General Motors Company (GM) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Joe Spak. I'm the lead automotive analyst here at RBC Capital Markets. It's my pleasure today to introduce the 2020 RBC Global Investor of Conference keynote speaker, GM's CEO, Mary Barra. Under Mary's leadership, GM has really impressed us with the transformation of the business, their execution during difficult times, the focus on structurally improving free cash generation and their transparency to the Street. Further, we believe they have some of the leading technology including electric and autonomous that will help the company become the key player where the industry is going and help them achieve that there's been zero crashes, zero emissions and zero congestion. The challenge has been getting the capital markets to appreciate some of the hard work that GM has been doing, which we will turn into. So with that, I'm very pleased to welcome Mary, who has some opening comments. We'll then get into the Q&A. [Operator Instructions] So with that, Mary, thanks for joining us today. We really appreciate it.

Well, thanks for inviting General Motors to participate today, Joe, and it's really a pleasure to speak with all of you. I'll begin with a very brief business update as the third quarter winds down, but I want to spend most of my time focusing on our zero emissions future, which we are building right now through our EV program, which has been moving very fast, and some of you attended our EV Day in March. I'll conclude with additional details and a video featuring what it has already become one of the most anticipated [indiscernible] EVs. That and everything we'll cover today will demonstrate that General Motors will win in electric vehicles and how we'll create a profitable and all-electric future with a range of products that look great, charge fast and conveniently and have the right combination of range, power and performance. I'll also talk more about our technology and our partnership developments in a few minutes, but let's turn to the business for a moment. While we carefully continue to monitor the coronavirus and its effect on public health and our operations, we are encouraged about the recovery we are seeing in most of our markets, including a strong U.S. industry SAAR in August. Our full-size and SUV plants are running all out, and our other facilities are operating in line with market demand. We are selling every full-size truck and SUV we can produce as demand remains strong and our inventories remain lean. In China, the industry continues its recovery, and our JVs have been seeing improved sales since the deepest impact of the virus in February. Our retail sales were up over 10% year-over-year in each of the past 2 months. This was led by an overall recovery in sales compared to earlier in the year and versus a weaker Q3 2019 and by sales of our all-new or refreshed vehicles at Buick, Cadillac and Wuling. Our EV sales in China are also up significantly, led by the Wuling Hong Guang Mini EV. Last month, it was China's top-selling EV just a month after its launch, and we've already taken more than 50,000 orders. That's a snapshot, and we'll share our complete Q3 results on November 5. The global pandemic has had significant impact on our industry, our company and our communities this year, but hardship can bring much needed perspective and clarity to decision-making. Very early in the outbreak as the leadership team mobilized to protect the business and our stakeholders, we looked at every single program with very clear eyes so we could preserve and even accelerate our work in EVs, AVs, software and connectivity solutions. With our industry and world upended, we believe then and we believe now that this is a defining moment for our company. We knew we needed to fully fund the programs that will drive our growth, help us realize our vision of a world with zero crashes, zero emissions and zero congestion and create value for our shareholders. Even before the pandemic, we were very disciplined about driving efficiencies and reducing complexity across our business. We have taken necessary steps to reposition GM more favorably for the future, including exiting Europe, Australia, Thailand and other markets, restructuring Korea and preserving our overall manufacturing flexibility. We streamlined our product development organization, and we have combined propulsion and vehicle development with a strong focus on software, and we have thousands of engineers doing in-house software development. We've addressed our cost structure in North America, and we are on track to realize the $4 billion to $4.5 billion of savings we've been targeting. And we are continuing our transformational way of thinking and operating with a new Senior Vice President of Innovation and Growth, Alan Wexler, who joined us just a month ago. He will focus on identifying future growth opportunities and driving innovation throughout the company. He has a long track record of challenging the status quo to develop new strategies for business growth, and we're really excited to have him on the team. EVs represent the key growth segment for General Motors. We are going to win in EVs and give our customers an amazing ownership experience. We are allocating more than $20 billion in capital and engineering resources to our EV and AV programs from 2020 to 2025, leveraging our strong and profitable truck franchise. Our highly flexible global EV platform and state-of-the-art Ultium battery system will empower our next-gen EV portfolio. We believe strongly in our EV future and not just for vehicles. The strength and flexibility of our Ultium battery systems open doors for many use cases, including aerial mobility, which represents a natural next step in a zero emissions vision. Ultium isn't just a differentiator for General Motors. It is an industry-leading platform technology that has significant market potential outside of General Motors as our recent agreements with Nikola and Honda demonstrate. We will build our long-term relationship -- build on our long-term relationship with Honda and our newly formed deal with Nikola when other companies choose our platform in our battery technology because it improves our scale, which leads to lower cost, making it even more attractive for industry partners. Our goal is to bring more EVs to customers in more markets. It can be difficult to predict market trends, but we've conducted extensive research to understand what will motivate customers to choose an EV. As I said earlier, we know customers want EVs that look great, charge fast and conveniently and have the right combination of range, power and performance. That's why our platform is flexible, to address the needs and desires of a wide variety of buyers, and that's why we're focusing on all aspects of the EV ecosystem. We are uniquely positioned to do this because of our industry-leading modular EV platform and Ultium battery system; our scale and manufacturing expertise and footprint; our joint ventures and partnerships that make the most of our owners capital; our strong brands and distribution network and our leading position in China, the world's largest EV market. For those of you who were unable to attend our EV Day in March, let me briefly review what we covered and update you about what our teams have accomplished since then. During EV Day, we demonstrated our multi-brand, multi-segment lineup of EVs, flexible battery architecture, infrastructure plans and meaningful sustainability commitments and why no one else can match our combination of advanced technology, flexibility and scale. Of course, the heart of our EV strategy is our highly flexible global EV platform powered by our proprietary Ultium batteries. These batteries are unique in the industry because they are large-format, pouch-style cells that can be stacked vertically or horizontally inside the pack. Engineers can optimize battery energy storage and layout for each vehicle design. All of this means we can compete for nearly every customer in the market today, whether they are looking for affordable transportation, a luxury experience, work trucks or a high-performance vehicle. Our EVs are on our path to achieve price parity with our gas-powered vehicles. With our joint venture partner, LG Chem, we will develop and mass produce the cells for Ultium batteries with the goal of reducing battery costs to industry-leading levels below $100 per kilowatt hour once we have the Lyriq and Hummer EV at full volumes and then substantially lower over time. These cells will be built in our brand-new joint venture manufacturing facility under construction in Lordstown, Ohio. We will have at least 20 EV models on the market by 2023. And by mid-decade, we expect to sell 1 million EVs per year in our 2 largest markets in North America and with our joint venture partners in China. In fact, more than 40% of GM's new launches in China in the next 5 years will be electrified. As I mentioned, the team has aggressively moved forward since EV Day and is making significant progress on new products and technology. We began introducing our LTE-empowered EV models last month in the U.S. with the debut of the Cadillac Lyriq, a dynamic fully electric luxury crossover. It was well received and positions Cadillac to be a leader in electrification, connectivity and automated driving. Next year, we'll launch the 2021 Chevrolet Bolt EV and the new Bolt EUV that uses our current battery electric system. The Bolt EUV will be the first Chevrolet equipped with Super Cruise hands-free driver assist technology, and I'll touch more on that in a few minutes. On the technology front, we have developed a battery tech road map that includes silicon anodes and lithium metal anodes, which improve energy density, vehicle range, affordability and reduce dependence on rare and costly metals. This goes beyond the 70% less cobalt in the current iteration of Ultium batteries compared to that of our current battery. For customers, this translates to future product plans that include premium vehicles offering 500 miles of range. We have a multi-pronged approach to defining our future, including collaboration through our joint venture and joint development agreements with LG Chem, fostering innovative start-ups, including GM Venture investments, university research partnerships and our own internal R&D. Last week, we announced that GM will be the first automaker to use an almost completely wireless battery management system for the production -- for production electric vehicles. This wireless system will enable us to power many different types of electric vehicles from a common set of battery components. This improves speed to market because we don't have to develop specific communication systems or redesign complex wiring schemes for each new vehicle. With expanded over-the-air updates provided by our all-new vehicle intelligent platform, the system can be reprogrammed over time with new software-based features via smartphone-like updates. In addition to technology progress, we have been very busy securing important alliances that will also accelerate our EV work. Earlier this month, we signed a nonbinding memorandum of understanding with Honda to establish a North America automotive alliance. It includes a range of vehicles to be sold under each company's distinct brands as well as cooperation and purchasing, research and development and connected services to maximize our combined resources and scale. And it builds on our agreement with Honda in April to jointly develop 2 all-new electric vehicles based on our modular EV platform and Ultium battery system. We have a long history of successful collaboration, including fuel cell technology development. And more recently, our partnership with Honda on EVs and AVs including the Cruise origin, an electric and shared self-driving vehicle. We also share a similar vision of a better, cleaner world, and that's what drives our plan to create synergies that will help make it happen sooner. Last week, we announced an agreement with Nikola to develop and manufacture its Badger pickup using our battery electric truck platform and Ultium battery systems. It will also leverage our production-ready Hydrotec fuel cell technology in the Badger fuel cell variant and in its Class 7 and 8 semi-trucks. Hydrotec fuel cells are a complement to GM's Ultium batteries as part of our comprehensive electrification strategy. Hydrotec is a promising new aspect of our electrification technology, which can now be applied to growth markets that are outside of our traditional core businesses. Hydrotec fuel cells can deliver zero-emission to solutions sectors of the economy that have high fuel consumption rates and represent unsolved emission challenges for the incumbent technologies. We are excited to be the exclusive provider of Hydrotec fuel cell technology to Nikola everywhere outside of Europe, and I expect our recent announcement will be the first of many more opportunities for applications of our Hydrotec technology and GM's growth into these new businesses. It's advantageous for GM to have third parties validate our electric vehicle and Hydrotec fuel cell technology. We are already pursuing additional collaborations that will accelerate EV adoption for both retail and commercial customers. Also, last week, we announced that we're teaming up with Uber to help accelerate the rideshare industry's transition to a zero emissions future. At the same time, Uber has vowed to contribute 800 million through 2025 to help its drivers switch to battery-powered vehicles, including discounts for vehicles bought or leased from partner automakers. We are offering eligible Uber drivers in the U.S. and Canada a GM employee discount on the purchase of a 2020 Chevrolet Bolt EV, and U.S. drivers are also eligible for discounts on charging accessories. We will launch a pilot program in Los Angeles and Denver, where Uber's most active and highest mileage drivers can receive special financing through GM Financial. And in August, we partnered with EVgo to triple their number of fast chargers in the U.S. Together, we'll support the installation of 2,700 chargers in city and suburban locations, and they will operate on renewable energy. With all the work we are doing to provide our customers with great EVs, we know we also need to provide technologies that improve all aspects of the driving and ownership experience. In 2017, General Motors introduced Super Cruise, the industry's first true hands-free driver assistance system. Over the years, we have continued to add new features and roads to an already robust and acclaimed system. We'll continue to do that while expanding the technology across our vehicle portfolio. In fact, we'll offer Super Cruise on 22 models by the end of 2023. In China, Super Cruise will be featured on Cadillac's entire lineup by mid-decade and will also expand to Buick and Chevrolet models. 85% of the current Super Cruise users have told us they would prefer or only consider a future vehicle with Super Cruise technology, and I think that's a pretty powerful endorsement. Our ultimate vision is a system that will enable hands-free transportation in 95% of all driving scenarios. We don't have anything specific to announce today, but stay tuned. We are taking on autonomous driving as the engineering challenge of this generation, and we are determined to do so in the right way. Our Cruise team continues to make progress, and we'll have more to share yet this year. Putting all the technology I've talked about today in the hands of our customers takes dedicated employees who are committed every day to our vision. Our team is fully focused on sustainability commitments, and we are striving to meet them. By 2030, all of our U.S. facilities will be 100% powered by renewable energy. And by 2040, we will source 100% of our global electricity from renewables. GM already enables 100% reuse or recycling of our batteries, and we'll continue to engineer our EV batteries for full reuse and recyclability. We believe they have long-term value and therefore are an asset. We are making strategic decisions that will best position the company for the future as demonstrated by our ongoing transformation plan and our clear EV and AV road maps. GM has the right team, the right partners and the right portfolio of technologies at the right time, and we remain focused on the right priorities. Our employees want to be part of a culture of innovation, transform personal mobility and leave a better, cleaner planet for our children and their children. So before I turn to your questions, I want to share more about what I think of as the world's first all-electric super truck, the GMC Hummer EV. We will reveal this truck on Tuesday, October 20. You won't want to miss it, and additional details about how you can watch this exciting debut will be shared as we get closer to the reveal. At the same time, we will begin accepting customer reservations through gmc.com. The GMC Hummer EV will offer up to 1,000 horsepower and up to 11,500 pounds of -- pound speed of torque and is part of our EV truck architecture that will be capable of charging 100 miles in 10 minutes. Today, we're sharing a short video to show one of the Hummer EV's industry first features. We call it Crab Mode, and I'd like you to be the first to see the clip. [Presentation]

4-wheel steering capability, which allows it to move nearly diagonally, functionality that is tailor-made for our off-road customers. Stay tuned for more updates, but in the meantime, I hope you'll put October 20 on your calendar. Thanks for your kind attention, and now I'm happy to take your questions.

Thanks, Mary, for all the color. And nice to see the Crab Mode demo. I'm quite excited. To start, Mary, the topic du jour, I guess [indiscernible] I guess the core just among investors is really about unlocking value, what you could do from a corporate structure perspective. The market appears to be stating that there's a cost of capital discrepancy between you and maybe some of these start-ups despite the fact that there's a general belief that among investors I speak to that you have some pretty good technology there. So how do you approach that challenge? Because it does seem striking there's some short-term zone versus long-term owning control of these assets. You can't ignore that cost of capital conundrum because if it does persist -- and clearly it can stifle your growth. So how do you go about that? What do you think your options there are? And if you stay the course, how do you go about proving your hallmark adapting to -- or thriving really in the face of Amazon versus a company being forced to maybe spin off like dot-com in the mid-2020s.

Well, thanks, Joe, for the question. And we do remain 100% committed to driving long-term shareholder value. As I've said many times, we will always do what's in the best interest of our shareholders over the long term, not necessarily for a short-term pop. And we are moving fast to realize the better future that we envision and how we continue to innovate, to deliver safe, efficient, connected vehicles and services that lead the industry and will exceed our customers' expectations. So as we look at getting to our goal of zero crashes, zero emissions and zero congestion, we're going to continue to deliver and demonstrate our execution capability in our performance. So I think when you look at the fact that we believe EVs are and will continue to be core to GM, and our EV strategy reflects a unique combination of strength, cutting-edge technology, proven manufacturing expertise and scale; and when you look back -- you step back and look at the core capabilities, we want to avoid any scenario where those competencies are compromised or there is a distraction from speed to market. So we'll have more to say about GM's EV strategy in upcoming launches by the end of the year, but our focus is on speed because we know we have the right technology and we have the right plan, and we don't want to do anything to compromise that.

Great. And when you say by the end of the year, is that just from a product perspective or also from a strategy perspective?

Well, I think we'll continue -- if you look at all the announcements that we have just made in the last month and everything that we've done since our EV Day in March, we're going to continue to build on our strategy, put proof points on the board, demonstrating that our technology is very, very good to the point that others are using and validating it by their desire to use it and then the partnerships that we're providing. So we're going to continue to build on that. And I think as all of the elements of our strategy unfold, people will see we have a very clear plan, very realistic with a focus on speed and with demonstrating EV leadership and building on our technology strength.

And maybe just to further hammer on this point a little bit, could you talk about maybe some of the easier difficulty with GM actually going through with the spin, either on electric vehicle business or maybe the Ultium battery business? And what do you think of this concept of GM becoming -- or I'm sorry, a subsidiary of GM becoming more maybe a supplier in the industry of which GM is clearly one of the most important customers?

Well, again we're going to -- we will always look at what unlocks long-term value. But speed, I think, is a very important unlocking value in demonstrating leadership. So there's a structural side of the conversation and then there's a technology side and a partnership side and an execution leveraging all of the assets that we have, and I think people will see how that all fits together and unfolds as we continue to build on it yet this year.

Okay. Maybe to some other news that was in the market, you made this announcement with Nikola recently or about there. They're effectively paying you for capacity and some access to your technology. In the days that followed, the company and management have been under this scrutiny. But can you talk about in terms of the Nikola transaction, some of the diligence and GM's commitments to the deal?

So our company has worked with a lot of different partners, and we're a very capable team that has done the appropriate diligence. I understand that Nikola presented a little while earlier. So on the specific issues related to Nikola, I'll let you have that conversation with them. But on the strength of the deal we put together, it validates our technology, it allows us to have more people using the technology, which gives us the advantage of scale and which will help us drive costs down. And then from a fuel cell perspective, using the Hydrotec fuel cell technology and entering a new segment for us, a growth segment, again validating our fuel cell technology, I think it starts to unlock all new growth area for us as it relates to fuel cells and tapping into -- in addition to, I'll say, commercial and passenger vehicles, different areas where fuel cells are the appropriate zero-emission technology.

Maybe I'll just turn the conversation to something that, I guess, mentioned often on over the years, but probably not enough focus on, and that's talent. You've lost Dhivya to Stripe, which has been disruptive as a talent magnet. So I think on the one hand, it speaks positively for you and your ability to get recognized talent. On the other hand, you may be getting back to the cost of capital and having a currency issue that we talked about earlier. Are there concerns about talent potential to bring in a new young talent? So how do you think about GM's approach to that issue?

Well first, Dhivya is truly an outstanding person who's well-respected and is well-respected internally as well as externally and a personal friend of mine, so I will miss her and wish her the best. I think she felt she had an opportunity which allowed her to have a unique growth opportunity, so I wish her nothing but the best. I would say that as we look at talent, General Motors is tapping on talent from everywhere with the recent addition of Alan Wexler, who just joined our team, along with Craig Buchholz from a senior leadership perspective. And we continue to have many people join our team. I think an area of focus is in the software space, and we're tapping into graduates from the University of Waterloo with our Markham facility in Canada. That university is a huge source for talent that sometimes moves to Silicon Valley by offering them the opportunity to stay where they grew that -- or where they attended college. That is proving to be a very important resource for us. We also have a technology center in Israel, and that is also tapping into an incredible pool of talent. And I would say with the lessons that we have learned with -- and the world is kind of learning with how we can work remotely, we are active, have been and all through the COVID period, have been hiring and will continue to hire specific talent that we need in the technical space around software, batteries, et cetera. So I would say we are -- we continue to bring in great talent, and so I think this idea that only a company located in Silicon Valley can tap into the best talent is just not true.

Any thoughts on either a time line or approach for announcing the CFO search?

We are in an active search, and I'm very excited about the progress it's making. So I'm not going to put a time line on it, but I can tell you I'm very excited about how the search is progressing, and we will have news in the not-too-distant future.

Okay. Maybe to go back to some of the new competitors that have been popping up in the market, what I find interesting about this is that they seem to be mostly focused on the 3 most profitable segments in the U.S.: so the pickups, work vans, luxury. It kind of makes sense as you think about just the general state of profitability of electric vehicles today that you go after the more profitable segment. Maybe let's just focus on pickups and maybe work vans for a second, where we do have a bunch of these new players especially coming to product. And for your friends down the Street, you're doing also around clients like you find their pickup truck. Look, many of the start-ups clearly got a lot of work ahead and potentially some challenges ahead of themselves. But for the first time in a while, it does seem like there is more competition in these segments than there has been historically. And basic economics will tell you that, that market structure is more favorable to reflect in some way. So what do you think that means for the segment? And how does GM win profitability in these segments in the future?

Well, I think you have to step back and understand that the truck segment, the business is structurally different from the rest of the automobile business in passenger vehicles. It has better underlying growth dynamics, and we're seeing that it has far better margin dynamics. But also I think is very important, it has strong loyalty, and those become competitive moats around our business. Historically, over 90% of these sales in the sector have been through the top 3 OEMS even though others have tried to enter this segment. We set out to increase market share through increasing the richness of our product mix with more differentiation. We've added more crew cabs, and we have more trim levels, so we are going from high value to high feature. On the Chevrolet Silverado, we expanded the model lineup from 5 to 8 distinct brands and added the Trail Boss and -- which is both a high-value and a high-volume opportunity for us in the market. And our premium LTZ and High Country trim levels have been a huge success in the high-feature market. Similar is true at GMC with the Denali sub-brand and the AT4 trim mix, they have been just a massive success for us in the premium truck segment. So as we did this new launch, we took the opportunity to add capacity to the existing pickup truck footprint and to reduce constraints, and that is really fueling the success of our business right now. And we sell more trucks in the U.S. than anyone by a wide margin, and we are unique that we have not one but 2 strong brands and distribution channels with Chevrolet and GMC. So when you translate that, we believe that the battery electric trucks that we'll build at the Detroit-Hamtramck plant will leverage the success we've had in the ICE business. We have over 100 years of mass production experience and truck knowledge and knowing what is important to truck buyers. So we know these customers well. We know what they want and what they need in an EV truck. And they want a truck that looks great, charges fast and conveniently and then has the right combination of range, power and performance. We also have an outstanding distribution channel, and we do not intend to cede our leadership position in this very important segment. And so we continue to -- we'll leverage our strong brands and that customer loyalty and relationship and knowledge.

Okay. Maybe a couple of questions just sort of hearing from investors that sort of tie into this, which I think is -- you touched on this a little bit on the call and Nikola announced it. But if things like loyalty are so important and again the market structure is important, there's just a question of sort of why you would help a would-be competitor launch products in Nikola.

Well, again, as we look at our -- we find it's another opportunity for General Motors. I mean I think the industry has been included -- has been accused in the past of not being as efficient as it could be with technology and with leveraging engineering and capital. So the partnership that we have with Nikola, and Honda for that matter, is doing exactly that. It's leveraging that technology instead of everyone doing a slightly different version of it. That will include the royalty or licensing or revenue in many different forms coming to General Motors as well as taking the costs down as the whole industry transforms and transfers to EV models. We will still compete fiercely as it relates to go to market with our strong brands like we do today. This is just a more efficient way to do it, gets us scale faster. So it's good for the customer, but also it's good for the General Motors shareholder because our technology is being used more broadly.

Another question that came in on electric vehicles here. I think you mentioned that the Bolt and the new Bolt EUV would be on the current battery. So when is it that we get the first Ultium power in electric vehicles? Is it in '21 with Hummer and then the Lyriq?

It will start to leverage the Ultium technology with the GMC Hummer EV that launches in '21 and then closely followed by the Cadillac Lyriq, is when we'll see the new Ultium-powered system.