General Motors Company (GM) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company First Quarter 2015 Earnings Conference Call. During the opening remark, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded, Thursday, April 23, 2015. I would now like to turn the conference over to Randy Arickx, Executive Director of Corporate Communications and Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning. And thank you for joining us as we review the GM’s financial results for the first quarter of 2015. A press release was issued this morning and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast and the Internet. As noted on our earnings conference call announcement, we are changing the format of our earnings calls. Included in a chart set materials published this morning, we’ve included the key take ways from each chart in the notes pages in order to provide color on the results. Our intent is to have a more efficient call with the majority of time allocated to answering your questions. This morning, Mary Barra, General Motors’ Chief Executive Officer will provide some brief opening remarks and then we’ll open the line for questions from the analyst community. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. In the room today, we also have Chuck Stevens, Executive Vice President and Chief Financial Officer; 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’d like to turn the call over to Mary Barra.

I see that everybody being on the call today. I mean if I – I mean I can look at our Q1, it was very solid performance and was in line with our expectations and we are on track to achieve our 2015 commitments. Really if I look at the first quarter it was another example of doing what we say we’re going to do. Our revenue was about $35.7 billion, our consolidated EBIT-adjusted was $2.1 billion, our earnings per share adjusted was $0.86 and for the first time we’ve shared our ROIC andover the last four quarters it’s nearly 20%, despite the intact of recall. Finally our adjusted automotive free cash flow was in line with our previous guidance and there was an outflow of $1.7 billion due to three reasons, first, an extra supplier payment, two, restructuring payments, primarily [indiscernible] and then recall-related payments that drove the $1.7 billion outflow. Also important to note is immediately we have started the share repurchasing after we made the announcement on March 9. And so through yesterday, we had actually repurchased 20 million shares for about $750 million. And that’s an addition to the stock repurchases, we’ve also returned about $5 million to our owners through the dividends in the first quarter. So again it has been a solid start to the year and we believe it provides a very firm foundation for our 2015 commitment to improve our EBIT-adjusted and also to approve our EBIT-adjusted margins versus 2014. If I just provide a few comments as we go through the world and took at company performance, let’s start with North America. First, our demand for the full-size pickups and SUVs remained very robust. The strong demand for the pickups full-size SUVs and our mid-sized truck help GMNA achieve its seventh consecutive quarter of year-over-year EBITDA margin improvement. We also shared some very significant products. In New York we released – revealed the Malibu, the Spark and the CT6 and we’ve got a very good response on all three of these products the Malibu Spark, again very important segment for us in the car segment. And then with the CT6, it’s very important as it represents a lot of our advanced technology and specifically our material strategy for structures to optimize math, but improve performance. These are very important vehicles that will play a significant role in helping achieve our targets not only for 2015, but for 2016 and they are a part of it. We have more significant launches that we’ll be dealing throughout the year. If I look at China, the industry does remain strong and we expect the auto industry in China to grow about 6% to 8% in 2016. As expected our results for in Q1 were impacted by product change over and launch cost. The product that we are launching is the Buick Excelle and the Chevrolet Sail 3 and also the Buick Envision. And we also launched a new plant the Buick Excelle is built in our new Wuling plant and this plant will have an annual capacity of 240,000 units, so again very important launches that will fuel our results through the rest of the year. In Europe, we had improved year-over-year performance and we’ve reduced losses, despite the headwinds in the Russia market. So our total European sales were up 3.1% versus the industry growth of 2.8% and we improved share in 11 European markets. The demand for the Corsa is very strong and we are seeing the variable profit improvement that we talked before we launch this car, so again very good reception in the marketplace for the Corsa. In South America it remains challenging given the macro economic conditions, especially in Brazil and Venezuela. The company is taking several aggressive actions across all aspects of the business to make sure that we continue to be able to meet our goals. And in GM International, we demonstrated year-over-year performance improvement, we’re narrowing the loss in the first quarter with roughly a $100 million and these are the results of several actions we have taken in the countries that make up GMI. And finally GM financials continue to grow its active presence among GM details and has successfully rolled out the lease capability and exclusivity with Buick, GMC, Cadillac, and Chevrolet dealers. Finally, as you’re aware the company provided details of the disciplined capital allocation, our framework and I hope you see that the actions that we’ve taken to change our business model in Russia, the restructured announcements that we talked about in Thailand, in Indonesia demonstrate that we are going continue to make decisions that allow us to allocate capital to generate the right returns for our owners. If I look at the remainder of 2015, clearly we expect trending robust year-over-year improvement in EBIT-adjusted in our margins in North America, we are on plan to achieve the 10% EBIT adjusted margins for 2015. In Europe, with the improved year-over-year performance expected to continue, we are on a path for profitability next year. And in China, as I already mentioned we expect results to improve when we look at the new products that we invested in this first quarter and the new plant, we’ll continue to see an expansion in Cadillac and then the – our launch cost and a change over cost that we incurred will be behind us. In GMI, we improved the top line performance and are benefiting from the restructuring and we expect to break-even in performance this year excluding restructuring. And finally in South America, the environment is more challenging and has changed rapidly in this first quarter, but as I mentioned we are taking aggressive actions to mitigate this and we expect to improve our profitability, so we are not changing our guidance for South America at this time. We’ve also are reaffirming our guidance for adjusted automotive free cash flow, which is expected to be flat to slightly up, compared to 2014. So if we look across the business, we are on track to achieve not only our 2015, but our 2016 financial commitments, and 2015 that is to improve our EBIT adjusted in our margins versus 2014 and in 2016 it’s North America EBIT adjusted margins of 10%, but in Europe to profitability and sustain strong margins in China. So with that, I would like to turn it back to Randy, who has been open it up for questions.

Okay operator we are ready when you are.

[Operator Instructions] And your first question will come from Rod Lache with Deutsche Bank.

Good morning everybody, can you hear me?

Hi, Rod.

Hi, couple of questions. First, in North America, I’m hoping you can give us a little bit more color on your pricing expectations kind of that a high level. Obviously, you’re going to start comping [ph] against the strong pricing from the trucks right now. So it looks like the tough pricing on the 700,000 or 800,000 cars and small crossovers that you sell is starting to come through. You did say in your comments that you think that’s going to improve as the cars get renewed. Skeptic would say that improvements in passenger car pricing from new products really, it just won’t lacks very long, because the segments over capacitize in facing currency advantage to competitors. Do you see something different there that makes you feel like that could be sustainably improved once the products launch?

Yes, Rod let me talk about Q1 pricing first from a North American prospect and make sure there is some clarity around the $600 million headwind. But first that’s primarily cars, clearly the carryover pricing includes whatever carryover impact there was from full-size trucks and SUV, but that’s relatively marginal. About one-third of that $600 million is retail-related and it’s primarily related to the passenger cars that we’re going to be launching or replacing here over the 12 months to 18 months. About two-thirds of that $600 million is fleet specific and wants a bit of explanation. We’re in a unique situation where we had a significant volume of past model vehicles going to auction in the first quarter of 2015, up about 50,000 units, versus the first quarter of 2014. And this is caused by recall events where we prioritize customer repairs over fleet resulting and carrying inventory longer. So had passed in our vehicles that we carried longer into the cycle and clearly as option values dropped the longer you go in a model that had an impact. Our expectation is it that we’re going to strike a lot of this in the first half of the year. Talking about the year in total, we still expect pricing and retail overall to be relatively flat for the year. Carryover pricing headwinds will be offset by our new major launches later in the year. And a portion of that obviously will be the impact of our next generation products like the Malibu that we’re going to be launching. On the bigger question that you asked on, do we expect pricing to able to hold on new model launches? We have one proof-of-point so far and that’s the Corsa in Europe as an example where we sid the next generation because it’s significantly better vehicle than one it replaced, would generate incremental profitability and thus far that’s holding. When you look at the next generation Malibu we’ve got a larger car than the one that is replacing, you’ve got a car that weighs 300 pounds less and drives significantly higher fuel economy. And our expectation is for that car and others is we’re well over the Chevrolet portfolio that we will be able to hold back price when we have clearly segment-leading vehicles that we’re launching into the market.

The content costs are starting to turn positive here, does that start to moderate when these new launches kick-in, is there significant amount of additional content there?

Well, there will be more content in the next-generation vehicles. Based on our assessment we will be able to price to recover that. What you’re seeing especially in North America, but also globally the material performances on carry over models. We have $300 million in the first quarter, run rate that for the rest of the year that’s $1.2 billion, globally. We’re very much on track to that $2 billion of savings that we talked about in October and January from our carry over material performance perspective.

Okay, and then just two more China there’ve been quite a few reports about some softening and deterioration in pricing in the luxury end. You’re not really mentioning that. I was hoping you can comment there. And then lastly, in Europe, last year, you took almost $700 million of restructuring. Assuming that the doesn’t recur and you get some savings from Bochum and from the new products, well, do you think the year-over-year improvement this year in Europe could be greater than that $700 million?

So, first, on the China pricing question, I mean, it continues to be a very competitive pricing environment across all markets. And then we just returned – we had the whole executive leadership team in China. We’re at the show. I think you’re seeing some very capable OEMs. So, we expect that to continue. And that’s built into the forecast in our plan, so not unexpected.

And relative to Europe, as we talked about before, yes we expect to see improvement in 2015 versus 2014 on our path to breakeven. We indicated that it wouldn’t be a straight line, and that the biggest driver of that improvement year-over-year would be the absence of restructuring. I think you’re seeing that play out in the Q1 results, but also, we would have launched costs associated here in the first half year with the Corsa and then the back half of the year with the Astra. And then once we cycled through that and headed into 2016, you would see the full benefit of the Corsa and Astra, which represents about half the volume in Europe really driving improved profitability.

Thank you.

All right. And your next question will come from the line of John Murphy with Bank of America Merrill Lynch.

Good morning, guys.

Good morning.

Just a first question, Chuck, to follow-up on the hit that you got from the rental car auction number here, it sounds like it was about $400 million. On an after-tax basis, that would be about $0.17 a share if we just applied your tax rate and your share count. Is that about right and that is in the ballpark and that is something you might expect to recur in the second quarter, but then not in the third and the fourth? I am just trying to understand the magnitude of the impact to the bottom line, as well as the reoccurrence or lack thereof.

Yes, first, I would start out by looking at overall North American results. And in North America, in the first quarter, we generated $2.2 billion of profitability and 8.8% EBIT margins, which is, again, some straight quarter up 110 basis points on a quarter-over-quarter basis versus the first quarter of last year so, clearly, on the path to 10% margins. If you look at a specific driver of Q1 impact, clearly, the auction impacted our Q1 results. But in the overall framework of North American results, it was offset elsewhere. Yes, we expect to cycle through this as we go through the second quarter, would expect that magnitude of impact to be lower. And then, finally, John, within – this was not an unexpected outcome from a North American perspective, as we provided guidance for 2015 and looked at our business. But this is certainly an issue that we’re factoring into our outlook, which, once again, higher aggregate EBIT and higher margins in 2015 versus 2014.

Okay, but if I am doing my math correctly, absent that, your margin was about 10.4% in North America, which is pretty strong and a little bit better than what you are even talking about getting to. Just kind of backing that out, which it actually happened, so it is tough to back it out….

Yes. That...

But the ongoing number looks pretty strong.

Certainly have a hard time arguing with your math on that one driver of the business for sure.

Okay. And then just a second question. I just got back from Shanghai as well and we met with SAAC, as well as VW and they did highlight the risk to pricing, but they also highlighted the fact that you, as well as Volkswagen, as well as most of the international players, are pretty tight on capacity utilization. So it just seems a little bit curious that the pricing is getting pretty weak over there. So just trying to understand, are you seeing the local players becoming much more credible in the market in creeping up and pressuring pricing? I’m just trying to understand where the pricing pressure is coming from with CAPUT that sounds like it’s pretty tight.

Yes. And looking at capacity utilization, it’s kind of a tale of two different dynamics. One the foreign OEMs are running 90-plus percent capacity utilization. The locals are running at about 70%. And I would suggest that the capability from a local [indiscernible] and you were there, so you saw it. It’s certainly improving. But the pricing dynamics that we’ve seen and that we’re anticipating this year, negative 3-plus percent net price on carryover, that’s the same dynamic that we saw last year and the year before. The market’s slowing. There’s a lot of competition. It’s maturing. Importantly, what we said, and recognizing that that was a headwind, was our launch strategy, more SUVs coming into the market, Cadillac, and continued cost efficiency was going to offset those pricing headwinds and enable us to maintain margins. And we’re executing that. I’ll give you an example, the Envision. It has just been outstanding performance since we launched that as well as the Chevrolet Trax, and when we look at crossovers and SUVs versus passenger cars, they’re more profitable by $1,000 and $1,500 a car. So, I think the pricing dynamic is going to continue to be challenging. In China, we’re planning around it being challenging, but we’re executing to the plan that’s going to offset that.

Okay that’s helpful. Then on free cash flow, negative $1.7 billion. I’m just curious though if you can outline what the exact numbers are for the extra week of supplier payments? And then as we think about the recall and restructuring cash used in the quarter, if you can just of delineate those three items for us just so we can understand.

Sure. Yes. The extra payment cycle was worth roughly $1.9 billion, and that’s a typical cycle payment that we have. The recall and restructuring combined about $800 million, $400 million each for the year. What we had talked about before was roughly $1.2 billion, $1.3 billion of recall-related cash, so we’re kind of on run rate for that as I think about the rest of the year and restructuring cash payments north of $1 billion for the year. And I think as you run through the rest of the year, that will start to diminish as we cycle through Bolcom [ph] and some of the other ones. But that’s kind of broad strokes, John.

So, horseshoes and hand grenades, it was basically more like a $1 billion positive free cash flow quarter if you adjust for those numbers. That’s just our numbers.

Yes. If I look at it on an apples-to-apples basis versus the first quarter of last year and excluded some – the extra payment cycle and the restructuring recall, I ended up with the same math you did.

Okay. And then just lastly, the buyback, you guys are being reasonably aggressive in the market and the pay seems to be a lot faster. It seems to be a bit faster than we would have expected. Is there any potential that you’ll blow through this buyback during the course of this year and we seen an up-sizing by the end of this year or the beginning of next year?

Well, when we announced the initial share buyback, what we said was within the context of the capital allocation framework, one, we wanted to get to our target cash balance of $20 billion as quickly and prudently as possible. And depending upon other contingencies, unknown issues that could result in acceleration of our share, we’d like to buy back the shares as quickly as possible, but I think you need to factor it into the $20 billion target cash level and how other things develop. We will monitor it, John, very closely on a month-to-month, quarter-to-quarter basis as we go through the year. And another important point, what we said was an initial $5 billion share buyback. So, depending on execution, we would expect this to be the first tranche.

Thank you. And what your shares are doing today, it seems like it will be a great time to accelerate it. But I appreciate the help. I appreciate the help, guys. Thank you.

As soon as we exit the window period, perhaps.

Okay. Thank you very much. I appreciate it.

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

Great. Thanks. Good morning, everyone.

Good morning.

Just want to start with South America. Maybe a little bit more color on some of the actions you’re taking that give you confidence you can still meet the full-year plan. And then, secondly, on the FX hit for the quarter, was that a balance sheet measurement? Want to get a little bit more color on that FX impact.

Sure. If you look at South America, the team has moved very proactively. Looking at all aspects of our cross-structure, there’ll be production cuts. And in line with that, we’ll look at our labor costs, there’s already active programs going on as it relates to our salaried workforce, and the appropriate adjustments will be taken from an hourly as well, and again very significantly. And then, I would say it’s really a detailed approach of looking at every single cost, a zero-based budget approach looking at indirect purchasing initiatives where everything is questioned. So, they have really gone to, I say, a very austerity approach. The other element on the revenue side is the price as appropriate because even though the market has shrunk dramatically, we still have a very strong portfolio, and are getting our share and a little bit higher share growth, it’s just the market is so much smaller. So, they’re looking at every aspect and cost element of the business, building on what they’ve done over the last two years.

And on your foreign exchange question, Itay, which aspect are you asking about the impacts on revenue or the EBIT [indiscernible]?

The $200 million EBIT, Chuck.

Yes. Fundamentally, that’s transaction exchange. And the biggest driver of that, the ruble in Russia, the real in Brazil. And then, we have a one euro interaction where the euro was weakening faster than the won and we still import a certain number of vehicles into Europe. Largely, on the ruble and real side of it, we’re trying to offset that with price. That’s why you saw that improved EBIT performance on year-over-year basis. But that’s fundamentally worth that.

Great. And then a question on the product cycle. One of the increasingly popular disclosures in your 10-K is the variable profit by segment that highlights cars, crossovers and trucks relative to the weighted average. I think it was about 40% for cars last year. As we think about the next couple of years, maybe first do you have an early rough estimate of what that might be this year for cars and maybe where that was historically in the last time you refreshed some of the small and midsize cars?

Yes. We haven’t changed our outlook on that, 160, 140. I believe 2010, 2011 timeframe, it was closer to 50, 100, 150, as we went into that launch cadence of the current generation of vehicles. I personally haven’t looked at the dynamics associated with this as we go through the launch cycle, but I would certainly expect those gaps to narrow on a go-forward basis based on our expectations on the next-generation product. But clearly, trucks and full-sized SUVs are always going to be most profitable, crossovers are going to be close to the average. And passenger cars, on a relative basis, are going to be least profitable just because you have all the small and compact vehicles in there.

Great. And I’d love to get an update too, Chuck, on raw material costs. We’ve seen steel prices continue to come down. Any incremental benefit that you might see from raw materials this year and at what point, if raw mats stay where they are today, might you begin to lock in some savings for 2016?

Yes, we expect right now, based on our view on raw materials were to be relatively neutral on a year-over-year basis, there’s puts and takes. Steel, resins and other raw commodity prices are down. Aluminum, some rare metals, rare metals are up. And again, you have to look at what’s indexed versus what’s tied to specific supply agreements. But broad strokes, I view that as relatively flat on a year-over-year basis. Relative to raw material, I would say this, and we talked about it before. As we were looking at 2015 versus 2014, we thought commodity pricing was going to be a headwind. Now, we view it as more neutral. And I’ve indicated that it’s several $100 million, not billions of dollars but several $100 million of the tailwind.

Great. So, that’s incremental. Okay. Great. That’s all I had. Thanks so much, everyone.

Thank you.

Thank you.

Your next question will come from the line of Michael Ward for Sterne, Agee.

Good morning.

Hi.

Thank you for taking my question. Two questions, first on Russia, I think if you include FX, it looks – sounds like it accounted for about $100 million loss in the quarter. Can you talk a little bit about the timing of the shutdown and when we might see some of those costs taking out of the pre-tax calculation? And the second thing on GM financial, I assume the equity line that we see now in the GM financial results is from the Chinese joint ventures. Is that joint venture in China similar to the automotive? Is it a self-funded joint venture and it’s an after-tax impact?

Okay. Yes. First on Russia. No. That was your math on the $100 million. I would suggest out of the losses in Europe, there’s a fairly significant Russian headwind in the first quarter. I don’t – I’m not going to provide specifics. But I would suggest as we go through the rest of the year, there’s going to be some roll-through impact in Q2, Q3 and Q4 on a diminishing basis as we wind that operation down and then we should get the benefit absent to those losses in 2016. And on GMF, yes, that equity that’s included in GMF is the joint venture now in China.

Okay. And is that a self-funded joint venture or can they fund themselves?

Yes. It’s a self-funded joint venture. And that is at least from the equity perspective after-tax in China rolling in to our equity line in GMF.

And can we expect similar type performance or expect it to grow as it gains some share?

Well, our initial view is we would expect that to grow because the market is going to grow and more and more people, as the market matures, are going to start financing vehicles. We’re penetrating right now at about 20% of SGM sales, and we would expect to see it grow over years. So, that’s certainly one of the strategic initiatives that we have.

Thanks, Chuck. I appreciate it. Thanks, everybody.

Thanks, Mike.

Thanks.

Your next question will come from Matt Stover with FIG.

First question is, during the quarter, you folks announced that you are considering increasing capacity on SUVs in North America. I'm wondering if you could address two things in this. One, what is the scope of the increase that you would envision? And number two, how do you think about this internally increasing the capacity of the product once you are getting such terrific yield when maybe in a longer-term perspective, the regulatory environment that could emerge post-2020, that might make that addition excessive?

Yes. So when you look at the full-size truck capacity, so right now, our primary focus is on breaking bottlenecks, not only in our plants but also in supplier plants to make sure that we’re providing not only the maximum capacity without installing any new brick-and-mortar because I think there’s still a lot that we can do there, but also get the mix to be exactly what customers are looking for. And so, we have a very – a dedicated team that works on that. We’ve already made tremendous progress. And I know you asked about full-size trucks, I will say though that in mid-size trucks, we are – because of strong demand for both the mid-size truck and the vans adding the third shift to Wentzville again, focusing on what we can do without capital and spending brick-and-mortar. So it’s really a breaking bottleneck strategy and then the shipped addition in Wentzville.

Do think you could add 10% to the capacity of this facility?

Which facility? Are you talking about full-size pickup and...

Full-size. Full-size.

We’re running pretty close to max line rate capacity. We’ve got opportunities from overtime perspective. And we will continue to look at efficiencies. At a system level, we’ve got capacity to meet demand from a trucks standpoint, a 17-plus-million industry at a 12.5%, 12.6% segment share. So, I think we’re in pretty good shape overall. And same thing from a full-size SUV, a segment share that’s running at 2.5% to 2.6% of industry. And as Mary indicated, our intention is to not to add necessarily fixed capital investment like brick and mortar. It is really to optimize where we can in the supply base and assembly. With the – and by the way, that’s what we’ve been doing over the last number of years. No brick and mortar. We add shifts. We continue to drive line rate efficiencies. And we’ll continue to look at that as well.

The second question is on international operations. Over the course of the last few years, you guys have restructured Australia and in this year, Thai and Indonesia. There is one more big operation there that seems to need some fixing. I'm wondering if we should expect to see something in Korea in 2015 or 2016, or is that just a putt that is too long.

We continue to work to optimize and drive efficiency in all of our operations. And Korea is one where we have that opportunity on a go-forward basis. In the 2015 plan and in the restructuring that we talked about already included in our plan is a small portion related to Korea on a variable separation program. And that’s just an ongoing activity we do there. But I would – certainly will not expect any significant restructuring in Korea in the near term.

Okay thanks very much.

Yes.

Your next question comes from the Emmanuel Rosner with CLSA.

Hi. Good morning, everybody.

Good morning.

I have a question on mix, both in China, as well as in North America, but starting with China, a lot of the noise that is, I guess, coming out of China now is that a decent amount of the growth in demand comes from the lower end, essentially a recovery in demand at the cheaper or Chinese made minivans or small SUVs. I wanted to know if you are seeing that in your numbers with either Wuling outperforming or the growth of Wuling outperforming the rest of your brands and if that constitutes a negative mix impact that we should look into. And at the same time, I would like an update on how Cadillac – where you are in the rollout there in terms of volume numbers and if that is offsetting some of the mix impact.

So, let’s start with China and especially, if you look at the lower end, what we’ve seen, first off, we have SGM Wuling, it’s a very, very strong local competitor. And it has successfully shift from not only a leading in commercial vehicles, but also, the launching very successful passenger vehicles. We have the Baojun 730. It’s a MPV in the C-segment. And it’s quickly becoming one of the best-selling models and its segment. And then, we have a very important launch, the Baojun 560 SUV that is very competitive. So, I think when you look at the lower end, our Wuling operations have successfully bridged to where the market is going in and looked out ahead of it and are participating in a leading position. So, that’s from a China perspective, I think, is how we’re seeing that opportunity.

Yes. And overall, again, Cadillac, we expect to sell close to 100,000 units in Cadillac this year, up significantly year-over-year in China. And that is part of the overall between the Baojun SUV launches, the SGM SUV launches in Cadillac that we’re going to drag much improved mix, which will offset the pricing headwinds that we talked about before.

Okay. And then on the North American operations, excluding recall expense, essentially the biggest driver of your year-over-year improvement seems to be the positive mix, which you attributed to full-size – to trucks in general. When I look forward at your goals for 2016, how much – do you rely on mix sourcing just as positive as it is now, or if the mix normalized or the markets were normalizing or the competition heating up in some of these full-size segments. Would you still be able to achieve the midterm goals?

Right. So, let’s talk about Q1 mix for a second. Q1 mix on a year-over-year basis, very robust and it’s consistent with the EBIT bridge and how we talked about 2015 developing. Q1 specifically, very strong full-size SUV mix. But remember, last year, we were launching the full-size SUV. So, we’re at run right now in Q1 versus Q1 last year. So, that’s driving that big mix number. We expect mix to be favorable as we go through the year, but certainly not at the same level as Q1. Looking forward, in the 2016, the biggest drivers in 2015 to 2016, number one, launching products and segments that we had not historically competed in like the mid-size trucks, like Chevrolet trucks and other products that we haven’t announced yet plus the improved passenger car profitability. So, we certainly don’t anticipate the mix continuing to improve. And I think it’s important also if you look year-over-year ultimately from a volume perspective between full-size trucks and full-size SUVs, they’ll be up but not significantly up on a year-over-year basis. So, again, strong mix in the first quarter, expect that to moderate as we go through the rest of the year. The real driver of catalyst for earnings improvement in our product perspective will be products that we have not sold before plus the replacement of some of our core Chevrolet portfolio.

Perfect. Thank you very much.

Your next question comes from Ryan Brinkman with JPMorgan.

Hi thanks for taking the call. You mentioned a 20% ROI hurdle as governing some of your strategic actions in recent years, presumably including Australia, Chevrolet Europe, Russia, Indonesia, etc. Now those are places where you are retrenching, right? So I am curious relative to some of the very big investments that you are making like the $12 billion in Cadillac, the $16 billion in China, how you think those investments stack up in terms of return potential.

Yes, let me talk about China first because it’s easier. China is self-funded by the joint venture, so we’re not putting incremental capital, and obviously, that’s absence of dividends we could be taking but I would say that China earned significantly higher return on invested capital because they have very strong margins and a relatively low invested capital base. So, I would suggest that that’s very accretive from an overall perspective. The $12 billion for Cadillac, that is a kitchen sink number from an investment perspective over the next number of years. It’s not just capital spend. The actual kind of North American or consolidated operations capital spend portion of that’s about 50% of the overall $12 billion or $6 billion relative to the product portfolio. And our expectations are that we’re going to drive better than 20% returns on Cadillac products as we should. They are more profitable than some of our mainstream products.

Okay. That's great to hear. Then just a couple questions on your cost structure in the United States. Firstly, there was a study recently I think by the Center for Automotive Research, maybe you saw it, that concluded GM had the highest hourly wages amongst Detroit-based manufacturers. They suggested one cause was a lower percentage of tier 2 workers. Is that consistent with your understanding? And then secondly, a Ford executive recently commented that they would look to close this year their cost disadvantage relative to Chrysler. Is that an objective and realistic objective of yours too, to get your cost in line with the competition there?

One, we are not the most expensive or the highest-cost OEM in the U.S. relative to an average cost per hour, so – and that’s based on Harbor Report data. Two, our objective, and it continues to be our objective, is to continue to drive efficiency and drive our costs, employment costs closer to the overall competitive benchmark. And we will work very, very closely with all the stakeholders including our UAW partners to try to close that gap, but that’s certainly our objective, and it hasn’t changed within the overall constructive, maintaining or improving our breakeven point in North America.

And we’ve been very clear in all of our conversations that improving our competitiveness is a key item that we’re going to be taking through all of the discussions as we get into negotiations.

Great. Good to hear there too. And then just lastly, Sergio Marchionne commented recently he was looking for a merger partner for Fiat Chrysler and he mentioned your company, amongst a couple others, as potentially being logical. I think the message from you though in recent years is that you don't need to merge with anyone else, you need to merge with yourself and you don't want to distract from that. But I am curious what your latest thoughts are with regards to strategic partnerships, or even more broadly the likelihood or need for consolidation in this industry.

So, specifically, about General Motors, I think, we’ve been very clear. We laid out a very comprehensive plan that takes us through the early next decade with milestones next year and beyond. There’s – as we communicated, we think there’s tremendous opportunity for us within the business as we look at efficiency measures, as we look at truly achieving the scale that we should have, because we’re already in that top tier of the auto industry among the largest OEMs. So, we have a very well-articulated plan. We’re in the middle of the executing that and we’re not going to entertain anything that distracts us from accomplishing that. So, that is the way we look at it and that’s how we’re executing. If you look more broadly from an industry-consolidation perspective, I mean, there are – the technologies that we need to invest in from a – whether it’s from a propulsion perspective, whether it’s some of the new emerging technologies, as we look at connectivity or even different business models as it relates to urban mobility, those are all – all require investments. We have a plan well in place to accomplish and to be in front of the change that’s going to occur in this industry over the next five to ten years. We’ve already made several significant announcements as it relates to autonomous specifically. And we’re already leading from a connectivity perspective when you look at our deployment of 4G LTE in the United States, which is now moving through Europe and through China. And we have more coming in those spaces, as well. So, I think there may be some need as other OEMs, states, the change that is happening. But again, we’ve got a very well-developed plan and we’re all 100% focused on execution.

Perfect. Thanks so much.

Your next question comes from Joe Spak with RBC Capital Markets.

Thanks everyone. I guess in the past you’ve talked about, as we go forward here, and I think it is embedded in your plan, having to add more and more content to your vehicles and that being a headwind. And I guess in light of some global competitors announcing a significantly lower cost of entry to features like active safety or in some cases even standardizing it, if you think that trend is happening quicker than you anticipated, if it's on pace and also how you are going to respond competitively?

Well, I think if you look at it, you have to look at every vehicle by segment to really understand what the customer is looking for because, I think, the key is getting the right technology and function and features on the vehicle by segment by market. And clearly, in the Shanghai 2015 show that we were just at, there is a lot more content being added, but you’ve got to look at the right content again for the segment. But, I think, again, this is why it’s so important that we continue to execute our strategy. As Chuck mentioned, we’re on track to the $2 billion goal from a material cost. I still think there’s more opportunity as we continue to execute there. Doing that allows us to then have the most efficient cost structure to be able to put the right features and functionality on the vehicles. And that’s our plan. So, we think we’ve got more opportunity in that area. And we’ll continue to work at it.

Okay. Are you surprised at all by I guess the pace that you see some people adding content, or it's sort of in line with what you guys were thinking?

I mean, I think, overall, I’m not surprised by it. I mean, there’s kind of two types of content. There was the content that you have to add from a regulatory perspective, and then there’s the features and functions that, I’ll say, create the customer delight and enthusiasm. And we have aggressive plans for both. I would say the one area where it is moving very quickly is with the domestic OEMs in China, big OEMs , saw that and being very significant. But again, our SGMW, Wuling is right in the middle of that and very much focused on the right content for the vehicles.

Okay. And then obviously the TPP agreement has been in the news a lot and I was wondering if you were willing to say what GM's stance is? Obviously it's important for auto and if you have any insight to how you think it plays out. Obviously it sounds like maybe the Japanese are looking to get some of the tariffs dropped, but in return maybe there's some language there are about currency manipulation. So any color you could provide there would be helpful.

Well, generally, General Motors, as I would – we believe in free trade. And I think our record evidenced that. Again, as you look at this, the key is in the details, clearly, something that puts some controls from – currency manipulation are important to us, and we’ll continue to evaluate that and work productively to provide input, because, generally, we’re very supportive of a free trade.

Thanks a lot, guys.

Your next question will come from Brian Johnson with Barclays.

I just want to follow-up on some of your comments about executing your plan with a question around plans are set, you execute sort of long-term plans, but the market is evolving very rapidly. So I'd like to get a sense just how you as a management team maybe are making midcourse corrections, maybe specifically around three things that have changed even since the investor day. The first is the collapse in oil prices and the impact on really weakening demand in the North American car market. You already talked about your SUV adds. Second, the deteriorating conditions in Russia and third, how do you pay for the content costs, particularly around connected car, where good news the take rates are accelerating faster than expected? Mixed news is some of the competitors are beginning to price things like 8S quite aggressively?

I didn’t hear your very last comment as you talked about competitors. I’m sorry.

Competitors price to gain as aggressively [ph], so just things that might have been different than when you – unless you had perfect foresight – than when you set out your plan.

Right. But if you could just go through those three items, I think we’ve been very agile in making sure we have the right full-size truck, full-size SUV, midsize truck SUV capacity and capability to put those products in the market and I think you’re seeing us do that. So, we’re going to respond and be opportunistic of what the customer wants to buy. And I have been very aggressive in that space. So, I think we’ve demonstrated that we can adjust there and we’ll continue to do so. As it relates to Russia, we took actions to change our business model in Russia reacting to this situation in the point that we were at again, wanting to make sure we’re staying true to our capital allocation framework and deploying capital where we are committed to generating the return for our shareholders. And then as it relates to content, I mean, especially if you look at – you mentioned connectivity. There’s also revenue opportunity associated with the connectivity, and I think we are just starting to scratch the surface as we look at additional functions that can be accomplished now that we’ve got the pipe into the car and that ability to communicate. And we have several initiatives of new features and functions that we’re going to be putting that utilize that. So, I think there’s a revenue opportunity there. And then finally, as it relates to the cost piece, again, I think with the – the plan we have this year for $2 billion in performance, I think we still have more room to go and that’s a GM-specific opportunity that we truly leverage our scale and have the right working relationship with our suppliers across-the-board, longer-term relationships and seize those opportunities. So, I would say – I don’t know, Chuck, if you have anything to add to those three.

And to the cost and continuing to drive efficiency. A few weeks ago, I was in New York and talked about across the broad dimensions of the business where we will continue to focus. And clearly, material and logistics is an opportunity that we talked about, Mary talked about. There are still opportunities to drive productivity and efficiency in manufacturing. And as I indicated, just our productivity on a year-over-year basis from a manufacturing perspective is worth $800 million or $900 million a year. We still are pursuing overhead cost reductions with global business services, our IT transformation that will generate significant savings on a run rate basis. And then to the opportunities with OnStar connected car, again, I said, just as Mary did, that we are just scratching the surface there. But even so, we had $350 million worth of improved profitability built into our plan based on what we have taken advantage of so far, and I think there’s significant upside to that, as well.

Just final question, could you maybe drill down on that in terms of what has already been realized with that $350 million, what the – you had some categories in the slide deck, but kind of what is already really set in place to collect versus what is going to require either partners in terms of revenue sharing from apps or changing consumer behavior to realize?

Yes. I would like to avoid getting into the details of those specifics and that $350 million improvement. Broad strokes. So, obviously, our agreement with AT&T and revenue-sharing opportunities are, one, avenue of improved earnings. Number two is vehicle health, maintenance and diagnostics and how that can drive improved warranty customer satisfaction on a go-forward basis is another opportunity. And then, ultimately, the application framework and how you deploy that on a business-to-business and business to consumer standpoint is another opportunity. But as I said, we’re just scratching the surface. There’s opportunities to leverage GMF [ph] as we grow them to full captive to link in better with our after-sales operations to drive service retention. So, significant opportunities that we’re going to continue to take advantage of.

Okay. Thank you.

And our final question will come from Dan Galves with Credit Suisse.

Good morning. Thanks for taking my question. First one has to do with the new vehicle architectures, which are really important to the outlook. You have already said that we will have increased content, but you expect to price for that. In terms of like-for-like material costs, how much savings can you achieve from globalizing these architectures maybe from a material cost perspective or engineering savings?

Well first, we’re starting to see some of it roll through in last year and this year. Last year, we generated roughly $1.2 billion of material cost performance and carryover, this year, $2 billion. Now with capturing carryover, our recently launched products like the K2XX platform. As we went forward, remember what we said about the Corsa and the Astra and the next-generation Malibu, and he next-generation Cruise that we expect is roughly one-third of the profit improvement in those vehicles on a variable basis to be coming from material efficiency. And part of that is getting more scale and leverage bringing the suppliers in early. So, I believe that there is still significant opportunity on go-forward basis as we execute our vehicle set strategy and ultimately get down to a handful of global architectures, so, more to come on that. But I wouldn’t just size it. I wouldn’t be surprised if the number ultimately ends up being 2% to 3% of material cost in kind of a run rate basis.

Okay, thanks. And then I have two questions on North America. The first one has to do with truck pricing. Some of the external groups that estimate pricing were reporting pretty large ATP increases on full-size pickups, and particularly the SUVs. Was there evidence in your year-over-year bridge of these increases? I guess was it buried in the $200 million of retail negative, or was this all due to mix or offset by content? And then the second question relates to North America costs. I think in January, you said that overall costs would be up in 2015 where fixed cost more than offsetting the material cost tailwinds. In Q1, you had a benefit of about $200 million from cost. How does that trend in the balance of 2016? Thank you.

Yes, let’s talk about general pricing from a pickup, full-size SUV. What we talked about and we’re seeing play out versus a relatively aggressive environment in 2014 is a more moderate pricing environment from a full-size pickup and a full-size – specific to full-size pickups. With that said, we have taken action already. This year, we have raised prices in full-size pickups and full-size SUVs as we look at the opportunities that are being presented. I would expect on a go-forward basis that we would certainly look towards trying to hold some of that. In other words, kind of the base price increases more than offsetting any increase in incentives. It’s still a bit early in the year. And we actually – how the market develops, but I’d say overall, the pricing environment is certainly more constructive this year versus last year from a truck and SUV standpoint. What was the second part of your question, Dan?

Just on the costs, between fixed costs in North America or structural costs in North America and material costs. I think you said in January that overall costs would be up a bit. You had a tailwind in the first quarter between these two items. Just wondering how that trends in the rest of 2015.

Well, I think the material performance is going to trend pretty close to our performance in the first quarter of the year. For the rest of you – from a kind of fixed cost perspective, our expectation was that engineering, in events of the product launches and marketing, was going to be up on a year-over-year basis. I would still expect that to play out. With that said, we continue to drive the efficiencies in the other parts of the business from a fixed cost standpoint overhead manufacturing. So, we’ll have to see how that plays out. But generally I would say we are very much in line with the guidance that we provided back in October and in January.

Okay. Great. Thanks a lot for the color and for the new format of the call. Appreciate it.

Thanks, Dan.

Thank you. I’d now like to turn the call back over to Mary Barra.

Thank you. So, I’ll be brief here. But I think if you look at it, we had a very solid first quarter. We’ve got a strong foundation to go through the rest of the year. We’re going to continue to build on this positive momentum, and I’ll reiterate that we are on track to achieving our 2015 and 2016 financial commitments. Also, you can see that we are already executing the capital allocation framework, and we’ll continue to do that, as Chuck said, month-by-month to look at what is the right strategy recognizing some of the uncertainties and open items that still need to be resolved. But we’re on track. And we will continue to look to maintain an investment grade balance sheet and the $20 billion balance and then invest in profitable growth opportunities and then return value to our shareholders. So, we’re continuing to execute our strategies. So, we look forward to talking to you at the end of Q2.

Thanks. Operator?