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General Motors Co  (NYSE:GM)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors Company Third Quarter 2018 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded Wednesday, October 31, 2018.

I would now like to turn the conference over to Rocky Gupta, Treasurer and Vice President of Investor Relations.

Rocky Gupta -- Treasurer and Vice President of Investor Relations

Thanks, Dorothy. Good morning, and thank you for joining us as we review GM's financial results for the third quarter of 2018. Our press release was issued this morning, and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast.

I'm joined today by Mary Barra, GM's Chairman and CEO and Dhivya Suryadevara, GM's Executive Vice President and CFO, and a number of other executives.

Before we begin, I would like to direct your attention to the forward-looking statements on the first page of the chart set. The content of our call will be governed by this language.

I will now turn the call over to Mary.

Mary T. Barra -- Chairman and Chief Executive Officer

Thanks Rocky, and good morning everybody. Thanks for joining. Our performance in the quarter was strong, demonstrating our determination to deliver strong business results in a dynamic environment, while also focusing on the innovation that will drive our work in the future of mobility. Looking at the numbers, we achieved a net revenue of $35.8 billion, EBIT adjusted of $3.2 billion, EBIT adjusted margin of 8.8%, EPS diluted adjusted of a $1.87, and our return on invested capital adjusted of 25.6%. Adjusted automotive free cash flow was $400 million.

In the quarter, we capitalized on the high demand in the crossover luxury and truck segment, in addition to record performance by GM Financial. As we continue to strengthen our automotive vehicle business with recently announced partnership of -- between Honda GM, GM Cruise to develop and deploy a purpose-built, autonomous ride-share vehicle. Based on the current rate of iteration, we continue to target commercialization in 2019 in a dense urban environment with safety as our gating metric.

Now let's turn to North America, where in the US, our go-to-market strategy drove record Q3 average transaction prices. In Q4, we intend to stay disciplined, but we will compete for every sale with our freshest products in years, including our all-new full-size pickups. We entered the quarter with lean inventories of our 2018 model-year full-size pickups, and focused on selling a very strong mix of SUVs, crossovers and mid-size pickups with lower incentives. We expect retail sales volumes will increase in Q4 and beyond, as we ramp up production of our new pickups.

The launch of our new trucks continues to be ahead of schedule, and response to our truck-for-every-customer strategy has been positive. Sales of the new high-margin Chevrolet Silverado LTZ and High Country crew-cab models are more than 30% above forecast. And the new GMC Sierra SLT, Denali and AT4 crew-cab models are selling within two weeks. Popularity of our new crossovers from Chevrolet Buick and GMC continues as the sales of Traverse, Enclave and Terrain grew in competitive segments.

Cadillac's product offensive continued in September with the launch of the all-new XT4 luxury SUV in North America and China. The brand is capitalizing on Chinese consumers' growing preference for luxury vehicle, with sales in China up 20% year-to-date. Cadillac is introducing a new model every six months through 2020, including the upcoming three-row XT6 SUV.

Moving to China, where we have more than 20 years of strong market presence, we achieved record third quarter equity income. This performance results from a improved mix of vehicle sales and a continued focus on cost and productivity improvements. Our earnings have been resilient as we benefit from the growth of important brands like Cadillac and Baojun. As we focus on electrification and launch future vehicle programs, we have opportunities to continue to improve our competitive position.

During two visits to China this month, I've had a chance to take a closer look at the macro conditions affecting industry performance. The recent weakness has been more significant in Tier 3 through Tier 5 markets that have less of an impact on our financial performance in the third quarter. Additionally, our growing strength in luxury and premium segments helps to offset the impact of the industry weakness. We continue with our plan to introduce 10 new and refresh models in the second half of the year, including the Cadillac XT4, the Baojun E200 Dove (ph), the Chevrolet Orlando MPV and Wuling Hongguang in third -- in the third quarter. In addition, in our internal -- international operations, we are beginning to realize cost reductions as a result of our restructuring actions in Korea.

And in South America, we have managed the effects of foreign exchange headwinds, as we continue to drive efficiency into the business and we remain very confident in the strength of our Chevrolet brand there.

As we look forward through the rest of the year, we expect full-year EPS to be at the top of our previously communicated guidance range with potential for further upside. This is due to our strong operating performance and a favorable tax rate outlook for the year.

Before I turn the call over to Dhivya, I want to assure our owners that we are focused on creating shareholder value. As we close out 2018 and prepare for 2019, we are committed to improving all aspects of the business by accelerating the pace and driving capital efficiencies due to our global vehicle development process improvements, while allowing us to continue to improve quality and speed to market; and by taking steps to transform the workforce to ensure we have the right skill sets for today and the future, while also driving significant efficiency. We will continue to update you on our progress in the near term.

Now, I'd like to turn the call over to Dhivya.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Thanks, Mary. Our execution was extremely strong in the third quarter even as we faced expected challenges from commodity pricing and significant currency devaluations in South America. As a result of our focused and disciplined execution, we generated $35.8 billion in net revenue, $3.2 billion in EBIT adjusted, 8.8% margin and a $1.87 in EPS diluted adjusted, which is the Q3's record. Favorable tax rate and performance of PSA warrants contributed to approximately $0.30 of EPS impact, while our strong operating performance contributed to the remainder.

Q3 adjusted automotive free cash flow improved by $1.3 billion year-over-year, net of our decision to opportunistically pre-fund $600 million of certain mandatory contributions related to our international pension plan.

Let's take a look at North America. GMNA generated $2.8 billion of EBIT adjusted and 10.2% margin, up 190 basis points year-over-year. The execution of the all-new full-size pickup truck launch is going very well. We produced 45,000 trucks in Q3, and expect to deliver another 75,000 to dealers in Q4, consisting primarily of highly profitable crew cab. This contributed favorably to volume, mix and price during the quarter. Our crossovers continue to perform across every vehicle segment. We will continue this momentum into 2019 with the launch of our all-new Blazer. As a result of matching supply with demand and disciplined pricing, passenger car results improved year-over-year in Q3. Light-duty pickup performance, combined with our crossover and passenger car results, more than offset mix and downtime taken in Q3 for heavy-duty trucks, which positions us well as we head into 2019. And as expected, commodity headwinds and increased vehicle content for newly launched vehicle was partially offset by strong material performance.

Moving to GM International. EBIT adjusted performance in GMI was down $300 million year-over-year, driven by significant devaluations of the Argentine peso and Brazilian real. China delivered record Q3 results with equity income of $500 million for the quarter. As Mary mentioned, this was driven by cost performance, as well as strong mix of vehicles, led by record Cadillac sales, which offset challenges from continued pricing pressure.

A few comments on GM Financial, GM Cruise and our Corp segment. As we continue to progress toward full captive, GM Financial posted an all-time quarterly record revenue of $3.5 billion and record third quarter earnings before tax adjusted of $500 million. Credit and residual performance remained constructive. As a result of strong performance, we have initiated an ongoing dividend payment from GM Financial. In the fourth quarter of this year, GM Financial will pay a dividend of $375 million, well ahead of our original plan. Through dividends from GMF, we have the opportunity to strengthen the long-term cash generation capability and narrow the gap between earnings and free cash flow on an ongoing basis.

GM Cruise costs in the quarter were $200 million and we continue progressing toward commercialization. We expect to spend approximately $1 billion in GM Cruise for the full year.

Corp segment costs in the quarter were better-than-expected, primarily due to continued favorability from valuation of our PSA warrants. We expect the Corp segment cost to be lower than the full-year expectation of $1 billion.

We project our 2018 full-year effective tax rate to be approximately 17% as a result of fluctuations in earnings geographies and favorable resolution of various tax positions.

Moving on to our outlook for the full year. Due to our strong operating performance and favorable tax rate outlook for the year, we expect the full-year EPS to be at the top of our previously communicated guidance range with potential for further upside. In North America, we continue to expect a full-year EBIT-adjusted margin of 9% to 10% as we launch our all new full-size trucks, while we still experience commodity-driven headwinds. In China, we continue to expect strong equity income of approximately $2 billion this year. With the majority of our launches occurring later in the year, we expect higher launch costs in the fourth quarter.

Moving to South America, we continue to monitor and work to offset the impact of currency volatility. The structural costs actions we've taken have lowered our break-even point by approximately 40% relative to where we were just a few years ago and our underlying franchise remains very strong. Regarding GM Financial, while we will experience traditional seasonality in Q4, we continue to expect significant year-over-year profit growth and we continue to expect core automotive free cash flow of approximately $4 billion before the impact of prefunding non-US pension contributions.

So to sum up the quarter, our Q3 performance is a demonstration of the team navigating through a challenging environment and delivering very strong results. As Mary mentioned, we're intensely focused on improving our cash generation. Following our new architectural launches, we expect a meaningful decline in future capital spending. Combined with the ongoing GM Financial dividend and our focus on cost reduction, we see significant opportunity to improve cash generation. We are confident in the opportunities ahead of us and continue to expect strong performance over the short term, as well as the long term.

This concludes our opening comments, and we'll now move to the Q&A portion of the call.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Itay Michaeli with Citi.

Itay Michaeli -- Citigroup Global Markets -- Analyst

Great, thank you. Good morning and congratulations everyone.

Mary T. Barra -- Chairman and Chief Executive Officer

Thanks, Itay,

Itay Michaeli -- Citigroup Global Markets -- Analyst

Just first -- Dhivya, just to clarify on the GMF dividend of $375 million in Q4, is that -- sustainable at that rate, quarterly rate going forward?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, Itay. We do expect this -- this will be an annual dividend. The exact amount will be driven by leverage ratio at GMF as we go forward. And when we get to a full captive stage early in 2020, we expect that the entire net income from GMF will be dividended up to the parent.

Itay Michaeli -- Citigroup Global Markets -- Analyst

Great. That's very helpful. And then as we're thinking about your progress going into 2019, love to get your latest sense on commodity costs directionally as you renegotiate some of that, one-year contract as well as just the ability of the business to continue to offset as you've been able to do, of course, here in Q3 in terms of the opportunity you're seeing to offset some of these headwinds.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, Itay. We had mentioned on the last call that on an unmitigated basis, we see a $1 billion year-over-year impact in 2019 over 2018. Again I would reiterate that, that number was based on the spot prices that existed at the time of our second quarter earnings call and there's been puts and takes since then. There's some tailwinds and commodities, there's some headwinds in the form of tariffs and so on. But I think net-net you should think about it as that number continues to be valid on an unmitigated basis. But as we think of 2019, you should look at that in the context of all the other puts and takes we have, including largely completing the transition of our light-duties, and as I mentioned, we have taken downtime already in 2018 as it relates to our heavy-duties. So we do not anticipate a significant year-over-year volume decline in our heavy-duty, so that should help offset as well. So think of commodities in the context of the broader overall picture that's happening.

Itay Michaeli -- Citigroup Global Markets -- Analyst

Great. And then just to move lastly on GMI, you know didn't -- can you lay your stocks there? You know it wasn't (ph) maybe a year ago, at this time you thought GMI would move to profitability. Maybe an update on the GEM's platform and the Korea restructuring and kind of how you are thinking about that segment now in the next couple of years, excluding China?

Mary T. Barra -- Chairman and Chief Executive Officer

I think as I indicated from a career perspective, we're starting to see the cost savings flow in. A lot of those were in this segment, so we see that are on -- very much on track for what we communicated as it relates to the Korea restructuring. I think when you look, there's progress being made in each of those markets, but GEM doesn't launch until next year, and so that -- that becomes an opportunity there. We have continued in South America to improve the business, taking additional cost out. We now have a very strong franchise there, so we see improvement coming across the board in GMI.

Itay Michaeli -- Citigroup Global Markets -- Analyst

Great. That's all very helpful. Thanks so much.

Operator

Our next question comes from the line of Joseph Spak with RBC Capital Markets.

Joseph Spak -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking the question. Just to -- to turn to the free cash. I mean, originally you were saying $4 billion for the year, then you have the $600 million discretionary pension, now you're adding back $375 million. So, where do you think we should end up here for the full year?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, Joe. I think about our free cash flow guidance consistent with the $4 billion that we alluded to in the second quarter. If you look at the pension prefunding, again, we took the opportunity to -- to risk manage that and get some of the mandatory contributions over with in 2018. But if you look at the underlying cash generation capability of our core business, it remains at that $4 billion level, which is very strong. And as we look into Q4, we expect that quarter to be where we are going to generate a significant portion of our cash, it's going to be a very strong free cash flow quarter. So I think about it as free cash flow guidance remains intact, as well as the ongoing GMF dividend initiation, you're going to see the impact of that as we go forward into 2019 and beyond.

Joseph Spak -- RBC Capital Markets -- Analyst

So it'd just be the $4 billion inclusive of the pension?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

At the $4 billion, before the mandatory contributions, that's $3.4 billion net to pensions. We guided to $4 billion on a core automotive basis and that continues to be the cash generation capability.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. And then just in GMNA, I think in the past you were sort of pointing us toward -- that fourth quarter would be the strongest quarter of the year. Obviously, there was good performance here in the third quarter. Is that still the case or was there some timing between the two quarters?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

We expect fourth quarter to continue to remain strong, Joe, and the favorability we're seeing in Q3 as it relates to our T1 launch should continue into Q4. From a factory unit sales perspective, we expect that Q3 and Q4 will be roughly in -- Q4 will be roughly in line with last year and Q4 will actually be up versus Q3 from a factory and sale perspective. We're continuing to expect strong crew-cab penetration within our sales as well. So if you overall look at the 9% to 10% guidance for North American margins, I would expect Q4 to be on the higher end of that range.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. And and then just last quickly, in China, I know there was this you know over 3 million unit recall. Does that impact the guidance at all and if so, in which quarter?

Mary T. Barra -- Chairman and Chief Executive Officer

No, no. From a -- it was not a material impact.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. Thank you.

Mary T. Barra -- Chairman and Chief Executive Officer

And it's happening under way right now.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Rod Lache with Wolfe Research.

Rod Lache -- Wolfe Research -- Analyst

Good morning, everybody. Congratulations.

Mary T. Barra -- Chairman and Chief Executive Officer

Thanks, Rod.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Thanks.

Rod Lache -- Wolfe Research -- Analyst

I was hoping to get a little bit more color on China. Your whole sales this quarter were down 4%, I think your retail was down 15%. So I was hoping maybe you can give us a sense of the components of the earnings bridge and how things are playing out. So in other words, if we were to have a plus or minus 5% from volume, what does that imply for the impact on GM and what do you have kind of in the pipeline in terms of positive mix that's offsetting that?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah. So typically, Rod, just from an earnings growth perspective, we experience about mid-single digit type pricing pressure on a yearly basis in China. And on a high level, how I -- how I would think about that is, offset roughly half by mix and half by cost. And that's sort of been the trend over the last several years. And what we're seeing from a mix perspective, especially as Mary mentioned, as we launch our -- our new Cadillac entries here that's been particularly strong. And from a volume perspective, I think it's important to highlight where the volume comes from, who would have a different impact on profitability. For example, Tier 3 to 5, where we're seeing a bunch of the weakness that Mary alluded to, that tends to be our less profitable portion of the market. Tier 1 to 2, we're seeing less of a decline there. In luxury again, the market is actually up year-over-year. So from an overall puts and takes perspective, I would continue to think about this as a strong performance and cost, as well as mix continuing to be a tailwind from a Cadillac perspective as we continue our launches.

Rod Lache -- Wolfe Research -- Analyst

Well, can you provide us with some kind of a sensitivity at this point on average for what -- what a 5% move in volume would be? You guys have done that in the past, but it's -- obviously, it's changed a lot.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah. It's again, difficult to predict because it's a -- it matters where it comes from as well. So I wouldn't go into that level of detail. And as I mentioned, it's too mix dependent. So if you're in a backdrop where volumes are declining, but again, luxury is holding up, you get a different answer. So it's hard to put -- to handicap that.

Rod Lache -- Wolfe Research -- Analyst

Okay. And can you just give us your kind of high level, maybe 30,000-foot view on China. There's been a lot of discussion lately about a stimulus of some kind, it's maybe coming -- maybe a purchase tax cut. Obviously there are a lot of other elements that are going on in China as well, vis-a-vis credit and so forth. So how do you see this playing out from a high level?

Mary T. Barra -- Chairman and Chief Executive Officer

Obviously Rod, we're -- we are watching it very closely as I mentioned I was. I've been there twice in the last month. And we have a very strong joint venture in China with SAIC, and have very strong brands. We're seeing growth in Chevrolet. We're seeing very good growth from a Cadillac perspective. And we have a -- you know a very good launch cadence of products coming out that are getting really strong reception from consumers. We have not seen any negative view toward our brands, and I think that's very positive. So I think we continue -- we have a organization there that is extremely disciplined on taking cost out and seizing opportunities to improve our go-to-market and then the products that we have from a mix perspective. So we're watching it carefully, and we're very hopeful that both sides will have dialog and get to the table to work through some very important issues that both China and the United States have as it relates to trade. And we're hopeful that will -- there'll be a foundation laid and they'll continue to do that. But I think when we look at our positioning, we have many levers that we can pull to continue to have strong performance in China.

Rod Lache -- Wolfe Research -- Analyst

And so -- but at a high level, are you expecting China to recover at some point as a result of -- I understand that there's some Company-specific positives, but are you expecting China to start to look a little better as some of the stimulus measures start to have an effect?

Mary T. Barra -- Chairman and Chief Executive Officer

We're watching that closely, I can't predict. And you know we all read the article that came out that they're considering the incentives. Obviously, that would be a very -- a very good measure from a industry perspective. But I I don't know, I can't comment if that's going to happen or not. I think they're looking at it closely, and we expect to see actions taken that are going to allow the market to continue to be. You know I wouldn't say maybe growth that we saw a few years back, but continue to be at an important level. And let's not forget, you know even at a 27 million tight unit market it's still very -- it's the largest market in the world.

Rod Lache -- Wolfe Research -- Analyst

Okay. And just lastly, I was hoping you could just describe how you're setting the level of the dividend from GMF. That business is now starting to generate something like $2 billion a year of earnings. So to the extent that you're not dividending that all out, obviously, you're building the equity base there. Is that something that gets ratcheted up over time?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, that's correct, Rod. So the way we set the dividend level is a number of factors, but primarily driven by leverage ratio of GMF. We have a manageable leverage ratio target of 10 times earning assets to equity and we're still growing the business. The year-over-year rate of growth is starting to stabilize, but it's still growing. And as we think about the balance sheet leveling out in a couple of years down the line, that's when you will expect that -- the net income from GMF will be fully dividended to the Company. And as we've -- what we've done basically here is, taking advantage of the fact that our strong performance at GMF has contributed to a lower leverage ratio than what's in our manageable target. So we're taking advantage of the upside there to be able to start the dividends early.

Rod Lache -- Wolfe Research -- Analyst

Great. Thank you.

Operator

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

Adam Jonas -- Morgan Stanley -- Analyst

Thanks everybody. Just a couple of questions. First, on China strategy. The BMW Brilliance arrangements, where BMW increases stake at JV to 75%, that kind of caught the market's attention. I'm just wondering from the lens of GM and China, are you satisfied with your 50% type stakes in your JV there, or is there potential to take this higher, given that you have the opportunity as part of maybe a broader plan to change internal combustion capacity to electric in that region?

Mary T. Barra -- Chairman and Chief Executive Officer

So, Adam, we have I think the strongest partner in China with SAIC. You know we, through the past 20 years, have worked together quite well doing work such as the joint development of the GEM product. as well as our work on the next-generation of the electric vehicle. So I think we have a very appropriate relationship, and at this current time, we're not looking into change the 50-50 structure, it's served us well. And I think the strength of our results demonstrate that.

Adam Jonas -- Morgan Stanley -- Analyst

Okay. Thanks, Mary. And just one follow-up on electric vehicles. So you currently sell one pure EV at least in the US right now, the Bolt, sales are down around 17% year-to-date. I think you're annualizing maybe around 16,000 units, this was for the US market. I realize you do sell globally. But just on the US, Tesla makes about as many Model 3s in three weeks as your whole year worth of Bolt sales in the States. So I guess the question is, when are we going to see -- when should we expect to see -- and again, taking nothing away from the efforts of the Bolt and really you stand apart from a lot of your Detroit brethrens from really going heavy on EV, so I think it is an appropriate question to say, given your lead and your experience of the technology, when can we see GM bring out like a couple of 100,000 unit type product that could really clean -- be really in-house in the ride-sharing fleets and turn heads and be a real headache for Tesla? Thanks.

Mary T. Barra -- Chairman and Chief Executive Officer

Adam, thanks for the recognition on the Chevrolet Bolt EV. We are -- we have announced that we are increasing capacity there. We've been opportunistic as to what markets we are allowing the current production to go to. But I think you'll see our sales in the United States increase. And although I don't have a specific announcement to your question, we have announced that we have several EVs coming in the next few years. So we believe in an all-electric future. I think you'll see us -- that will we roll out over the next couple of years, and then very importantly, we're working on our next-generation, which we're calling EME 1.0, that we're looking to make sure we have EVs that are affordable, obtainable, desirable and have the right range. We're also working actively from a infrastructure -- on several fronts to make sure that the charging infrastructure is there to support the growth of EVs. And even most recently, which was announced, we're working with Delco Electronics on a fast-charging technology, because I think as we look at it from a customer perspective, what do they need to really get the growth to make the EV, their only car as opposed to their third, fourth or fifth car, you need to sell the charging infrastructure. Fast-charging is a big piece of it, so we're very optimistic and we're 100% committed. But I'm not going to -- I don't have specific volume announcements to make today.

Adam Jonas -- Morgan Stanley -- Analyst

Okay. Thanks, Mary. Thanks, team.

Operator

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

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good morning, guys.

Mary T. Barra -- Chairman and Chief Executive Officer

Good morning.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Good morning.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Just a first question on slide 11 on the North American bridge, probably, I think the most important thing in the quarter is that you've got positive pricing on carryovers as well as majors, and that's probably the first time I've seen that in 20 plus years of looking at your financials. What's going on with the pricing? I mean that's a wild positive action that you were able to get, positive pricing on carryovers.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, John it's across the board, I would say. If you look at the components of that, a lot of for recently launched crossovers are now falling in the carryover category. So we continue to see pricing trends there especially in the mid-SUV segment. We have remained disciplined from a passenger car perspective, as well as we have matched supply and demand. So I would say it's not just in one area John, it's across the board.

John Murphy -- Bank of America Merrill Lynch -- Analyst

I mean, and -- do you think this is the kind of action though that could be sustainable going forward, this isn't sort of a one-time (inaudible), this is a real focus and change in philosophy?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

We -- look, you see it obviously go up and down every quarter, but our intent is absolutely to stay disciplined.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Okay, that's great. Then second, as we look at, you know, the rise in rates, there is a lot of concern around what that's going to do to the value chain particularly on the demand side, but it's helpful on pensions. I'm just curious, you know, what you're seeing on sort of pension remeasurements and funding these datas, and really your thoughts there, Dhivya?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, on that John, absolutely a rising rate environment tends to be a tailwind for pension especially in the US. So we have made a ton of progress in closing our underfunded gap over the last several years. And we remain leveraged to the upside as rates increase. The important thing to note is the mandatory pension contributions in the US do not start until the mid-2020. So you're really talking about a good seven, eight years of a runway here for us to benefit from potential market moves before we're going to have to take any mandatory contribution actions. But again, we're risk-managing this, we're making sure that we're also downside protected as we move forward. But you're right, we'll see tailwinds there and we remeasure pensions as you know on that -- at the end of the year, so we'll have more to say when we report our calendar year earnings.

John Murphy -- Bank of America Merrill Lynch -- Analyst

And can you also just remind us when we think about the demographics of the work, the active workforce, how many are legacy workers and how many are your entry levels, what's the mix right now roughly?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

You know, I don't have --

Mary T. Barra -- Chairman and Chief Executive Officer

I think it's about roughly 50-50, I should say.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

We can confirm that.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Okay. And then just lastly, Mary, when you talk about safety is the gating factor on the Cruise commercialization and real widespread launch, how do you measure that safety? I mean, obviously you're not hitting things, it's obviously a very critical one, it's a very simple one for us to see, but not to make light of this, but I mean -- but how do you really get comfortable with sort of the risks in the real world because there are always going to be out there particularly when we're in a world of some of these regular human, you know, crazy drives, which the cars have to deal with? I mean how do you think about that and why don't you just let it go?

Mary T. Barra -- Chairman and Chief Executive Officer

Well, you know I think the fact that we're doing our development in downtown San Francisco gives us probably the most exposure to those types of situations, not only drivers, but bikes and all sorts of activities. We did release our kind of guide to safety that was part of the guidelines that Nexus (ph) was looking for. But I would say we've also -- we haven't released details, because we think it's a competitive advantage. We have done extensive work to understand what -- how we will measure through actual road performance simulation. We've gone back and looked at our historical patterns as it relates to safety, and we have a very well-defined plan of what we have to demonstrate, to demonstrate that the AV is safer than a human driver. And that's the path that we're on and so when we talk about gated by safety, we have -- we are measuring ourselves against that plan that also had external input.

John Murphy -- Bank of America Merrill Lynch -- Analyst

And that gate will get lifted with the commercialization in 2019, is that a fair statement or assumption?

Mary T. Barra -- Chairman and Chief Executive Officer

This -- you know our intent is based on the progress and the rate of iteration that we're making that we see a path to be able to do that. But as we demonstrated with Super Cruise, we will make sure we hit our safety metrics before we launch and commercialize. But right now, the rate of iteration says that we're believing we can do that in 2019.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thank you very much.

Operator

Our next question comes from the line of David Tamberrino with Goldman Sachs.

David Tamberrino -- Goldman Sachs. -- Analyst

Hey, great. Really good looking quarter. Want to dig into a thread from earlier on free cash flow because I think there's some confusion on this. The original guidance versus for the last quarter's guidance was just $4 billion. You took a $600 million prepayment contribution on pension, so roughly $3.4 billion. Does that $3.4 billion include the dividend from GMF or would that be on top of the $3.4 billion getting you back to around that $4 billion?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

It includes that David. What we were not able to pre-announce was the dividend because we had not -- the GMF Board of Directors had not declared it at that point, but it was contemplated in our guidance. So you're correct, $4 billion core automotive free cash flow generation where we prefund the pension piece, that comes down to $3.4 billion, both of which already contemplate the GMF dividend.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. Just under communicated. Understood. On the Cruise automation spend, this year you earned (ph) about $500 million I know that's just like two, three quarters in a row now. You're still expecting a $1 billion for the year, what's the ramp up that you're going to be seeing that you're going to double year-to-date spend in the fourth quarter?

Mary T. Barra -- Chairman and Chief Executive Officer

So, we are hiring and continuing to do that development to the plan. Right now, we're looking at -- still we will be roughly around a $1 billion as we previously communicated. But you know the team is being smart about it and if they can achieve what they need to achieve at a lower level, they will but we're still holding at that level and it is due to a lot of hiring and continued continued work from accumulating miles and experience.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay, but there's not like a large increase in the fleet that's coming or an expansion in new city that's going to drive that incremental spend because that's all we can think of that could kind of get you there?

Mary T. Barra -- Chairman and Chief Executive Officer

No.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. And then for the quarter, the commodities headwind in North America was $300 million. I know this is absolute, a little bit earlier of $1 billion for next year unmitigated. What was this quarter's gross unmitigated and how much were you able to essentially mitigate? Just trying to get a sense of how effective you've been.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

So I would just -- from the bridge perspective, you can see that for the total Company, we experienced $400 million of commodity headwinds, and what we've been trying to do David as you are aware, we have our $6.5 billion target that we committed to in 2014 as it relates to commercial and technical savings. And we've been continuing to execute on that and we remain on track to achieve that by the end of this year. And you see material performance in our bridge of $300 million that serves to offset some of the commodity headwinds we're talking about and obviously there's broader puts and takes outside of commodities as well where we've seen strength in a number of other areas that have offset commodities. And looking into 2019, again, too early. We -- our purchasing teams are having those discussions as we speak. And we'll have more to share early next year.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay. To clarify the point though, earlier in the year, you had talked about gross impact and what the mitigated impact was and I believe this $400 million is a mitigated impact. What would have been the gross impact for the quarter before you took any mitigating factors?

Mary T. Barra -- Chairman and Chief Executive Officer

The -- just to clarify, the over a $1 billion stands at over a $1 billion. So we had $1.4 billion and we're roughly in that zip code currently from a commodity headwind perspective. And $400 million is what you're seeing of that $1-ish billion (ph) flowing through in this particular quarter and the mitigation is after that and which is the $300 million of material performance that you see flow through in our bridge.

David Tamberrino -- Goldman Sachs. -- Analyst

Okay, very clear. Thank you very much. Great looking quarter.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Thank you.

Mary T. Barra -- Chairman and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Ryan Brinkman with J.P. Morgan.

Ryan Brinkman -- J.P. Morgan -- Analyst

Hi, good morning. Thanks for taking my questions.

Mary T. Barra -- Chairman and Chief Executive Officer

Sure.

Ryan Brinkman -- J.P. Morgan -- Analyst

Firstly, another one on China. You know the latest speculation as was discussed is that the sales could rise from here if the government reduces the purchase tax on new vehicles and I hope that does happen. I wanted to ask though, if you have done downturn planning in that country similar to what you have done in the US? So for example, in the event that there were a material downturn in China, I know there hasn't been, but something on the order of magnitude of like 25% peak to trough, like you discussed in the US, what would that mean for your operations there? Do you think you would be profitable in that type of a scenario? I think you would be, given you've just generated a record profit of a 15% volume decline, but curious if you could mention how a material downturn might impact you in that region and if it is any harder or easier to pull cost levers on the, say, the people side in China in comparison to, say, in North America.

Mary T. Barra -- Chairman and Chief Executive Officer

So we have done that planning at both a moderate and severe levels. That's something that I just reviewed this past week and it is something we update on a continual basis. It's hard to completely quantify it based on -- tell me what's driving it, tell me what the mix will be, what -- where is the impact most from a from a Tier 1 to Tier 5 city perspective. But we have done that with a wide range of sensitivity analysis based on those factors. So I can't really share a specific number. We do have flexibility with the workforce. As you know from a US perspective, one of the things that benefited us from the 2015 contract was the ability to have a more flexible workforce. And so, we are -- every year, we grow and have -- I would say, that it increases from a North America perspective. We have that with the workforce in China as well, especially as we look at the temporary workforce that we have there. So it's been very well modeled, continually monitored.

Ryan Brinkman -- J.P. Morgan -- Analyst

Okay. Thanks. And can you speak to the degree to which the record GM Financial results in the quarter were helped by structural factors that we can expect will continue like portfolio expansion, et cetera versus maybe -- I don't know, some more temporal factors, such as presumably stronger auction prices during the quarter. What is your outlook for GM Financial going forward and how should we expect this business to fare in an environment of higher interest rates?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, I think from a GM Financial perspective, we have talked about roughly doubling the EBT from a couple of years ago to, I believe, we said 2019. That remains on track. A lot of it is the portfolio growth that you're talking about. We continue to increase the penetration within GMF, as well as just grow the overall size of the balance sheet, and you're seeing those results come through. The other points worth highlighting are credit losses. They remain within range, and so, we're constructive there as well. And residual prices, as you're well aware, they remain -- they remain constructive also. So I would say it's all of the above. And we're, again, continuing to risk manage this business and this is going to be a strong contributor to earnings as we move forward.

Ryan Brinkman -- J.P. Morgan -- Analyst

Okay. And then just lastly from me, can you provide some color on how investors should be thinking about the new heavy-duty pickup trucks due out next year, and the profit potential they might provide? And I'm not even thinking here about the C/K 2500s, for example, and you point north, but even bigger trucks, I think are going to be built in a plant in Ohio with Navistar. Could this be a very meaningful profit contributor for you?

Mary T. Barra -- Chairman and Chief Executive Officer

Well, I think it's an important truck that we have. And one of the things that is important is, for some of those buyers having the full suite we think will also increase our heavy-duties as you mentioned that we will be launching next year from a point perspective. That was -- it's the adjacencies that I think are going to drive the overall business up. So that's the way we look at it, I don't have specific figures to give you, but we'll have that opportunity, but what it drives in medium-duty is probably more significant, excuse me, what it drives in heavy-duty is more significant.

Ryan Brinkman -- J.P. Morgan -- Analyst

Got it. Thanks. Congrats on a great quarter.

Mary T. Barra -- Chairman and Chief Executive Officer

Thank you.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Thank you.

Operator

Our last question comes from the line of Colin Langan with UBS.

Colin Langan -- UBS Securities -- Analyst

Oh, great. Thanks for taking my question and congrats on the third quarter.

Mary T. Barra -- Chairman and Chief Executive Officer

Thank you.

Colin Langan -- UBS Securities -- Analyst

Looking through the model, can you explain some of the weakness that is expected in Q4, because I think you mentioned North America is fairly stable. I guess, Cruise get a bit worse, and maybe other gets a bit worse, so what is the big drivers that's sort of implied even at the high-end of guidance? It seems like there's a core deterioration quarter-over-quarter.

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Yeah, so I would say Colin, a few things. One, we expect in Q4 all the core operating segments to be -- to continue to be strong. I already talked about North America, where we're going to continue to see tailwinds from T1, as well as the crew-cab mix that I alluded to. So North America will continue to remain strong. I did mention the launch cost-related factors, that we're factoring into China. But again, the $2 billion equity income is reiterated. In South America, the FX continues to be the question mark over there. We've seen some tailwind after the elections, but we're going to have to see what that -- what happens in Q4 from an FX perspective. GMF tends to be, from a Q4 perspective, the seasonal low point. But again, you've seen, to the prior question as well, significant profit growth year-over-year in GMF. So if you take a step back, the core operating items remain intact. What we don't want to -- what we really want to be mindful of is, the non-operating items such as PSA warrants. For example, we saw tailwinds during this quarter. And that's really going to be driven by what the stock price does there and that's a non-operating item and the FX type macro items that we want to be mindful of, but we will see continued strength in Q4 from the operating side.

Colin Langan -- UBS Securities -- Analyst

Got it. And I noticed in the walk, you mentioned crossovers as negative. In the past, that used to be cars. Is that -- there's a lot of concern about SUV profitability. Are crossovers getting less profitable or is it just the mix now of cars that's small that big crossovers versus pickup is a bigger trend (ph)?

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

I think it's -- it really depends on which segment within crossovers. I think if you look at small and the compact segments, you're probably well aware Colin, there's a lot more competition there and there's pricing pressure there. The mid-SUVs continue to perform really well. So it's really a segment-by-segment within crossovers.

Colin Langan -- UBS Securities -- Analyst

And lastly, there is a recent article on Cruise highlighting -- people saying there's technology challenges there. Any common on that media report and the 2019 launch incentives, if they still on track or is that (inaudible) being delayed?

Mary T. Barra -- Chairman and Chief Executive Officer

So we haven't explicitly said where that launch is going to be, but we are doing our testing in San Francisco. But look, we continue to iterate rapidly. When you step back and look at this, this is really -- I think what is happening is, people are realizing this. This is really hard. And so when we take the work and the expertise that we continue to grow at Cruise along with the auto expertise and combine that, we're working hard to solve that challenge. I mentioned before, we have a well-defined plan on how we'll look at safety, and we'll be gated by that. And really launching in one city is just the first step in what will be a multi-year, probably over decades, transformation of how people move from point A to point B. So I think we need to keep that in perspective. There was also comments made about miles, and I want to remind everybody that a mile is not a mile, when you're doing AV testing. Clearly, the most complex miles that we're gaining experience in San Francisco are very valuable. And so we're being efficient in driving the miles that we need to drive, getting the maximum learning as we move forward. So I think that's the way we're looking at the business and I think it's a balanced view. But as I said, with the rate of iteration we're doing, we still believe and are continuing to target 2019 deployment.

Colin Langan -- UBS Securities -- Analyst

All right. Thank you very much.

Operator

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

Mary T. Barra -- Chairman and Chief Executive Officer

Well, I want to once again thank everybody for participating on the call. And to sum up the quarter, I'd like to point to the fact that our strong results demonstrate our commitment to execute our plans amid industry headwinds. We continue to adapt and take actions necessary to create shareholder value through our strong and growing franchises, as well as our leadership position in the future of mobility. The management team is resolved to take actions to strengthen the business, and we have driven downturn protection and disciplined capital allocation into the business. And we also have an intense focus on generating cash. As we continue to operate in a dynamic business environment, we are fully focused on increasing our speed of execution, as we transform GM and the future of the industry.

So, thanks again for joining today. I appreciate all your questions and interest.

Operator

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

Duration: 48 minutes

Call participants:

Rocky Gupta -- Treasurer and Vice President of Investor Relations

Mary T. Barra -- Chairman and Chief Executive Officer

Dhivya Suryadevara -- Executive Vice President and Chief Financial officer

Itay Michaeli -- Citigroup Global Markets -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Rod Lache -- Wolfe Research -- Analyst

Adam Jonas -- Morgan Stanley -- Analyst

John Murphy -- Bank of America Merrill Lynch -- Analyst

David Tamberrino -- Goldman Sachs. -- Analyst

Ryan Brinkman -- J.P. Morgan -- Analyst

Colin Langan -- UBS Securities -- Analyst

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