Randy Arickx - Executive Director, Corporate Communications & IR Mary Barra - CEO Chuck Stevens - EVP & CFO

Rod Lache - Deutsche Bank John Murphy - Bank of America Merrill Lynch Brian Johnson - Barclays Itay Michaeli - Citi Ryan Brinkman - JPMorgan Patrick Archambault - Goldman Sachs Emmanuel Rosner - CLSA Mike Stover - Susquehanna Financial Group Dan Galves - Credit Suisse

Welcome to the General Motors company Second Quarter 2015 earnings conference call. [Operator Instructions]. I would now like to turn the conference call over to Randy Arickx, Executive Director of Corporate Communications and Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning and thank you for joining us as we review GM's financial results for the second quarter of 2015. Our press release was issued this morning and the conference call materials are available on the GM investor relations website. We're also broadcasting this call via webcast on the Internet. Included in the chart set materials published this morning we have included the key takeaways from each chart in the notes pages in order to provide color on the results. This morning Mary Barra, General Motors' Chief Executive Officer, will provide some brief opening remarks, followed by Chuck Stephens, GM's Executive VP and CFO. Then we will open the line for questions from the analyst community. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. In the room today, we also have Tom Timko, Vice President, Controller and Chief Accounting Officer, to assist in answering questions. Now I will turn the call over the Mary Barra.

Thanks, Randy. Welcome, everyone, to the call. I'm glad you can join us today. I'm really pleased to be able to talk about our second quarter. As we look at it, we have delivered strong earnings growth in the second quarter and we've posted a net income of $1.1 billion and an EBIT adjusted of $2.9 billion. And if you look across our regions from North America, it was strong year-over-year performance in the quarter that was anchored by a record $2.8 billion EBIT adjusted and a 10.5% EBIT adjusted margin. In Europe, we demonstrated a near-breakeven quarter which gives us confidence as we move forward and in China, we continued with strong performance despite, as we all know, a much more challenging market. For the calendar year, we're on plan to increase our earnings and margins and consistent with that, we expect our EBIT adjusted for the second half to be higher than the $5 billion EBIT adjusted we've posted through June. So with this foundation, we're confident in our ability to achieve our 2016 target. To just quickly look at the quarter, our revenue was $38.2 billion, our EBIT adjusted was $2.9 billion and this is the second-highest quarterly result on record. Our earnings per share adjusted was $1.29, up 122% over last year and our adjusted automotive free cash flow was $3.3 billion, very strong, up from $1.9 billion a year ago. We have also committed that each quarterly broadcast or earnings broadcast we will talk about our return on invested capital. Our trailing fourth-quarter average is 23.4% and I think it demonstrates our disciplined capital allocation is paying off as we look across the globe on how we invest. With our strong performance in the cash we have generated it has enabled us to return more than $3 billion to our owners so far this year through the share buybacks that we announced early this year as well as dividends. And I am also pleased that Fitch reaffirmed our performance by raising GM and GM Financial to investment grade. So before we get into the Q&A, I want to couple with this strong financial performance and just give you a couple of examples of things that we're working on and continuing to do to achieve the strategic priorities that we laid out last year. First, as we look at technology and innovation, we do have a lot going on. One example that I don't think a lot of people know about is we have just completed a ridesharing project at Google's headquarters where we had 50 Chevrolet Spark EVs. We learned a tremendous amount of ridesharing from a whole ecosystem perspective and a lot of those learnings are going into the CarUnity car sharing app that is being launched with Opel in Europe which allows consumers to rent their vehicles to others. So that's just one example in what the urban mobility space, as people call it. From a connectivity space, we continue to grow OnStar and 4G LTE and we have over 1 million vehicles on the road today with 4G LTE. We will also see OnStar enter Europe with the launch of -- when we launch the Opel Corsa and with OnStar we'll enter Brazil as we launch the Chevrolet Cruze. I think another important area in this space is with our GM smartphone integration technology. It allows your smartphone, whether it be Apple or Android, to project certain things that you are very used to using on your phone on to the car, not everything, but some key areas. This is really listening to customers and putting them at the center. And you are going to see us expand this to global markets very quickly. So I think you can expect to continue to see General Motors be very aggressive when we look at the technology and innovation we're bringing into the vehicle and for the whole ownership experience. Let's move to another one of our strategic priorities or actually two, earning customers for life and building strong brands. Let me just give you a couple highlights here. From a quality perspective, North America we won four J.D. Power initial quality segment awards for the Chevrolet Malibu, Equinox, Silverado light-duty truck and the Spark and Chevrolet had 10 models in the top three of their segments. Just this week they also announced the J.D. Power APEAL Study. Again, we [Technical Difficulty] performance with four segment award winners and demonstrating continued improvement. From a sales momentum perspective, with Chevrolet and GMC full-sized pickups that momentum was continuing. Share was up to 38.5% for the quarter and that is a 2.9% year-over-year improvement. We also revealed additional products with the 2016 Chevrolet Cruze, the Camaro and the Camaro convertible and they all received very positive reviews with those vehicles. In China, we achieved record first-half retail sales of 1.7 million vehicles and we gained market share. I think it's very important and I know we will have the opportunity to talk more about China as we go through the call here, but very important an 83% increase in SUV sales and record sales for Buick, Cadillac and our Baojun brand. And just an interesting fact with the Baojun brand and this actually is a launch that is in July, so third quarter. But the Baojun 560 which is an SUV, within the first 24 hours of launch we had 15,000 orders. Again, we will talk more about China, but some important progress was made in the second quarter. At GM Financial our North America retail penetration grew to almost 30%, up from 10% a year ago and it's important to note the second quarter marked the first full quarter in which we have positioned GMF as our exclusive lease provider. So I think it demonstrates we're well underway with the GMF strategy that we have outlined. As we look at driving core efficiencies, you will see through the deck and also in the comments that Chuck and I will make as we go through the Q&A, there has been a lot of work done just to continually have discipline in driving efficiencies into every aspect of our business. But another way to drive core efficiencies is partnering. A very good example of that is a recent agreement with Isuzu in the U.S. to produce the low cab forward trucks for Chevrolet and this will begin next year. This is really important because it gives us a broader suite which is very important for the commercial customers that they want one-stop shopping. So have this not only as an opportunity to have this truck, but also we believe will help us sell more full-size pickups. So before I turn the call over to Chuck, I would like to spend a minute or two talking about our 2016 targets. We believe the results in the first half of the year demonstrate that we're on track to achieve the 2016 commitments we have made. If you look at North America, our potential for achieving a 10% EBIT adjusted margin in 2016 is evidenced not only by what we did in Q2, but with eight straight quarters now of year-over-year margin expansion. And on top of that we've got some important launches. We also project that there will be continued high demand for trucks and SUVs and our three-truck strategy is reaping strong benefits. That is even before the refreshed Silverado and Sierra pickups with new powertrain enhancements hit the dealerships later this year. As we look at 2016, our launch schedule again is aggressive. We will have replacements for the high-volume Chevrolet Cruze and the Chevrolet Malibu. And remember, as we talked about, those have an estimated variable profit improvement of about $1,500 per unit. When you talk about Europe and achieving our goal next year to have breakeven performance, again we're getting closer to that goal. With the Astra launch later this year, we will have full availability of both our high-volume Corsa and Astra in 2016. And to look at that, those two models represent about 50% of our volume in Europe. And, again, we expect that the estimated variable profit improvement will be about $900 for the Corsa and about over $1,200 for the Astra. Chuck is going to talk about China a bit more, but I want to make a couple points. First, we expect a more volatile market in China as growth moderates. It hasn't changed our long-term view of China. We continue to believe that the market will grow. There's estimates to about 35 million units over the next 10- to 15-year period. We're well-positioned right now in that market and we want to continue to be well-positioned to capitalize on that growth. We have a very strong partner with SAIC. We're seeing the benefits of what we're doing with Cadillac and the growth -- even additional growth. We have substantial growth opportunities with the Cadillac brand and you will see across all of our brands we're going to continue to have a very aggressive product cadence. Having said that, though, I think as we look at a market as it rapidly matures we need to look at other ways to continue to drive performance. And in China we're also doing that the captive finance capability that we're growing, our increased after sales and OnStar. Again, we're going to look at multiple ways to continue to drive the momentum in China, recognizing that there has been a change. In summary, a very strong quarter with an EPS adjusted of $1.29. We're confident as we execute through this year and into next year. I will look forward to your questions, but right now I'm going to turn it over to Chuck.

Thanks, Mary. I just wanted to take a couple of minutes this morning to provide some perspective on the quarter and the first-half results. In addition to a great second quarter, we also had a very strong first half for the company. Profitability EBIT-adjusted results for the first half grew to $5 billion, up $600 million year-over-year when adjusting for the impact of recalls last year. And, importantly, EBIT-adjusted margins for the first half were at 6.7%, up 110 basis points year-over-year, again adjusting for the impact of recalls. Great results and results that are very much on plan. The results were broad-based, with all but one of our automotive regions posting year-over-year profit improvement during the first half of the year. And although we're very pleased with the strong performance year-to-date, we continue and will continue to take actions to further position the company for long-term success. For example, the second quarter included a $300 million asset impairment charge for GM Thailand. This charge was largely related to ongoing strategic actions to reconfigure and restructure our business, including focusing on core truck and SUV business in Thailand. We believe that these actions will position the country for long-term, sustained profitability and drive return on invested capital to the target levels that we want to achieve. The restructuring action in North America announced during the quarter is another example of us reconfiguring the business to improve our long-term profitability. I would like to spend a few minutes on China. By far, that is the biggest concern being raised by our investors and the biggest concerns are around, obviously, the moderating growth in China and its potential impact on GM. So let me provide some commentary on that topic. At the beginning of the year, we had a really planned for some industry moderation and increased price competition. Our initial assumptions as we entered 2015 were 6% to 8% industry growth overall and 3% price deterioration on a year-over-year basis. It has been clear to us for some time that the moderation is stronger and the pricing environment more challenging than we anticipated. However, I think it's important that despite these developments, we generated very strong performance in the second quarter and the first half of the year. $1 billion in equity income in the first half of the year with 10.1% net margins which represents margin expansion on a year-over-year basis and a much more difficult environment in China. We were able to generate these results specifically because we had been very proactively managing the market risks with several actions, such as further optimizing mix by increasing productions of our SUVs. Mary mentioned year-to-date SUV sales are up 83% versus 2014. The teams in China have been aggressively reducing costs by rolling out cost-down/efficiency-up initiatives and we have been working closely with our dealer body to manage inventory levels. Clearly, on the back of these proactive measures, based on the results that you saw in the second quarter and the first half, we were able to offset market and price pressures to continue to deliver strong earnings. I think it is important also to point out that GMW's Baojun portfolio continues to expand and that provides General Motors with a unique opportunity in the China market to compete strongly with domestic OEM portfolios and particularly in the Tier 2, 3 and 4 cities and particularly in the fast-growing SUV and MPV segments. Looking forward, we're expecting continued moderation of industry growth and we expect the macroeconomic volatility to continue. Frankly, based on the current environment, we now expect the industry in China to grow for the full year in low single-digit range versus 2014. And despite somewhat anemic growth in the first half of the year, from an industry perspective around 1%, our low to mid single-digit growth forecast is underpinned by several factors. First, the launch cadence by several OEMs, including General Motors, that will introduce new models in the second half of the year which should spur demand. Next, seasonality. Typically the second half in China is the stronger half, driven by national holidays in the fourth quarter of the year. And then, finally the potential recovery from the current reaction to the volatilities in the stock market. Clearly, June and thus far in July there's been pretty significant headwinds on a year-over-year basis. We don't anticipate that that is going to continue through the year, but that is something we're going to have to monitor. Despite our revised industry outlook, we expect to sustain our first-half performance throughout the rest of the year. Specifically, increase market share and similar equity income levels. There are a number of drivers that give us confidence in our outlook which include our new launches, like the Buick Verano and Baojun 560 SUV that Mary mentioned, continued success of the Envision which is exceeding our expectations and continues to grow on a year-over-year basis, and further growth in Cadillac. Second, improved mix again driven by recently launched products like the Buick Envision, the Baojun 730 and the Baojun 560. Again, as we mentioned, SUV sales are up over 80% year-over-year and the Baojun brand sales are up 370% on a year-over-year basis. Third, further cost actions and efficiency improvements. I think the team demonstrated in the first half of the year the ability to be agile and address headwinds and actively, proactively mitigate those. Again, based on our results. I think it's also important to remember that our first half results and we talked about this in the first quarter -- were negatively impacted by plant downtime and launch costs ahead of new product introductions. We also recognized one of the areas causing elevated concerns in China relates to pricing and let me provide some context in how we think about that as it relates to GM. As I mentioned before, in the past we had experienced carryover price reductions of about 3% on a year-over-year basis and generally we were able to largely offset that through material cost performance. For 2015, given the increased pricing pressures, we're expecting price reductions in the 5% to 6% range, give or take and obviously this is something we will monitor closely. As a general rule of thumb, a 1% carryover price reduction at SGM is worth about $100 million of equity income for GM, absent any mitigating actions. And I think that's important, absent any mitigating actions. Similar to Q1 and Q2, we will continue to look for opportunities and we plan to find opportunities to offset those price headwinds, including improved mix and cost efficiency. As I mentioned, you'd expect the team is working hard on the cost side to ensure we protect our profitability. We're highly focused on that. So bottom line, we recognize the market has become more challenging, but we're confident in our plan and we're taking the necessary actions to help mitigate these headwinds. Finally, with regard to our total company outlook for the balance of the year, we're very much on plan for improved full-year profit and margin growth versus 2014, very much on plan in the first half. This will translate into EBIT adjusted north of $10 billion on a total company basis and our expectations are the second half is going to be greater than the first half. And there will be assuredly puts and takes versus our original expectations as we move through the year. There have been already puts and takes versus our original expectations, if you look at South America and some other developments, but, overall, we expect a very strong outcome for the company for the full year. So that concludes our opening comments. We will now move to the question-and-answer portion of the call, thanks.

[Operator Instructions]. Our first question comes from the line of Rod Lache with Deutsche Bank.

Was hoping you might just clarify a few things for us. One is, Chuck, that 1% is about $100 million. Last year that was a $44 billion revenue business unconsolidated, so I would think that 1% is over $400 million and we might get half of that. So what are we missing there? I would imagine that your fixed costs is up a little bit just given the increasing capacity. Can you maybe comment on maybe what the sensitivity is for every 1% movement in volume for you, just given how your mix has shifted today?

Yes, let me talk about the price first. The price and the price impact is largely isolated to SGM. Given SGMW's position in the market, their strength in the commercial vehicle segment, we're not seeing the same kind of headwind. It's really around SGM, so I think that carves off a piece of the $44 billion. Secondly, that is carryover price. So, similar to all other markets, as we launch new products they are not faced with a year-over-year price impact. So that would be the other driver of that, Rod, why that is $100 million versus just taking 1% of $44 billion. I hope that answered your question. Clearly on your fixed cost side, yes, as we mentioned in the first quarter and even in the first half, there's some incremental costs around manufacturing associated with the launch, incremental D&A, but there's still opportunities to drive improvement in fixed costs in indirect, in SG&A, in driving overall efficiency. And that is what the team is very focused on in China. Again from an overall industry perspective, it really depends on ultimately how that plays out. Our view right now is that in that low single-digit growth in industry, we will see a reasonable improvement in passenger vehicles and more headwinds in commercial vehicles in the context of that overall. So that has a bit of an impact on muting the impact on our overall results. My perspective, Rod, when looking on a year-over-year basis, the biggest risk to us or the biggest risk from a China perspective is really pricing more than industry when we look at the overall picture.

What's the sensitivity for a 1% move in volume? And can you give us maybe a little bit of insight into? You mentioned two sources of growth. One is the Tier 2 through 4 regions and some of it is coming from the new product. What is the exposure today to Tier 2 through 4 and what kind of volumes would you expect from some of these new products?

If you look at our overall volume in China, roughly half of it is SGM and half is Wuling, broad strokes. And within Wuling is Baojun, so the vast majority of Wuling sales are in Tier 2, 3 and 4 cities and Baojun brand is up 370% year-over-year. So that kind of gives the idea of the opportunity that we have in those cities and the expected improvement there. The pressure in the Tier 1 cities is really where the foreign OEMs dominate. That's where the price pressure is and that's where some of the volume pressure is as well.

So what is the sensitivity for a 1% move? Is there a rule of thumb that we could use?

I would think, if it translated into a full dollar of revenue it's going to be kind of similar to the price sensitivity. Hard to look at that without factoring in mix and I can't come up with a general rule of thumb, Rod, on that because there's different drivers. It depends again where that 1% would fall.

Okay, one last thing, if I may. I know I'm taking too much time here. But in North America you are doing some pretty impressive margins, especially in light of the fleet pricing and restructuring costs and recall that you had. There are a number of things that you have said before that are in your control, like product material cost declines and some of that seems to be coming through. What should we be thinking, if you can just refresh our memory, in terms of the cost reduction expectation, net cost reduction for this year and next in North America?

I will talk about material costs on carryover thus far and overall [indiscernible]. From a corporate perspective, we generated about $1.1 billion of year-over-year improvement, roughly $600 million to $700 million of that was in North America. Our expectations would be we would see that continue into the second half of the year. Overall fixed costs, again from a company perspective, year-over-year look to be relatively flat to slightly up. We continue to drive a lot of efficiency with operations excellence. So overall cost, again excluding the material costs on new major kind of product programs, will be down, from a material cost perspective, relatively flat fixed. And I think that is also consistent for North America.

Same cadence into next year?

We will talk about next year when we come out and talk to you in January.

Your next question comes from John Murphy with Bank of America.

Just a first question on slide 14 on North America. I think you guys had alluded to about a $300 million hit in auctions for some recall action, similar to what we saw in the first quarter where it was a little bit larger. If we were to back that out, that would probably add about 1.1% to the 10.5% that you guys printed. Is that about right, Chuck? Is that where you shake out?

The math is correct, John. When you look at just that driver of the business, look, the results in North America, 10.5% margins. I think margin speak for themselves and clearly one of the headwinds that we had to offset in the quarter was that auction issue and the loss at auction issue on fleet. But as we move through the rest of the year there will be puts and takes as well, but clearly the core operating performance in North America was very strong in the second quarter.

I'm just trying to understand, if we were to back out those recall actions, as well as the restructuring, you probably would've been doing more like a 12.4% margin in North America. Obviously, there will be puts and takes as we go through the rest of the year and go into 2016, but I mean the ongoing underlying performance is even stronger. Although 10.5% is impressive, it looks like the underlying performance is even stronger than what is generally perceived and I'm just trying to make sure we understand that right. But I think that's kind of about where the math shakes out.

I certainly wouldn't dispute your math. My message would be first half of the year North America generating 9.7% EBIT margins which to me demonstrates that we're very much on the path to a sustained 10% margin objective in 2016. So we're very pleased with the results so far.

Okay. And then just a quick second question, if we think about South America, a 23% drop in volume, yet there was almost no change in EBIT. I'm just curious, for that EBIT line to turn in the right direction, what would it take. Because you are holding the line on a 23% drop in volume, could we be seeing some small conservation coming from South America on a very small volume recovery?

This goes back and we've talked about this before. This goes back to the actions we started to execute in 2012 and have been consistently executing and that is to continue to drive efficiency in the business model in South America. And the team in South America did an outstanding job earlier this year when we saw the industry performance and the growth and some of the headwinds in Brazil specifically but now kind of spreading through the rest of the region, took very, very proactive action. We talked about that a bit with the Q1 release. We've cut our workforce, hourly and salaried, by 20%. We're going to see the benefit of that in the second half of the year and going into 2016. Frankly, I would expect for South America to see second-half results kind of similar to last year which is relatively close to breakeven, even under the current economic situation. Hard to predict what's going to happen, but under the current economic situation I think you're going to see kind of the same cadence as last year. And my take away is we're highly leveraged to any recovery in South America and I think the actions we have been taking over the last few years will put us in position to quickly get into a positive profit position there.

Similarly on Europe, it was a good performance but there's a product launch in the second half of the year and maybe some more restructuring that might go on. How should we think about the remainder of this year? Because it looks like you are getting to breakeven already and just curious if you could hold the line on that in the second half or are there other events that might change the picture there.

Again, second quarter results is another proof point that the underlying business has the capability and we're very much on track to our 2016 commitments. Typically, if you look at Europe seasonally, Q3 is generally weaker than the second quarter just because there's broad-based shutdowns across the whole industry and all the countries. So seasonality would suggest some headwinds in the second half versus the performance in the second quarter. And as we talked about, big launch with the Astra, so there will be some launch-related costs, both manufacturing and potentially marketing, as we tail out of the year. But for me it was very, very promising and very optimistic based on the results in the second quarter that we're developing and executing to our 2016 commitment. The results are starting to be a proof point around that.

And then just lastly on the buyback program. I just wanted to make sure you guys have a 10b5-1 program in place so you can buy through the blackout period. Also, is that runoff sort of a grid or is there a real program in place so when the stock drops there is significantly more buyback? Just trying to understand how that program is being run and if there's any blackout period or you can just run straight through the quarter.

We have a 10b5-1 program. It will run through the next window which will open somewhere around July 28. We do have somewhat of a built-in flexibility where we can increase the amount of shares that we're buying within that program depending on the performance of the stock. Overall on stock buyback, consistent with the commitments that we made when we rolled out the capital allocation framework, we've been aggressive. We've been aggressive within the overall objective to drive our target cash down to $20 billion, bought back $2.1 billion thus far of a $5 billion program and we're going to, as aggressively and prudently, as possible continue to act because clearly our stock is undervalued.

Your next question comes from the line of Brian Johnson with Barclays.

In China can you give us a sense? You commented on retail versus wholesale in the quarter in the comments, but just how that breaks up from brand and any visibility you can give us into dealer inventory.

What clarity are you looking for on retail versus wholesale by brand, Brian?

Which brand? Yes, in the second quarter which brands did wholesales run ahead of retail? Where did it lag and just how are you thinking about that balance between the two?

If I look at quarter-over-quarter broad strokes in the second quarter, retail was down slightly 1.4%, wholesale was up slightly 1.4%, so reasonably balanced. Where we're seeing good performance on a year-over-year basis in the second quarter on retail, importantly Cadillac and Baojun and in SUVs which are up north of 80%. And that same dynamic holds on wholesales. But from a dealer inventory perspective, clearly at the end of second quarter as sales kind of trailed off our inventory picked up. We're not way out of range of our target that picked up about 20,000 units and we will work as we go through the second half of the year to make sure we align supply and demand. We want to make sure that we proactively manage that with our dealers and we have been doing that in the first half of the year, so a little bit out of balance at the end of the second quarter but not significantly.

Okay. Second question on China, you have talked about new GM kind of operating models and the discipline we're seeing coming through in North America and Europe. How is that different in China, given the JV structure? And then how do you -- in terms of the cost reductions you need in light of the deteriorating pricing situation, just how quickly can you get your JV partner on board with some of those moves and how does it actually work?

I think it works very well. The partners work day-to-day, even the -- the senior leadership of the team is very close to our SAIC partners. And so we very proactively, as we started to see things change, together worked to look for efficiencies, looked to seize opportunities in the SUV market. Again, with the portfolio that we have. We just launched the 560 which is a very important product for Baojun, an SUV. So from the portfolio to managing mix to looking for opportunities, we work on an integrated basis day-to-day with a very strong relationship, so there's no extra hurdle there to go after that.

Are you able to move quickly should you need to adjust staffing levels?

I'm sorry, I didn't hear the question.

Would they be able to move quickly to adjust staffing levels or [indiscernible] enterprise to other barriers there?

SAIC is a great partner and very, very commercially minded, so -- and we have demonstrated that. We have regular meetings, they were just in Detroit early in June for the SGM Board meeting and we were there in April, so we're totally aligned on where this business needs to go.

What I would also say is, in addition to having a great relationship with a partner where we aggressively look at the challenges in the marketplace and how to manage the business appropriately, our head of China, Matt Tsien, was in town last week. And Chuck, myself, Dan and others spent an incredible amount of time making sure we have a good read of what's happening, what to expect and the actions we need to take again to stay in front of it.

Okay. And then final question, North America. Just a little bit of rental car accounting. Wholesales were ahead of production. Was that the return of the rental car? Did that actually contribute to EBITDA net of the price impact or was that kind of a wash?

Well, you're right on the first part, wholesales being greater than production largely was driven by auction disposals of rental vehicles. Generally, if you look at the overall EBIT impact, the rental vehicles don't contribute a lot to the bottom line so that extra wholesale was not real accretive to earnings in the quarter. In fact, obviously the auction loss had a bit of headwind impact for us.

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

Just a question on China again. Chuck, with the outlook I think for kind of flattish equity income second half of the year, what does that come to in terms of the China margin for 2015? And then any updated thoughts around the prior 9% to 10% mid-decade and beyond targets that I think you talked about for China at the investor day?

So our outlook for the year, you're right with the math once again that it's going to be -- sustained performance in the second half of the year would put our equity income in the range, give or take, of $2 billion. We have not moved off of our margin objectives in China of 9% to 10% net margins. First half of the year we generated [Technical Difficulty] percent, so we're not moving off that. And we have not moved off our longer term guidance, mid-guidance on continuing 9% to 10% margins. Clearly, we will continue to closely monitor the market in China. We will closely monitor the developments through the rest of this year and potential implications over the next couple years, but we haven't changed our view either on this year or going forward yet.

And then just moving along to Russia. Any update on how that wind down is going, maybe how we should think about roughly modeling that into 2016?

The execution is going very well, very much according to plan. And as I talked about in Q1 when we announced this, I would expect the impact of Russia and European results to diminish as we go through the year. And, frankly, looking at Q3, Q4 it's going to be relatively immaterial based on our current view. So we will have wound through those implications as we finish the sell down and the regular commercial operations that are still impacting EBITDA adjusted.

And then just last question on CapEx and cash flow, it does seem like CapEx is running I think below the original guidance for the year. I know you got some product launches in second half of the year, but love an update there. And also you're still looking for free cash flow to be kind of flattish this year versus last year. I'm not sure if there is an update there as well.

Sure. Capital spend first half of the year $3.4 billion which was relatively consistent with last year first half. We've got pretty significant launches as you think about the rest of the year, Astra, Cruze, Malibu. We certainly expect capital spending and the cash associated with that to increase in the second half of the year. We're not moving off of our $9 billion guidance for the year yet, Itay. We will continue to monitor that as we go through the year. As I talked about free cash flow before, I said flat to slightly up. Based on the performance we've seen so far, I wouldn't necessarily change that perspective, but I might underline or emphasize slightly up on a year-over-year basis. Our performances on cash flow is a bit ahead of plan, so we're optimistic that we will be able to do better than we anticipated, but we're not changing the overall guidance yet.

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

Maybe just to hone back in on China again, but kind of dovetailing on that earlier South America discussion. You have proven very skilled at taking out cost in South America when volume declines and the team there is clearly very used to that. But in a downside scenario in China, what do you think decremental margins look like? I don't know that there's really a precedent that we can point the investors to. So I'm curious whether you engage in the type of downturn planning in China like I know that you do in North America. Any color would be helpful whether regard to flexibility of labor, ability to re-time the capacity expansion, stuff of that sort in the off-chance that we do see not just a slowing but, in fact, a real potential downturn.

First, as Mary mentioned earlier, Ryan, we continue to expect China to grow. We haven't changed our long-term view of China to be somewhere in the range of $35 million and we're not the only ones that do that. Yes, clearly we look at downturn scenarios. We look at potential implications that growth isn't as aggressive as we thought it was and in a rapidly maturing market there's going to be increased volatility. We're not anticipating a year-over-year sales decline yet, but clearly that is something that we model and we look at the opportunities to offset that and what that would be. I'm not ready to share that at this point in time, but we do that across the whole company across all the regions. I would say that we have not moved off our guidance for the year and we have not moved off our 9% to 10% guidance for 2016 and beyond at this point in time. And, as I mentioned earlier, we will continue to monitor the situation there and if something changes then we will communicate it appropriately.

And then how do you think GM is positioned in China relative to some of the changes taking place in the market? You talked about the trend toward SUVs and CUVs. What about the trend toward a greater portion of the sales taking place in those Tier 3, 4, 5 cities or interior of the country, away from sort of Shanghai where you are really, really strong? Perhaps you can share are you building out your dealer network any differently? Did you already anticipate these changes? What are you doing to remain as successful in China as you have been but in a different environment?

I think if you look even a couple years back, I think the SGMW team was very good at looking to see the shifts that were coming with the creation of the Baojun brand and then not only passenger vehicles from the commercial vehicles that they are so good at building to the SUVs and with the MPV that we will rolled out and now the SUV that coming out. So I think it was anticipating where the market was going and that something also, with the partner and the senior leadership. We look and try to look over the horizon to see where the market is going to be, where the opportunity is. Then that is a very capable team from an execution perspective. They have a very good, strong brand reputation across the country. If you look at this Baojun 560 SUV, it has I would say, some pretty substantial technology in it when you look at connectivity, when you look at crash, when you look at the material strategy with high strength steel. So I think we're very well-positioned and I think somewhat uniquely positioned in that we have such a very important partnership with a very strong domestic maker in the China market.

Okay. And then just last question. I know you are often limited in what you can say relative to labor negotiations, but I would just observe that it seems like you announced in 2Q a tremendous amount of investment in jobs and factories in the United States. And I couldn't help but notice that these were ahead of, rather than in conjunction with, the labor negotiations and sort of stood in contrast to Ford which actually during the period of time that you were making these announcements, talked about moving small car production to Mexico. So maybe you could just comment as to whether this is a reflection of your strong relationship with UAW that you don't need to tie these negotiations in conjunction -- these announcements in conjunction with the negotiations and that you do expect a good outcome with the partners that maintains or even enhances your competitiveness?

Again, I'm not going to comment on the specifics, but I think when you look at it, we're working with the UAW and having conversations on a daily and weekly basis. And so we're going to look at where we have capacity announcement expansion, new product investments to make and we look at doing that at the right time. It's a continual cycle. I would say one of the takeaways is it's a continual discussion, and I think we have improved the relationship and both parties work hard to do that. That is not to say that there is not issues that we have got to solve. We're actively working and doing that and using our creative and constructive problem-solving to look at the issues and find the right solution that is going to be good for the company and help us improve our competitiveness, as well as be something that is good for the workforce because the UAW, as you step back aside from the negotiations, we work jointly together on safety and I think our safety leadership represents that, the quality work we're doing. And we're taking that to the next level. When you look at the scheming that we have done our plants to be able to get more midsize trucks and every single full-size truck and SUV out, again that's doing that in partnership. So that is the fundamentals of the relationship. We'll work through the issues. Again, we're constantly talking so it's not as it may have been in the past that it's saving things up for the negotiation. But I don't want to underemphasize that we do have some important work to do and we're on it.

Your next question will come from the line of Patrick Archambault with Goldman Sachs.

A couple of China questions and then one kind of broader product question. Just I think it was hit on a little bit in Ryan's question, but the mix impact, how we think about it net-net some of the trends that are going on? It's obvious that you are having a lot of success in the Tier 2 and Tier 3 cities where Wuling and Baojun are doing very, very well, right? But on the flip side, you have the more traditional SGM products that are more coastal that one would think are higher margin -- they are certainly higher revenue -- that are flattish and down in certain months. And then I guess overlaying that you have this SUV trend. So I'm just trying to think as we -- forgetting about cost saves for a second, just as we think about the variable implications of those trends, where does that push margins as we go forward?

And let's bifurcate just a bit between SGM and SGMW and we talked about it before when we talked about 2015 and what we expected to do. Pricing headwinds -- and, clearly, they are more challenging than we thought -- would be offset by mix, mix driven by SUVs and Cadillac growth. We're seeing both of that in the SGM channel, the growth in SUVs up 80% and Cadillac is up year-over-year. We always looked at that not only for 2015, but beyond as a way to continue to maintain the margins in China. SGMW, I think you have two implications. You have the passenger car growth in the Baojun brand that is really going to help us in Tier 2, 3 and 4 cities and you have SUVs. And the SUV market is split between kind of premium SUVs, like Buick Envision, the Trax as an example, Encore and other products sold in the Tier 1 cities and the lower cost SUVs which are a big growth dynamic in Tier 2 and 3 and 4. So SUVs apply to both Tier 1 and Tier 2, 3 and 4 cities. Cadillac applies to Tier 1. That mix is what is going to help us maintain those 9% to 10% margins, assuming conditions normalize as we expect they will and get back on a growth trajectory in China.

Okay. It sounds like, despite the fact that some of the local-oriented stuff is doing way more than you would have thought, it's still within the realm of being able to stick with that mix statement. One other question, just the impact of credit in China. I take it that's captured in GMF rather than in your China operating segment. Have you guys kind of disclosed an order of magnitude there? Because I can imagine that that is probably starting to get important.

On the finance company equity income?

Correct, yes.

Yes, that will be in GM Financial's results and it will be GM Financial's results that they publish later today. Broad strokes, it's about $25 million of benefit in the second quarter on our equity share in GMF.

And then, Mary, maybe more of a product question. There is no question that from a technology perspective there's a tremendous amount happening, everything down to the 4G LTE stuff that's being rolled out aggressively to the Super Cruise for next year. But there has been a lot written in the last week actually just about some of the security concerns and so I was just wondering how you were thinking. You guys probably have the most aggressive rollout of connected cars of almost anybody and was wondering just how -- what kind of security protocols you are able to put in place to make people comfortable that those risks are manageable.

Good question and it's something we have been working on for a couple years now and very actively in the way that we look at the whole system and the levels. Really when you look at cyber security you've got to look at levels of security, because you look at vehicles on the road today, they are on the road for 11 years. And so as we move into a world that has more connectivity you've got to make sure not only do you have many layers of protection in the design of the vehicle, but then also what's very important is our over-the-air capability as well. That if something happens you are able to quickly go in and prevent and correct if that's necessary. So we named last year our champion, naming a Chief Product Security Officer, Jeff Massimilla, who is on our team, who lives and breathes this every day. We've partnered with external experts. We regularly do testing, but this is an area you have to stay diligent on and keep looking because it's across all of industry. We take it very seriously, we work hard at it every day and it's a key focus.

And your next question will come from the line of Emmanuel Rosner with CLSA.

I wanted to ask you first about the pricing environment in the U.S.. Obviously in your North American earnings work it seems like, focusing on the retail side, pricing was sort of slightly north of flat which is obviously a pretty good performance. At the same time, when I look at slide number 12 and you bring back the ATP incentive information from J.D. Power, it seems like your incentives are sort of like just been steadily, but fast increasing throughout the quarter from like 10% of ATP in the first month, 11% and then 12% finally in June. And then from what we heard so far in July, there's been also increased incentives, particularly on the truck. Would you be able to comment on are you seeing sort of a deterioration of U.S. pricing or a need to add incentive in specific segments?

I will give a broad perspective. Overall, in the U.S. industry this year our expectations are, on a retail basis, a relatively benign pricing environment. We talked about that when we talked about carryover pricing back at the beginning of the year and that's playing out. And I would expect to see pricing improve as we move through the rest of the year and start to launch some of the new products. In Q3, Q4 or early Q4, the carryover pricing dynamic will continue as it has been in the first part of the year. From an incentive spending perspective, that will -- as a percent of transaction price, that will toggle back and forth depending on specific go-to-market strategies at any point. My expectation, Emmanuel, for the rest of the year would be that we will be at the run rate we have been for the entire year, somewhere in the range of 10.5% to 11% for the balance of the year. Overall industry has been disciplined. We have been disciplined and we're going to continue to be disciplined, but there can be some volatility within an individual month for sure.

And then my second question is on China actually. When I think about China I totally agree with you there is some volatility now and obviously still a very exciting market for the long-term. The part that sort of worries me in the midterm is more the amount of capacity that's coming in into China. And so when I last met your China team, it sounded like you wanted to increase your capacity from 4 million units to 5 million units over the next few years. Is that still the goal? And to the extent that you would see a pronounced slowdown, do you still have room to sort of pull back on some of these capacity additions?

Absolutely. Actually adding capacity in China is something that we can do quite quickly. So we will continue to monitor the situation and look at, as we have our plans to add capacity, to do it prudently with a daily read on where the market is and then looking over that horizon from a trend of where it's going. So we will be monitoring that closely and we will only do when we think it's prudent to do.

Is there a rule of thumb that you could point to, like how many months or years in advance the plans that are in place will have to happen, let's say in the next six months, a year? And how far out can you actually sort of pull back some of these plans?

I think there is a lot of different ways to add capacity. You can add capacity by increasing line rate which is more equipment changes or smaller expansions, all the way to an all-new plan and each of those have different timelines. But I would also say China is one of the quickest across all of those aspects of being able to add capacity. Again, those are all the levers we have. Just a for-instance example, if you see you still need capacity but it might be slightly less than what you thought, you can pick an option of expanding an existing plan or increasing line rate, etc. So we will be looking at all of that, that is something we have a lot of experience from around the globe that we bring to the table as we work with our partner. Again, it will be very dynamic and based on not only the day, the month, but what we see and what we predict the trend will be as we go forward.

And your next question will come from the line of Mike Stover with Susquehanna Investment Group.

Most of my questions have been hit, but a housekeeping item on the cash flow. Could you give us a sense of any cash used for funding restructuring actions and then any cash that would've been impacted by recall-related outflows?

We indicated at the beginning of the year that we expected roughly $1.2 billion of restructuring-related cash and about $1.5 billion of recall-related cash to impact the results this year. Still generally in line with that first half, and second half will be about half. And so very much according to plan on both restructuring and recall-related cash.

Okay. So if I'm just trying to pencil in backing out what happened in the first quarter. If I assume that half of both of those items occurred in the first half that would be about right, Chuck?

Yes, that would be broad strokes, about right.

Okay. And then the second thing was on the ramp of the new product in North America. Do you expect for that to have a bigger impact on the incremental cost at the beginning of 2016 or should that begin at the end of 2016? Sorry, end of 2015 rather?

I think there are two aspects of that. There's preproduction start up and launch from the manufacturing perspective and I think that will primarily hit in 2016 and then there's launch-related costs which would be advertising. On any major program, when you look at both of those, they are roughly about the same. The launch manufacturing costs and the marketing launch costs are roughly the same. So again, thinking about the launch cadence -- the Cruze, Malibu and everything else I would think there is going to be some manufacturing primarily in the fourth quarter and marketing primarily in kind of the first quarter and second quarter next year, broad strokes.

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

I had a couple questions on North America for the back half. Is there any way you can help us with wholesale shipments? Typically it looks about kind of even first half versus second half, but maybe with the increased rental disposals in the first half it would be a little lower in the second half. Any color you can give us there?

Typically second half of the year generally in line. I would suggest that as we cycle through the third quarter there we're going to work our way through these auction losses. Then you have the fourth quarter with the Thanksgiving and Christmas holiday. So for planning perspective, I would think relatively flat to slightly down in the second half of the year versus the first half on wholesales. Again, just given the seasonality in the fourth quarter.

And then just going back to January, one thing on North America you said was that it looks to me that you were expecting fixed cost increases related to launches to offset to more than offset the reductions in material costs. It looks like through the first half you are way ahead on that metric with material costs down a lot, fixed costs basically flat. Should we be expecting that still, like some really significant fixed cost increases in the back half or has there been a change in the view?

I think the fixed costs in the second half of the year will be up versus the first half associated with the launch-related costs. The team in North America has just done a dynamic, great job in scheming the business and driving efficiency in the first half. But, again, I would expect to see launch-related costs, fixed costs be up in the second half and similar level of material performance in the second half of the year as well that we saw in the first half.

And just one more on Europe. Are there any kind of big pieces you can give us in terms of the sequential improvement from Q1 to Q2? I know volume was up a bit and were the Russia losses abating quite a bit in Q2 versus Q1?

Russia losses moderated for sure in Q2 versus Q1 and pricing likely got better in Q2 versus Q1. It did get better as the Corsa and Vivaro ramped up. Those would be the two biggest drivers Q2 versus Q1.

Okay, so that was more GM-specific than industry wide on the pricing improvement?

Yes.

Thank you. I would now like to turn the call back over to Mary Barra for closing remarks.

Thank you very much. Appreciate everybody's participation on the call. Hopefully you saw we recognize that China's a big concern, obviously the market has changed, more volatile. It's moderating. We tried to really be specific and share with you how we think about China and have that be the foundation for what we think and we're going to keep the pressure on ourselves to deliver in the second half of the year. But, rest assured, we're actively monitoring it daily and also be working very hard to proactively position ourselves to continue to drive the performance that we have. I would also like to say, as you look across all the regions and I won't repeat all of them, but there are a lot of challenges and opportunities in each of the regions. Hopefully you see the GM leadership team is really seizing opportunities and mitigating challenges in a very proactive fashion. We think our overall results demonstrate the very strong earnings potential of this company. And we believe when you look at what we have been able to accomplish in the first half of this year, it lays the foundation for the commitments that we've made for 2016 that we're very focused on executing and providing the proof point that we're doing what we say we're going to do. As we move forward, we're going to continue to execute with discipline with all aspects of our plan, including our capital allocation framework and we're confident that we will continue to drive profitable growth, strong returns on invested capital which we demonstrated this quarter, all to drive shareholder value and that is our focus day in and day out. So thanks again, everybody. I really appreciate your time.

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