© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company Third Quarter 2018 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded Wednesday, October 31, 2018.
I would now like to turn the conference over to Rocky Gupta, Treasurer and Vice President of Investor Relations.
Thanks, Dorothy. Good morning, and thank you for joining us as we review GM's financial results for the third quarter of 2018. 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.
I'm joined today by Mary Barra, GM's Chairman and CEO; and Dhivya Suryadevara, GM's Executive Vice President and CFO; and a number of other executives.
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.
I will now turn the call over to Mary.
Thanks, Rocky, and good morning, everybody. Thanks for joining. Our performance in the quarter was strong, demonstrating our determination to deliver strong business results in a dynamic environment, while also focusing on the innovation that will drive our work in the future of mobility.
Looking at the numbers, we achieved a net revenue of $35.8 billion, EBIT-adjusted of $3.2 billion, EBIT-adjusted margin of 8.8%, EPS diluted adjusted of $1.87 and our return on invested capital adjusted of 25.6%. Adjusted automotive free cash flow was $400 million. In the quarter, we capitalized on the high demand in the crossover, luxury and truck segments in addition to record performance by GM Financial.
As we continue to strengthen our automotive vehicle business with recently-announced partnership between Honda, GM, GM Cruise to develop and deploy a purpose-built autonomous ride-share vehicle, based on the current rate of iteration, we continue to target commercialization in 2019 in a dense urban environment with safety as our gating metric.
Now let's turn to North America, where in the U.S. our go-to-market strategy drove record Q3 average transaction prices. In Q4, we intend to stay disciplined, but we will compete for every sale with our freshest products in years, including our all new full-size pickups.
We entered the quarter with lean inventories of our 2018 model year full-size pickups and focused on selling a very strong mix of SUVs, crossovers and midsize pickups with lower incentives. We expect retail sales volumes will increase in Q4 and beyond as we ramp up production of our new pickups.
The launch of our new trucks continues to be ahead of schedule and response to our truck-for-every-customer strategy has been positive. Sales of the new high-margin Chevrolet Silverado LTZ and High Country crew-cab models are more than 30% above forecast, and the new GMC Sierra SLT, Denali and AT4 crew-cab models are selling within two weeks.
Popularity of our new crossovers from Chevrolet, Buick and GMC continues as the sales of Traverse, Enclave and Terrain grew in competitive segments.
Cadillac's product offensive continued in September with the launch of the all-new XT4 luxury SUV in North America and China. The brand is capitalizing on Chinese consumers' growing preference for luxury vehicles with sales in China up 20% year-to-date. Cadillac is introducing a new model every six months through 2020s, including the upcoming three-row XT6 SUV.
Moving to China, where we have more than 20 years of strong market presence, we achieved record third-quarter equity income. This performance results from an improved mix of vehicle sales and a continued focus on cost and productivity improvements. Our earnings have been resilient as we benefit from the growth of important brands like Cadillac and Baojun. As we focus on electrification and launch future vehicle programs, we have opportunities to continue to improve our competitive position.
During two visits to China this month, I've had a chance to take a closer look at the macro conditions affecting industry performance. The recent weakness has been more significant in Tier 3 through 5 markets that have less of an impact on our financial performance in the third quarter. Additionally, our growing strength in luxury and premium segments helps offset the impact of the industry weakness.
We continue with our plan to introduce 10 new and refreshed models in the second half of the year, including the Cadillac XT4, the Baojun E200 BEV, the Chevrolet Orlando MPV and the Wuling Rong Guang in the third quarter.
In addition, in our international operations, we are beginning to realize cost reductions as a result of our restructuring actions in Korea. And in South America, we have managed the effects of foreign exchange headwinds as we continue to drive efficiency into the business and we remain very confident in the strength of our Chevrolet brand there.
As we look forward through the rest of the year, we expect full-year EPS to be at the top of our previously-communicated guidance range with potential for further upside. This is due to our strong operating performance and a favorable tax rate outlook for the year.
Before I turn the call over to Dhivya, I want to assure our owners that we are focused on creating shareholder value. As we closeout 2018 and prepare for 2019, we are committed to improving all aspects of the business by accelerating the pace and driving capital efficiencies due to our global vehicle development process improvements, while allowing us to continue to improve quality and speed to market, and by taking steps to transform the workforce to ensure we have the right skill sets for today and the future, while also driving significant efficiency. We will continue to update you on our progress in the near term.
Now I'd like to turn the call over to Dhivya.
Thanks, Mary. Our execution was extremely strong in the third quarter even as we faced expected challenges from commodity pricing and significant currency devaluations in South America. As a result of our focused and disciplined execution, we generated $35.8 billion in net revenue, $3.2 billion in EBIT-adjusted, 8.8% margin, and $1.87 in EPS diluted adjusted, which is a Q3 record.
Favorable tax rate and performance of PSA warrants contributed to approximately $0.30 of EPS impact, while our strong operating performance contributed to the remainder. Q3 adjusted automotive free cash flow improved by $1.3 billion year-over-year net of our decision to opportunistically pre-fund $600 million of certain mandatory contributions related to our international pension plans.
Let's take a look at North America. GMNA generated $2.8 billion of EBIT-adjusted and 10.2% margins, up 190 basis points year-over-year. The execution of the all-new full-size pickup truck launch is going very well. We produced 45,000 trucks in Q3 and expect to deliver another 75,000 to dealers in Q4, consisting primarily of highly-profitable crew-cab. This contributed favorably to volume, mix and price during the quarter.
Our crossovers continue to perform across every vehicle segment. We will continue this momentum into 2019 with the launch of our all-new Blazer. As a result of matching supply with demand and disciplined pricing, passenger car results improved year-over-year in Q3.
Light-duty pickup performance combined with our crossover and passenger car results more than offset mix and downtime taken in Q3 for heavy duty trucks, which positions us well as we head into 2019. And as expected, commodity headwinds and increased vehicle content for newly-launched vehicles was partially offset by strong material performance.
Moving to GM International, EBIT-adjusted performance in GMI was down $300 million year-over-year driven by significant devaluation of the Argentine peso and Brazilian real. China delivered record Q3 results with equity income of $500 million for the quarter. As Mary mentioned, this was driven by cost performance, as well as strong mix of vehicles led by record Cadillac sales, which offset challenges from continued pricing pressure.
A few comments on GM Financial, GM Cruise and our Corp segment. As we continue to progress towards full captive, GM Financial posted an all-time quarterly record revenue of $3.5 billion and record third quarter earnings before tax adjusted of $500 million. Credit and residual performance remained constructive.
As a result of strong performance, we have initiated an ongoing dividend payment from GM Financial. In the fourth quarter of this year, GM Financial will pay a dividend of $375 million, well ahead of our original plan. Through dividends from GMF, we have the opportunity to strengthen the long-term cash generation capability and narrow the gap between earnings and free cash flow on an ongoing basis.
GM Cruise costs in the quarter were $200 million as we continue progressing towards commercialization. We expect to spend approximately $1 billion in GM Cruise for the full year.
Corp segment costs in the quarter were better than expected, primarily due to continued favorability from valuation of our PSA warrants. We expect the Corp segment cost to be lower than the full-year expectation of $1 billion.
We project our 2018 full year effective tax rate to be approximately 17% as a result of fluctuation in earnings geographies and favorable resolution of various tax positions.
Moving on to our outlook for the full year. Due to our strong operating performance and favorable tax rate outlook for the year, we expect the full-year EPS to be at the top of our previously-communicated guidance range with potential for further upside.
In North America, we continue to expect a full-year EBIT adjusted margin of 9% to 10% as we launch our all-new full-size trucks, while we still experience commodity-driven headwinds.
In China, we continue to expect strong equity income of approximately $2 billion this year. With the majority of our launches occurring later in the year, we expect higher launch costs in the fourth quarter.
Moving to South America, we continue to monitor and work to offset the impact of currency volatility. The structural cost actions we've taken have lowered our break-even point by approximately 40% relative to where we were just a few years ago, and our underlying franchise remains very strong.
Regarding GM Financial, while we will experience traditional seasonality in Q4, we continue to expect significant year-over-year profit growth. And we continue to expect core automotive free cash flow of approximately $4 billion before the impact of pre-funding non-U.S. pension contributions.
So, to sum up the quarter, our Q3 performance is a demonstration of the team navigating through a challenging environment and delivering very strong results. As Mary mentioned, we're intensely focused on improving our cash generation. Following our new architectural launches, we expect a meaningful decline in future capital spending. Combined with the ongoing GM Financial dividend and our focus on cost reduction, we see significant opportunity to improve cash generation.
We are confident in the opportunities ahead of us and continue to expect strong performance over the short term as well as the long term.
This concludes our opening comments and we'll now move to the Q&A portion of the call.
Your first question comes from the line of Itay Michaeli with Citi.
Great. Thank you. Good morning, and congratulations, everyone.
Thanks, Itay.
First, Dhivya, just to clarify on the GMF dividend of $3.75 in Q4, is that going to be – kind of sustainable at that quarterly rate going forward?
Yeah, Itay, we do expect that this will be an annual dividend. The exact amount will be driven by leverage ratio at GMF as we go forward. And when we get to a full-captive state early in 2020s, we expect that the entire net income from GMF will be dividended up to the parent.
Great. That's very helpful. And then as we think about your progress going into 2019, love to get the latest sense on commodity costs directionally as you renegotiate some of the one-year contracts, as well as just the ability of the business to continue to offset as you've been able to do, of course, here in Q3, in terms of the opportunities you're seeing to offset some of these headwinds.
Yeah, Itay, we had mentioned on the last call that on an unmitigated basis we see a $1 billion year-over-year impact in 2019 over 2018. Again, I would reiterate that that number was based on the spot prices that existed at the time of our second quarter earnings call and there's been puts and takes since then. There's some tailwinds in commodities. There's some headwinds in the form of tariffs and so on. But I think net-net, you should think about it as that number continues to be valid on an unmitigated basis.
But as we think of 2019, you should look at that in the context of all the other puts and takes we have, including largely completing the transition of our light duties. And, as I mentioned, we have taken downtime already in 2018 as it relates to our heavy duties. So, we do not anticipate a significant year-over-year volume decline in our heavy duties, so that should help offset as well. So, think of commodities in the context of the broader overall picture that's happening.
Great. And then just maybe lastly on GMI, kind of your latest thoughts there. Maybe a year ago at this time we thought GMI would move to profitability. Maybe an update on the GEMs platform and the Korea restructuring and kind of how you're thinking about that segment now in the next couple of years excluding China.
I think as I indicated from a Korea perspective, we're starting to see the cost savings flow in. A lot of those were in this segment, so we see that and are very much on track for what we communicated as it relates to the Korea restructuring.
I think when you look, there's progress being made in each of those markets, but GEM doesn't launch until next year and so that becomes an opportunity there. We have continued in South America to improve the business, taking additional costs out, have a very strong franchise there. So, we see improvement coming across the board in GMI.
Great. That's all very helpful. Thanks so much.
Our next question comes from the line of Joseph Spak with RBC Capital Markets.
Good morning. Thanks for taking the question. Just to turn to the free cash, I mean, originally you were saying $4 billion for the year. Then, you have the $600 million discretionary pension. Now, you're adding back $375 million. So, where do you think we should end up here for the full year?
Yeah, Joe, I think about our free-cash-flow guidance as consistent with the $4 billion that we alluded to in the second quarter. If you look at the pension pre-funding, again, we took the opportunity to risk manage that and get some of the mandatory contributions over with in 2018.
But if you look at the underlying cash-generation capability of our core business, it remains at that $4-billion level, which is very strong. And as we look into Q4, we expect that quarter to be where we are going to generate a significant portion of our cash. It's going to be a very strong free-cash-flow quarter. So, I think about it as free-cash-flow guidance remains intact, as well as the ongoing GMF dividend initiation. You're going to see the impact of that as we go forward into 2019 and beyond.
So, just the $4 billion inclusive of the pension.
The $4 billion is before the mandatory contributions. It's $3.4 billion net of pensions. We guided to $4 billion on a core automotive basis and that continues to be the cash-generation capability.
Okay. And then just in GMNA, I think in the past you were sort of pointing us towards that fourth quarter would be the strongest quarter of the year. Obviously, there was good performance here in the third quarter. Is that still the case or was there some timing between the two quarters?
We expect fourth quarter to continue to remain strong, Joe, and the favorability we're seeing in Q3 as it relates to our T1 launch should continue into Q4. From a factory unit sale perspective, we expect that Q3 and Q4 will be roughly in – Q4 will be roughly in line with last year and Q4 will actually be up versus Q3 from a factory unit sale perspective. We're continuing to expect strong crew cab penetration within our sales as well. So, if you overall look at the 9% to 10% guidance for North American margins, I would expect Q4 to be on the higher end of that range.
Okay. And then just last quickly. In China, I know there was this over 3-million-unit recall. Does that impact that guidance at all? And if so, in which quarter?
No. No. From a – it was not a material impact.
Okay. Thank you.
And it's happening – underway right now.
Okay. Thank you.
Our next question comes from the line of Rod Lache with Wolfe Research.
Good morning, everybody. Congratulations.
Thanks, Rod.
Thanks.
I was hoping to get a little bit more color on China. Your wholesales this quarter were down 4%. I think your retail was down 15%. So, I was hoping maybe you can give us a sense of the components of the earnings bridge and how things are playing out. So, in other words, if we were to have a plus or minus 5% from volume, what does that imply for the impact on GM? And what do you have kind of in the pipeline in terms of positive mix that's offsetting that?
Yeah, so, typically, Rod, just from an earnings bridge perspective, we experience about mid-single digit type pricing pressure on a yearly basis in China. And on a high level, how I would think about that is, offset roughly half by mix and half by cost. And that's sort of been the trend over the last several years and what we're seeing from a mix perspective, especially as Mary mentioned, as we launch our new Cadillac entries here, that's been particularly strong.
And from a volume perspective I think it's important to highlight where the volume comes from, would have a different impact on profitability. For example, Tier 3 to 5 where we're seeing a bunch of the weakness that Mary alluded to, that tends to be our less profitable portion of the market. Tier 1 to 2, we're seeing less of a decline there and luxury, again, the market is actually up year-over-year. So from an overall puts and takes perspective, I would continue to think about this as a strong performance in cost as well as mix continuing to be a tailwind from a Cadillac perspective as we continue our launches.
Can you provide us with some kind of a sensitivity at this point on average for what a 5% move in volume would be? You guys have done that in the past. But this obviously has changed a lot.
Yeah, it's, again, difficult to predict because it matters where it comes from as well. So I wouldn't go into that level of detail. And as I mentioned, it's too mix-dependent. So if you're in a backdrop where volumes are declining but, again, luxury is holding up, you get a different answer. So it's hard to handicap that.
Okay. And can you just give us your kind of high level, maybe 30,000-foot view on China? There's been a lot of discussion lately about a stimulus of some kind that's maybe coming, maybe a purchase tax cut. Obviously, there are a lot of other elements that are going on in China as well vis-a-vis credit and so forth. So, how do you see this playing out from a high level?
Obviously, Rod, we're watching it very closely as I mentioned. I've been there twice in the last month and we have a very strong joint venture in China with SAIC and have very strong brands. We're seeing growth in Chevrolet. We're seeing very good growth from a Cadillac perspective and we have a very good launch cadence of products coming out that are getting really strong reception from consumers. We have not seen any negative view toward our brands and I think that's very positive.
So I think we continue – we have an organization there that is extremely disciplined on taking costs out and seizing opportunities to improve our go-to-market and then the products that we have from a mix perspective. So, we're watching it carefully and we're very hopeful that both sides will have dialog and get to the table to work through some very important issues that both China and the United States have as it relates to trade. And we're hopeful that will – there will be a foundation laid and they'll continue to do that. But I think when we look at our positioning, we have many levers that we can pull to continue to have strong performance in China.
But at a high level, are you expecting China to recover at some point as a result of – I understand that there's some company-specific positives, but are you expecting China to start to look a little bit better as some of the stimulus measures start to have an effect?
We're watching that closely. I can't predict. We all read the article that came out that they're considering the incentives. Obviously, that would be a very good measure from an industry perspective. But I don't know – I can't comment if that's going to happen or not. I think they're looking at it closely and we expect to see actions taken that are going to allow the market to continue to be – I wouldn't say maybe growth that we saw a few years back, but continue to be at a important level. And let's not forget, even at a 27-million-type unit market, it's the largest market in the world.
Okay. And just lastly, was hoping you can just describe how you're setting the level of a dividend from GMF, that business is now starting to generate something like $2 billion a year of earnings. So to the extent that you're not dividend-ing that all out, obviously you're building the equity base there. Is that something that gets ratcheted up over time?
Yeah, that's correct, Rod. So the way we set the dividend level is a number of factors but primarily driven by leverage ratio at GMF. We have a managerial leverage ratio target of 10 times earning assets to equity and we're still growing the business. The year-over-year rate of growth is starting to stabilize but it's still growing. And as we think about the balance sheet leveling out in a couple of years down the line, that's when you will expect that the net income from GMF will be fully dividended to the company. And what we've done basically here is taken advantage of the fact that our strong performance at GMF has contributed to a lower leverage ratio than what's in our managerial target. So we're taking advantage of the upside there to be able to start the dividends early.
Great. Thank you.
Our next question comes from the line of Adam Jonas with Morgan Stanley.
Thanks, everybody. Just a couple of questions. First, on China strategy, the BMW Brilliance arrangement where BMW increased its stake as JV to 75%, that kind of caught the market's attention. I was just wondering from the lens of GM in China, are you satisfied with your 50% type stakes in your JVs there or is there a potential to take this higher, given now you have the opportunity, as part of maybe a broader plan to change internal combustion capacity to electrics in that region.
So, Adam, we have I think the strongest partner in China with SAIC. We've – through the past 20 years have worked together quite well – doing work such as the joint development of the GEM product as well as our work on the next generation of the electric vehicle. So, I think we have a very appropriate relationship and at this current time we're not looking to change the 50/50 structure. It's served us well and I think the strength of our results demonstrate that.
Okay. Thanks, Mary. Just one follow-up on electric vehicles. So, you currently sell one pure EV at least in the U.S. right now, the Volt, sales are down around 17% year-to-date. I think you're annualizing maybe around 16,000 units, that's just for the U.S. market. I realize you do sell it globally. But just on the U.S., Tesla makes about as many Model 3s in three weeks as your whole year worth of Volt sales in the States.
So, I guess the question is, when are we going to see – when could we expect to see – and again, taking nothing away from the efforts of the Volt and really you stand apart from a lot of your Detroit brethren from really going heavy on EV, so I think it is an appropriate question to say given your lead and your experience with this technology, when can we see GM bring out like a couple hundred thousand unit type product that could really clean house in the ride-sharing fleets and turn heads and be a real headache for Tesla? Thanks.
Adam, thanks for the recognition on the Chevrolet Volt EV. We have announced that we are increasing capacity there. We've been opportunistic as to what markets we are allowing the current production to go to, but I think you'll see our sales in the United States increase. And although I don't have a specific announcement to your question, we have announced that we have several EVs coming in the next few years, so we believe in an all-electric future. I think you'll see that will roll out over the next couple of years. And then very importantly, we're working on our next generation, which we're calling EME 1.0, that we're looking to make sure we have EVs that are affordable, obtainable, desirable and have the right range.
We're also working actively from an infrastructure on several fronts to make sure that the charging infrastructure is there to support the growth of EVs. And even most recently, which was announced, we're working with Delco Electronics on a fast-charging technology because I think as we look at it from a customer perspective, what do they need to really get the growth to make the EV their only car as opposed to their third, fourth or fifth car. You need to solve the charging infrastructure. Fast-charging is a big piece of it. So we're very optimistic and we're 100% committed but I'm not going to – I don't have specific volume announcements to make today.
Okay. Thanks, Mary. Thanks, team.
Our next question comes from the line of John Murphy with Bank of America.
Good morning, guys.
Good morning.
Good morning.
Just a first question on slide 11 on the North American bridge. Probably, I think the most important thing in the quarter is that you got positive pricing on carryovers, as well as majors. I think that's probably the first time I've seen that in 20-plus years of looking at your financials. What's going on with the pricing there? I mean, that's a wild positive action that you were able to get positive pricing on carryovers.
Yeah, John, it's across the board I would say. If you look at the components of that, a lot of our recently-launched crossovers are now falling in the carryover category, so we continue to see pricing strength there, especially in the mid-SUV segment. We have remained disciplined from a passenger-car perspective as well, as we have matched supply and demand. So, I would say it's not just in one area, John. It's across the board.
And Dhivya, do you think this is the kind of action, though, that could be sustainable going forward? This isn't sort of a one-time blip, this is a real focus and change in philosophy?
Look, you'll see it, obviously, go up and down every quarter, but our intent is absolutely to stay disciplined.
Okay. That's great. Then, second, as we look at the rise in rates, there's a lot of concern around what that's going to do to the value chain, particularly on the demand side, but it's helpful on pensions. So, I'm just curious what you're seeing on sort of pension pre-measurements and funding status and really thoughts there, Dhivya.
Yeah, on that, John, absolutely a rising rate environment tends to be a tailwind for pensions. Especially in the U.S. we have made a ton of progress in closing our underfunded gap over the last several years and we remain leveraged to the upside as rates increase.
I think important thing to note is the mandatory pension contributions in the U.S. do not start until the mid-2020s, so you're really talking about a good seven, eight years of a runway here for us to benefit from potential market moves before we're going to have to take any mandatory contribution actions.
But, again, we're risk managing this. We're making sure that we're also downside protected as we move forward. But, you're right, we'll see tailwinds there. And we remeasure pensions, as you know, at the end of the year, so we'll have more to say when we report our calendar-year earnings.
And can you also just remind us when we think about the demographics of the work, the active workforce, how many are legacy workers and how many are your entry levels? What's the mix right now roughly?
No. I don't have...
I think it's about roughly 50/50, we should say.
Okay. Yeah, and we can confirm that.
Yes.
Okay. And then just lastly, Mary. When you talk about safety as the gating factor on the Cruise commercialization and real widespread launch, how do you measure that safety? I mean, obviously, not hitting things is obviously a very critical one. That's a very simple one for us to see.
But not to make light of this, but I mean how do you really get comfortable with sort of the risks in the real world? Because they're always going to be out there, particularly when we're in a world of some of these regular human crazy drivers that the cars have to deal with. I mean, how do you think about that and when do you just let it go?
Well, I think the fact that we're doing our development in downtown San Francisco gives us probably the most exposure to those types of situations, not only drivers but bikes and all sorts of activities. We did release our kind of guide to safety that was part of the guidelines that NHTSA is looking for.
But I would say we've also – and we haven't released details because we think it's a competitive advantage. We have done extensive work to understand how we will measure through actual road performance, simulation. We've gone back and looked at historical patterns as it relates to safety and we have a very well-defined plan of what we have to demonstrate to demonstrate that the AV is safer than a human driver, and that's the path that we're on. And so, when we talk about gated by safety, we are measuring ourselves against that plan that also had external input.
And that gate will get lifted with the commercialization in 2019; is that a fair statement or assumption?
Yes. So, our intent is based on the progress and the rate of iteration that we're making that we see a path to be able to do that. But as we demonstrated with Super Cruise, we will make sure we hit our safety metrics before we launch and commercialize. But right now, the rate of iteration says that we're believing we can do that in 2019.
Okay. Great. Thank you very much.
Our next question comes from the line of David Tamberrino with Goldman Sachs.
Hey, great. Really good looking quarter. Want to dig into a thread from earlier on free cash flow, because I think there's some confusion on this. The original guidance was for, the last quarter's guidance, was for $4 billion. You took a $600 million prepayment contribution on pensions, so roughly $3.4 billion. Does that $3.4 billion include the dividend from GMF? Or would that be on top of the $3.4 billion, getting you back to around that $4 billion?
It includes that, David. What we were not able to preannounce was the dividend because we had not – the GMF Board of Directors had not declared it at that point, but it was contemplated in our guidance. So you're correct, $4 billion core automotive free cash flow generation. When we pre-fund the pension piece, that comes down to $3.4 billion, both of which already contemplate the GMF dividend.
Okay. Just under-communicated. Understood. On the Cruise Automation spend, this year you're only about $500 million. I know I've asked this like two or three quarters in a row now. You're still expecting $1 billion for the year. What's the ramp-up that you're going to be seeing that you're going to double year-to-date spend in the fourth quarter?
So we are hiring and continuing to do that development to the plan. Right now, we're looking at still we'll be roughly around $1 billion as we previously communicated, but the team is being smart about it and if they can achieve what they need to achieve at a lower level, they will. But we're still holding at that level and it's due to a lot of hiring and continued work from – accumulating miles and experience.
Okay. But there's not like a large increase in the fleet that's coming or an expansion in a new city that's going to drive that incremental spend?
No.
Because that's all we can think of that could kind of get you there.
No.
Okay. And then for the quarter, commodities headwind in North America was $300 million. I know this was asked a little bit earlier, $1 billion for next year unmitigated. What was this quarter's gross unmitigated and how much were you able to essentially mitigate? Just trying to get a sense of how effective you've been.
So I would just – from a bridge perspective, you can see that for the total company we experienced $400 million of commodity headwinds. And what we've been trying to do, David, as you're aware, we have our $6.5 billion target that we committed to in 2014 as it relates to commercial and technical savings and we've been continuing to execute on that and we remain on track to achieve that by the end of this year. And you see material performance in our bridge of $300 million that serves to offset some of the commodity headwinds we're talking about and obviously there's broader puts and takes outside of commodities as well where we've seen strength in a number of other areas that have offset commodities. And looking into 2019, again, too early. Our purchasing team is having those discussions as we speak and we'll have more to share early next year.
Okay. To clarify that point, though, earlier in the year you talk about gross impact and what the mitigated impact was and I believe this $400 million is the mitigated impact. What would have been the gross impact for the quarter before you took any mitigating factors?
Just to clarify, the over $1 billion stands at over $1 billion still. So we had $1.4 billion and we're roughly in that zip code currently from a commodity headwind perspective and $400 million is what you're seeing of that $1-ish billion flowing through in this particular quarter and the mitigation is after that and which is the $300 million of material performance that you see flow through in our bridge.
Okay. Very clear. Thank you very much. Great looking quarter.
Thanks.
Thank you.
Our next question comes from the line of Ryan Brinkman with JPMorgan.
Hi. Good morning. Thanks for taking my questions.
Sure.
Firstly, another one on China. The latest speculation as was discussed is that the sales could rise from here if the government reduces the purchase tax on new vehicles and I hope that does happen. I wanted to ask, though, if you have done downturn planning in that country similar to what you have done in the U.S. So, for example, in the event that there were a material downturn in China, I know there hasn't been before, but something on the order of magnitude of like 25% peak to trough like you discussed in the U.S., what would that mean for your operations there? Do you think you would be profitable in that type of a scenario? I think you would be given you just generated a record profit on a 15% volume decline. But curious if you could dimension how a material downturn might impact you in that region and if it is any harder or easier to pull cost levers on, say, the people side in China in comparison to, say, in North America.
So we have done that planning at both a moderate and severe levels. That's something that I just reviewed this past week and it's something we update on a continual basis. It's hard to completely quantify it based on tell me what's driving it, tell me what the mix will be, where's the impact most from a Tier 1 to Tier 5 city perspective. But we have done that with a wide range of sensitivity analysis based on those factors. So I can't really share a specific number. We do have flexibility with the workforce. As you know from a U.S. perspective, one of the things that benefited us from the 2015 contract was the ability to have a more-flexible workforce and so we are – every year we grow and have I would say that increases from a North America perspective. We have that with the workforce in China as well especially as we look at the temporary workforce that we have there. So been very well modeled, continually monitored.
Okay. Thanks. And can you just speak to the degree to which the record GM Financial results in the quarter were helped by structural factors that we can expect will continue like portfolio expansion, et cetera, versus maybe, I don't know, some more temporal factors such as presumably stronger auction prices during the quarter. What is your outlook for GM Financial going forward and how should we expect this business to fare in an environment of higher interest rates?
Yeah, I think from a GM Financial perspective we have talked about roughly doubling the EBT from a couple of years ago to, I believe, we said 2019. That remains on track. A lot of it is the portfolio growth that you're talking about. We continue to increase the penetration within GMF as well as just grow the overall size of the balance sheet and you've seen those results come through.
The other points worth highlighting are credit losses; they remain within range and so we're constructive there as well. And residual prices, as you're well aware, they remain constructive also. So I would say it's all of the above and we're, again, continuing to risk-manage this business and this is going to be a strong contributor to earnings as we move forward.
Okay. And then just lastly from me, can you provide some color on how investors should be thinking about the new heavy duty pickup trucks due out next year and the profit potential they might provide. And I'm not even thinking here about the CK2500s, for example, in Flint North but the even bigger trucks I think are going to be built in a plant in Ohio with Navistar. Could this be a very meaningful profit contributor for you?
Well, I think it's an important truck that we have and one of the things that is important is for some of those buyers having the full suite we think will also increase our heavy duties as you mentioned that we'll be launching next year from a Flint perspective. So it's the adjacencies that I think are going to drive the overall business up. So that's the way we look at it. I don't have specific figures to give you. But, we'll have that opportunity but what it drives in heavy duty is more significant.
Got it. Thanks. Congrats on a great quarter.
Thank you.
Thank you.
Our last question comes from the line of Colin Langan with UBS.
Great. Thanks for taking my questions, and congrats on a great quarter.
Thank you.
Looking through the model, can you explain some of the weakness that is expected in Q4? Because I think you mentioned North America is fairly stable. I guess Cruise gets a bit worse. Maybe Other gets a bit worse. But what is the big driver that's sort of implied even at the high end of guidance, seems like there's a core deterioration quarter-over-quarter.
So, I would say, Colin, a few things. One, we expect in Q4 all the core operating segments to continue to be strong. I already talked about North America where we're going to continue to see tailwinds from T1 as well as the crew-cab mix that I alluded to. So North America will continue to remain strong. I did mention the launch cost related factors that we're factoring in to China but again the $2 billion equity income is reiterated.
In South America, the FX continues to be the question mark over there. We've seen some tailwind after the elections but we're going to have to see what happens in Q4 from an FX perspective. GMF tends to be, from a Q4 perspective, the seasonal low point. But again, you've seen – to the prior question as well – significant profit growth year-over-year in GMF.
So if you take a step back, the core operating items remain intact. What we really want to be mindful of is non-operating items such as PSA warrants for example, we saw tailwinds during this quarter and that's really going to be driven by what the stock price does there. And that's a non-operating item. And FX-type macro items that we want to be mindful of. But, we will see continued strength in Q4 from the operating side.
Got it. And I noticed in the walk, you mentioned crossovers as negative mix. In the past, that used to be cars. Is that – there's a lot of concern about SUV profitability. Are crossovers getting less profitable or is it just the mix now of cars is so small that crossovers versus pickups is the bigger drag?
I think it really depends on which segment within crossovers. I think if you look at small and the compact segments, you're probably well aware, Colin, there's a lot more competition there and there's pricing pressure there. The mid-SUVs continue to perform really well, so it's really segment by segment within crossovers.
And, lastly, there's a recent article on Cruise highlighting people saying there's technology challenges there. Any comment on that media report? And is the 2019 launch in San Francisco still on track? Or is that at risk of being delayed?
Well, we haven't explicitly said where that launch is going to be, but we are doing our testing in San Francisco. But, look, we continue to iterate rapidly. When you step back and look at this, this is really – I think what is happening is people are realizing this is really hard. And so, when we take the work and the expertise that we continue to grow at Cruise along with the auto expertise and combine that, we're working hard to solve that challenge.
I mentioned before we have a well-defined plan on how we'll look at safety and we'll be gated by that. And really launching in one city is just the first step in what will be a multiyear, probably over decades, transformation of how people move from point A to point B. So, I think we need to keep that in perspective.
There was also comments made about miles and I want to remind everybody that a mile is not a mile when you're doing AV testing. Clearly, the most complex miles that we're gaining experience in in San Francisco are very valuable, and so we're being efficient in driving the miles that we need to drive, getting the maximum learning as we move forward.
So, I think that's the way we're looking at the business and I think it's a balanced view. But as I said, with the rate of iteration we're doing, we still believe and are continuing to target 2019 deployment.
All right. Thank you very much.
Thank you. I'd now like to turn the call over to Mary Barra for her closing remarks.
Well, I want to once again thank everybody for participating on the call. And to sum up the quarter, I'd like to point to the fact that our strong results demonstrate our commitment to execute our plans amid industry headwinds. We continue to adapt and take actions necessary to create shareholder value through our strong and growing franchises, as well as our leadership position in the future of mobility.
The management team is resolved to take actions to strengthen the business and we have driven downturn protection and disciplined capital allocation into the business and we also have an intense focus on generating cash. As we continue to operate in a dynamic business environment, we are fully focused on increasing our speed of execution as we transform GM and the future of the industry.
So, thanks again for joining today. I appreciate all your questions and interest.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your line.