General Motors' (GM) Management Presents at Citi Industrials Broker Conference (Transcript)

| About: General Motors (GM)

General Motors Company (NYSE:GM)

Citi Industrials Broker Conference Call

June 15, 2016 09:30 ET

Executives

John Stapleton - Chief Financial Officer, North America

Steve Dork - Investor Relations

Analysts

Itay Michaeli - Citi

Itay Michaeli

Good morning, everybody. I think we will get started with the next session. I am Itay Michaeli, Citi’s auto analyst. And I am very pleased to have GM back with us for the 2016 Citi Industrials Conference. From GM, we are pleased to have John Stapleton to my right. He is the CFO of North America. And to his right is Steve Dork from Investor Relations. John will make a presentation and we will have some time for Q&A. Just two quick housekeeping items, if you do like to ask a question, just please un-mute and un-mute your microphones in front of you. And for those who need Citi’s legal disclosures, we have them upfront as well.

So with that, we are very pleased to have GM back with us at the conference. And John, I will turn it over to you.

John Stapleton

Okay. Thank you, Itay. I appreciate the opportunity to talk about General Motors North American operations. Before I get into the pitch, I would like to show a video. So, let’s shoot the video. We just launched this last week.

It’s a good video. No go? Okay, so let me describe the video. So last week, on Wednesday, we launched a head-to-head video, our Silverado versus the Ford F150. And in the video, we highlighted the fact – we looked at utilizing the bed of the truck. So, we – I don’t know if you guys have been able to see it, but we dumped some bricks into the F150. We dumped some bricks into the Chevy Silverado. The F150 has an aluminum bed. The Silverado has a high-strength steel bed. And the bottom line is if you look at the video, we like having steel in the bed. We believe you need to have steel in the bed for the functionality. It takes a beating. The aluminum, actually, when you dumped the bricks as well as pushing a toolbox into the bed, you actually pierce the metal. So, it’s aggressive. We actually went out with it last week. You can – there is actually pierce and actually splits in the metal on the Ford. The Chevy Silverado just had dents. That went out on Wednesday. On Thursday, we actually got notification from Google, who owns YouTube that was the number one watched video in the United States last Thursday. So, it was very, very powerful. We have both an English version and a Spanish version. As of Monday, we had 36 million views of this video, so very powerful. If you get a chance, go look at it. I will talk about our marketing here in just a second.

Itay Michaeli

We can all play it on our iPads, if you want.

John Stapleton

No, the screen is frozen.

Itay Michaeli

There we go.

John Stapleton

Okay. Today’s presentation is going to be governed by the following forward-looking statements. Next slide, there you go. Okay, before I get into North America, I have to talk about GM as a compelling investment opportunity. From an earnings growth perspective, North America we were able to achieve 10% margins in 2015 one year ahead of schedule. We are growing our adjacent business like our after-sales business, like our OnStar business. They are very profitable. GME is on the cusp of profitability. And China continues to grow.

Our disciplined capital allocation, we are reinvesting in the business at 20% return on invested capital. And we are trying to maintain a target cash balance of $20 billion returning excess to the shareholders. Relative to robust downside protection, in 2007, our breakeven in North America was 16 million units. Today, it’s between 10 million and 11 million units. We have been able to take a lot of fixed cost out. We have compressed a lot of manufacturing. We have been able to get rid of a lot of legacy costs like retiree healthcare. And now we are on the DC pension plans. So, it’s – we are much stronger than where we are at before the last recession.

Okay. The agenda, I will talk about North American margins then I will shift on to our products and brands and then I will finish off with our adjacent sales. Okay. So, I have showed this chart before. Chuck Stevens, our CFO, has shown this chart many times. This is North America margins. We have achieved 10% margins in 2015. In 2016, our goal is again to sustain the 10% margin while we invest in the future. We do have to cover costs such as launches, engineering and advertising of our new product.

In subsequent slides, I will cover the new models and adjacent sales, but just a quick couple of comments on the three bullets below. So, material cost optimization, Chuck Stevens has guided in the past that we will achieve a $2 billion material cost reduction year-over-year for carryover material and logistics. I mean, that’s strong. That’s a couple of years in a row where we have had a couple of billion dollars of material cost. This is carryover material. How are we doing this? We are actually bringing the suppliers in early in the process. We are giving them multi lifecycles of product to get the lowest possible cost and the most innovation. We are reducing build combinations, taking complexity out, so that you have a larger scale of buy.

The second bullet there, that’s not highlighted, is the operational excellence. We have a team of – that we have trained there like Six Sigma OpEx leaders, they actually sponsor projects throughout the company to take cost out. It’s embedded in the company. We review it at the senior leader level twice a month. It’s actually harvesting great results. And finally, GMF. So North America, we don’t show the GMF profit, but it does help our results. If you look, we are full captive now on our lease. When you have lease customers coming back at the end of the cycle, we see strong loyalty with a full captive to the 4 to 5 points of loyalty. In addition, it’s great to have a captive as you walk into some type of downturn so you know that you actually have financing for sales.

Okay. Let’s get into North America a little bit here. Our U.S. retail sales strategy, the first bullet, not all shares created equal. We have been public. We are trying to reduce our rental volumes, significantly reduce our rental volume. 2015 to 2014, we pulled out 50,000 units. ‘16 to ‘15, our goal is to pull another 80,000 units out, 130,000 units out of the system in just 2 years. 4 years ago, our rental volume as a percent of total volume was 17%. In the calendar year-to-date timeframe this year, we are running at 11%, so a strong reduction. And industry today is running at 14%, which is a bit high, but we are actually below industry. So, the result of the strategy should hopefully improve our brand health. We need to see better residuals and we will see hopefully better loyalty, which again is going to be key as you walk into a future downturn. Loyal OEMs, we saw the OEMs with a higher loyalty actually had higher share. And again, we are doing everything in our power to get loyalty.

The second bullet, retail share, we have increased about 50 bps, strong full-size pickup trucks, strong full-size SUV and midsize cars. Our incentive spend has actually been quite disciplined. In Q2, our incentive as a percent of ATP, average transaction price, is about 10.2%. Industry is at 10.6%. We are below industry. Calendar year-to-date, GM North America or U.S. were at 11%. The industry is at 10.9%. So, we are right on the industry and that assumes a rather big sell-down of our old Chevy Malibu and Chevy Cruze in the beginning of the year.

Relative to industry leading marketing, we have – I wish I could have shown you the video. We have strong, passionate marketing out there. Malibu started it. It’s reinforced that Chevrolet is not just the truck brand, it’s actually a great car brand. In the past 2 years, Chevy has garnered 44 awards, including 3 Cannes Lions award, which in my understanding is the most prestigious award in the global marketing world. So, what you will see in subsequent slides is how this marketing is translated to results.

Okay, new models. So, we are extremely pleased with the Malibu to-date. The first bullet, our retail segment share has moved. We were eighth in the segment. We are now #4. We have created a much stronger cross-shop dynamic. And a couple of examples. So, Camry, the old Malibu was 36th in consideration relative to a Camry buyer. We have actually moved from 36 to number two, Altima from 12 to one and Ford fusion, from 12 to four, so strong cross shopping performance that we just have not seen in the past for Malibu. Our build combinations, we have moved from 46 to 22, again a huge reduction. What we are trying to do is not only do you get the scale to buy, you do get to the lower complexity, but you make it easier for the customers to order the vehicle, you make it easier for the dealers to order the vehicle. Our goal is to have high turning, high volume vehicles at the dealer. And hopefully this translates to again, better loyalty and reduce sales allowances.

The Cruze, we are still launching. We are building inventory right now. We have a 37-day supply, very, very low days supply. We are going to launch a new hatch and we have a diesel coming, so more to come. We have gained one point of share as we look at it from April to May. And we are currently launching the CT6, the XT5, Acadia, Envision and Bolt, more to come on that. The Bolt we will actually launch later in the year. And I would be remiss if I didn’t say, on the Malibu and the Cruze, we have been public relative to a $1,500 variable profit improvement, old and new. That is still the plan for both the cars.

Okay. Chevrolet, we are working very hard to improve the Chevy brand. And I think it’s paying off. We think it’s paying off. I would just jump right to the table. If you look at our retail share, we have increased 50 bps and that’s the same as General Motors U.S. in the prior slide. So it’s been dominated by Chevrolet, the fastest growing full line brand in the industry. Now the next four metrics are more brand health metrics; net momentum, conquest, loyalty and opinion. And if you look at the metrics, we have increased net momentum by 17 points. And what is net momentum, we go out to customers and ask the question, would you say the brand is moving in a positive direction or a negative direction and there is five selections, two negatives, a neutral and two positives. And the way that it works is, the positives less the negatives equal the score that's on the screen of 34. And for us to essentially double our net momentum score is just huge.

We have ways to go the Toyotas and the Hondas are in the 40 – low-40, so we have got a little bit more work to do, but again strong progress. Conquest, we have increased our conquest share, up 0.8 points and we are the only brand to grow share in ‘16. Loyalty and I will continue to hit on loyalty as I go through the pitch. We are up 1.4 points, it’s the highest in 12 years. And we got to have the loyalty, not only is it to increase our revenue, our profit, but also prepares us to hopefully maintain our gross share in a future downturn. And then excellent opinion, we have raised opinion up by 5 points and we have closed the gap to Ford. Again, more work to do against Toyota, but significant progress for Chevrolet.

Okay. Trucks, if you – no other OEM can offer what we are offering right now with the midsize pickup, a large pickup, both light and heavy and then a large SUV. If you look at the table, we have industry leading ATPs, we continued to grow ATPs. And we are maintaining or even growing market share in some of the segments, which is strong. We feel lower for longer gas prices and weak housing starts will support a sustained truck segment in the foreseeable future. In addition, the car parc age, it’s old. And I will go through a couple of numbers on another slide. We feel there is a great opportunity here to continue to sell deep in trucks, so a couple of numbers here. So the mid-pickup, you will see we essentially a couple – 3 years ago, we were at zero segment share. Now we are up to 34. The Colorado’s top conquesting model is the Ford F150, it’s interesting. So it’s a midsize truck. Our number one conquesting model for Colorado is the F150. We are offering a diesel engine now that gives 31 miles per gallon, so an extremely competitive product. We are doing very, very well. And we have very low days supply, 46 days supply right now in the field.

Large pickup, in May, Silverado and Sierra had the highest ATP on record. And you can see, relative to the competition we are actually slightly above from an ATP perspective. We have held share. There is a lot of articles about GM’s losing share. We have held share in a calendar year-to-date basis. And then if you look at what we are doing with special editions, special edition is a unique model that will offer not a ton of volume, but we are – it keeps the showroom fresh. It attracts customers that normally wouldn’t come to a Chevy dealer or a GMC dealer. They are younger buyer. They are more affluent. They have a higher education level. Our volume turns in a third of the time of regular pickup trucks, the special models like the Midnight Edition, Blackout Edition. We have a special ops edition. We have a Realtree edition, so strong performance in the large pickup. And finally large SUV, if you look at the data there, we have been very fortunate to grow share six points, retail share and our ATPs are extremely strong, well above the competition.

Okay. We will shift again to trucks but this is Denali, so a brand within a brand of GMC. Denali represents 25% of our volume at GMC, 35% of our profit. We all sell Lincoln, Land Rover, Volvo and Porsche, again a brand within a brand. And we are going to launch the new Denali Canyon this fall. So the Denali customer is much more affluent than other customers buying our vehicles. The Denali customer has average household income of about $237,000. The Tahoe Yukon is about $147,000. And a typical GM customer on average is $87,000 household income. So a high household income, which is great, because actually we have a very strong loyalty to the Denali brand, which is great. As I have said as we walk into potential future downturn down the road, they have the means to actually continue to purchase product. And then also, we have a lower incentive spend on Denali than the rest of the models.

Okay. Crossovers, if you look at our crossover portfolio, we do have an aging portfolio. On average, if you look at our Equinox Terrain, if you look at our Traverse, you look at our Enclave, they are 6 years to 8 years old. So again, we need to get the new product out there. We do have some new product, it’s the XT5. For Cadillac, we have a new slightly smaller Arcadia that we are now just launching. The Envision for Buick is just now launching. So we do have some new products, but a lot of the mainstream compact SUV volume is still quite old. Compact SUV is the number one segment in the United States and Canada. So that’s the Equinox and the Terrain. It’s like a 3 million unit segment. It is now bigger than midsize car segments and compact car segments. So if you look at the data, we have shed a little bit of share, I relate that to you again some of the age of our portfolio. But given that age, a refresh can’t be too far away. And I will just leave it at that. We have been able to hold ATP as well.

Okay. A couple of slides on adjacent businesses, so after-sales, if – I will just try to clear the slide. The left side of the slide would be the car parc at General Motors in millions of units. So the blue bars. The right side is our revenue. And if you look at the slide, historically speaking, our car parc has been shrinking. But the good news is, if there is good news in this, is that we have been increasing our revenue as – even in the facing a slowing or a decreasing car parc. How are we doing it, initiatives, we are working very hard to get customer retention in the service line. I will talk a little bit about that relative to OnStar and how that’s helping us. Next-day repair, having parts as the customer walks into the showroom with an issue, the goal is to get the parts to the dealer the next day, so they have a great experience at the dealer and then strategic pricing.

Now prospectively, if you look at ‘16 and beyond, the car parc is actually starting to grow. So we will take full advantage of that. And I would – my expectation is the slope of that revenue line should actually start to increase with an increased car parc, so a couple of facts for you relative to the car parc. And these facts in my opinion, support strong after-sales revenue as well as strong new car sales on a go-forward basis. The average U.S. car parc is 11.5 years old. So the average car out there burning gas today, 11.5 years old. At General Motors, our car parc is 14.2 years old. So it’s older, again more of an opportunity, in my opinion, to convert some of those vehicles back to a new vehicle hopefully soon. The full-size pickup truck car parc is 11.9 years old, so a little older than the average. The General Motors’ version of full-size pickup truck car parc were 12.6 years old, again an opportunity for us to convert those driving older vehicles to a new vehicle in short order.

Almost 20% of our pickup car parc is 20 years old. So that’s a big number. And again, we are doing everything in our power with CRM, with OnStar to try to get these customers back into the showroom and convert them into a new. But until they do that, we are going to sell them as many after-sales parts as we can. And then one final comment relative to after-sales. So we are growing revenue. We are growing profit. It’s a very strong business. I call after-sales the small full-size truck of North America. It doesn’t have the dollars billions in revenue. But from a margin perspective, it’s the same type of margin as a full-size truck. So, we are doing everything in our power to grow this business and to take care of the customer. In addition, the after-sales business is not as susceptible to industry fluctuations bored down. And as you know, we ultimately head into a downturn down the road. Strong after-sales business will actually be more steady and again having that high full-size truck margin business available to us in the downturn is very attractive.

Okay, OnStar, another adjacent business opportunity. 1.2 billion customer requests responded to in the last 20 years. We have – there is a lot of OEMs that are connecting their vehicle, but I don’t think any OEM can claim the history that we have relative to how we have already been connected for many, many, many years. We have a lot of history. We have a lot of knowledge. We have had a lot of interactions with the customers, 12 million connected vehicles around the world by year end. We are going to be 7x more 4G/LTE than the rest of the industry combined. By 2020, three quarters of our sales should be connected.

So, a couple of more facts for you. Last year, we have had 133 million interactions with customers through OnStar. We are starting to see this interaction double every single year. And we have had over 50 million interactions in the first quarter alone. So, think about this connection to the customer, connection to the car and potential to up-sell, up-sell products like more subscriptions, some B2B sales. We can sell more 4G Wi-Fi, e-commerce. So, it’s a great opportunity to take care of the customer, a great opportunity to promote our vehicles, but also a good opportunity for us to drive more revenue and ultimately profit.

Other revenue opportunities, the service lane work. So, you get a notification you need an oil change. You get a notification that your pressure is low in your tires. We have certain preventative diagnostics on parts of the vehicle that can say, hey, it looks like your water pump may go in the future. And it’s trying to get vehicles – sending them a notice, getting the customer into the showroom, get it fixed before it’s a walk home situation. So, it’s very, very powerful. In addition, we can use the pipe, the 4G pipe for over-the-air fixes, over-the-air warranty fixes like a re-flash of the electronics. It’s very powerful what you can do now with all the electronics in the car and 4G.

Last slide, okay, summing it all up. North America, we remain focused to sustain the 10% margin and we will continue to invest in the brands. We do have a lot of launches. We are supporting the launches with marketing. We are supporting the launches with engineering. We do remain committed to our retail sales strategy and that’s a huge reduction in our rental volumes and we are going to continue to do that to promote our brand health. And finally, we will continue to invest in the brands and the goal is to offset that investment with other efficiencies such as the material cost reduction that I mentioned, the carryover material costs and logistics savings to help pave for that. In addition, we are obviously trying to bring as much cost out of SG&A, manufacturing. I mean, we are actually pretty good at taking cost out of the system.

So with that, I will turn it over to you.

Question-and-Answer Session

Q - Itay Michaeli

Great. Thank you very much, John. So, we have got about 15 or so minutes for Q&A. Maybe I will just kick it off I think with a question lot of people are probably asking these days. You delivered 10% margins last year. It seems like that’s still the target for this year. When you look at the last few months, people have pointed to kind of so, so retail SAR some weakness in used pricing, the main objects for GM in particular were of discussion. As we kind of look at the whole market today, both the industry and to what GM is doing, how do you feel about that 10% margin target this year relative to maybe where – what you felt in January? What’s going right? What’s going less right, more right in kind of whole update on the field?

John Stapleton

We still remain confident that – on the 10% margin in 2016. Yes, we have seen a little bit of weakness in retail and the retail SAR – the fleet SAR is actually going up. But that being said, what are we seeing out there? We are – we still have strong truck sales, strong truck demand. Our day supply is lean. It’s very good. Full size SUVs are still moving. Even our older compact SUV, the Equinox and Terrain, while it is roughly 7, 8 years old, our day supply is extremely low. We are still moving a lot of volume right now. So, I – we still feel very strong. I also feel that the after-sales business that I mentioned and the OnStar business, it’s just the two hidden gems that help contribute where maybe we fall down a bit on the vehicle side. We are starting to see increased revenue on, let’s say, after-sales, to help offset some of that. So, we still feel very good.

Itay Michaeli

Maybe I will sneak one more and you mentioned that the pickup truck market, a market we have done a lot of work on ourselves. And hoping you just comment on what you are seeing in terms of industry supply demand. Our work has shown that there is an imbalance in terms of capacity having come out over many years, while the installed base of pickup trucks, where the parc has actually grown. You shared some statistics as well on the average age. Are you seeing that tight supply demand imbalance that was caused by the capacity cuts years ago? And is that something that two might give you confidence perhaps in terms of sustaining margins in a plateaued SAR?

John Stapleton

Yes. So, I get a lot of questions about full-size pickup truck capacity. And as you say, we have removed quite a bit of capacity in the 2009, 2010 timeframe. But that being said, if you look at – what we are trying to do is rather than put brick-and-mortar in and large installments of capital or capacity we are tweaking the system. So, let’s tweak it to get another 1 or 2 jobs per hour in a plant, not have to spend any capital. Let’s negotiate with the union to try to work more Saturdays, if at all possible, over and above what a union contract would provide for. And in some cases, we can actually ask for volunteer work even on Sundays. So, we are doing unique things like that to get more volume. If you look at 2015 versus ‘14, we have been running very, very hard on pickups in both years. Yet ‘15, excluding midsize trucks were up – we produced 7% more. If you look at 2016 calendar year-to-date versus 2015 calendar year-to-date, again, we produced another 7% more. So, we are finding ways to get more production, unique ways, again dialing it up a little bit relative to line rates as well as union deals. And I think that we have been very smart, because we are running at a very, very high industry right now to put the capacity, to put the capital in. Right now, I just don’t know if it makes sense. And if you look – if you remember the market share slide, we have been maintaining market share. So, it’s – we feel we are in a good place right now. Add to it, we actually have a midsize pickup truck, so plus 140,000 units in the pickup truck world that had nothing to do with the full-size and that’s all incremental volume versus three years ago.

Itay Michaeli

I would like to ask you a structural question for the industry over the next 5 years. But there are two emerging trends though are picking up steam, one is autonomous and second is the shared economy. And some argue that this will really restructure the entire industry and the amount of cars we put into the market where instead of two cars per household, we are going to have fewer than that as we shared those resources and we will need fewer drivers, because they have autonomous, semiautonomous technologies to do it for us. How do you think that will change the business? You are talking about 11 million cars to breakeven. Is this a realistic number that will see the industry cut by half, because we just share cars instead of drive our own?

John Stapleton

So we have guided in the past that we feel the industry in the United States will be in the mid 17s into the foreseeable future. Why? Because of the housing starts just haven’t taken off as well as we think lower for longer gas prices. So, that’s going to help. So, let’s just assume you are at a mid-17 industry, which again is really strong. So, how would autonomous impact us? It’s going to take a while. First of all, you got to figure out a way to make this safe before people are going to sit in an autonomous car. And so I don’t know if that’s within the next 4 years, the next 10 years, but there is a lot of work to do to make it safe. Will it replace vehicles? In particular for General Motors North America, a lot of the autonomous we would see in urban city areas. If you look at our market share, where we are the weakest, it’s in the big city areas. So, in one aspect, I could view this as an opportunity for General Motors to grow our market share in the cities with autonomous vehicles. I think we have been public that we currently have a Bolt EV autonomous vehicle running around in San Francisco right now. So I don’t know if I view it as a huge negative in many ways in big cities for General Motors just because we are – we under index versus our market share nationally. Kind of contrary, maybe that’s an opportunity for us. But it’s just too early to tell relatively to replacements. We do feel though that the car sharing is going to significantly increase in the future and that’s hence some of our investments with Lyft and Cruze.

Unidentified Analyst

Just to follow-up on that, what does car sharing mean to your OE sales, fewer cars each time, but you replace them more often because they drive more?

John Stapleton

Well, I mean from a – we have what we call the Maven business. So we actually have cars, car sharing, residential car sharing like in apartment complexes. We have city car sharing that you can actually just rent the Chevy Cruze for a while and then we have Express Drive, which is Lyft. They go and they get the vehicle, they can run it for a day, a week, a month and then just drive people around. We feel that that business is just starting, but the actual vehicles that you move into that dynamic are not necessarily new vehicles. We take them off rental. We could use a 2-year lease vehicle. So I have already booked the sale. I have already captured the revenue and the profit. Now the vehicle is being driven in another segment, another capacity. And then they go into this car sharing. So it’s almost – I get a double benefit in some ways. That’s how we are running the Maven business right now.

Unidentified Analyst

Thank you for taking the question. Just some maintenance questions, quickly. The $2 billion material cost reduction, what’s the timeframe on that, also what are your pricing assumptions within the breakeven level of 10 million to 11 million SAR. And then do you have an update for the European emissions issues right now I believe within Opel? And then lastly, with Moody’s, when was your last conversation with them and what are your expectations for the upgrade timing?

John Stapleton

Okay. What was...

Itay Michaeli

That’s four in one. What was the first one again?

Unidentified Analyst

The timing for the $2 billion material cost reduction, what was the timeframe?

John Stapleton

Okay. $2 billion carryover material costs and logistics 2016 versus 2015, so calendar year. Relative to pricing and the SAR, in a lower SAR environment, was that your question?

Unidentified Analyst

Yes. What are your pricing assumptions baked into that, I am assuming you are not holding pricing flat on a breakeven at 10 to 11?

John Stapleton

No. In a dramatic, 10 to 11, which is where we were back in the 2009 timeframe, I just don’t know if we will ever see something like that in the near future. But our pricing assumptions, we definitely have to increase our incentive spend. I am not going to give you the exact number, it’s nowhere near though what happened back in the ‘09 timeframe. Why, if you look at the pins – if look at incentive as a percent of ATP back in 2009, at General Motors, our full size truck incentive spend was like 19% and our cars and SUVs were very high as well. But since then, we have taken out so much install capacity that it’s not going to be as big of an impact. I think our competitors have also reduced their install capacity as well. So will we take more have to increase incentives, yes, there is no doubt. But it won’t be to the level that what you saw back in the ‘09 timeframe. If you think about what we have been able to take out of the system, we have taken two full-size pickup truck plants out from 2009 to today, two big, 300-plus thousand full-size truck plants out and one full-size SUV plant out, Arlington – I am sorry, Janesville in Wisconsin. So those are just some examples of why we think it won’t be as bad. But again, we are not – we are also realistic. And we would have to take some incentives. Relative to your third question on Europe, I – my focus is more North America. I don’t to get involved with Europe as much, especially on the diesel discussion. And I am not involved in the discussions with Moody’s, so I can’t answer that question.

Unidentified Analyst

Maybe I will sneak one in, John. So after-sales, interesting topic, I think at the Investor Day last year, Dan Ammann sort of sized up the profit contribution to the whole company, I think something in the billions, can you maybe size that for North America, give us some of the clue there perhaps on that size and then ultimately where that can go order of magnitude in the next few years as well as I think some of the opportunities longer term with connectivity to maybe capture parts of the aftermarket in 7-year-old and older vehicles you might not be capturing as much today?

John Stapleton

Okay. Connectivity, so from an after-sales perspective, I mean Dan has mentioned profitability, increasing profitability. And I think he did use the word billions. North America, we are the biggest in General Motors. So I don’t know if – I can’t tell you the exact number, but we are a big contributor to his billions number. We have a strong focus right now on after-sales. Again, it’s full-size truck margin like profitability. And with the connectivity in the car and with our relationships with the dealers, we think that there is even more opportunity for us to drive more revenue into the future. So our long-term outlook is more revenue and more profit. We are taking lessons learned from mature markets like North America and Europe and we are actually installing some of those lessons learned in China, where we have another huge opportunity on the after-sales side, huge opportunity. Relative to connectivity and what was the question on service?

Unidentified Analyst

Yes. Just in terms of the opportunities that kind of big data and real-time analysts can give you to capture new parts of the aftermarket where you may be under-indexed today?

John Stapleton

So just relative to like OnStar, we will put the module in virtually 100% of our vehicles in North America. And so a customer, after the free trial period may not elect to do it. But if he or she sells the vehicle to another person, they may and we do market to that. We have serum activities that because it’s actually installed in the vehicle already, it’s pretty much we just have to flip a switch. So that’s again another opportunity for us to activate more subscriptions out in the marketplace. And we do, do that. We definitely go after a 2 year or 3 year or a 4-year-old vehicle out on the road where their OnStar is not active. And we market and tailor the opportunities, whether it’s crash protection, I mean there is a lot of turn by turn, there is a lot of nice advantages for OnStar.

Itay Michaeli

And maybe a question.

Unidentified Analyst

Maybe I can sneak two in here real quick. First of all, can you talk a little bit about what do you think is the right size or the right percentage of sales in your daily rental business, on your slide there, you are talking about the right size of that. And also in the U.S., can you talk a little bit about your outlook for the passenger car segment, just kind of profitability going forward and how you are thinking about that market?

John Stapleton

Okay. So the right size of the rental business, I said that we are at 11% calendar year-to-date. The industry is at 14%. This is total rental sales as a percent of our total sales. So I would say that on average, we have seen the industry actually run somewhere 11%, 12%. 14% is a little high, so I would say what we would like to be more close to industry. In the past, we were at 17%. And that’s – the plan is not to go back to that level, so more in line with industry. Relative to the passenger cars, it’s extremely competitive. There is the ton of installed capacity right now in North Americas and a lot in the U.S., actually, relative to other OEMs the Hondas, the Toyotas, the Hyundais. So it’s very, very difficult right now, especially with the gas prices. But that being said, I think if you look at the segment size compact car and mid-car, there is still like 4.8 million units on the United States, a huge, huge segments, they are declining, but they are still huge. So if there is ways that we can get that customer into that Malibu our Chevy Cruze, year – old or new, we will make a little bit more money, as I mentioned. But our – we will also try to up-sell. We – the person that bought that Toyota is a high likelihood that Camry, that they bought a non-GM crossover with it. We get them in to that Malibu, it’s – we are going to work like crazy to get them into another General Motors Chevy product whatever, crossover. So there are other advantages, up-selling our other vehicles that will take full advantage of in this 4.8 million units segment, both compact car and mid-car.

Unidentified Analyst

Maybe I will sneak one last one in, John. It sounds like that you mentioned in your remarks that kind of in spite of the competitive pressures in sedans, you are still kind of comfortable, if I heard you correctly on the $1,500 variable profit improvement goal you have outlined for Cruze and Malibu, is there any – if you think about the next year crossover, I think redesigns that are expected, how should we think about the rough variable profit gap that you might look to target in those vehicles, I think you mentioned kind of 6 years to 8 years old today, is it similar to that $1,500 that you are trying to target with the Cruze and Malibu?

John Stapleton

Yes. I am not going to actually give a number out on the compact SUV or the mid SUV, new to old. We still hopefully will be talking about that in the future here. But given the age of the vehicle, they are – in some cases, they are relatively low cost vehicles for us. And so when we plow all the technology into the new models, it becomes more and more difficult to grow your margins. Again, I still think we can grow margins, I just – I am not going to give a number at this time.

Itay Michaeli

Great. I think we are out of time. So, I want to think the John, Steve…

John Stapleton

If we can run the video.

Itay Michaeli

We actually have the video. So, we will run over the video after all. So, thank you for the presentation, John. But I think we have the video to video setup. So, why don’t we run the video?

[Video Presentation]

Itay Michaeli

Thank you very much.

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