Source: Seeking Alpha
General Motors Company (NYSE:GM)
Q2 2014 Earnings Conference Call
July 24, 2014 10:00 AM ET
Randy Arickx – Executive Director, Communications and IR
Mary Barra – CEO
Chuck Stevens – EVP and CFO
Tom Timko – VP, Controller and CAO
Niharika Ramdev – VP Finance and Treasurer
Rod Lache – Deutsche Bank
Itay Michaeli – Citigroup
Brian Johnson – Barclays Capital
Colin Langan – UBS
John Murphy – Bank of America Merrill Lynch
Patrick Archambault – Goldman Sachs
Ryan Brinkman – JPMorgan
Adam Jonas – Morgan Stanley
Ladies and gentlemen, thank you very much for standing-by and welcome to the General Motors Company Second Quarter 2014 Earnings Conference Call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session for analysts only. (Operator Instructions) As a reminder, this conference is being recorded on Thursday, July 24, 2014.
It’s now my pleasure to turn the conference over to Randy Arickx, Executive Director of Communications and Investor Relations. Please go ahead, sir.
Randy Arickx – Executive Director, Communications and IR
Thanks, operator. Good morning and thank you for joining us as we review the GM financial results for the first quarter of 2014. Our press release was issued this morning and the conference call materials are available on the Investor Relations Web site. We are also broadcasting this call via the Internet. Before we begin, I would like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set. The content of our call will be governed by this language.
This morning, Mary Barra, General Motors’ Chief Executive Officer will provide opening remarks followed by a review of the financial results with Chuck Stevens, Executive VP and CFO.
After the presentation portion of the call, we’ll open the line for questions from the analyst community. Marry Barra will then conclude the call with some closing remarks. In the room today, we also have Tom Timko, Vice President, Controller and Chief Accounting Officer and Niharika Ramdev, Vice President, Finance and Treasurer, to assist in answering your questions.
Now I’ll turn the call over to Mary Barra.
Mary Barra – CEO
Thanks, Randy and thanks to everybody for joining this call. On our last earnings call in April, I spoke about GM’s resiliency during a very challenging first quarter. As you all know, the ignition switch recall and difficult market conditions in some parts of the world put tremendous pressure on our bottom-line. Nevertheless, we remained profitable. Just as important, we also continued our steady investment in new products and we returned more than 480 million in capital to common shareholders, stockholders through our first quarter dividend. Years of hard work to improve our vehicles, our operations and the customer experience made this possible.
As expected the same issues continued into the second quarter, but once again we had strong operating performance and we earned a profit on both in EBIT adjusted and a net income basis and we stayed on our plan. I’ll speak to all these points starting on Slide 2, which presents a summary of our second quarter results. Then I’ll review the highlights that speak to the heart of our business, which is to build great products, satisfy its customers and do it very profitably.
At the top of Slide 2, you can see that we delivered 2.5 million units in the quarter. As we announced last week, this was our highest second quarter volume since 2005. Sales in North America and China, the two largest and most profitable markets in the world were up 6% and 8% respectively. However, this was offset to a large degree by declines in markets like Russia and Venezuela, where the industry is weak as well as the strategic decision we made to wind down Chevrolet Europe, this also had an impact on market share. Our global market share in the quarter was down three tenths of a point. However, market share in the United States was equal to a year ago. On a revenue basis, we improved our results by more than 570 million, based on large measure to improvements at GM Financial.
Turning to the bottom-line, net income to income to common stockholders was 200 million or $0.11 per share. Combined the recall-related charges and special items we sited in our press release reduced net income by $0.91 per share in the quarter. Absent these items net income would have been about 1.7 billion in the quarter.
Looking at net cash, net cash from our automotive operations activities was 3.6 billion and the year-over-year decline reflects recall activity as well changes in working capital due to timing. And what’s not on shown on the slide, our automotive available liquidity improved by 4 billion from a year ago.
Finally on an EBIT adjusted basis, GM earned 1.4 billion and our adjusted automotive free cash flow was 1.9 billion. Absent recall and restructuring expenses, EBIT adjusted in the quarter would have been improved slightly from a year ago. For the first half of the year, adjusted automotive free cash flow was nearly 1 billion better than a year ago. Chuck Stevens will break all this down for you in just a few minutes.
Let’s look at Slide 3 which presents several highlights from the quarter starting with GM North America, where our core operating performance was exceptionally strong. In fact our EBIT adjusted margins excluding recalls climbed above 9%. This marks the fourth consecutive quarter of year-over-year margin growth excluding recall. In China, we reported record sales and our margins improved by six tenths of a point from a year ago.
In Europe, the wind down of Chevrolet Europe is ahead of schedule and costs are below expectations. Meanwhile the recovery of the Opel/Vauxhall brand continued. Opel/Vauxhall sales increased 3% in the quarter and 4% in the first half. Our share was up in 11 European markets in the first half including Germany, which here rose three tenths of a point to 7%. In June alone, our share in Germany reached 7.6% which is almost up a full point versus a year ago. New products have made a big difference. For example, the Mokka was the best selling SUV in the first six months of the year in Germany.
All of this keeps us on-track to be profitable mid-decade. We are also targeting European market share of 8% and EBIT adjusted margins in the 5% range by 2022. GM South America meanwhile continues to be very challenging with volumes under pressure across the region. But our core underlying performance in the region is improving. Finally GM Financial continues to execute its growth strategy in order to support increased GM vehicle sales. For example the acquisition of Ally Financial European and Latin American businesses in 2013 as well as GMF’s growth in the North America lease market helped increase their share of GM financing activity from 13% to 20% compared to a year ago.
This trend should continue as GMF expands their prime retail loan program in the United States starting in the second half. The next step for GMF is to complete the acquisition of Ally’s joint venture in China, which we expect to close subject to certain regulatory and other approvals late 2014 or as soon as possible thereafter.
Let’s turn now to Slide 4, which discusses our recall activity in the quarter. Let me begin by stating that my total focus is to make GM the best automotive company for our customers as it relates to the safety, quality, reliability and overall value. We are not going to be satisfied by simply solving our current problems. We are completely aimed at being industry leaders. By now, all of you are familiar with the findings of the Valukas’ report which was presented to our Board of Directors in June and then shared with NHTSA and other government agencies.
I have fully embraced the report and pledge to act on all of the recommendations. Importantly a great many were acted on before the report was even released. Actions that we have taken include elevating safety decision making to the highest levels of the company. Creating a new position, the Vice President of Global Safety, that’s Jeff Boyer and he has full access to me and has regular reporting out to our senior leadership team as well as the Board.
We also reorganized vehicle engineering and created the new product integrity organization which I am confident will improve quality safety and the functional performance of our vehicles through a better design, execution and systems integration. We also removed 15 employees from the Company, some for misconduct or incompetence, others because they simply don’t take responsibility or act with a sense of urgency.
We instituted a Speak Up for Safety program to encourage and recognize employees when they report potential safety issues and do it quickly. We have already received more than 280 suggestions. And we’ve now added 60 safety investigators to identify and address issues much more quickly and we’ve aligned the legal staff to help assure transparency and information sharing among the staffs and other business units across the entire company. Overall, we are dramatically enhancing our approach to safety.
You can see it in the aggressive stance we are taking on recalls and the redoubling of our efforts. This year we have looked at vehicles going back to the 1990s and the results were 60 individual recalls in United States covering 29 million vehicles in North America. About two-thirds of the recalled vehicles are no longer in production and more than 12 million of the vehicles will be fixed by simply replacing or modifying the key.
In addition, some of the recalls were quite small. We had 13 recalls of less than a 1,000 vehicles and 5 with less than a 100. The financial impact of this activity in the second quarter is outlined on the slide. A recall related charge of 1.2 billion in this quarter. This work is now substantially complete and I believe we have now addressed the major outstanding issues. But if we see new data we will address it.
Today we are bringing greater rigor, discipline and urgency to our analysis and decision making process with regard to safety and our recall. We are mining every source of data available to us from the factory floor to warranty information to customer calls to social media to legal claims, all sources of information. And we’re not waiting to see if the trend develops. We want our customers to know that if we identify an issue that could possibly affect their safety we will act quickly.
With respect to the ignition switch recall itself, as I have said before, we are taking responsibility for what happened and we are treating the people who suffered physical injury or loss of loved one with compassion, decency and fairness. As you know the compensation program that independent program administrator Ken Feinberg has developed will begin accepting claims on August 1st. The creation of the program has resulted in a 400 million pretax special item in this quarter as you can see on the slide.
Also, vehicle repairs are well underway. More than 550,000 vehicles have been repaired and we are on-track to have enough kits to repair the majority of the recalled vehicles by early October. As parts availability has improved and the pace of repairs has accelerated, we have seen a corresponding decline in the demand for rental cars. This was expected. Okay. Let’s turn back to earnings and I’ll now ask Chuck to walk you through a detailed review of the quarter. And then Chuck and I will take your questions. Chuck?
Chuck Stevens – EVP and CFO
Thanks Mary. On Slide 5 we again remind you of the results for the quarter. Net revenue for the period was 39.6 billion. So nearly 600 million increase from the prior year is primarily attributable to favorable mix of 1.2 billion, favorable price of 1.1 billion, increased revenue from GM Financial of 400 million, partially offset by a negative 1.8 billion associated with lower wholesale volumes and unfavorable foreign exchange of 400 million primarily due to the weakening of the Brazilian real and the Argentine peso against the U.S. dollar.
Our operating income was a loss of 500 million primarily attributable to 1.2 billion in recall-related expenses, and 1.3 billion in special charges which I will cover in more detail later. Net income to common stockholders declined 1 billion to 200 million and our diluted earnings per share came in at $0.11, again, influenced by recall-related expense and special charges. As Mary indicated, net income was 1.7 billion excluding recalls and special charges.
Automotive net cash from operating activities was 3.6 billion, a 900 million decrease from the same period in 2013. For our non-GAAP measures EBIT adjusted was 1.4 billion in the second quarter including 1.2 billion of recall-related expenses and $200 million of restructuring. And EBIT adjusted margin was 3.4%, down from a year ago again adversely impacted by a negative 2.9% due to recalls. Adjusted automotive free cash flow decreased 600 million to 1.9 billion for the second quarter. However, this is nearly 1 billion higher for the first half of the year compared to the first half of 2013 including $300 million of recall-related cash costs.