General Motors Company (GM) Q2 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you very much for standing-by and welcome to the General Motors Company Second Quarter 2014 Earnings Conference Call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session for analysts only. (Operator Instructions) As a reminder, this conference is being recorded on Thursday, July 24, 2014. It’s now my pleasure to turn the conference over to Randy Arickx, Executive Director of Communications and Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning and thank you for joining us as we review the GM financial results for the first quarter of 2014. Our press release was issued this morning and the conference call materials are available on the Investor Relations Web site. We are also broadcasting this call via the Internet. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. This morning, Mary Barra, General Motors' Chief Executive Officer will provide opening remarks followed by a review of the financial results with Chuck Stevens, Executive VP and CFO. After the presentation portion of the call, we'll open the line for questions from the analyst community. Marry Barra will then conclude the call with some closing remarks. In the room today, we also have Tom Timko, Vice President, Controller and Chief Accounting Officer and Niharika Ramdev, Vice President, Finance and Treasurer, to assist in answering your questions. Now I'll turn the call over to Mary Barra.

Thanks, Randy and thanks to everybody for joining this call. On our last earnings call in April, I spoke about GM's resiliency during a very challenging first quarter. As you all know, the ignition switch recall and difficult market conditions in some parts of the world put tremendous pressure on our bottom-line. Nevertheless, we remained profitable. Just as important, we also continued our steady investment in new products and we returned more than 480 million in capital to common shareholders, stockholders through our first quarter dividend. Years of hard work to improve our vehicles, our operations and the customer experience made this possible. As expected the same issues continued into the second quarter, but once again we had strong operating performance and we earned a profit on both in EBIT adjusted and a net income basis and we stayed on our plan. I’ll speak to all these points starting on Slide 2, which presents a summary of our second quarter results. Then I’ll review the highlights that speak to the heart of our business, which is to build great products, satisfy its customers and do it very profitably. At the top of Slide 2, you can see that we delivered 2.5 million units in the quarter. As we announced last week, this was our highest second quarter volume since 2005. Sales in North America and China, the two largest and most profitable markets in the world were up 6% and 8% respectively. However, this was offset to a large degree by declines in markets like Russia and Venezuela, where the industry is weak as well as the strategic decision we made to wind down Chevrolet Europe, this also had an impact on market share. Our global market share in the quarter was down three tenths of a point. However, market…

Thanks Mary. On Slide 5 we again remind you of the results for the quarter. Net revenue for the period was 39.6 billion. So nearly 600 million increase from the prior year is primarily attributable to favorable mix of 1.2 billion, favorable price of 1.1 billion, increased revenue from GM Financial of 400 million, partially offset by a negative 1.8 billion associated with lower wholesale volumes and unfavorable foreign exchange of 400 million primarily due to the weakening of the Brazilian real and the Argentine peso against the U.S. dollar. Our operating income was a loss of 500 million primarily attributable to 1.2 billion in recall-related expenses, and 1.3 billion in special charges which I will cover in more detail later. Net income to common stockholders declined 1 billion to 200 million and our diluted earnings per share came in at $0.11, again, influenced by recall-related expense and special charges. As Mary indicated, net income was 1.7 billion excluding recalls and special charges. Automotive net cash from operating activities was 3.6 billion, a 900 million decrease from the same period in 2013. For our non-GAAP measures EBIT adjusted was 1.4 billion in the second quarter including 1.2 billion of recall-related expenses and $200 million of restructuring. And EBIT adjusted margin was 3.4%, down from a year ago again adversely impacted by a negative 2.9% due to recalls. Adjusted automotive free cash flow decreased 600 million to 1.9 billion for the second quarter. However, this is nearly 1 billion higher for the first half of the year compared to the first half of 2013 including $300 million of recall-related cash costs. On Slide 6, we disclosed the special items that impacted earnings per share. Net income to common stockholders was 200 million and our diluted earnings per share were $0.11. Included…

and:

Thank you, sir. Please note that the question-and-answer session is for analysts only. (Operator Instructions) Our first question comes from the line of Rod Lache from Deutsche Bank. Please proceed sir.

Can you help us first of all with that Slide 13 that $1.6 billion cost number, you did say that about a 1 billion of that was recall, would it be reasonable to say that maybe 900 million was content, last quarter was around a 1 billion and that you had maybe 300 million of positive structural cost items is that a good estimation of that breakdown? Deutsche Bank: Can you help us first of all with that Slide 13 that $1.6 billion cost number, you did say that about a 1 billion of that was recall, would it be reasonable to say that maybe 900 million was content, last quarter was around a 1 billion and that you had maybe 300 million of positive structural cost items is that a good estimation of that breakdown?

Yes. That’s close, Rod out of the 1.6 billion as we indicated roughly a 1 billion related to recall activity. Material on majors was 1.1 billion unfavorable partially offset by GPS carryover material performance of a couple $100 million and the balance was fixed-cost.

Okay. So, if that’s right material a 1 billion and maybe it’s a 900 million net of some cost savings and older items, how do we kind of put that into context against the pricing that you had in the quarter which was 800 million it would look like the contribution would be somewhat negative and it’s still, it’s kind of early days when you compare the pricing versus the material right now a lot of these products are pretty new, is there anything to kind of read into that? Deutsche Bank: Okay. So, if that’s right material a 1 billion and maybe it’s a 900 million net of some cost savings and older items, how do we kind of put that into context against the pricing that you had in the quarter which was 800 million it would look like the contribution would be somewhat negative and it’s still, it’s kind of early days when you compare the pricing versus the material right now a lot of these products are pretty new, is there anything to kind of read into that?

Pricing on majors for North America in the quarter was $1.4 billion against that material cost, material and majors for North America specifically Rod it was 1.1 billion, so roughly accretive to earnings 300 million. I mentioned material performance on carryover favorable 200 million, so carryover pricing was unfavorable in the quarter on a year-over-year basis about $600 million.

Okay. But this is arguably the peak of the Company’s product cycle and the combination of new products versus carryover products is not, that doesn’t appear to be favorable at this point. Is that something that we should be thinking about sort of in the context of the longer term margin target and I know you are doing north of 9% right now but the longer-term margin target for North America being closer to 10? Deutsche Bank: Okay. But this is arguably the peak of the Company’s product cycle and the combination of new products versus carryover products is not, that doesn’t appear to be favorable at this point. Is that something that we should be thinking about sort of in the context of the longer term margin target and I know you are doing north of 9% right now but the longer-term margin target for North America being closer to 10?

Yes, I would say we are still confident and convicted around our glide path to 10% EBIT margins, Rod. I would suggest that we still have a significant portion of the launch cadence out in front of us. As we’ve indicated before we will be launching products in the 2014 to ’17 timeframe at twice the pace of the previous four years. So I think that there is continued opportunity from a pricing on new content as I’ve discussed before, the carryover pricing dynamic versus where we were sitting a year ago is becoming a bit more challenging and that’s why we need to focus on cost and efficiency which is really the second leg of our glide path to 10% EBIT margins.

And just lastly if I can sneak another couple of things in, can you just clarify your wholesale of 830,000 units it looks like it was maybe 60,000 units lower than production, is that just rental car accounting and do you have any just broad color on the outlook for the back half for South America, or the consolidated IO business? Deutsche Bank: And just lastly if I can sneak another couple of things in, can you just clarify your wholesale of 830,000 units it looks like it was maybe 60,000 units lower than production, is that just rental car accounting and do you have any just broad color on the outlook for the back half for South America, or the consolidated IO business?

For the first question, Rod, absolutely right that is just rental car, the difference between in service versus auction. So over the next 9 to 12 months that will bleed out, that’s the biggest difference between production and wholesales. Relative to South America, it continues to be a very challenging environment. Brazil and Argentina, the industry continues to weaken, but in the context of overall results, we continue to execute to our plan to driving efficiency in those operations and I would expect absent some change to see slightly improved performance in the second half of the year. Our consolidated operations as we’ve talked before. We’ve got a number of important product launches in the second half of the year primarily led by full size pickups and full size SUVs in the Middle-East. So again I would expect to see some marginal improvement from our consolidated operations run rate as we get into the second half of the year. And while we are at it from a company standpoint, as we’ve discussed before, we believe the second half of the year is going to be stronger than the first half of the year ex-recall and we are still confident that we are on or ahead of plan for the year.

Thank you, sir. And our next question comes from the line of Itay Michaeli from Citi. Please proceed with your question.

Chuck, hoping we can maybe talk about the second half outlook in North America, it sounds like you still are confident in the second half of the year. What are some of the big buckets we should be thinking about there both in terms of in particularly a focus on kind of the pricing versus material cost equation in the second half of the year? Citigroup: Chuck, hoping we can maybe talk about the second half outlook in North America, it sounds like you still are confident in the second half of the year. What are some of the big buckets we should be thinking about there both in terms of in particularly a focus on kind of the pricing versus material cost equation in the second half of the year?

Yes I wouldn’t say that our expectations for North America is that we will grow margins in the second half of the year versus the first half ex-recalls and also grow margins versus the second half of last year. The big drivers behind that will be continuing the full size SUV launch and getting that up to run and eliminating some of the constraints that we’ve had a from a production perspective. We will have the ATS Coupe launch later this year from a Cadillac perspective, mid-size truck is later in the year I don’t think that’s going to be a big driver of earnings. Generally 60% of the truck industry is in the second half of the year versus the first half of the year. So we expect continued strength from a volume and mix perspective as well.

That’s very helpful. And then two quick follow-ups, first it does sound like you raised your outlook for the mid-decade in Europe from breakeven to profitable and maybe a subtle change. But maybe talk a little bit about what may have driven that? And then secondly just a quick housekeeping, what’s sort of the cash recall cost that’s still -- which you will be expecting over the next several quarters? Citigroup: That’s very helpful. And then two quick follow-ups, first it does sound like you raised your outlook for the mid-decade in Europe from breakeven to profitable and maybe a subtle change. But maybe talk a little bit about what may have driven that? And then secondly just a quick housekeeping, what’s sort of the cash recall cost that’s still -- which you will be expecting over the next several quarters?

Okay, yes. Speaking to Europe first, I think it’s a combination of a number of things. First we continue to get traction in the core markets. Germany, the UK with Opel and with Vauxhall. The brand’s strength continues to improve the wind down of Chevrolet Europe is ahead of planning going much smoother than we expected about 80% of the dealers that are in wind downs have signed up with Opel as well. So that’s going extremely well. And the industry is performing a little bit better than we expected. The other thing that’s driving that with that strength is we are going into the heart of the product launch cadence with the Corsa letter this year and the Astra next year. On the recall cash component of that, our expectations, Itay, is that 60% to 70% of the $2.5 billion that we booked thus far will result in a cash impact in the second half of the year with the balance rolling out into Q1-Q2 next year that’s our latest thinking on that.

Great, that’s very helpful. Thanks everyone. Citigroup: Great, that’s very helpful. Thanks everyone.

Thank you. Our next question comes from the line of Brian Johnson from Barclays. Please proceed with your question.

Yes. Good morning. I have a housekeeping question and then a more strategic question. On the housekeeping question just following up on the wholesale versus sale, retail sales. If we just kind of look at it from retail sales at the dealer level and inventory build, it looks like that number from what you’ve put out there was about 910,000 this quarter you only had 830,000 wholesale units that’s a difference of about 77,000, if I look over the last four quarters of that delta, it’s never got above 26,000. Is there something different going on with either the volume of rental programs, how much they want to do this program versus race cars? Is there anything with GM Financial’s leasing business that’s going to affect recognition of our wholesale sale and then kind of how does that play out going forward or a potential program business outside of daily rental? Barclays Capital: Yes. Good morning. I have a housekeeping question and then a more strategic question. On the housekeeping question just following up on the wholesale versus sale, retail sales. If we just kind of look at it from retail sales at the dealer level and inventory build, it looks like that number from what you’ve put out there was about 910,000 this quarter you only had 830,000 wholesale units that’s a difference of about 77,000, if I look over the last four quarters of that delta, it’s never got above 26,000. Is there something different going on with either the volume of rental programs, how much they want to do this program versus race cars? Is there anything with GM Financial’s leasing business that’s going to affect recognition of our wholesale sale and then kind of how does that play out going forward or a potential program business outside of daily rental?

Yes, I think your question was around the difference between production and wholesales this time versus the…

No, actually the difference between dealer sales and dealer inventory build and wholesale sales… Barclays Capital: No, actually the difference between dealer sales and dealer inventory build and wholesale sales…

Okay well…

In a different way than from production. Barclays Capital: In a different way than from production.

Yes as vehicles are sold to daily rental while the revenue and associated costs are reverses and then amortize over the anticipated life of that buyback agreement the deliveries are counted in the quarter that when they are delivered to the rental. So that would answer the first question. And relative to the dynamic with daily rental, the first half of the year is the typical seasonal pattern and if you look over the last few years is always fairly significant difference between production and wholesales especially in the second quarter. I would also say the dynamic within daily rental to your other comment has changed a bit. We are taking advantage of strong our residual value, used car values, and putting more in repurchase so that we can control that and control that inventory as it comes out. Our overall fleet penetration is relatively flat year-over-year. So from a total sales perspective so there is no dynamic there that is an anomaly. It’s just timing and more repurchase versus risk unit.

Okay. Because I’d like it some of our estimates about a big chunk of the -- your model versus -- your results versus our model seem to be 30k wholesale units and what I am hearing is you’re doing more program business with rental car companies and that’s can affect the timing therefore the wholesale sales? Barclays Capital: Okay. Because I’d like it some of our estimates about a big chunk of the -- your model versus -- your results versus our model seem to be 30k wholesale units and what I am hearing is you’re doing more program business with rental car companies and that’s can affect the timing therefore the wholesale sales?

Correct.

On a more strategic in China I think this is the second quarter in a row we’ve seen a year-over-year gain and earnings margins are holding. I do know you sent a new executive to China last year and maybe from the point of view of Mary what do you think is driving this improvement in the equity income from China and in particular -- and maybe it is a Dan Ammann question as well is there a mandate now to actually not just hold market share in China but to grow equity income and profits? Barclays Capital: On a more strategic in China I think this is the second quarter in a row we’ve seen a year-over-year gain and earnings margins are holding. I do know you sent a new executive to China last year and maybe from the point of view of Mary what do you think is driving this improvement in the equity income from China and in particular -- and maybe it is a Dan Ammann question as well is there a mandate now to actually not just hold market share in China but to grow equity income and profits?

There is definitely a mandate to do that there continues to be huge growth potential when you look across the globe I know people talk about China slowing but it’s still is a huge opportunity from a growth perspective. And if you look at some of what’s feeling that is the SUV that we’ve recently launched but there is still much more work to do and opportunity when you look across the Chevrolet portfolio the dealer’s portfolio which continues to be strong, and then the Cadillac portfolio that’s doing well as well. So we’re really investing in not only building the brands but then also at our first -- my first trip there at the beginning of the year and I think it was reinforcing messages of the past as the market grows we need to participate in that growth in cases in a disproportionate fashion to make sure that we’re seizing the opportunity. So I think the team has really come together and look for every opportunity we continue to have our plans to increase capacity and continue to build the brand. So I expect that trend to continue.

And was it one thing specific that maybe added to the bottom-line there it’s just a bunch of actions? Barclays Capital: And was it one thing specific that maybe added to the bottom-line there it’s just a bunch of actions?

I think it’s a number of actions I think it was again somewhat product drive somewhat driven by the focus of the team and the clear expectations laid out and the work that we need to do and the convey as it relates to the brands. I think Cadillac is also significant as well.

Now you’re guiding to margins lower in second half 9% to 10% versus 11% is that just seasonality when the product program launches and kind of should we be thinking about the 10ish percent margin going forward on a full year basis? Barclays Capital: Now you’re guiding to margins lower in second half 9% to 10% versus 11% is that just seasonality when the product program launches and kind of should we be thinking about the 10ish percent margin going forward on a full year basis?

Yes, 10% is ballpark the right number to think about on a full year basis. There is seasonality in China typically Q1 is stronger than Q2. We’re holding to 10% EBIT margins on a go forward basis. So as' we’ve indicated we expect the growth of Cadillac and launch of a number of SUVs to be a tailwind from a margin perspective but as you know the market in China from a pricing perspective on carryover is challenging roughly 3% per year, net price deterioration. So we will hold our margins by improving mix and continuing to drive cost efficiency to offset those price headwinds, that’s the broad strokes of the plan, Brian.

Thank you, sir. Continuing on, our next question comes from the line of Colin Langan with UBS. Please proceed.

Great, thanks for taking my question. Can you give any -- you said the cadence of earnings is the same, but it does look like restructuring is a little bit more even through the year. How should we think about the restructuring? Is the $1.1 billion for the year still good, or is it actually coming in a bit lower than you were thinking? UBS: Great, thanks for taking my question. Can you give any -- you said the cadence of earnings is the same, but it does look like restructuring is a little bit more even through the year. How should we think about the restructuring? Is the $1.1 billion for the year still good, or is it actually coming in a bit lower than you were thinking?

Yes. Colin to you first comment, I think what we said was in the second half we expect earnings to be better during the first half, so not equal on a cadence perspective. And then from restructuring, we talk about the 1.1 billion for the year. I would say in the first half of the year we’re generally on-track on a run rate basis to that 1.1 billion, the biggest driver of that is the restructuring events in Germany. And that is pretty flat quarter-to-quarter. So I don’t think that there’s a material difference in the second half versus the first half of restructuring.

And how should we think about the restructuring potential in GMIO? Obviously, with the end of Chevy in Europe, what are the plans for that plant that was supplying those Chevy products? UBS: And how should we think about the restructuring potential in GMIO? Obviously, with the end of Chevy in Europe, what are the plans for that plant that was supplying those Chevy products?

We continue to look at optimizing our footprint in Korea associated with the wind down take, I would say for the year restructuring across in IO are in the range of a $100 to $150 million it’s really largely dependent on voluntary separation program and we work through that. And we’ll continue to work through that over the next number of years. Australia, as we indicated before we will continue to work through that restructuring between now and 2017 and that will be part of the run rate that I talk about before we would expect in the range of $400 to $500 million of your restructuring on an ongoing basis.

Okay and just one last one. Can you clarify when you've talked in the past about mid-decade, that doesn't mean 2015, is that correct, when we think about both Europe getting back to profitability and the North America 10% margin? Is that the right way to think about that, somewhere in that range is the way to think of it? UBS: Okay and just one last one. Can you clarify when you've talked in the past about mid-decade, that doesn't mean 2015, is that correct, when we think about both Europe getting back to profitability and the North America 10% margin? Is that the right way to think about that, somewhere in that range is the way to think of it?

Yes. The way to think about it is mid-decade. I’m not going to give any more specifics in that Colin aspect to say this. We are on-track in executing to the North American plan, if you look at the last four quarters on a year-over-year basis. Our margins are up, excluding recalls a 150 basis point, clearly we feel more optimistic and forward leading in Europe because we’ve changed our guidance from breakeven mid decade to profit, our mid decade, we continue to work it extremely hard, but I would say for both of those commitments we are on-track.

Okay, alright, thank you very much. UBS: Okay, alright, thank you very much.

Thank you, sir. Continuing on, our next question comes from the line of John Murphy from Bank of America Merrill Lynch. Please proceed.

Good morning. I just wanted to follow-up on sort of the product cadence and the cadence of earnings that you are expecting in the second half this year, particularly in North America. And Chuck, specifically, and Mary, it seems like there is an over focus in the market that you are sort of it's a one and done product cadence with the K2XX, Silverado and SUV launches. But there's a lot more to the product launch as far as I can tell. I'm just curious if you can maybe either confirm or comment on the product launches going forward. It seems like the HD launches will benefit the second half of this year and the first half of next year. And then over the next two years, you have the launches of the small crossovers, the large crossovers, and some midsize sedans here in North America that should be real positive as the market remains tight. So I'm just curious if you can comment on sort of that statement, and really this concern that you are sort of a one and done product cycle here, because it just seems very misguided right now? Bank of America Merrill Lynch: Good morning. I just wanted to follow-up on sort of the product cadence and the cadence of earnings that you are expecting in the second half this year, particularly in North America. And Chuck, specifically, and Mary, it seems like there is an over focus in the market that you are sort of it's a one and done product cadence with the K2XX, Silverado and SUV launches. But there's a lot more to the product launch as far as I can tell. I'm just curious if you can maybe either confirm or comment on the product launches going forward. It seems like the HD launches will benefit the second half of this year and the first half of next year. And then over the next two years, you have the launches of the small crossovers, the large crossovers, and some midsize sedans here in North America that should be real positive as the market remains tight. So I'm just curious if you can comment on sort of that statement, and really this concern that you are sort of a one and done product cycle here, because it just seems very misguided right now?

Yes. Couple of points on that, first you’re absolutely correct specially even if you look at our full size trucks, there is more coming as we continue to look at the -- through the life time of the K2XX they are not going to get out in front and announcing, stick to our announcement cadence, but there’s definitely more substantial things coming to enhance the K2XX over its lifecycle. Also I think the importance of the midsize truck that comes out later this year and then it’s truck is that there is clearly strong cadence of products coming out of it with the next couple of years that I think, there’s been, they’ve had the ability to have the complete focus of our work on material cost for those products and optimization of -- you’ll say revenue in the cost aspect of it. So you’re correct, it’s not just a one and done there is significant more coming not only the K2XX which we understand is very significant to have it do et cetera, but other products as well.

Okay. Then just a second question, Mary, on following up on all the retail activity and sort of the re-measurements you seem to be doing and sort of everything you've been digging up. There's always been a question with GM's IT systems and your ability to really measure and metricize and respond to things like these recalls. I am just curious as you are going through this process if there's anything you really think you might need to revamp more on a structural basis on the IT systems in GM, so you can understand better and more quickly what's necessarily going on in the Company? Bank of America Merrill Lynch: Okay. Then just a second question, Mary, on following up on all the retail activity and sort of the re-measurements you seem to be doing and sort of everything you've been digging up. There's always been a question with GM's IT systems and your ability to really measure and metricize and respond to things like these recalls. I am just curious as you are going through this process if there's anything you really think you might need to revamp more on a structural basis on the IT systems in GM, so you can understand better and more quickly what's necessarily going on in the Company?

I am not sure I completely understand your question, but it is specifically related to recalls. I mean I think there is data, the ease of which data is available but I am not going to pin it on IT systems. I mean it’s clearly the trunk process that we need to have within the company that’s process driven, people driven and I think we’ve addressed that completely with the creation of the Jeff Boyer organization and the way that structures the way that operates across the company. I would also say the way that we’ve really in that area, are comprehensively looking at data to understand what the customer is seeing or experiencing, whether it comes directly from customer calls, emails, or customer engagement center, warranty information, legal claims. Also we have a team that just mines data off the internet to make sure we understand as customers raise issues. So that is comprehensive of what we are doing that. Now there is an opportunity to do that better and our IT team is working hands in hand with Jeff, because we feel and any extra we’re finding outside expertise as well to make sure we’ve got the right tools to more quickly be able to mine data and spot trends or see connect point. But, so there is an IT aspect of it and we are well underway doing that and we will continue to just advance that. But I think the most important point to make sure that we are looking across and understand what’s happening with our vehicles is the way we completely change the organization, change the process we follow and make it very clear to the entire organization what the expectations are.

Just to speak a bit to the financial systems and IT, I think you’ve seen this, there has been a significant improvement in that over the last two or three years along with the finance transformation and IT transformation and obviously more work to go, but starting with country sale reporting, product line profitability we are launching globally profitability on a win level basis. We are building an enterprise data warehouse with the business intelligence group so there is a lot of work that’s been going on and we will continue to go on from specifically a financial perspective so that we can get the right data, analyze it quickly and react and I think that we are well along the way on that.

And we are looking forward to the VIN level profitability, if you will disclose it to us? Bank of America Merrill Lynch: And we are looking forward to the VIN level profitability, if you will disclose it to us?

We won’t.

One last question on subprime, particularly because GM Financial has a big exposure there. There's obviously a great debate in the markets right now of subprime being overheated for auto lending. It doesn't necessarily appear that way to us. I was just curious if you could comment on sort of your exposure to subprime, what you think of it right now, and is it more of an issue or an opportunity? Bank of America Merrill Lynch: One last question on subprime, particularly because GM Financial has a big exposure there. There's obviously a great debate in the markets right now of subprime being overheated for auto lending. It doesn't necessarily appear that way to us. I was just curious if you could comment on sort of your exposure to subprime, what you think of it right now, and is it more of an issue or an opportunity?

That’s a good question. It’s been interesting, our share of sub-prime actually has come down because for a while there was a competitive move into sub-prime so it was being reasonably well served, it looked like in the second quarter that there was a back off from that a little bit perhaps because of the exposures. Let’s just say that AmeriCredit, now GM Financial are experts in sub-prime, they never lost money during the downturn in 2008-2009, they know how to manage and score these customers. And I think that manage an appropriate level of risk associated with sub-prime, and again, as they expand our overall product offering. So we feel that that’s a very, very well managed segment of their business.

Okay, thank you very much. Bank of America Merrill Lynch: Okay, thank you very much.

Thank you, sir. Our next question comes from the line of Patrick Archambault from Goldman Sachs. Please proceed sir.

Thank you, good morning. I guess a couple from me. Just first, I think there was some production constraints, I think, referenced towards the beginning of the call when we were discussing the cadence of margins and the overall North America performance. So maybe we could get into that. Obviously, just sort of the newer truck models and SUV models that are kind of rolling off, sort of how far are you away from the sort of true run rate of production? And as we think about -- how do we think about that, and how meaningful it is in subsequent quarters? Goldman Sachs: Thank you, good morning. I guess a couple from me. Just first, I think there was some production constraints, I think, referenced towards the beginning of the call when we were discussing the cadence of margins and the overall North America performance. So maybe we could get into that. Obviously, just sort of the newer truck models and SUV models that are kind of rolling off, sort of how far are you away from the sort of true run rate of production? And as we think about -- how do we think about that, and how meaningful it is in subsequent quarters?

Yes, I would say it’s not an overall system production constraint more specific mix. We talked about this before. The higher penetration trim levels, the crew cab versus double cab versus regular cab mix have performed much better than we expected and we’ve been working hard in the first half of the year with suppliers, with engineering to address these bottlenecks. What we currently have right now from a full size SUV perspective there are some constraints on escalate, up level escalate in Denali, the Yukon Denali. We are continue to work through that, we have the expectation that we will build a free up some of those trim constraints as we go into the second half of the year. So it’s not like an overall capacity but more specific up level trim constraints that we’ve had and I think that’s going to be net of positive benefit in the second half versus the first half.

Okay, that's helpful clarification. Then my follow-up was just on Brazil and Latin America specifically. I know you did address it a little bit, but I wasn't sure if some of the color you provided was GMIO. So maybe can we just, at the risk of repeating some of that, can we talk about what the anticipation is sort of for the back half? I would also be curious, specifically are there concerns about inventory levels there? It's one of the things that we have been hearing about that, with sort of the general buyers' strike going on ahead of the elections, people are just stuck with a lot of stock that they need to get rid of in the second half. Goldman Sachs: Okay, that's helpful clarification. Then my follow-up was just on Brazil and Latin America specifically. I know you did address it a little bit, but I wasn't sure if some of the color you provided was GMIO. So maybe can we just, at the risk of repeating some of that, can we talk about what the anticipation is sort of for the back half? I would also be curious, specifically are there concerns about inventory levels there? It's one of the things that we have been hearing about that, with sort of the general buyers' strike going on ahead of the elections, people are just stuck with a lot of stock that they need to get rid of in the second half.

Yes, let’s talk about Brazil, South America. Clearly, the first half of the year impacted by Venezuela fundamentally no production and we’re carrying all the fixed costs associated with that. There has been I am not getting overly optimistic but there has been some positive movement recently relative to currency releases. It looks like we will be able to put a -- some level of production in the second half of the year in Venezuela. So that would be one of the drivers of the second half versus the first half performance. The big question mark for us right now is how does Brazil and Argentina, how do those industries perform going forward whether there is just a hangover from the World Cup and things are going to normalize it appears that the government is trying to supportive of the industry by holding off and raising IPI tax. So, we’re optimistic that there is some upside in the second half from Brazil and Argentina. I think the key thing is that we continue to execute the plan that we led out and drive efficiency and fixed costs we continue to do restructuring there and take people out of the system and optimize manufacturing. We’re continuing to drive localization and improve logistics. And relative to your question on inventory specifically, we saw that coming and part of the challenge in the second quarter on our South American earnings specific to Brazil is we took a lot of production out in the second quarter in advance of the World Cup because fundamentally the country shutdown. So we tried to get out in front of that inventory issue in the second quarter.

Okay, great. Thank you very much. Goldman Sachs: Okay, great. Thank you very much.

Thank you. Continuing on our next question comes from the line of Ryan Brinkman from JPMorgan. Please proceed.

Good morning, thanks for taking my questions. I think that the North America margin of 9.2% ex recall likely tracked below some of the higher-end expectations. At the same time, I think investors believed that you would be cyclically helped by product cadence in 2014, to such an extent that your margin ex recall would likely decline next year. You've said before, though, that you think that in the march toward reaching by mid-decade a run rate of margin that personally 10% over the course of a business cycle that the intention would be to turn higher and higher margins each year until you get to that goal. So my question is if investors are modestly disappointed today with the current GMNA margin because they think it is benefiting from a peaking product cadence, what can you tell them that would give them the confidence in the mid-decade target that you repeated today you have conviction in? It seems like in Mary's response earlier to a similar question, she'd somewhat disputed the fact that product cadence was currently peaking. What other margin drivers are there out there that are going to help you? If you could please just kind of walk us through those multiyear drivers and trajectory margin in a way that would make us excited. JPMorgan: Good morning, thanks for taking my questions. I think that the North America margin of 9.2% ex recall likely tracked below some of the higher-end expectations. At the same time, I think investors believed that you would be cyclically helped by product cadence in 2014, to such an extent that your margin ex recall would likely decline next year. You've said before, though, that you think that in the march toward reaching by mid-decade a run rate of margin that personally 10% over the course of a business cycle that the intention would be to turn higher and higher margins each year until you get to that goal. So my question is if investors are modestly disappointed today with the current GMNA margin because they think it is benefiting from a peaking product cadence, what can you tell them that would give them the confidence in the mid-decade target that you repeated today you have conviction in? It seems like in Mary's response earlier to a similar question, she'd somewhat disputed the fact that product cadence was currently peaking. What other margin drivers are there out there that are going to help you? If you could please just kind of walk us through those multiyear drivers and trajectory margin in a way that would make us excited.

Thanks Ryan. First I would say look at the track record of execution. Going back to 2012 through today and we’ve been pretty clear that our objective was to grow from 7% to 7.5% EBIT margins by 300 basis points and that was going to be over a multiyear period trenched in a 100 basis points roughly over three year time frame more or less. Count to-date for the last 12 months we’ve grown margins in North America 150 basis points on a year-over-year basis ex-recall. So, we’re executing to the plan. As Mary indicated and I’ve talked about before, our launch cycle, our launch cadence over the next four years is going to be at twice the pace it was in the previous four years. So it’s not a one end done with the full size trucks. As we talked about the glide path, the first trench of the margin expansion was going to be driven to a large extent by launches. The second trench really around cost and efficiency primarily manufacturing footprint, the SG&A initiatives we have with Global Business Services IT transformation and material costs and logistics optimization and those are all in execution mode. And then the final driver of margin expansion was really around fully leveraging the business and that was the expansion of GM Financial that was growing our customer carrying after sales business by expanding our reach in the after sales market beyond traditional dealer parts with F&I products gap extended warranty and that was really by fully leveraging global connected customer and our capability with 4G LTE and our ability to manage the customer. So, this has been a laid out plan since 2012 we’re executing to it and we’re one third of the way through it and we put the numbers on the board thus far that we talked about and that’s why we’re confident that we’re going to continue to execute to that plan.

Okay, great. Thanks. Then just my second and final question, it looks like you are making progress on reducing your losses in consolidated international operations. I thought maybe the moves that you were making their relative to Chevrolet in Europe would benefit earnings for GM Europe, that pressure of consolidated IO as you take out production before you take out capacity. I know that consolidated IO is more there is a lot of moving pieces. But it would seem that the stopping of the export of Chevrolet vehicles might actually have improved profitability, suggesting that the variable contribution on those vehicles might have even been negative. Can we look forward to maybe another leg in improved profitability for consolidated IO as you go ahead and now take out that capacity that's no longer needed to support those vehicles that were previously exported? JPMorgan: Okay, great. Thanks. Then just my second and final question, it looks like you are making progress on reducing your losses in consolidated international operations. I thought maybe the moves that you were making their relative to Chevrolet in Europe would benefit earnings for GM Europe, that pressure of consolidated IO as you take out production before you take out capacity. I know that consolidated IO is more there is a lot of moving pieces. But it would seem that the stopping of the export of Chevrolet vehicles might actually have improved profitability, suggesting that the variable contribution on those vehicles might have even been negative. Can we look forward to maybe another leg in improved profitability for consolidated IO as you go ahead and now take out that capacity that's no longer needed to support those vehicles that were previously exported?

Well first, Chevrolet Europe results were reported and are continued to reported in the IO sector. So by itself is as we wind down Chevrolet, you expect that to be ultimately a net positive as a matter of fact in the second quarter, part of the fixed cost improvement that we saw in IOs driven by reduced fixed costs related to Chevrolet Europe. At the same time, we created a fairly significant capacity issue for ourselves in Korea that we need to deal with. We took roughly 200,000 units of Chevrolet Europe volume out that created a underutilized footprint and we are working to address that, that’s got a bit longer tail on it to get fully addressed. We’re going to have to manage through that as we go forward. For me, from an international operations perspective, the key that’s going to change the dynamic from our -- significantly change the dynamic from an earnings trajectory perspective is going to be product. And we are working very hard on an emerging market portfolio, that’s first and foremost. Then get the business model, the infrastructure right around that portfolio and then make sure that at the market dealer network, the brands are ready and built to the levels so that we can fully optimize that. So that’s kind of the strategic footprint for IO.

If I can just add to that I mean I think there, again with the improvements that we’ve made from a financial data availability to manage the business across the country or across the globe, country-by-country as we look at the consolidated international operations, we are really looking at what is the take to winning those markets, to be in the core of the market as Chuck said to have the product cadence and then right systems and business plan around it. And I think if you look at several of the last few months personal announcements that we’ve made, there is also a new leadership team across the board that fully understands their responsibility to look at it holistically but make sure in each of those countries, we have a winning plan centered around products, but broader across the business and so we are watching that closely working with that team.

Great, thank you both for all the color. JPMorgan: Great, thank you both for all the color.

Thank you. Our last question comes from the line of Adam Jonas from Morgan Stanley. Please proceed with your question.

Thanks, everybody. My first question was just on the logic of including the majority of the recall costs in adjusted EBIT, which traditionally was a metric to kind of demonstrate underlying profitability. And I know the intentions are honorable and you've explained it that unlike other companies and maybe even yourself in the past, you want to not hide these things and have them upfront and in the adjusted number. But I would imagine recalling 29 million recalls is pretty extraordinary. And just the reason why I'm asking is a lot of investors are owning your stock on the expectation of, let's say, real underlying EBIT improvement. And you maybe unintentionally put yourself in a situation where just holding the underlying profit stable, you could have like a 40% or 50% increase in EBIT next year just on not recalling the vehicles again. Morgan Stanley : Thanks, everybody. My first question was just on the logic of including the majority of the recall costs in adjusted EBIT, which traditionally was a metric to kind of demonstrate underlying profitability. And I know the intentions are honorable and you've explained it that unlike other companies and maybe even yourself in the past, you want to not hide these things and have them upfront and in the adjusted number. But I would imagine recalling 29 million recalls is pretty extraordinary. And just the reason why I'm asking is a lot of investors are owning your stock on the expectation of, let's say, real underlying EBIT improvement. And you maybe unintentionally put yourself in a situation where just holding the underlying profit stable, you could have like a 40% or 50% increase in EBIT next year just on not recalling the vehicles again.

Yes, I am sorry, Adam. Go ahead.

So I just wanted to note of the thought process and logic there because it could create some different let’s say management expectations versus investor expectations? Morgan Stanley: So I just wanted to note of the thought process and logic there because it could create some different let’s say management expectations versus investor expectations?

Historically, we have taken recall campaigns to EBIT adjusted and in the first half of this year, we certainly talked about whether we should think about this as a special item or not but ultimately it boiled down to a responsibility perspective. Operating management-to-management the leadership of this organization, we are responsible for those charges and we wanted to make sure that it was reflected appropriately in EBIT adjusted for a number of reasons. I think that the go forward approach to this as you’ve seen as we’ve got more data in the special non-cash charges we took in the second quarter, we are going to accrue recall campaigns on a perspective basis as sold, which were more closely aligned with the competition and eliminate some of the volatility that we’ve seen on a go forward basis.

Okay. Can I just ask is the incentive structure, are there any adjustments to the management incentive structure though to adjust for that so that you are not let’s say rewarded for just non-repeat of recall costs? Morgan Stanley: Okay. Can I just ask is the incentive structure, are there any adjustments to the management incentive structure though to adjust for that so that you are not let’s say rewarded for just non-repeat of recall costs?

I am not sure I have completely understand your question Adam, but…

Just to clarify the -- my understanding is a significant proportion of variable compensation is tied to delta of adjusted EBIT of the company, that’s the heart of what I am asking about. Morgan Stanley: Just to clarify the -- my understanding is a significant proportion of variable compensation is tied to delta of adjusted EBIT of the company, that’s the heart of what I am asking about.

But look I think that the key is part of it wasn’t treated as a special item. I mean we don’t broadly comment on executive compensation other than what we disclose on an annual basis but I would say I think we are responsible, it’s our -- the basic need to do a recall is when you -- something is wrong with the vehicle from a customer perspective and that’s the core of the business and that’s how we treated all of the vehicles.

I appreciate that. Just last as a follow-up and I know you won't be able to pinpoint it, but the recall itself has obviously been a very important stimulus for showroom traffic at dealers. And I was wondering if when you analyze that and in discussion with your dealers, do you think that the recall activity has been a net positive to your volume and a chance to kind of reengage and rebuild trust and maybe offer a good deal, that extra traffic? Or has it been more neutral or net negative in terms of volume, just isolating volume? Thank you. Morgan Stanley: I appreciate that. Just last as a follow-up and I know you won't be able to pinpoint it, but the recall itself has obviously been a very important stimulus for showroom traffic at dealers. And I was wondering if when you analyze that and in discussion with your dealers, do you think that the recall activity has been a net positive to your volume and a chance to kind of reengage and rebuild trust and maybe offer a good deal, that extra traffic? Or has it been more neutral or net negative in terms of volume, just isolating volume? Thank you.

One specific data point on the program that we offer to the recall, the ignition switch recall population 2.6 million vehicles to-date we’ve sold about 6,600 vehicles under that program so clearly that’s been a benefit for us to build the reengage with some of these customer that had very old products. I would say our dealers are doing an outstanding job dealing with all of these customers that are coming and trying to get their vehicles fixed. We are working with the dealers to use that as an opportunity to demonstrate that our current products are much improved versus some of these older expired architecture vehicles that are being recalled. I think it’s too soon to tell. We need to continue to build that relationship and we’re early in the process. But so far our sales have been resilient. Our loyalty rates seem to be reasonably resilient. And we need to continue to focus on putting the customer at the center and taking care of all these customers they come in that have to have their vehicles repaired.

Yes, and just let me add to that. I mean it really is one interaction at a time and I have to reinforce what Chuck said that the dealers are doing an outstanding job. When you think that as we talked here at the end of first quarter, we really did redouble our effort and really went back it into the late 1990s specifically as it related to some of the safety assistance related to ignition switches to make sure we were doing the right thing. And our dealers have truly responded and we do see this and I’ve talked to dealers Alan has clearly talked to dealers. And to make sure that we see this as an opportunity to demonstrate the trends of those products that we have available today and the customer the way that we’re focused on the customer and the way that we want to make sure their experience goes well as they go through this process. And it’s a partnership but it’s one at a time, and we still have a lot to go as we look to second quarter or second half of the year so that will be a huge focus.

Thanks for that Mary, thanks Chuck. Morgan Stanley: Thanks for that Mary, thanks Chuck.

Thanks a lot.

Thank you. And Ms. Mary Barra, I will turn the presentation back to you for your closing remarks. Thank you.

Thank you operator and I want to start off by saying I really do appreciate the opportunity for both Chuck and I to answer your questions. As we go forward here I think we started the conversation by talking about the fact that General Motors, I think we’ve demonstrated resiliency as we’ve gone through this. And I think we’d all agree it’s an important quality in today’s business environment but I want to make it clear that we and the senior leadership and the team at General Motors, we understand that we have a lot more work to do and we’re focused on it. We are working hard to be one of the very best companies in this industry and we feel and are committed to treating the customer right and making sure they stay at the center of everything we do because that’s a long term objective that happens as I said one interaction at a time but we believe it’s key to winning in this business. It isn’t a new strategy for us it’s we rolled out a couple of years ago our core values and the customer being the first and the importance of relationships and then excellence. And we've been consistent as we’ve dealt with the issues that we faced in the first half of this year of staying sure to those core values. And I think it that in terms of purpose that has helped us to be able to stay on plan and drive our operating performance during the first two quarters. I would also say it underpins everything we’re doing as it relates to product design, the way we engineer vehicles in our power trains, supplier quality, our manufacturing operations and sales and service. To demonstrate that I think if you look at…

Thank you, operator.

Thank you, sir and ma’am. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a wonderful day.