DETROIT -- General Motors delighted investors and analysts Wednesday by posting $1.2 billion in operating profit for the second quarter -- a $1.4 billion improvement over the same quarter last year.
"Our turnaround has not just gained traction, it's accelerating into high gear," said GM CEO Rick Wagoner.
Wagoner has been under pressure to show improvement as GM studies a possible three-way alliance with Nissan Motor Co. and Renault SA. He said the results vindicated the company's turnaround strategy.
"While significant work still remains, our ability to identify and initiate $9 billion in cost cuts over the past year is unprecedented in this industry," Wagoner said.
GM's loss in North American operations -- the focus of its restructuring -- narrowed to $85 million in the quarter, excluding charges. That's an improvement of $1.1 billion from the year-earlier period on lower pension and other costs.
But CFO Fritz Henderson isn't ready to declare victory in North America because, he said, GM's results do not indicate sustained financial strength. The bulk of the second-quarter results came mostly from cost reductions, Henderson said.
"What we have to do is get the job done better on the revenue side during the second half of the year going into 2007," Henderson said Wednesday during a conference call with analysts and the news media.
Overall, GM posted a net loss of $3.18 billion for the second quarter, compared with a loss of $987 million in the second quarter last year. But this year's results include $4.3 billion in charges for shutting down factories and a worker buyout program taken by more than 34,000 unionized employees.
Total revenue rose to a record $54.4 billion in the quarter, from $48.5 billion a year ago.
IMPROVING PRODUCT MIX
Henderson said GM will work to improve its product mix, build its profitable nondaily rental fleet business and hold to its strategy of lower sticker prices and fewer incentives.
GM's average revenue per vehicle in the second quarter was up about $500 compared with the year-ago period, Henderson said. Roughly half of that is the result of profitable sales of GM's new full-sized SUVs. The strong Canadian dollar and product improvements also factored into per-unit revenue boosts.
But Henderson warned that profits from sales of the full-sized SUVs and trucks likely will shrink in the second half of the year.
Excluding the restructuring charges, GM outperformed the most optimistic Wall Street projections. That touched off a rally in the company's stock and bonds that pulled shares of Ford Motor Co. higher as well.
Meanwhile, the cost of insuring GM's debt against the risk of default fell sharply on the signs that the automaker's turnaround effort was producing results.
GM raised its target for cutting recurring costs in North America by $1 billion, to $6 billion, by year end. Henderson said GM also increased its targeted cost reduction on an annualized running basis to $9 billion from $8 billion.
"We're still not satisfied as to where we are in terms of our cash flow, but progress -- that's how I'd put it -- is being made," Henderson said.
Combined with GM's first-quarter net profit, the results show the automaker is on the right track, said Argus Research analyst Kevin Tynan. Sustained gains will hinge on GM's success in moving beyond cost cutting, he said.
"They have a good opportunity to convince a lot of people that what they are doing is working at least in the near to intermediate term as far as the restructuring actions go," Tynan said.
Henderson said results for the final two quarters of the year would show continued improvement against 2005 results.
But he said GM management would not back away from a commitment to spend three months studying the possible benefits of an alliance with Nissan-Renault and the chief executive of those companies, turnaround specialist Carlos Ghosn.
"We're going to spend the next 90 days trying to understand the industrial logic of such an alliance and what the synergies might be," Henderson said.
GM will then assess how an alliance would fit into its business operations and what the financials of it would be, he said.
AUTO OPERATIONS POST OPERATING PROFIT
GM posted its first operating profit in global auto operations since 2004 after cost reductions in the U.S. market.
The improvement came despite weaker U.S. vehicle sales in the quarter. GM's unit sales were off 17 percent in the quarter, but the automaker steered clear of the big discounts that boosted volume while cutting into margins a year earlier.
GM's introduction of the full-sized SUVs, such as the GMC Yukon and Cadillac Escalade, raised average sale prices per vehicle, Henderson said.
High gasoline prices and rising interest rates have hurt sales of SUVs and pickups, but the new line of GMT900 SUVs has taken share from rivals in the weaker market.
Auto revenue rose 11 percent, to $45.2 billion.
In recent months, GM has cut factory jobs through buyouts and early retirement offers and clinched an agreement with its major union, the UAW, reducing the company's share of health care costs.
Shares of GM were up $1.15, or 3.6 percent, to $31.81 in early trading on the New York Stock Exchange, after trading as high as $32.12. The stock has gained 60 percent since the start of the year.
GM's largest individual shareholder, Kirk Kerkorian, has urged consideration of a Nissan-Renault tie-up. The move is widely viewed as a way to prod Wagoner to quicken the automaker's turnaround efforts after a $10.6 billion loss in 2005.
Kerkorian's representative on GM's board, Jerry York, had pointed to GM's rate of cash burn at the start of the year as a danger sign for the automaker.
For the second quarter, GM had operating cash flow of $700 million, an improvement of more than $2 billion from the year earlier. That included a $1.4 billion dividend from GM's financial arm, GMAC. GM has agreed to sell a controlling stake in GMAC in a deal expected to close in the fourth quarter.
Reuters contributed to this report
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