General Motors Company (GM) Earnings Call Transcript & Summary

Please welcome Paul Jacobson, Chief Financial Officer of General Motors, interviewed by Rajat Gupta at JPMorgan.

Great. Good morning, everyone. Thanks for joining. My name is Rajat Gupta. I head U.S. Equity Research for autos. Very pleased to have with us today starting day 2 of the conference, Paul Jacobson, Chief Financial Officer at General Motors. So thanks, everyone for joining, and thanks Paul for doing this.

Great. Well, thanks for having us. It's always great to be at this conference. Number one, I love the venue. [indiscernible] But I just love being over here and I'm not shy about saying the questions over here tend to be 5 years or longer in the future versus 5 days of trading and data, but love the strategic focus and the long-range planning because I think that's one thing that we've done exceptionally well. That being said, just a couple of comments about the quarter. We're almost at the end of the quarter. The consumer continues to hold up really well. probably surprisingly well over the last several years in terms of what we've seen pressure wise, but that's been great for our portfolio. We're wrapping up the third quarter, we have been able to take up guidance twice this year, and we're very much on track with our higher range for the full year. So we're excited to finish out '26 we're really starting to look forward to 2027, as we're in the planning cycle. I'm sure we'll have a lot of questions about 2027. So just grateful to be here, and thank you all for joining us.

Great. I know sales [indiscernible] analysts like me, sometimes, always tend to start with some of the negatives, but maybe I'll start with the positive today.

Thank you. That would be a good...

The free cash flow has transformed over the past decade. It's averaged $10 billion in the last several years. and with some of the cash restructuring on EVs going away next year, it looks like you're already healthy starting point into 2027, just give us a sense of you're going to prioritize reinvesting value shaded [ tuning ] capital. How does the 2027 cash picture just change that balance?

Yes. So it was at this conference a year ago that we talked about the transformation and really focused it on cash flow. I'm an old school CFO. I believe cash is king and at the end of the day, it's super important to really drive that cash generation in the business and transfer it and make it pass all the way through to free cash flow through disciplined capital expenditures. So the team has done an amazing job of transformation here. I mean if you look at the last decade, the first 5 years, we averaged about $3 billion of free cash flow. The last 5, we've averaged over $10 billion. And that's incredible generation. I think it really starts with an incredible product portfolio, probably the best in our company's history from a price point to price point. And I think it's important that people understand, a lot of times when you think about GM, you think about trucks and SUVs, they are a growing contributor and a fabulous business that we have there. But most people don't realize that last year, we also sold over 700,000 vehicles with the starting MSRP below $30,000. So we've really crossed all aspects of the consumer wallet and really try to be there for as many customers as we can. What that's done, I think, has made us far more resilient. So as you look at the cash flow story and the focus, we've set our capital budgeting around that $10 billion to $12 billion a year that's higher than it's been historically. But our operating cash flow has grown even more than that. So that discipline combined with the performance of the company has been a huge catalyst for us that we plug into our capital allocation philosophy, invest in the business because it's critical that we're already working on the vehicles that are going to be dazzling customers 3, 4, 5, 6 years and beyond. Maintain a very strong balance sheet. If you look at our balance sheet, it's probably arguably stronger than it's been in decades. A pension plan that is very close to fully funded credit stats and credit metrics that are on generally sort of positive buys from all the rating agencies across the board and very, very healthy debt loads. And then the third is return capital to shareholders. And obviously, that's been a linchpin of our strategy for the last several years. We've retired, I think, over 37% of our shares outstanding, really since 2013. And as long as we continue to see the type of free cash flow yield and the low multiple on the stock. We feel very committed to continuing to do that while the actual amounts or a Board decision, our Board has been very supportive of that strategy for the last few years, as you've seen.

And you obviously, as you just mentioned, a big advocate for buybacks. What's the payback math and what multiple or yield would you start to like consider otherwise? And maybe a little bit of color on '27 given the GAAP cash flow increases significantly with the restructuring relative to '26?

Well, I wouldn't say there's any trigger for stopping repurchasing. We we've been very outspoken about wanting the multiple to move. I think we deserve a higher multiple I'd be shocked if you had a CFO up here that said they didn't. But you look at our performance over the last few years, the consistency of it, our relative performance against the industry, whether it be pricing or share levels or margins, et cetera, across the board. I think we should have a higher multiple from that standpoint. So we're not shy about saying that. We trade at a discount to many of our peers who are underperforming. But I understand that. I mean I understand the historical cyclicality. That's why last year, we chose this conference to really talk about taking away some of the self-imposed cyclicality maintaining better inventory levels, maintaining better pricing, managing better free cash flow. All of these are cushions against what the next down cycle might be. We don't see any signs of that right now. But it will come and we need to be ready for that. So I would just say that it's there's room for substantial improvement in the multiple. And I think as you see us starting to lean more into the [ Desolin ] subscription story and what that revenue stream looks like, some of the other businesses like GM Defense, et cetera. I think there are opportunities to expand that multiple, but it's going to be a little bit of a journey. And in the meantime, we're retiring shares very, very cheaply at a double-digit free cash flow yield.

Makes sense. Now we will come into -- we're looking into some of those anti-cyclical pieces in a bit. But quickly going back to like some of the concerns again, going back to the consumer, you described...

Didn't take you long to get back there, but that's good.

You described a [ 2-speed ] consumer widely called the [ ship ] economy. Maybe when we look at sentiment surveys and like actual behavior, things tend to be divergent. What's the real risk signal you're watching when it comes to the consumer?

Yes. We watch a number of variables every -- in some cases, daily a lot of weekly, try not to get too caught up in the headlines because I think in your question, is a really important point, which is we have started to see more than we've seen in decades, divergence between the survey data and what's actually happening on the consumer. And this has been going on for a couple of years where you see consumer sentiment down, but behavior hasn't really changed. And that's been true across the board. We've still seen a lot of success in our full-size trucks and SUVs. And no sign of that abating. Our share levels have been consistent, the share of industry has been fairly consistent across the board while we've expanded our vehicle portfolio at some of the lower price points. So I would say that the consumer has maintained a strong level of resiliency. We've seen that the fact that household income has actually grown faster than affordability and so on. So I think a lot of that is caught up in the surveys, but not necessarily what we see on the [ crowd ]. We look at where our daily sales going, how are they trending against our forecast. We've got a lot of data through our GM Financial subsidiary with $125 billion balance sheet. We can see delinquency trends, we can see default rates, et cetera. Nothing has materially changed. I think we've come off of the low points of post-COVID, where there was such a big injection of liquidity in, but we've normalized around kind of those pre-COVID levels. So there isn't anything that we see on the immediate horizon that's giving us any cause for concern.

Like the low [ 16 million ] [indiscernible] still like a reasonable base case?

And in a lot of cases, I think it's probably better for the industry because what we're -- we're not doing, and I think this has been a big catalyst for our free cash flow generation is we're not discounting in search of that next 100,000 units et cetera, as we're content with the volumes that we're producing. And for the first time, I think, in a long time, we've got real brand equity in our vehicles, and that is a sort of pricing premium that I think customers have demonstrated a willingness to pay. And when you look at what the backdrop is we're in the last year of a truck cycle before we come to the new trucks next year, for example, and probably haven't had a truck offering performed better in its last year of production than what we're seeing right now. And I think the team has done a really good job of managing through the transition. We still have a lot of work to do before we get the new trucks up to full production level. But so far, I think the team has done a really good job of balancing pricing inventory as we transition to the new vehicles.

That makes sense. And I think this is a good segue into just some of the 2027 moving parts. I know you mentioned you've talked about like the positives last week. There was warranty, some mix around the full size -- new full-size pickups. Is EV profitability getting better, digital, defense. Maybe like walk me through -- walking through like the puts and takes again. Could you rank some of those tailwinds by size or tell us which probably have the widest range of outcomes in your opinion?

Yes. Well, I think it's too soon to get into details and us even providing commentary on 2027 during the second quarter call is quite early to do that. And the messaging that we really wanted to get across to the market is many of the tailwinds that you mentioned, EV profitability improvement, warranty improvement, the new trucks and digital revenue growth. All of those are multiyear tails, right? So this isn't something that is just a 2026 tailwind. It's something that, at the end of the day is going to continue because we've seen, for example, warranty trend to really, really high levels. And we've had some challenges ourselves. We're focused on making sure that we are doing right by the customer in everything that we do because more than warranty expense. There's that creating a great experience for the customer, which will benefit you way beyond a little bit of savings warranty. But we've noticed that the cash spend on warranty monthly flattened out, and we're watching it start to trend lower. The warranty expense always lags that, right? When you're looking at accruals. So that gives us some confidence that if we're able to continue to inflect that and move that monthly warranty spend down, that we will see continued benefit into '27 and even beyond. Our goal is to get back to historic levels of GM quality and get back to where we were and then even go beyond that, we'd like to be a world-class leader in quality, and you look at Toyota and others. I think the number is about 1.2% of revenue that they spend, whereas we're closer to 2%. So a lot of things in place, a lot of use of technology, both in the manufacturing operations as well as supply chain and looking at the data coming off the vehicles as well to really try to get ahead of problems, fix components instead of do massive overall changes. And I think the team is really focused on the right things and that should manifest itself. So when you look at that, what we said in the second quarter is all else being equal, these 4 tailwinds should make '27 better than 2026. We've continued to see the content and the hostilities in the Middle East. We've seen that affect inflation and raw materials, oil prices, et cetera, that could provide some pressure, but we still feel confident about the multiyear journey here. And then when you think about you think about '27, it's not just earnings, it's also about cash flow. Cash flow should be substantially better in '27 than '26 because we'll have worked through substantially all of the EV restructuring that we've paid this year. So we expect '27 is going to be another good, consistent year of performance.

And anything philosophically that's changed in your budget planning process for '27 versus '26. You've had like a really strong year for price mix and with the new truck coming is there like a change in focus for the company? And what are you trying to manage given you cannot really bank on price every year? Just curious if anything has changed.

I don't think anything has changed per se. What I would say is we have more tools with the new truck. That's going to be a great new tool. But the team has shown a remarkable ability to respond to what's coming at us. The P&L this year, while we've taken guidance up a couple of times looks different than what we thought it was going to at the beginning of the year, probably a little bit more price, a little bit more inflation, et cetera. And that is the consistent behavior that we've seen over the last several years of our ability to just respond and execute. I love that about our team because it tells you that we don't get distracted by what's going on, whether it was tariffs or whether it's supply chain shortages or inflationary pressures, et cetera. We pivot, we focus on the problem. We solve it and then we move on. So I made a mistake, I think it was in February of this year, saying that it was the calmest start to a year since I've been at GM. And then 3 weeks later, we start hostilities in the Middle East. It -- so I'm not going to go ahead and say I expect '27 to be a calm year, but I've got the confidence in the team that we'll be able to pivot and adjust. As far as philosophically, I think we've had such a really strong run of pricing over the last several years and notwithstanding the fact that we should have some good pricing on the new truck because there will be a lot of demand for that new truck. I think we've got to make sure that we're also focused on getting structural costs out of the business not cutting too deep, right? You don't want to diminish the quality of the product. But at the same time, using AI structurally to try to figure out where we can get rid of and shed a lot of fixed costs in order to make our vehicles more competitive because there will be inflationary pressures. We will continue to see that. And I just -- I don't want to be so reliant necessarily on passing that through to the consumer based on the record that we've had over the last 5 years. I think we have to prepare for potentially more modest increases in pricing, which means we've got to go focus on execution.

Right. That makes sense. Maybe just on the point on pricing in the trucks. Just a quick update on the new pickup. I think December was launched. I mean is that still on track? And by when do we expect to hit like a full run rate? And then in that context, is 2028 [indiscernible], like volume upside here versus '27 for these trucks?

Yes. I think that's the right way to think about it. So when you're starting a new program, the first and most important thing is you've got to scale and you've got to do it with quality and changing over with such big changes that we're seeing, making sure that it's executing well. So as you transition that, the first thing that you see, and you've already seen some of it we've announced will be short, 35,000 trucks in the fourth quarter as we're kind of cutting over year-over-year. That's part of it. So the transition is going well. I would say that the -- all the testing of the new powertrain and then the vehicles that are coming off, the preproduction vehicles are doing well. we'll start to see those vehicles hitting showrooms at the end of this year, and then we'll scale up production from there. So what tends to happen in these new products launches will probably begin production with a richer mix. So that's where you can kind of see some of that pricing and mix benefit next year, but volume will probably be flat until we get to the back half and sort of the end of '27 and start scaling even more. So that's where I think this is not just a story about '27. It's also a story about '28 where we potentially have more volume on the trucks as well.

Got it. And then maybe just a quick more broader industry question on that topic. We've heard and read a lot about new onshoring investments in the U.S.? Like do you worry at all about potentially getting into an excess capacity situation over the next couple of years? And then how would you manage that if it happens?

Yes. Well, I think the United States is the most lucrative auto market in the world, and that's evidenced by what you see many competitors doing in terms of aiming more capacity. I think that's been a defense and a pivot away from some of what we've seen of Chinese competition throughout the world. and the U.S. becomes a little bit of a safe haven. So I think we've got to be competitive. That's where I talk about structural costs as well. But more importantly is focus on customer execution and our vehicle portfolio. So I feel like we've got an asset in that space [indiscernible] that's certainly been demonstrated with our pricing strategy and our relative pricing that we've seen where we're anywhere from 150 to 250 basis points below industry average on discounting while we're maintaining our share. That's a really strong position to be in. So I think what we've got to do is we've got a focus on executing our playbook, not worry as much about what competitors are doing on the discounting side but just have the confidence in our vehicle portfolio, and it's held up really, really well through the pace of it. I think it's contributed to some of [ outperformance ] that you've seen relative to the industry. So we've got to maintain our discipline, not get too excited about overproducing ourselves. And I think at the end of the day, things are going to work out for us as long as we stay focused on the customer and the vehicle portfolio.

Understood. I just want to pause there for a second to see if there's any questions from the audience here. None yet, but we'll continue. So on one of the other tailwinds on digital, I did want to spend a little more time on that. You've talked about the $7.5 billion deferred revenue balance to the end of this year, $3 billion recognized revenue this year, growing double digits. How much of that growth over the next couple of years is locked in just from amortization versus new subscriber additions. Any way to think about that split?

Yes. So we gave a presentation earlier this year, we'd encourage everyone to go look at it on the website. I think it was in February of this year. And we tried to lay out as much as we could about the accounting and how the revenue is recognized. But there is a substantial sort of increase as we continue to increase the deferred revenue balance that more and more of that is coming in. So a good bit of that revenue growth is already baked in, but we also see, for example, I think we had 35,000 vehicles this year coming off of the 3-year period for Super Cruise and we're seeing attachment rates of new subscriptions at 30% to 40%. That number, the 35,000 will double next year. because we're coming off of the years where we were constrained by the tube shortage, and we'll see more and more. Also with the new trucks, there's going to be super crews available on more vehicles. We're trying to widen that aperture. So it's not just in premium trim levels and you can buy it as a feature. So we're excited about getting more penetration in there that's going to ultimately lead to more subscriptions. And then lastly, we've talked a lot about what OnStar Digital can do with AI connected vehicles, et cetera. We see a lot more product offerings in the future that beyond just that sort of base level of OnStar basic amortizes over a period of time after you buy the vehicle, there's opportunities for additional subscriptions and services for customers, and we see pretty good take rates on that as well. And as we can broaden that product portfolio, we think there's room for even more growth than what we've seen.

Got it. Would there be a point where we get more separate disclosure on digital [indiscernible] separate segment entirely within your [ walk ]. I mean is it still too early?