General Motors Company (GM) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the General Motors Company Second Quarter 2013 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, July 25, 2013. I would now like to turn the conference over to Mr. Randy Arickx, Executive Director of Communications and Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning and thank you for joining us, as we review the GM financial results for the second quarter of 2013. A press release was issued earlier this morning and the conference call materials are available on the Investor Relations website. We are also broadcasting this call on the web. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The content of our call will be governed by this language. This morning, Dan Akerson, General Motors Chairman and CEO will provide opening remarks followed by a review of the financial results of Dan Ammann, Executive Vice President and CFO. Dan Akerson will then conclude the remarks portion of our call with some closing comments. After the presentation portion of the call, we’ll open the line for questions from the analyst community. Also joining us today are Tom Timko, Vice President, Controller and Chief Accounting Officer; Chuck Stevens, CFO, North America; and Jim Davlin, Vice President, Finance and Treasurer. Let me turn the call over to Dan Akerson.

Thank you, Randy and thank you to everyone joining the call today. Once again, General Motors has delivered a strong quarter driven by our ongoing success in North America and China, progress in Europe, and some very well received new vehicle launches around the globe. As you can see on slide two, we increased our second quarter global deliveries by about 4% from a year ago. Our net revenue increased by $1.5 billion. EBIT adjusted was up 7% to a robust $2.3 billion and adjusted automotive free cash flow was $2.6 billion. For the remainder of the year, we will continue to focus on delivering great value to our customers executing flawless vehicle launches and addressing business challenges head on. Looking deeper into the quarter, our aggressive rollout of new products North America is continuing to drive improved results, especially for Chevrolet and Cadillac. In Europe, lower cost, higher volumes in United Kingdom and strong new vehicles like the Opel/Vauxhall Mokka helped narrow our year-over-year loss, but the demand driven recovery isn’t inside yet. So, we have to keep working on cost, complexity, and brand building. In China, our joint venture has delivered record sales and our results have been particularly strong in the midsized upper, medium, and luxury in SUV segments. Finally, GM Financial continues to grow side by side with our core vehicle business and deliver very good risk-adjusted returns. Strong results in these businesses are helping to offset difficult conditions in other parts of the world especially in GMIO outside China and GMSA outside of Brazil. Dan Ammann will go in more detail on these issues but I will see we’re working hard to improve the things we can control just like we’re doing in Europe. For example Holden has introduced a redesign of it's flagship of…

Thanks, Dan. On slide four, we again remind you of the results for the quarter. Net revenue for the period was $39.1 billion, the $1.5 billion or 4% increase from the prior year, includes a $400 million unfavorable impact from foreign exchange. Our GAAP operating income was unchanged at $1.8 billion. Net income to common stockholders declined $300 million to $1.2 billion and our fully diluted earnings per share came in at $0.75. Net income from the quarter includes an increase in tax expense of $0.5 billion, or $0.29 per share compared with the second quarter of 2012. Automotive net cash from operating activities was $4.5 billion, a $700 million increase from the same period of 2012. For our non-GAAP measures, EBIT adjusted was $2.3 billion in the second quarter, and the EBIT adjusted margin was 5.8%, up from a year ago. Adjusted automotive free cash flow increased $900 million to $2.6 billion for the second quarter. On slide five, we disclosed the special items that impacted earnings per share. Net income to common stockholders was $1.2 billion, and our fully diluted earnings per share was $0.75. Impacting these numbers was a $200 million loss related to the acquisition of GM Korea preferred shares. This charge had a $0.09 unfavorable impact on earnings per share. I would also like to point out that due to our recent increase in our common stock price we now use the if-converted method to calculate EPS. More information on this change in methodology is available in our supplemental slides. On slide six, we show our consolidated EBIT adjusted for the prior five quarters. At the bottom of the slide, we list the revenue and margins for the same periods. Our GAAP operating income margin for the second quarter was 4.5% slightly lower than the…

Thanks Dan, quickly as you can see from the quarter strength in our brand, improving quality and streamlining the organization is starting to pay off. Not only our GM products the best in memory our business is much more resilient in the face of economic headwind. I say resilient not immune. There always be currency shifts, recessions or unrest somewhere in the world that we have to manage through. But in GM the short-term challenges are no longer the tail wagging the dog, that’s the benefit of our fortress balance sheet and aggressive new-product program and our systemic attack on the issues that hold us back including complexity and cost. With that said, we’re now happy to take any questions you might have.

(Operator Instructions). Our first question comes from the line of John Murphy from Bank of America. Please proceed.

First question on Europe given the great performance there is there any consideration in moving forward your target from 2015 to 2014 on your breakeven there because everything you’re doing is real self-help, you’re not getting a lot of help from the market itself, you’re really creating this performance on your own. I’m just curious what your thoughts are there.

Yeah John we don’t have an updated target at this point in time. We’re a few quarters into our plan and executing to our plan and the market environment remains quite challenging as you’re well aware. We’re pleased with the year-over-year improvement we’re showing through the first half of the year. We do typically have as you know some seasonal sort of challenge more in the second half so we got to work our way through that but we’re pleased with performance that are but still long way to go particularly with the macroeconomic environment.

John we’re pleased not satisfied, we’re going to continue to push both play offense and defense. The new product roll out so help on offense but we’re going to continue to focus on taking cost out of the business.

Second question, truck maybe on pick-up pricing, it's been much stronger than expected, I know on the new truck versus the old truck you’re keeping MSRPs flat but obviously that’s not the full story on average transaction prices. I’m just curious is there a possibility that you might get even better pricing than you initial expected on the new truck at the back half of the year because the pricing on the outgoing truck has been better than expected.

Yeah John I it it's too early to make predictions about whether we’re going to have upside or not on the new truck. We have just launched it in the month of July about 20% of our sales will be the new truck which is the crew cab. I would say that what we have seen in the market over the last three or four months with a stronger segment share our performance with the outgoing GMT900 in the reduction and incentives would give us cautious optimism that the pricing will hold-up and we may have an opportunity but it's really too early to tell on that truck.

Okay then Dan just on the (inaudible) on slide 19, the 12.9 billion underfunding for the U.S. plan does that include a remeasurement for discount rates or any other actions?

No it does not.

Okay good and then just lastly, Dan Akerson I mean you talked about it in your opening comments the global business services group and it sounds like a great idea and it sounds like it's in it's early stages, I’m just curious as you work through that process is that going to be more at a cost saving exercise or is that going to create more efficiency through the organization. I was just trying to understand really what the true aim of that is and what we can expect out of it?

The way I have seen this done when I was on the Board of American Express, we benchmarked off, then we benchmarked off of P&G, and what you do is you consolidate your back office systems and try to get more efficient and take cost out, and it does have organizational implications.

Okay. And the timeframe for that, is there targets?

We just started it in earnest. We are really in the early stages of it, but over the next year or two, we hope to take. Well, I don’t want to give a number, but it’s we have strong ambition, strong targets to reduce our cost.

Okay, thank you very much.

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

Hey, everybody. Just a first question on GMIO, can I ask kindly to give a bit more detail about where the execution issues are maybe between India or Australia or other factors? And also within that question, has the change in the segment reporting shifted a little bit of profit out of GM, out of GMIO and into GMIO from the GM Korea ops, has that also been an impact here that you like to quantify?

Yes. Let me address the second piece and then I will direct the first piece. The short answer to the second piece is no, there is no impact on the year-over-year comparisons, because last year was represented on the same basis. Back to the first question, there is really three aspects of us that I identified. One is there are couple of markets that have underperformed from a volume point of view, the overall market, so think about the softness in India as an example, Russia to some extent. The second dynamic is more to the Southeast Asia, including Australia, where we have a lot of competition from the Japanese manufacturers who are sourcing to those markets out of Japan, whereas we are sourcing more out of Korea. So, there has been a currency impact there. And then the third element more on the cost side is we have had a handful of our warranty and recall items stood us in the second quarter. So, the way to think about this going forward is we will continue to have some impact from all of those things probably rolling into Q3, but as we exit the year, we do have some important launches ahead of us in the second quarter. We do hope to see warranty recall related items will fall away, and obviously, we will need to address whatever those competitive dynamic is in the market from a currency perspective as we go, so…

Can you quantify that, so the warranty recall seems to more fall on execution and the others are more market conditions and competition, I mean, can you quantify the warranty recall, is it $100 million or $200 million order magnitude?

I would say it’s the – more than half of the impact is market related and less than half is the warranty and other expense related.

Okay, that’s great. A question on North America, would you describe kind of big picture that the truck changeover year-over-year in the quarter was a net positive, negative, or neutral when you factor in kind of say benefits on pricing versus kind of the delta year-on-year with the changeover knowing that you are also doing some changeover pre-production in the deferred maintenance last year as well, what was the balance of the truck isolating, if you could directionally?

Yes, from a financial perspective net, slightly negative in the quarter in fact. There was $300 million in manufacturing, pre-production and startup. We only produced about 50,000 K2s. So, I would say from that aspect slight negative. Overall truck performance in the quarter quite positive from a share standpoint, our retail segment share primarily on the strength of the GMT900 and retail was up 140 basis points year-to-date. So, I would say, that had a benefit in health from a pricing perspective as well on the GMT900.

That’s very helpful. Thanks. And last question just on GM Financial credit losses, would the credit losses still have improved year-on-year, even excluding the Ally IO addition? Thanks.

Yes, is the short answer to that.

Great. Take care guys.

Our next question comes from the line of Colin Langan from UBS. Please proceed.

Great. Thanks for taking my questions. Can you just give an update on your guidance for North America? Do you still expect second half to be stronger. I think you started, you were saying that the percentage margin should be five year-over-year and I guess related to the question on the (inaudible), the 300 million in pre-production cost will that go in the second half or do you have similar cost there.

And the first question I don’t think we’re really changing our guidance, our guidance was aggregate EBIT would be up year-over-year with the cadence you know more back-end weighted and I think the plan is being executed to that and nothing has changed versus that. From a pre-production startup perspective relative specifically to the K2XX in Q3 and we’re going through the kind of saying launch process we went through was slow (ph) in Q2 so those costs will be present in Q3 and I would expect them to start to mitigate a little bit going into Q4 with the launch of the heavy duties and full size SUV in Q1 next year. Colin Langan – UBS: Okay and you had very good cash flow in the quarter, any thoughts on dividends for common shareholders and what factors would sort of drive that decision to add a divined?

We have no decision on dividends at this point in time, well what we have outlined from a capital allocation point of view first and foremost we’re going to be reinvesting in products and the product portfolio and you have seen us do that over the last year or two, we’re obviously looking to preserve our fortress balance sheet we took some action in the quarter along those lines retiring some expensive debt that we had internationally which is obviously accretive to the bottom line and as we look at over the next 12 to 18 months we do have a significant opportunity later next year to redeem the very expensive preferred that we have outstanding for the (inaudible) trust who want to address and balancing with all of that is returns to shareholders. We obviously took an aggressive move at the end of last year with a significant stock repurchase to help us solve the U.S. treasury exit and we’re going to look to keep a balanced approach between those three buckets between reinvesting in the business, strengthening the balance sheet and returning cash to shareholders that balanced approach that you’ve seen so far will continue. Colin Langan – UBS: Okay and just lastly any update on your partnership with Peugeot I mean there was some media reports I guess a month or so ago, expect claim you may be interested in increasing your stake. Any thoughts on that will be helpful.

Our focus right now is on executing the alliance that we have discussed over the last year plus we have product programs that are being actively worked on, logistics work that’s been done, purchasing work that’s been done and that’s really where the focus is right now.

Our next question comes from the line of Brian Johnson from Barclays. Please proceed.

In South America we did see improvement yesterday from one of your competitors there, I don’t think we have seen the Fiat numbers yet. But just you know what is the path to sort of getting back to sort of 2% - 3% profits there and since you’re on a product roll out why aren’t we seeing some of the benefits or are we just seeing that’s swamped by currency or things in other regions?

I would say there is really a couple of dynamics, as you point out we do have essentially a brand new product portfolio in Brazil which is fairly the biggest market and that is performing the way that we wanted to and we’re in the marketplace getting the results that we’re looking for. There has been really two dynamics that have impacted us to-date this year that we’re not fully baked into the plan if you like from the outset, the first being the just political unrest that we’re seeing in Venezuela which has disrupted our operations on multiple occasions through the year and that’s an important market from a profitability point of view for us, the second component is there has obviously been some very substantial moves on an FX basis, while we’re significantly localized in the market from a production point of view we still have some meaningful amount of imported components and so on for the market and so when we have the Brazilian currency for example devaluing in the way that have has, that does cause an impact to us. So portfolio working well, Venezuela disruption making an impact and FX making an impact.

And last year we asked a similar question and you talked about the process to localize component sourcing, is that underway and is there a flip over point in model years or anything we can look forward to? Is it just going to be very gradual?

It’s going to be a sort of component by component activity and it’s underway, but further to go on that.

Okay, thanks.

Our next question comes from the line of Rod Lache from Deutsche Bank. Please proceed.

Good morning everybody. Just first to follow-up on that last question, as far as the outlook for Latin America in the back half, are there any factors maybe product-related that could offset a bit of a weaker macro environment?

Well, obviously, we will be looking at what’s going on in the marketplace from a pricing point of view as to what we can recover on the FX side there. So, we will pay close attention to that. And then the Venezuela situation will be a variable, but from a product point of view, we are finishing up the launch activity through the first half. So, it wasn’t all, we didn’t come into the year with the whole portfolio launch, but we are getting, excuse me, close to that point now. So, we will get a little bit of tailwind from that in the second half.

Okay, but relative to what we see in Q2, it might accelerate a little bit, is that fair?

Yes, there is a possibility. Again, it’s going to be a function of sort of Venezuela situation and currency and what we have been offsetting the marketplace.

Okay. And can you pass along any thoughts on China, what is the impact of a bit more moderate GDP growth and SHIBOR issues there. Is there sort of a range of expectations that you might have if GDP growth there has a six handle instead of an eight handle, any kind of broad macro thoughts on that market for you?

Yes, our industry view is still to see the industry up high single-digits for the year 7% to 9%. We are obviously participating nicely in that and both from a share point of view and margin management point of view. So, our outlook remains reasonably favorable, but obviously, we are keeping a close eye on the short-term dynamics in our credit markets and all those things.

Alright. And then just lastly a pretty impressive number for Europe in terms of the cost savings, is this the run rate that we should be thinking of going forward? Are there elements here whether it’s restructuring that takes a while to get implemented or the PSA cost savings that actually continue to, they would be accretive to this?

Well, remember, a piece of this is obviously the DNA savings that we talked about.

Right.

At some length, so that will roll through. Beyond that, it’s really just what you are seeing is the result of just day-to-day walking and tackling and driving hard on the business. We got a terrific team on the ground there that’s really executing. We still got a long way to go to get figured to where we want to get to. We will see as we go along some restructuring items come through as we make progress on some of our rationalizations, but we are driving very hard. So, it continued to deliver good year-over-year improvement.

Okay, great. Thank you. Congratulations.

Our next question comes from the line of Ryan Brinkman from JPMorgan. Please proceed.

Hi, thanks for taking my call. Just on pension, I am curious if the rise in interest rates changes in any way you think about the pension, does the rise in interest rates, does it make strategic actions less imperative or could it impact to the opposite that an improvement in the funded status we knew that you could take that improvement and reinvest it in strategic actions, that increased the under-funding, but decreased the overall liability and risk such as the transaction that you did with Prudential?

Yes, I would say, that as the plants get more fully funded, it gives us ultimately more flexibility. We have been on a long journey now for the last few years and we have talked about it at great length of de-risking and having the plants get more fully funded. I think we have made some very significant strides so far. I think everybody has been anticipating at some point that interest rates would increase. We have seen obviously a piece of that happened so far. Rates can also go down just as you believe they have gone up here, but as and if we get more fully funded, I think it gives us more rather than less flexibility.

Okay. Then just lastly, obviously, you continue to have very strong results in China overall, and I know that your 1Q performance there was unusually strong and those margins were unlikely to continue at that rate. I think it was indicated few months back, but I am curious just that given that your wholesales in China were up something like 11% and why there was not much resulting operating leverage there with the net income margin rising only 10 bps year-over-year, is this about the pricing pressures that we often read out or is it maybe something else like lumpiness of reinvesting in the business or something, thanks.

Well I think it's a reasonable representation of where we’re from a run rate point of view so the business grew but it's a competitive market but we were able to within that competitive market not only hold margins but increase then slightly. So we think that’s the solid result and we’re obviously be continuing to try to work that on court (ph).

Our next question comes from the line of Patrick Archambault from Goldman Sachs. Please proceed.

A follow-up question on the pension front, the sensitivities is just going off of what’s in the (inaudible), on the U.S. plan I think it's something like 2.2 billion for every 25 basis points in rates, of course it's sort of being well publicized that your allocation to fixed income you know is now a lot higher at about 60% I believe so clearly there would be some offset from the decline into your bond portfolio. Can you help us think about how we might put together a net sensitivity either in dollar terms or how we think about the duration of your asset portfolio?

I would say the simplest way to think about that is to have the sensitivity that we have put out there, so take the liability side and divide it by half and you get the results. Another way is that the effective asset allocation approximately half on the asset side to fixed income.

Right like 1.1 billion negative for every 25 bps.

Yep.

Okay that’s straightforward. I had a follow-up question on Brazil you know just with some of the social unrest that you’ve seen there and people sort of broadly starting to take down or are continuing take down I should say their GDP expectations. How are you guys thinking about the end market demand for that regions or does that region and Brazil specifically, are you starting to see that show up and slower showroom traffic or it has been fairly resilient.

I wouldn’t say we have seen anything really tangible yet although it creates a little bit of a risk element for the market in the second half of the year but like I said no real signs at this point.

Our next question comes from the line of Matthew Stover from Guggenheim. Please proceed.

Most of my questions have been addressed, I guess just sort of a big picture question and there has been a lot of discussion about the housing market and pick-up trucks and with the snap up in rates and the adjustments that we have seen mortgage rates and the adjustments that we’re seeing in some of the housing stocks right now. Is that causing your folks to change your view on how the pickup truck market could or should develop over the course of next year.

I wouldn’t say that there is a fundamental change, I mean we’re quite focused on what’s driving the underlying demand of the business and the role that interest rates play in that EBIT directly or indirectly through the housing market. So where we are keeping close eye on that but there is more than just the housing market that’s driving the truck business at this point in time you know obviously our product cadence, lot of pent-up demand as generally.

Our next question comes from the line of Itay Michaeli from Citigroup. Please proceed. Itay Michaeli – Citigroup: Just one clarification on cash, free cash flow was at 2.6 billion but it looks like the cash balance, the automotive cash balance was flat sequentially, if you can just help us walk through that?

Yeah there is couple of components, really three main ones and some are the cats and dogs, the first one is we invested 1.3 billion in the quarter into GM Financial to facilitate the our international acquisition the first part of that. Remember when we announced that deal last year we said that there will be a $2 billion capital contribution from GM and to GM actually it's somewhat (ph) first leg of that this quarter and we spend about 700 million to redeem the remaining portion of the GM Korea preferred which shows up as a debt instrument on the balance sheet, so it's a 7% coupon instrument that we’re able to redeem as we view that as expensive. And then the final piece is we have our preferred dividends that we pay every quarter that rolls through below the cash flow or after the cash flow measurement line. So, those will be the main components. Itay Michaeli – Citigroup: That’s helpful. And then going back to the Europe, I mean last year, you identified about $500 million of fixed cost savings between 2013 and 2015, can you update us on how much of that $500 million are you realizing this year roughly?

We are getting into a reasonable chunk of that. And we are not constraining ourselves obviously to $500 million. We are going after everything that we can find, but as you know the first dollars on those kind of exercises are the easiest ones to get and you have made some good progress, but we still got a fair amount of work to do. Itay Michaeli – Citigroup: Great. Just lastly, Chuck, you may have mentioned it in the past question, but did you quantify how much if any positive pricing you saw in the wholesales for K2XX in the second quarter?

I did that, indicate that specifically. I would say generally, when we looked at K2 pricing, the overall impact of new measures, including the K2, Impalas, and other vehicles net-net was about $600 million of the tailwind in Q2 with carryover products, primarily the GMT900 had $300 million headwind. Itay Michaeli – Citigroup: Perfect, that’s helpful. Thanks so much, guys.

Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Joseph Spak from RBC Capital Markets. Please proceed. Mr. Spak, your line is open. Please proceed with your question.

Thanks for taking my question. First one is just a point of clarification on Europe, you talked about the tougher second half seasonally, but you are still counting on improved performance on a year-over-year basis that was just versus the first half?

Yes, that’s correct. We are driving obviously for year-over-year improvement, but if you go back and look at the last two, three years you will see clearly a seasonal decline in the second half.

Okay. And then maybe if you could just give us some color (inaudible) to the fixed income call later I guess, but of what the impact of rising rates has been so far, and whether you are really seeing the consumer rates move up in tandem with rates or whether you guys internally and maybe some of the independents have been getting some of that interest rate increase?

Yes, we haven’t really seen it at all in terms of big consumer rates in a meaningful way from, you remember again, we are more operating from that perspective at the shorter end of the curve and so the short answer is no meaningful impact at this point.

Okay, thanks a lot guys.

Mr. Arickx, I will now turn the call back to you please continue with the presentation or closing remarks.

Thank you, operator, and thank you everyone for joining us today. I appreciate it.