General Motors Co

NYSE:GM

Earnings Call Transcript 2022-Q2

[Operator]

Good morning and welcome to the General Motors Company Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Tuesday, July 26, 2022. I would now like to turn the conference over to Ashish Kohli, GM’s Vice President of Investor Relations.

[Ashish Kohli, Vice President, Investor Relations]

Thanks Brad. Good morning, everyone and thank you for joining us as we review GM’s financial results for the second quarter of 2022. Our conference call materials were issued earlier today and are available on the GM Investor Relations website. We are also broadcasting this call via webcast.

Joining us today is Mary Barra, GM’s Chair and CEO; Paul Jacobson, GM’s Executive Vice President and CFO; Dan Berce, President and CEO of GM Financial; and Kyle Vogt, CEO of Cruise, will also be joining us for the Q&A portion of the call.

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

And with that, I am happy to turn the call over to Mary.

[Mary Barra, Chair and Chief Executive Officer]

Thanks, Ashish and good morning, everyone. Thanks for joining the call today. As you have seen in our press release and other materials, GM delivered $2.3 billion of EBIT-adjusted in the second quarter, which is in line with the update we shared on July 1. We also remain on track to deliver our full year guidance, which includes EBIT-adjusted of between $13 billion and $15 billion. This is a truly unique and dynamic market that presents both challenges and opportunities for GM.

Overall, GM production continues to improve year-over-year despite some short-term challenges and we are on track to increase our wholesales by 25% to 30%, in line with our expectations for the year. This has helped us extend our U.S. truck leadership, where demand is the strongest and supplies are well below optimal. The Chevrolet Silverado and the GMC Sierra led the industry in total full-size pickup sales in 2020 and in 2021. We continue to lead in 2022 by a wide margin. In fact, our retail market share in the first half is up 2 percentage points to 40%. But even as we operate our truck plants at near full capacity, our inventory has remained extremely low due to continued strong demand.

The stock on the ground for GM full-size pickups has been in the mid-teens in terms of days supply for more than 90 days. For full-size SUVs, it’s below 10. This helps explain why we continued building trucks in June even though we couldn’t ship everything right away due to supply chain issues. The facts are the customers are there for our vehicles. They have been waiting and all indications are they remain ready to buy. While demand remains strong, there are growing concerns about the economy to be sure. That’s why we are already taking proactive steps to manage costs and cash flows, including reducing some discretionary spending and limiting hiring to critical needs and positions that support growth.

In addition, we have modeled several downturn scenarios, and we are prepared to take more deliberate action when and if necessary. Regardless of the circumstances, we continue to move forward from a position of strength. We have a foundation of strong earnings and cash flow, an investment-grade credit rating, historically low pension obligation and outstanding vehicles, services and pricing. I like our position and I wouldn’t trade it with anyone in our industry. All of this will help us continue to execute our growth strategy and insulate it from short-term market challenges.

Cruise is an example. Without question, the Cruise team’s launch of fully driverless commercial operations in San Francisco in June was historic. The next steps for Cruise in the second half include working with regulators to increase their hours of operation and service area, expanding their fleet of Bolt AVs and testing the Cruise Origin. And as always, we are committed to safety as Cruise expands. Kyle Vogt and I will have much more to share about Cruise on September 12 at the Goldman Sachs Technology Conference in San Francisco. We will also host our own event later that day for investors and analysts, including an opportunity to experience a fully driverless ride.

Another major highlight was the first customer deliveries of the Cadillac LYRIQ earlier this month. We are extremely proud of the LYRIQ and it has received almost universal praise from the media, who says it stands with the Escalade as one of the best Cadillacs we have ever done. I can’t wait until everyone sees the CELESTIQ in person. Nearly 70% of the LYRIQ reservation holders are new to Cadillac and 30% are from the West Coast. This is very similar to what we are seeing with the HUMMER EV, where 75% of reservation holders are new to GMC with a very heavy concentration in California, Texas and Florida.

And looking ahead to early spring 2023, anticipation for the Chevrolet Silverado EV continues to build. We now have more than 150,000 reservations and the average fleet customer is requesting more than 200 trucks. The reaction to the Chevrolet Blazer EV has also been very enthusiastic. We think the media who says it’s going to shake up the electric SUV market, thanks to its design, technology, range and pricing, are spot on. Chevrolet will follow it up in September when it reveals even more affordable Equinox EV. And the ownership experience for all of our EV customers will be enhanced by agreements like the one we just signed with the Pilot Company to expand our Ultium 360 charging network to facilitate interstate travel.

Together with EVgo, GM and Pilot plan to install 2,000 DC fast charger stalls at 50-mile intervals along U.S. interstate highways with special benefits for GM owners like exclusive reservations and discounts on charging. With Pilot investing $1 billion to upgrade their customer service, we are confident that this will be a very good solution for our customers. And as our EV strategy scales, the key question investors frequently ask is, how will you build enough batteries when competition for raw materials is intensifying? And as I have said, our strategy is to control our own destiny and that includes building cells in partnership with LG Energy Solution. We are just weeks away from the launch of the 7-day operations at the first Ultium Cells JV plant in Ohio. Then each quarter, the plant will add 20% to its capacity, reaching the full 35 gigawatt per hour capacity in Q4 of 2023. Securing cells from this plant are key to significantly ramping up production of the GMC HUMMER EV and the Cadillac LYRIQ to beat pent-up demand.

The second cell plant, which is under construction in Tennessee, is on track to open next year. And just last month, ironworkers and our construction partners installed the final beam in a topping-out ceremony. In Lansing, Michigan, the site of the third cell plant, the foundation work is underway and steel work will begin in August and that plant opens in 2024. And the team is also making good progress towards selecting the site for the fourth U.S. cell, which will take our projected total battery capacity to 160 gigawatts. What’s happening upstream with these plants is just as critical to our long-term success. On previous calls, we had talked about all of the fully executed supply agreements GM has secured for EV raw materials and components. Today, we are announcing three more binding supply agreements. The first is with LG Chem, who will supply us with approximately 1 million tons of cathode material between now and 2030. We have also reached agreement with POSCO Chemical to supply us with CAM from their Korean operations from 2023 to 2025.

The third is a multiyear supply agreement with Livent to secure significant quantities of lithium. What this means is GM now has binding agreements securing all battery raw materials supporting our goal of 1 million units in annual capacity in North America in 2025. This includes lithium, nickel, cobalt and the full CAM supply.

As we move forward, we will increasingly localize our supply chain just as we have localized battery cell production. For example, due diligence is already underway to further expand capacity at the JV CAM and CAM precursor facility GM and POSCO Chemical are building in Quebec. GM and LG Chem will explore the localization of a CAM production facility in North America by the end of 2025 and Livent has a goal to transition 100% of the lithium hydroxide they are processing for GM to the U.S. I want to thank the team for their hard work to deliver this critical milestone, which includes close to 20 individual supply agreements. And I also want to thank our supplier partners. I use the word milestone deliberately, because we are planning significant volume growth to meet our Investor Day commitment of $90 billion in annual EV revenue by 2030. That means our supply chain must be even more scalable, sustainable and resilient.

To that end, the team is building on existing supplier relationships and forging new ones. And for certain commodities, we will direct source up to 75% of our needs through 2030 with a focus on North America. We think this strategy will mitigate risk, drive down cost and help us deliver upside volume opportunities. As you can see from these examples, every part of the company is rising to meet today’s challenges and we are adapting, changing and innovating to execute our pivot to EVs. We are being thorough, collaborative and leaving nothing to chance. And that’s how we have made such huge strides and why we are so confident in our future.

So thank you. And now I will turn it over to Paul.

[Paul Jacobson]

Thanks, Mary and good morning everyone. I am extremely proud of the team’s execution in Q2 and remain excited about our future. We are at the beginning of an accelerating EV product ramp that we believe will drive a continuous increase in revenue as we transition to an all-electric future.

And as Mary highlighted, we are making significant progress on several fronts, including Cruise commercialization and our battery supply chain. Just yesterday, the Department of Energy announced a conditional commitment to Ultium Cells LLC, our 50-50 joint venture to manufacture battery cells, for a $2.5 billion loan to help fund the construction of our battery cell manufacturing facilities in Ohio, Tennessee and Michigan, supporting our goal of the secure battery materials and technology supply chain here in North America. We are also finalizing the deals of GM’s sustainable finance framework, which will unlock options to help us align our balance sheet with our ESG strategy.

Now, let’s get into the Q2 results. We generated $35.8 billion in revenue, up $1.6 billion year-over-year driven by strong pricing and slightly higher volume. We generated $2.3 billion in EBIT adjusted, 6.6% EBIT adjusted margin and $1.14 per share in EPS diluted adjusted, all within the $2.3 billion to $2.6 billion EBIT adjusted range laid out earlier this month. Our results were impacted by the short-term tactical decision to build more than 90,000 North American vehicles without certain components with revenue retime from Q2 into the second half of 2022.

The supply chain challenges causing the company vehicle inventory buildup, primarily occurred in June and have continued in July, affecting some of our plans. While this is frustrating, we have built some of this uncertainty into our full year guidance. Some of these vehicles will be quick to complete. In fact, we have already wholesaled about 15,000 vehicles with the expectation to get through substantially all of the vehicles by the end of the year, with about 50% in Q3 and 50% in Q4.

Despite these challenges, we have seen a continuous year-over-year volume improvement, Q1 up 1%, Q2 up 7% and we expect Q3 to be up 90% to 100% year-over-year as we lapped the significant impacts experienced in Q3 ‘21 and the retime vehicles and Q4 to be up 20% to 30%, remaining on track to increase our 2022 wholesales by 25% to 30% year-over-year as we guided to at the beginning of the year. Adjusted automotive free cash flow was $1.4 billion for the quarter, down $1.1 billion year-over-year driven primarily by higher CapEx related to EV investments and the impact of holding these vehicles built without certain components in the company inventory.

Let’s take a closer look at North America. In Q2, North America delivered EBIT-adjusted of $2.3 billion, down $600 million year-over-year and EBIT-adjusted margins of 8% driven by higher commodity costs and investments in growth partially offset by strong pricing across our portfolio, but especially on our full-size trucks and SUVs and the non-recurrence of 2021 recall cost. Our mix was primarily impacted by the more than 90,000 vehicles built without certain components, about 75% of these being full-size trucks and SUVs. As Mary mentioned, new vehicles have continued to turn very quickly and U.S. dealer inventory remains tight at around 250,000 units with much of this inventory in transit. Inventory on dealer lots continues to be only 10 to 15 days. We continue to watch this very closely, but the consistently tight inventory on dealer lots over the last several quarters and months demonstrates the strong demand for our vehicles.

Truck ATPs have continued to be very strong at over $60,000 and Denali continues to be a strength for GMC, accounting for nearly half of the total Yukon sales this year. Our truck and SUV customers have been asking for a broader range of choices, including premium options, which we are delivering on with the GMC Denali Ultimate, the GMC AT4X and the Cadillac Escalade V-Series. The investments we have made in these vehicles over the last couple of years, including the significant refresh to our full-size light-duty trucks earlier this year, provide a strong bridge to our all-electric future.

Now, let’s move on to GM International. GMI delivered second quarter EBIT-adjusted of $200 million. This included $100 million of equity loss in China, down $350 million year-over-year driven primarily by their COVID-related impacts. However, we saw an improvement starting in June with production levels beginning to recover. The China team continues to navigate a very dynamic and difficult environment, both personally and professionally. I can’t thank them enough for their efforts this quarter. EBIT-adjusted in GMI excluding China equity income was $300 million, up over $500 million year-over-year with results driven by favorable pricing, volume and mix, partially offset by commodity, logistics and semiconductor impacts. These results also include a mark-to-market gain of around $150 million. The GMI results excluding China equity income and mark-to-market gain was a record Q2 and first half. The progress the team has made over the last couple of years has been impressive and I look forward to the team continuing to build upon that momentum.

A few comments on GM Financial and corporate expenses. GM Financial once again delivered solid results driven by strong used vehicle prices with Q2 EBIT-adjusted of $1.1 billion, down $500 million year-over-year primarily due to the reserve adjustments made last year. Corporate expenses were $700 million in the quarter, up $700 million year-over-year driven primarily by differences in year-over-year mark-to-market changes in the portfolio.

Moving to Cruise, which we are very excited about, we believe the autonomous opportunities go well beyond the robotaxi business, including delivery, personal vehicles and a commercial application with BrightDrop. Cruise expenses of $550 million for the quarter are consistent with the run-rate we would expect for the remainder of the year.

Now, let’s turn to our second half outlook. As we indicated earlier in the month, we are confident in achieving our full year 2022 guidance range metrics, including EBT-adjusted in the range of $13 billion to $15 billion and North America margins of 10%. We see tailwinds with volume, including completing the vehicles in company inventory. Pricing remains strong and has held up more than we estimated at the beginning of the year, helping partially offset the incremental commodity costs.

We are encouraged to see some moderation in the spot prices of certain raw materials, but the timing of the flow-through of this benefit into earnings varies by commodity and typically lags. We would not expect to see a meaningful impact until later in the year and into 2023. We are also incurring significantly higher logistics costs, including premium freight to overcome some of the supply chain challenges, which is offsetting some of the moderation in raw material costs. With these puts and takes in commodity and logistics costs, we still expect about a $5 billion year-over-year headwind impacting our global operations with the expectation to offset with cost and pricing actions.

GM Financial is currently trending towards the high-end of the expected $3.5 billion to $4 billion full year EBT range with some moderation anticipated in the second half as credit and used vehicle prices are expected to normalize somewhat. There are also other cost headwinds in the back half of the year, including some seasonality, growth investments and initiatives to drive EV adoption and expand charging infrastructure. However, we will be nimble in bringing on these costs at the appropriate time and remain prudent in our spending to ensure we meet our growth commitments.

In summary, the first half of the year, we have seen strong pricing and continue to see a recovery in volumes. We have executed well on the things we can control and we remain focused on our growth opportunities. We are starting to see the benefits of the EV and battery investments made over the last several years. And vehicles such as the Cadillac LYRIQ, the GMC HUMMER EV pickup validate that we have transitioned our engineering and manufacturing expertise to EVs.

We are laser-focused on execution and what you’ve seen is just the start of a transformative period for GM. We are strategically building an EV portfolio in the luxury, SUV and truck segments to produce vehicles with great design at the right price points for customers and at the margins we come to expect.

This concludes our opening comments. And we will now move to the Q&A portion of the call.

[Operator]

[Operator Instructions] Our first question comes from the line of Itay Michaeli of Citi. Your line is open sir.

[Itay Michaeli, Citi]

Great. Thanks. Good morning, everyone.

[Mary Barra, Chair and Chief Executive Officer]

Good morning.

[Paul Jacobson]

Good morning, Itay.

[Itay Michaeli, Citi]

Good morning. Just two questions for me. Just first, I was hoping you could dive a little bit deeper into the price mix assumptions you have in the second half of the year. Maybe also if you can quantify the logistics headwind, Paul, you just referenced? And second question, Mary, in the shareholder letter, I think you mentioned modeling a number of downturn scenarios and actions you can take. I was hoping we could expand a bit more about how you are thinking about various macro scenarios and options that you have and sort of maybe the range of kind of your earnings and free cash outcomes we should think about under kind of reasonable downturn scenarios?

[Paul Jacobson]

Yes. So Itay, I will start on the inflation pieces and the mix side. So, if you look at the inflation that we saw in the quarter, I would say about half of it is commodity driven and then about the other half is split between logistics and other supply chain challenges that we have seen before. I think – the thing I am excited about in the quarter is that when you look at inflation, the pricing and the mix was able to offset largely all of that inflation as we expected it to do. I think where the second quarter challenges manifested is, obviously, we were expecting higher volumes. We have been dealing with some of these chip issues for the last couple of years. This one was a little bit late breaking, which affected the volume and the mix on the quarter. Otherwise, I think it was a really good quarter. And we feel good about making up all that volume in the back half of the year as we have outlined. So I think with the vehicles being completed out of that inventory, we should see a little bit of a richer mix in Q3 and Q4 largely because of the truck side of it, but that’s going to help us keep us on track to the $13 billion to $15 billion.

[Mary Barra, Chair and Chief Executive Officer]

And from a downturn perspective, we are looking at, I’ll say, moderate downturn and a more severe. And we know the actions that we would take. As I mentioned, we’ve already started to reduce discretionary spending, but we are doing critical skill hires because we feel we’re positioned right now to continue executing our EV strategy even with some of the different things that might hit us. And it’s a really unique time because there are so many factors that are very positive. As I mentioned, we’re still seeing strong demand, but there are some indicators that look – that freight uncertainty for the future. So we’ve done a lot in preparation. If you go back to the transformation that we did in 2018 and 2019, we completed in 2020 that took out about $4 billion to $4.5 billion of cost. We also have systematically reduced vehicles and exited unprofitable segments and regions. You’ve seen about a $2 billion improvement in GMI versus 2018. And we’ve done significant restructuring in India, Southeast Asia and Russia as well as retiring the Holden brand in Australia. So the steps that we’re taking right now is continue to focus on eliminating complexity reduction, not only in our ICE lineup, but also in our EV lineup to be very customer-focused. We’ve done a lot as it relates to reuse, driving manufacturing efficiencies, go-to-market where we’re finding efficiencies that we can actually reduce the cost of selling a vehicle and then our overall fixed cost. And so we – again, it’s hard to predict exactly what the margins would be depending on what happens, where is demand. What we’re seeing right now, we’re still seeing strong demand for our products and frankly, as Paul said, even going in the second half of the year a higher mix. But believe me, we’ve run many different scenarios, and we know the steps. We’ve taken a lot of steps already, but we know the steps we would take if the situation went in a different direction.

[Itay Michaeli, Citi]

Great. That’s all very helpful. Thanks for all that detail.

[Operator]

Thank you. The next question will come from John Murphy of Bank of America. Your line is open.

[John Murphy, Bank of America]

Good morning, everybody. I just wanted to ask first on the supply chain readiness from sort of the chip side and also from other suppliers. I mean, Mary, do you think about this – I mean, if we had like a 20% improvement in chip supply, what would that mean for volume? I would imagine just given what’s going on with content and mix that it wouldn’t sort of result in a 20% improvement in unit volumes. Just trying to understand that? And then also on the supply chain readiness, we’re hearing lots of anecdotal stories about suppliers having a hard time getting human capital or labor and being concerned about the working capital relined as volumes ultimately recover?

[Mary Barra, Chair and Chief Executive Officer]

Yes. Each supplier depending on where they’re located, I think, is facing different circumstances and situation. And we have a team in our supply chain group that works with each of these suppliers. First, what we do is we go in and try to help them address their costs, figure out what we need to do to get the right resources. And so it’s a very active group right now as we work across the supply chain because we know we need to have suppliers who are healthy, can get and hire the people that they need, that they’re trained and that they can deliver high-quality parts to us. So I would say there’s ongoing work. And there are a lot of anecdotal stories, but we just work each and every one. As it relates to the semiconductors, we do see impact from semis into next year. And – but I think depending on where we’re at with demand, right now, it’s hard to exactly forecast what will happen because we’re selling every vehicle we can make right now. And we think there’s an opportunity – we’re at suboptimal levels from an inventory days on the field. We’ll never go back to where we were before the pandemic. But right now, it’s a little too lean.

So even as we are hoping and what we see now is that we have strong demand, let’s remember, we have new refresh full-size trucks. Our SUVs are, again, very strong with the enhancements that we made. And so if that – even as – or if I should say, if we get to a more normalized level that we aren’t – don’t have pent-up demand for full-size trucks, SUVs and midsized crossovers, we still have some work to do to get a healthy level of inventory, a very lean but healthy level of inventory. So that’s what we’re focused on. And frankly, we need more chips to do that. And as we move and continue to put more technology in vehicles, we needed even more semiconductors. That’s why the strategy that we’re putting in place for the 2026 time frame to have three families of semis that we leverage across our vehicles will give us much more stability, resilience and ability to transfer the semis to the segments that are most in demand.

[John Murphy, Bank of America]

I guess, Mary, just to follow-up on it, more succinctly maybe to get volume up 5% to 10%, would you need like a 10% to 15% improvement in chip supply or content? I’m just trying to understand. I mean, there’s a very – I mean, there’s a question of the shortage, and then there’s a question of the growing content and mix. I mean, is there sort of like a 5% to 10% delta on content and mix that we should be thinking about roughly?

[Mary Barra, Chair and Chief Executive Officer]

John, it so depends on what vehicle segments. I mean, we do know trucks use more semiconductors. Full-size utilities use more semiconductors than a sedan. A lot of it depends on how much technology on the vehicle, for instance, Cruise or all of the power features. So it’s really hard to make a – just a swag of what that would be. But what I will say is if you get 20% more, it’s not 20% more vehicles, that’s for sure.

[John Murphy, Bank of America]

Okay. I’m sorry, just my follow-up. When you said your severe and mild recession scenario planning, I mean, we have been in a recession level volumes for autos and certainly are this year in the U.S. and globally. When you think about mild and severe, I mean, how much value downside are you guys kind of modeling in? Because it’s kind of hard to believe there’s really significant unit volume downside from where you’ve been traveling at least for the last 6 months for sure.

[Paul Jacobson]

John, it’s Paul. I think as we look at that, it becomes less a question about volume and more a question about pricing. So what do you have to do to stimulate the same volumes that we’ve seen. It’s a rather unique circumstance because I don’t think we’ve ever gone into the economic noise with as low SARs as we’re seeing. But a lot of that has been production. I think that’s led to some of the pent-up demand that gives us confidence at least in the near-term, in the mid-term to continue to produce these vehicles and take the type of position that we took with the vehicles built without certain components. So I think it really comes down to more on the pricing on the consumer side. And all the data that we’re seeing continues to give rise to strong demand for our products.

[John Murphy, Bank of America]

Okay, thanks very much, guys.

[Mary Barra, Chair and Chief Executive Officer]

Thanks, John.

[Operator]

The next question comes from Rod Lache of Wolfe Research. Your line is open, sir.

[Rod Lache, Wolfe Research]

Hi, everybody. So until now, just on John’s question, North American sales have been constrained by supply. And they still are. And as you said, the demand still feels very strong. But if you clear out that extra 90,000 units in the back half, it looks like inventories could recover. It depends on what sales do obviously, but they could recover to the 400,000, 500,000 unit range pretty easily in North America, so maybe 50, 60 days. Just from your last comment, Paul, do you think you may need to make some adjustments to address affordability of vehicles just given the magnitude of changes that we’ve seen over the past 2 years or are you kind of more inclined to throttle production in order to sort of keep the inventory in that 50 or 60-day range?

[Paul Jacobson]

Yes, good morning, Rod. It’s a fair question. I think when you look at the inventory levels, as they sit right now, the overwhelming majority of the inventory is actually in transit. It’s not on the dealer lots, which I think is very different than what we’ve seen in the past. And as others have talked about, the logistics of getting vehicles to the dealers has been a little bit slower than normal. So I think as vehicles are getting to the dealers, they’re continuing to turn very fast. We are watching that closely. That’s probably one of the key data points that I spend the most time thinking about is the turn times once the vehicles come. So I think the pricing environment that we’re in right now has been very good, very robust. And I think it demonstrates the demand for our products. So we’ve got to continue to monitor that and continue to watch it because the cash flow that we’ve got and running the business for cash flow is critical to help fund our journey in the EV transformation.

[Rod Lache, Wolfe Research]

Okay, thanks. And just switching gears, these binding agreements on battery feedstocks, can you just give us a little bit of color on since they are binding, you’ve made commitments here. Have you been able to maybe insulate yourselves a bit going forward from some of the pricing volatility on these feedstocks? And just any color on just as you struck these deals, what that tells you about prospects for EV profitability.

[Paul Jacobson]

Yes. So Rod, I would say two things to that. Number one, we’ve talked about taking a portfolio approach to these commodities, meaning that we’ll take some index pricing, we’ll take some fixed pricing, we’ll take some discounted pricing. We’re willing to invest and prepay and just be very flexible as it relates to the suppliers. And two, I would say we’re focused on long-term partnerships. These aren’t just contracts that we’re looking to say, give me this volume of material. It’s about helping our suppliers. Those producers expand their operations and doing it in a way that is focused on creating efficiencies within the entire supply chain. So these agreements today represent, I think, what is the best of the best out there in terms of creating these partnerships for the mutual interest of our suppliers and ourselves.

[Rod Lache, Wolfe Research]

Okay, thank you.

[Operator]

Thank you. The next question will come from Joe Spak of RBC Capital Markets. Your line is open.

[Joe Spak, RBC Capital Markets]

Thanks. Good morning, everyone. Paul, just on the – thanks for the color on how you expect those 90,000 plus units to come back, but I am wondering, especially given some of the comments on semiconductors, like does that – like you can make those up, but does it at all impact your ability to wholesale what you thought prior like before you had this issue because if you still have some semiconductor availability issues, like I’m just wondering if that at all impacts where you think you fall in that 25% to 30% range for the year?

[Paul Jacobson]

Yes. So Joe, I would say that based on what we can see and as we’ve talked about before, we get together weekly with the supply chain team to talk about this. And what we see out on the horizon gives us comfort in hitting that 25% to 30% goal. And while the year-over-year increases have been lower than that in the first half, remember how challenged we were in the third quarter of last year with Malaysia. That seemed to impact us somewhat uniquely. So that’s where we get a lot of confidence. And we’re already essentially 1 month through the quarter, and that’s given us more confidence in terms of hitting those numbers and what the team has been able to do, both with production as well as completing those vehicles. So no concern yet. But as this quarter indicated, things sometimes happen, but that’s what we’ve got to do to be able to manage tactically. It was unfortunate that it happened at the end of the quarter because it crosses that quarter end. But the result is we will have that mitigated within that sort of 4 to 6-month time horizon, and we feel good about that based on our forward projections.

[Joe Spak, RBC Capital Markets]

Okay. And then switching gears to the EV side, I’m glad to see the Ultium cells are starting production this coming month. Can you give us an idea of how that ramps because you stuck to your 400,000 EVs over the next 2 years. It looks like maybe you’ll do 50,000 or so this year. So a significant ramp next year. And I’m curious like of that, let’s call it, 350,000 or so, how much do you think will be supplied by that joint venture versus third parties?

[Mary Barra, Chair and Chief Executive Officer]

Well, as I said in my remarks, we need the cells coming from the Ohio joint venture plant to really ramp the existing products we have, both the LYRIQ and the HUMMER. And we’re weeks away from that plant starting up. It will grow. So clearly, the bulk of the volume start to add in Q4 and then much more rapid increase because of that plant through next year. So – and we’ll be at full capacity. So you can almost do the math and look at it with the guidance we gave of 20% by quarter between now and then. And so the plan is very significant in helping us achieve the plan that we have to get to 400,000.

[Paul Jacobson]

And Joe, that ramp too is, I think, pretty consistent if you just look linearly to 2025, getting to 1 million from where we are right now. So I think this shows how far ahead of this we are because cell plant 2 is coming on in ‘23, cell plant 3 in ‘24 and so on. So we really see this as a very thoughtful, methodical approach of ramping up that volume. But I think you pointed out why we’re so excited about the trajectory of where we sit right now.

[Joe Spak, RBC Capital Markets]

Okay, thank you.

[Operator]

Thank you. The next question will come from Adam Jonas of Morgan Stanley. Your line is open.

[Adam Jonas, Morgan Stanley]

Thanks, everybody. I wanted to follow-up on Rod’s question about the inflationary cost environment on metals and your long-term profitability assumptions of your EV business. Given how much the market has changed upstream and battery materials specifically, notwithstanding your efforts to mitigate and control your destiny, how has that changed your long-term view of profitability or returns on the EV business?

[Mary Barra, Chair and Chief Executive Officer]

So Adam, overall, we’re still targeting the 10% margins as we go through this decade. Of course, when you see some of the increases right now, they’re going to have an impact broadly not only the EV materials but across all commodities. But no one knows exactly where they’ll be in 2, 4, 6 years as we go through this. What we’re doing is we’re continuing to drive efficiencies. That’s what engineers do. We solve problems. We take cost out. We find technology solutions. We’re working with not only internally but with LG, but with several other EV people involved in the battery chemistry and different parts of it to take cost out. That’s why we have the Wallace R&D center for manufacturing starting up this fall. As we look at a lot of promising battery technologies, where people struggle is to scale at automotive grade and have the manufacturing consistency. We know how to do that, and that’s why we’ll have R&D operations working with many of these companies to do that. So I’m confident as we continue to progress, we’re going to find ways to take cost out and drive efficiencies that we’re going to achieve the goals that we had from a margin perspective.

[Adam Jonas, Morgan Stanley]

Thanks, Mary. Can I just follow-up on GM Financial? Obviously, gives you really unique insight into the health of the consumer. And given the deteriorating environment facing the consumer, you see Walmart’s warning overnight, what changes are you making in either the originations or provisioning or other aspects of GM Financial to help protect the business in a deteriorating environment?

[Dan Berce]

Yes. Adam, this is Dan Berce. I’ll take that. So really, on a regular basis, we take a granular approach to analyzing our portfolio by product, term, credit tier, structure, structure meaning payment to income LTV and many other views. And based on these views, we make decisions constantly whether to tighten or ease credit. What we’re seeing now in our GM new car portfolio, we’re seeing extremely strong performance regardless of credit tier. On the used side, there’s probably places that – segments that we’re a bit more concerned about and that we would look to tighten. But the new car portfolio is the vast majority of our portfolio, and it’s performing very, very well. So really no view to tighten there at this point. As far as reserve levels, we’ve been expecting credit normalization all along. And so normalization is built into our reserves and provisioning already. In this quarter, in particular, we – our economic overlay that we have to apply under the CECL methodology, we’ve taken a view to a weaker economic environment going forward. So that economic overlay would serve to increase our reserves that we took this quarter.

[Adam Jonas, Morgan Stanley]

Thanks so much.

[Mary Barra, Chair and Chief Executive Officer]

Thanks, Adam.

[Operator]

The next question will come from Ryan Brinkman of JPMorgan. Your line is open.

[Ryan Brinkman, JPMorgan]

Hi, thanks for taking my question. I see you’re continuing to guide to a full year EBIT of $13 billion to $15 billion, which is far above consensus for less than $12 billion. If I had to guess, probably the difference relates to skepticism regarding sustainability of record pricing as the economy softens and maybe likely the sequential deliveries ramp from the first half to the second, given continued issues with chip availability. Are you able to update on what the very latest might be in terms of pricing? Maybe what gives you the confidence that pricing will hold in as inventory normalizes? Are there any examples in your portfolio you could point to or maybe inventory for select vehicles has improved yet the pricing did hold in? And with regard to the chip availability to support the 25% to 30% growth in wholesale for the full year, what visibility do you have to being able to secure those chips? Could maybe a cooling of economic conditions ironically help chip availability by reducing demand elsewhere in the industry or even maybe outside the auto industry? How are you thinking about pricing and chips tracking in the back half of the year in order to make that above-consensus guidance?

[Paul Jacobson]

Yes. Thanks, Ryan. So I would say that at the end of the day, all the data that we’ve seen to date on vehicle pricing and demand remains strong. I think I alluded to turn times earlier, what we see with Dan’s data from GM Financial but also importantly, the fact that while we’ve increased production to date, inventories on the ground at dealers hasn’t changed in really about six quarters even as production has gone up. So we still think that there is a big pocket of demand that hasn’t been met yet. And we continue to meet that. We’ll respond, but we – if we need to, but we feel good about where that sits, which is why we had the confidence to build those vehicles without fully completing them and be able to work through those.

As it relates to the chips, again, we had a level of confidence about the chip supply as we gave our guidance for 2022. It didn’t mean that it was over. In fact, we highlighted that we’d still see some challenges, and we have seen challenges but largely been in line with our expectations for the year. So there hasn’t been anything in the first 6 months or even the last couple of months that has deteriorated our confidence in being able to hit that full year goal. And in some cases, pricing has been more resilient for longer than we expected going into the year. So that’s kind of what’s giving us the confidence around that $13 billion to $15 billion guide, and we continue to remain focused on it.

[Ryan Brinkman, JPMorgan]

Okay, thanks. Maybe just a quick follow-up on the trajectory for Cruise EBIT, the losses seem to pick up there a little bit as you commence more commercial operations, maybe you have more people on the ground. What’s the way to think about that, that the losses do pick up as you launch operations? Or maybe as you launch operations, begin to generate some revenue, you can amortize some of the more fixed costs? How should we think about EBIT there tracking over the next year or so?

[Mary Barra, Chair and Chief Executive Officer]

I’ll let Kyle comment, but I would say, first off, we are very confident and excited about Cruise’s opportunities to scale. With what they are demonstrating in 30% of the San Francisco area having the ability to charge for rides and with the plans that we have for this year and next, we are going to make sure that we have all of the resources available to scale that business quickly because we do think there is a first-mover advantage. And so one of the strengths and the work that Cruise and GM do together is make sure that we have a plan and we have the funding available to support a rapid growth strategy. I don’t know, Paul, if you have any specifics on the amortization of the investment.

[Paul Jacobson]

Yes. So, I think at the end of the day, it’s continuing to perform at or faster than we expected going forward. The increase in cost is both headcount, but it’s also a change in the compensation expense, given what we have seen with the liquidity option that we have provided. That’s all built into our cash expectation for the year. So, there haven’t really been any surprises for Cruise going forward.

[Mary Barra, Chair and Chief Executive Officer]

And I don’t know, Kyle, if you have anything that you want to add just overall related to Cruise.

[Kyle Vogt, Chief Executive Officer, Cruise]

Yes sure. Thanks, Mary. When you have got the opportunity to go after a $1 trillion market where you can have a highly differentiated technology and product, you don’t casually weigh into that. You attack it aggressively. And given our strong cash position in Cruise, we are able to do this and aggressively presenting the market, I think, is a competitive advantage. And given our position right now, I think the results speak for themselves. But what you are seeing right now is the early commercialization. We just have that first initial revenue coming in. Our first driverless ride was just November last year. And since then, we are doing over 0.25 million – we have done over 0.25 million driverless rides, thousands of customer adds and covering 70% of one of the top ride-share markets in the world. So, we are scaling that up very rapidly. It’s exponential. I think it’s going to catch people by surprise. But certainly, on our initial scale, we – there is quite a bit of cash spending, but that’s in preparation for the ramp that we expected to do over the next year or so.

[Ryan Brinkman, JPMorgan]

Very helpful. Thank you.

[Operator]

Thank you. The next question will come from Mark Delaney of Goldman Sachs. Your line is open.

[Mark Delaney, Goldman Sachs]

Hi guys. Good morning and thank you very much for taking the questions. First one is on China. Maybe you can talk both in terms of your ability to operate as the Shanghai region has reopened, and there are still constraints on your ability to operate in China, but also what you are seeing in terms of demand in the China region. I think there has been some stimulus that perhaps helped the demand to recover. Do you think that’s sustainable in the China region?

[Mary Barra, Chair and Chief Executive Officer]

So, clearly, during the shutdown phase and specifically with a lot of our operations in Shanghai, we saw a drop in the Q2 timeframe. When some of those restrictions started to open, we already saw improvements in the June timeframe. And we are very optimistic that we can regain share and also be a very significant player from an EV perspective. We have the LYRIQ launch that’s coming very shortly. And we have our plans there to convert more than 50% of our foot – manufacturing footprint in China to EV production by 2030. We also have the strong performance and the leaders – sales leadership that we have with SGMW with the Hong Guang Mini. So, we are expecting a recovery. It might be slowed as China ramps. We are encouraged by some of the stimulus that the government has put in. But we do feel with our lineup coming in China, we will have a strong recovery.

[Mark Delaney, Goldman Sachs]

That’s helpful. My second question was a follow-up on the battery raw materials agreement. And now that you have some added visibility on the raw materials front into your battery cost structure, can you talk about whether or not you still think GM is tracking at the battery pack level for cost to be under $100 per kilowatt hour mid-decade? Thank you.

[Mary Barra, Chair and Chief Executive Officer]

So, that’s what we are continuing to work to make sure that we hit those and go well below $100 because we need to do that from an affordability perspective. And again, as I mentioned before, it will be by manufacturing efficiencies, by scaling the operations, we have an advantage with the LTM platform because we can scale. We don’t have a lot of unique configuration that’s going to help us take cost out as well overall. So, we are looking at the total cost of the vehicle. I mean in some of the cases, the raw material prices will be what they are, but we think we will have a differential advantage to our competitors because of the strategy that we are executing.

[Operator]

We will move on to the next question, Emmanuel Rosner with Deutsche Bank. Your line is open.

[Emmanuel Rosner, Deutsche Bank]

Thank you very much. One of the hardest things for us and I think investors to assess is what is the pricing downside risk, vehicle pricing risk as we move into potential downturn or recession. So, I was very encouraged to see you have been sort of like refreshing some of these downturn scenarios. And I was wondering if you would be willing to share some of your framework there. I think a few years ago, you used to host these GM office hours, where I think you had a historical framework around potential pricing pressure. Just curious if you could help us with how do you think about it?

[Paul Jacobson]

Good morning Emmanuel, I think two things to that. Number one, we are going through our long-term planning process with the Board. And we will have more to share in the fall just generally about the multiyear forecast and kind of how we are trending towards Investor Day goals, etcetera. Second, I think that there is a level of sort of normalization, and there is a level of recession across the board. So, as Mary articulated, looking at moderate and severe is kind of what dictates that. So, I think when we look at pricing, certainly in a down demand world, we would expect to see potentially some significant moves in pricing. But I think as we model out the recession, then we have got to figure out what happens to commodities, what happens to logistics, etcetera, where we would expect a lot of the air to come out of that balloon. So, I think we have got a decent sort of natural hedge to some of that in the event of a downturn. But no comments on any specific pricing variables that we are putting into it.

[Emmanuel Rosner, Deutsche Bank]

Okay. And then I guess one of the potentially growing – as I am thinking about the goods [ph] for the next sort of like 18 months or so, I think the one that could become more important is the near-term profitability of some of the electric vehicles. Obviously, with the goal to produce 400,000 units between this year and next, this is going to be a meaningful volume contributor next year. So, I know forecasting mid and long-term is probably going to be pretty difficult, but as we think about it maybe going to next year with this volume ramping up, how should we think about it as a factor? What sort of contribution margin are you expecting in the near-term?

[Paul Jacobson]

So, as we have talked about before, Emmanuel, I think our goal here is to get EVs to ICE parity by mid to late part of the decade going forward. So, I think we haven’t talked specifically about vehicle profitability and we don’t. But I think, generally, with EVs, I think you are going to see some rapid improvement in profitability on every model as we scale it up. And as we get the Ultium battery plants flowing and increase capacity, that’s a key driver of our strategy going forward. So, in the short run, there is some pressure, but I am not sure that it’s all that meaningful against where we are. As we get to getting to the 1 million vehicles and beyond, we should expect some pretty steady year-over-year improvements as we ramp up EV production.

[Emmanuel Rosner, Deutsche Bank]

Okay. Great. Thank you.

[Mary Barra, Chair and Chief Executive Officer]

Thanks Emmanuel.

[Operator]

The next question comes from Chris McNally of Evercore. Your line is open.

[Chris McNally, Evercore]

Good morning team. Just a follow-up to Ryan’s question on Cruise, I guess is it fair to say you just maybe don’t want to comment on the shape of the EBIT burn rate specifically for ‘23 right now or you are holding off until the September event? The reason I ask is I think investors are just going to assume in the absence that the losses may accelerate materially next year as San Francisco ramps, more cars, more rides, but also new cities are launched. So, even if not quantified, are we thinking about the shape of that EBIT burn going up next year correctly?

[Mary Barra, Chair and Chief Executive Officer]

First, I think Chris, Kyle and I are going to be speaking in September at the conference, the Goldman Sachs conference there. And then we will be providing more input from a forecast for 2023 when we give guidance. So, I would say we are going to make sure we fund Cruise and the spending is done in such a way that we can gain share and have a leadership position as well as we have plans that we are taking cost out as well as we – as the technology matures. Obviously, the Origin will be an important part of that as well. So, what I would ask is you stay tuned until we talk in September, and then we will give further guidance as we give overall guidance for 2023.

[Chris McNally, Evercore]

Okay. Great. That’s very helpful, Mary. And then just maybe you could remind us, Kyle, just the comments that you guys have made publicly about what cities may be next. I know Arizona, there is a lot of testing. Is Dubai referenced in the media? And then anything around the timing of – or what a 100% launch may look like in early 2023? Will there be a ride-hailing app into the public in 2023, again, anything that you can comment on?

[Kyle Vogt, Chief Executive Officer, Cruise]

Yes. So, we haven’t announced our next cities yet for obvious reasons, but mainly that we don’t want to give everyone a heads up where we are going and when. But that we have very aggressive scaling plans for future years. We have done substantial work to de-risk the technical approach to taking what works well in San Francisco and deployed in other similar and attractive ride-share markets. And then on the ride-share app, we do have an app now that is open to the public. Thousands of members of the public have used it in San Francisco, and we are able to charge fares for the majority of those rides. So, that’s – it’s early stages. That’s pretty fresh off the press just in the last couple of months. But that was a big step for us going from essentially a pre-revenue company to the beginning of our first revenue coming in and at the beginning of that rapid scaling trajectory.

[Chris McNally, Evercore]

Okay. Thanks so much. Look forward to September.

[Mary Barra, Chair and Chief Executive Officer]

Thanks Chris.

[Operator]

The next question will come from James Picariello of BNP Paribas Exane. Your line is open.

[James Picariello, BNP Paribas Exane]

Hey. Good morning guys. Just on commodities and freight. So, I mean at current spot rates today and the timing of your contracts, is there any way to be thinking about based on the lag in your P&L flow-through what next year could look like, again, using the hypothetical exercise of current spot rates as the baseline?

[Paul Jacobson]

Yes. I would say, James, it’s premature to be giving any 2023 guidance from that standpoint. Certainly, it would be better as evidenced by the fact that you look in 2021, we had a lag benefit as commodity prices were going up. So, we have about a third of our commodities that are kind of on index pricing and about two-thirds that are on sort of multiyear agreements going forward. So, I would say stay tuned for that. The commodities environment is obviously going to change quite a bit from here to there. But there are some savings there certainly as it sits right now.

[James Picariello, BNP Paribas Exane]

Savings for next year. Okay.

[Paul Jacobson]

Yes.

[James Picariello, BNP Paribas Exane]

And then any color on the timing of the announced fourth battery plant? I thought the company was hoping to make an announcement sometime in the first half. So, just curious what’s there? And then can you provide any details on the timing and the terms of the $2.5 billion U.S. government loan announced today through the ATVM program? Thanks.

[Mary Barra, Chair and Chief Executive Officer]

So, the announcement for the fourth battery plant will be in the not-too-distant future. It will definitely be this year. So, just stay tuned on that. Obviously, there is a lot – the team has done a tremendous amount of work. So, we are approaching announcement there. And then I will let you talk about the terms.

[Paul Jacobson]

Yes. So, on the Department of Energy loan, we obviously still need to close that loan. As we close it, we will have more details on it. But it is a loan to Ultium Cells LLC, so it benefits both us and LG Energy Solutions, and it is non-recourse to GM. Beyond that, we will disclose more at closing.

[James Picariello, BNP Paribas Exane]

Thanks.

[Operator]

The next question will come from Colin Langan of Wells Fargo. Your line is open.

[Colin Langan, Wells Fargo]

Great. Thanks for taking my question. If battery raw material costs don’t fall, what are the cost opportunities to offset this pretty big increase? I mean I am estimating right now that EVs are probably possibly $7,000 more costly than internal combustion engine, which is a pretty large gap. So, how can you fill that gap going forward, particularly as we go into next year with the big ramp? I mean it seems like your margin targets haven’t changed really, and the spike seems to be a pretty material headwind.

[Mary Barra, Chair and Chief Executive Officer]

Well, I think as we ramp up, scale is going to be a very important piece of it. I would also say the team continues to find opportunities to take cost out of battery cell manufacturing, finding manufacturing efficiencies. We have found opportunities in purchasing. We can – and over the, I will say, the mid to a little bit longer term, we will continue to look at what chemistries we can use that improve cost, also chemistries that use less of the more expensive materials. So, Colin, really, we look at every single element to take cost out. Our number one goal right now is to get these battery plants up and get it launched because there is such strong demand for the products that we have, whether it’s the HUMMER or the LYRIQ and continuing – we are seeing really good interest in the Bolt from a customer perspective. But as we get into next year with the Silverado EV, the Blazer EV, the Equinox EV and yet this year later, the SUV of the HUMMER, we are busy getting everything ramped up. And then if one thing General Motors’ engineering team and manufacturing team knows how to do is take cost out, and we will do it.

[Colin Langan, Wells Fargo]

Okay. You talked about pricing is stable. Can you comment a bit on lead times or in this unusual environment where you kind of have a lot of preorders. Some of the dealers have indicated that the lead times have shrunk. Is that true? Is that what you are seeing that the lead times have kind of started to normalize?

[Mary Barra, Chair and Chief Executive Officer]

No. I mean there could be for specific products, we might be seeing that. But frankly, for our most in-demand products, when you look at full-size trucks and SUVs, there is – we still really aren’t seeing a change in the lead time to get these products out.

[Colin Langan, Wells Fargo]

Okay. Alright. Thanks for taking my question.

[Operator]

Our last question comes from Jairam Nathan of Daiwa. Your line is open.

[Jairam Nathan, Daiwa]

Yes. Hi. Thanks for squeezing me in here. So, I just had a question on inventory. You talked about pretty like 90% to 100% increase in the third quarter and 20% to 30% in the fourth. How should we look at the mix of production? We have seen companies like Walmart kind of building inventory of the wrong things. And especially given gas prices and large SUVs, it seems counterintuitive. So, how should we look at the mix in terms of how much the production volume?

[Mary Barra, Chair and Chief Executive Officer]

Well, right now, we can’t build enough full-size trucks and SUV as we mentioned, mid-teens and even lower from a – for full-size SUVs. So, it’s something we watch very, very carefully. And I think the opportunity we have, we still expect very strong demand. A lot of these vehicles, we have customers waiting for them. Believe me, I get emails from them waiting for their trucks and SUVs. And so we are confident with the decision we made in June to build these vehicles that we are going to see strong demand. And then post that, when we do eventually, and we don’t know when start to see demand start to normalize, we still have work to do to build the inventory to the appropriate level. Again, never back to where even close to where we were, but at a level. So, with that, we are confident in the vehicles we are building today that we have strong demand for them.

[Jairam Nathan, Daiwa]

Okay. As a follow-up, I just wanted to understand, like how do – what’s the plan to allocate these battery packs? And it looks like for some of your products like BrightDrop, for instance, it looks like there is a lot of demand. And you are – you have announced quite a bit of EVs coming up. So, how do you kind of allocate the battery resources between these vehicles?

[Mary Barra, Chair and Chief Executive Officer]

Yes. So, we look across all the whole EV portfolio that we have off of Ultium and look where the strongest demand is. And in general, we are going to allocate where we see the strongest demand. The challenge we have right now is our – that’s why we are so excited to get battery plant cell one up and next year plant two and the following year plant three because right now, our demand is outstripping our capacity. And so we look to kind of make sure we are covering all the key segments and the customers. And a lot of it is just looking at what that demand is and kind of allocating across. So, we will continue to do that, especially where we see the strongest demand for whether it’s the fleet vehicles from BrightDrop, knowing the importance of getting affordable EVs out with the Blazer and Equinox, but also the strength that we are going to see – that we are already seeing in the Silverado EV and the LYRIQ as well. So, it’s a problem we are working out of, but frankly, it’s a better problem to have than others.

[Jairam Nathan, Daiwa]

Okay. Just to understand if I kind of put a spectrum, right, like, let’s say, Bolt’s at the one end, and BrightDrop’s the other. One would argue that you should be making all BrightDrops or the Silverados, but would that be the plan, or would it be more spread out?

[Mary Barra, Chair and Chief Executive Officer]

It will be more spread out as we look to have the portfolio because remember, having vehicles in the key segments that there is huge demand for, I think is going to drive EV volume. So, again, we will allocate as we evaluate the market and the ability because we have common cells and the packs that gives us a lot of flexibility to make decisions as we see how the demand unfolds.

[Jairam Nathan, Daiwa]

Okay, great. Thank you.

[Operator]

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

[Mary Barra, Chair and Chief Executive Officer]

Thank you so much. As Paul and I have discussed today, we believe the team is executing well on both our short-term and our long-term commitments even in this environment that’s pretty uncertain. We have a strong foundation in place. And we believe, as I just said, we are rolling out the right EVs in the right segments. We have strength across Cadillac, strength across Chevy, and you will see it in GMC and HUMMER as well. And we also – the feedback that we are getting with the performance, the design, the technology on these vehicles, we couldn’t be more pleased with the response that we are seeing from every vehicle that we reveal. So, we feel that there is going to be strong customer demand, and that will, again, as we execute our business plan, get us to the margin targets that we have talked about.

I will also say, we are very pleased that we will host another investor event in the fall in New York City and one that includes hands-on experience with their EVs. So, you can see these vehicles and the strengths that they bring to the market. We are going to have more details to share soon, but please mark your calendars for November 17th. And I look forward to seeing you there if I don’t before then. So, thanks again for all your questions, and I hope everybody has a good day.

[Operator]

That concludes the conference call for today. Thank you for joining. You may now disconnect.