General Motors Company (GM) Earnings Call Transcript & Summary

All right. Good morning, everyone. For those that don't know me, I'm Andrew Percocco. I cover autos here at Morgan Stanley. Pleased to be joined by Paul Jacobson, CFO of General Motors for the next session. But before we get started, just a quick disclosure here. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. All right. With that out of the way, Paul, I just want to pass it to you if you've got any opening remarks for the audience in terms of the setup for the remainder of the year and kind of how you see the business evolving over time.

Yes. Great. Thanks, Andrew. Thanks for having us, and thanks, everybody, for being here today and for those joining the webcast. This year has been a pretty interesting one as we started, I think I said in January or February that the year had gotten off to a pretty calm start and then suddenly Iran happened, and it's been a lot of uncertainty. But the team continues to navigate really, really well. I think the story of the year has to be the consumer. It's been remarkably resilient in the auto space, and we've seen that over the last couple of months of industry demand, probably been a little bit stronger than we even thought coming into the third quarter. But the business held up well. I think we are doing quite well on production. Remember, as we think about where SAAR is and so on, remember, we're a wholesale business. And so we don't necessarily get affected by the day-to-day. It helps with the inventory and management. But what we're really looking for is to really chart that course. And as we sunset the pickups and go into the next generation of pickup trucks next year, pretty optimistic about where things are going.

That's great. And maybe just picking up there. You mentioned the third quarter has been stronger than you expected. SAAR has held up better. What does that mean? I think initially, you were expecting 3Q to look similar to 2Q. Has that changed at all versus your expectations? Just curious how the quarter is shaping up. And as we think about going to the fourth quarter, with the changeover happening, I think you had communicated a heavier seasonal weakness in the fourth quarter than normal. Has that changed at all just given the resiliency that we've seen in the consumer? Or is all of that still your expectation there?

No, we're -- the quarter is tracking pretty consistently with where we thought. So as you see a little upticks in demand, keep in mind that we're max production pretty much everywhere across the system. So when we're wholesaling vehicles, that's really the driver. So inventory might go up and down. But what that strong demand allows us to do is maintain consistency in pricing and incentive levels and making sure that we're continuing with our inventory discipline that we've seen. So things don't get out of balance. And I think the team has been -- has executed well. As we look at the fourth quarter, fourth quarter is typically seasonally weaker than Q2 and Q3. This year, it's compounded by the fact that, as we disclosed on our last call, we'll lose about 35,000 trucks with the changeover, ultimately, a long-term good thing, but we'll have that little headwind. So I would just say seasonality less than 35,000 units is about the right way to think about Q4.

Okay. That's super helpful. And then obviously, 2026, you guys have navigated it tremendously well, I think better than anyone was expecting sitting here last year. So kudos to you for the execution. Now of course, the natural evolution of that conversation is what does 2027 look like? And how does the consumer break? What does this kind of look like as we walk into next year? On the last call, you committed to or at least tentatively are guiding towards growth in revenue, EBIT and free cash flow next year. Just hoping you can just break that down for us in terms of what are the biggest puts and takes, positives and negatives that you're expecting as we roll forward into 2027?

Yes. I appreciate the comments about '26 being better than a lot of folks expected, but '25 was better than people expected, '24 was better than people expected. And it's something that we've tried to take a lot of pride in and really execute towards. So as we're looking at 2027, '27 is going to have its own headwinds, right? We still have some tariff uncertainty out there as deals are continuing to be negotiated and continuing to evolve. We continue to see signs of inflation out there, whether it's DRAM or just general other commodities, fuel prices, et cetera. They haven't come down the way that a lot of people were expecting post conflict. The conflict continues to rise, and we continue to see price inflation, particularly around logistics and so on. That's not to say that we've come off of what we said in 2Q because I think when you look at 2027 for us, it's a lot of things that are in our control. So we have the new truck platform. That should be good for pricing. As you roll off the last year of the trucks, there probably, I would argue, never been a more successful final year of a truck generation than what we're seeing in our portfolio right now. So that means there is pricing potential. It's not that giant steep ramp-up that we've seen historically because of the performance of the outgoing truck. So we've got to execute on that. We've got a number of sort of capacity initiatives with Orion coming up to speed and some of the onshoring that we've done. There's a lot of opportunity there as we see that. There's opportunities in the portfolio, particularly around continuing to narrow EV losses, continuing to improve on warranty. And then lastly, growing digital revenue, a little bit of growth in the defense business, et cetera. So you look at all those controllables, and that's where we felt good going into 2027. And as we round out our budget preparation and get into the beginning of next year, we'll have more color on the specific ins and outs, but we feel pretty good about that. The cash flow story, I think you look at how consistent we've been over the last 5 years, and we've got a chart out on our IR website that looks at the last 10 years of free cash flow, and it's a tale of 2 half decades. And the 10 years ago, we were looking at an average of probably about $3 billion a year of free cash flow. In the last 5, we've averaged more than $10 billion. This year, it's been a little bit about using that free cash flow to rightsize and fix some of the EV production challenges and capacity as we rationalize some of that capacity. Next year, we should be largely free of that. So we think it's a really good cash flow story heading into '27 as well.

That's great. I want to double-click on a few things that you mentioned right there. But first, starting with the truck changeover, you guys have managed that quite well. You haven't seen inventory ballooning, incentive...

So far.

So far, so good. It's been very impressive. It's not normal to see that at the end of the life of a model year or program. As you think about 2027, I think the focus for us or the market is less about the success of your platform, but more around what your competitors are doing. And you have 2 large competitors in the truck market. One is adding a lot of incremental capacity. The other is being -- has been vocal about wanting to regain share in the U.S., and we'll see what their strategy is to do that. But how do you think about how you internalize that and set the strategy of the company to make sure you're not chasing a market share number or really just executing and making sure you're remaining disciplined on pricing and incentives? Like how do you balance that within the organization, just given some of these external factors at play?

Yes. So look, I think there's a lot to unpack in that. And if you look at the success over the last 5 years, I would say that it really is putting the customer front and center and how do you deliver value to them with your products. And what we found is a pricing and a content strategy that is really aimed at furthering and advancing that loyalty that we have in the portfolio because we go into the new truck with a really strong loyal customer base. They're that way. They've stuck through it with us even through some of the challenges with the L87 and so on that when you put customers at the front and center, everything else becomes noise somewhat. And I think what the team has done a really good job of is not focused on selling that next marginal unit, right? Let's focus on really driving long-term brand value and brand equity in the portfolio. And that you can operate more consistently while the competitors around you do their thing. So what I would say is it's mostly focused on ourselves, our strategy. We started it post-COVID with inventory discipline, making sure that we -- make sure we're managing production to where demand is. I remember, I think it was in 2022, we shut down Fort Wayne for a week because our inventories were growing. And you would have thought that there was chaos in the market in terms of the way the market responded to it, but we did exactly what we said we were going to do, which is produce to that demand, maintain our disciplined production. I think that was really the beginning of making sure that we're saying, let's be rational. So when we see SAAR tick up a little bit, when we see monthly share numbers kind of trickle up and down because of what a competitor is doing, I wouldn't say we're not aware of it. We're very aware. We're not hyper focused on it to the point that says, okay, well, we've got to go discount everything to sell 2,000 more units. It's not good for the enterprise. It's not good for the equity and the residual value of the vehicles that you sold. So really, focusing on that long-term customer value proposition is what's navigated us. And like I said, the last year of this truck generation is doing better than any truck we've ever done. That demand has held up even as people are starting to see more and more of what's coming with the new one. So we're excited about what that new one can bring and the long stream of consistent results that we can be known for into the future.

That's great. And the other piece is warranty has been a big tailwind for you guys in 2026. Can you just give us a few examples in terms of what you're focused on or maybe what you've changed as you think about the model year change over to make sure that the warranty execution on that new vehicle is better than what it's been historically to make sure that you can continue this tailwind of warranty versus it shifting to a headwind at any point in the next few years? Like what are some examples that you guys have implemented internally to make sure that goes better?

Yes. So I would say this has been a throw everything at it because candidly, our quality is not where we want it to be. Not where it's known for, and it's been in some areas of the vehicle that we've notoriously been very well known for. So I would say it really runs the gamut. Number one, it's looking at how to deploy technology into predictive analytics on the vehicle performance and the testing, et cetera, and try to get ahead of where we see those things. That started to bear some early fruit, and we're excited about that. Now ideally, what you've got to do is you've got to get that technology platform integrated through the supply chain because I would say that the second area is the supply chain. And I don't know if it's macro based because of what we've seen down in Tier 2, Tier 3, Tier 4, local businesses that have experienced a lot of inflation in their wage rates, a lot of turnover that historically they haven't had. And I think we're not seeing the level of consistent quality out of that tiered supply base that we're used to as they see higher turnover because obviously, you don't have as much expertise in doing those things and seeing problems, et cetera. So we've deployed people through the supply chain, but really trying to help them and figure out where we can stop production problems before they really manifest and catch them early. That's one of the things that I think really failed and broke down in the L87 from the supply chain perspective. The third element is work with our dealers and work with our engineers to minimize repairs, don't replace transmissions if you can replace components, don't replace engines and powertrains if you can replace components. And that worked pretty well, it's brought the cost down. So what we've talked about is the monthly spend rates have to plateau and then they have to start to come down before you can come over the top on the liability. We're starting to see some of that, and that was the $1 billion to $1.5 billion, but we think that this can be a multiyear journey going forward. As far as the new trucks go, I think we've got a new powertrain with the Gen 6. We've got over 1.5 million miles on the road testing that. So we've been very thorough across the board, and we're optimistic. Changeovers are hard, but the team is really focused on making sure that we do right by the customer and make sure that these trucks go off successfully.

Yes. That's great. The other side of the powertrain is EVs, right? And that's been a benefit for you this year. You've made a lot of progress over the last 12 to 18 months in taking capacity out of the system. You've also been benefited by volumes have come down dramatically year-over-year. So there's been a positive mix benefit there as well. As we think about 2027, it feels like we're maybe bottoming potentially on demand and maybe you see some volume growth into 2027. How should we think about that from a contribution margin standpoint, if we get to a point where you are starting to see growth again in the EV portfolio, is that still a good guide on a year-over-year basis for you on EV losses? Or how should we think about that dynamic into 2027 if we are in a scenario where you get some modest volume growth in the EV portfolio?

Yes. So keep in mind, EV profitability has been hit really hard over the last couple of years. First, tariffs Second, everybody was logging EV credits as part of the variable profit equation and EVs, both of those went the wrong direction against profitability. So the variable profitability of EVs took a couple of big hits with that. So the first thing we do is rationalize capacity. We've done that. The second thing we're doing, and we've talked about how we're still investing in EVs, but it's not about expanding the portfolio per se. It's really about going after the architecture going after the makeup, going after the battery cell technology to bring down the cost of EVs. The first big step of that will be in '28 when we start to produce the LMR technology, which is premium and power load at the same cost as LLP. So that will be a stark improvement, thousands of dollars per vehicle at the pet level for new EVs as we start to roll those out. So '27, I think, is going to be a little bit of a sort of flat spot in the EV [ journey ] depending on how much volume we pick up and might get some scale benefits, et cetera, but really looking to '28 to start that step function in print again and getting there. We still believe EVs are a long-term play for us. And we've got to get it right. We got to get them profitable. And I think with the investments that we're making, we're continuing on that journey more than many of our competitors are.

Yes. On that being, I think Mary said North Star is kind of the EVs for you guys long term. You always get asked about the rods I'm not going to ask about hybrids, but EREVs like an extended range electric vehicle, what's your perspective on that? Some of your competitors are now bringing those to market? It does seem to solve some of the range concerns that those customers have some of the towing concerns that they might have. So is it the technology you've looked at what should we maybe expect from GM from that perspective, especially in the truck and the SUV market, which is where the profit pool is today. How do you think about that option for that part of the market?

Yes. Well, I mean, I think we've been leaders in the range space and trying to do that you look at the trucks and the escalate IQ with over 400 miles of range towing capabilities, et cetera. So making sure that customers don't have to step back in capability of the vehicle to move into an EV. I still think that we as a society have ways to go on the charging in structure. It's coming, right? And you see a lot more of it. I think the next year to drop more than range is going to be fast charging. And how do you really change that equation, so a customer can pull up to a charging station and get a pretty material charge in a short period of time, simulating gas stops, et cetera. So we're working on charging speed. We're working on continuing to range. I think LMR is going to be a big step forward to us. in terms of bringing the cost down while also delivering that range expectation because between range, weight and cost, a lot of gives and takes in that too. So really across the board, we're focusing on that EV technology and making sure that we bring a portfolio of vehicles that are competitors so that we can meet customers where they are. We've already got, what I would say is the broadest most capable ICE portfolio from everything from the tracks up to the Escalades to the Corvettes. We need to be able to do the same and deliver that to customers in the EV realm as well, whether they're looking at range, charging speed or value. Would you see produced?

Yes, absolutely. All right. Maybe shifting gears to the digital side of the business, software services. I think this is an area where there's increasingly more debate around what is the future of an OEM business model look like? How does software and services start to filter in and really change the revenue and margin profile of the business. You guys have added more disclosure, I think $3 billion of revenue this year is the expectation, double-digit growth going forward. What are the gating factors? Like where do you see this business going over the next kind of 5 years? And then kind of how do we get there? What are the technology milestones that we need to see and that we should be watching to really audit your success and some of the efforts that you guys are making on the digital side of the business.

Yes. So we've been very intentional in terms of walking our disclosures forward as the business has grown. We didn't want to go out there and promise the Sun, Moon and the stars. But if you go back even to Investor Day that we talked about, we had $20 billion of digital revenue by 2030. [ $11 billion ]of that was subscription services and so on. And we're not there, but we're moving up really rapidly, and that's been very intentional. So it really breaks into 2 components: one, beyond Star connectivity. And we talked in the last year, and you'll hear more coming from us about where AI can be, connected cars. And what that vehicle experience can mean for customers, really enhancing that OnStar platform that we have. So as -- just as a refresher, the -- when you buy a vehicle, you get an OnStar basic package that's included for a period of time, and we defer some revenue over that time period. But it also gives us a direct attachment to the customer in order to be able to deliver them even more value. So there's a lot of things that are coming around that space as to where we can grow within the car park in addition to expanding that deferred revenue base with every vehicle that we sell. Then the second side of it is Super Cruise, right? We're still seeing 30% to 40% attachment rates at the end of the 3-year prepaid period, which is great. and customers really, really like it. And as we get more into the technology space with eyes-off, hands-off in 2028 with the Escalade IQ, pretty excited about what that means. Our next mission is how do we get Super Cruise into more vehicles. So we took a different approach than what many of our competitors did. So Super Cruise is available for the purchase with an option -- as an option with purchase. And other competitors have included the hardware in every vehicle, et cetera. We're working on getting the cost down to make that feasible and trying to marry proliferation of Super Cruise with the economics and the business case of making sure that it could be -- it could be good because many of the competitors that are rolling it out in every vehicle have attachment rates of less than 10%. And that's a lot of frictional cost to go in there into a subscription model, whereas we're leading with strength, we're focused on the margin of the business, and we're focused on growing it. And we think there's more room to go there.