General Motors Company (GM) Earnings Call Transcript & Summary

Okay. I think we can start to get going with the next presentation then. Once again, I'm Ryan Brinkman, the U.S. Automotive Equity Research Analyst at JPMorgan. I'm very happy to have Paul Jacobson with us today, General Motors Executive Vice President and Chief Financial Officer. I want to thank him for coming to the conference and for bringing the GMC HUMMER EV, the 1000-horsepower Super Truck and the Cadillac LYRIQ, which everyone in the audience is welcome to drive. So thanks, Paul, for coming, for bringing your cars.

Well, thanks, Ryan. I appreciate everybody being here and appreciate you having us here today. I was telling, Ryan, right before the mics turned on, I sat in this seat for a number of years wearing a different hat, but it's great to be back at 383 Madison and great to be back in person with everybody as well. We've obviously done a lot of exciting things on our plate at GM. We're about to come into a real inflection point on EV production, as we're just kind of weeks away from opening our first cell plant and initiating production there. And as you've seen from a lot of the materials that we put out, we have a new cell plant opening each of the next 4 years. We've talked about locations for the first 3. We'll soon have a location for the fourth, but we're set to be an industry leader in cell production here domestically as well, which I think is an important piece of the puzzle. When you look at what we've done recently, what we announced on our earnings call with the supply chain, we've locked up all the battery raw materials that we need to through 2025. We're now turning our attention to 2025 to 2030 for the next phase of our significant ramp-up in EV production. But if you look at where we've come in just the last year, our targets have doubled by 2025 from 1 million to 2 million vehicles globally. And we're very excited about what that is. We've got 4 vehicles in market now. As we speak, many more coming next year with the recent reveal of the Silverado, the Blazer and soon to come next month the reveal of the EV Equinox. So as you can see, we're creating a portfolio that addresses the broad swath of customers that, that have come to appreciate everything that GM offers across all of the brands. And we think that, that's a winning solution going forward. I know it stands counter to what some others have said in terms of focusing on just a couple of models, et cetera, but we feel like there's a real untapped opportunity as we go through all price points, whether it'd be at the HUMMER EV or down to the Equinox or we've even teased vehicles that are potentially even cheaper than that for consumers going forward. All of that happens with scale, and that's what we're in the phase of doing right now. So really thrilled to be here with everybody today, looking forward to answering your questions that everyone may have. And lastly, just -- but not least, we'd like to welcome Ashish and Mike and the team from GM Financial here to support us through this. I really appreciate all their support and what they've been doing to help the story. So Ryan, getting the back to you.

Thank you for those introductory, but it sounds like an electric vehicle for every purse and purpose, right? So I thought to start my questions with really a frequent topic area, right, for discussion in the auto industry today, and that is the latest developments with regards to the supply chain. Earlier in the year, some industry participants commented that maybe the semiconductor chip shortage may now resolve more toward the middle of 2022, as opposed to the end, as was previously thought. And in 2Q, however, you did have to hold back 95,000 vehicles, mostly high-profit trucks that were otherwise built, but nevertheless missing some critical components. So can you update us on what is the latest with regard to sourcing? And how could that impact your production over the balance of the year and into next? What are the problems that have been solved? What are the ones that remain to be solved? And what is your latest estimate in terms of when we might finally cycle past some of these issues?

Yes. So I mean that is the sort of the question of the here and now. Before I get to the details on that, Ryan, I just want to give a shout out to the entire GM team, incredibly proud of how resilient they've been, how agile they have been through this because I've had kind of 2 really, really proud moments in my brief tenure here at GM and one happened last year and another one happened this year, which is in the midst of the storm, in the midst of the supply chain crisis that we saw last year, we actually increased our speed at which we're converting the EVs. We announced additional capital going into it, representing the confidence that we have in the long-term vision that we're creating despite the noise that we see in the here and now. And now while it's continued longer than I think anybody had wanted, we're certainly seeing improvement in it. But here, we are doubling the number of EVs that we're going to produce by 2025. So I think historically, when you look at the type of volatility we've had to deal with, it starts to derail long-term strategic plans, but we're actually, as a team leaning in and accelerating on this journey. And I think we're going to see the benefits of that effort going forward. So Q2 was a bit unfortunate, in that we had a disruption late in the quarter. I would say it's not unusual what we've been facing for the last 18 months, but like I said, the timing was unfortunate. We're able to dig out of a lot of these situations in pretty short order. And while we were expecting there to be some vehicles that were built without certain chips, we didn't expect the volume to be that high, which hit us late in the quarter. But as we said on the earnings call, we've made tremendous progress. I think we cleared out about 20,000 of those vehicles in the month of July alone. So while we've said that we're leaning in very, very aggressively to get those vehicles to market because the demand is there, and we need to get them in customers' hands. The team has done a really good job of doing that. So in the short term, a lot of tactical efforts that happen, whether it's scheduling, prioritization, spending a lot of money on priority freight and really expedited freight, air shipping where we need to, to keep the production line full. These are things that as the economy normalizes, whether we go into a recession or not, there's a lot of cost pressures in the system that we've been dealing with that I think will start to work their way out as we get into 2023, '24 and if we see an economic slowdown. So we're trying to be very cautious but not alarming in terms of what we see as potential headwinds down the road. Longer term, we've taken the step of reducing the number of chip families by 95% that are going to go into the vehicles. We think that by the middle of the decade, we'll have 3 chip families and we'll go all the way up to the -- all the way down the manufacturing tier to make sure that we're helping to control the production of those chips partnering with the chip makers themselves, but the simplification is going to be tremendously beneficial to us, as we look to scale and look to get more consistency in the supply chain over the longer term. And we have applied many of those lessons to battery raw materials, and you saw a lot of the longer-term agreements that we just announced at earnings. So a lot of learnings through this period, but it certainly has been noisier for longer than we wanted it to, but really proud of how the teams performed.

Yes. Thanks a lot. That is interesting. Just to maybe push on the last point a little bit further. As you look bigger picture at the supply chain, how would you say all of the various different supply chain issues over the past several years, it could be the pandemic, the patchwork of COVID restrictions, the semiconductor shortage, of course, other component shortages, raw material shortages at times, port delays, how have all of these factors may be influenced your long-term sourcing strategy? You touched on a little bit of kind of vertical integration, but how do you think about balancing like the supply chain resiliency versus the supply chain cost? And how does this maybe factor into like geographic sourcing decisions to?

Yes. Well, I would say that I once had a mentor shared with me that today's wounds are tomorrow's scars that you tell stories about. And I think that's kind of the environment that we're in right now. We've had to learn a lot about managing the supply chain very aggressively and holistically, not just for our benefit, for the benefit of our suppliers as well to try to get more information flow across the board, et cetera. But what you've seen generally is sort of more of a control all the way up to supply chain, where we need to and where we have got to -- have critical items going forward. The chips is just one example. You mentioned the battery raw materials. We're open for business on battery raw materials, and that's what we've shared with all of the processing companies and everybody that we've partnered with. We're not looking to say we need x kilotons of lithium or cobalt or nickel. We're in there -- we want long-term partnerships because we see an opportunity to help fund exploration initiatives, to help fund new mining projects, et cetera, whether it'd be through longer-term contracts or it'd be through investments together. We're here to think creatively because we want that partnership to work. That's the only way we're going to see EV inflection as if we're concentrated with each other on supply and making sure that we've got new sources. We are also using it as an opportunity to increase resiliency in the supply chain. We're doing a lot of onshoring the deal that we talked about with Livent to bring processing into the United States. It might cost a little bit more, but when you look at where we are on logistics and shipping rates and moving everything around, I'm not sure that won't be a really, really good long-term investment, not just for continuity but also for cost going forward as we get better at that and so on. So I think it's been very consistent with the policies of the administration in Washington. And really what we all want, which is to bring more of these high-quality jobs back to America. And I think with what we're doing in terms of securing that supply, it lines up really, really well with our goals.

Interesting. Thank you. And it must come as a relief that after the earlier tremendous runoff, peaking in late 1Q or early 2Q that the prices for many commodities used to manufacture a car are now materially lower even than when the Russian invasion of Ukraine began. And the price of oil, well, elevated historically, has come back down too. This will, of course, lead to lower cost to GM over time. But the true story is more nuance, right. With suppliers being competed on a lag, steel being negotiated for in advance. And presumably, you're seeing some impact of inflation on your own, like internal logistics, labor might reset in 2013 -- 2023. So when you take into account the reseating spot prices, but maybe also some of these other inflationary pressures that are still bubbling up, what is the sort of latest updated assessment you can provide in terms of how material costs may track in the back half of the year? Or if you were to sort of straight line what you know now through the end of 2023, what might it look like next year? Could it even be a tailwind next year? Or still you think more headwind?

Yes. So as we touched on in February, we see sort of total supply chain and logistics costs up about $5 billion year-over-year. Some of that is consistent with the increased production that we've talked about 25% to 30% higher than last year, but a lot of it is just the inflation inherent in the system, whether it's commodities or it's shipping rates, it's trucking rates, it's across the board. We've seen that. And we have started to see, at least on the commodity side, some relief coming in, as you mentioned on that. We've talked about how we've got a portfolio approach of commodities. So as it relates to steel, we have some on spot price, we have some on index contracts that benefited us in 2021. It's hurting us a little bit in '22 and probably have a little bit of a lag effect in 2023. But overall, we should see it trending down at these levels consistently and hopefully, even trending down before. But what's been amazing through that, you mentioned oil prices and gas prices is the resiliency of the consumer and the demand for the vehicles. So as we refreshed our full-size trucks and SUVs, the demand for them has far outstripped our ability to produce in this environment. And that's created an opportunity to make sure that we're level setting the input costs as well as the pricing going forward. And we've obviously been a tremendous beneficiary of that going forward. So that's what gives me the confidence to continue to reinforce our EBIT target, which we've affirmed several times now throughout the year in which we're still tracking to that 13% to 15% on EBIT. We've got confidence in our cash flows going forward, which is why we're able to accelerate. So we've got to continue to watch it. I think it's too soon to say whether it will be a tailwind in 2023. We're obviously watching that. We're getting into the beginning stages of our '23 budget planning. We're just wrapping up our long-term plan, which is, as you know, served as the foundation for Investor Day, last year. We'll be presenting that to our Board with the updated environment and then more to come on that, then we turn our attention into the budget for next year. So we'll have more to come towards the end of the year.

Great. Thanks. I wanted to ask on what you think is the right organizational structure for GM? And how GM goes about assessing what is the right structure, either from an internal managerial perspective or from an external segment reporting perspective, GM last changes reporting segments, I think, after having sold Europe and folding South America into consolidated international operations? Ford for its part has outlined plans to segregate its EV business from its internal combustion operations along many different lines into no longer report by geography. BrightDrop, I know is not a reporting segment, but I think is managed separately. Realizing that the reorganization can also be distracting too, right? Does it make sense to look at internal or external reporting any differently, as the industry undergoes changes, including as it relates to, say, electrification?

Yes. We evaluate that pretty constantly, Ryan. I think that we did a lot of restructuring back in 2018, 2019. We talked about getting an organization in place for the EVs. And we've got a lot of chief engineers that are specifically focused on the EV programs going forward, but we also recognized there's a lot of content sharing with the ICE portfolio, they need brakes, they need windshield wipers, they need turn signals a lot of that. So we're trying to harness those benefits between EV and ICE, while having a team that's fully dedicated to EVs, both in terms of profitability as well as getting the quality and the launches on time and with the quality that we're looking for. So we need to maintain that flexibility. I think we all recognize that there is an absolute need for key performance indicators, specifically as it relates to EVs. Stay tuned for us through the rest of this year. We've got an Investor Day coming up in November. And I think you'll -- we'll see more of that in terms of how do we draw the road map from what we outlined in 2030 at Investor Day last year to the '23, '24, '25, so that we can start to chart a course and give everybody the confidence that if we hit these objectives, and this is what you should expect to see, get heightened confidence that 2030 is in our sight. Because I can tell you, we still are very confident in those goals that we put out there. And we recognize that we need to prove it, but we're going to start drawing that road map for the short to medium term of how we're going to get there.

Great. Thanks. And I'd love to get your latest thoughts on Cruise. Both from an operational perspective, as you continue to roll out San Francisco, as you look forward to Dubai next year, but also maybe from a financial or capital structure perspective, after the latest transaction that was announced in March. In March you invested $3.5 billion. And after purchasing SoftBank's stake, I think your ownership has increased to roughly 80% from roughly 70% prior. When Microsoft invested, you had put out a press release saying that it was at like a post-money valuation of $30 billion or so. Have you said or can you say today at what valuation the most recent round was done at? And look, whether we're multiplying $30 billion times 80% or 25% or whatever it is anywhere in that neighborhood, given parent GM's $55 billion market cap, which includes all of your EBITDA and a great many other assets, apartment from Cruise, GM Financial, everything, it does seem like the valuation of Cruise is not being very well captured in GM stock price today. So firstly, do you think that's the case? And then secondly, if so, what are your thoughts on a path toward better realizing the value over time?

Well, I'll first respond by saying I don't think GM's valuation is where it should be. So if you buy GM in a discount, you get Cruise for free is the way that I look at it from that standpoint. But what we had with that last transaction with SoftBank, I don't look at that as a valuation exercise. I look at that as an opportunity was presented to us, and we saw an opportunity to increase our ownership at an attractive valuation, we exercise that. It's part of the flexibility of the strong balance sheet that we have and the belief that we have in what Cruise is doing. So I think the best proxy for the valuation of Cruise is, are we on track for the business plan? And the answer is yes. Yes, we are. So with the commercialization efforts that they have, and we're looking to ramp up both the operational area as well as the hours that we're collecting revenue going forward, I think the team is really, really well positioned to take this to the next level. And I think you'll hear more about that coming up in the fall. So that's where we are on that. I think from an ownership, from a capital standpoint, we've said all along that we're wide open to thinking about it. But as there were a lot of questions about making it public 1.5 years ago, think about the distraction that would be in today's market where we've seen pre-revenue companies and valuations dropped precipitously. We've got Cruise very focused on executing its business plan, ultimately running the business for cash, and that's where the valuation is going to come. And as we start to get that and we'll start to see more confidence in that, we're open to thinking about what is the right structure for that. And as Mary always says, focusing on doing the right thing for our shareholders.

Okay. And I think another path toward unlocking shareholder value, you touched on this in your opening remarks, is to demonstrate strong progress in the area of battery electric vehicles. Can you remind us of some of your more important targets there? What are the most important electric vehicles that you'll be launching over the next year? You've updated, I think, is it 150,000 reservations now for the Silverado EV, 70,000 for the HUMMERs. Is there any number that you can share for the Cadillac LYRIQ? Have you started taking orders for the Equinox or the Blazer EVs yet? And is there any update that you can provide there on those -- what has been the popular reaction to those more affordable EVs, right? Because so far, it's kind of a higher-end product. And how should investors kind of best gauge your progress? Is it by the number of launches, whether they launch on time, the sales volume, the quality? How should we think about that?

So obviously, the next few years are going to be pretty active for us. I mean we're talking about taking from our current levels of production up to 1 million EVs in North America by 2025. That's exponential growth in production. And as we start to open the battery plants and succession, you'll start to see that. We've started in kind of limited waves of production because it allows us to take vehicles to market faster, but we still have to scale up production. So the vehicles that we're producing today are coming in at a higher cost because we're buying the cells where we're doing it on a much, much lower volume, less efficient. Those scale benefits should start to accrue going forward. And that's why we have the confidence that we can get EV in the portfolio to isolate margins by the end of the decade, late middle part of the decade, I think, is exactly that we've said. So the interesting thing, and this is how we've got to figure out how to draw the line on the KPIs for the EV portfolio is not all the vehicles are going to be created equal in profitability, as we're going through an aggressive launch cycle. So if you look at the HUMMER, you look at the LYRIQ, as we scale those production, we're going to see those benefits improve and the profitability improve on those vehicles, while we're launching new vehicles, which in terms of the aggregate volume might be holding back what you see. So these are some of the things that we're thinking about. Historically, we haven't given model level profitability. Do we need to do that in the future to show that juxtaposition between things that are in full production, things that are in start-up. So I think it's pretty remarkable what's underway right now just below the surface and coming to us in 2023. You touched on the orders and the reservations. I think this is one of the most encouraging points that I've seen in the EV portfolio at this early stage because one of the things that we said at Investor Day last year is that we see EVs as a growth opportunity for GM. This isn't just a case of -- if I stop selling an ICE vehicle and I substitute a lower-margin EV, it's not a very compelling story. The compelling story is through the transition that we can actually grow our market share and we can grow our reach. And when you look at the orders for the HUMMERs, the orders for the LYRIQs, the orders for the Silverado, 60% to 70% of those orders are coming from people that are new to GM. This is exactly what we've said the thesis is because where we've underperformed in those markets historically. With the ICE products, the EVs are in high demand in parts of the country that we've underperformed. So we see this in the aggregate as an opportunity to grow revenues and ultimately scale up that EV business to be unparallel while the ICE business is unwinding over the next 15 years. That doesn't mean that the ICE business is worth 0. It means that the ICE business is a significant cash engine that's funding this start-up that's going to be experiencing rapid growth beginning next year for us and really quickly inflecting into profitable territory. And that's what we see going on. And what's intriguing about that is being able to do it with customers that are new to GM, combined with the industry-leading loyalty that we have on the ICE brand.