GM faces earnings test as several plants retool

DETROIT -- The discipline that has helped General Motors beat Wall Street expectations for nine consecutive quarters will be put to the test in the coming months, when lower earnings are anticipated because several of its most profitable plants will temporarily close for retooling and slowing industry sales will pressure the company’s unusually high inventory.

After announcing second-quarter net income of $1.66 billion Tuesday, CEO Mary Barra and CFO Chuck Stevens warned that the automaker expects lower profits for the second half of the year due to production cuts and softening U.S. sales.

“Clearly second-half production is going to be lower than the first half because of the downtime that we anticipated, and clearly second-half earnings are going to be lower than the first half, which is totally consistent with the guidance we provided earlier this year,” CFO Chuck Stevens said Tuesday, after the automaker posted second-quarter net income of $1.66 billion.

GM, Stevens said, expects to build 150,000 fewer vehicles in the second half of the year than it did in the first. That would amount to a 15 percent decline versus the second half of 2016, when it built 1.9 million vehicles, according to estimates from the Automotive News Data Center.

Stevens said light-duty pickups account for roughly 40,000 of the 150,000 lost units, as GM shuts down the plants that build them to get ready for an upcoming redesign. The company has scheduled a total of at least 13 weeks of product launch-related downtime at its pickup and crossover plants during the last six months of the year, mostly in the third quarter.

70-day supply

GM has said it deliberately built up stocks to prepare for several plant shutdowns planned this year for retooling. But instead of the 90-day supply it had targeted at mid-year, it had a 105-day supply as of June 30.

Still, Stevens said the company remains on track to reach a roughly 70-day supply by year’s end.

Neither Stevens nor Barra commented on recent reports from Automotive News and other media outlets that the company is considering cutting some cars from its North American lineup in the coming years to focus on more profitable crossovers and SUVs.

“We will take production out to align supply and demand on passenger cars, wherever that demand lands,” Stevens said.

GM shares closed Tuesday down 0.7 percent to $35.57.

Stevens said GM has not changed its guidance for the year that earnings would be $6 to $6.50 per share. First-half earnings were equal to $3.64 per share.

Sell-down

Barra said GM remains disciplined when it comes to U.S. sales, opting for double-digit profit margins over high incentives to gain market share.

The company’s average U.S. retail incentive as a percentage of its average transaction price has steadily climbed from a 10.2 percent a year ago to 12 percent now.

Strong pricing on crossovers will help GM withstand the slowing U.S. market, Stevens said. Many analysts have reduced their forecasts for 2017 from the mid-17 million range to closer to 17 million. 

European exit

In the second quarter, GM said its net income dropped 42 percent to $1.66 billion, primarily because as a result of the pending sale and restructuring of its European operations.

The company recorded a loss of $770 million from discontinued operations, which include the sale of its Opel and Vauxhall operations to PSA Group of Europe. Excluding those costs, the company recorded a profit of $2.43 billion, down 11 percent from a record second quarter in 2016.

Revenue from continuing operations fell 1.1 percent to $37 billion, mostly due to lower volumes.

In North America, earnings before interest and taxes declined 7.2 percent to $3.48 billion, also due to a decline in sales of 110,000 units, or 11 percent, to 894,000 vehicles sold.

Earnings from GM's continuing operations were equal to $1.89 a share, topped Wall Street estimates by 20 cents.

GM delivered 2.3 million vehicles in the second quarter, down slightly from about 2.4 million a year ago.

The company reported a 10 percent profit margin globally from continuing operations and a 12.2 percent margin in North America. Earnings before interest and taxes were $3.7 billion, down 4.3 percent.

The sale of its European operations remains on track to close by the end of the year, Stevens said. The company is expected to experience a special charge of about $5.5 billion when the deal closes.

Global results

GM’s international operations, which include China, posted pretax earnings of $340 million, 79 percent more than the same period a year ago. It reduced losses in South America by 81 percent, to $23 million.

The company’s financial arm recorded net income of $50 million in the second quarter, down $203 million from a year ago due to a $209 million loss from discontinued operations -- primarily Europe. Without that loss, GM Financial would have recorded net income of $259 million, up 25 percent from a year ago.