General Motors Company (GM) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining us for this keynote session with General Motors as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos analyst at Deutsche Bank. We're very pleased to host General Motors' EVP and CFO, Dhivya Suryadevara, for a discussion with us this morning. Dhivya, thanks a lot for being with us.

Thanks for having me. It's good to be here.

Thanks. So the format for this session will be a fireside chat around some of my prepared questions as well as questions from all of you on the call. To submit a question, please type it in the box on the left side of the webcast window. I highly encourage you to do so and get involved in the discussion. Only I will see your question, and I will ask it on this call without mentioning your name or affiliation. So with that, let's get right to it.

So Dhivya, can you, maybe to start, give us an update on the progress in restarting your operations in North America? Where are you tracking on capacity utilization? Is the supply chain holding? And when are we back to normal levels of production?

Sure. So we restarted our operations here in North America, including Mexico, in May, and obviously, under very extensive safety measures. And the restart has gone very well, and the procedures from a safety standpoint are working well, thanks to really all the great work that the team has put in and the work of the -- of our supply base. So we're working with everyone to ensure that everyone understands the protocols and that we need to operate safely. We're listening to the concerns and addressing the concerns from folks. And obviously, everybody is coming from a different place as it relates to the virus. We are respecting that and communicating. And really, safety and communications have been the top priority here. To your question, from a ramp standpoint, it's been gradually increasing production, and you've seen that the demand is strong from a customer perspective as well. So we have been gradually ramping up to meet that demand. And last week, we had 3 of our crossover assembly plants in the United States and Canada, well, they started operating 2 production shifts. And 3 of the assembly plants here in the U.S. building the trucks, both mid and full size, they moved from 1- to 3-shift operations. Now there's a couple of states in Mexico that are taking a more cautious time line from a return to work perspective, and we're working with them. And so we are optimizing the production ramp here in North America based on that as well. And so we're modifying the plan to take all these factors into account. We're still targeting to be at normal capacity by the end of June or sooner if possible. But obviously, it's a very fluid situation. And we do know the playbook, though, and these are areas where we've had a lot of expertise. And we're -- we'll leverage all the experience that we have and get us back to a full ramp as quickly as possible.

Okay. That's great to hear. Is the available production capacity any lower in the post-COVID world with the safety initiatives and the new processes like social distancing? Like is there any loss of efficiency? Or can we think of old normalized production level as achievable as well?

We're learning as we go along here. And look, from the moment our operations shut down, we've been working on what does it take to resume production and minimize the amount of time lost while maintaining safety. And if you look at how the operations have progressed in China, we've maintained production in Korea and all the learnings from our ventilator and mask production, that's where we learn how the cleaning protocols work, how we can quickly turn things around while maintaining safety. So I would say it's a process that's ongoing. And as I said, we will be at a much more normalized run rate by the end of June. And from there, we'll get better at physical distancing and cleaning and reducing the gaps to the normal run rate as quickly as possible. And it's not -- these are refinements that we would have to make. And like I said, it's a fluid situation, but we know the playbook.

Right. And so you were mentioning the strong demand for some of your products. The U.S. inventory levels of some of your trucks seem historically low. So are you worried that this could start impacting your sales or market share? If you were to do that, can you make it up in mix or pricing? And I guess just to the inventory, how fast do you see you can replenish some of those full-size truck inventories?

Yes. The inventory is on the tighter side, especially because of -- and you know the strike as well that we had in fall of last year. And as I mentioned before, we've been ramping up production and prioritizing these vehicle lines and optimizing the inventory as we go along, getting the plants up and running as quickly as possible. And Magnum is in production. That's the primary focus as well as logistics and minimizing the amount of time that it takes to get to -- get a vehicle to a dealer, how quickly the dealer turns the vehicle. So we're working on all of the elements of the chain. And a few examples. Again, the models that we're turning, we're prioritizing fast-returning models and the colors of the option. We're working the order book with the dealers to make sure that we're prioritizing fast returns again and not recommending configurations that are slower moving. So we're -- if you think about the whole process from the production line up to when it reaches the customer, there's many elements to it, and we're working on all of those elements. And from a pricing perspective, to your point, it does provide an opportunity, and we've been disciplined from an incentive standpoint. And if you look at our ATPs in May versus even April, the light-duty pickup ATPs are up about $400 per unit and primarily relative to lower incentives. So it provides an opportunity from that standpoint as well. So I can't put a time line on when the inventories will be replenished. But in the operating model that we're in, we're optimizing as much as possible.

Great. How is the new full-size SUV launch progressing? When will the vehicles start showing up on dealers' lots?

Yes. We're -- it's progressing really well, and we're really excited about this launch, and it's a big one for us. And we've -- so we still have all the ramp constraints that I just spoke about because of the virus situation, but we were able to do some of the retooling and the changeover activities when we weren't producing during the pandemic. So these vehicles should be hitting the showrooms this month. And we've -- as we have showcased some of these products before, they're very exciting and significant improvements versus the products that they're replacing. You probably know the -- it is the same architecture as what we've used for the pickups. And we've -- each of these entries have been redesigned and -- whether it's interior space or technologies or features that are going to be in the full-size SUVs, the driving dynamics. It's a lot of exciting improvements that are being rolled out in these vehicles. And these are our more profitable and high-ATP vehicles. And just like we've done with our full-size pickups, we're going to be optimizing trim mixes and packaging strategies to maximize profitability, especially when production and ramp-up is more constrained. And I just wanted to touch on a few features. It is very exciting. These vehicles will have independent rear suspension and a longer wheelbase. And that's very important, especially in this segment because it increases the cargo space and the legroom in the rear area. So that's particularly important for customers who seek these kinds of vehicles. The interiors are also fully redesigned. And the display screens with the safety and the version features inside, that's a lot of improvement as well. And the Escalade will be the first full-size SUV with Super Cruise, which we've talked about a lot. So just to summarize, the ramp is happening, and it is a very exciting vehicle and an important launch for us.

Yes. Very -- definitely very exciting. Just one last one on sort of like current U.S. recovery condition. The car auction price -- the used car auction prices seemed to have bounced back particularly fast, and I know this is something that was obviously a headwind earlier on. What impact could this bounce back have on GM this year? How should we think about it?

Yes. So it's something we're watching very closely because early days, we were, as I mentioned during the earnings call, we talked about a 7% to 10% decline, and that was in line with the industry estimates. And you know that at the beginning of the year, we had projected a 3% to 4% decline. So we had anticipated even as recently as a month ago that it was going to be more severe, in the 7% to 10% range. To your point, the data points we're seeing since then, they're alluding to a strength in that market. And it's early days, but if this continues versus the 7% to 10%, it'll definitely be a tailwind from a GMF standpoint. But again, we're being cautious because it is early days, and we'll watch.

Great. Just before I turn to some questions on free cash flow, I wanted to bring in some questions that were submitted by the audience on the U.S. product and the cycle. One of them is on the landscape for the crossovers in this market. It seems like maybe it's becoming a little bit more competitive. The presentation just before yours was from the CEO of Volkswagen in North America who will be also announcing some new SUVS. So how has pricing held up in the crossover market segments? Where is GM a leader? And how you think about it going forward.

Yes. Sure. So we are seeing a couple of different dynamics within the crossover market. On the compact side, to the point that you're making, there have been more pricing pressure. There has been more pricing pressure, I should say. And we, within that concept, we're staying disciplined but definitely more incentive activity there. From a mid- and larger crossover perspective, it's less so. So what we need to continue doing there is continue to get commercial and technical savings out of the vehicles and noncontent-related improvements. And a lot of work that we're doing on complexity, those are actually impacting the crossover segment, I would say, the most and whether it is the number of build combinations that we have or a given part, what variations of those exist among all of our crossovers. And are there material cost efficiencies to be made from more commonization? And where can you reuse and share parts across our variety of brands and lineup? So that's something we've spent a lot of time. And it's still early days. We're just scratching the surface on that. And as we go forward here, as the market continues to get more competitive, we're going to have to make sure that we are as efficient as we can be in particularly that market but really all across vehicles. So it is a more competitive dynamic, especially on the compact side. On the mid side, it is one of our hottest selling vehicles. And again, prioritizing the inventory build there, and getting it out as quickly as possible is going to be a priority.

Great. I appreciate the color. So maybe shifting to some of the near-term free cash flow dynamics. You had provided a framework for $7 billion to $9 billion in free cash flow burn in the second quarter, assuming an 8 million to 10 million US SAAR. Obviously, US SAAR is trending above that through the first 2 months, and June likely to be sequentially stronger. So does this provide upside potential to your framework? Or not really, since the main driver of your free cash flow is really GMT production level?

Yes. So it's a great question. So first of all, I would say it is one scenario that we painted, and the idea was to give everybody what are the levers that impact cash burn. And as you're pointing out, the -- there's 2 big factors. Production, and within that, the level of production and production timing, which tends to be underappreciated as a point. So I would reiterate that. And then the second really is the SAAR level. And if you look at all the drivers that I mentioned during the earnings call, and I've mentioned 4 or 5 of them, cash costs, we're continuing to implement our austerity measures and having those stick as long as possible until we get to a more normalized level. And the CapEx levels as well that I alluded to, those are in line. I'd say good to assume the levels that I alluded to about a month ago. The part that's harder, obviously, the ramp. And as I mentioned, it is a fluid situation, but the retail coming in stronger means that the sales allowance unwind will be higher. And typically, it moves along with the SAAR level and the depletion of dealer inventory. That's where we pay out our sales allowances. And that impacts -- a stronger environment would impact the outflows from a sales allowance perspective. And as I -- from a production standpoint, as I mentioned earlier, we've had to adjust our ramp in North America, particularly with the slower start of Mexico, which will impact the [ RNAP ]. But again, that's timing. So from a production level perspective, if it gets pushed out towards the end of the quarter, you will be collecting those receipts later, and it might not fall within the quarter. So when you put all this together, it does mean that some of the cash that we expect to generate in Q2 may be pushed out into Q3. So I would, again, think about these as a ramp-related fluidity of the situation, which is completely to be expected in an environment like this. And it's also important to step back and say, how is the underlying business performing holistically? And how are we -- what is the cash flow breakeven? What are the fundamentals in the business? And we think those remain very strong.

Okay. That's clear. And I guess on -- all your strong work on reducing costs. So you disclosed a fixed cost run rate of about $2 billion a month. Can you provide us some context what that was before the restructuring actions? And how much of the new run rate reflects temporary actions during this downturn to preserve liquidity versus permanent cost reductions that we could expect to continue?

Yes. So on the cost front, look, I don't want to put a number to it because it is an approach that is directly related to the level of activity we're going to have. And just kind of taking a step back, as soon as the crisis hit, we quickly implemented a zero-based budgeting, which basically starts with a clean sheet of paper and add from there. And so we looked at advertising as an example. We looked at other discretionary spending. We had compensation from a deferment perspective. We looked at some of that, and then employee furloughs. And we said, how do we preserve every dollar of liquidity we can? And some of these austerity measures, by definition, normalize as production normalizes, demand normalizes. And as we've been bringing back the employees from furlough, clearly the level of activity there is picking up as well. And if you're talking about salaried employee actions, we're -- those are deferrals. They're not permanent reductions. So from a timing standpoint, it's not -- it would be more of an expense item that comes back later on as opposed to more permanent savings. But having said that, the zero-based budgeting has allowed us to question a lot of expense we've had across the board. And we asked our team members to say, well, we've done without these kinds of expense items in the past couple of months. Do we really need it? And do we -- can we have that stick? And how can we try and make some of those permanent? Again, that's work that's ongoing. I'm not going to put a dollar amount to it today. But any time you have these kinds of activities happen, it does open up new opportunities. And you've seen us over the past several years take a variety of cost improvement measures, and in that spirit, we will continue to have as much of this possible -- as much of this stick as possible.

Okay. That makes sense. And then CapEx, how should we think about it beyond this year? Is the -- will there be some payback after delaying some spending this year? And then can you breakout within this? How to think about electrification CapEx going forward?

Sure. So CapEx spending, it's on a product-by-product basis at this point. And we have some minor product refreshes that we had delayed, and we had certain nonproduct program-related CapEx that we delayed as well. Our key programs, as we have mentioned before, whether it's trucks or full-size SUVs or EVs or AVs, we're making no change, and the teams are continuing to work on those. So the way to think about it is not to multiply Q2 by 4 and try to get the overall level. And as the activity comes back here, we will bring back some of the spending that we had previously deferred. And within that context, we're going to say, are there efficiencies? Should we rescope some programs to make sure that we really focus on what the customer wants? And from a non customer-add, value-add perspective, was there any spend that we can adjust further? So we will be looking at that. And you'll see that some of the delayed CapEx, which really is retiming, will come back when things normalize. And specific to electrification, we will allocate, we've said this before, about $20 billion of capital over the next 5 years towards EV and AV, and that's about half of our total spend. And that continues as planned.

Okay. Shifting focus a little bit to your longer-term targets. So in North America, a key goal of GM has been this 10% margin across the cycle. Is this still the case? Is this still achievable across the cycle? Or are there any specific industry volumes required to achieve this?

Yes. So from a margin standpoint or, obviously, from a short-term perspective, the focus is on ramping production, and I've talked about that. It's cadence and happening as quickly as possible. And I also mentioned costs which directly impact margin levels as well. So whatever efficiencies we can find there. But stepping back, just beyond the current short- and medium-term situation, we've been on a path to improve North American margins over the past several years. And that, you've seen the ability of the North American business to generate very strong margins, as we have highlighted in recent quarters. So that's really driven by the strength of the product portfolio to start with, the strength of especially, the truck franchise. And on top of that, our adjacencies, which we call -- and it's really OnStar and aftersales. Those are high-margin businesses which we've slowly been growing over many years. So you take the trucks, which is high margin and it's an important franchise, and then you add the adjacencies, which are also high margin. Those are typically margin tailwinds. And within that, we've been optimizing the content and trim mixes and all of that inside of those vehicle lines as well. So that's on the product side. On the cost side, I talked about, whether it was the transformation we announced in November of 2018 or previous cost measures, we've slowly been taking fixed costs out of the system, which obviously improves margins as well. And we've had headwinds. There's always puts and takes on these kinds of things, whether it's commodities or FX challenges that we have faced or, looking forward, EVs where the margins will be initially lower, but we've talked about scale and sale cost reduction which will help improve the margins there as well. So I'd say those are the broad puts and takes. But from an underlying strength of the North American business perspective, it is very strong and it is cash generative.

Great. And shifting to China. So you're targeting about $200 million in equity income from China per quarter in the near term. That's obviously still much lower than the historical performance. So first is, can you just remind us what is the timing like to get back to the $200 million? Is it already happening? And what do you see as a more normalized level of profitability for your operations there beyond this year?

Yes. So near term, it has -- China performance has been impacted by the virus situation. But as the market continues to recover, there's a few aspects that are important. Our recent and upcoming launches that are very critical, those are going to be tailwinds from an equity income standpoint. Cost reduction measures are very strong in China as well, and so that's also another tailwind. The industry pricing pressures and volume issues have been significant over -- even prior to the virus. It has been a challenging market macro from a China standpoint. And as we come out of this crisis, it's looking, I'd say, stronger. But again, early days. The macro environment being constructive would certainly help as well. So together with the launches and some of the steps we have taken to address the challenges that we're facing and the new propulsion variations as well as the new vehicle models as well, we would expect the earnings in China to improve over time and add on top of that the eventual recovery. And just a macro point I'd make. It remains the largest vehicle market, so it's useful to look at it as cyclical downturns are normal in maturing markets. So there's no surprise that cyclicality does develop in a market like this, and it's been 2 decades of continuous growth. But having said that, this market, we do think, will grow to well over 30 million units annually. And having the right product portfolio within that and the right cost structure has been our focus.

That definitely makes sense. And then in your international operations ex China, what is the latest thinking in terms of reaching profitability? Any time line you can put on this? And what needs to happen for it to get there?

Yes. You're aware of the steps we've taken in Thailand and Australia and New Zealand, so I won't go too much into that, and Korea as well more recently. So those are all just, I'd say, broadly on track. And that brings a real focus area to South America. FX has gotten more challenging. It has recovered some in the past few weeks, but it continues to be more challenging than the past couple of years that we've seen there. And I had mentioned a couple of important initiatives that we're taking more recently beyond just the normal steps that we had talked about in the past several quarters. So we're -- with the brand strength that we have and with the current challenges in the business, we are pricing more for FX now and that's more of a change, I'd say, versus the prior practice. And just as an example, in May alone, we implemented significant price increases of 4%. And we'll continue to watch that and take actions on that front, and it looks like the competition is following suit as well. And so we're clearly attacking this from the revenue side. We've already talked about the austerity measures and the cost actions we've taken, and we have further intensified those. And another step we've taken is on the channel mix side. We have taken a very close look at entries and channel mixes that have become less profitable, especially with the FX moves that we've seen recently. And we are optimizing and redirecting volume towards more profitable channels or really reducing the activity that we had in the less profitable channels. So those are 2 near-term actions we have taken. And -- but importantly, the -- again, product is the key. And with our global family of vehicles that we have talked about in the past couple of years, those have started launching, and that's going to be a step function improvement over the prior models. And we've talked about the complexity reduction that it brings about. We're taking about 13 legacy products, and we're replacing them with the new models that are coming out. And the first wave is already in place. And we've launched the Onix B last year, which is the B car, one of the largest segments in the market, and that's performing really well. I'll give you a data point. Just versus 2019, if you look at 2020, our share is up over 3.5 percentage points. So the product was received really well and it's doing well. And in March, we launched our Tracker B SUV, and that's seen a significant improvement as well as off to a great start. And it is actually leading the segment now, increasing market share from about 4% to 17%. So you can see the significant improvement there. So hopefully, again, it demonstrates that we're taking all the steps. There's no stone unturned at this point to get closer to breakeven. And so while we can't put a time over -- a time line on it, you can see that it's product related, it's cost related, it is channel mix, revenue optimization and all of those areas we're focusing on.

And with regard to South America, a question from an investor on the Chatbox. "Why stay in a market where FX and politics are so volatile and out of your control and also impacting profitability negatively? Is capital better allocated elsewhere?"

Yes. It's definitely a great question, and it's one in which we look at it in the context of our capital allocation. You've seen us take actions across other markets. So it's not like the capital allocation intent isn't there. I think in this particular market, we are the market leader, and we are the -- just from a product strength perspective, the network we have in place and the overall strength with the consumer, this is a different market than other markets that we have chosen to exit. Having said that, I'd just say all options have been on the table. And from a -- if it makes sense from a dollar standpoint to take other actions, we are not afraid to do so. It's just a question of is the cost going to be worth the payback period, and that's something that we haven't seen so far. So again, we do not intend deploying -- continuing to deploy capital in an environment where we're not going to make a return. And so you'll see us have all options on the table as we go forward.

Understood. And maybe, I guess, in the last 5 minutes of our conversation, let's focus on future product plan, on electrification, on mobility. A lot of the questions that we received from investors are about the -- some of your product plans, both on the electrified as well as connected vehicles. So can you maybe speak a little bit about this medium-term product cycle for you? When can we see some of this electrified vehicle, in particular the electric pickup? When will that be for sale? Any updates on the HUMMER unveil which had been delayed? And then specifically on connectivity, any plans to get into fully over-the-air updates for GM's lineup?

Yes. So I just want to point out while the reveals may have been delayed, the product time line, whether it's HUMMER EV or Cadillac Lyriq, they've not been impacted. And we're all-in on electrification. You probably saw that during our EV Day, the Ultium battery system, the approach that we have that's fully integrated, and a joint venture from a battery standpoint with LG, the partnership that we have with Honda, the scale that we get with China. Again, EV will be a critical part of the lineup as we go forward, and we think we're very well positioned there. And as you think about the lineup that we have, I've talked about the capital spend that we have, about half of it towards EV and AV. That will continue. And we will, across a -- because of the flexible architecture, it will be across a variety of segments and brands as we move forward here. So from an over-the-air perspective, to your last question there, with our new electric architecture, which has already started rolling out, it has significantly more capability from an OTA perspective. And we are going to see that across our rollout, across our other products as well, including the full-size SUV ramp-up that I talked about. So again, well positioned, I would say. As we look towards the future products, whether it's the existing truck franchise or really in the EV and connectivity areas, that we're making the right investments.

Great. And then maybe just to conclude on Cruise. There were some recent headlines around headcount reductions at Cruise. Has there been any change in specific focus, software versus hardware or anything else? And just curious if you could just provide a general update of where the development cycle is tending? What's the potential time line for launch or commercialization?

Yes. From a recent cuts perspective, I would say it was primarily on the nonengineering side. And on the engineering side, it was to really double down on the talent that we wanted to have and start aggressively -- or continue to, I should say, aggressively compete for top talent in critical engineering roles, whether it's robotics or AI and even on the hardware side. And you probably saw the news about the purchase of the German radar company as well. So the moves that Cruise is making continue to be aggressive from talent standpoint, and everything remains on track there generally from a headcount and talent perspective. In terms of time line, I have nothing new to share today. You've heard Dan talk about it and Mary talk about it in the past, whether it's Capital Markets Day or since then. Mission continues unchanged. It is incredibly well capitalized, which is very important in times like this. There is a very productive partnership that we have with Honda, and we're continuing to execute on our internal metrics as well. So I would not provide a time frame necessarily but just pleased with the progress we're making.

Great. That's a great update. So I think we're fresh out of time. So Dhivya, I want to thank you again so much for all these insights, for being with us this morning at our Global Autos Conference. And I want to thank everyone for joining, for your great questions on the platform. And stay with us for Continental and WN Motors on the 2 tracks right after that. Dhivya, thank you so much again.

Thanks for having me. Have a good day.