General Motors Company (NYSE:GM) Q4 2023 Earnings Call Transcript

General Motors Company (NYSE:GM) Q4 2023 Earnings Call Transcript January 30, 2024

General Motors Company beats earnings expectations. Reported EPS is $1.24, expectations were $1.12. General Motors Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the General Motors Company Fourth Quarter and Calendar Year 2023 Earnings Conference Call. During the open remarks, all participants will be in a listen-only mode. After the open remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded Tuesday, January 30, 2024. 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 fourth quarter and calendar year 2023. Our conference call materials were issued this morning and are available on GM’s Investor Relations website. 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 be joining us for the Q&A portion of the call. On today’s call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties include the factors identified in our filings with the SEC. Please review the Safe Harbor Statements 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. As we begin 2024, I believe GM is well positioned for a year of strong financial performance that builds on everything we accomplished and importantly learned in 2023. Consensus is growing that the US economy, the job market, and auto sales will continue to be resilient. At GM we expect healthy industry sales of about 16 million units. We have an unmatched ICE portfolio in North America, rising EV production on the LTM platform and GM Financial continues to perform well. We’re building on a foundation of products that our customers love. In 2023, GM sold more vehicles in the US than anyone else. All of our US brands grew their sales year-over-year and gained US market share with healthy margins, thanks to stable pricing and incentives that were more than 20% below the industry average.

The Chevrolet Bolt EV and EUV had record sales. We led the industry in initial quality for the second year in a row according to J.D. Power. And we now have led the industry in combined pickup, full-size van, and full-size SUV sales for 10 consecutive years, making us the leader in the highest ATP quadrant of the market and helping us lead the commercial fleet market. And we have passed Honda and Toyota in the most affordable quadrant, thanks to attractive and profitable vehicles like the Chevrolet Trax, which is one of Car and Driver’s 10 best trucks and SUVs, and the Buick Envista, which is winning with younger buyers. In fact, more than one in four Envista customers are between the ages of 18 and 35. The broad-based momentum we have today is important for our future because our customers are the most loyal in the industry.

All of this success contributed to full year EBIT-adjusted of $12.4 billion and adjusted auto-free cash flow of $11.7 billion in 2023, which brings our total to more than $22 billion for 2022 and 2023. Almost two-thirds of that cash is being returned to shareholders through dividends and share repurchases, including the impact of the $10 billion accelerated share repurchase program that we announced in November. Through the ASR, we immediately retired 215 million common shares in the fourth quarter. Our current share count is less than 1.2 billion and we are working to reduce this even further to less than 1 billion common shares outstanding, which would be about 600 million fewer than at our peak. As we look ahead, our priorities and our commitments are clear.

They are to maximize the opportunities we have with our winning ICE portfolio, grow our EV business profitably, deliver strong margins and cash flow, and refocus and relaunch crews. Across the enterprise, we are taking important steps to deliver on each priority. Let’s start with our ICE portfolio. Chevrolet’s crossover lineup had record sales last year, and this year we’re enhancing two of its most important models which compete in growing segments. For example, Super Cruise will be available on the Traverse for the first time and we will introduce a new premium Z71 off-road model. The 2025 Chevrolet Equinox that we unveiled last week is another great example. It has more standard safety equipment, new truck-inspired styling, and a strong focus on technology.

And importantly, both the Traverse and Equinox will have higher projected margins than the outgoing model. Buick and GMC are also launching new crossovers this year to keep our momentum going. In our EV business, we expect our US portfolio to be variable profit positive in the second half of the year based on our current expectations for EV demand and production growth. Strong interest in our vehicles, lower commodity prices and other factors will support this. Our plan is to produce in wholesale 200,000 to 300,000 Altium-based Chevrolet, GMC, Cadillac and BrightDrop EVs in North America this year, but we will be guided by customer demand. It’s true, the pace of EV growth has slowed, which has created some uncertainty. We will build to demand and we are encouraged that many third party forecasts have US EV deliveries rising from about 7% of the industry in 2023 to at least 10% in 2024, which would mean another year of record EV sales.

We believe our competitive position will improve throughout the year based on higher production of the Cadillac LYRIQ, the GMC Hummer EV, the Chevrolet Blazer EV, and the Silverado EV work truck. We’re also excited to have the Chevrolet Equinox EV and the Silverado EV RST, the GMC Sierra EV Denali, and the Cadillac Escalade IQ arriving in showrooms over the course of the year. We are confident in the design and performance of these vehicles. For example, the LYRIQ is driving growth at Cadillac. Its sales have increased sequentially every month since September and January deliveries should be in line with December despite winter storms across the country. We also have more than 10,000 — excuse me, 100,000 reservations and orders for EV pickups that we expect to fulfill in 2024 and 2025.

However, if demand conditions change, we’ll take advantage of our manufacturing flexibility in Spring Hill and Ramos to build more ICE models and fewer EVs. We can also mix between different EV products at Factory ZERO. Ultimately, we will follow the customer. The supply chain, manufacturing, and software changes we have made will support our growth. On the battery front, our Ultium Cells joint venture is at full production in Ohio, and the new plant in Tennessee will begin shipping cells this quarter. In addition, our supply chain team has moved very quickly to resource two minor cell components after the US Treasury published its updated IRA guidelines in December. This change means that new production going forward of the Chevrolet Blazer EV and the Cadillac LYRIQ will qualify for the full $7,500 consumer credit.

We work closely with our dealers to ensure consistent pricing for our customers, which we estimate will impact no more than about 25,000 vehicles. Our battery module production is on schedule. The team has improved the automated equipment at our assembly plant used to build modules and installation of new high capacity assembly lines should be complete by mid-year. Our software and services team is also in the process of resolving the stability issues some customers have experienced with the Chevrolet Blazer EV that impacted their screens and charging experience. And they are working with a huge sense of urgency to lift the stop sales soon. We disappointed these customers and we know it. We are determined to get the software right and we will.

We have made several organizational and process improvements that will help us deliver the best possible customer experience going forward. Among several important organizational realignments, we established a software quality division within the software and services team that has been performing a retrospective on the Blazer EV and has improved the current software development and test processes across the enterprise. Outcomes of this activity are getting applied to all programs going forward and they include improved standardization of the software development and release process, increased focus on test automation at the vehicle level, and additional quality gates and metrics for software at the vehicle level. From a margin and cash flow perspective, we are making good progress on cost reduction and capital efficiency.

Compared with 2022, our fixed cost net of depreciation and amortization will be down $2 billion as we exit 2024, which will offset the higher impact — the impact of higher labor costs. We are also beginning to see savings from winning with simplicity, and all of our current and future programs have embraced this very important way of designing products. Each team is responsible for creating trim series that make vehicles easy to order with the content customers want and far fewer standalone options. By making more equipment standard in trim series with logical price swaps, we can eliminate literally thousands of unique part numbers and dozens of software releases. For example, we have eliminated over 1,000 selectable options across our current and near-term product programs, which is reducing hardware, software, ordering and manufacturing complexity, and importantly, all the costs associated with them.

In 2024, the savings are expected to be about $200 million. To be clear, we’re talking about $200 million of savings to execute the same product plan. These savings will grow over time as we apply the discipline to future products like our next generation full-size pickups. We’re also continuing to balance capital priorities and consistent free cash flow generation. We expect that our 2024 capital spending will be in the $10.5 billion to $11.5 billion, which is roughly flat year-over-year and down considerably from the $13 billion top of our end initial 2023 guidance. Our forward plans include bringing our plug-in hybrid technology to select vehicles in North America. Let me be clear, GM remains committed to eliminating tailpipe emissions from our light duty vehicles by 2035.

But in the interim, deploying plug-in technology in strategic segments will deliver some of the environmental benefits of EVs as the nation continues to build its charging infrastructure. We are timing the launches to help us comply with the more stringent fuel economy and tailpipe emission standards that are being proposed. And we plan to deliver the program in a capital and cost-efficient way because the technology is already in production in other markets. We’ll have more to share about this down the road. Moving to Cruise. Last week we released the results of the third-party reviews and we’ve already begun to implement significant changes to build a better Cruise. We are committed to earning back the trust with our regulators and the public through our actions.

Our plan 2024 investment in Cruise reflects our more deliberate and cadence go-to-market strategy and we are developing new financial targets and a new roadmap. Spending will be down considerably this year, but we will continue to invest in the people who are advancing the software, specialized hardware, and AI capabilities. This reflects our commitment to our vision, which is to deliver the safety benefits of self-driving technology and a scalable, profitable business. I look forward to sharing our timetable for returning Cruise EVs to the road soon. To summarize, we learned a lot in 2023, and those learnings are helping us build our strengths and addressing our challenges. Everyone on the team is committed to building on our momentum and creating shareholding value.

You’ll see in our proxy statement this spring, executive compensation is tied even more closely to delivering our comprehensive ICE, EV, AV, and software plans, while meeting our financial targets. So our goals are truly aligned with yours. Before I turn the call over to Paul, I would like to share some thoughts about our next Investor Day. Because of the significant changes that are underway at GM and Cruise, we think it makes sense to wait until later in the year to host an event. This will give our software team the time to focus on software for our upcoming launches, and we will be able to share more tangible proof points on all four pillars of our strategy, ICE, EV, AV, and software. When we do get together, we will show you what we’ve done, not just tell you what we’re going to do.

In the meantime, we’ve already provided a roadmap for EV profitability in 2025, and we’ll share updates on Cruise as we finalize the technology and relaunch plans. With that, I’ll turn it over to Paul to go through our 2023 financials and provide more details on our 2024 outlook. Then we’ll take your questions.

Paul Jacobson: Thank you, Mary, and good morning, everyone. I appreciate you all joining us this morning. I’d like to begin by recognizing the entire GM team for what they accomplished in 2023. When you look back over the last couple of years, the results show an impressive trend in revenue growth, EPS consistency, and cash generation. For the full year, our EBIT-adjusted of $12.4 billion came in slightly above the midpoint of the range we guided to in November, thanks to the continued strength of the core business. We grew revenue by 10% year-over-year to a record $172 billion and generated $7.68 of EPS diluted adjustments. A key focus has been profitable growth. And for the full year, we demonstrated this by growing U.S. market share by 30 basis points, while keeping incentives well below industry averages.

It’s important to mention the 2023 actions we’ve taken to reduce fixed costs and the progress made on the $2 billion net cost reduction program. For example, automotive engineering was reduced by $400 million, driven by portfolio simplification, realizing the benefits from winning with simplicity as well as our drive to virtual engineering. Marketing spend was reduced by $500 million and we expect another $400 million this year. And we saw approximately $500 million from lower BrightDrop and other growth business spend, along with the impact of the voluntary separation program across the enterprise. These $1.4 billion of fixed cost reductions were partially offset by $400 million of higher depreciation and amortization, meeting our target to achieve half of the $2 billion program in 2023.

We began 2023 with $24 billion of auto cash and marketable securities, generated full year adjusted auto-free cash flow of $11.7 billion, and returned approximately $12 billion to our shareholders through dividends and share repurchases, including the impact of the $10 billion accelerated share repurchase program initiated in Q4. Coming into 2024, we are well positioned with roughly $20 billion of auto cash and marketable securities and will appropriately balance our capital allocation priorities with the plan to continue to return capital to our shareholder through repurchases and our new higher dividend rate. Let’s get into Q4 results. Total company revenue was $43 billion, consistent year-over-year, despite the impact of the strike. However, we did have a number of cost items that we do not expect to reoccur in 2024 that impacted our margin performance in the quarter.

We achieved $1.8 billion in EBIT adjusted, 4.1% EBIT adjusted margins, and $1.24 in EPS diluted adjusted. These results were also impacted by the strike, which had a $900 million EBIT adjusted impact in Q4 and a $1.1 billion impact for the full year, primarily from losing an estimated 95,000 units of production. Additionally, we increased our inventory valuation allowances by $1.1 billion to remeasure battery cell and EV inventory held at year end. This adjustment was significantly larger in Q4 versus prior quarters, driven by a combination of increasing cell production in preparation for our 2024 EV acceleration and holding more EVs in company inventory. Adjustments for the full year totaled $1.7 billion. We expect this to be substantially lower in 2024 as we continue to make progress toward our EBIT margin targets on EVs. North America delivered Q4 EBIT-adjusted of $2 billion, down $1.6 billion year-over-year, driven primarily by the $900 million strike impact and $1 billion of inventory adjustments I just discussed.

The performance was also driven by higher pricing and lower fixed costs, which more than offset mixed headwinds. North America margin of 8.7% was within our targeted 8% to 10% range for the full year and included a 1.6 percentage point impact from the strike and the inventory adjustments. Part of this performance is from proactively managing our inventory levels, helping to minimize incentives. I’m pleased that we ended the year at 50 days of U.S. inventory, which is at the low end of our 50 to 60 day target range, and incentives that were more than 20% below the industry average. GM International had another solid quarter with Q4 EBIT-adjusted of $300 million, which was consistent year-over-year. I want to thank the entire international team for another year of good execution and delivering $1.2 billion of EBIT adjusted.

GM Financial also performed well with Q4 EBIT-adjusted of $700 million. down slightly year-over-year. Full year results were $3 billion at the top end of the $2.5 billion to $3 billion guidance range. Portfolio credit metrics continue to be strong, in part due to a predominantly prime credit mix with net charge off up slightly due to moderation in credit performance. GM financial has consistently been an integral part of the business supporting our customers, supporting our dealers and paying dividends of $1.8 billion to GM in 2023. Cruise expenses were $800 million in the quarter, up $300 million year-over-year and similar to the spend level in Q3. So let’s look ahead to 2024. We expect EBIT-adjusted in the $12 billion to $14 billion range.

EPS diluted adjusted to be in the $8.50 to $9.50 range, including an estimated $1.45 per share benefit from last year’s accelerated share repurchase based on the current share price, which will be partially offset by roughly $0.50 headwind from a higher tax rate and lower interest income on lower cash balances, and adjusted automotive free cash flow in the $8 billion, $10 billion range for the year. I want to summarize a few items in 2023 that we don’t expect to repeat and will help to contribute to our higher outlook for this year despite some of the potential macro headwinds. These include the $800 million EBIT-adjusted impact from the LG agreements. And as a reminder, this will save us an additional $1,000 per vehicle going forward on our path to EV profitability.

$1.1 billion EBIT adjusted impact from the strike and a substantial amount of the $1.7 billion of net realizable value adjustments as we work through the sell inventory, improve EV profitability, and benefit from lower lithium prices. In light of the current macro environment, we anticipate a market similar to 2023 with total US industry volumes of around 16 million units. We expect wholesale volume to grow as we rebound from the impact of the strike and continue our track record of market share gains, primarily from higher EV volumes. However, we do assume mixed headwinds from our ICE production driven by anticipated actions to proactively manage full size truck inventory levels. We also assume a 2% to 2.5% pricing headwind year-over-year, but overall we remain confident in our ability to balance production, inventory levels and profitability, while growing revenues and sustain our North America margins in the 8% to 10% range.

We are on track to realize the remaining $1 billion of net fixed cost savings with the benefits coming from similar areas to last year, including marketing, engineering, and the full year benefit of the actions we took in 2023. We expect $1.3 billion in higher labor costs, along with logistics being a slight headwind year-over-year, primarily driven by higher finished vehicle shipping costs. Cruise expenses are expected to be around $1 billion lower, given the new operational plan Mary mentioned earlier. In November we gave an update on our path to EV profitability with an estimated EBIT margin improvement of more than 60 percentage points and a lower overall EV loss in 2024 compared to 2023, even when you exclude the impact of the inventory adjustments.

This will largely be driven by higher EV volumes and fixed cost leverage from both EV and battery cell manufacturing, along with the benefit of all of our North America volume being on the Ultium platform. We are already seeing an improvement in cell cost today, driven by significantly lower raw materials prices and better pricing on cells produced at our first battery JV plant from higher capacity utilization. For GM International, we expect relative stability in our South America and Middle East operations, however, we anticipate ongoing pressure in China, including the plan to reduce production in Q1 to balance dealer inventory levels. These actions will likely result in Q1 China equity income being a slight loss, with a return to profitability starting in Q2.

For GM Financial, we expect EBIT-adjusted again in the $2.5 billion to $3 billion range with credit performance and used vehicle prices returning to normal throughout the year, along with earning asset growth from retail loan originations and the commercial loan portfolio. We are forecasting another year of robust automotive adjusted free cash flow, but we anticipate modest year-over-year headwinds from 2023 working capital benefits that we assume will not repeat and the timing of payments associated with accruals recognized last year. For example, warranty, tax, and higher assumed inventory levels. From a modeling perspective, remember that Q1 is our seasonally weakest cash flow quarter of the year. We expect our capital spend to be similar to 2023, inclusive of $500 million to $1 billion of investments in our battery JVs. Our 2024 effective tax rate is assumed to be in the range of 18% to 20%, up from last year, primarily due to the global mix of earnings and lower R&D credits primarily due to lower Cruise spend.

And our full year EPS guidance assumes the weighted-average fully diluted share count of slightly below 1.15 billion shares. This includes the impact of the remaining shares to be purchased through the ASR, which we expect will reduce our fully diluted share count to below 1.1 billion shares once completed. The actual share count will depend on several factors that impact the final ASR settlement, including the average share price during execution and excludes the impact of any incremental share repurchases beyond the ASR. In closing, we know the EV market is not going to grow linearly and we are prepared to flex between ICE and EV production, given our unique manufacturing capabilities to balance inventory levels and to build customer demand.

This will help support pricing and our continued incentive discipline. While we have faced some challenges in our EV transition, we are actively working to address them and remain excited about our future and look forward to a successful 2024. This concludes our opening comments, and we’ll now move to the Q&A portion of the call.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question from the line comes from Itay Michaeli with Citi. Your line is open.

Itay Michaeli: Great. Thanks. Good morning, everybody and congratulations. Just a couple questions on the outlook. First, maybe can you share what you’re assuming for end of year US dealer inventory day supply. And in all the pricing, Paul, you mentioned 2%, 2.5%. can you maybe talk a bit of what you’re assuming per individual segments there?

Paul Jacobson: Yes, good morning, Itay, and thanks for your comments and your questions. First on the inventory question, what I would say is, we’re continuing to pursue our targeted range of 50 to 60 days on hand of inventory. I think the team has done a really good job of balancing that, and I think that’s provided some of the ability to be disciplined with incentives, and clearly is, I think, resulted in a competitive advantage for us that we’ve utilized for the last couple of years. As we think about that 2% to 2.5%, similar to what we’ve done for the last couple of years, I would call that a planning assumption rather than an expectation of where we see pricing. We want to make sure that we do that to make sure — to ensure that we can hit our targets, generate the cash flow that’s needed for investment and drive the free cash flow performance.

So, as similar to years past, if we don’t see that, I would expect that we can get some upside into the numbers that we’ve talked about. So, we haven’t gone through and assigned an expectation to any particular categories that’s just something top-sided we do in the planning process. I hope that helps.

Itay Michaeli: It does help. Thank you. And a quick follow-up, on the second half target on EV positive VP per unit, can you just talk about what you’re assuming for the broader competitive environment and how much cushion you have on the price mix side and still be able to hit those targets?

Paul Jacobson: So without getting into very detailed specifics, because, obviously, it can get quite complicated. What I would say is, we feel confident about hitting that variable profit positive target in the — in probably the low 200,000 units of the range that Mary mentioned. That’s based on a pretty consistent demand profile, so as we’ve seen the demand for the vehicles that we’re producing and the way that customers have received them, we think we can keep that up. So to the extent that we see any pricing softness or demand retreat we might have to revisit that, but we feel very good about the trajectory that we are on right now.

Itay Michaeli: Perfect. That’s all very helpful. Thank you.

Operator: Thank you. Our next question comes from Rod Lache with Wolfe Research. You may go head.

Rod Lache: Good morning. Hey, Mary and Paul. I wanted to first ask — from the outside at least, it looks like there’s a lot more scrutiny being applied to capital allocation. I’m thinking about the posture that you’re talking about for Cruise and BrightDrop and the adjustments to EV spending. So my question is, just on the surface it looks like the pendulum has moved a little bit from growth to cash flow. Are these kind of temporary changes or are you kind of thinking about adjustments to GM strategy?

Mary Barra: Hi Rod, thanks for your comments. I wouldn’t necessarily say change in our strategy, I think as we’ve continued to progress in the EV transformation we have found more ways to be much more efficient with capital. And I do want to correct a statement I made earlier where I said, we’d eliminated 1,000 selectable options across our portfolio. It was really a hundred. Although, I think I have a new stretch target for the team as we take the initiative global. But its initiatives like that of continue to look for ways to optimize the capital. When you look at our ICE portfolio, the investment that we made in the last part of the last decade really sets us up well to have all new products coming off the existing platforms, whether it’s full-size trucks, full-size SUVs, mid-size SUVs, etc.

And so, we’re looking to continue to be very focused with capital to make sure it’s going to generate the right return. And I would also say we are prioritizing, continuing to return cash to our shareholders as we go through this transformation, because we think the strength of our business, especially our ICE business allows us to do that. So it’s not a change in strategy. I would say on some of the business you mentioned like BrightDrop and others, as we look at the business. I think it’s important is we started them to give them some room, but as we got clarity on where the real opportunity for GM was, we could make those businesses much more efficient. And we’re going to continue to do that to work on our cost structure to make every dollar a capital count.

But we still see growth opportunity. I mean, we had a revenue growth of 10% last year. So we still have many initiatives in which to grow. We’re just going to do it in a very optimized way.

Operator: Thank you. Our next question comes from Dan Ives with Wedbush. Your line is open.

Dan Ives: Yes, thanks. So can you just talk about Cruise? What are some of the targets for this year that we should think about that would just give more confidence that we’ve turned the corner there? I mean, from an investor perspective. And how you look into that long term, you are committed to Cruise, right? That’s the best way to think about that once get through some of these situations.

Mary Barra: Yes, appreciate the question, Dan. We are committed to Cruise. When we look at the technology, the foundational technology is sound. We had already demonstrated and validated externally that Cruise technology is already safer than a human driver. One of the things we’ve learned is, humans expect technology computers to be much more safe than they — their expectations than they have for other people. And with that knowledge we are already working on what the level of the technology needs to be to meet the consumers’ expectations. We think we can do that, so we are committed. And we are working on the detailed plan right now of how we’ll go forward. We’re also looking — the other big learning was, as you roll out technology that is as transformative as this and has incredible benefits to safety, you have to do it in a way where you’re really working with the regulators at the local, state, and federal level, as well as first responders.