General Motors Company (NYSE:GM) Q3 2023 Earnings Call Transcript

General Motors Company (NYSE:GM) Q3 2023 Earnings Call Transcript October 24, 2023

General Motors Company beats earnings expectations. Reported EPS is $2.28, expectations were $1.84.

Operator: Good morning, and welcome to General Motors Company Third Quarter 2023 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the conference call is being recorded, Tuesday, October 24, 2023. I would now like to turn the conference over to Ashish Kohli, GM’s Vice President of Investor Relations.

Ashish Kohli: Thank you, Amanda, and good morning, everyone. We appreciate you joining us as we review GM’s financial results for the third quarter of 2023. Our conference call materials were issued this morning and are available on GM’s Investor Relations Web site. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM’s Chair and CEO; and Paul Jacobson, GM’s Executive Vice President and CFO. Dan Berce, President and CEO of GM Financial, will also join us for the Q&A portion of the call. On today’s call, management will management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially.

A garage mechanic working on a car engine, a bright light shinning on its components. Editorial photo for a financial news article. 8k. –ar 16:9

These risks and uncertainties include the factors identified in our filings with the SEC. Please review the safe harbor statement on the first page of our presentation as the content of our call will be governed by this language. And with that, I’m delighted to turn the call over to Mary.

Mary Barra: Thanks, Ashish, and good morning, everyone. Thank you for joining us. I’d like to begin by thanking the entire GM team for once again delivering very strong results, including $3.6 billion of EBIT-adjusted in the third quarter. Our supply chain team and logistics partners in North America have done great work improving the flow of vehicles from our assembly plants to our dealers. Our U.S. dealers have helped us outperform the market from a share standpoint with strong ATPs, and essentially flat incentives. We were profitable in every region, including China. And GM International is on track to deliver significantly higher EBIT in 2023 compared to a year ago thanks to our operating discipline and the lift we’re getting from successful vehicles like the Chevrolet Montana and the Trax.

I’d also like to recognize our teams in Canada and Korea. They reached new competitive labor agreements and ratified them with little or no disruption to our operations. Because we are in a highly competitive cyclical industry, we have been laser-focused on four fundamentals to strengthen our position; they are delivering vehicles that customers love and are willing to pay for, a competitive cost structure, marketing efficiency and incentive discipline, and matching production to demand. Driving these fundamentals has been and will continue to be the foundation of our consistently strong earnings. For example, GM has now led the industry in full-size pickup sales for three consecutive years, and we have led full-size SUVs for nearly 50 years.

Our overall incentives have gone from consistently above the industry average to consistently below. And we are on track to exit 2024 with fixed costs that are $2 billion lower net of increased depreciation and amortization than 2022. And we’re launching several new SUVs this year and next year that will be more profitable than the models they replace. We’re also taking immediate steps to enhance the profitability of our EV portfolio and adjust to slowing near-term growth. These steps include moderating the pace of our EV acceleration in 2024 and 2025 to maintain strong pricing. The new launching timing at Orion Assembly also enables us to make engineering and other changes that will make the trucks more efficient and less expensive to produce, and therefore more profitable.

Let’s dig a little deeper into the steps we’re taking with our ICE portfolio to keep margins and EBIT strong in a very competitive environment. Over the last several years, we have bolstered our position in high-margin segments, including full-size pickups, full-size SUVs, and large luxury SUVs. We did this by managing capacity to meet demand, expanding the range of premium trim series that we offer, and with innovations like Super Cruise and the MultiPro Tailgate, and factory-lifted trucks. And we’re not going to let up. As I said, we’re launching a wide range of SUVs that will have automotive gross margins up to five points higher than the models they replace. The first two are the Chevrolet Trax and Buick Envista. These affordable small SUVs are rapidly gaining market share, and more than 50% of the Chevrolet Trax customers are new to GM.

Then, in the first-half of 2024, we begin launching the new Chevrolet Traverse, GMC Acadia, and Buick Enclave, followed by the next generation of the ICE Chevrolet Equinox and GMC Terrain, which begin launching mid year. Here are the profit drivers. First, they are in growth segments. The larger SUVs compete with in a segment that we expect to grow by 25%, to three million units, over the next three years, and the smaller SUVs compete in the industry’s largest segment, which we expect to grow 9% to 3.4 million over that same period. Second, they’re outstanding products. They offer more comfort and interior roominess, better cargo space, enhanced safety features, and innovative technologies, including Super Cruise, which will be a segment exclusive in the Traverse.

And third, we develop them efficiently. We have simplified the powertrain lineups where we’re using 60% of the power and reduce build combination by 80% to 90%. Now, let’s look at EVs. Our commitment to an all-EV future is as strong as ever, and we continue to plan to have annual EV capacity of 1 million units in North America as we exit 2025. This will allow us to participate in the EV market upside, but we are also scaling in a way that’s consistent with the operating discipline I mentioned. Over the course of 2023, our battery cell manufacturing joint venture in Ohio has made tremendous progress. The plant will be running at full capacity next month, as planned, and they are targeting the production of 36 million cells this year. Next year, production in Ohio is expected to rise to 100 million cells.

At the same time, our battery module constraint is getting better, which helped us more than double the Ultium platform production in the third quarter compared to the second quarter. And we are now in the process of installing and testing our high-capacity module assembly lines, which will continue into the first part of next year. We are currently challenged getting some of the critical equipment components, but we have a dedicated team working with our suppliers to resolve all issues and get these lines running at rate. By mid-year, we expect that modules will no longer be a constraint, and we will be focused on building to customer demand rather than setting new production targets. Software is another critical piece of the strategy, and Mike Abbott and his team are actively engaged in the early assessment and in each of these launches.

Since he joined our team this summer, Mike has been moving aggressively to build a world-class software organization to fully execute our software-defined vehicle strategy while accelerating our vision. We now have executives with experience from Apple, Google, Microsoft, Amazon, Uber, and other leading tech companies heading up our human interface design group, our product software and services group, our software engineering, and our software strategy group. The team is optimizing the software strategy and fine-tuning the plans for our new vehicles to help make sure we executive with the highest possible quality and customer experience, while positioning the company to drive significant revenue growth from subscriptions in the future. To give the team time to do this, we’ll move out the launches of three products, the Chevrolet Equinox EV, the Silverado EV RST, and the GMC Sierra EV Denali, each by only a few months.

This will ensure their success. We believe our products will succeed, and the costs are coming out quickly. For example, our cost per cell has already decreased 45% over the last 12 months as production volume in Ohio has ramped up. We also expect to achieve significant margin improvement on our battery electric trucks through engineering efficiency and improvement, supplier cost, and reducing order complexity, buildable combinations, and manufacturing. Another key launch for us is the next-generation Chevrolet Bolt EV. I know there has been some speculation in the market as to why we are developing a new Bolt EV. Our strategy is to build — is to build on the tremendous equity we have in the brand and to do it as efficiently as possible. Our prior portfolio plans included several newly designed vehicles in the entry level segments and a capital commitment of $5 billion over the next several years.

,: So, now let’s turn to Cruise. Since the early days of our company, GM has been defining the future of transportation. And today, that’s more true than ever with Cruise. In February, we celebrated Cruise becoming the first company to [eclipse] (ph) 1 million driverless miles. Fast-forward to today and they have logged more than 5 million miles, and they continue to expand. Just last week, we announced that GM and Cruise are working with Honda to bring driverless rides to Tokyo in early 2027. We’ll do that with our Origin, the world’s first-ever vehicle purpose-built for autonomous driving on public roads. As Cruise continues to push the boundaries of what AV technology can deliver society, safety is always at the forefront.

And this is something they are continuously improving. In fact, it’s our zero crash vision that keeps us pressing forward. And we know from the data that Cruise AVs are involved in far fewer collisions than human drivers. This remains the focus of their ongoing discussions with government partners and regulators at the federal and state levels. And now, let’s talk about strikes. We know we have ongoing strikes at some of our U.S. facilities. I know many of you are concerned about the impact of higher labor cost on our business in the U.S. Let me address this head-on. I’ll start with the macro environment. And then, I’ll cover how we are positioned to — positioning the business for success. It’s been clear coming out of COVID that the wages and benefits across the U.S. economy would need to increase because of inflation and other factors.

This has been playing out in many sectors for some time now. I believe that the offer we have on the table with the UAW is better than the contracts that employees at companies like Caterpillar, UPS, and Kaiser Permanente have ratified. The current offer is the most significant that GM has ever purposed to the UAW. The majority of our workforce will make $40.39 per hour or roughly $84,000 a year in salary by the end of this agreement’s term. It also includes the cost of living reinstatement, a 25% increase to the company’s 401(k) contributions, world-class healthcare with no out-of-pocket premiums or deductibles for our senior members, and enhanced paid time off, and several other benefits. Since negotiations started this summer, we have been available to bargain 24/7 on behalf of our represented team members and our company.

They have demanded recorded contract. And that’s exactly what we have offered for weeks now, a historic contract with record wages that have increases that are substantial, record job security, and world-class healthcare. It’s an offer that rewards our team members, but does not put the company and their jobs at risk. Accepting unattainably high cost that would put our future and the GM team members’ job at risk is simply something that I will not do. Clearly, given the industry’s changing pricing and demand outlook and higher labor cost, we have work to do to ensure we achieve low-to mid-single digit EBIT on EV margins targets that we have laid out for 2025. The work has already begun. And I am confident we will achieve our targets and grow from there.

So, when you add up all the things we have talked about so far, it should be more clear than ever that we have taken and will continue to take decisive steps to grow our revenue while sustaining strong 8% to 10% EBIT margins in North America through 2025. We are optimizing both our ICE portfolio and our cost structure to continue to deliver strong profits. We are strengthening our EV business. And then, we will accelerate further. And we have assembled a world-class team to deliver new high margin reoccurring revenue streams from software defined vehicles. It does remain a truly exciting time for us. Now, I’ll ask Paul to take you through the third quarter financials in greater detail. And then, we will move to G&A.

Paul Jacobson: Thank you, Mary, and good morning, everyone. I would like to start by thanking our team members for once again delivering strong results in the face of several challenges. To those employees that continue to build vehicles through the uncertainties of the UAW strike, thank you for your focus, your commitment to quality, and passion to deliver great products to our customers. In Q3, the UAW strike had a roughly $200 million EBIT impact, and so far in Q4, we estimate the lost production has had an incremental $600 million EBIT impact. Moving forward, we estimate that the impact of the UAW strike to be approximately $200 million per week based on the facilities impacted as of yesterday. We’re not going to speculate on the duration and the extent of the UAW strike, and because of this uncertainty, we’ve chosen to withdraw our 2023 full-year guidance metrics even though our strong underlying business fundamentals were pushing us towards the upper half of the range prior to any strike impacts.

After we have a ratified contract, we will provide an investor update to quantify the final impact of the strike as well as labor costs moving forward. Despite these challenges, we’re already working to offset the incremental costs. Mary mentioned the great work the team is doing with the net $2 billion fixed cost program announced earlier in the year, and the winning with simplicity initiative to drive further efficiencies and cost savings. Higher labor costs will make it even more imperative that we continue to focus on the most significant and margin accretive parts of the business. Let’s move now to the Q3 results. Total company revenue was up 5% to more than $44 billion, driven primarily by our consistent pricing and higher wholesale volumes, which were up 2% year-over-year.

We achieved $3.6 billion in EBIT-adjusted, 8.1% EBIT-adjusted margins, and $2.28 in EPS diluted adjusted, inclusive of the $200 million UAW strike impact during the quarter. Production volumes and pricing were up year-over-year. However, these benefits were more than offset from other parts of the business normalizing, including mix and GM financial, along with our continued investments in EVs and crews, resulting in a $700 million decrease year-over-year. Adjusted auto free cash flow was $4.9 billion, up $0.3 billion year-over-year, driven by the continued strength of our core auto operating performance. North America continued to deliver strong results, with $3.5 billion in EBIT-adjusted. Pricing continued to be robust, and we are starting to see the benefits of our fixed cost reduction program, realizing about $500 million year-over-year savings in Q3 from lower people cost and marketing savings.

Expected headwinds from pension income, warranty costs, and mix, along with the impact of the UAW strike, more than offset these tailwinds, resulting in a $400 million decrease year-over-year. As we shared in our prior quarter’s update on warranty costs, the quality of our vehicles continues to be strong, as demonstrated by the decrease in claim rates year-over-year. However, we have experienced an increase in the cost of repairing vehicles due to inflationary factors. We are committed to reducing the number of claims and finding efficiencies to minimize costs and are optimistic that year-over-year warranty headwinds will begin moderating in Q4. EBIT-adjusted margin was 9.8%, and at the top of our 8% to 10% target range. In the U.S., we continue to drive profitable market share growth with 0.7 percentage points year-over-year in Q3, growing both retail and fleet share.

At the same time, we continue to hold incentive spend consistently low and reduce marketing spend by $200 million year-over-year. We have completely modified our approach to incentives over the last few years. J.D. Power PIN data shows our 2021 U.S. incentive spent as a percentage of ATP was one percentage point above the industry average of 6%. In 2023, we are trending about a half a percentage point below the industry average of 3.7%. This $1,500 per vehicle relative performance improvement from 2021 to 2023 equates to more than $3.5 billion in annualized EBIT improvements and is attributable to our strong product portfolio and disciplined inventory strategy. And as Mary mentioned, new and updated products coming in 2024 will have improved profitability, bold designs, and new technology to help continue our sales and pricing momentum.

Total U.S. inventory has remained within our 50 to 60-day range, with a slight sequential increase to 443,000 units at the end of Q3. This is a testament to the hard work of our team who have navigated through the continued logistics challenges and uncertainties related to the UAW strike. GM International had a solid Q3 performance with Q3 EBIT-adjusted of $350 million, which was consistent year-over-year. Despite a decrease of $150 million in China equity income, which amounted to $300 million for the quarter, GM International ex-China EBIT adjusted, was $150 million, a significant improvement from breakeven, in 2022. I want to take a moment to take the entire International team for the work they’re doing to deliver profitable results, including the actions in China to help mitigate some of the industry challenges.

GM Financial had a strong quarter, with an EBT-adjusted of $750 million, their fourth highest Q3 ever in spite of higher interest rates and lower used car values. This performance was in line with expectations and primarily due to lower net leased vehicle income. We also saw increased finance charge income associated with portfolio growth, and a higher effective yield offset by that increased interest expense. Corporate expenses were $300 million in the quarter, and consistent with the prior year. Cruise expenses were $700 million in the quarter, and we expect a similar quarterly run rate moving forward as they balance expanding operations with further efficiencies. A larger fleet of AVs and additional resources drove the incremental $200 million of expenses year-over-year.

I also want to highlight a few items Mary on our retimed EV volume and product production decisions. These actions will impact our previous EV production targets, including the 100,000 EV target we had for the second-half of 2023, and cumulative 400,000 EVs from 2022 to the first-half of 2024. We are not providing new targets, but are moving to a more agile approach to continually evaluate EV demand and adjust production schedules to maximize profitability. We purposely built flexibility into our manufacturing facilities, and are uniquely positioned among our competitors to be able to flex our production between ICE and EVs. For example, our Ramos facility builds both ICE and EV variants of the Blazer and the Equinox, along with Spring Hill, which builds the Cadillac LYRIQ along with existing ICE vehicles.

These actions prioritize Ultium profitability versus volume, which helps solidify our North America EBIT-adjusted margin target of 8% to 10% through 2025, and the cash flows funding our future in EVs, AVs, software-defined vehicles, and other new businesses. Given a more agile approach to our EV transition, we now expect to retime at least $1.5 billion of capital spending at our Orion plant, implement engineering improvements, and improve EV profitability prior to accelerating production of battery electric trucks. We’ll provide more detail around EV profitability once we have clarity on labor costs. In closing, I want to emphasize that our EV momentum is building. We see it in everything from cell production, to manufacturing, to software.

We continue to install significant EV capacity, and have the agility and decisiveness to make further adjustments to both accelerate or moderate our transition to adapt to customer preferences. Higher labor costs are at the top of everyone’s mind, but will likely be another example of the numerous challenges this team has tackled over the last few years. And I remain confident we’ll continue to execute and find solutions to grow EPS moving forward. The cost initiatives we’re implementing are not one and done, but rather a change in mindset that we expect will drive efficiencies for years to come, fundamentally strengthening the company. This concludes our opening statements. And we’ll now move to the Q&A portion of the call.

Operator: Thank you. [Operator Instructions] Our first question comes from Rod Lache with Wolfe Research. Your line is open.

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Q&A Session

Rod Lache: Morning, everybody.

Mary Barra: Morning, Rod.

Rod Lache: I was hoping you could provide a little bit more color on the slower demand growth for EVs. Obviously, GM is just getting started now with mass market Ultium products, still the fastest growth segment within the market. And just at a high level, is this kind of an assessment of the premium that you think EV buyers are willing to pay or are you less optimistic on the IRA becoming a point of sale benefit next year? And just given the investments that you’re making, why wouldn’t lower volume or pricing assumptions affect the 2025 EV earnings expectations?

Paul Jacobson: What I would say is the observation about slowing EV demand growth is something that everybody’s been talking about. We’ve seen it in competitor earnings profiles, et cetera, but I want to be clear, we’re not seeing that in our portfolio right now. Now, admittedly, that’s in considerably lower volumes than some others that are out there, but we continue to see strong demand for our portfolio, and we’re making progress on increasing Ultium EV production, with Ultium products up 2x 3Q versus 2Q. So, we are scaling. But what we’ve seen here is an opportunity to slow some of that scaling down and take advantage of some of the learning that we’ve seen through the engineering and manufacturing process in the early stages.

And what it allows us to do is to build a stronger foundation before we scale aggressively upwards. So, that’s really what we’re seeing. I wouldn’t chalk it up necessarily to price. And what we’re seeing in our portfolio is our customers have been remarkably resilient in the order book, continuing to keep their orders on the books.

Rod Lache: Great, thanks, Paul. And just secondly, obviously there’s consequences to almost any change that affects the business. At a high level, do you think that GM will need to make adjustments to the company’s product strategy to adjust for higher labor costs than some of your competitors? And can you clarify whether this $2 billion net fixed cost reduction contemplates a scenario for UAW costs?

Mary Barra: Rod, this is Mary. Yes, we’re committed to the $2 billion that we’ve talked about. And we already have tremendous work underway to continue to take costs out of the business. So, I don’t really think this changes our product portfolio. As Paul said, as we get further into the transformation to EV, it’s a bit bumpy, which is not unexpected. And so, what we’re moving to is something that we can react in a much more agile way to make sure that we have the right vehicles. And I believe our portfolio that we have that looks at the most important segments, and make sure that we have the right entries. We’re already seeing strong demand for entries when we have EVs that people actually want to buy. So, I think there is a lot of focus in the portfolio to have the right cells, but just to give ourselves more flexibility.

And I think the Bolt EV versus the previous [AV] (ph) that we had in the portfolio was a great example. We were able to get the Bolt EV more quickly. As we’ve mentioned, it will require a lot less capital deploy. And frankly, we’re leveraging the strong customer enthusiasm that people have for the Bolt EV. So, it’s decisions like that where we’re still going to have the right portfolio but do it more effectively from a cost and timing perspective.

Rod Lache: Great, thank you.

Operator: Thank you. Our next question comes from Itay Michaeli with Citi. Your line is open.

Itay Michaeli: Great, thank you. Good morning, everyone. So just first going back to the Ultium targets in 2025, could you just review the factors that are allowing you to maintain that low-to-mid single-digit EV margin target? Given the lower volume, maybe you could touch upon any changes to the LG relationship, from maybe recent changes there? And also, if you could quantify a bit some of the engineering changes you alluded to that can enhance profitability?

Mary Barra: Sure, thanks, Itay. And exactly as Paul said, we’re taking steps to better position ourselves as we expand. But we are very much committed to the low-to-mid single-digit margin target in 2025 for our EVs. And it’s not one thing, it’s multiple things. So, first, as I mentioned just a minute ago, it’s having the right products in the right segments that have the right features, the right range, the right functionality, et cetera. That’s number one. And I think the Silverado EV is a prime example when you look at the range that vehicle has in bidirectional charging. So, also, the feedback that we’re getting on the Blazer EV is outstanding as well. So, those are just two examples. It’s also the fact that we’ll be well into the scale of the battery cells at that point in time.

And I already mentioned how much the cost has come down just from having one module to virtually having, by the end of the year, on plan, we’ll have the Lordstown plant fully ramped. And then we’re on track for the other plant. So, getting the Ultium battery cells scaled will be another important piece. I talked about, last time, what we’re doing with winning with simplicity. And really honing in and going to market in a simpler way that, frankly, we think is better for the consumer because they’re not overwhelmed with the number of choices they need to make. And taking that kind of order complexity and build combination complexity out drops a tremendous amount of cost to the bottom line from designing it, engineering it, sourcing it, and planning for it to get [lineside] (ph).

And then we’ve seen product improvements. With the Ultium, it was our first generation. We learned a lot from the Bolt that went into how we designed this first round of Ultium product, but we’re already seeing improvements we can make in Ultium, and then improvements we can make beyond the EV platform in these vehicles that will make them more efficient. And it’s appropriate application of things like [giga-castings] (ph), which is already on the C8. We learned a lot on the CT6. It will be a part of CELESTIQ. And there’s other vehicles that we haven’t announced yet that it will be an important part of. So, it’s, frankly, looking at fundamentally everything. But we remain committed to get there. And, frankly, where lithium prices are trending is another enabler.

Itay Michaeli: That’s all very helpful. And as a quick follow-up, maybe wanted to touch upon Cruise, with Cruise really scaling now to multiple cities and making a lot of progress, any just thoughts on funding going forward, as well as any strategic thoughts you can share as Cruise goes into the next stage of growth?

Mary Barra: Well, we’re going to have a lot more to say about Cruise in the latter part of this year. Paul will be at a Barclays Conference. We also will have fourth quarter earnings, and then our Investor Day. So, we do believe that Cruise has tremendous opportunity to grow and expand. Safety will be our gating factor as we do that, and continuing to work with the cities that we’re deploying in. So, we’ll have more to say about that at a later date. But rest assured we do have funding plans that will support Cruise’s expansion.

Itay Michaeli: Perfect, that’s very helpful. Thank you.

Operator: Thank you. Our next question comes from Joseph Spak with UBS. Your line is open.