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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 Fourth 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. [Operator Instructions] As a reminder, this conference call is being recorded Wednesday, February 6, 2019.
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 fourth quarter and calendar year 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; Dhivya Suryadevara, GM's EVP and CFO; and a number of other executives.
Before we begin, I'd 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 Barra.
Thanks, Rocky, and good morning everyone and thanks for joining. We delivered very strong results in 2018 despite significant macro headwinds and a year in which we transition to our light-duty pickup truck. Our North American performance was very strong as we launched pickup trucks and crossovers. China results were strong despite the market environment and GMF delivered record result.
Let's get the full year 2018 numbers. Net revenue was 147 billion, EBIT adjusted was 11.8 billion, EBIT adjusted margins was 8%, our EPS diluted adjusted was $6.54. Our automotive adjusted free cash flow was 4.4 billion and this excludes the 600 million intention and prefunding payments and ROIC adjusted was 24.9% on a trailing four quarter basis.
As we shared in January, we expect to improve 2019 earnings and cash flow as we move into the next phase of our transformation, linear, more agile and better position to win. Our favorable outlook is based on a continued robust mix of new products around the globe continue cost efficiency and our business transformation initiatives. We believe that we will continue to be macro uncertainty but we expect to mange through them based on current market conditions.
Let’s look at our performance in North America where we achieved a strong year including record fourth quarter earnings. In the U.S., we lead the industry and pickup sales for the fifth straight year and delivered more than a million crossovers. We will benefit from a full year of sales of our all new light-duty pickup and the cadence will continue with all new heavy-duty models.
We've revealed the Chevrolet Silverado heavy-duty yesterday in Flint and it will go on sales later this year along with the GMC Sierra heavy-duty. We’re encouraged by the early success of the newly launched Cadillac XT4 SUV which already leads in it segment and we will also see a full year of sales of the new Chevrolet Blazer.
I would like to take a minute to update you on the business transformation actions we announced in November. We said, we would outline our product portfolio in capacity in North America with changing consumer preferences and transform the workforce to position the Company for long-term success. To-date, nearly 950 U.S. hourly employees have been placed in U.S. plants with products in key growth segment.
At GM Canada, we are supporting affected employees by working with local colleges on retraining as well as with dealers and more than 20 local employers who have expressed interest in hiring these experienced employees, and we will also provide outplacement services to be impacted salaried employees. Business of the strong business results we delivered last year, eligible hourly employee will share in this success through profit sharing payments later this month.
Moving to our international operations, the actions we announced earlier last year have placed GM Korea on a path to enterprise level profitability. However despite improved share in Brazil, the South America business remains a concern because of continued macroeconomic pressures. We are having productive discussions with key stakeholders to generate acceptable returns in the market. In China, we earned 2 billion in equity income last year and an increasingly challenging business environment. While we expect macro issues and flat industry performance will impact our results this year, we remain confident in the long-term position in China.
We expect China industry sales to be roughly in line with 2018 levels based on expected GDP growth and our current assessment of market condition. Last week, the government announced actions to stimulate the economy and the industry and we look forward learning more about the details on these initiatives; however, generally such report had a positive impact on the auto sector. Our aggressive product cadence continue this year in China with more than 20 new and refresh models from our Buick, Chevrolet, Cadillac, Baojun and Wuling brands. This includes 7 SUVs and first of our all new global family of vehicles.
I also want to mention the momentum at Cadillac. Last month, we announce that it will be GM's lead electric brand where we introduced our next generation EV technology. Through technology innovation and beautiful design, we’re fully committed to restoring Cadillac to the luxury leader it should be. Last year, Cadillac posted another record year of global sales and we expect continued growth as we introduced a new model roughly every six months through 2021, including the XT6 SUV we unveiled last month.
Turning to our future mobility initiatives, we made real progress last year toward expanding our leadership in both autonomous and electric vehicles since first announcing our vision of a world with zero crashes, zero emissions and zero congestion nearly 18 months ago. GM Cruise is deeply resourced to succeed with more than 1,100 employees and 5 billion raise in external capital from Softbank and Honda in 2018.
We have demonstrated our willingness to work with partners with common value and where a partnership can improve efficiency, capital spend and speed of development. For example, our AV collaboration with Honda builds on our existing EV battery and fuel cell work. On the EV front to encourage greater consumer acceptance of battery electric vehicles, last month, we announced the collaboration with three partners to establish the largest collective EV charging network in the United States.
In addition, Cruise continues to focus on the entirety of the autonomous vehicle ecosystem citing the partnership with DoorDash last month. So to recap, we had another year of strong earnings and volatile environment. We offset macro headwinds with fresh product in the right segments by staying intensely focused on cost and by making the business decision throughout the year.
So now I will turn the call over to Dhivya.
Thanks, Mary, and good morning everybody. We exceeded our expected 2018 results from both an EPS and adjusted automotive free cash flow perspective. Our performance was driven by strong execution across all of our operating segments including record fourth quarter results in North America and GM Financial. We were able to accelerate the execution of our transformation cost savings and started to see early benefits of these actions in the fourth quarter. With that, let’s review the results in more detail.
As Mary mentioned, we generated calendar year results of 147 billion in net revenue, 11.8 billion in EBIT adjusted, 8% margins, 6.54 in EPS diluted adjusted and 4.4 billion in adjusted automotive free cash flow excluding the impact of pension contribution. In the fourth quarter, we generated 38.4 billion in net revenue, 2.8 billion in EBIT adjusted, 7.4% EBIT adjusted margin, $1.43 in EPS diluted adjusted and 4.2 billion in adjusted automotive free cash flow.
Let's turn to North America. In the calendar year, North America generated 9.5% EBIT adjusted margin despite over a 1 billion of commodity headwinds and downtime taken for full site changeover. In Q4, North America delivered record EBIT adjusted results of 3.0 billion and 10.2% margin, up 20 basis points year-over-year. Performance of our all new light-duty pickup and strong material cost performance in the quarter more than offset commodity headwinds and the volume impact from downtime.
The full-size pickup truck launch has been very strong. We have experienced a smooth ramp up of the new models as well as sell down of the old model. This reduced over 75,000 all new trucks in Q4 consisting primarily of highly profitability crew cab. This contributed favorably to volume, mix and price during the quarter.
Let’s move to GM International. Full year EBIT adjusted in GMI was down 900 million year-over-year primarily driven by FX headwinds in South America. For the fourth quarter, EBIT adjusted in GMI was down 500 million year-over-year due to South America headwinds as well as lower equity income in China. We still delivered strong full year equity income of 2 billion in China driven by our market position, cost performance and a richer mix of Cadillac.
Equity income for the quarter was 300 million down year-over-year as a result of the industry slowdown, continued pricing pressure, and partially offset by cost efficiencies and Cadillac growth. Important to note that there were some factors specific to Q4 including lower production levels and elevated launch cost that impacted the results for the quarter by $100 million.
A few comments on GM Financial, Cruise and our Corp segments. GM Financial posted all-time record revenue of 14 billion for the year and all-time record EBT adjusted of 1.9 billion. In the fourth quarter, GM Financial generated revenue of 3.6 billion and EBT adjusted of 400 million both records for the fourth quarter. In October, GM Financial paid a dividend of 375 million.
As I mentioned last month, continued dividends from GM Financial provides an opportunity to strengthen our long-term cash generation capability and narrow the gap between earnings and free cash flow. Cruise costs were 700 million for the year and 200 million for Q4. We expect to spend approximately 1 billion in the GM Cruise segment in 2019.
Corp segment costs for the full year were 600 million including approximately 250 million combined favorable impact from PSA warrants and revaluation of our list investment. We expect to spend the Corp segment to be about a billion in 2019. In the fourth quarter, Corp sector costs were impacted by unfavorable performance in PSA warrants and were $400 million negative for quarter.
Before I close, I wanted to reiterate our outlook for the calendar year. As I mentioned last month, we expect strong EPS diluted adjusted in the range of $6.50 to $7 and adjusted automotive free cash flow in the range of $4.5 to $6 billion. Catching on the headwinds, we will take downtime to the tune of 25,000 units as we prepare for the launch of our all new full-size SUV. We expect China equity income to be down moderately year-over-year. We expect to see headwinds year-over-year from commodities and tariffs to the tune of $1 billion.
Finally headwinds from depreciation and pension income are expected to be approximately 1 billion, and as a reminder, since these are non-cash items, they were compressed the gap between earnings and free cash flow. Offsetting these are a number of tailwinds specific to GM. The full year benefit of our truck launch will provide tailwinds in volume, mix and price in 2019. We expect a meaningful benefit from full year of XT4 and Blazer, the launch of Cadillac XT6 as Mary mentioned, and the rollout of our global family of vehicles.
We also expect year-over-year growth in high margin adjacencies like aftersales and OnStar. When you layer on top of that, the transformational cost savings of 2 billion to 2.5 billion through 2019, we expect these tailwinds to more than offset the headwinds, assuming a similar macro-environment. It is also important to understand this year quarterly cadence, we expect the first quarter to be the weakest since most of our SUV downtime will be taken in the first quarter.
In addition, we will have lower volumes in China, given continued industry pressure while staying disciplined by reducing our inventory levels. As we progress through the year, we expect to see improvements in China equity income following these inventory actions and with a strong product launch cadence later in the year.
As a reminder Q1 is typically our weakest cash flow quarter due to working capital seasonality. In addition, this year given the SUV downtime that I just mentioned, Q1 cash flow is expected to be meaningfully below our historical averages. For the full year, however, we expect cash flow to improve after Q1 and our full year free cash flow, as I mentioned earlier, will be in the range of $4.5 billion to $6 billion.
In summary, we had a solid finish to 2018 and we will continue to stay focused on execution in 2019, and as I mentioned in January, we had three key financial priorities including improving our free cash flow and cash conversion, a best-in-class cost structure and efficient capital deployment.
That concludes our opening comments and we will now move to the Q&A portion of the call.
[Operator Instructions] Our first question comes from the line of John Murphy with Bank of America.
A sort of follow-up question to your finish there, Dhivya. I am just curious, if you could go through the cadence of the truck launches, I mean it sounds like you've got 75,000 to light duties in the fourth quarter, but obviously that’s much lower than run rate you expect on a new truck. When the HD will actually start really contributing post there ramp and there launch and then when the SUV will layer in? So if you kind think about when those -- the SOPs for those and when the real full throated benefit comes for reach of the three tranches of the trucks?
Sure, John. So, if you look at Fort Wayne, we’re already up and running in full volume and that transition is over. So, if you switch over to Silao, which is where we have taken our downtime in fourth quarter, we’re now up to full line rate reproduction for our light-duty pickup. As after January, we’re up to full level of production. So light duties, we’re pretty much with our transition.
If you switch over to heavy-duty, most of the changeover we have been working on in 2018 and through second quarter of 2019, we will see transition. And after that starting in Q3 of 2019 is when you will see, the full production ramping up for heavy-duty. For SUVs, we’re going to take the 25,000 downtime for the year that will be mostly in Q1 of 2019 and the SORP for that will be in 2020 and will have more to talk about that later.
Just a second question, if you could update us on what’s going on with Cruise? I mean, obviously, there was some talk about getting launched with a fleet, commercial fleet this year, something that might get a little bit delayed. And also maybe Mary, if you could talk about what’s going on to DOT petition on the fourth gen Cruise? And if there's any word on that whatsoever?
So, there is really no word on the petition for our level four, our track four vehicle, but we also are very capable of launching with the truck three model. So, I think we’re in good position there. We -- as we've been consistently communicating, safety is going to be the getting metrics for Cruise. We have hired -- we're at 1,100 people, so we've got the right team and at right focus obviously moving out there has been I think just shows our commitment to what we’re doing there and been able to work on the whole ecosystem as well as the technology.
We continue to make rapid progress with the technology, I think that's as evidenced by the video, we released just last month that shows that our vehicle can handle the new that others are struggling with. So I think we’re in a very strong position, if not a leading position. So, we’re continuing to make the rapid progress. We’re going to make sure we meet all the appropriate safety thresholds that we defined for ourselves as well as the regulatory requirements, and this is going to be a really important critical year, and we’re going to continue to update you as we progress, but I would say everything is moving forward in a very positive fashion.
And then just lastly just one sort of housekeeping, when we think about the GMF dividends, I think it was 434 in '18. So what is the progression as the balance sheet and the earnings growth at GMF? And how should we think about sort of the addition of cash flow in 19 and 20 and beyond?
So, John, you're absolutely right. The dividend in GMF is now at a level which is lower than what would be our steady state potential. If you look at our long-term earnings before tax expectation for GMF that's in the range of about $2 billion, and we expect that once we reach full captive and that's going to be likely in the early 2020, we would be able to dividend the earnings before that will after taxes, net income I would say about to be apparent. The curve between there and now would be determined by our average ratio along the way.
And we have our managerial target of 10 times to leverage ratio of GMF. And if we've seen potential for the dividends, we will take that but we will ultimately be governed by maintaining and appropriate leverage ratio and our communications to the rating agencies and how much of dividends we take out of fin-co where we will assume in our outlook for 2019 is that a level that's comparable to 2018 from a dividend perspective. And if we see anything above that, that would be upside. But we will post you that from that as we move forward with how the leverage ratio developed.
But simply, it's fair to say 1.5 billion potential upside run rate to free cash flow as GMF normalizes into its size that you want to get it to?
Thanks John.
Our next question comes from the line of Rod Lache with Wolfe Research.
Couple of questions. One is this fourth quarter margin in North America obviously was really strong, it was up year-over-year despite the higher DNA, the commodity inflation, all of those headwinds and obviously you are so kind of early in the truck launch. I was hoping you may be able to just address one aspect of how we should be thinking about the truck positive from where we are right now into 2019? At one point, you talked about, I think it was a $2 billion revenue opportunity for you, as you convert your average transaction prices between where you were on the old trucks and were you expected to be. What your updated view on that? Are you tracking towards that? Is that something we should see in 2019?
Sure. So, before we even get into the numbers, I would say from a truck launch perspective, we're really excited about the new generation of trucks and where we have been in the leadership position that for many years, and we expect to continue with that with this brand new launches that we have. And within that, Rod we -- if you remember, we had talked about the releasing a number of constraints that we have historically had with our previous truck platforms including crew cab capacity, which we have fixed that I would say with the current generation versus the prior generation. And also a wider and broader offering of vehicles including high-content, high-value, we would really participate in the middle of the curve and now we've sort of expanded that to the edges as well.
So put all that together, Q4 you are starting to see, you already started to see the impact of pricing as well as mix in our new trucks. And what you're going to see in 2019 is, you could easily run rate that off of Q4 and we're also not going to have the volume headwinds that we saw in 2018 for light duties as we were transitioning them. So light duties, I would say volume up, mix favorable and pricing continues to be support of this world. Heavy duties, even you see this similar dynamic in the second half of the year, so you will see half year of benefit of that and SUVs as it continues to be a transition year. So, a simple way of looking at it for you would be to take the Q4 results for light duties and run rate that in 2019.
I was also hoping that you can address the non-China part of GMI? Looks like, it was about a $1.6 billion drag last year. What are your high-level expectations for this going forward? Obviously, there is some Korea improvement and is the rest of it contingent on macro in South America? Or are there some other things that you would expect to be big drivers?
Yes, if you look at our South American business, over the last several, we've taken a number of actions to right size the cost structure and set the business up for future profitability. And in fact in Q4 of 2017, the business did breakeven and turned a profit. What happened in 2018 was, as you will know, the FX story there with the Brazilian real and the Argentine peso. What we've done since then is to start working with a number of our stakeholders, as you know in South America, and we will have more to say as we make more progress there.
But it is important to know a couple of factors specific to 2019. One is, we are going to have a full-year impact of pricing in South America because priced tends to lag FX there. So last year as we were experiencing headwinds in FX, we were pricing for them but on a lagged basis. So you are going to see a full-year impact of that in 2019. And the second aspect is, towards the end of the year, we're going to start to see the impact of our global family of vehicles, and this is the portfolio that we shared more in detail about in last month of our Capital Markets Day.
That portfolio is a new architecture that replaces the numbers of legacy architecture. So, the cost profile and the margin profile of the portfolio is different as well as the footprints to the portfolio where we have more hedged from an FX perspective. So, you're going to start to see the impact of that. So, year-over-year in 2019 based on everything in South America and those actions we've taken in Korea as well, we expect to see improvement from a profitably perspective with GMI.
And just my last question. You've talked about 4.5 billion to 6 billion of free cash flow, but 6 billion to 6.5 billion excluding the timing differences, which were I think largely related to the supplier payment days. If we were to think about the underlying free cash flow of the business in 2019, to kind of users as you for bridging purposes to understand where your free cash flow generative power is of the Company. Is it really closer to the 6 billion and the 6.5 billion just on a go forward basis?
Yes, I think timing you have addressed, Rod. It was basically related to supplier payments as well as production timing and our changeover. And as we look at -- look beyond 2019, excluding the impact of timing, you are going to see the remaining cost savings flow through, we said 4.5 billion in total. 2019 will get a about a half of it and the 2020 results will have the remaining benefits of the cost savings as well. And couple of that with our CapEx savings, we talked about how our 8.5 billion run rate will get to a -- 8.5 billion current level will get to a 7 billion by 2020. You're going to see the impact of that in 2020 as well. But obviously, if all of that is in the context of this current macro-environment and I'm -- what I am giving you is puts and takes assuming and nothing else changes, but you have tailwinds working for us in 2020.
Our next question comes from the line of Itay Michaeli from Citi.
Just a first question on China, given the recent challenges in the last few quarters, how you're now thinking about normalized China margins for GM say over the next couple of years?
I think if you look at, there is kind of puts and takes there from a Cadillac perspective and launching more cross over, we think there is an opportunity continue to grow and improve their margins. Clearly, as we transitioned to more electrified vehicles as we gain scale that will be lower and then we move higher. So, we're still focused on having strong margins and China will go through a bit of transition with the EVs. So, we think that specifically the growth of Cadillac and some of our larger SUVs will help to offset that.
And then, I think you've mentioned a $1 billion still assumed on for commodities and tariffs. Love to get your thoughts on tariffs component in terms of what you're assuming and just some of that the scenarios that we should be thinking about Section 232 and some of the other items are still outstanding out there?
Yes, Itay, it's a pretty volatile environment, so I don’t want to put specific numbers on individual components here. You've seen some pullback in steel and aluminum. Palladium has gone up and it changes day-to-day. So I wouldn’t really break that down into individual components. We do have the 301 tariffs factored into our outlook for the year that's embedded in our 1 billion number. And as we said last year, the amount -- since our sourcing for steel and aluminum is largely local, we don’t anticipate any tariff components there that's more of where the spot prices are moving and that tends to be lagged by a couple of months. So take that as a broader $1 billion number and we've shown during 2018 that we're going to work to offset that with matured cost efficiencies and other efficiency, so we can find and that's a no different in 2019.
Our next question comes from the line of Joseph Spak with RBC Capital Markets.
Just one quick question and I think Rod alluded to this. The higher D&A in North America, it looks like I think some of that was accelerated depreciation related to some of the actions you took in North America. Was that actually backed out then the accelerated part from the adjusted results?
That's right. The accelerated depreciation as a part of the overall charge for transformation which is treated as special for EBIT adjusted. The one that Rod was talking about in the form of additional D&A, that is our normal cadence of our D&A normalizing to our capital level, and we saw a good portion of that flow through in the fixed component of our EBIT walk. For the fourth quarter as well as the calendar year, it impacted results. And as I said in 2019, that will continue to impact results as well. So, that's the normal D&A, Joe. The accelerated one is not counted in that.
Okay. So of the 1 5 roughly in America, that includes the accelerated portion, so it was up -- so on an apples-to-apples basis, it was up a couple of $100 million year-over-year?
You are talking about the accelerated portion or the normal…
No. On an adjusted basis, how much higher was the D&A?
I would say from the transformation perspective, we took a charge of about 1.3 billion for the year that included D&A of about 300 million or so with the 1.3 billion charge. So, that's the transformation portion. And on the normalized basis, if you look at our calendar year EBIT walk, the fixed component had a year-over-year increase a vast majority of that. If not all of it, I would say it would be attributed to D&A.
The real point in going down this path is as we think. You showed the free cash flow walks on Slide 13, as we think about that CapEx less depreciation for '19. Does that gap further narrow relative to your $8 billion, $9 billion CapEx guidance for the year?
Yes, the way I would think about that bridges in 2019, you are going to have 1 billion of additional depreciation and pension income which are non-cash, so you will see the compression in the first two bar coming from that. And in 2020, you are going to see additional depreciation and pension and a decline in 1 billion of capital. So that should be on top of the pension and depreciation number that I would think about. And as John asked earlier about GMF, that's the other component of when that dividend starts to come in, that will be on top of this first two components.
Our next question comes from the line of Colin Langan with UBS.
There is obviously a lot of pushback on the plans to close some plans. I mean, how much of that 4.5 billion is at risk, if the unions don’t allow those the concessions are closing? And do you see that as a risk?
I think obviously it's important, we announced that the plans are unallocated and as part of our UAW negotiations, this year we need to finalize the status. But I think when you look at the fact of the 2,800 workers that are impacted, 1,200 of retirement eligible, and we have about 2,700 jobs available, as I mentioned already 950 people have been placed. I think as we worked through and addressed the concerns from a workforce perspective, that will go a long way to allowing us to make this transition.
And obviously, we have work to do, but when we look at what we need to do from a market perspective, we can't run at a 70% utilization, we had to improve that and that will work to accomplish. So, that's the way I look at, and I don’t see risks from especially with the ability that we have to do with the people to places where we're hiring. And we just announced yesterday that we have 1,000 jobs available in Flint. So, I think it's the transition we have to go through, it's what we have to do and problem solve with UAW.
And when we look at your '19 guidance, what is the assumption on pickup? I mean, do expect to ends up more about the new product take pricing? Some of the recent data showed some market share shift, but it's followed months-to-months. I mean, are you optimistic that you're going to gain share with new truck? Or is it more about them?
I would say as volume mix priced all of the above, we expect the truck penetration to hover around the ranges that it has booked in the recent past, which is in the low 20s. We expect that to continue going forward. The crew cab makes us an important component of all of this. As I mentioned earlier, in the second half of the year while we release the constraint on crew cab with Fort Wayne, we saw the tailwind associated with that and we are going to see in the full year, calendar year, a full impact of both Fort Wayne and Silao still out running at full crew cab capacity.
Got it. So with the recent market share changes that are showing up, that they are not -- until next year I guess, would be the short answer?
Yes, I wouldn't extrapolate from one data point Colin.
Got it. And just lastly, any color on where your inventory in China is -- a lot of concern that there is still high inventories, I guess, across the industry?
Yes, I would say we've taken actions in Q4 to right size our overall production levels. We took out about 250,000 units of production in China in Q4. If you look at the overall inventory picture, we target to be typically around 40 to 45 days of inventory. SGM, which operates more in the tier 1 to 2 cities, is a touch above that, and we're working on that further in Q1 of 2019. SGMW is at a level that is higher than we would like, and again that's action that we have to continue to take in Q1 as well.
So when I talk about the cadence in my remarks, and I alluded to Q1 being the seasonal low in China as well, it factors the inventory right-sizing actions within that.
Got it. All right. Thank you very much for taking my question.
Sure.
Our next question comes from the line of David Tamberrino with Goldman Sachs.
Great. Let's stay in China for the moment. Trying to read the tea leaves on your comments, as it sounds like your JV income should take a step down from the $300 million run rate in the fourth quarter and the first quarter, as you take some of these inventory actions and shutdown production in wholesales, but then you're expecting it to improve sequentially throughout the year, and outside -- getting to normalized wholesale shipments, I am just wondering what's the main driver there?
Yes. Firstly, I would not assume that it would take a step down from Q4. I would say similar to Q4 we're taking inventory actions. We took them in Q4, from a production perspective and we're going to continue to take them in Q1 as well. And I think it's important to note, the 20 new launches that we talked about earlier, they are in Q2, Q3 and Q4. So actions that are specific to us, I would say, really starts to take effect in the latter half of the year. So from a cadence perspective in China I would say, Q1, expect similar-ish levels to Q4 and then pick up after that. But obviously with an eye overall on the macro environment as well as the sales picture over there.
Got it. That's helpful, Dhivya. And then from a Cruise perspective, the spend, well below your billion target for the year. Is there anything to read into that? Are you signaling anything here? I kind of want to understand that if there was a tone-shift earlier, another analyst asked a question, it wasn't necessarily answered or not, if we should expect a later deployment in 2019. It seemed a little bit more squishy, if I can use that term. But on the back of that one tone-shift question; two, should that spend in 2019 ramp toward at $1 billion that you were looking for? And then what type of increased spend are you really contemplating at deployment for your operations, as well as customer acquisition costs with getting people into a AV ride-hailing network?
David, we're not squishy at all on our plan for AV for Cruise. I would say one of the reasons the spend is lower -- it turned out to be lower in 2018 is, Kyle Vogt is an excellent leader and manager and he spends every dollar like it's his own. So there's incredibly good cost controls in GM Cruise set out, and saw that we expect to spend this year. So I think that's just good cost discipline.
As I said that -- this is one of the biggest technical challenges of our time. But I think we're really well positioned. We're committed. We have every resource we need, and if they come forward and say they need additional resources, we stand ready to provide those. So I think it's in a strong position from funding. I think it's in a strong position, as we continue to do the development. And yes, so we're going to keep you posted throughout the year. But we're on-track from the performance that we've talked about, and I think again, reference to video that -- what the vehicle is now able to do, we're going to continue to work on the regulatory front as well, and we will hold ourselves to the safety standards that we've set. But we're committed and we're moving at a very aggressive pace.
Okay. And just within that, maybe I'm missing it, you did about $700 million of spend this year, your target was $1 billion for 2018, you came in $300 million low, I understand some cost saves. Are you expecting a similar level, $700 million in your 2019 guidance, just…?
Our guidance for 2019 for GM Cruise is approximately $1 billion.
Our next question comes from the line of Adam Jonas with Morgan Stanley.
Two quick questions. First, when do you think GM can sell EVs for a positive EBIT margin roughly?
So Adam, we've talked to you about the fact that with our next generation of development, that we want to make sure we have obtainable, profitable, desirable, and with the appropriate range. And so that is the work that we're doing. We benefit from the fact that we have a strong position in China, and as you know, the regulatory situation we will drive there. Also I think, important to note that we have the partnership with Honda to leverage the technology as well. So I think we're in a good position, driving our cell costs down, also from a quality perspective, and that is our stated goal when we launch that next family of vehicles.
Okay. So I'm interpreting that as kind of post 2020, maybe 2021, correct me if I'm wrong. Second, question for either Mary, you or for Mark if he is on, what do you think of an all-electric pickup truck and when will GM sell an E-Silverado?
So, I think you said, correct, if you're wrong. I would say early next decade, but I wouldn't put any more specificity on EV profitability than that. And I'll say on your second question is, we believe in an all EV future. So you'll have to stay tuned.
We will. Thank you.
Our next question comes from the line of Ryan Brinkman with JP Morgan.
I thought to ask on GM International restructuring progress outside of China that is. So can you provide us with an update on the Korea restructuring announced in the 1Q call last year, and how you would rate your progress there since that time? Also I think there were two international plants included in the restructuring announcement back in November. These were unnamed, but slated to close sometime in 2019, presumably they are outside Korea, perhaps South America. Any update you can provide on how investors should think about the cadence of those savings, as 2019 progresses?
I would step back and look more broadly at GMI, not including China and Dhivya has already addressed South America. I would say that Korea restructuring is on track, and we're also seeing a pickup in our share there. Obviously, there was a difficult period of time. So we continue to implement all of the actions that we announced last year. I would say there is still work that we're doing around that region to right size the business, have a solid plan to profitability and that work is under way. So I don't have anything more specific to add. But we're -- what we announced with the two plants is definitely on track. And I don't know, Dhivya, if you have any additional color you want to add there?
I would just say that the cost savings that we have outlined for 2019, contemplate the right cadence for these plants as well. So it's all baked in.
And then lastly, but sticking with GMI. It looks like currency continues to be a fairly large headwind, $300 million in the quarter. Seemingly the Argentine peso and the real, biggest drivers there. Based on the prevailing spot prices, any hedges that you might have? And then your localization plans with regard to the GEM platform, how should we think about this trend as 2019 progresses?
Yes, I would say there has been some stabilization post the elections in Brazil from a Brazilian real perspective. But obviously remains elevated relative to historical averages. I think the way to think about Brazil and Argentina is, we're able to price in line with inflation in Brazil, and we typically pass through the FX headwinds in Argentina. There might be a lag, Ryan, but I wouldn't think of Argentina as anything other than -- you take last few months of FX headwinds and kind of factor that into your future pricing ability.
So, I wouldn't think of it as hedges and we don't use forwards necessarily in these areas. I would look at pricing and localization as the 2 primary levers we have from an FX management perspective. And on localization, the next generation of vehicles that I mentioned earlier, will be more localized. But with all the actions we're taking, it is our objective to be able to breakeven and turn a profit at even more extreme levels of FX. So we're continuing to work on it.
Our next question comes from the line of Brian Johnson with Barclays.
Yes. I want to ask a few questions around GM Financial. First, if I look at full year 2018 over 2017, ROA seemed to expand from 140 bps to 195 bps. Could you maybe dimension how much of that was due to lease residual performance versus credit performance versus other factors like net interest margin or cost saves?
Yes, I would say, if you look at overall year-over-year GMF EBT bridge, if you will, half it from increase in volumes as they continue to grow to full captive levels. So just their penetration getting higher and their overall volume is getting higher and the other half coming from the fact that, residual values were flat in 2018 versus 2017, so take the delta, Brian and divide that by two.
Okay. So the main factor of the ROA increase would have been the residuals. Which gets to the second question, you've talked about a mature run rate of about $2 billion EBIT, full year 2019 was $1.9 billion and fourth quarter would kind of be right in line with that. Are you implying that it's sort of going to be flattish, as perhaps residual gains come down, given your used car pricing forecasts or even down next year?
I'd say 2019 flat to 2018, we're expecting a 4% to 6% decline in residual values, which we expect will be offset by the growth in volume that I mentioned and our continued penetration. And the other aspect longer term as well, Brian, as the business matures, you're able to spread the OpEx over a larger asset base. So we should see OpEx efficiencies as well as we move forward.
Okay. And the need to grow the asset base is why you're not committing to upping the payout ratio to the full 100% just yet?
That's correct. So our current asset base is around -- north of $95 billion. We would see in the next several years, that that would tail off probably in the $120 million range. So the amount of equity that we are holding in the fin-co now is to support that remaining growth.
And final question is around your GM Financial JV in China. At least the 3Q is up to 44% retail penetration, which seems impressive. A few, just more strategic questions; to what extent is there further room to use that to offset some of the headwinds in the Chinese market? And then second, as you kind of think about the mix -- vehicle mix in China, are you better able to penetrate the upper Cadillac, Buick and -- of the market with that support, versus the lower end, given the credit profile of the buyers?
I'd say to you, first question, there's certainly room from a growth perspective for SAIC-GMAC joint venture. We are still in the early stages of, I would say, of penetration over there on financing and also the leasing portfolio which is in its infancy, so more growth to be had longer term. And across the board, I would say, in China, adjacencies are at its early stages of development across the board, whether it's the after sales, GMF and others. So, we will continue growing those. And from a vehicle mix perspective, perhaps more tilted toward the tier 1 to tier 2 market, than the tier 3 to tier 4 market. But I wouldn't specifically draw trends on Cadillac versus other brands.
Our next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Wanted to ask you about the expected cadence of some of the benefits from your restructuring actions, I assume that as part of your comments on the cadence for the earnings this year, some of it is also -- when some of these benefits hit and maybe beyond the first quarter. So can you maybe talk us about that $2 billion to $2.5 billion benefit expected for this year, how should we think about it in terms of progression throughout the year?
Yes, I'd say we're off to a pretty good start. As I mentioned in my comments, Q4, we already started to see early signs of these savings starting to flow through. And if you look at calendar year 2019, the savings will be tilted more toward the earlier part of the year. So we will be off to a pretty good start here after Q1. So I'd say Q1 is when we implemented, Q2 onwards, you will start to see the benefits.
Okay, I understand. And I guess second question, there is -- I don't think there was a big focus on the Capital Markets Day. But I was curious about your thoughts around the opportunity to do some -- or the priority around doing some buybacks this year. It feels like if you achieve your $4.5 billion to $6 billion guidance, even after financing, restructuring and the common dividend, it feels like there could be some room, depending on where you shake out for some buyback. Is that a priority or is 2019 viewed as a more a transition year, and then it would come in future years?
Yes, we're going to stay very committed to our capital allocation framework of looking at opportunities to continue to invest in the business to generate a greater than 20% return, as well as maintaining an investment grade balance sheet. And then, as we get to that point, there is opportunity that will be returned to shareholders. So I don't have anything specific to say other than we're going to follow our process.
Okay. And then I guess, finally, just curious what you're seeing in terms of latest data and trends in China. Obviously you're assuming a fairly flat market for the year, which I think when the guidance was given, may have been perhaps seen as optimistic. Now the most recent data point throughout January seemed to think there is going to be a little bit of stabilization. Are you seeing any of that or is it sort of like too early to say, in terms of the Chinese market?
No. I think we're seeing improvements from Q4. I mean it's early days, but we're optimistic, not only from what we've seen in the month of January, but also, what the government has announced, because we've seen that have a positive impact. And then again, the team there is very focused on costs and improving mix, etc. So with the new launches, we see a lot of, we see opportunity from an industry perspective, with the signs we saw in January and we also have a lot of, I'll say, GM specific opportunity.
And just very finally, I guess still on China. So how should we think about your guidance for a modest decline in equity income? I mean, it seems like you're speaking about Q1, not necessarily any worse than Q4, then I would assume beyond that, you sort of have the benefit from some of the new products and then potentially some stabilization in the market. So is it really thus -- mathematically you are lapping some very strong quarters last year, or is there anything else that's sort of like a headwind to expect throughout the year?
I wouldn't say there's headwinds to expect beyond what we shared at Capital Markets Day. I think it's important to note that, when we say moderately lower equity income we're factoring all these in and it's our intent -- there will be puts and takes in different regions and between North America, China and so on. It's still our intent to post a strong calendar year, results from a company perspective. So I wouldn't over train on one versus the other. We do expect that as Mary mentioned, there's company specific factors that's going to help us. It is a volatile market at the end of the day, I wouldn't get any more specific on that.
Our last question comes from the line of Chris McNally with Evercore.
Hi. First time caller, as they say, so appreciate getting on the call. Maybe I can attack this cadence on the North American EBIT Just in a slightly different way. I think you guys been clear, that Q1 is low, we have production shutdown, and the cadence of the cost saves across the year. I think some of the questions investors may have are around in the second half. Is there any extraordinary cost that we should think about, given the launch of the heavy duty and the SUVs? Because if not, you would you would think that sort of cadence, beats the sort of Q4 as another peak. So is there any sort of offset to the benefit that you've laid out, that should get better across the year?
I don't think there was any specific launch related costs or anything we haven't already talked about, that's going to weigh on North American results. We had talked about depreciation and pension income going down and commodity headwinds, that does impact North America, but that should even through the whole year, depending on how commodities behave in the next several quarters here. But I'd just say, beyond what you talked about on Q1 with the downtime and all the factors that I mentioned, that should positively impact the second half of the year. There is nothing that we haven't already discussed.
And just one follow-up on actually the timing of commodities and tariffs, I mean obviously, the $1 billion we are still annualizing some of the costs from last year, so it would make sense that those hits are greatest in the first half. It sort of surprised me a little bit, when you talked about some of the spot prices of the quarter of being a lag of quarters, I know sometimes with hedges, could be anywhere from, four to six quarters. Is it possible that if we see these spot levels continue over the first six months, that there actually could be some benefit by, let's call it the end of the year, as you know, obviously you've had to project out, for the full year?
Yes. The lag that I talked about is in our index commodities. We typically experience a three month lag in -- when the actual impact shows up on our income statement versus when the spot prices go up or down. And I would say, it's really difficult to call the specific cadence of it. As you well know this moves up and down every quarter. I'd say evenly distributed through the entire year. We are obviously watching the 301 tariffs very closely, because that will have an impact, and within the current market environment, I'd say, you also need to look at the mix of which commodities are going up and down as well. So it's difficult to provide any more specificity on a topic that is inherently pretty volatile.
Thank you. I would now like to turn the call over to Mary Barra for her closing comments.
Thank you. Well, thanks everybody for participating today. As we begin the next phase of our transformation, I want you to know that we are committed to continuing to strengthen the core business, as well as continue to accelerate our work to lead in the future of personal mobility. We are really repositioning this company, what from -- one that was trying to be all things to all people in all markets, to a very strategic, agile and profitable company. And we believe we are in a very differentiated position than many of the competitors in this industry. We are intent on reinventing personal transportation, capitalizing on the $1 trillion opportunity on making the world safer, better and more sustainable.
In 2019, we will continue to deliver on our commitments that we've made to you, our owners, by capitalizing on our strong global vehicle portfolio, our adjacent businesses, and we will stay focused on driving profitable growth across the business to create value in the short term and long term for our shareholders. This transformation will be very dynamic and -- but you have our commitment, that we will continue to act with speed, with discipline and with integrity, to drive the business performance that we need to win not only today, but in the future.
So thanks again for your time.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.