General Motors' CEO Discusses Q1 2013 Results - Earnings Call Transcript

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General Motors Company (GM)

Q1 2013 Earnings Call

May 2, 2013 10:00 am ET

Executives

Randy Arickx – Executive Director-Communications and Investor Relations

Daniel F. Akerson – Chairman and Chief Executive Officer

Daniel Ammann – Senior Vice President and Chief Financial Officer

Chuck Stevens – Chief Financial Officer-North America

Analysts

Rod Lache – Deutsch Bank

Adam Jonas – Morgan Stanley

Christopher Ceraso – Credit Suisse

Patrick Archambault – Goldman Sachs

Colin Langan – UBS

John Murphy – Bank of America Merrill Lynch

Brian Johnson – Barclays Capital

Ryan Brinkman – JPMorgan

Joseph R. Spak – RBC Capital Markets LLC

Itay Michaeli – Citigroup Global Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company First Quarter 2013 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, May 2, 2013.

I would now like to turn the conference over to Randy Arickx, Executive Director of Communications and Investor Relations. Please go ahead, sir.

Randy Arickx

Thanks, operator, good morning, and thank you for joining us, as we review the GM financial results for the first quarter of 2013.

A press release was issued earlier this morning and the conference call materials are available on the Investor Relations website. We are also broadcasting this call via the Internet. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set.

The content of our call will be governed by this language. This morning, Dan Akerson, General Motors Chairman and CEO will provide opening remarks followed by a review of the financial results of Dan Ammann, Senior Vice President and CFO.

Dan Akerson will then conclude the remarks portion of our call with some brief closing comments. After the presentation portion of the call, we’ll open the lines for questions from the analyst community. In the room today we also have Tom Timko, Vice President, Controller and Chief Accounting Officer; Chuck Stevens, CFO of North America; and Jim Davlin, Vice President, Finance and Treasurer.

With that, I’d like to turn the call over to Dan Akerson.

Daniel F. Akerson

Thank you, Randy, and thank you all for joining us. As we do every quarter, I’ll review some highlights and then Dan Ammann will take you through a more detailed presentation on our results.

Before I do that, I want to let you know that the segment reporting we are showing today reflects the successful implementation of what we call country of sale financial reporting. What this means is from now on, our automotive segment revenue and profits will be reported in the geographical regions where the vehicles are sold.

This new approach will give us improved visibility into our profit and revenue across the individual markets and product lines which in turn will help us optimize capital allocation and drive improved results. As we will walk through the numbers, you’ll see that what we are providing you with an apples-to-apples set of comparisons to prior periods using this new approach.

Let’s turn to Slide 2, which summarizes our performance. Despite the mix of red and green arrows, this was a solid quarter for GM, and we are much more of a formidable competitor now than we have been in more than a generation. We are very much on plan financially as well despite the competitive landscape, the volatility that we have seen in several currency markets, and Europe’s ongoing challenges.

I won’t read the entire slide, but I would like to draw your attention to a few key points. First, we increased our global market share to a 11.4%, which is up 0.02 year-over-year. The gains were concerted in North America, Europe, and international operations. And what you are seeing is the result of several new successful product launches.

In addition, we are reporting EBIT-adjusted of $1.8 billion, which is down $400 million compared to a year ago. When you look at the regional detail, you can see that Europe actually improved its EBIT-adjusted results year-over-year. North and South America was down slightly and both GMIO and GM Financial were essentially flat.

Market conditions at GMIO outside China continued to be challenging. You can also see on the slide that our adjusted automotive free cash flow was down quite a bit year-over-year, which Dan will cover in more detail. As we will explain, we are impacted by lower cash earnings in the adverse timing of various items, which you expect to reverse in the balance of this year.

Now, let’s turn to Slide 3, which is a summary of other first quarter highlights. Let’s begin by recognizing GM Financial. GM Financial already helps us meet the financing needs of customers and dealers in strategic and underserved markets in North America, all with very good risk adjusted returns and a smaller balance sheet than other captive automotive finance companies.

As we look at our global growth strategy, we saw significant opportunity for them to help us with cars profitably around the world as well. That’s what drove us towards the acquisition of Ally International Operations. We recently completed this acquisition in a majority of markets and we expect to close the remainder in a timely fashion.

Going forward, GM Financial will be able to provide financing in markets that represent roughly 80% of our sales volume. Of course, our customers are the final arbiters of success and our momentum is building with each new launch.

In China, GM and its joint ventures had a record first quarter sales and March was the second best month ever. We also began domestic production of the Cadillac XTS in February, which marks the start of our drive targeted to triple Cadillac annual sale in China to 100,000 units by the end of 2015.

In the United States, meanwhile, Cadillac’s 38% year-over-year increase in the first quarter was the largest of any volume brand and Buick’s 28% increase was number two. The driving force at both brands is great new products like the Cadillac ATS and Buick Encore, which are both in segments where we didn’t compete here before.

Another success story is developing in the United Kingdom, where Vauxhall grew in its quarter sales by 19% a year ago. The entire UK market was up less than half that amount. Strong early sales of Opel Mokka and the Opel ADAM also helped to drive these results, and both vehicles are off to a strong start in the rest of Europe as well. In fact, we now have more than 100,000 Mokka orders and more than 30,000 ADAM orders on the books.

Finally in Brazil, the new all-new Chevrolet Onix helped Chevrolet deliver a 3.2% first quarter sales increase almost more than double the market. Progress in Brazil helped to offset challenges in Venezuela due to geopolitical situation.

As we move forward, we are going to keep the pressure on. In China, our 2013 capacity is about 20% higher than last year. And we are introducing redesigns of the Buick Excelle and the Cadillac SRX. Our strength in China offsets weaknesses in our other GMIO consolidated operations.

On the other side of the world, the production of the all-new Chevrolet Impala has begun at our Oshawa, Ontario plant. This car has designed to shift to our sales mix from roughly 70% fleet to 70% retail over time. At Cadillac, we unveiled our new CTS at the New York Auto Show to rave reviews. And we also unveiled redesigns of the Buick LaCrosse and Regal.

These new cars will give Buick an essentially all new U.S. showroom by the end of this summer. Perhaps and most important product news was the announcement of the Chevrolet Silverado 1500, we’ll launch with carryover pricing and D8 fuel economy that’s one MPG better than Ford EcoBoost D6.

Together the Sierra and Silverado are winning combination that should drive our average transaction prices through a combination of improved series mix and option penetration along with lower incentives.

The Coupe have models are in production and we’ll bring other light-duty models on line later this summer. Finally, we submitted our global leadership in connected vehicles in February when we announced the automotive industries largest deployment of 4G LTE mobile broadband. We are going to rollout 4G LTE across all GM brands and regions starting in 2014 in the United States and Canada.

What makes our approach so innovative is we will offer built-in connectivity, in other words you will not need a tablet or smartphone to access 4G LTE in a GM product. There are many more examples of GM’s progress that I could say, but I think the message is clear. We are a very healthy company that’s getting stronger each quarter and in the product arena we’re playing offense in competing to win.

Now in the interest of time, I’m going to turn the call over to Dan Ammann, who will review our quarter in detail after that I will return to some closing comments. Thanks.

Daniel Ammann

Thanks, Dan. Slide 4 provides a summary of our first quarter GAAP and non-GAAP results. Net revenue for the period was $36.9 billion. The decline from the prior year was partially due to $400 million in unfavorable foreign exchange translation. In addition, while our deliveries to end customers were higher, our wholesales, which drive revenue, were down. Our GAAP operating income was unchanged at $1 billion. Net income to common stockholders declined $100 million to $900 million and our fully diluted earnings per share came in at $0.58.

Our automotive net cash from operating activities was $500 million, a $1.8 billion decreased from the same period in 2012. For our non-GAAP measures, EBIT adjusted was $1.8 billion in the first quarter and EBIT adjusted margin was 4.8%. Our adjusted automotive free cash flow was negative $1.3 billion for the quarter. The decline from 2012 due to lower earnings and timing related items we’ll discuss later in the presentation.

Slide 5 identifies special items of the first quarter that had an impact on our earnings per share. At the top of the slide, our net income to common stockholders was $900 million and our fully diluted earnings per share was $0.58. As we advised in our 2012 calendar year earnings announcement, we had a $200 million impact from the devaluation of the Venezuelan Bolivar in the first quarter. This charge plus the net effective few smaller items had a (inaudible) unfavorable impact on earnings per share.

On slide 6, we remind you of our consolidated EBIT adjusted for the last five quarters. At the bottom of the slide, we list the revenue and margins for the same periods. Our operating income margin for the first quarter of 2013 was 2.6%, which was equal to the same quarter in the prior year. Our EBIT adjusted margin decreased 1 percentage point to 4.8%. We next display the recent history as our consolidated wholesale vehicle sales, which were 1.6 million vehicles in the first quarter slightly lower than the prior year. We’ll discuss our new disclosure of this volumetric momentarily. Our global market share increased 0.2 percentage points to 11.4% for the first quarter.

On slide seven, we provide an explanation of the $400 million decrease in year-over-year consolidated EBIT adjusted. We are in $2.2 billion in the first quarter of 2012. Volume was $200 million unfavorable primarily due to lower wholesale volumes in North America and Europe. Mix was $100 million unfavorable. Price was $200 million unfavorable in GMNA and total cost was $300 million favorable due to lower expenses in Europe. Other was $300 million unfavorable due to foreign exchange.

On the next slide, slide eight, we discussed our transition to country of sale reporting that Dan previously mentioned. Beginning with this quarter’s earnings announcement, we will now report revenue and profitability in the automotive segment, in which we sell our vehicles to our outside customers. Previously, our segment results included the impact of inter-segment sales and profits. This new approach improves the profit and revenue visibility across our markets, which will be helpful for managerial purposes.

Chevrolet Europe financial result will continue to be recorded within the IO segment to be consistent with how we manage the business. This new approach of reporting automotive segment financial performance does not affect our consolidated results.

We will also now report wholesale vehicle sales volumes instead of regional production volumes. This change fully aligns our disclosed with that new country of sale reporting.

Slide nine gives a summary of 2012 calendar year revenue and EBIT adjusted on a previously reported and on a country of sale basis. Please note that under our revised methodology will generally no longer have revenue recorded in our corporate and eliminations as the segment results reflect only sales to outside customers.

Slide ten gives a similar comparison of the two methodologies for the first quarter of 2012. The country of sale results for the other quarters of the previous year will be displayed on our upcoming segment charts.

Slide 11, gives our year-over-year EBIT adjusted performance by segment on a country of sale basis. North America was down $200 million to 1.4 billion. Europe improved to a $200 million loss. The performance in IO was flat at $500 million and South America reported a break-even performance, down $200 million for the same period in 2012.

GM Financial continued to deliver solid profitability with $200 million in earnings before taxes and our corporate sector was a $100 million expense for a total of $1.8 billion EBIT adjusted for the quarter.

We now move on to our segment results with the key performance indicators for GM North America on Slide 12. For the first quarter of 2013, our total U.S. market share was 17.7%. Our retail incentive levels on an absolute basis are higher from the prior year period.

On a percentage of ATP basis, our incentives for the good quarter were 111%. This puts us at a 116% of industry average levels for the first quarter of 2013. The increase from the prior year is largely due to increased incentives on full-size trucks as we manage to transition to our all-new Chevy Silverado and GMC Sierra.

Turning to Slide 13, we showed North America’s EBIT adjusted for the most recent five quarters. At the bottom of the slide, revenue was $23 billion, down $200 million from the same quarter in 2012. EBIT adjusted margin was 6.2% for the first quarter, down 0.9 percentage points from the prior year. Our U.S. dealer inventory was 744,000 units at the end of the first quarter. The increase from the prior year was primarily due to our recently launched vehicles in new segments. GMNA's wholesale vehicle sales were 829,000 units for the quarter and 19,000 unit decrease from the prior year due to production downtime we’ve taken to prepare for upcoming launches.

North American market share came in at 17.1%, which was an improvement from both last year and the prior quarter. On slide 14, we provide the explanation of the $200 million year-over-year decline in North America’s EBIT adjusted. EBIT adjusted was $1.6 billion for the first quarter of 2012. Volume was $200 million unfavorable due to the lower wholesale vehicle sales. Mix was $100 million favorable due to our recent launches of the Cadillac ATS and XTS.

Price was $200 million unfavorable due primarily to higher incentives as we manage our full-size truck transition. Cost had no net impact as $100 million in reduced pension income was offset with $100 million in decrease material and freight costs. This adds to EBIT adjusted of $1.4 billion.

On slide 15, GME reported an EBIT adjusted loss of $200 million for the first quarter, a $100 million improvement from the prior year. Revenue was $4.8 billion through the quarter, down from $5.3 billion in the prior year period. EBIT adjusted margin in the segment was negative 3.6%. GME’s wholesale vehicle sales for the quarter were 249,000 units, 17,000 less than the first quarter of 2012. Our European market share in the first quarter was 8.3%, a small increase from the prior year.

On slide 16, we provide the major components of GME’s $100 million year-over-year improvement and EBIT adjusted. Despite the lower number of wholesale vehicle volumes, volume rounded to zero impact. Mix was $100 million unfavorable due to continued vehicle downsizing and unfavorable country mix. There was no impact from price although we continued to see competitive pressures in the European market. Cost was $300 million favorable due to $100 million in lower depreciation and $200 million of savings between engineering expense and other fixed costs. Other was a $100 million unfavorable due to foreign exchange, primarily the weakness of the British pound. This totals to Europe’s EBIT adjusted loss of $200 million for the first quarter of 2013.

We now move onto GMIO’s profitability for the prior five quarters on slide 17. On the first quarter of 2013, EBIT adjusted was $500 million including equity income from our joint ventures, approximately equal to our performance from a year ago has strengthen our China JVs, offset weakness in consolidated operations. At the bottom of the slide, GMIO’s revenue from our consolidated operations was $4.8 billion, the $200 million decline from first quarter 2012 is partially due to $100 million in unfavorable foreign exchange translation.

GMIO’s EBIT adjusted margin from consolidated operations was a negative 1.4% down 3.7% percentage points from the prior year. This is due to pricing pressure in Australia related to the (inaudible), the 12% industry decline in India as well as unfavorable mix in volume in the Middle East.

We expect some of these factors to continue to pressure the performance of our IO consolidated operations in coming quarters. Our net income margin from our China JVs was 11.7%, a 1.5 percentage point increase from the prior year.

GMIO’s wholesale vehicle sales were 243,000 for consolidated operations and 841,000 for our China JVs. Our market share in the region was 9.6%, a 0.2 percentage point improvement from last year. Our market share in the China market remained a very strong 15.2% for the first quarter.

Turning to slide 18, we provide the major components of GMIO’s year-over-year performance. Volume had no net impact and mix was $100 million unfavorable due primarily to unfavorable country mix. Price was zero because we’re able to offset pressure in some markets with increases in Korea. Costs also had no impact as lower material and freight costs offset an increase in depreciation and amortization. To change due to other made at the zero is the $100 million increase in equity income was offset by unfavorable FX in our consolidated operations.

On slide 19, we look at South America’s EBIT adjusted for the last five quarters. The bottom of the slide revenue was $3.7 billion in the first quarter to $200 million decrease in 2012, which is more than explained by unfavorable foreign exchange translation.

The EBIT adjusted margin in the segment was a negative 1%. GMSA’s wholesale vehicle sales were 233,000 units, 4,000 less than the first quarter of 2012. South America market share was 17.2% in the quarter, a 1.1 percentage point decline from the prior year. Although as Dan mentioned our market share in our core market of Brazil was favorable year-over-year.

On slide 20 if we look at the components of the $200 million decline in profitability in our South America segment. The impact due to volume was zero as reductions in wholesale vehicle sales in Venezuela, Columbia, and Argentina set by gains in Brazil.

Mix was zero was an unfavorable country mix was offset by favorable product mix driven by our new vehicle launches. Price was a 100 million favorable as we took action in Argentina and Venezuela to partially offset inflation in those markets.

Cost had no impact in other words 200 million unfavorable due to a 100 million unfavorable foreign exchange in Brazil and Argentina in the absence of the gain from our 2012 acquisition. This total was our break-even performance for South American in the first quarter.

Slide 21 provides our walk of adjusted automotive free cash flow for the first quarter. After adjusting for non-controlling interest, preferred dividends, and undistributed earnings allocated to Series B and deducting GM Financial, automotive income was $1.1 billion for the quarter.

We had $200 million in non-cash special items and our depreciation and amortization was $1.4 billion expense. Working capital was $1 billion use of cash, reflecting typical working capital seasonal trends. the $300 million decline in this category year-over-year is primarily a function of timing impacts of lower production in North America.

Pension and OPEB cash payments exceeded expenses by $300 million in the quarter. Other was an $800 million use of cash, the $700 million change from the prior year due to fewer vehicles and service for their rental car customers and the timing of cash payments related to prior quarter incentive accruals. This total is down to automotive net cash provided by operating activities of $500 million.

We had $1.9 billion of capital expenditures in the quarter and $100 million true-up contribution related to our 2012 salaried pension annuitization deal for a total adjusted automotive free cash flow of negative $1.3 billion.

On slide 22, we provide a summary of our key automotive balance sheet items. We finished the first quarter with $24.3 billion in cash and current marketable securities and $11 billion in available credit facilities, the total available liquidity of $35.3 billion. A book value of debt was $5.2 billion and the book value of our Series A preferred stock remained at $5.5 billion. Our U.S. qualified pension plans are now underfunded by $13 billion and our non-U.S. pensions are underfunded by $13.3 billion. or unfunded OPEB liability was $7.7 billion at the end of the first quarter.

Slide 23 provides a summary of our order financing activities. GM Financial reported their results this morning and will be holding an earnings conference call at noon. Our U.S. sub-prime penetration in the first quarter came in at 7.7%, modest decline from the prior year and closer to the industry penetration. Our U.S. lease penetration increased 8 percentage points to 20.6% in Q1 as we took advantage of our higher residual rates and new Cadillac launches to significantly close the gap to competitive leasing levels. Lease penetration in Canada was at 9.6%, up 0.7 percentage points from the prior year. GM new vehicles as a percentage of GM Financial originations were as to 51% and GM Financial’s percentage of GM’s U.S. consumer sub-prime financing and leasing was 26% in the quarter. GM Financial’s annualized net credit losses remained low at 2.6% and earnings before tax was a $180 million for the first quarter similar to last year.

On slide 24, we’re updating our estimate of the company’s full-year effective tax rate to be closer to the high 30s in percentage terms. Please note we calculate the effective tax rate on an income before taxes and before equity income basis and also exclude the impact of special items. Our effective tax rate was 35% for the first quarter of 2013 and 12% for the prior year period. The rate for the entire 2012 calendar year was 15%.

Now, I’ll turn it back to Dan for his closing remarks.

Daniel F. Akerson

Thanks, Dan. We covered a lot of ground this morning. But I hope you can see that we are systematically and successfully implementing our plan to grow profitably around the world. There’s a new vitality here at GM and is represented in all of our brands. We’re aggressively addressing the issues that have held us back. We’ve maintained our fortress balance sheet and improved our financial flexibility and our new products are connecting with customers.

With that, I’ll turn it back to you, Randy.

Randy Arickx

Okay, thanks, Dan. Operator, we’re ready to start the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) Our first question comes from the line of Rod Lache with Deutsch Bank. Please go ahead.

Rod Lache – Deutsch Bank

Good morning, everybody. Can you hear me?

Daniel F. Akerson

Yes. Good morning, Rod.

Rod Lache – Deutsch Bank

Couple of things; one is, I was hoping you can talk about Europe a little bit and costs savings in Detroit. You suggested that you’d have about $600 million of lower depreciations that maybe half of the $300 million cost reduction that you had this quarter, but you also indicated about $300 million of other restructuring savings. It looks like in this quarter at least it was maybe twice that. So any thoughts on the outlook for cost and also related to Europe just any additional color on how you expect the year to play out as the inventory correction behind you and so forth?

Daniel F. Akerson

Right. So starting at the end there, we came into the year with the company inventory in pretty good shape, but a little bit heavy on the dealer inventory side, so we have worked through a good chunk of that in Q1 here. And in terms of the more general trends in the business, I guess what I would say is that, we are very much on plan with the actions and objections that we’ve laid out back in our third quarter call last year, both in terms of what we’re trying to do on the top line, as well as on the bottom line.

The cost performance in Q1 was quite strong. I would say that there are some timing items that came into Q1 that amplify the cost savings that you are seeing and, we’ll see some normalization as we will through the year. But everything that we talked about in terms of our objectives on the cost side and on the product side, we are achieving obviously, that’s what we control the things, we don’t control over the overall market environment and the overall industry there and that remains quite challenging.

Rod Lache – Deutsch Bank

Okay. And just secondly, if you can talk a little bit about the China JVs, obviously, are showing some pretty good profitability at this point and you talked about some very aggressive growth and spending plans over the course of the quarter. Does that – the mix of those two – how does that kind of play out vis-à-vis dividends? Are you able to sustain the historical policy of dividending the prior year’s earnings or will the capital spending acceleration have any impact on that?

Daniel F. Akerson

I’d say, as a general matter, we’ll be add-on year the prior year’s earnings going forward. So, no fundamental change to that at this point.

Rod Lache – Deutsch Bank

Okay. And just one last thing, you’re still expecting improvement in South America for the full-year?

Daniel F. Akerson

Yeah, the first quarter – the story there was really a function of Venezuela and everything that’s been going on there. Venezuela is, I think you know, is a profitable market for us and others. We had very little production in Venezuela in Q1 due to geopolitical obstacles, if you like, so that impacted the Q1 results. We see a path to get that back on track. And importantly, the business in Brazil, which is really the biggest market there, obviously, has performed well and is picking up a fair amount of the [slide] there. So bottom line, we expect to build, as we’ve said before, build on last year’s progress for the region for the year.

Rod Lache – Deutsch Bank

Great, thank you.

Operator

Our next question comes from the line of Adam Jonas with Morgan Stanley. Please go ahead.

Adam Jonas – Morgan Stanley

Hey, thanks, everyone. So you’re calling out that your Chinese capacity should be up 20% year-on-year. I was wondering if you could give us a similar figure of how much your capacity will be up in North America year-on-year and how much it will be down in Europe year-on-year?

Chuck Stevens

Yeah, hey, Adam.

Adam Jonas – Morgan Stanley

Hey, Chuck.

Chuck Stevens

From a North American perspective, I guess the biggest driver on any capacity change year-over-year would be what’s happening with the truck plants. And as we talked about before, that’s going to be relatively flat. So I don’t see a significant change in capacity. As a matter of fact, if you look at Q1 with some of the downtime that we had in Arlington, our capacity utilization was a bit below 100%. So I don’t see a fundamental shift in our overall capacity as we go through this year.

Daniel F. Akerson

And I’d say on Europe, I mean, obviously, the main action in terms of installed capacity there will come at the end of next year with Bochum. It’s the moment we’re optimizing shifts and so on to keep demand capacity as opposed to the installed capacity optimized for the volumes that we see, so and you have no fundamental change there even.

Adam Jonas – Morgan Stanley

Okay. And if I can follow-up with a question about the Japanese yen, the topic came up yesterday in the sales call a little bit, kind of seeing some initial signs of some aggression towards a discounting and price reduction, I believe Dan Akerson, you are on the tape earlier today also pointing out that’s an issue, maybe it was you Dan Ammann. Can you give a sense of how much your market share may have benefitted over the past few years as the yen has been so strong and perhaps how much of a headwind this could be as the Japanese either improved their products with a value proposition?

Daniel Ammann

I’d say, it’s really hard to go back and try to – we are sort of going through the exercise. But it’s hard to go back and define exactly how much market share movement is attributable to what. So I mean, the way we look at it is, we compete in the marketplace every month. Month-in and months-out, we obviously keep an eye. We have our strategies. We have our vehicle portfolio. We have our launch activity. We have all the things we’re doing.

We keep a close eye on the competitive dynamics whether it’s currency-driven or something else driven and adjust course as we need to on a month-to-month basis at least at the tactical level. So, we’ll keep an eye on what people are doing here, the market share dynamics through the first four months of the year. I mean, you’ve clearly seen them as we have, which has been favorable to us and to some of our domestic competitors, we’ll see how people react to how it played out. So it’s just too soon to make a call really.

Daniel F. Akerson

Adam, this Dan Akerson. I think it varies by market, for example, in the U.S., where some of our Japanese competitors are manufacturing a lot of product here in North America and then their supply chain will be to some extent and it will vary by competitor sourced in North America. And where you see and where I’m particularly vigilant is where does it – how does it impact us into lesser developed countries, emerging market countries where both U.S. and Japanese competitors are exporting into out of a base, it might be in Japan or might be in Korea or China or wherever. So, as Dan said, it’s hard to isolate this and give it a broad brush, it’s very specific to by country, by region.

Adam Jonas – Morgan Stanley

Thanks, Dan. And just a one quick housekeeping follow-up with your change of your reporting structure of revenues where vehicles are sold rather than produced. Can you confirm where are you now, recognize royalties from the China JVs, the imported cars in into China and spare parts into China. Can you tell us are those then accounted for outside the China JVs in the regions or they – has that been moving around? Thank you.

Daniel Ammann

There’s no real change between what’s in the China net income or China equity income line versus what’s on the balance of the business, royalties are part of the overall engineering expense that are allocated around the segments based on revenues and so on. But there is no change between China and the rest of the company.

Adam Jonas – Morgan Stanley

And spare parts also in the regions as well.

Daniel F. Akerson

Same story.

Adam Jonas – Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Christopher Ceraso – Credit Suisse

Thank you. Good morning. I wanted to talk a little bit about price in North America. It was a headwind in Q1, but you mentioned as the new trucks ramp up, you should get some improvement in ATP. At what point do you think we will see price flip to a tailwind in North America?

Chuck Stevens

Yeah, as we talked about back in January and most recently March, as we think about 2013, we expect price on carryover products to be a headwind primarily related to the transition on truck. So I would expect that headwind and carryover products to continue through the sell-down period in Q2. But as we start to come up with new products like the Impala, the K2 which were launched and just started production earlier this year, we started to see some offset with pricing on new products. And I would expect to see some of that rolling in, in Q2, but really be more second half weighted.

Christopher Ceraso – Credit Suisse

Okay. And then I guess kind of a related question if I understood your discussion about the cash flow correctly that 800 million of other that was a negative with cash going out the door for incentives where you had accrued previously, so it wasn’t in the P&L. Are we going to see that effect happen in subsequent quarters as you move trucks off the lot that have these heavier incentives on them, and the cash goes even though they’ve already been accrued?

Chuck Stevens

Yeah, I would say that the cash flow cadence, some of the 800 million was attributable to what you described. I would say the cash flow cadence is going to be a little bit back and forth more than usual as we move through this year because of the unusual production cadence. If you look at the Q4 to Q1 to Q2 production cadence, usually it’s up and then up again and this year we had a different production cadence on that. So that moves payables around and moves receivables around and moves incentive accruals and cash amounts around, so there’s fair bid going on in terms of cash flow timing.

Christopher Ceraso – Credit Suisse

Okay. I am sorry. Can you run through that again? What is the timing that you expect and how does it differ from your typical seasonality?

Unidentified Company Representative

Well, typically Q1 is our seasonally weakest quarter for cash flow. That remains the case this year. In fact, it’s exacerbated this year due to some of the production cadence timing. Obviously, we had lower earnings in the quarter, so it translates straight through the cash flow. The biggest chunk of the impact relates to some of these timing items, which will reverse during the course of the year.

Christopher Ceraso – Credit Suisse

Okay, and then just one last item on Europe, I think you mentioned that you drew down inventory, does that mean you’re going to be building some in the future, which helps earnings in subsequent quarters relative to Q1 or now you feel like you are at a more comfortable level?

Unidentified Company Representative

I think we are about where we would like to be, and again, obviously it’s a function of what the market does over the coming quarters.

Christopher Ceraso – Credit Suisse

Okay. Thank you

Unidentified Company Representative

Okay.

Operator

Our next question comes from the line of Patrick Archambault with Goldman Sachs. Please proceed with your question.

Patrick Archambault – Goldman Sachs

Yeah, thanks, good morning. A couple of quick ones, first on North America capacity, just taking a multiple year view, I think on a straight time basis [IHS] has, you had about 80% and I understand that not everybody looks at it on a straight time basis, but starting with that, how are you thinking about the capacity needs as you get to peak volumes? You know it sounds like you’re not looking at too much in the way of new facilities, but how should we think about that impact on incremental margins as you roll out third shifts over time that sort of thing, taking sort of a multi-year view?

Daniel F. Akerson

Yeah, perhaps I adjust this capacity utilization was on a three shift basis. Right now on a two shift basis, we’re running at about 100%. As we go forward and think about industry in the U.S. at $16.5 million, $17 million, we would expect to build and meet that by increasing the number of our facilities on three shifts today. We have eight or about 50% of our facilities on three shifts. Obviously, we have the capability to take that up. Our expectations would be to be running at a 120% to 130% utilization rate going forward as measured on kind of a two shift basis or closer to a 100% on a three shift basis. Obviously that has a significant impact on sending fixed cost if you can run your facilities on three shifts versus two shifts. I am not going to provide an estimate on that on a go forward basis, but that would be clearly what we want to do to get more fixed cost utilization going forward.

Patrick Archambault – Goldman Sachs

Okay. And then it sounds like there’s a lot of variable cost that has to come into the system, obviously, if you are increasing the shifts, but it would be dwarfed by the efficiencies on the fixed side, is that kind of the right way to think about it?

Daniel F. Akerson

Absolutely.

Patrick Archambault – Goldman Sachs

Okay. And the one follow-up if I can, just really quickly, on Europe, the pricing, which was flat year-on-year, I mean, can you just give us a little bit more on that? Is that sort of an indication that things maybe stabilizing at, albeit, fairly low pricing levels in the region or is there product and other things in there that are helping that?

Daniel F. Akerson

Certainly, there is product in there that’s helping that for us, the pricing environment remains quite competitive as you would expect given the situation there. We’re product line by product line, market by market to optimize pricing, taking price where we can giving it up where we need to in order to optimize. We have much better visibility and much better tools frankly to manage some of that now than we had previously and that’s allowing us to further optimize where we are.

Patrick Archambault – Goldman Sachs

Okay, great. Thank you very much.

Operator

Our next question comes from the line Colin Langan with UBS. Please go ahead.

Colin Langan – UBS

Great, thanks for taking my questions. I was just wondering when you show the walk for North America costs were flat year-over-year, but you do have the K2XX rolling out. Why is that cost, even I would have thought that had been given the size of the launch and should we think of that maybe being a headwind from a cost as we go in to Q2 and Q3. (Inaudible) maybe how that launch cost played out through the year.

Daniel F. Akerson

Yeah, let’s start by talking about the calendar year again consistent with what we talked about back in January. We expect year-over-year fixed costs to be up primarily because of incremental D&A, incremental marketing, some pension income headwinds, and some manufacturing costs per-production and startup. I would expect most of that to roll through in Q2 and Q3 as we really start to ramp up the K2XX and the plants to the rest of the year and start the marketing activities.

Specific to Q1, we had as Dan mentioned earlier a $100 million headwind related to pension income. We also had a $100 million headwind from a fixed cost standpoint on manufacturing, primarily related to the downtime in Arlington, those were offset by favorable performance in variable cost, a $100 million in material and freight, and on around a $100 million in warranty related costs as the quality and base vehicle Monte gets better for us. So good performance on variable cost, we still have fixed cost headwinds as we expected and I would expect the fixed cost headwinds to increase as we go through Q2 and Q3 and hit the real launch cadence.

Colin Langan – UBS

Okay. Thanks for that color. I was looking at your upcoming, I guess, was that an optimism to annualize the Q1 results? How should we think about the Cadence, I think you touched on this before, but I think you mentioned that you expect your losses to be reduced by a third to a half, is this still the right range to be thinking about or do you think you maybe doing a little bit better given how Q1 came in?

Unidentified Company Representative

As I said I think earlier the – we laid out a plan in Q3, we gave some perspective back in January for the year. What we’re seeing in the first quarter is on plan and consistent with the execution of those objectives, but in terms of the top line and the bottom line, as I mentioned earlier, cost performance was a little stronger attributable partially due to some timing benefits that came into the first quarter. So I’d say we are on track relative to the objectives that we’ve previously laid out. But this is the first quarter into the year and there are huge uncertainties obviously in relation to the European macro-economic environment and how that’s going to unfold. So where we end up will be function of the things we do control, which we feel quite good about and a function of things that we don’t control, which are quite uncertain.

Colin Langan – UBS

Okay. And just two last quick questions, where will be – part of [LA] has closed, I mean what is the – any estimate of the impact that should have and the timing of, obviously, that impact. And also in terms of the tax rate, I mean, it seems to be in the high 30s for this year based on your guidance. Is that normal or should we think when we go past this year it comes back down again, I think, mid 30s and above?

Daniel Ammann

(Inaudible) the results will roll in consistent with the closing so we closed the biggest chuck of this back on April 1 so that will come into the second quarter results. The overall outlook and run rate that we’ve talked about previously still holds in relation to that. On the tax rate, we gave the perspective for this year, obviously, we’ll see as we move through the year how that involves and how that rolls into next year. But I’d point out importantly our cash tax rate is unchanged from – essentially unchanged from last year or continued to be in that 10 percentage range from a cash tax point of view notwithstanding the fact that the accounting GAAP tax rate will be in the upper 30s.

Colin Langan – UBS

Okay. Thank you for your help.

Operator

Our next question comes from the line of John Murphy with Bank of America Merrill Lynch. Please proceed with your question.

John Murphy – Bank of America Merrill Lynch

Good morning, guys.

Daniel F. Akerson

Good morning.

John Murphy – Bank of America Merrill Lynch

Just a first question on the change in the reporting, presumably this isn’t just an accounting exercise, I am just trying to understand as you shift the country of sales methodology here, what the shift internally as far as accountability and targets of your organization and really sort of what does mean for us measuring performance internally and driving the business.

Daniel F. Akerson

Well, the main reason we’re doing this is for internal managerial purposes. I mean, as you’ve seen and what we’d laid out to you this morning that the external at the segment level that the changes aren’t that dramatic between the previous approach and this approach. When you get below to the country level and to the product line level, we now have dramatically improved visibility by market, by product line from a profitability point of view and that will allow us to get much more focused on decisions ranging all the way from capital allocation to sales accountability, profitability, accountability. So this is a much greater and more significant internal impact than it is externally and we’re seeing significant benefits from the improved visibility already on an internal basis.

John Murphy – Bank of America Merrill Lynch

That’s helpful.

Daniel F. Akerson

I would say if you go back a couple of years in time, we weren’t quite sure with some of our products were in terms of profitability. And I know that – it may sound a bit strange, but we did not have the clarity, and therefore we didn’t have the accountability that we have now. So this in my opinion in terms of managing the company is a huge step forward.

John Murphy – Bank of America Merrill Lynch

Yeah, it’s incredibly encouraging, I appreciate that. Second question just on raw materials in general, if we look back over the last year, it was about a $1,000 drop in raw mats going into a vehicle. The players that we talked to all are pointing their finger at the automakers as taking the benefit, because there’s indexing and escalators and all that stuff. I’m just curious what you’re seeing on the raw mat front if you’re getting the benefit from that already or when that ultimately should come and particularly given such a severe pullback through the beginning of this year?

Daniel Ammann

We are seeing the benefit of that. We’ve taken some of that benefit in Q1. It really depends commodity by commodity, supplier by supplier, agreement by agreement as to how much is indexed versus how much isn’t, what the lag time is and so on. But we certainly had some benefit in Q1 and based on where our current spot rates are we would expect to continue to have some benefit. But commodity prices are proving to be very volatile. I think they’re all up again today from where they were.

So that’s a spot driven, market driven element. We will obviously keep a close eye and take the benefits where we can and try to mitigate increases if and when they come.

John Murphy – Bank of America Merrill Lynch

Okay. And just lastly, I mean if we look at the current consensus EPS for 2013 in the ballpark of 335, I’m sure that will change today. But then if we think about really the cash earnings, it’s at least 435 if not greater. I think one of the confusions around the stock is that, it looks like it’s trading in north of nine times earnings, but reality is trading south of seven times earnings on a cash EPS basis. Would you ever consider communicating maybe more explicitly a cash earnings number? So the multiples would be more comparable to history, because I think a lot of people are being confused by the simplistic PE and not understanding of the actual cash PE is much cheaper than it is – than it looks like?

Daniel Ammann

Well, that’s something that we would hope that these sophisticated sell side community will help to educate me on this. But hopefully we’ve been quite clear about the difference between and one of the main drivers obviously is the GAAP versus cash tax rate. We’ve tried to be as exclusive as we can in helping people understand that I would say from our dialogue with your larger investors, we haven’t seen a whole lot of confusion on that front. But it’s a useful perspective and we’ll take that as we go.

John Murphy – Bank of America Merrill Lynch

Great. Thank you very much.

Daniel Ammann

Thank you.

Operator

Our next question comes from the line of Brian Johnson with Barclays. Please go ahead.

Brian Johnson – Barclays Capital

Yes, good morning. I would like to hear from Dan Akerson on a point he made on early slide about the 4G connectivity. Basically, I’m looking for – what’s the business case not just division around, what you are doing with connected car with that? Because at least the first [client share] of other competitors are varying just to use the consumers smartphone as they are linked in to the cloud and on a kind of costs per vehicle basis, you can certainly see the argument for that. So what is really the business case you see for this move?

Daniel F. Akerson

Well, we think going forward that this new demographic coming into the marketplace, pleas recall, I have children now that – I have grandchildren I should say that have only growing up in the world with smartphones. And our estimation instead of waiting for trends to overwhelm us, try to look over the horizon, having come out of the technology and communications area, the bigger the pipe, the more you reward it into the future.

So when we look at what we can do with a 4G pipe into a car, you can change the business model almost entirely. You maybe able to have a real revenue generating opportunity into the car with – when you come up for example, what happens if when the logo shows on your screen, analysis brought to you by Allstate, how many times is that going to pop and how much can you get from Allstate or I don’t want to pull out one insurance company. Children, as you take them to school, of course, you got to watch distracted driving, we are very aware of that, but in the back seat, you can literally go from your living room, the children can pick up the same show that was on television or watch anything they want because this is going to deliver an incredible amount of downloaded capacity in different formats.

So at very little marginal cost, we opened up what I think are potentially lucrative lines of business that don’t exist in kind of a safety and security or what you see on a – that’s not integrated into other forms of media that exist in the household, can transition right with the car. So…

Brian Johnson – Barclays Capital

And are you…

Unidentified Company Representative

…it’s a different model, but you have a different demographic that is different than you and I that’s going to – we already see in some of our market research that put this high on their scale on their list of what’s important in buying a car?

Brian Johnson – Barclays Capital

And have you made any progress of your former colleagues in Telcom on bundled data plans that would include SIM car in a connected car?

Daniel F. Akerson

Yes.

Brian Johnson – Barclays Capital

As a modest additional cost?

Daniel Ammann

I don’t want to get into the contact, but I will tell you, having come out of that industry, the change that we’ve affected between these two and the modules we’ll be putting in these cars, it will affect, it will be a 4G LTE combination that will allow us to switch our entire fleet overnight. We’ve never been able to do that. So we have flexibility that allows for our service providers to have to compete for our business, not only in terms of price, but featured to functionality.

Brian Johnson – Barclays Capital

Okay, thanks.

Operator

Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

Ryan Brinkman – JPMorgan

Hi, good morning, congrats on the quarter, and thanks for taking my call. There was a question earlier on your strong China JV margin, which 11.7% looks to be the strongest in a couple of years now, but can you maybe help us a bit more on the drivers of that improvement, because previously I think, we have been hearing on these calls about modest margin compression on a tougher pricing environment over there. So what accounts for that nicely bounded 1Q, and was there maybe anything lumpy to report in there?

Daniel Ammann

Yeah. I’d say, first of all it’s one quarter. But second of all, the business continues to grow over there and you understand as well as we do this as a business that has meaningful fixed costs and a fair amount of operating leverage to it. So if you can grow the business and keep some control from a pricing point of view, you do get operating leverage and that some of what we’re seeing. How that market shakes out of the balance of the year, we’ll need to watch, clearly people are adding capacity and it’s a very competitive marketplace. But we’ve grown – we’ve been outgrowing the market there for the last little while and we hope to continue to do that.

Ryan Brinkman – JPMorgan

Okay. Then on slide 16, you mentioned that the cost in your (inaudible) positive swing helped just $100 million by the lower D&A. So can you talk about the non-D&A savings there? I know you’ve taken out a lot of salaried people in recent times, et cetera, is that the primary driver or there are other structural cost reductions to report. And then just second to that, is there anything you can say now in terms of savings from the Bochum closure now that we a better idea of how that’s going to shake out.

Daniel Ammann

We are not saying anything about the Bochum closure at this point in time other than to refer you back to the overall fixed cost reductions that we previously talked about. In relation to the first quarter Europe cost performance, some of that a bit over of $100 million of that is the D&A reduction as a result of the impairment we talked about last time. There is a good chunk of fundamental cost savings in there between engineering and some of the other manufacturing items as I mentioned earlier. There are some time – other timing items that fell into this quarter which further helped that number. But I’d say more fundamentally, we are in aggressive cost control mode in Europe, frankly, across the whole company hopefully as you have seen in our results, but in Europe, in particular, it’s a very tough market environment. Ultimately, we don’t totally control the top line but we do control what’s going on cost wise and we’ll stand aggressive on it.

Daniel F. Akerson

Let me just jump in there. First of all, we are pleased with our progress, but we are still losing money in Europe, a lot of it. And so we have a lot of work to do. Our objective is clearly to breakeven and then profitability. But I think we sent from the outset, it’s okay, we have to match production with demand. But we also have to reduce cost across the board and everything we do, whether it’s an IT, advertising, human resource cost across the board. And that’s – we’re trying to do that globally. But we’re particularly focused on it given the situation in Europe, the uncertainty over the next year or two on a macroeconomic basis; we have to protect the business as much as we can. And so although I think this is good progress, we have a lot of work to do yet.

Ryan Brinkman – JPMorgan

Okay, thanks. Then maybe just my last question could be much to do about nothing. But it looks like you filed an S3 last Friday. Is that just a generic shelter? Is there anything you can tell us more about it or what it might imply? And then second to it, it seems that the registration of course does not encompass any primary shares and there will be no proceeds to the company. But it does say, in one location that proceeds are received from the exercise of warrants could be used for general corporate purposes. So could you also sort of maybe remind us on the procedure of warrant exercise here and whether you could use that, use the net share, settlement method or otherwise use any cash proceeds from such exercise to repurchase stock as it’s sometimes the case? Thanks.

Unidentified Company Representative

Yeah. The ability to net share settled the warrants is a function of individual warrants. The warrants that are referenced there are those that are held by the selling stockholders. And so the registration statement more generally, this is a procedural issue. We wanted to put that up. I mean as we said in a press release concurrent with filing that shelf that we’re not aware if it’s time of any specific plans by any selling shareholder to execute an offering. But we just wanted to take that mechanical step to have that ready.

Ryan Brinkman – JPMorgan

Okay. Congrats again on the better results.

Operator

Our next question comes from the line of Joe Spak with RBC Capital Markets. Please proceed with your question.

Joseph R. Spak – RBC Capital Markets LLC

Thanks for taking my question. Maybe just one more quick one on your – can you just – you mentioned the volume was flat despite wholesale is down, it looks like they were down 6%. Can you just explain that a little bit, what exactly – how did that happen?

Daniel Ammann

It’s because we look at it on a country-by-country basis and aggregated up that way. So while total maybe down, it’s a country-by-country in terms of the financial impact.

Joseph R. Spak – RBC Capital Markets LLC

Okay. And then just one more in Europe, is it possible to give a day’s inventory number across all of Europe?

Daniel Ammann

It is, I don’t have that number right in the hand. What I’d say to you is that and I think I mentioned it before, we came in the year in good share on a company-owned inventory basis, a bit heavy on the dealer inventory side. And I’d say we worked that down so that we feel based on the current market environment at least that we’re in a reasonable place on both.

Joseph R. Spak – RBC Capital Markets LLC

Okay. And then last one from me, back in Detroit for GMIO you said EBIT absolutely will be up, margin will be down, and just given the change in structure, it looks like GMIO actually had the largest change. So is that still accurate or is there any change to that outlook for the year?

Daniel Ammann

We’re not updating our outlook specifically here on this call. But I guess what I’d say is that we did have some challenges in the consolidated operations in Q1 as evidenced by the result there. In Q1, those were offset by strength in China. We’re one quarter into the year. We’ll need to see how those relative trends shake out over the balance of the year.

Joseph R. Spak – RBC Capital Markets LLC

Okay, that’s all.

Daniel Ammann

Thank you.

Operator

Our final question comes from the line of Itay Michaeli with Citigroup. Please proceed with your question.

Itay Michaeli – Citigroup Global Markets

Yeah, great, thank you, good morning. so wanted to go back to the 4G LTE conversation and hoping you can talk about how OnStar fits into that roll out. And is this an opportunity for you to perhaps significantly grow on size global subscriber base, I know it’s been very, very well in China and here in the U.S. and Canada, and could that be a segment that you may consider eventually disclosing separately, perhaps investors see just a subscriber base business and potentially high margin there?

Daniel Ammann

Quite honestly hadn’t thought about it, because this doesn’t happen until end of 2014, but that’s a good question. We do want to change this from primarily safety and security business to one that’s much more feature rich and where we get, we get some real money from it, and we’ve never been properly compensated in my opinion having come out of this industry in terms of what we provide to the carriers. For example, with the new contract when it kicks in every time we implement, we get $20, we use to get nothing.

And we’ll actually revenue share and usage on that service, so this is a little bit different than the model of just having a carrier plug into your jack in the car, the carrier gets all of it, all of a sudden we’re part of the solutions and not just an intermediary where we start to share revenue in different ways with the carrier. So we are not in the wireless business, but we are facilitating a customer and we’re facilitating content. So there is a whole new frontier for us that I think we’ll have margins that will exceed which you typically see in the manufacturing business.

Itay Michaeli – Citigroup Global Markets

There are no further questions at this. I will now turn the call back to Randy Arickx, please continue with your presentation or closing remarks.

Randy Arickx

Thank you, operator, and thank you, everyone, for joining us this morning.

Operator

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



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