General Motors Company (GM) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company Second Quarter 2017 Earnings Conference Call. As a reminder, this conference call is being recorded Tuesday, July 25, 2017. I would now like to turn the conference over to Dhivya Suryadevara, Vice President of Corporate Finance. Please go ahead, ma'am.

Thanks, operator. Good morning, and thank you for joining us as we review GM's financial results for the second quarter of 2017. Our 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. Included in the chart set materials published this morning, we had the key takeaways from each chart in the notes pages in order to provide color on the results. This morning, Mary Barra, GM's Chairman and CEO, will provide some brief opening remarks; followed by Chuck Stevens, GM's Executive VP and CFO. We will then open the line for questions from the analyst's community. Before we begin, I would like to direct your attention to the forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. In the room today, we also have Tom Timko, Vice President, Global Business Services, Controller and Chief Accounting Officer; and Rick Westenberg, Vice President and Treasurer to assist in answering your questions. I will now turn the call over to Mary Barra.

Thanks, Dhivya, and good morning, everybody. Thanks for joining. We delivered a strong second quarter despite a more challenging business environment that included softer industry sales in the U.S. and pricing challenges in China. Results from our continuing operations adjusted for the pending sale of our Opel/Vauxhall brands and GM Financial operations in Europe include net revenue of $37 billion, income of $2.4 billion, EBIT-adjusted of $3.7 billion, and EBIT-adjusted margin of 10%, EPS diluted of $1.60 and EPS diluted-adjusted of $1.89, EPS-adjusted of $3.5 billion in North America and EBIT-adjusted margins of 12.2%, adjusted automotive free cash flow of $2.6 billion, and our return on invested capital adjusted is 30.4% on a trailing four-quarter basis. This reflects the positive impact of our disciplined capital allocation framework. Also, important to note, that during the quarter we returned about $2.1 billion to shareholders, $600 million in dividends and $1.5 billion in share repurchases. We expect to return up to $7 billion to shareholders by the end of 2017 through dividends and share buybacks, subject to market conditions. We made significant moves in the quarter to strengthen our core business performance and capitalize on growth opportunities for the long term. In May, we announced our intent to restructure our international operations, to focus GM India on export manufacturing only, to transition our business in GM South America to ISUZU Motors and to phase out the Chevrolet brand in both markets by the end of the year. Combined with the pending sale of our Opel/ Vauxhall brands and GM Financial's business in Europe, our recent restructuring actions will allow us to deploy resources and capital to higher return opportunities, such as refreshing our profitable global SUV and U.S. full-size truck portfolios and our global emerging-market vehicle program. We will also continue the growth of GM Financial and our very profitable after-sales, will continue leveraging our connectivity leadership through OnStar, and transforming Cadillac to lead in the global high-margin luxury segment. We're also investing in transformative technologies around electrification, autonomous technology, connectivity, and shared mobility services as part of our continuing work to redefine the future of personal mobility. We will continue to build on our significant progress by driving improvements across markets and in product segments to deliver the appropriate returns. Now, let's take a look at a few of the regions that really drove our performance in the quarter. First North America. In the United States, our total sales and retail sales and market share are on pace with last year's first half performance and ahead of the industry. We believe our disciplined go-to-market strategy is paying off. Our retail sales mix of 6% in Q2 was not only the lowest among full-line automakers in the U.S., it was our lowest for GM in eight years. We are also seeing disciplines on incentives. Our incentives spend, as a percentage of average transaction price, was about 12% in the second quarter, down two full percentage points from the first quarter. We continue to grow in the critical crossover segments that are most popular with consumers. GM's retail crossover share in Q2 was up 24% year-over-year, representing the best quarter in our history for crossover sales. As we prepare to launch four more crossovers in the second half, this is a strong starting point. Overall GM's crossover retail market share increased 1.7% year-over-year, or 1.7 points year-over-year. Cadillac SUV sales were up 16% year-over-year, the best Q2 in history. Buick sales were up 16% year-over-year, its best Q2 since 2005. Our average transaction price in Q2 of $35,000 was essentially flat year-over-year exceeding the overall industry by about $3,800 and we continue to make strides on vehicle quality. In the J.D. Power Initial Quality Study, Fort Wayne assembly received the 2017 Gold Plant Quality Award for the Americas for the highest manufacturing quality. The plant builds light and heavy-duty Chevrolet Silverado full-size pickups, which led their segments, and the GMC Sierra and Sierra heavy-duty. As we moved to China, GM China set a Q2 sales record with deliveries of 852,000 vehicles, up about 1% year-over-year. Cadillac and Baojun also set Q2 sales records on strong sales of the Cadillac XT5 and Baojun 510. Cadillac sales were up 62% and Baojun sales were up 66% year-over-year in the quarter. Year-to-date Cadillac is up 70%. Deliveries of the Chevrolet Equinox SUV in China surpassed 10,000 units since its launch in late April. And the Velite 5, Buick's first extended range electric vehicle made its global debut in April. We expect it to go on sale later this year. I also want to make a few points about South America. Despite challenging macroeconomic conditions, we posted a year-over-year improvement to essentially breakeven. Our sales and market share gains outpaced the industry and Chevrolet continues its 17-year market leadership. In the quarter, South America delivered 160,000 vehicles, up 18% year-over-year and market share rose 0.7 points. Throughout the first half of 2017, sales were up more than 14% compared to a year ago. As we look at the technologies that are transforming our industry, our commitment to leading in this transformation and the future of personal mobility includes making game-changing technologies available to as many customers as possible. We are excited that the Chevrolet Bolt EV, the first affordable long-range electric vehicle, goes on sale nationwide August 1 at certified Chevrolet dealerships. More than 80% of Bolt EV customers have not previously owned a Chevrolet. Chevrolet has sold nearly 8,200 Bolt EVs since they went on sale in December of 2016. Our Cruise Automation team in San Francisco and our technical experts in Warren are making significant progress in our drive to safely deploy our self-driving electric vehicles in commercial ridesharing networks. Last month GM became the first company to use mass production methods to build 130 autonomous vehicles, growing our test fleet to 180. We plan to deploy these vehicles in the challenging driving environment of San Francisco, as well as Scottsdale, Arizona, and Metro Detroit where we are already testing our vehicles today. In addition, technologies like Super Cruise are helping us create a safer future. As we prepare for the fall introduction of Super Cruise on the 2018 Cadillac CT6, GM engineers have logged roughly 160,000 miles of driving on U.S. and Canadian highways as part of the final validation of the system. And when it comes to shared mobility, we keep refining Maven to meet customers' needs as we learn more about the growing sharing economy and freelance economy. In addition to expanding Maven City in New York, we announced that Maven Gig will be in California in three cities. Freelancers can rent Chevrolet Bolt EVs for delivery and ridesharing services. So as we look at H2, we clearly see a tougher business environment and the entire GM team has a disciplined and relentless focus on doing what is necessary to address challenges. For example, in addition to the actions in Europe and our international operations, we are managing passenger car output to ensure our inventories are appropriate and to protect our brands. In North America, our crossover launches continue with the Chevrolet Equinox and the Chevrolet Traverse, the GMC Terrain, and the Buick Enclave. We will also launch the Equinox in Q4 in South America and launch 10 newer refreshed models in China. As Chuck shared with many of you last month, we expect another strong year in North America with EBIT-adjusted margins of 10%-plus. In addition, on a continuing operations basis, we still expect our EPS diluted-adjusted to be in the $6.00 to $6.50 range for the full year. Now, I'd like to turn the call over to Chuck.

Thanks, Mary. We had another strong quarter capping off a record first half of the year. On a continuing operations basis, we generated net revenue of $74.3 billion, EBIT-adjusted of $7.2 billion, and an EBIT-adjusted margin of 9.7% in the first half of the year. Our strong second quarter is another proof point of our commitment to price and cost discipline. Our performance also underscores the benefits of the strategic actions we've taken to focus the company on markets and segments where we have strong competitive positions and believe we can drive higher returns. North America continued to lead, overcoming softer industry conditions to generate first half revenue of $57.8 billion, up nearly 2% year-over-year. EBIT-adjusted of $6.9 billion, up 13% versus the first half of 2016, and a 12% EBIT-adjusted margin, an increase of 1.2 percentage points versus 2016. For the second quarter, North American EBIT-adjusted was $3.5 billion with a 12.2% margin, driven primarily by solid cost improvement of $600 million and improved mix of $500 million as we are just starting to see the benefits of our strong crossover launches and our focus on cost continues. Through the second quarter, we've generated about $5 billion in cost efficiencies since 2014 and are on our way to achieve our goal of $6.5 billion by the end of 2018. Shifting to inventory, as we have indicated, we built inventory in the first half in preparation for our previously announced downtime in trucks and crossovers in the second half of the year. We're also committed to take action on passenger cars, which we have done and will continue to do as required to align supply and demand. And as we exit the second quarter, we are generally on plan with days supply at 105 days. We are committed to bring inventory in line with year-end 2016 levels of about 70 days supply by the end of this year. Clearly, our production will be impacted in the third quarter and the second half. We expect factory unit sales in North America to be down about 150,000 units in the second half versus the first half. With that said, and consistent with our last Office Hours session and the comments Mary just made, we fully expect to generate strong 10%-plus margins in North America in 2017. Moving on to China, China generated another $500 million of equity income in the second quarter for a total of $1 billion of equity income for the first half, both flat year-over-year. We continue to benefit from shifting consumer preferences and our strength with new products in the luxury, SUV and crossover segments. Again, we are very much on track to deliver another year of strong equity income in China. Turning to South America. In the first half, revenue was $4.3 billion, an increase of $1.3 billion, or 43% year-over-year and the EBIT-adjusted loss was about $100 million, a $40 million improvement from a year ago. As Mary mentioned, we essentially broke even in the second quarter, highlighting that our new breakeven SAAR is approximately 2.2 million units in Brazil. Based on that, we have reduced our breakeven point by about 40% from the last peak in 2012. We expect our second half results to continue our year-over-year improvement, driven by a modest industry recovery and the strength of our portfolio on brands in South America. A few words on GM Financial, the corporate sector, free cash flow and share buybacks. GM Financial generated quarterly revenue of $3 billion, up 40% from $2.1 billion in 2016, resulting in record earnings before taxes of about $400 million in the quarter, up about 67% year-over-year despite continued pressure in residual values. Through the first half, GM Financial generated almost $600 million of earnings before taxes, up about $200 million, or 44% versus the first half of 2016, driven by a 41% increase in revenue to $5.7 billion. We do expect the decline in used-car pricing to continue to put pressure on GM Financials' residual values through the second half of 2017, and we would expect some moderation in earnings in the second half, but we will still deliver solid year-over-year earnings growth for the full year. Corporate costs were about $500 million in the second quarter with the first half total of approximately $800 million, including spending on autonomous and other future mobility initiatives. As discussed during our recent Office Hours webcast, the corporate sector will include about $200 million of annual legacy European costs going forward, primarily related to retained pension expense. Also going forward, we would expect the corporate sector will result in a net expense of approximately $400 million to $500 million quarterly. Adjusted automotive free cash flow for the second quarter was $2.6 billion for a first half total of $2 billion. This is an improvement of $300 million compared to the first half of 2016, driven primarily by improved automotive net income. CapEx was $4.1 billion for the first half and we expect full-year capital expenditures on a continuing operations basis to be approximately $8 billion. Our strong cash flow performance enabled us to repurchase $1.5 billion of shares in the second quarter, along with $600 million in dividends. Due to the pending sale of Opel/Vauxhall and GM Financial's European operations to the PSA Group, GM has provided our 2017 outlook on a continuing operations basis, which is described in more detail in our Analyst Deck. We expect revenue, EBIT-adjusted, and EBIT-adjusted margins to meet or exceed our 2016 performance on a continuing operations basis. And it's fair to say that when compared to what we reported in February for 2016, we expect EBIT-adjusted and EBIT-adjusted margins to improve. Adjusted auto free cash flow is expected to be approximately $7 billion. This is in line with our original guidance of $6 billion after taking into account the approximate $1 billion impact of European related cash flow. And we anticipate to generate a ROIC-adjusted of greater than 25% for the year. We expect our cash generation, along with our ability to reduce our cash balance by $2 billion after the Europe transaction closes, to allow us to return up to $7 billion to our shareholders in 2017 through dividends and share repurchases, again, subject to market conditions. And as Mary mentioned, we still expect to deliver EPS diluted-adjusted in the $6.00 to $6.50 range, supported by our strong first half performance and the benefit of the Opel/Vauxhall sale. This concludes our opening comments. We'll now move to the question-and-answer portion of the call.

Our first question is going to come from the line of Brian Johnson with Barclays.

Yes. I want to follow-up more on the strategic question. First, can you give us some sense on the car side, especially after your exit from PSA? Just sort of what your ongoing investments in sedans are going to be over the next several years? How you're thinking really about South America and Asia-Pac ex-China? And was there any discussion of those potentially going along with the Opel sale? I think South America might've been originally established as an Opel branch. And just kind of as you think about your capital, what's the incremental return of putting it into cars versus crossover and pickups?

Good morning, Brian. So, first, I think with the Opel/Vauxhall transaction, we've said that – and with the announcements that we made in India and South Africa, that we believe we're in the right market. We have a very strong franchise in South America and as I said in my opening remarks, we're going to continue to work to improve performance and efficiency in each country and by segment. So from a where we intend to play, I think that outlines that. When you look specifically at passenger cars, recall we just launched the compact and midsize architectures, the Chevrolet-branded Malibu and Cruise, a very, very efficient architecture that we believe will get two-plus lifecycles out of because of the design of that architecture. So we think we're well positioned. And although to your point, we are seeing smaller car segments and the impact of consumers choosing crossovers and trucks and SUVs, to a certain extent around the globe, we feel – and I'm not going to go into specifics of outlining the entire product portfolio, but we have taken a very much an over-the-horizon look of where we think that's going. We have very efficient architectures that are installed. And so I think we can leverage that very effectively to be well-positioned as the market continues to transform. As we talk, we also have very strong SUVs and crossovers that we're rolling out first half of this year, continue to do that in the second half. So I think we're going to be well-positioned to capitalize on that growth and then well-positioned from a car perspective. Finally, from an emerging market, those China, South America, Mexico, and some of the other more developing markets recall that we have made the investment in our global emerging markets platform that will have a range of vehicles coming off that – and this is a purposely designed architecture from a safety perspective, from an efficiency perspective, from a fuel economy perspective that we think will also be very well-positioned in those markets. So, again, we've looked at where we think the market is going and the trends are consistent with what we believe and the investments we've made in the plans that we have.

Okay. And I'm just looking at that capital allocation chart you put out for the recent conference, and propulsion is a chunk, it looks like $2-ish billion of that but stepping down post 2020. Is there any kind of way you could dimension how much that's going for ICE versus hybrids versus your pure electric efforts?

We haven't broken that out, specifically, but what I would say is that I believe we are making the right investments from an electrification, and looking to really have platforms that go from eAssist to plug-in hybrids to full electric vehicles. And looking at that holistically across the portfolio. So that's the comment I would make but we're not breaking that out.

Okay. Thanks.

Our next question will come from the line of Rod Lache with Deutsche Bank.

Good morning, everybody.

Morning.

I had a couple questions. One is the fixed cost savings that you are achieving in North America looks like it's quite high. Is North America basically already benefiting from the lower spending on passenger car development? Because your comments on longer-lasting platforms and gens coming? And at this point, on a continuing basis, ex-Europe, going forward, can you just talk about maybe some of the key earnings drivers that you have looking out to next year? Could this run rate of fixed cost reduction be sustained? Do you see some other positives starting to kick in?

Yes, I would say, Rod, to your first question on the cost performance and the fixed cost performance in North America, there is very little engineering in there at this point in time. As you know, with the launch cadence of the crossovers here and then leading into the full-size pickup, the next-generation SUVs, we're probably at the peak from an engineering spend perspective and North America absorbs a pretty significant chunk of that. Where we're seeing the fixed cost opportunities are in manufacturing, SG&A, and you know, the non-engineering pieces of the business and consistent with our $5 billion run rate, and really being supported and driven with operational excellence at Global Business Services and a lot of focus from our manufacturing perspective. When I think about North America next year, and I don't know if the drivers of your question are specific to fix costs or specific to kind of the continued run rate at 10%, clearly our product launch cadence is going to be supportive. We're going to continue to drive efficiency across the board wherever we can find it from a cost standpoint. I would expect to see engineering costs, over the next couple of years, start to wind down as we work our way through this very large portfolio launch cadence that we have in front of us here in 2017, 2018 and 2019. We still have opportunities in manufacturing for sure. When you look at benchmarking on where we stand versus harbor from a productivity perspective. So, I think that we're going to continue to very much focus on driving efficiency across the board, not just fixed cost but commercial performance, quality, warranty, the whole nine yards because I think there's opportunities across all of those in North America. And we're seeing some of the benefit in the first half of this year across all of those dimensions.

So can you quantify what kind of targets you might be looking at in terms of net cost reduction or fixed cost reduction in North America looking forward beyond this year?

Not at this point. In July, I would say, again, we've delivered $5 billion of efficiency through the second quarter against our $6.5 billion target through 2018. That's overall level. Clearly, most of that accrues to North America. We expect to achieve that $6.5 billion. So that will kind of size up that run rate but to get into the specifics at a North American by component perspective, not at this point beyond. We're very much on track on that $6.5 billion and the vast majority of that will accrue to North America. And we had said before that roughly half of that would fall to the bottom line, right? Net of incremental investment, marketing, D&A, technology. So there will be a benefit to North America from that perspective.

Okay. And then lastly, obviously there's a lot of focus in the industry on the auto 2.0 businesses that you guys have been investing in. Financially today, the biggest needle mover that you've quantified, I think, is Cruise. You guys had said that you're going to spend about $150 million a quarter on autonomous. OnStar today is contributing revenue. Can you just update us on where OnStar is? What's the run rate of that business? And any high-level thoughts on financial targets for these businesses or the value that you see in them?

Well, let me speak specifically to OnStar. And Mary will talk to Cruise slash autonomous vehicles. As we've talked about before, yes, OnStar is generating revenue. We don't disclose that separately. It continues to grow. What we have said was we expected to see improved profitability rolling through North America of roughly $0.5 billion by the 2018, 2019 timeframe associated with the growth of OnStar. I'd say we're still executing to that. Feels more like a 2019 timeframe and that was compared to 2015. So, we expect to see some accretion from a earnings perspective on OnStar. And that is, obviously, taking full advantage of 4G LTE, our revenue share with AT&T, and the services that we provide, application framework, et cetera, et cetera. But that's still what we're executing to.

And from an auto 2.0, as you look at specifically autonomous vehicles, of course, built on which we think is the most efficient platform on the all-electric vehicles. So leveraging the Bolt EV platform, I think we are moving aggressively in the development of that technology. As I noted, that we built the next 130 vehicles that we are in the process of deploying onto roads in San Francisco, Scottsdale, and Metro Detroit, leveraging manufacturing at scale methods to be able to build those vehicles. So when I look at where we're at, we're working aggressively at leveraging the assets General Motors brings to this, also learnings that we have from Maven. You know, we've talked about the true opportunity in this business which we think will first come in ridesharing. And we think that can be significant and then grow even further. We haven't sized that yet, but I would say we're working very aggressively on auto 2.0 to make sure we have substance and technology that we believe will generate significant shareholder value. And as we move forward, we'll be able to size that and put some milestones and timing around that. So I would say stay tuned.

Great. Thank you.

Thanks, Rod.

Our next question will come from the line of Ryan Brinkman with JPMorgan.

Hi. Good morning. Congrats on the quarter. Could you talk about the profit strength at GM Financial? It looks like 2Q was a record profit even as investors have been worrying about subprime defaults and lower used-car residual prices. So what has the trends been in charge-offs and provision? And how would you rate the sustainability of the better GMF results?

Yes, I would say, first, from a credit perspective, the overall headline numbers are improving and that's a function of mix as we take on more prime business. But I would say within that, GMF continues to perform very well. Subprime, we have been relatively flat-lined on our subprime business over the last number of years and haven't grown that. And we perform, actually, better than the market does from a subprime perspective. So overall, stable results from a credit perspective. Clearly, we grew revenue in the quarter as we continue to grow our prime business and that drove a fairly significant portion of the improvement. We continue to be very focused on operating expense and that was a benefit in the quarter as well. As I said earlier in my comments, though, we do expect to see that run rate moderate in the second half of the year. Clearly, the used-car pricing and the impact on residuals was more, maybe not clearly, but I'll provide that perspective. Now is more backend loaded into the second half of the year. We're still guiding around a 7% reduction on a year-over-year basis in 2017 versus 2016 and further moderation in 2018, and we want to make sure we mark to that as we go through the year. With that said, I would still expect to see overall performance improve on a year-over-year basis, solid improvement at GM Financial and another driver is we're growing our business in China as well and that's flowing through GMF from a equity income perspective. And that's going to provide a year-over-year tailwind as well.

Okay. That's very helpful, thanks. And then just lastly from me, a question on consolidated IO. It looks like their losses there narrowed quite a bit. What was the driver of that? Were any of the operations in either India or South America maybe moved into discontinued operations, or is it pretty comparable year-over-year? And then what should we think about the cadence of the expected savings from the restructuring actions announced during the quarter?

Yes, I would say they're not in discontinued ops. It's comparable on a year-over-year basis. I think one of the benefits that we saw in the second quarter was the sale of our East Africa business and we picked up a reasonable gain on that $40 million, partially offset by some charges we took related to Uzbek. I'd say there was some timing, too, relative to the flows of production into the Middle East. Very little run rate savings associated with the restructuring actions. I would expect to see those play out in 2018. We will continue to lean out the Singapore headquarters office as we move through the end of this year and complete those restructurings in India and South Africa as we move through this year. And as we indicated, we would expect to see about $100 million a year run rate improvement. With that said, we still have plenty of work to do in our consolidated operations. The Middle East remains challenging and it is pretty volatile right now when you look at the industry conditions there. We have to continue to focus on cost efficiency in Korea. We're starting to stabilize our business in Australia. We expect to see some improved results in Southeast Asia, but we still have plenty of work to do in the remaining operations but we see a path to continue to improve that.

Great. Thanks for all that color.

Our next question will come from the line of Itay Michaeli with Citi.

Thanks. Good morning.

Good morning.

Good morning.

So just, Chuck, I'm hoping you can talk about just the cadence of earnings in Q3 and Q4 as you tacked up production actions. And also just specifically on free cash flow, I think the guidance does imply a significant improvement second half versus first half. Given the production cuts and the working capital swings, can you kind of help us, walk us through the puts and takes around that?

Yes. As we've been talking about earnings cadence since earlier this year and the expected downtime in the U.S., North America. And as I generally look at the consensus view of the second half of the year, I think we're in line from a overall cadence perspective, as I said back in January and talked about a couple of times in Office Hours, we would expect Q3 to be our weakest quarter of the year with 13-weeks of downtime in mid crossovers and full-size pickups, and then see a recovery in the fourth quarter. I think that same trend will impact free cash flow. I think Q3 will be relatively weak from the free cash flow perspective. And then we'll see a pickup in Q4 with improved earnings, and as we wind back up our pipeline, obviously that will have a favorable impact on payables. So those are the broad strokes. Itay, again, mostly being impacted – when I look at second half versus first half, the biggest driver is volume. And the biggest driver of that volume is North America and the downtime that we've talked about consistently, and that's what's going to drive the cadence.

That's very helpful. And just a second question. Going back to the $6.5 billion of costs savings. I think back in April, you alluded to seeing potential opportunities above that $6.5 billion post the Opel divestiture. Can you update us on that or able to size that up for us in terms of what that could be and the timing as well?

Itay, we definitely are working to improve that. I think first, we want to make sure we achieve the $6.5 billion and I think as Chuck said, we're well on track to do that. But the specific work that we're referencing is, as the Opel/Vauxhall transaction closes, we're looking at, how do we take structure and simplify the way we work and out of the company? And that work is actively going on right now and we'll continue to work that through the end of the year. That I think provides additional opportunity. And as Chuck said, achieving the $6.5 billion, but with the operational excellence toolset and mind-set that we're rolling out to the entire company about constantly improving the business, and we've had a very successful deployment where we have our top 1,600 people engaged in running projects. I think you're going to see a continual cost efficiency improvement mind-set as a company. But I'm not ready to take it up further from the $6.5 billion now, but I think as we move forward you'll see us continue to increase that number or set a new target once $6.5 billion is achieved

That's very helpful. Thanks so much.

Our next question will come from the line of Adam Jonas with Morgan Stanley. Adam Michael Jonas - Morgan Stanley & Co. LLC: Hi. Just a couple of questions. First, so Tesla's been out with a car capable of OTA updates in firmware for about five years now. Now excluding Cruise, does GM currently sell any car capable of OTA updates of firmware? Mary?

So on the updates. We have done over-the-air updates primarily to the OnStar system. We are in the process of deploying a new electrical architecture which is a pretty comprehensive undertaking, and that's well underway and being deployed as well as a whole new generation of infotainment systems. So you'll see us have that capability as we move forward. Right now it's pretty much limited to updates from an OnStar basis Adam Michael Jonas - Morgan Stanley & Co. LLC: So any view on timing of when that new architecture could be out that could enable the, obvious, ability for your fleet to learn and revenue opportunities that are within? What side of 2020 could that be, do you think?

Before 2020. Adam Michael Jonas - Morgan Stanley & Co. LLC: Okay. Great.

Go ahead. Adam Michael Jonas - Morgan Stanley & Co. LLC: Thank you. So obviously, with the experience with OnStar and all the work you've been doing in mobility, you recognize that there's a huge opportunity to turn your car customers or your drivers into subscribers and to capture some revenue from the two or three billion miles a day that your fleet kind of conducts. But you don't get that. It's kind of a wasted opportunity right now. So, Mary, what's the plan for getting paid for the data opportunity? I'm curious. We hear from OEMs insurance, insurance, but like putting that aside. That's more obvious. Can you give us any example at all of a kind of revenue monetization you could do with the data?

Well, in our data monetization, I agree with you that the opportunity is there. I would say we are just in the initial steps of not only leveraging the data to provide more value to customers. You know, one of the assets that we have that will – is actually in touch right now so it will be leveraged shortly, is active health management of being able to assess different components in the vehicle and be able to alert customers ahead of time, schedule them for their vehicle to be fixed, unlock the door with OnStar. So really – and then fix the vehicle, lock it back up. That capability that is near-term that we have and will be deploying. So I think there is this segment around the data to how do you use data that we get from the vehicle and because we have the largest connected fleet to improve the customer experience and therefore pull people to our vehicles. And then the second piece, as you indicated, is more of a B2B opportunity. And I don't have any specific examples that I'm going to share right now but I can tell you we're actively working both internally and externally. We just hired a Chief Data Officer into the company, started this month and so there's quite a bit of work going on. You'll hear more as we go forward but I think we're seeing monetization through OnStar with different activities. And like you said, insurance is one but there's additional framework. We recently also launched OnStar Go with IBM and that creates a marketplace that's able to be customized for our specific passengers or consumers. So more to come on this, Adam, and I agree with you of the opportunity and we've got to seize it. Adam Michael Jonas - Morgan Stanley & Co. LLC: Okay. That's great. We look forward to meeting the Chief Data Officer. And one final one to squeeze in. There's been some talk about the Chinese government considering changing rules to allow foreign OEMs a chance to buy out 50% stake of the JVs if they don't already own. Mary is this a trap? I mean, what's the catch here? One could argue that the skills transferability into like auto 2.0 for right now from your partners, could be challenged, particularly with the uncertainty around the rulemaking from the government. I'm just curious how you view that. Is that something, if there was an opportunity to acquire, is that something – how do you feel about that opportunity? Or is it not an opportunity? Thanks.

Well, as I look at potential changes in the rules, we have a very strong partner with SAIC, been very productive and are working together and I think it's been demonstrated in our market performance, we do joint development. A big portion of the global emerging-market platform that work is being done in China. So we've integrated the PATAC Center. So as I look at regulatory changes or rule changes from a China perspective, this isn't one on the top of my list because I think we work together well and I think there's benefits to that. What I am looking for is to make sure that we have a level playing field and that we have rules that are aligned with the timing required to effectively implement from an automotive company perspective. When you look at some of the latest rulemaking around electrification, being implemented now and being rolled out now with implementation next winter, that's a pretty short timeline to effectively and efficiently meet those requirements. So that would be something I'd look for before I'd look for relaxing of the 50%. Adam Michael Jonas - Morgan Stanley & Co. LLC: Got it. Thank you, Mary.

Thanks, Adam.

Our next question will come from the line of David Tamberrino with Goldman Sachs. David Tamberrino - Goldman Sachs & Co.: Great. Thank you for taking our questions. Maybe we just come back to North America for a second. We think about your production cadence. It sounds like a lot of the downtime is going to be taken in the third quarter, but with the market a little bit softer year-over-year, do you see a need to raise your incentive levels in order to move your passenger cars in order to hit that 50 days of inventory by the end of the year? Do you expect a rebound in retail sales or demand for pass car in the back half?

Yes, I would say that we're going to remain disciplined from an incentive perspective as we go through the second half of the year. The first lever that I would pull, and this is Chuck Stevens speaking. The North American team will probably have their own perspectives but the first lever I would pull would be the production lever to ensure that we align supply and demand. We do not want to damage the brand. Clearly, there is a shift in passenger cars to crossovers but the compact segment is still a big segment here. And we still want to continue to improve the financial performance of those cars at whatever buy-in levels that we sell. And we want to reach kind of a natural demand so that we can get our manufacturing footprint, and logistics, and supplier footprints all aligned around that. So I would say we're going to pull the production lever. With that said, we will be competitive, but certainly wouldn't anticipate significant price moves or incentive moves from that perspective. David Tamberrino - Goldman Sachs & Co.: Got it. So embedded in that you are expecting somewhat of a pickup in passenger car demand in the back half of this year since we've seen a passenger car recession if you will, beginning what, a couple years ago?

Yes. I would say broadly speaking what we expect to see is better sales in the second half versus the first half, which is kind of the way the industry runs. Within that perhaps marginally better passenger car, but we're certainly not counting on a recovery. Obviously, our launch cadence is pretty critical from our perspective with all the new crossovers that we're launching, and that's going to help in the second half of the year. But we're not – we will take production out to align supply and demand on passenger cars wherever that demand lands. David Tamberrino - Goldman Sachs & Co.: Understood. Thank you, Chuck.

Yes. David Tamberrino - Goldman Sachs & Co.: And then just moving to your autonomous vehicles, I've got a couple of questions there. First, when you think about the breakdown of a fully autonomous vehicle, a lot of compute power needed, a lot of power draw. Where do you fall on the line of needing a pure battery-electric vehicle versus a plug-in hybrid approach? Second, when you think about the current sensor suite, specifically to LIDAR, do you believe that hardware is necessary? Or do you think you can operate your vehicles autonomously without a LIDAR? And then I'll have a third one and a follow-up for Super Cruise.

Clearly the – we believe that most efficient way to execute autonomous vehicles is with the pure EV, that's why we are using our Bolt EV platform. And we think it allows for more efficient integration to the vehicle. We do believe in a sensor suite that LIDAR is a part of its solution to have the right sensing to provide the right safety level. David Tamberrino - Goldman Sachs & Co.: Okay. And then the last one, thank you, Mary, is just on the miles needed for validation. I think the shareholder letter mentioned about 160,000 miles of validation for the Super Cruise currently. Is that enough? And how do you gauge that as being enough? And then if we extrapolate from there to fully-autonomous vehicle, what do you think is going to be necessary for validation in terms of miles for fully autonomous?

So, first on Super Cruise, recall that we actually held that technology till we did appropriate validation, the 160,000 miles that we talk about, I'll say, would be final validation. That was substantially more work done from the Super Cruise development, testing and validation for the company to feel that it met our requirements from a safety perspective to launch into the public. From an autonomous vehicle perspective, miles driven is certainly a factor, but it's not the only factor, because what is the quality of the miles driven? Right now, to our knowledge, we're the only one testing our autonomous vehicles in Downtown San Francisco, which is a pretty dense urban environment with a lot more, I'll say, opportunities to learn from different situations. So it's not just the miles traveled. It's the quality of those miles in the number of incidents that you're exposed to that the vehicle learns. And so although we don't have a very specific mile, there's quite a bit of work we're doing, even with agencies or groups outside of the company to put that together. As we move forward, we'll share, because as we understand it today with the NHTSA requirements for U.S., a big portion of the guidelines they put out is to demonstrate how you're measuring, and then share that as they look at authorizing, pulling the driver out of the vehicle. So there's quite a bit of work going on there. So I would say it's much more involved than just miles traveled. And that's what we're working on right now, and we'll share more as we go forward. David Tamberrino - Goldman Sachs & Co.: Understood. Appreciate the time. Thank you.

Sure.

Our next question will come from the line of John Murphy with Bank of America.

Good morning. Just a first relatively I think simple question, as we look at sort of the bottom line guidance, it hasn't really changed much, but you've put Europe on a discount basis. So that should be about a $400 million benefit. Is basically the pressure that you're seeing, or the deterioration in North America market just generally the offset? Or is that a oversimplification? And are there other factors that are at work here?

Yes. I think you're drawing the conclusion that we have fundamentally reduced our guidance, or used the European dynamic to offset other impacts. If you start at the top, and say on a continuing ops basis, we haven't changed our guidance on EBIT or margins, that would lead you to we haven't changed. And in fact, we've probably improved our guidance on EPS. It's in the range of $6 to $6.50 and still in the range of $6 to $6.50, but you guys can do the math and the impact of excluding Europe is probably depending on whose model you pick, $0.12 to $0.15 a share. We're still in that range, so we didn't change the guidance, but certainly if again, starting at EBIT and EBIT margins, we expect to be greater than or equal to 2016 results on a continuing ops basis.

Great. That's very helpful. And then a second question. If we think about the pressures in North America and if they continue, Chuck, are there any other levers other than sort of the structural items that you've outlined so far, maybe going to external measures and looking at your partners on the dealer and supplier base that are, in some cases, making a lot more money? Is there an opportunity to spread the pain through the value chain and work with your partners?

Well, we work with our partners across the value chain on a day-to-day basis. I think we get into a slowdown thing. The first thing is to take full advantage of driving as much efficiency as you can in the things that you control. And what we control directly, to a large extent, is our own cost base and our own fixed cost. And that's where, as you know, we have significant leverage, much more so than we did back in 2008 and 2009. And as we've talked about before, we believe there's $3 billion to $4 billion of cost efficiency that we could drive as we entered a downturn, assuming it was a 25% downturn. We work continuously with our suppliers. We've been strategically engaged with our suppliers over the last number of years. You look at the commercial and technical performance that we've been generating and as a big part of that $5 billion that we've generated to date, that's because of our relationship with the suppliers, much different than it used to be in the past. Work, bring their best ideas to the table, innovate. So I'm sure if we were in a challenging environment, we would work it with our suppliers. We worked with our dealers in 2008 and 2009. I'm sure we would continue to work with our dealers on a go-forward basis. One example of that is when we had the challenges back in 2014. We never lost any share. The dealers repaired millions of vehicles while taking care of customers, while continuing to help us achieve our business objectives, and that's a strong partnership. The other thing I would say is in a downturn and we don't talk about it a lot, customer care and aftersales is countercyclical and that will help us to keep our earnings robust and outperform going through the downturn, as well. So again, a number of levers to pull, a number of partnerships we'd certainly want to leverage as we go into it, and we leverage those today.

Great. And then just lastly on the crossover launches. I mean, was curious what kind of an opportunity you think there is directionally and maybe even in numbers on the pricing on these crossovers in the near term. And then in the long term, that is a segment that a lot of folks are obviously chasing. It looks like the nameplates based on our estimates are going to go up 40% the next year. So that segment does get a little bit more crowded. Do you think in the near term pricing opportunity and then the long term, is there risk that the competition erodes maybe some of these excess economic profits in the segment?

Yes, we expect that there's a pricing opportunity in the near term and clearly in the second half of the year. When you look at second half of 2017 versus second half of 2016, we think price is going to be a tailwind for us from a crossover launch perspective. But I'd also agree with you in the medium term that there's likely to be margin compression in the crossover segment, especially the small and compact. Mid-crossover, I think there's a few less competitors, but in the small and compact segments. And again, that's why we're so focused on driving cost efficiency and taking advantage of our scale from that perspective because we anticipate price erosion as we move through the lifecycle of these vehicles and margin compression, at least from a pricing perspective.

Okay. Just one last quick housekeeping. The lease levels in the U.S. in the quarter, what was that and what do you see for the industry?

In Q2, we were at 31%. The industry was about 30%. We're generally in line with where we were last year and in the first quarter, so we're running generally at industry levels. June, we came down to 29%, so on a downward trajectory. I think we're reasonably comfortable in the 25% to 30% range depending on the dynamics. So again, running at industry levels, been relatively consistent over the last number of quarters. Probably at the top end of where we want to be from a leasing perspective and we'll work to bring that down, especially as rates increase, then subvented financing has a tendency to pick up as well.

Great. Thank you very much.

Yes.

Our next question will come from the line of Emmanuel Rosner with Guggenheim.

Hi. Good morning, everybody.

Good morning.

Chuck, I wanted to come back to some of the early 2018 outlook factors for GMNA. And clearly the product launch cadence will be supportive and the engineering costs you expect them to keep coming down. How should we think about the volume piece of the equation for GMNA? Is the downtime for the continued changeover process, is it comparable to 2017 or could it be a longer downtime and we could see some volume pressure there?

Yes, I would say that early days, right? We're in July. We're certainly operating in an environment right now kind of month-to-month to see how the U.S. industry develops, but I would say all else being equal, we would expect to see more truck downtime next year versus this year. But by the same token, we will have incremental opportunities for compact and mid-crossovers next year because we've got significant downtime. But if I was providing an outlook right now, I would say probably production volume is going to be down in 2018 versus 2017 given the downtime. But I still, again, in July still would suggest that North America in a 17 million-ish SAAR environment is a 10%-plus EBIT margin company next year as well, absent some unexpected events.

That's extremely helpful. And then, Mary, you were mentioning on the autonomous side, the first opportunity will come in ridesharing. And over the past week, Lyft announced that it's starting its own autonomous driving research efforts. And what is the impact from that on your own autonomous strategy and then your partnership with Lyft?

I don't think it affects it. The partnership that we have with Lyft was never exclusive for either Lyft or for General Motors. We're quite far along in our autonomous vehicle development based on the fact that shortly we'll have 180 vehicles testing. I don't know if you've had a chance to see the different videos that we posted of the capability of our autonomous vehicles to date that grows frankly on a weekly basis. So we still think the opportunity to deploy in a ridesharing. And the reason for that is as you first have electric vehicles as the capability will go up in those vehicles from the speed at which they can travel, the different circumstances, tunnels, et cetera, that the vehicle is capable of learning. So integrating in a shared fleet – in a ridesharing fleet I think allows to get the best exposure for the vehicle to keep learning as we go forward, but I would say that's in the early stages of sub-deployment. So again, we have a good relationship with Lyft and we think that opportunity presents itself, but that's how we see it playing out right now, and again, understand their work that they're doing on their own as well.

Understood. Thank you very much.

Our final question for today will come from the line of Colin Langan with UBS.

Oh, great. Thanks for taking my question. Just a follow-up on Emmanuel's first question. I adjust forecasting and pretty significant double-digit decline and pick up next year. I mean from your tone, do you think that – any comment on that? Is that too bearish given what you're looking at now?

Help me with a little bit of context on that. I just was looking at a double-digit decline in production for full size pickups next year for General Motors.

Yes. Yes. Sorry. Yes.

Yes. Again, it's early days as we think about next year and I would say built in kind of the baseline plan at this point in time when we think about the incremental downtime next year, could we be off 10% production next year versus this year? Yes, that's a possibility, but I think it's just too early at this point in time because we always are looking at trying to optimize the timing and the amount of downtime that we have related to launch cadence. So surely we will provide more visibility around that as we close out the year and early next year. Again, I would just return to my earlier comment and similar to the comment I made for 2017, the North American business model is proving to be very resilient to some of the challenges that we're facing. We believe this year we will generate 10%-plus EBIT margins based on our first look at 2018 under a reasonably constructive macro environment. We believe that we'll continue to generate 10%-plus EBIT margins. There will be puts and takes. More visibility around that as we move through this year and get a better sense of where the market is heading.

And when we look at your target of getting inventory to around 70 days by year-end, is that all driven by the, I think you mentioned, 150,000 first half versus second half reduction in production or is there some assumption that market share, actually, picked up by the end of the year?

Well, I think it's a bit of both. Largely, the production, because just to give you the data points, last year we ended at 980,000 units of inventory. We want to be in the 800,000 to 825,000 at the end of this year. That would equate, based on our view of the industry, to somewhere in the ZIP Code of 70-day supply. So a significant portion, the majority is going to be production cuts but we also grow share generally in the second half the year because trucks, generally, you sell 60% of those in the second half of the year versus the first half of the year. So obviously, we expect to see – and by the way, with our launch cadence as well, we expect to see some sales performance but the vast majority of the reduction in inventory will be related to production cuts.

Thank you. I'd now like to turn the call over to Mary Barra for her closing comments.

I want to thank everybody for joining us today. We believe the strong results we reported today reflect on our ongoing work to transform GM into a more focused and disciplined company. This team has demonstrated quarter after quarter that it has the right mindset to capitalize on opportunities, make the hard decisions, overcome headwinds, and meet our commitments all with integrity. We're going to continue to take bold and decisive actions to execute our strategic plan and that's in the core business or Auto 1.0 where we're working to make sure we have the right product portfolio as we move forward, as well as the very, very efficient business on all aspects. And then from a future of personal ability, or Auto 2.0, we are taking very deliberate steps and working, I'd say, quite aggressively to make sure that we leverage all the assets we bring to this equation. We believe we can translate that into significant shareholder value and that's what we're focused on doing. So again, thanks for participating.

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