maybe just put into context is puts and takes.
Yes, sure. So you will still have in the second half of the or a couple of headwinds as it relates to wholesale still will be down relative to what might have been a kinda adjusted second half of last year, a normal type environment. So you know depending on where the.
The where the industry lands and our ability to fully liquid production. It depends on that secondly, gms <unk> is projecting that 6% to 8% decline and used vehicle prices and a higher consumer loss number and up to the extended that comes in at the better end of the range.
There could be some GMF opportunity there so even though production is running all out it is not quite back at the levels that.
The that pretty cold would ability do run all loud and especially in some of the international markets that marries talking about we might still have some.
Some production.
Production levels that are lower than than the pre a golden so GM of production levels and I think it's safe to say that at normal a normal second half would be if you don't have downtime production was back at the normal levels and the credit losses and used vehicle prices normalized.
Okay. Thank you for the color.
Your next question comes when a line of Mark Delaney with Goldman Sachs.
Hi, good morning, Thanks for taking the questions. So when you talk about the margin implications for the company has the mix shifts towards ease in the near or intermediate term and are there any milestone investor should be monitoring in order to gauge when the shift to ease will be neutral to your margins so milestones in terms of where about.
Sorry costs may need to be or certain volume of the views that the company may need to show.
Well as as I mentioned that we start rolling out off of our LTM platform and a cell system next year or with the Hummer EDI and I've been continue and early in that life. We think we're going to get to 100 into low and then we have a fairly rapid plan to continue to take care.
Cost out so it at I think it will happen over the life of that program that will be able to see the costs and depending on the ice powertrain get to a parity 0.3 that generation.
That's helpful and my question was around the us down 6% to 8% used vehicle pricing.
You had mentioned you talk a little bit more about.
Yes, just coming up with that I think somebody to investors.
Their use pricing I mean, a stronger than that more and more recently, so just some context about how you're thinking about used pricing within that.
A number that you called it would be helpful. Thanks.
Yeah.
That is a very good point, we are seeing strong recovery after the no point in April.
No we are looking to be more on the conservative side few reasons clearly the macro backdrop, but the question Mark at this point.
And there's always seasonality in the second half of the year, there's increased awfully supply coming from the lease extensions that we've seen in the first half of the your.
Rental car companies are de fleeting. There's also new vehicle inventories are starting to increase as we just talked about so when you put all that together, we just think it's appropriate to be conservative and of and clearly if you're going to see a continued to trend in the.
In the used vehicle prices as we've seen the last few months that represents an upside over what I talked about.
Thank you.
Your next question comes from Atlanta fraud, Lash with Wolfe research.
Hi, everybody.
Did you I was hoping you can just.
Just clarify a couple of points here on the.
Not guidance, but scenario that you laid out for the back half you said four to 5 billion of EBIT in the back half the I think the sum of.
Jim International Gms crews and Corp.
Probably around a billion negative so that would imply five to six from North America with some inventory and the cost structure.
Eliminates some of the temporary stuff is that what you're saying and it seems like that would include about a billion 4 billion five of inventory building. So maybe three to have four and a half billion at a 14 billion to.
14 million unit market is that.
Kind of a reasonable interpretation.
So right it's difficult to look at this on a regional basis Theres. So much puts and takes across regions as well, but I think what you're trying to get to is what might a normalized underlying free cash flow potential of the company might be and if assuming that's what you're trying to get to from the second half of.
Scenario that I provided.
Simple way to think about it is we at the beginning of this year. When we were expecting a 17 million Saar environment, we guided to $7 billion the free cash flow.
And we also said last quarter that if you had a 13 million U.S.. Our that's the pointed which we would breakeven from a free cash flow perspective globally. So that gives you sort of like the boundaries from a free cash flow standpoint, and depending on whatever demand environment. You can come up with you can you.
You can interplay between two point the key take away I'm trying to come up trying to communicate here is the underlying cash generation potential of the business remains intact with the critical would levels and that's how to think about it and obviously you're going to see you on a quarter to quarter some volatility associated.
Production or working capital assumption or sales allowances and so on but if you take a giant step back and think about what's changed since threeq over would we would say the business is strong the important product launches are behind us and they're performing really well austerity has anything to marries point is going to add too.
Some level of bottom line and importantly, we've been talking about cash conversion for a couple of years now and we're continuing to execute on those cash conversion measures and taking more dividends from Gms and so on so we are.
I'd say this is intact and that's how you should read into the numbers that I provided from a scenario standpoint.
Okay. Thanks, Yeah, it's pretty clear you explained.
It sounds like $2 billion to $4 billion in the back half, that's working capital, but with some inventory build.
How should we be thinking about.
Obviously macro is gonna be the biggest driver of the variance from this year to next year, but the things that are within your control.
Thailand, and Australia, I think you've quantified is about 400 million.
You suggested on the call that you can get South America closer to breakeven <unk>, how should we be thinking about some of those items as we look out to two next year.
Yeah I'd say.
Coolest side, the key tailwind will be the product downtime that I mentioned earlier here. We so you saw that in the in each of the last few years and we're not going to how bad.
We're going to have a full year of core but sales adjacent these have been growing up as you've seen both from an onstar as well as a after sales perspective, that's going to continue into 2021 and the GM I had restructuring is on track with the actions we've already announced seldom.
Erika as I mentioned, we've been inching towards both the breakeven with both the revenue side as well as the cost side again, I won't put a timeline on it but it's all hands on debt from the South America perspective, so from a controllable standpoint, I would say we are on the on the right site.
All of those initiative and all the all the regions and as you look into 2021 from a cash flow standpoint, I think all those will serve us as our strong suits will next year.
Great and just lastly was hoping maybe you could just address married.
Just the status of the China business right now you mentioned in your prepared remarks that especially luxury seems to be coming back, but seems like Cadillac was still underperforming the market a bit as we looked at the last quarter, what do you see in that market. It at the moment and and what's your view on the prospects from you.
Sure.
I think Oh, we see an opportunity to continue to improve that business clearly there continues to be ongoing pricing pressures, but we do have a strong cadence of new launches on that I mentioned a few of them. We also address the issue and added to four cylinder engine options that I think inhibited.
And some of our progress at the end of last year. So very important that we add the four cylinders and then obviously to the region stays very disciplined on costs. So as I look at the strength of Buick, we have seen progress progress in Cadillac I agree with you that weekend and we will do more so I.
An opportunity for this year, we've got it said that I'm, assuming kind of trajectory that were on will continue to maintain that roughly 200 million per quarter, but I see upside opportunity as we move forward and and as you go even further when you look at the recovery of that market and the ability of the market to get to a 30 million.
Type unit and our planned portfolio for any these I think in the medium term, there's even more opportunity for growth and profitability.
Okay, great. Thank you.
Your next question comes on line of Brian Johnson with Barclays.
Yes, good morning, Jim to.
A couple of questions. So if we think of Churg.
Do you use to put out sorted in the 2012 2013 Gergrude showed North America fixed cost base. If I just do the math of subtracting about 10000 per vehicle variable contribution.
From your $11 billion or revenue I get to sort of $8 billion of cost Comscores 32 billion can you update us on a couple of things a is that in the ballpark for you're doing such cost bases in North America.
Two of the cost reduction how much was to fix cost than how much was things like supplier price concessions or redesigning bill of materials and so forth.
Yeah, I'd say, Brian the number that you came up with its probably on the on the higher side, I'd say lower than that and part of that is actions. We've taken with a transformational cost savings. If you think about it from the 20 Htwo 2013 timeframe. The two alluding to we have been consistency.
Taking pictures cost out of the system. So the I think you can you can produce a year number by.
At least defense original cost savings, if not higher too to get to a lower number and the second question a lot. The austerity actions were on the fixed cost side. So I'll give you a few examples marketing spend typically goes into this bucket of fixed cost that you're talking about that with Miller.
A lot of the salary deferrals as well those are paid related items typically fall into fixed costs as well that was lower travel and sundry expenses typically fixed costs. So it's less about extracting more variable concessions out of this is Jim and more about the.
These kinds of us reactions that I talked about hopefully that's helpful.
And as we kind of go into 21, assuming things somewhat normalized in the world how much of those fixed costs come back.
That's the challenge as I'd say it's.
The transformational cost savings assumed that those are permanent and we will continue to move to was the four to four and a half billion. So that's a if anything it would be on the on the high end of that range and.
From a regular austerity perspective, whatever salaried or or the or the hourly pay until on clearly, yes were restoring activity that's going to come back and the rest of the fixed costs.
Good to see what we can do to make it stick obviously, when we give them 2021 guidance and more color that time, we'll be able to talk more about the cost environment, but really from a number standpoint, it's too soon.
Okay and then just final question over on GM financial delinquencies were in good shape, but.
Throughout the consumer finance industry. There are forbearance agreements with customers can you update us on where GM stanch close forbearance and as opposed to risk to delinquencies.
As we move into further into the fall.
Yeah, it's actually been very much on truck, we've seen a slight pickup in earlier in the quarter towards the April timeframe and actually the second half of the quarter.
The numbers were starting to come back down again, so we've been watching all these numbers closely we've looked at.
Made fees and all the payment to flows and we've seen that across the board. All these metrics are decreasing from the peak we saw in April and we're returning closer to the normal levels by July and obviously, we're being conservative about it.
Okay. Thank you.
Your next question comes on line of daily be with credit Suisse.
Hi, good morning, Thank you.
The first just wanted to ask a question on inventory levels.
No you're saying target of 600000 by year end disposable kit. The the 2018 to 19 through your typical month end inventory was typically around like 800000 units I know we're not enough.
17 million Saar, but what's a fair reasonable to assume overtime beyond year ended I assume the 600000 does reflect production furnishings and isn't.
Hi, good inventory per se.
Yeah. So 600 to your point is based on a.
A a second half environment of closer than 14 million life vehicles are that I alluded to so we we will calibrate us based on the demand level that we see and to the extent that the industry is trending stronger we will look to get back to the levels that are.
In the range I would say of working just you just alluded to.
Clearly from a truck standpoint, we will be limited by production capabilities as well, we're already running all out and we are taking all the measures we can to increase or add to production levels on trucks as much as possible and I think as we calibrate to into an appropriate industry level you will see that's it.
Hundred numbers tactical Doug I go back up again.
Okay great.
So the follow up you you've talked about I know you reaffirmed today, the North America EBIT breakeven in sort of $10 million to $11 million you just did total company breakeven with.
Good morning America volume down 60%.
Our down 60%.
10 million, yes, a lot better than 10 to 11, so why isn't your breakeven or better than the 10 to 11 million you've highlighted and given the resiliency of mix is there potential to see a 10% margin in the Saar environment below 17 million or is there something that's missing it would just about.
No.
He the development expenses coming online.
What's what are we missing there.
Yeah. So if you if you just take this quarter's noodles and looked at a wholesale implied SAR. If you will wholesales were down 62% that would imply a sort of about 7 million units and the reason it is so much better than the 10 to 11 million units as we were.
Able to take a very significant almost extreme austerity actions given that oil production basically ground to a chance to and you can ask yourself. The question. If it's more of a quote normal downturn and everything is continuing but demand is lower how much of those levers will you be able to pool I think.
We think some of them would be difficult to pool. When production is actually ongoing so austerity will be dependent on the nature of the downturn and secondly, you saw what pricing did this quarter inventories were low.
And the both the carryover pricing as well as the new vehicle pricing held up very well in this environment and you're gonna have to tell me what assumption to make during the normal downturn to see if a pricing levels would hold up with that at that level not so no. We are going to continue to drive the breakeven level down.
And we're not settling comfortably attend to 11 million well then of course that down as much as possible. While we're not doing is using this particular unusual circumstance to advise a formal break even point to a different level, having said that said, we will work to reduce that as much as again.
Okay, but could just squeeze in one more on the on the product side you talk about your presence in off road, we're obviously seeing wanted excitement.
Given the product actions of some of your competitors.
You know.
So how much of a priority is off road for you and what are your plans with 84 would you expand 84 beyond GMC to the Chevy brand.
I think you know we look at each brand and are continuing to build on our off road offerings in GMC as well and Chevrolet Chevrolet and then I think when you look to hammer, you'll see a true capability there as well. So oh, we think it's very important is the.
Customers and we'll continue to expand our offerings.
Okay, great. Thank you.
Our last question will come from the line of Chris Mcnally with Evercore.
Thanks, So much fantastic results guys and thanks for the second half framework. So real quick one strategic and then one on the numbers so I'm sort of in the spirit of some of the other easy questions.
In the 12 upcoming models.
I think many industry participants believed that this may only be incremental progress and not really big leads and particularly in design and we even have trouble pointing to one of those vehicles, which could be sort of 100000, plus so it's my question would you mind, just sharing which you think is James chance of of best chance of a high unit.
Program adverse let's say, a new product, which is more of a.
A wide portfolio post it to easy.
I think if you step back and you look at what we shared it at our everyday in March is we have a with the new LTM on cell and platform technology, we have the B T. The battery our battery electric truck.
Offerings, and then are bad, which I'll say it kind of mainstream and then are bad plots that allow us to do expressive vehicles, there's huge sharing between those three platforms that are foundational for the portfolio that we have coming forward. We do have a full portfolio plan to cover high volume segments I think when you see on.
To start with it the Cadillac lyric and then the truck portfolio. We have planned you'll see that we plan on participating in a very significant way and I think you'll see design and technology back it up to truly be tapping into what the customer wants expects and the excitement that it'll bring.
But there is it fair to say that it's more of a portfolio poach that.
Really no one vehicle is going to lead the charge in terms of.
Hi number of units.
I know I don't think Thats correct I think that we have some entries that are in the sweet spot of key segments that are large segments, and we and intend to get our fair share plus more so it won't be I'm on the fringes it'll be mainstream.
Okay, Great and then just one real quick one in the second half numbers.
Is it is it fair to assume that the mix component should turn positive again in Q3 in Q4, even despite.
The tough comp of CHC launch last few but obviously you have the new FCB launch. This year. So can we see mix turn positive as well as well as long as in second half.
Yeah, I think there's a few months components, obviously truck and because I think we production.
Going to drive favorable already from a mix standpoint, and I wasn't sure whether you're talking about 19 numbers adjuster, when adjusted for the labor disruption or not but.
In terms of fall all volume, we're going to equal size I think we'd rombach alphabet generally favorable to mix and the other aspect is 10, Meg and all that we're seeing as I mentioned 84, Oh, do Mali, and all TV and high country mix, all trending very high and Uh huh.
Typically when those are strong there. These are all more profitable vehicles and both tend to be a tailwind as well from mix standpoint, so well vehicle mix as well as can make.
Driven by.
A full size trucks as well as schools I think we the more specifically should generally be favorable to mix as we go forward in the next two quarters.
Okay, great very clear thanks, so much.
Oh.
Thank you I'd now like to turn the call ever to Mary Barra for closing comments.
Again, thanks, everybody for joining today, we recognize that we're at a critical point for General Motors. Our company, we know from an industry perspective, and frankly the world as you look at the virus, we are committed to leading through the current challenges and into the future to provide a very strong future. We're determined to run the business in a way that create.
The value our shareholders deserve and with outstanding vehicles for those who attended our EDI data comments, we had under design and technology coming was very very strong we need to continue to share that I'm much more broadly and we will.
And we also are very focused on technology, and having customer centered innovations like super crews, which is an important step as we bring self driving vehicles to market.
I Hope you understand we're very focused on our work from an easy at an 80 perspective, and believe that will deliver deliver not only a growth, but profitable growth and ultimately help us achieve our vision of creating a world with zero crashes zero missions and zero congestion.
And I know many of you are eagerly awaiting to see more of our EDI plan. So in addition to the launch that we haven't next week on the lyric at 11 am today, we're posting a video to our IR and media websites spotlighting the upcoming GMC Hammer easy, it's not a complete reveal but it's more information and we believe it is truly the world's first.
Super truck. So we hope you'll take some time to take look and thank you again for your time.
Ladies and gentlemen that this conference call for today. Thank you for joining.
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