General Motors Company (GM) Earnings Call Transcript & Summary

Welcome, everyone. My name is Edison Yu. I lead the U.S. autos equity research at the bank. It's my pleasure to welcome the CFO of GM, Paul Jacobson. Thank you so much for joining.

Thanks for having us. Appreciate it, Edison.

It's been a dynamic start to the year, to say the least. We have tectonic shifts in U.S. policy. Generally speaking, I think most people would agree, U.S. automakers, U.S.-based automakers are the relative winners. You really prioritized pricing since you took over the helm. At the same time, based on some of the comments and latest guidance, it does seem that GM is signaling ability to absorb some of the costs through volume. How are you thinking about this balance of volume/market share versus pricing incentives?

Yes. So let me start at the beginning. I mean, first of all, I don't think what the administration is doing is trying to pick winners and losers necessarily. I think there's clearly a policy shift, policy agenda. And I think, as you said, there's been a little bit of a big shift since the beginning of the year, but that's been true for each of the last several years, whether it's been chip crisis or demand changes, et cetera. But I think what the team has really demonstrated, I think, is a sense of resiliency and a let's just figure it out, grind it out and make sure that we continue to run the business as efficiently as possible. I'm incredibly proud of what the team has been able to do and the results they've been able to publish in spite of all that uncertainty and what we've generated. And I think this is just another step. I think you saw the announcements last night, about $4 billion of investments into U.S. manufacturing. It will increase production by about 300,000 units in the U.S. for the U.S. It's through a combination of underutilized capacity shifting from plants as we see where demand is responding to customer trends as well as creating some incremental production in some of our best-selling units, particularly full-size SUVs and Equinox, et cetera. So what we're trying to do is make sure that we recognize the variables that are changing and go after them and go after them in a way that's efficient that responds to where our customers are. and also help to drive the product portfolio the best we can. Because your question about pricing, too, is I wouldn't say that been really focused on pricing. I would say we've been focused on discipline throughout the industry. Pricing is an outcome of that. But discipline throughout everything that we do is really helping to create more consistent results and a more consistent offering to customers. It benefits them in terms of having some certainty. We have more certainty and consistency in residual values, et cetera. And it benefits us because we're able to plan better. So I think this industry has been very cyclical, not unlike past industry that I've been in as well. But what we've got to do is avoid the self-imposed cyclicality. What are the things that historically we've done but actually accelerate or amplify that cyclicality over time. And one of the ways that we typically contributed to that was with inventory management. We would take inventory way up. We'd find that demand slowed and then we'd have to discount steeply to be able to do that. That leads to a significant decline and a rapid decline in cash flows and doesn't allow us to plan. It doesn't allow us to budget. It doesn't allow us to properly allocate our capital according to our policy. So it's really that discipline more than focus on pricing because you can say you're focused on pricing and just take it higher if the demand isn't there, if you don't have the quality of products, if you don't understand where you sit in the competitive landscape, that's a failing strategy. But what we've been able to do is really focus it on the customer, our portfolio and the demand for that portfolio and to a large extent, I would say we've been able to be independent. So we're not responding immediately to what's going on in the market because we're focused solely on our demand set and our product portfolio. And that's really benefited us, and I think it's contributed to a lot of the outperformance that you've seen against some of our competitors.

I wanted to touch on the announcement yesterday. Obviously, that was very timely for this conference, right? You just mentioned, I think you added about 300,000 units of production that takes you to about, call it, 2-plus million in the U.S. How do we think about, I guess, the distribution of that 300,000? Is it primarily on the full-size trucks? Is it kind of split evenly between that and some of the other vehicles?

Yes. It's really a combination of all of it, and it's really went on focusing how are we going to utilize the plants, how are we going to create more security in our plants given the uncertainty of where EV adoption is. So if we start with Orion, we had planned for that to be a big EV plant as we were thinking about rapid expansion of electric vehicles. And clearly, we haven't seen that happen. So as we look at that capacity and we look at the landscape where we're in, pivoting that to full-size truck production as well as incremental full-size SUV production is going to help create and satisfy the demand that we've already seen in the marketplace for our industry-leading products and give an opportunity to be able to produce and increase production a little bit more by benefiting from that higher utilization. Then you've got the Equinox, which we're going to be able to create some incremental production as well as shifting it and use that in a great solution that's going to allow us much like Spring Hill to be able to produce EVs and ICE vehicles on the same line. That optionality is really important and critical for us as we move forward, being able to respond to where EV demand is going to be. And ultimately, why we chose Spring Hill as the location for our Investor Day last year was to showcase that and then to be able to move the blazer into Spring Hill, which will help us ultimately balance that plant as well as we see some of the ICE vehicles that were produced there starting to come out. So I think this is a great example of how we can pivot, how we can adjust, how we can be resilient in the face of an environment that's changing around us. I know a lot of the fear from talking to investors was that the policies that are being enacted by the administration were going to create a significantly run on -- significant run on capital, $4 billion is a lot of money, but I think we've been able to thread that in ways that are capitalizing on the next generation of vehicles coming in to do it efficiently, not building walls that we don't need to build where we can fill plants up and also keep our capital forecast in line and consistent with where we've seen it. So we've taken it up a little from $10 billion to $11 billion in 2025 to $10 billion to $12 billion over the next couple of years. But that's our job is to balance that to reprioritize and reallocate capital, and I think the team has done a good job.

Just one housekeeping on the 4. Does that include the [indiscernible].

No, that was -- this is additional. So we talked about that Gen 6 capacity that is going to be there in Tonawanda, and that's going to help us with that truck. But it coincides with the next generation and what those Gen 6 engines are going to go into.

And I guess as it relates, you mentioned capital, and obviously, we've heard similar feedback from investors. Now that we have some numbers around the CapEx, does that give you, I guess, a bit more line of sight into the capital returns and how quickly or how aggressively you can get on that?

Well, I mean, I think we said at a conference a few weeks ago that we expect to be in a position to resume potential share buybacks in the second half of the year and potentially as soon as the third quarter. We're trying to get through the uncertainty just like everybody in the market is from that standpoint. And I think as the administration has rolled out the tariff policy and how it's going to be implemented, as we've seen demand remain relatively stable. And as we've seen a market that seems to be moving past it a little bit, it gives us a little bit more certainty around the cash flows. And that's what we've been looking for is we are absolutely committed to our capital allocation policy, but we've got to make sure that we maintain that confidence going forward. And through this period of uncertainty, I think it was a good pause. As I've mentioned before, we were still in the market for the bulk of the second quarter as the banks that were party to that accelerated share repurchase were still in there retiring their shares, covering their positions, et cetera. So we were still in the market doing it even if it was under that ASR. But I think we'll be in a position as soon as the third quarter to potentially start repurchasing shares again.

I want to get your thoughts on kind of what you're seeing on the ground, particularly in the U.S. When the tariffs first were announced, obviously, we saw a big surge in sales. I think you probably called that some maybe prebuy. How is the consumer looking from your perspective? And do you think you're starting to see some of that prebuy kind of wear off based on kind of last month sales?

Yes. I mean we've certainly seen that come back down. And I think the question out of earnings was going to be how far does it come down? So we were running at about a 16 million SAAR. That spiked in April and first part of May up to high 17 million 17.8 million. And we've seen that come back down in late May and early June. And we're seeing it around that high 15 million, 16 million mark. And it's still been pretty recent. It's only 2 to 3 weeks. And -- but we feel comfortable that at the end of the day, it's going to kind of settle out where we thought it was going to be around that 16 million unit mark. So we're watching that closely. Like I said, it's pretty new information. But certainly, the sales rates and the volumes that we saw in April and the first part of May are going to -- we don't expect them to continue through June. As far as where the consumer is, I think, look, many competitors have announced pricing actions and so on and so forth. I think as a general rule, they've been somewhat less than what expectations maybe were right out of the announcement from that standpoint. So I think, hopefully, that results in some stability in the consumer going forward. I think we don't ever want to be in a position where we're shocking the consumer and reacting. So you raise prices, you create a lull in demand and then you have to start discounting again. We want to be more consistent about how we do that. And that goes back to that discipline that I talked about in the answer to the first question is the more disciplined you are, the less inventory you have sitting around them, the less you have to withdraw pricing and discounting in order to address those inventory builds. So really proud of how the team has managed that. I know historically, there have been temptations even from the finance side of the house to go ahead and produce to try to hit numbers and so on and book those wholesales. We got to get out of that business and focus on where that end consumer is and maintaining that discipline, I think, has helped us through this as well.

On the competition, I sort of -- you sort of I think, would agree that there are certain kind of structural advantages maybe GM has with some of the Asian OEMs. Are you surprised they actually haven't raised price more given their cost structure is kind of unfavorable?

Well, I mean, I won't comment on anybody's specific pricing strategies or what we're seeing. I think that's a question for them. As I mentioned, our approach to pricing is looking specifically at where our demand set is, how we discount, et cetera. And I think when you look at the relative incentive levels, not just based on where the industry is today, but based on where we are in relation to that industry. I think you see the power of our disciplined approach. We're running 200 to 300 basis points less than the industry average on discounting. And that's generating significant incremental revenue to our products, and that helps us because I think so much of the history of this business has been focused on cut cost, cut cost, cut costs. Well, you can do that to a point. But once you start cutting content out of the vehicle and cutting costs, I mean, you can have the cheapest vehicle produced in the world. And if there isn't demand for it because customers don't respond to the features or whatever you cut out of it, it doesn't matter. You don't have anybody to sell it to. So focusing on that margin balance, where you're also looking at the revenue side of the equation and what are those features that customers want, that's really benefited from us. We've benefited from that. So that's our approach to pricing. And I think, like I said before, it served us quite well in terms of our financial performance and our ability to deliver more consistent results.

You mentioned costs. I think most of you would agree, GM has actually done an excellent job on the cost structure. With tariffs now, you indicated you would actually mitigate quite a bit of this. Is that kind of going according to plan on the tariff mitigation side?

Yes, I would say so. And I appreciate you saying that because we actually don't hear that we've done an excellent job on cost. So that's -- I'm flattered. Thank you for that. And anybody in the meetings later today, if you want to say it, we'll take that, too. But I think this is important in the disciplined side of it because as much as I talked about, cutting costs in the vehicle and going after customer content is not the right way to run a successful business. Going after cost and being more efficient in all those things that the customer doesn't see is absolutely critically important. And we had good success with our $2 billion cost reduction. When we rolled out the -- what we're calling it self-help, et cetera, the 30% offset of the tariff impact, we really put that into 3 different buckets. One was go-to-market, which we said we didn't need to take any price increases, et cetera. We just needed to maintain some consistency. And based on how we started the year, we felt like we were in a good position to do that. That was the first bucket. The second bucket was the footprint changes. So things like what we did at Fort Wayne, where we increased the line rate to get an extra 50,000 units of trucks capacity annually in Fort Wayne simply by hiring a few people and increasing the line rate, driving more efficiency and utilization out of the plant. The announcements that we made today -- or last night, sorry, are -- they're going to help us. But at the end of the day, it's going to take a couple of years to get that, as we said, early '27, late '26 before that production starts. And then the third bucket is going to be cost reduction. So we cracked open the COVID playbook. We were really careful to look at it and study how did the company respond really quickly to that shock to the system, if you will. And what are some of the lessons that we could apply today, recognizing it's a very different environment. Back then, we could cut production and we could cut costs because nobody was leaving their house and certainly not going to dealerships to buy vehicles. Today, they are. In fact, for the first couple of months, they've been going to dealerships faster than they were before this. So there are things that we can do and manage our cost down. And we had put a $500 million to $1 billion target in there. I'd say we've made really good progress in the first 6 weeks. We're not where we need to be, but 6 weeks into it, it's in a really good spot, and I feel confident that we'll be able to get there. So it's important to note, especially as an analyst, you're really focused on the quarter performance. The second quarter, we expect will be the highest tariff impact we have because ultimately, it's going to take time to work some of these net offsets in, et cetera. So there will be a little bit of seasonality that works its way in, but we feel good about our overall strategy and being able to work through it.

Two-part question on EVs. GM has obviously done a tremendous amount of investment in the U.S. on EVs. First part, how does one think about the kind of the regulatory backdrop we're in right now in the context of all that? And then secondly, is there an opportunity to kind of collaborate in some way to kind of spread that cost around? I know you worked with Honda. Is there more room for that, something like that?

Well, I think we've got good partnerships, and we've got an open mentality to look for those. And the work that we're doing with Hyundai that we've announced at least the framework and there will be more specifics coming around that, I think, shows our willingness to collaborate and find efficient solutions where it makes sense. I think there are areas that we need to make sure that we maintain a competitive advantage where we can. So we have to be careful about that in areas where we can make parts of our brand distinctive, et cetera. So I think it's finding that right blend and being able to do that. The Honda partnership worked out really well for us in various aspects. We're excited about what we can do with Hyundai and excited for a lot of the things that we have in our own pipeline as well.

Shifting gears to kind of autonomy. You've been integrating the Cruise team. Also a 2-part question. I guess, how does one think about the level of investing going forward on autonomy in the context of the $10 billion to $12 billion? And then separately, there's -- you have a partnership now with NVIDIA, which is getting, I think, a lot of attention on the AI side. What's the future there?

Yes. So when we made the tough decision to walk away from the robotaxi business, it was really one that was based on capital availability, notwithstanding the fact that autonomy had been experienced a pretty boom in interest in the capital markets. When we went to the markets, what we were finding was a lot of people were willing to put in a little bit of money, but they were only willing to put in a little bit of money after GM put in a lot of money. And that was something that when you look at our cost of capital, when you look at our capital priorities, funding a robotaxi operation and building that wasn't going to be something that we saw as a sort of good sort of disciplined use of capital going forward, especially against all of our other commitments and priorities. So we made that decision. It wasn't walking away from autonomy. It was walking away from the robotaxi side of it. So the personal autonomy, I think, is something that's still important. And so what we've done is we've retained some of those engineers, focused that on personal autonomy. And at the end of the day, we said we'll save about $0.5 billion this year and working our way up to saving $1 billion a year versus what we were spending on the Cruise. And that will be a lot more capital light because it coincides with the work that we were doing on Super Cruise and L2, L3, ultimately, that train going forward. So we think it was a much more efficient solution. I mean we're grateful for what the Cruise team did. It just -- it's part of the tough reality of capital allocation and prioritization that we had to make that decision. But I think it's the right one for the shareholders of GM.

On the -- I guess on the revenue side of that, when do you think you can kind of start monetizing those efforts with higher level of personal autonomy?

Well, we're already kind of seeing that a little bit with Super Cruise. And I think this is a good test bed for the commercial features and customers' willingness to pay for those features. So our strategy with Super Cruise has been a little bit different. So customers buy it upfront, pay for the hardware package, get it for 3 years. And then at the end of 3 years, we see opportunities for them to subscribe to it and continue to subscribe to it. So if you look at that, the customer elections and adoptions of Super Cruise are actually increasing exponentially. We expect that to double this year. And it's a little bit different than those companies that are actually putting it on every vehicle and then soliciting folks. We think this is more efficient because people will cover the cost of the hardware who want it. And what we're seeing is customers who have it, love it. And so it's in the really early stages of coming off that initial 3-year prepaid period, but we're now seeing attachment rates north of 30% in that for people whose 3-year period expires and they're re-upping for a new subscription. So we're going to be really focused on that because obviously, that's incredibly high-margin revenue for us going forward. And I think it's indicative of what the market is going to eventually be for that. But we've got to keep up with the functionality. Clearly, there are a lot of companies that are out there that are making great strides in autonomy. And we need to figure out at the end of the day, do we continue to go it alone? Do we partner with somebody? Do we enter into strategic relationships, et cetera. So we're working through all that to try to find the most efficient way to get the best products to market for our customers.

What's the -- I guess, the biggest obstacle to getting, I guess, much, much higher Super Cruise adoption? Is it cost? Is it education to the consumer?

Well, I think it's the education, and this is the part of the strategy of going out and having a prepaid subscription along with the hardware for 3 years is get people comfortable with it, et cetera. I think over time, and we're -- like I said, we're dealing with really small numbers because remember, the vehicles that are rolling off that 3 years were during the peak of the semiconductor crisis. And as we said before, semiconductor related to Super Cruise for some of the most heavily impacted chips that we saw. So they're still relatively small numbers. I think we've got to focus on how do we reach our customers, how do we explain the value proposition, et cetera. And then ultimately, over the long haul, how do we make sure that we understand and are able to capture the second and third owners of the vehicle going forward. I think this is going to be integral to the software revenue strategy overall as we expand that into software-defined vehicles is making sure that we're marketing to the vehicle owner, whoever that might be, even if it's not the initial purchaser of that vehicle. So a lot of good work going in here. I want to give a shout out to Ralph Darmo and the entire GM Rewards team. We just rolled out a new loyalty card with a new bank partner. We've seen some really good success with that. But I think that rewards opportunity, the co-brand card is a real opportunity for us to build those muscles on that direct-to-consumer, that B2C business that historically, we're going to have to get really good at in the future in order to help maximize and drive the revenues from personalization and so on. So really encouraged by that start. It's been a couple of weeks. And if you haven't already, go get the new GM Rewards card, that's my free promo for that. But lots of exciting things coming alongside that.

I'll trade in my Delta card.

I'm a shareholder of Delta. You can have 2 just plug ours into your Apple Pay and everything else, but happy for you to use both. Drive your GM card in the airport to get them a Delta flight will work great for my family.

So switching gears, I actually -- we noticed that there's a very fancy Cadillac dealer in Paris, very established. Any thoughts on GM kind of taking closer look or getting bigger in Europe?

Yes. So we have previously announced that we're targeting Europe, but it's very, very different than the way we've done it before. I think the notion of having a lot of assets and a lot of infrastructure over there, we really can't do it that way. So we're doing much more of an asset-light model, bringing our electric vehicles there. What we've seen is that the value that we can get for them over there incrementally somewhat a little bit better than what we've been able to do here given lower adoption rates here in the U.S., although they're performing well. So the idea is, can we ship some production over there? I think we're continuing to watch it really closely. What we've challenged the team is we can't get too deep in the cost structure before we've started to build up some of the success. So what you see in Paris is what I would say is a dip the toe in the water type approach to test it. We've seen some really good results. I mean it's the #1 selling EV, luxury EV in its class in France. We saw car of the Year from many journalists in Germany for electric Vehicle of the Year in that segment, which is a huge testament to what we've been able to do with the Cadillac LYRIQ and what it means to consumers. So I think we're meant to get it out there, but we're meant to do it as efficiently as we can so that we can watch the market and scale appropriately rather than just putting a lot of assets and trying to make something work.

Kind of in relation -- and this last question on my end. GM is getting into F1 in a really big way. Their crosstown rival is also getting involved in a different way, though. Why do you think there's such a big push now from U.S. automakers to get into F1?

Well, I think when you look at GM Motorsports, we have a long legacy there, and we'll be in Le Mans this weekend as well as I know Ford also will be and looking forward to spirited competition in those classes. But when you look at the success that we've had, whether it's in Indy, NASCAR, IMSA, Le Mans, et cetera, that F1 is a natural opportunity for that. But what I would say is it's a little bit different. I mean -- and it's not just the premise of your question was Europe, but I think you look at the growth that we've seen in North America and throughout the world, it clearly is an amazing brand and an amazing testament to racecraft technology, et cetera. But I think it's also an opportunity to really amplify the Cadillac brand. So we were able to go in with our partners at TWG Motorsports, incredible partners to have and absolutely committed to that success of that team and what we bring to the table in terms of building our own power unit, we'll bring that to the grid in 2028, but also participating in the ownership of the team. That's going to be really important because it helps us to not only amplify our brand, but also capitalize on the -- what we expect to be the success of that team going forward and being able to share in the revenues and the value accretion from that team. But if you just look at some of the initial things that we've done, I think the Cadillac logo -- Formula 1 team logo reveal that came out, I think, had 9 million views on social media. That blows out of the water, anything that Cadillac has done on its own, et cetera. So this is an opportunity not just to showcase it, but to really amplify the Cadillac brand, not just throughout Europe and the world, but even here in North America. And I think represents a really great opportunity for us going forward.

Well, we're looking forward to that for sure. I'll open it up to the audience for a quick question. I think we have time for maybe one.

The hardest part is I have to convince my children to drop their favorite teams and have a new favorite team next year. So...

Thank you so much for coming. Really appreciate it. Just a quick question on segmentation between the different electrified lineup for Chevy, for GMC for Buick and now with Cadillac, the IQ. I saw my first IQ in the street, by the way, look great. What's the strategy going forward with -- in terms of -- is there a cannibalization potential there with too many EV models out? And what do the economics look like for the larger scale EV, whether it's the Blazer or the Cadillac? Is the profitability the same as the ICE for those models? And what's the path forward in the next couple of years and the future of driving profitability for the 100,000-plus models of the Cadillac?

Yes, sure. So first of all, I appreciate the kind remarks about the Escalade IQ. I know the team is incredibly proud of that and the people who have gotten one have been raving about it. So we're excited about that vehicle and what it represents alongside that premium brand that we were just talking about going forward. So look, electric vehicles, we started this, and I know many people didn't believe us when we said it at Investor Day a couple of years ago, that we saw EVs as a growth opportunity. And we're pretty confident at that time that we could pick up share in EVs at the same time we were growing share in ICE vehicles. And the market really didn't believe us. But you look at our ICE penetration right now, we're up 2 points of share year-over-year, running in the 17s, which are numbers that we haven't seen in more than a decade, which is a testament to that vehicle portfolio and what I talked about before. But at the same time, even though EV adoption is flat to slightly down, we're growing faster than many other people. And Chevrolet recently, just Chevrolet became the #2 seller of EVs last month in the country. So General Motors has a clear lead in #2 in electric vehicles. So we've been able to do that. I think the difference in our EV strategy than what you've seen from many others is it goes back to that platform. So while the hype of EV adoption 3, 4 years ago, people generally perceived us as being late, and we probably were, but we were focused on that platform. We were focused on what Ultium could do. We talked about being able to switch form factors and switch chemistries in the future, et cetera, and that flexibility was really important. But also the flexibility for the portfolio because the propulsion system is the same and the batteries are shaped -- put in different configurations, but they're the same battery cells, same motors, et cetera. It allows us to build a variety of top hats and build a portfolio much more efficiently than if we're just building single set electric vehicles. So that helped. And I think it's put us in a position where we can be successful even in a slower adoption world. So as we look at what the next 5 years might be, and let's assume that the administration is successful in sort of bringing back some of the regulatory requirements that we're basically trying to put the industry to 50% EVs by 2035. It's clear the consumer is not ready for that yet. But we do think EVs can continue to grow, and we can be a meaningful role in that. We talk internally about the #1 thing that we can do for our multiple and market capitalization is get EVs to profitability. And we're on that journey, a big step several weeks ago when we announced the new LMR chemistry, the new prismatic can form factors as well as doing LFP with our partners at LGES, that's going to save us thousands of dollars and ultimately make the vehicles that much better going forward. So we're committed to getting EVs profitable. In fact, if you look at our capital expenditures around EVs, it's going to look different for the next 3 years than it did for the last 3. Last 3, we were building out a portfolio. The next 3 years of capital and engineering are focused on taking that portfolio and making it as profitable as we possibly can. It will take a while to be able to get there to the same level of ICE, but we believe that it can be done, and we're on a journey to be able to do that. We said in the first quarter that about 40% of our vehicles are variable profit positive. We weren't VP positive at the fleet level like we were in the fourth quarter, primarily because of mix. But we're focused on getting each individual offering to that level and being at 40% of our product portfolio is, I think, a great first step. We have a lot of work to do, but we're committed to being able to do that. And ultimately, we think much the same as our ICE portfolio, we can deliver EVs that customers want and that customers are looking for. And that's why you've seen us being able to grow that share despite the fact that in the EV space, our incentives are less than 50% of what others are offering in the marketplace. So we think that's a much more sustainable approach, and we expect it to be successful for us over the coming years. Thanks for that question.

On that note, I think we are out of time.

All right. Well, thank you for your time. Thanks, everybody, for joining us. And for those that have listened on the webcast.