General Motors Company (GM) Earnings Call Transcript & Summary

Good morning. Thank you all for joining. I'm Mike Ward at Benchmark. And very happy to welcome General Motors. From General Motors we have Michael Heifler and Diane Farrow from IR; and Barry Engle, GM Executive Vice President and President of North America. Thank you, everyone from General Motors for joining.

Barry, perhaps to start it off, can you provide some of your background and current responsibilities?

Sure, Mike. As you mentioned, I am currently serving as President of our North America business. And so in that capacity, I'm responsible for our operations here in the U.S. as well as Canada and Mexico. I also look after the Chevrolet brand globally. And in that capacity, I serve on the Board of our joint venture in China. I joined GM originally in 2015 as the President of GM South America. We reorganized a couple of years later, and I became the President of GM International. Over the years, I've had the chance to work around the world and have been involved in the auto industry in a variety of different capacities, both on the OEM side as well as on the supply side and even had a chance to be a dealer for a while. So it's an industry that I know and love.

What I'd like to do this morning is break down our dialogue into two parts, market update and then your strategy. First off on the market update. Can you provide an update on some of the industry data points in May, along with GM's performance? Specifically, what's the latest you can share with us on sales trends, production and inventory?

Okay. Sure. Let me start with sales. And here in the U.S., we're really focused on retail sales. Retail, we believe, is the best barometer of real consumer demand. And in that dimension, we started out the year with a really strong Q1. January, February were great. The impact of the coronavirus started to hit in March. And we ended Q1 on a retail basis down about 10% on a year-over-year basis. As we moved into April, April, for us, was down about 35% year-over-year at retail. And we believe now that as we close out May, and today is the day that we wrap up all the reporting, and we'll have the numbers tomorrow. But it looks like the industry should come in probably down somewhere between 15% to 20%, and we'll -- we should be maybe a little bit better than that. And so compared to the 35% down that we saw in April, we're looking at continued strengthening in the business, and we'll be down probably half of what we were down last month. And that would equate to roughly a 12 million unit SAAR here in May with continued strengthening. But one thing I would point out, within all of that, we've seen a tremendously resilient full-size pickup business. And that's true for the whole industry. This segment typically would run 13%, 14% of total industry sales. And we saw it running in March, April and parts of May. It's been up over 20%. It's moderated a bit now over the last several weeks as the rest of the industry has started to pick up a bit. But it's been really strong. And within that, we've had good market share performance, and it's really been a bright spot for us. With regard to production, yes, it's about that as well. As we do go back to work and back to producing, safety of course is our #1 priority. We have been able over the last couple of weeks to bring our operations back up across North America, U.S., Canada and Mexico. We've done that in a very thoughtful cadenced way, starting with one shift and increasing from there, again, with the real focus on keeping all of our people safe, both inside our plants as well as with our suppliers. In terms of inventory, inventories are getting well, getting tight. We went into the crisis with about 665,000 units of inventory at the dealers for us across GM here in the U.S. At the moment, we're looking at inventories that are roughly 1/3 versus that with, of course, pickups and light-duty trucks in particular being the tightest at the moment. Our dealers, however, are doing a really great job of turning the low inventory and selling as deep as we can. And again, we're -- I'm really pleased with what we've been able to do with our trucks. So I think I hit all the key points there for sales and production and inventory?

Absolutely. Mexico started up a bit later than the U.S. and a part shortage slowed the acceleration of full-size pickup truck production. Have those issues been resolved? And what is -- what flexibility do you have for an alternative source? And what is the timing of getting pickup production up to full speed?

Sure. It is true that Mexico, they got hit with the coronavirus a little bit later than here in the U.S., and they're still wrestling in a bigger way, perhaps with some of the effects of it. And so it has been a little bit harder to get to the supply base and the plants there in Mexico up and running. We have, however, over the last week or two made tremendous progress. And at this point, working with both the federal government as well as all the individual state and local government entities, we believe at this point that we're clear and we expect everything to be back up and running this week. So we feel good about the situation at the moment there in Mexico. With regard to your question about alternative sources, our focus is really on getting our existing supply chain up and running. And we do have a -- as everyone does, and we have a global supply chain. Some of the various parts and materials are dual sourced. And so we're pulling from wherever we need to around the world to get these plants back up and running. With regard to trucks, in particular, as we do ramp back up, this is -- because of our inventory situation, it is our absolute #1 priority to get the truck plants up and running. And we started there with one shift. And we did announce late last week that beginning today, that we'll be adding 3 shifts or we'll be back up 2, 3 shifts in our facilities. 3 of our truck plants here in the U.S. So that's a big step forward for us and should help a lot in terms of the inventory pressure.

Okay. What are your current expectations for demand, production, pricing as we look out for between now and second half of the year or whatever time frame?

Sure. Yes. This is a -- it's pretty dynamic fluid situation, obviously. The industry did not drop probably as deeply as some might have expected. If we use China as a template, what we saw there was the business at one point had dropped off to roughly 90% versus prior year. Here in the U.S., we never dropped that far. And the recovery seems to be happening at a perhaps slightly faster rate as well. And so as I think about the demand and where the industry is going to go, on the one hand, there were certain things that would suggest it's not a bad time to buy a car. Interest rates are at all-time lows. Fuel prices also are very low. To the extent that people are getting back to work, the employment situation there consequently is getting better. There's been a ton of stimulus money that's been put into the economy. And frankly, with the industry being as low as it has been over the last several months, there's some amount of pent-up demand as well. And so as we sit here today with roughly a 12 million unit SAAR's, we do believe in the balance of the year, as we go into the second half, Q3, Q4, we do anticipate that the industry will continue to improve. At the same time, though, there's a lot of unknowns. And -- not the least of which is as we look at the improving sales rate, what is the depth of the recovery? How much of this is pent-up demand versus recovery that has legs? And so we -- on our side, we're cautiously optimistic and are encouraged by what we have seen, but at the same time, recognize that there are some challenges out there. The -- what some of those challenges might be is -- includes production. I think the situation is a function of both demand and production. And on the production side, I've spoken already about safety and the ability to keep the coronavirus out of our plants and keep our workforce safe. Obviously, that's a big determinant of our ability to produce and keep things running. The supply chain, we talked about a bit as well, which will also -- the stability of the supply chain and their ability to keep up will be a critical determinant of ultimate levels of production. So those are all things that we're working on and keeping an eye on. And I think -- to summarize, cautiously optimistic on demand and working hard on the production side to make sure that we can keep up with that demand, whatever it might ultimately be.

How do you view a Clunkers 2 program? And does that change your outlook at all?

Look, we welcome any initiatives that would stimulate the economy and including the auto industry. We think there's a variety of programs and ways to do that. From the customer research that we've done, we know that customers are interested in any kind of direct stimulus that would improve the terms of the deal. There is particular interest in financing, low cost financing, easy access to credit. In fact -- I don't think we need to look any further than what we've been able to do over the last number of months with 0% interest for 84 months. That was something that, for sure, helped to stimulate the industry and produce the results that we did see over the last number of months, and it certainly helped the truck business, as we've talked about.

Turning to strategy. GM has been able to hold its breakeven level in North America despite inflationary pressures in material and labor. Has the virus shutdown altered the cost side of the equation at all?

Dhivya, our CFO, has affirmed here recently again that in North America, as we think about breakeven EBIT that we're looking at an industry of 10 million to 11 million units SAAR. And as we do all these calculations, of course, it's based on a set of underlying assumptions, the relative strength of the segments, particularly trucks, SUVs, pricing dynamic, cost assumptions, et cetera. All of those things factor into this. And in the environment that we've been in, which is one of 0 production, of course, we've been able to take and chose to take some fairly drastic austerity measures. And as we now resume production, some of those costs necessarily are going to come back. So I think I would say that it's too early to tell, but we're always looking for opportunities to improve our business and some of those cost savings, hopefully, will stick. But for the moment, we're -- we continue to look at 10 million to 11 million SAARs as being roughly breakeven.

Pretty good. GM seems to be moving towards a global C or B platform that is expected to represent the majority of sales in South America. Can you talk about some of the benefits of a global B-size platform in the areas of savings?

Sure. The program that you're referencing is something that we've -- in the past, we've referred to as the GEM program, which is simply an acronym for Global Emerging Markets. And it's a global product development effort for a whole family of contact vehicles both B- as well as C-sized vehicles. And essentially, we're leveraging a common architecture and powertrains. Our biggest markets are China and Latin America, which you mentioned. And in terms of the -- how we think about it and the benefits and the savings, there -- obviously, as we collaborate with our business there in China, there are opportunities to share the development cost. Material cost also is an area where we're able to generate scale. And there's manufacturing efficiencies locally as we then build everything on common platforms with better flexibility. And essentially, what we've done is we're replacing a variety of older legacy products with this new modern architecture and design, technology, safety, et cetera. And these products, they are coming out in the marketplace now. They've been very well received. We launched the B car in South America last year in the second half, Q3, Q4, and that car replaced the Onix, which had been, for a number of years, the best-selling vehicle in the region. That's never an easy feat to step in and have to replace the vehicle that's been that successful. But what we've seen with the new product is that sales have actually increased even further yet in terms of the share. And then more recently, in the first half now, we -- just right before the crisis, we launched a locally produced SUV of that same platform. And that's a first for us. We've not had a local product like that in South America, and it too has been very well received. And so we're optimistic that the same way the Onix has absolutely dominated the B car segment, which is the largest segment, that the B SUV will be able to do the same. And it's gotten off to heck of a start and during the crisis has moved into leadership position.

One area that has not been talked about as much is the area or the idea of supply base consolidation. As global platforms become the norm crossing different segments of the market, and new technologies are introduced, will there be another wave of supplier consolidation?

I think, overall, we believe the supply base is generally probably where you'd want it to be. Our first priority here is that we simply want a strong healthy supply base. That's good for everybody. Secondly, we also want a competitive one that's able to deliver the best possible price. And this GEM family of products that we talked about was probably a pretty good example of how we want to work with our suppliers. We were able to generate fantastic scale there. And then collaboratively with our suppliers, wherever possible, we sourced globally to really leverage and get full benefit of that scale. And as we work together with suppliers, they step forward with all kinds of great ideas, and competing at that lower end of the market is not easy and costs are really important. And so I think we're really pleased with the way the suppliers pulled together and helped us to get out that program and make it work. And again, I would hold it up as a pretty good example of on a go-forward basis how we can collaborate to allow them to be strong and healthy and still make money while delivering to the customer and to us the best possible price.

GM is currently among the leaders in several developing technologies, enhanced powertrain and safety. Can you talk about the balance between adapting new technologies and the ability to get price in the market?

When we think about these new technologies, sometimes in our business, we're -- I believe we end up adding new technologies to comply with various regulatory requirements, could be safety, emissions, fuel economy, what have you. And many times, when that happens, the whole industry needs to move, and we're not able to get the price, and we're not able to necessarily recover those costs. And then there are other times when new technologies represent features and benefits that the customers really want and can, in fact, become reasons for people to buy your vehicles. And yes, we love those technologies. And some examples of that, in the case of Cadillac, we've got the Super Cruise. And while we launched that technology originally on Cadillac, we are actively expanding it to other opportunities and applications as well. And we did some recent research with Cadillac CT6 owners, and over 85% of them said, and these are folks that had Super Cruise on their vehicle, over 85% say that they would prefer or only consider a vehicle for their next car that is, in fact, equipped with Super Cruise. And so I think it speaks to just how compelling that particular technology is. And then once you have it, people are hooked, and they're not going to leave it. Another example is probably what we've done with -- in our truck business with the MultiPro Tailgate. This is an innovative new tailgate that gives you easy access to the bed of the truck, gives you a lots of improved functionality. We launched that feature originally on GMC. And again, it's something that customers are clamoring for. It's a differentiator. It's a reason to buy that truck. And so these are great examples of new technologies that people want and that they're willing to pay for and become differentiators. And then sometimes you're able to do bulk. Sometimes you're able to kill 2 birds with 1 stone. And I think an example that I got in mind here is our 3-liter Duramax diesel that we've put into the light-duty pickup. Brand-new powertrain for us in that truck, and it allows us to achieve great fuel economy, emissions, et cetera. But at the same time, this thing has got best-in-class fuel economy, 33 miles a gallon, highway, in a full-size pickup truck that will still tow 9,300 pounds. So an awesome example of new technology that has real purpose that people are willing to pay for. So anyway, just some thoughts around the technology. And Mike, I'm sure that you and all of your guests can hear my dog barking. Yes, we're still working from home. And the dog gets excited about the auto industry, too. So my apologies for the background noise.

Barry, I'm waiting -- I have 8 dogs, and I'm waiting for them to interrupt. So if they do, it's a fair warning. Over the next 2 to 3 years, it looks like most vehicles in GM's North American lineup will be updated. What are the benefits of over-the-air updates for different items? And will all new vehicles utilize the technology? Can it help to reduce recall or warranty costs? What are the real benefits there?

Sure. Yes, this is something that we're pretty excited about. We just talked about technology. Well, okay, here's another one. And this is one that -- we refer to this as our new global digital platform. Sometimes internally, we talk about it as Global B. And it allows us to expand our over-the-air capability to a whole bunch of new systems and features. And we have had in the past over-the-air update capability, but it was limited primarily to things like telematics, GPS, OnStar, infotainment, essentially the head unit of the vehicle, if you will, or just one of the subsystems. And what we get with this new electrical architecture is a platform that goes well beyond that. And essentially, if you think about your smartphone and how you get these automatic over-the-air updates that improve over the life of the phone, the functionality, it's the exact same idea, but in your vehicle. And so we're really excited about that. And it goes beyond what we talked about with telematics and infotainment. And theoretically, any of the software-based subsystems of the vehicle can now be upgraded through over-the-air. We launched this originally in -- last year in our new 2020 CT5 Cadillac. The new Corvette also has the same electrical architecture. And the new full-size SUVs that we're just starting to produce, those too. All of these vehicles have the same electrical architecture. And between now and '23, all vehicles globally will have the -- this new electrical architecture. And yes, it should help reduce the warranty costs for sure.

GM is committed to expanding electronic platforms in several segments. I think one area that was interesting that I thought was the idea of selling the battery platform to some of your competitors. Can you talk about that a little bit?

Yes. We did just recently announced the collaboration with Honda, in which we did agree to jointly develop 2 all-new electric vehicles for Honda. And that effort is based on the -- our highly flexible EV platform and powered by our batteries, which -- our proprietary batteries, which we call Ultium. And we -- certainly, we're willing to collaborate with other OEMs as well if the right opportunity were to present itself, just as we did with Honda. We believe in the case of EVs, the scale is going to be very important to get the cost down and improve profitability. And this is one way to do it. Obviously, our current focus is on getting these vehicles to market. And our own EVs as well as Honda's. And for those who participated in the EV Day that we held right before the coronavirus, you got a glimpse of some of the awesome new EVs that we have in the pipeline. And we remain focused and committed on getting those to market as quickly as we can.

And so this whole idea that not just with EVs, but other advanced technologies, that it sounds like we can expect additional alliances as well for developmental or supply arrangements.

In our industry, I think there are alliances, and then there are alliances. And what I mean by that is that over the years there've been many different collaborative efforts across companies that have been announced, and probably fewer that really worked and delivered the anticipated results. I think a lot of times, these are companies with strong cultures, and the alliances didn't always pan out exactly the way they were envisioned. And in our case with Honda, that's a relationship that we're proud of, and we think it is a good example of how companies can work together. I would point out that it's something that has been years in the making. We started with fuel cells and then eventually expanded to autonomous vehicles and then batteries and EVs. And now we're leveraging our platform as well as OnStar and connectivity and really working together on these new vehicles. I'd also point out that it's a relationship that's really based on trust. And we have a tremendous -- our engineers have a tremendous respect for Honda's engineers and their capability and vice versa. And that mutual respect, I think, is important and has allowed us to bridge cultural differences and really be able to collaborate and make a real difference. And as we go forward across the industry, we all are going to be resource-constrained as we transition from ICE to EVs. That was already a difficult transition that required resources. Now post-COVID, I think everybody's resources are going to be even more limited. And so collaboration is a way to achieve scale and get those costs down. And as we do that, we certainly are open to it and cognizant of the fact that we need to choose good partners and the right partners in order to get the desired outcomes.

During the shutdown, your U.S. dealers were successful in expanding online purchases. Do you think their success can lead to changes in the dealer model, perhaps an expansion of eventually getting to a build-to-order model for the dealer base?

There has been for some time a movement towards online activity, both from the part of our customers as well as our dealers. And what we saw during the crisis was either reluctance on the part of the customer to go to the dealership or to go out at all just based on the health concerns, or in a lot of jurisdictions, they're just simply -- you weren't able to go to the showroom. And so all of that kind of conspired to create a set of conditions where both our dealers and our customers all of a sudden became a lot more open to transacting online. And dealers are incredibly nimble, resilient entrepreneurs, and they quickly saw the need to transact differently and start looking for ways to enable that. In our case, at General Motors, we had a tool for a number of years that we call Shop-Click-Drive, which is an online tool that lives on both our sites as well as that of our dealers. And primarily in the past, it had been a lead generation tool. And so we quickly collaborated with our dealers, and we got about 750 additional dealers, and we've got a network in North America of about -- or in U.S. rather, 4,100. We still got another 750 of them during the crisis that signed up. So we've got about 85% of dealers that are now using the Shop-Click-Drive, and 90% of them have agreed to do home delivery. And we're working with them to accelerate enhancements to this tool to be able to do more of the transaction online and ultimately to be able to do the whole thing there together with our dealers. And so it's an example of how in the middle of a crisis, we've been able to use that as a catalyst to accelerate certain initiatives, which ultimately have the ability to not only improve the customer experience, but also, as you talk to dealers, there's a chance also to take out a fair amount of their cost, one of the biggest cost is simply labor, and in a more traditional sale, it can be fairly labor-intensive. And so if instead, the customer can transact and do a lot of the process online, there's an opportunity there to realize efficiencies for everybody and improve dealer profitability. So yes, it is something that -- I don't know any of us had necessarily anticipated or thought about this going into the crisis. But it is an outcome of the crisis, and we're excited about what we've seen and the opportunities going forward.

What steps is GM taking to help or entice the dealers to rebuild the inventory and get back on track?

I'm not sure I need to do a whole lot of enticing right now just to take more inventory. In fact, the opposite is occurring. They're all calling and asking where the production is and when they can get more vehicles, particularly trucks. So I think for -- at least for the foreseeable future, there's certainly an appetite and desire to get more products. As I mentioned already, we're focused on our full-sized trucks. And a number of those plants this week already are now going to 3 shifts. We are starting production also in our full-size SUV plants, and again, those are brand-new products that we're really excited to bring to the market. And so the dealers will be building inventory of those. And of course, they're anxious to get them. And so we'll keep collaborating with our dealers and try and stock them as quickly as we can in all those places where they most need it. The one thing that I would say is I think that -- certainly, back late last year during the strike, we learned with our dealers how to live on lower levels of inventory and how to turn the inventory faster. And that was a good dry run for what we've encountered now with the crisis. And frankly, I've been surprised at how well these dealers have been able to turn stock. And so we continue to work closely with them to make sure that we're ordering the right stuff and the inventory that we do have are those items that can turn quickly, that's really what customers want. And so again, in the same way that we've learned there are some online efficiencies to be had through this crisis and how we interface with our customers, et cetera, I also believe one of the other takeaways is there could be opportunities to realize -- to manage inventory a little bit differently and perhaps a little more efficiently eventually as we work through that process with the dealers.

Listen, Barry, I can't thank you enough. I think it's -- you obviously have a full schedule on your plate, so for you to give us some time is greatly appreciated. I hope it was useful for everybody that's on the call. And Mike and Diane, thank you. Thank you very much.

Mike, it's my pleasure. Thank you so much for inviting us, and we appreciate the opportunity to talk about our business. Thank you.

Thank you. Bye.