General Motors Company (GM) Earnings Call Transcript & Summary

And I think we are live. Welcome, everyone. Thank you for joining. I'm Dan Levy. I lead equity research coverage of the U.S. auto sector at Crédit Suisse. And very pleased to have you join for our fireside chat with the team at GM. We have with us on the line, Mary Barra, GM's Chair and CEO; Paul Jacobson, GM's CFO; as well as Rocky Gupta, GM's Treasurer; and Mike Heifler and Diane Farrow from the IR team. I think it's going to be a very timely and topical discussion, focusing on both the near-term dynamics of the business coming out of the semiconductor shortage as well as GM's longer-term journey in electrification and Auto 2.0 endeavors. I'll run through a series of questions on the topics. And at the end, we've reserved a few minutes for audience Q&A. We hold an outperform rating and a $72 target price on GM. And I think we'd argue that the opportunity for GM is really on 2 fronts right now. Obviously, there's a very strong cyclical recovery. But what we're also seeing is a very fascinating and interesting path on GM's transition to an EV world and also in other nonautomotive opportunities. So with that, Mary, Paul and team, thank you so much for joining us.

Well, thanks for the opportunity, Dan. We're glad to be here.

Great. Why don't we jump right in. And I think the best place to start is really on the interplay between your near-term strength but also the longer-term transition that you have. And Mary, I think what we're seeing right now is you have -- you're generating record profits. Aside from GMI ex China, really every region is -- every part of the business is humming. So help us understand, as we put together -- as we connect the near-term strength of the business with your longer-term journey, how does this strength enable you to fund the transition on EV Auto 2.0 endeavors? What are you doing now that wouldn't otherwise be possible without this strength? And just given how much you've really streamlined the business, do you think that your efforts -- the efforts that you've done to streamline the business over the last few years give you an edge, maybe over some of your competitors in the EV transition given how strong the business is functioning right now in terms of giving you the additional resources to fund that transition?

Well, Dan, I think the short answer to that question is yes. We believe we have a strong competitive edge in the EV space, not just from a financial flexibility perspective, but also in terms of our strategic and operational focus as well as the depth and the breadth of the EV platform and our technology. We believe we really have more flexibility, more versatility and more scale. And then when you couple that with the experience that the GM team has, I think we're extremely well positioned. We've been long believers in an all-electric future, and we've made moves early on it to position GM to lead the revolution of the industry and to build a competitive advantage with our investments and our dedicated EV organization and a very integrated strategy. We're putting together a full portfolio of electric vehicles in a variety of styles and price points, more cost effectively than anyone else. And we have the plans to launch 30 new EVs in just the next few years across all of our brands in a range of models, uses and price points. And that's really important because that's what our customers are telling us is important from an EV adoption perspective. The foundation of our EV portfolio is our differentiated and proprietary Ultium platform and ground-up EV architecture. That provides us a significant flexibility and competitiveness in terms of design, cost and performance. We also have leading design capabilities, which I think you can see in the beautifully crafted Cadillac LYRIQ and also the very true to the HUMMER brand, the GMC HUMMER EV. And the LYRIQ has scored the highest in interior, exterior appeal among all vehicles we've ever tested, luxury and nonluxury. We are absolutely laser-focused on great product, but also on a great ongoing experience for our customers. After the purchase, including the target infrastructure, we want to make sure we have a more consumer-friendly way to purchase the vehicle and a relationship to manage the product beyond the original sale in a way that consumers really haven't seen from us before, and frankly, I don't think they've seen in the auto industry. Beyond our focus on the EV strategy, we're also adding to our competitive advantages and our iconic brands, our industry-leading customer loyalty and our established sales and service network. And when we look at then the capability that we bring from an engineering perspective, vehicle validation, safety, quality, durability, testing and then manufacturing, and the experience we have of really understanding customer requirements and preferences, I think that really positions us well. So I'd also like to say we do have a strong ICE business that generates a lot of free cash flow, and that's what we're using to reinvest in new and existing businesses, helping us fund the business transformation, and we are not constrained for capital. So it's a really exciting time, and I'm glad about the decisions we made over the last few years to position us this well as we are in this transformation.

Great, very holistic strategy. And we'll unpack a few of those in a bit. Let's -- you mentioned the ICE business, and I want to ask another one on sort of the interplay between the ICE and EV business. I think you noted on one of your prior earnings calls that this is going to be the first year in the company's history that you're going to be spending more on EV/AV programs combined than legacy gas diesel programs in the company's history. I can only imagine this is only going to shift even further toward EV/AV. So can you maybe give us a sense of how long, Mary, the tail of gas diesel spend will last, especially if you're targeting 100% 0 emission by 2035 because, obviously, you're making this transition, but the ICE business right now, has been talked about in a moment, is just on fire. I mean you literally do not have any cars to sell. So help us understand that shift in funding as you're managing that transition.

Well, it is an interesting time right now in the marketplace, but I'm really proud of the team for the way that they're managing through it, I think, very successfully. But when we look at the EV to ICE -- excuse me, the ICE to EV transition, we think that's going to occur over the next decade. And we aspire to be all electric, especially for our light duties by 2035. So when you look at the fact that we've talked about, we're investing more than $27 billion in EV/AV program through 2025. And by the way, we're looking at additional opportunities in evaluating it because we have the wherewithal to make further investments. So stay tuned on that front. But we are in this year alone, investing $7 billion. And so I think when you look at the anticipated capital spend will happen in the next few years, it's incredibly significant. But there are some important ICE products coming as we look to make sure we're on the winning side with our franchise products and continue to lead from an industry perspective and also continue to attract and delight our customers. And we continue to work on identifying and framing out opportunities, for instance, with the Honda MOU to reduce costs on ICE vehicles. But what I will say is what we think is -- that is important is we've made a lot of investments over the last 5 to 7 years with our ICE platforms. And so whether it's small, mid and then full-size trucks and SUVs, we really don't have to make many investments in those architectures. It's mainly making sure those products are going to win from a customer-facing perspective, and that's what we'll focus on between now and 2035 from an ICE perspective as we transform to EV.

Great. One more on this before -- I'd like to address a few on the current business, and then we'll go back to ICE and EV. And maybe, Paul, this is a question -- we're obviously getting a lot of questions on EV profitability. So if ICE profit is really strong right now. EV is obviously still developing. You haven't said where your profit is, but we can all make our own assumptions. Is there a risk that we might see a profit dilution coming at some point or margin dilution as you begin to shift that mix. And obviously, the pickups are the most obvious area where we'd see this. But help us understand maybe what you can do to mitigate some of these profit headwinds as you begin to shift your mix from ICE to EV, especially on trucks where we know you're disproportionately profitable.

Thanks, Dan, for that. And I think that's the $100 billion question about the transition that we're in right now. And I think everybody understands that it's pretty clear that it comes down to battery technology and scale. Scale, I think, we have the potential to be the undisputed winner in that. And certainly, we're on that trajectory. Mary talks about it frequently. On the battery side, we are making strides every day, and we've talked about the Ultium platform gives us a 40% cost reduction versus the batteries that are in the existing bolts. And we've talked about the next generation of that Ultium technology by mid-decade, getting us to a total 60% reduction. So we see the costs in the EVs coming down. Overall, we've targeted about a 10% margin that's been in place for a long time. And I think we're making great strides to there. As far as parity, we -- it gets difficult to compare that between what's now versus what's the cost of an internal combustion engine 5 years from now or 10 years from now because of all the additional technology and engineering that's going to go into it regulation, emission standards, et cetera. So I think we've got a really, really good platform, and we've got a good trajectory to manage through that transition and keep those margins intact. And then, ultimately, when you look at it as part of a holistic strategy of bolting on the additional subscription services, whether it's connectivity, OnStar Insurance, BrightDrop, we see that there's an opportunity to take margins even higher off that platform into the future. So we're looking at this in a completely holistic fashion. We think we've got a road map to be able to get there.

So it sounds like some cost and revenue actions you can take to make that transition.

Yes. And ultimately, the consumer here is going to decide how that transition takes shape. We're certainly in a position where we think we can help to win the consumer over to EV with the exciting products that we're bringing and through the dealership relationships. So we see an opportunity to continue to lean into that, and the technology is making great strides right now.

Great. Let's pivot briefly to the semi shortage because I think this is what's been on a lot of investors' minds. And Paul, I know you issued a press release this morning saying the first half profitability would be significantly better than what you previously expected, which I think was call it like implied second quarter, $1.1 billion of EBIT. It sounds like your volume is starting to prove. So maybe you could just help us unpack or give us an update on the latest in the chip shortage. Where are you in terms of starting to rebuild on volume? Are we past the worst of this? Where are we in mix, pricing? Help us unpack the latest on the chip shortage and the current business dynamics for yourself?

I appreciate that, Dan. And no surprise we've gotten there. I think I've answered more questions about chips than I have about cars since taking over in the job. But it's a lot of exciting stuff to report for the team. As we've said, we're right in the middle of this right now. That's not unexpected. But the way the team has come together, whether it's manufacturing, supply chain, engineering, finance, sales, everybody has really come to the table to help manage through this in a way that I think, honestly, is when we look back on it, going to be world-class and industry leading the way the team has navigated this. And what we tried to do in the midst of all of this incredible volatility is try to be credible. The reality is, I don't think we like necessarily updating guidance a month after we just issued it, but that shows you how fluid and volatile the situation has been. So as we look at what's occurred and what's transpired in the last year, what I would say is that May has continued to be -- or did continue to be very, very strong in the consumers' minds. And we saw a little bit of a step-up in production versus where we thought we were going to be a month ago. And then as we highlighted in the press release, we had an opportunity to accelerate some chip availability into the second quarter from the third quarter, which is enabling us to clear about 30,000 trucks from our inventory lots where we built these vehicles without those components. It's allowing us to complete those. So when you look at those 2 pressures, that's where we say that we're coming in significantly above where we thought we were going to in the second quarter. I'll caution, and we remain very, very optimistic about the full year. And I think as we said in the release, we're optimistic that we can beat the high end of our $10 billion to $11 billion guide for the year. But as you can tell from these updates, it is very fluid. So as we continue to navigate through this, we'll continue to provide updates and be as transparent as we can as we get the information and we develop confidence around the near-term and intermediate-term forecast.

And is there a baseline view on when you'd expect this chip shortage to be fully mitigated that you can run at full run rate volume?

Well, I think what we've said is that we expect the middle part of the year in the second quarter. And given the timing and how some of these chips have moved, we may see a little bit of challenge creeping into the third quarter as well. But we certainly see it starting to get better in the second half. And hopefully getting to a point where we've reached normalization in 2022 from that standpoint. But like I said, I caution going out that far just given how rapidly this has changed. I don't think my colleagues that have been at GM much longer than I have ever seen anything like this.

Right. Very, very fluid environment. Let's unpack the pricing and the inventory for a second. Your pricing obviously at a historically strong level. You have 22 days of stock. I think historically, you probably held 80 days of stock, 200,000 units of dealer stock, I think, historically, you've been 700,000 to 800,000. So very, very tight inventory. Given your expectation that inventory won't return to prestrike levels, is it maybe fair to say that on the pricing front, you won't give back all of the benefits that you've seen in recent quarters? And maybe help us unpack some of the inventory and specifically the pricing dynamics, given everything we've seen.

Well, I think, number one, Dan, I think we are singularly focused on delivering value for the customer. And when you look at the demand and the success that we've seen for the full-size trucks and SUVs. There's no doubt consumers are really, really pleased with the value that they're getting for the vehicles. And I think the challenges of thinking about pricing for the longer term are there are a lot of things that are all occurring in and around us as well. So it's not just the inventory levels. It's the fact that used car prices have skyrocketed as well in the face of that lower demand. That's helped GMF, served as a little bit of a hedge against what we've seen in the inventory shortages. It's something that's affected the entire industry. But additionally, you've got sort of unprecedented levels of government stimulus, a lack of discretionary capital alternatives for consumers. They're not spending as much on travel and other discretionary items. And they've had more money in their pocket to spend on vehicles. So I think we've got to be cautious about how we think about what that is. But as long as we hold to that principle that we're looking to make sure that the customer gets good value in the eyes of the vehicles that we're producing. We'll be able to manage through that. As we said on the last earnings call, I think there are certainly some lessons that we can learn here about how we manage. And I think as we said on the call, if I recall correctly, which I will, because our Investor Relations team is on the phone as is my boss. But we said that the right amount of inventory is probably less than what we historically carried. But there's absolutely no doubt that it's more than what we've got right now. We have too many dealers that have empty lots. And as we've articulated, consumers want to be able to go into a dealership and drive off in their new vehicle. And we've got to make sure that we have some inventory available well above kind of the current levels that we've been carrying. So as long as the consumer remains strong, we're optimistic about the value that we're continuing to deliver.

Great. Let's pivot to the cost side on the near-term front. And raw mats, obviously, there's been a lot of questions on cost inflation. I think your last comments were you're expecting a headwind of more than $2.5 billion in 2021. Maybe just given the timing of the contracts, assuming prices remain flat here, help us maybe understand the rough magnitude of headwind we could be seeing into 2022. Is it comparable to 2021? And again, similar to what I asked before is, what actions can you take to mitigate these raw mat headwinds?

Well, I think you're absolutely right that, they've been really significant and sort of compounding the volatility that we've seen in the semiconductor space in particular. The actual number that we're seeing right now, and this is what was baked into our guidance that we gave on the call a month ago was closer to $3.5 billion to $4 billion of year-over-year pressure. That's concentrated in the second half of the year. But like I said, built into our current expectations, including our comments today. So I think absent some correction, and I think with a lot of things that are around the sort of rebuild trade -- or restart trade, if you will, I do think that some of the error will come out of the balloons on the commodity side of it, or at least hope they will. But at these prices, we would expect to continue to see some pressure into the first half of next year. But what we've seen is an ability to price for that given the strong consumer and where we sit in that curve. So we're going to have to continue to monitor that. It's just yet another variable that we're taking into account. And so far, year-to-date, the team has done an extraordinary job of managing through that issue as well.

Great. Let's ask one more on the near-term earnings profile before we pivot back to EV. Just big picture, I think by the end of 2Q, you're going to be on track for something like $15 billion trailing 12 months of EBIT. I'm pretty sure that's a record for GM. So how should investors look at that $15 billion figure. Is that peak? Is that unusual? Or do you believe that really this earnings profile has some sustainability to it. And we're now finally starting to see all the fruits of GM's efforts over the year to really streamline the business. And so this $15 billion trailing 12-month number actually may have some sustainability to it.

Well, first of all, Dan, I appreciate you pointing that out on behalf of the GM team. And as any good CFO, I'd love to take credit for all of that. There's a lot of that work that was done in the years leading up to now. So I think it's a combination of things. I think we're in an unprecedented level of consumer strength, as we talked about. That's likely probably going to revert back to the mean a little bit. But I think there are some real lessons learned in the way we've managed through this and thinking about changing the way of the business. And then I think there are far more permanent things about the businesses that we've exited or rationalized and where we have fixed some of the challenges historically as well as the strength of the new lineup of vehicles that are going to certainly be with us. So while I think it's too soon to say whether this is the run rate or the peak, I can tell you the team is very, very focused on making this the norm and not the exception and doing the best we can around that. But again, we've just got to be careful about extrapolating too much from the unusual nature of where we are in the economy right now.

Right. Let's go back to EV. And Mary, I think you were talking before about some of the opportunities you have. So let's just unpack those. And big picture, you talked about HUMMER EV, you've talked about LYRIQ, you've talked about Bolt EUV. We have Silverado EV unveil coming. What can we extrapolate from these vehicles to your eventual -- I think we're all waiting for the Tesla competitor, the Model 3 competitor. So what can we extrapolate from these vehicles to your eventual, so to speak, high-volume entry and maybe help us appreciate some of the scalability of Ultium that can help to enable that.

Well, I think what you said, Dan, is key. It is the salability of Ultium because as we've said, you're going to start to see a steady launch of electric vehicles from us. reaching a total of 30 by the end of 2025. And as we've stated, 2/3 of those 30 will be available in North America, and many will be high-volume entries. And we see those in the marketplace by 2023. And the foundation is the Ultium platform. It's a combination, I really think of groundbreaking battery architecture. But I think what's so key is it's highly flexible and the common battery cells that can be scaled across our portfolio in different sizes, it's kind of like a LEGO building block or how many batteries you need the performance that you're looking for. We think this is going to be a key differentiation element for our products and our EV portfolio going forward. I would also say it enables speed because it is a building-block nature that allows us to put the pieces together, and it's not new engineering for each vehicle. And I think that's where General Motors is positioned exceptionally well. In terms of the upcoming EV launches and what to expect, we do have the all-new Chevrolet Bolt EUV, which I've just been driving and love it. And the next generation of the Bolt EV that are arriving in dealerships. And that starts a very positive momentum, especially when you look at the affordability of both vehicles and the customers of those vehicles are extremely -- some of our most satisfied customers. And then later this year, we'll have the opportunity to share the much anticipated GMC HUMMER EV pickup and I had a chance to drive the vehicle last week, and I can't wait to get people into the truck to absolutely know, it is a super truck. I think it's going to be very critical as truck drivers see the capability of this vehicle. And then, of course, as we get into next year, we'll be launching the Cadillac LYRIQ. And we've also shared the Cadillac CELESTIQ, which is really a flagship for Cadillac. We rebuild the GMC HUMMER EV in Q4. We've had incredible interest in that vehicle. It was one of the most watched reveals in history and created the highest website traffic of any GM model ever. And we want to kick off GM's acceleration toward EVs with something exciting like the GMC HUMMER EV, which would -- which is everything you would expect from a super truck that really has to be if you're calling it HUMMER. So getting to experience crab walk, Extract Mode, Watts to Freedom. These are all innovations and things that I think are really going to generate a lot of excitement. And again, it's part of the Ultium platform, and we're going to be able to do multiple configurations and price points, leveraging that configuration of Ultium. So when you look at the fact that the Ultium platform is capable of driving long ranges, including models that can drive GM estimated ranges of up to 450 miles on a full charge, with 0 to 60 acceleration and as low as 3 seconds and battery energy storage ranging from 50 to more than 200 kilowatts, I think you can see the flexibility that we have in this platform. And as Paul mentioned, the Ultium battery pack costs will be 40% lower than what we have with the Bolt today -- the Bolt EV and EUV today. And by mid-decade, we'll be in the second generation and getting too close to a 60% cost reduction from today's EV. So we're very focused on costs. And as we take cost out of the Ultium battery, that expands the portfolio of vehicles we can offer to customers, and we will have a full range portfolio because we think that's what is necessary to drive EV adoption and that's what's necessary to get to our goal. So more to come. For competitive reasons, we're not sharing a lot of details, but we will have some very significant high-volume products in this space.

Great. Let's -- if we could talk about Silverado for a second. Obviously, you're going to unveil EV Silverado later this year. But maybe for now, you can help us understand how wide a net you want to cast on potential buyers. We know that, obviously, you have a wide range of buyers between fleet buyers who may be purchasing lower price points. You may have urban cowboys that are buying vehicles at higher price points. So how do you manage -- how wide a net do you want to cast on EV Silverado? And how do you manage the potential cannibalization or negative mix, which may come from ICV. And I think you've sort of addressed this in the past, but EV Silverado. Yes.