General Motors Company (GM) Earnings Call Transcript & Summary

Morning, everyone. I'm Joe Spak, lead automotive analyst here at RBC Capital Markets. Welcome to day 2 of our Global Industrials Conference. We're very pleased to have with us General Motors. From GM, we have CFO, Paul Jacobson. The format for this session is a fireside chat. We prepared some questions. We're going to have a conversation. I do urge investors on the line to get involved. [Operator Instructions] So Paul, thanks for joining us this morning.

Well, great. Thank you for having us, Joe, and thanks, everybody, for joining this morning. As you've heard us talk about, it's really an exciting time to be at General Motors with the level of transformation that we have undergoing right now. It really is a once-in-a-generation opportunity. And I think some of that has gotten lost in the short term. Obviously, as we work through some of the challenges, which I know we'll talk about, Joe, today. But we really are extremely well positioned to take advantage of what's going on in the industry and really the world have changed. And we're really excited about it. And despite what we've seen, we still have a lot of momentum in the business. Year-to-date, our full-size pickups are driving a 39% market share. Our full-size SUVs, I think, are over 65% market share for us. We just announced a significant refresh to the 2022 Silverado, which includes some pretty amazing features, which we'll demonstrate at Investor Day coming up, the Super Cruise with the trailering functionality, just a lot of technological innovations, a lot of exciting things ahead of us. So we're excited to share some of that. So thanks for having us, Joe.

Great. Yes. I saw the new Silverado, looks like a nice update. Well, let's, I guess, get started with. Obviously, there's been a lot going on in the headlines from a production standpoint and some shutdowns. When you last updated the Street with your second quarter earnings call, you talked about 100,000 units of lower volume in GM&A in the second half versus the first half. It's a little bit difficult to know exactly sort of what the starting point is. But as we track it, it seems like, especially with some of the more recent announcements, maybe that's a little bit worse than expected. So maybe you could just update us first and foremost with some of these recent downtime announcements. And of course, also the news earlier this week of another shutdown wave in Malaysia, and we know that sort of was an impact for the first go around here, how you're thinking about that now?

Yes. Well, thanks, Joe. Obviously, as we really said from the beginning of the year, this is and remains a very, very fluid situation. And I think it's evolving quite a bit. Towards the end of the second quarter, we really started to see some of the challenges emerging from Malaysia. And I'm grateful at the time that we seized the opportunity to pull ahead some chip availability from Q3 into Q2, which obviously helped our Q2 results. During that time, as you mentioned, we thought the second half was going to be down about 100,000 units with a little bit of a heavier concentration from some of the higher-margin full-size trucks and SUVs. But as everybody is reading, the global supply chain continues to deteriorate a little bit. We've got multiple impacts that have worsened primarily the semiconductor supply chain risk. As you know, inventories have been very, very thin all year. And that's going to give us a little bit of risk throughout the year. It's primarily related to COVID in Southeast Asia. We've recently seen upwards of 60% production restrictions. But it's a different situation than really it was in the beginning of the year. In the beginning of the year, it really was about fabrication capacity and really way back at the wafer phase. What we're seeing right now is really kind of in the back-end processing facilities that are in Southeast Asia. The good news for that is we typically see the throughput at those facilities run faster than the fabrication. So if you think about it, there's a little bit of pile up in the supply chain that really needs to be unlocked. And as we see Malaysia making progress with vaccination, it's great. We've been helping even going all the way to the suppliers to try to extend some of the GM protocols that have worked for us over time to help them. And I think some of those facilities have been very grateful for General Motors' help as well. But once we see them open up again, we should see a little bit of a freer flow of chips. But when we reported the second half, as we said, it would be down about 100,000 for the first half. Given where we are right now, we probably back the second half wholesale volumes will be down around 200,000 units. Most of that occurring in Q3. And while we expect Q3 is going to be challenging, we still believe that we're going to be able to hit our calendar year guidance range for us as we are continuing to use all the tools that are available, whether it's in vehicle pricing or in building some vehicles without the chip -- the particular chips and then finishing them later. So we've seen a little bit of an uptick in that inventory, which is good. That helps us preserve some of that option value. But we're watching it closely, both on the working capital impact as also is when we expect that we'll be able to free those up with chip supply coming back on. So everything that we said from the beginning of the year, in fact, to put it all into perspective, despite all of this, we're still going to deliver a year that is higher than what we originally thought coming in, in January. We had $10 billion to $12 billion guidance, now $11.5 billion to $13.5 billion. So I think we're managing it well, but I'm proud of the team that it's not distracting at all from the long-term focus, making the investments that we need to in EVs and battery plants and that acceleration. So overall, despite some of that short-term choppiness, the long-term thesis is very much intact, and we look forward to exploring that further.

Yes. Appreciate the update. And I guess maybe just, Paul, to sort of dig in a little bit on that. So an extra 100,000 units, maybe versus what you thought prior, still it seems like you still feel comfortable with sort of full year range. You worked -- you talked about sort of working harder to sort of offset maybe some of those numbers. Can you let us know what some of those initiatives are to -- so the investors can have some confidence that we just don't have the volume impact? Or are maybe some of the other factors that you listed in terms of half-over-half impact like either on the GMF side or maybe I think assuming sort of pricing was pretty flat, and we've seen pricing actually move higher, are those some of the offsets to the volume?

Yes. Absolutely, Joe. The tools that we've used effectively in the first half of the year, we're using today. I think the challenge has been really in that wholesale volume, which seems to have peaked a little bit in the third quarter. Again, some of that because we pulled forward some of those chips, got some incremental production in June as a result of that. But overall, I think we continue to manage this week by week. I think the team is doing a fantastic job, whether it's at GMF or it's on the sales side in terms of what we're doing with incentives. It's obviously been a very, very strong year for pricing for both new and used vehicles. And honestly, we expect some of that environment to continue into 2022. And we can talk a little bit about some of the puts and takes as we see them today as we're developing the budget. But it has been a strong environment for the consumer, and that's been very helpful. There are a number of cost initiatives that we've undertaken, and we continue to be dynamic with that. But what we really don't want to do, and I don't think we're in the position to need to do this, is drive a level of COVID austerity into the business that slows it down from where we are. This is not a crisis of COVID as we were. And I think it's important as a finance team and as a leadership team that we don't convey a level of panic of where we are because actually, the business, as I said, through it all, is actually performing in line to ahead of where we expected it to be at the beginning of the year.

Yes. I guess the other thing, Paul, that sort of has come up from you is the Bolt recall. So one, I guess, if you could just sort of clarify that, that comment is sort of excluding that additional sort of Bolt recall charge or whether the guidance now includes that? But also, just can we take a step back and sort of give us the update in terms of what exactly is going on with LG? I mean, it sounds like it was maybe a manufacturing defect on their end. But where exactly sort of things fell apart, where GM is involved in this process? And you talked about potentially getting some recoveries. Is that contemplated this year? Or is that maybe into '22?

Yes. We're obviously focused 100% on the safety of our customers and the products. And that's been the bulk of the work that's undertaken so far. So we had the original charge of $800 million, which was in the guidance that we gave in the third quarter. And then now we have the incremental $1 billion charge, which was not contemplated in the original guide. Despite that, I think we can still deliver results in that range going forward. So really the kind of the incremental piece from where we were is the $1 billion for the Bolt EV second recall and then the 100,000-vehicle volume loss. But we still think that we can deliver inside the range of where we were. So as the engineering team and the manufacturing team have dug into this, as we've articulated, the fault lies in 2 rare manufacturing defects that when they occur in the same cell, increases and creates this potential problem. So we feel good that we have figured out the cause, and we're working through with LG on both improving the manufacturing processes with GM manufacturers side-by-side with them, really instituting some of the GM quality metrics that we're so famous for. And ultimately, I think that we'll get through that resolve. The #1 focus right now, obviously, is to get the production line fixed, the manufacturing process cleaned up and get into -- get back into cell production and ultimately get a path for these vehicles to be repaired and ultimately do what's right for our customers. So that's what we're doing. We're obviously engaged in high level conversations with them about how we handle the financial accountability, we do expect that we will get reimbursement for that. But the main priority right now is to work through how do we do the #1 priority for the customer. And ultimately, we'll figure that out, I think, as the good partnership that it is.

But just the gross number, not -- there's no sort of recovery sort of contemplated in the back half for now in your guidance?

The guidance we gave today hasn't contemplated any recovery in that. So we're going to -- like I said, what we're trying to do is just isolate sort of the core of the business right now, and that will come when it comes.

Right. And I think the other thing that's important here, right, and I know Mary has stressed this in the past is this is sort of the last generation technology for all, it's sort of separate from the Ultium. And in some respects, Paul, I'm wondering how you sort of think about this, like does this almost validate that it's worth sort of spending the capital and sort of going more on -- in the JV on future battery technologies such that you have tighter control and are more integrated in the manufacturing process, and maybe you could sort of catch these things a little bit earlier on.

Yes, 100%. And I recently actually had the chance to go to cell plant 1 in Lordstown and see the progress in place. And I was overwhelmed with the level of GM attention to detail, whether it was in safety or manufacturing or processes or quality control, we're very comfortable that the Ultium, also being a different technology, is going to be the high-quality battery that we expect going forward. So that, I think it absolutely does validate what we and others have said that battery technology is core to the next generation of vehicles. And that vertical integration is absolutely the right strategy.

Yes. You talked about, Paul, about not hitting the panic button here. And I think one of the things that maybe would give you confidence in doing so is that it seems like all of these issues are really supply driven and that even though we sort of seen the SAR in the U.S. and really around the world sort of take a step back, it's really more, again, availability and sort of tight inventories. I mean do you agree with that because one of the things that sort of does come up from investors a little bit is, so maybe some growing concern that some of the -- there's a little bit of price fatigue entering the consumer because -- obviously, we've seen ATPs continue to sort of track higher, especially here in the U.S.? So how does GM sort of view what you're seeing in the SAR, which I know is sort of really a demand proxy, but it really just might not be a representative of true underlying demand at this point?

Yes. Joe, I think -- I agree with you that I think the lion's share of what we've seen in the SAR has really been lack of supply. I mean our dealers have been incredibly resilient. We're working with them on technology solutions that give them more insight into when the vehicles are going to arrive. But the reality is a lot of these vehicles are selling off the delivery truck, essentially to the dealers with a very, very low inventory. So there's -- I think there's no doubt that consumers are aware that prices have gone up. But certainly, from what we've seen and what I highlighted in my introductory comments about the full-size trucks and SUVs is consumers have really responded well to the models that we have out there. And those are doing incredibly well. So we feel confident that we're going to continue to be able to sell vehicles. We just got to make sure that we can get through the noise of the production, which we do see easing up as we get into the end of the year and 2022. We've got to get this COVID challenges behind us.

Yes. So maybe you alluded this a little bit earlier. And I think we're sort of at that time of year when certainly internally, you're probably thinking about planning for next year. I think investors are also sort of thinking about turning the page, especially since I think it's difficult to capitalize a lot of the sort of short-term sort of disruptions we've seen here of late. So how should we sort of think, again, at a very high level, and I'm sure we'll hear more at the Analyst Day later this year, about the puts and takes for what '22 can be? Maybe said differently, what can we really take from what we've seen over the past couple of quarters and what you're talking about here in the back half as sort of a baseline for '22?

Yes. So a couple of things, Joe, and before I talk about '22, what we've been up to over the last several months, and I think this is kind of leading up to Investor Day is we've kind of really plowed deep into our long-term plans and looking at longer-term financial models, and there's some exciting things out there about growth initiatives and opportunities and what the industry looks like. And we're going to go into some of those details quite a bit at Investor Day going forward. But the reason I bring that up is because that long-term planning process is really starts to inform our baseline targets and our thoughts for what '22 should look like. So how do we know that we're on the 10-year trajectory unless we set that marker for what next year needs to look like and the year after and so on. So we're just kind of in those beginning stages. What I would say is high level, obviously, we expect volume to be up. We expect it to be much more stable. I think the wafer fabrication has made great strides. I think there still may be some hiccups in that. But like I said, the current chip situation that we're facing in the here and now is very, very different than kind of what it was in the beginning of the year. So that gives us a little bit of reason for encouragement that we'll have a more stable year in 2022, even if it's not back to completely unconstrained. We do expect a little bit of normalization in GMF. Obviously, they're having an amazing year on both credit and used car prices. I don't see credit changing all that much from the consumer. We'll have to watch that. You'll expect over time that, that will normalize a little bit. But certainly, the quality of our portfolio has performed quite well. Used car prices, probably see a little bit of normalization depending on what production looks like, but those are going to interact I think, very, very similar to what we've seen this year, depending on how that changes. We've got quite a bit of pressure from commodities still that will mainly be focused in the first half of next year. We've seen the increases abate a little bit over time, but we're still going to see some of that year-over-year pressure in the first half of '22. And then ultimately, we are going to continue to make investments. '22 will be another heavy investment year for us as we work towards that $35 billion target with -- honestly, about 2/3 of that program capital is going to EVs and AVs. So really feel good about where we're headed directionally. And we'll work through some of the short-term noises and changes in '22 as we finish the budget.

So that was very helpful. And I think this came up even on the last earnings call, some of the investment that's needed and you just sort of alluded to it again. And obviously, '22 is sort of the start of what's going to be a product onslaught on the electrification side. How should we think about that as it relates to sort of impacting the margins? I think there was a question about 10% in North America sort of always been this goal. Like is that -- assuming the semi issue sort of resolves itself as sort of you laid out, is that still a reasonable target even with some of the investment and some of the ramping up on some of the new product?

Yes. Actually, I think it is, Joe. And I think as we look, obviously, early stages, we think 10% is quite achievable in '22. Again, it doesn't mean that there isn't some work to do to get there. But I think that's a very reasonable goal, even including where we are. And I think one of the challenges, I think that we and others are facing in the industry is the idea of what the margin progression looks like from here to there as we migrate from ICE to EV and through the transition. And I think we've got some encouraging news about what that trajectory is going to look like for us, both in terms of some of the cost things that we've been able to do around EVs, but also some of the other new business developments and the ramp that they're on going forward. And we'll share more of that at Investor Day in a couple of weeks.

Yes. No, that's -- I think it's a good point. I mean, and I'm glad to hear that we're going to -- there's going to be more color there because I think that's clearly an area that investors have been -- that path from ICE to EV is some investors have clearly been focused on. You mentioned or alluded to a couple of times some of the other initiatives. It seems like one of the big ones that GM has really been trying to set the stage for is more of this software and subscription opportunity. So I guess -- and I'm sure we'll hear more about this, and I don't want you to sort of steal some of the thunder, but at a very high level...

You're going to make go through everybody's Investor Day script.

At a very high level, how should we think about this? And how is -- I mean about a high level of the opportunity and also, maybe more importantly, how is GM going about thinking about where they want to play within that ecosystem? Because clearly, you have some sort of core competencies. You have some relationships with the customers, but there's some other tech companies out there that might have additional capabilities. And so how does it all come together?

Yes. No, this is -- you've touched on, obviously, something that we're incredibly excited about, Joe. And I think we -- what we've been trying to do is stitch all this together, and that's really what I think Investor Day is going to be about. We'll have a lot of discussion about it, both on the technical side, but also the commercialization front and some of the work that we've been doing in consumer studies, et cetera. But I think one of the things that I don't think we talk enough about is we already have a massive connected vehicle ecosphere already out there, right? So if you actually think about where we are, we've got more than 10 million connected vehicles. We've already logged 1 trillion connected vehicle miles out of our carpark and where we are. We get about 15 billion high-speed telemetry transactions a day into General Motors, 3 million call center interactions, 45 million mobile app requests a month, really stemming from the OnStar platform and where we are. So we've got millions of customers that are already paying us anywhere from $15 to $50 a month, highly cash-generative, high margin, good customer base that really represents a good strong foundation to build off of. And then the technology side, we've talked about the vehicle intelligence platform, and I'll let Doug and others talk about that at Investor Day, but it really does have the capacity to manage not only all of the loads of what Super Cruise needs to run, driver assistance programs, electric propulsion but really all kinds of capacity to manage future applications. And that's what's really excited. By the end of '23, we'll have that platform already on 7 million vehicles. So it's not just an EV story. It's really a vehicle story. So I think when you look at -- these are just a couple of examples of where we are and where we think we can go with that. But I think the #1 thing to remember about what the connected vehicle addressable market is going to be is getting your vehicles into the hands of consumers, and that still comes back to win them with style, win them with functionality, win them with form, win them with loyalty. And when you combine that with GM's brands, we think we've got the best foundation to lay that going forward, and we'll talk more about that at Investor Day.

One of the things that Mary has sort of talked about in the past, this was the move to EVs and sort of the Ultium platform is a faster clock speed. And I know you've already sort of brought forward a lot of sort of the EV product. As you sort of get further into this process, is there still an opportunity to maybe fast track some other product that sort of hasn't yet been announced? Or is there ultimately a constraint and maybe you want to be a little bit data-driven and sort of see really what -- how sort of some of these initial funds will just go? Because like if you look at what you're coming out with the HUMMER and LYRIQ and they all look great, but they're either high end or somewhat niche, the trucks are a little bit more -- the pickup trucks, the Silverado, Sierra, are a little bit more volume. It seems like there's these areas in like mid-size crossovers, for instance, that where GM sells a lot of units where that space is still wide open for everyone, and there's an opportunity to grab it. And so I'm just curious about the ability to maybe take that mantle and really run with it.

Yes. Absolutely, Joe. And that's why we're so excited about what the Ultium platform provides for us because if you think about the different paths to getting electrification, many manufacturers are basically just fitting a battery into an existing body style. What Ultium does is it gives us the flexibility to build the battery in any way that we need to in order to fit around the vehicles, which are form-designed for style and functionality. So we're very excited about that. What it allows us to do is go faster. So I think what you've seen us do, and this was really evident in the decision to increase the capital from $27 billion to $35 billion is what we want to do is stay on the aggressive end of that EV adoption curve. Ultimately, the consumer is going to decide the pace at which EVs are widely accepted. We're going to help the consumer because we're going to give them variety across the spectrum with great functionality and great capabilities that ultimately, we believe are going to win customers over. And you can't do that just at the high end. There's -- obviously, the vehicles that we're making now are really exciting. The LYRIQ is, as we've said before, the highest clinic vehicle in GM's history. And we're really excited about that. But as we also say is we want to put everybody in an EV, and you can't do that until you start to get to high volume, lower cost entries. And as both -- as scale ratchets up as well as battery technology continues to improve with the generational improvements we've got in Ultium, we feel confident that we're going to be able to really dominate the volumes that are out on the roads with our full suite of product.

Yes. Maybe another way, it looks like GM is utilizing electric vehicle platforms is to enter areas where -- that are more white space for you, and I think BrightDrop is sort of a good example there. It seems like you -- it seems like maybe because of demand, you sort of have fast tracked that a little bit. I know you're using some contract manufacturing for those sort of initial units until sort of the your plant gets ready later on. But -- and you have that sort of one marquee customer with sort of FedEx. But as -- since you announced that, which I believe was earlier this year at sort of CES, I'm sure that, that sort of sales effort has sort of intensified. Maybe you could update us a little bit about what you're hearing from potential customers and fleets about the opportunity there.

Yes. So we have an aggressive plan for BrightDrop. We think it is game-changing technology, not just for the electric bands themselves, but also the e-pallet solutions that we've also tested with some key customers as well. So we think about BrightDrop actually as an ecosystem and the vehicle is a conduit to that ecosystem. So we've already got customers lined up. We'll start delivering the vehicle at the end of this year, and we're focused on really kind of starting to build and aggressively ramp up production the way we can. So we're going to have more that will be a feature at Investor Day as well. But as you're talking about the new lines of business, I can't help but also bring up Cruise automation and what they're doing. I was out in San Francisco earlier this week and got my first ride in the driverless auto. It will be -- I kept telling the tech --I said that car just made a better decision than a human would have. It is just astounding. So we're excited about the path and the journey that Cruise is on. Dan is going to be a featured day 1 speaker for us, and we'll have a little bit of a view into the technology as well, but lots of exciting things going on there.

Yes. Unfortunately, Paul, I guess we are at half hour. And there's so much talk about here, we ran out of time. Cruise is definitely on our list, but we didn't get there. But you wet our beak enough to sort of see what we're going to talk here about -- more about the GM Investor Day in October. So really appreciate you joining us today. Thanks for the update. Thanks for all the color on the GM story and look forward to seeing you at the Investor Day in October.

Well, we appreciate you, Joe, and thanks, everybody, for joining. Lots of exciting things going on at General Motors.

Great. Thanks, everyone, for joining this session. Take care, Paul.

Thank you.