General Motors Company (NYSE:GM) Q1 2023 Earnings Call Transcript

General Motors Company (NYSE:GM) Q1 2023 Earnings Call Transcript April 25, 2023

General Motors Company beats earnings expectations. Reported EPS is $2.21, expectations were $1.73.

Operator: Good morning, and welcome to General Motors Company First Quarter 2023 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. As a reminder, the conference call is being recorded, Tuesday, April 25, 2023. I would now like to turn the conference over to Ashish Kohli, GM Vice President of Investor Relations. Thank you. You may begin.

Ashish Kohli: Thanks, Julie, and good morning, everyone. We appreciate you joining us as we review GM’s financial results for the first quarter of 2023. Our conference call materials were issued this morning and are available on GM’s Investor Relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM’s Chair and CEO; Paul Jacobson, GM’s Executive Vice President and CFO; and Kyle Vogt, CEO of Cruise. Dan Berce, President and CEO of GM Financial, will also join us for the Q&A portion of the call. Before we begin, I’d like to direct your attention to the forward-looking statements on the first page of our presentation. The content of our call will be governed by this language. And with that, I’m delighted to turn the call over to Mary.

Mary Barra: Thanks, Ashish, and good morning, everyone. Thank you for joining us. Paul, Kyle, Dan and I are glad to have this opportunity to discuss our first quarter results with you. Once again, we delivered strong earnings, and I appreciate the efforts of everyone involved, including the GM team, our dealers, our suppliers, our unions, that all helped us meet strong customer demand for our products. Highlights include our international markets outside of China, which had a record quarter, and North America, where we earned 10.9% EBIT-adjusted margins. In the U.S., we are the market leader in retail and fleet sales, including commercial sales. We earned the largest year-over-year increase in U.S. market share of any automaker, and we did it with strong production and inventory discipline as well as consistent pricing.

We delivered more than 20,000 EVs in the U.S. in the quarter, on the strength of record Bolt EV and EUV sales and rising Cadillac LYRIQ deliveries. This moves us up to the second market position and increased our EV market share by 800 basis points. We also continue to sell more trucks in the U.S. than anyone by a wide margin. In addition, the $2 billion of fixed cost reductions we are targeting will flow to the bottom line faster than we originally expected. And the enterprise value of these fixed cost reductions will have even greater than $2 billion of value because we’re strengthening our culture, which has consistently delivered strong results; we’re reducing our executive ranks by more than 15% through voluntary separations, which will help reduce bureaucracy; and we are empowering our leaders to structure their teams to be faster and more agile.

In addition, we are prioritizing programs and projects that have the highest revenue and cost impact. We understand the bar continues to be raised, so we’re holding ourselves accountable to drive improvements every single day. As we look at the performance of the business and the opportunity ahead of us with new ICE and EV launches, we’re able to raise our full year 2023 earnings guidance to a range of $11 billion to $13 billion. The new ICE products we are launching around the world will build on this momentum and support strong mix, pricing and EBIT. In GMI, the new Chevrolet Trax, is off to a very fast start in Korea with more than 13,000 orders placed in the first week of sale. In Brazil, the new Chevrolet Montana pickup saw more than 10,000 orders out of the gate.

And demand for our new midsize and heavy-duty pickups in North America is growing, especially at the high end. Over the last years, we’ve evolved our premium truck offerings from a niche to a franchise. And we did it through manufacturing investments, design, demonstrated capability and technologies like Super Cruise. Our customers are responding. 60% of dealer and customer orders for the new Chevrolet Colorado, our high-end Z71, ZR2 and Trail Boss models. Last year, it was 42%. 75% of the GMC Canyon orders are for higher-end AT4 and Denali models. Last year, it was 45%. 52% of Chevrolet Silverado HD orders are for the top-of-the-line high-country model. And 30% of the GMC Sierra heavy-duty orders are for the new Denali Ultimate, which is a brand-new model that didn’t exist a year ago.

Our profitable growth opportunities extend into other segments as well. For example, the Chevrolet Trax and Trailblazer and the Buick Encore GX and Envista will help us win new customers from brands that walked away from affordable vehicles or scaled-back customer choice. All four of these small SUVs are beautifully designed, packed with technology and include a long list of standard active safety and driver assistance technologies, yet they all have starting MSRPs below $30,000, with the Trax starting below $25,000. As a measure of just how good these vehicles are, the Trax earned a 63% lease residual. That’s 24 points above the previous generation and the best we’ve ever done in this segment. As for the Envista, one auto writer said its gorgeous styling resembles the Lamborghini and another said, as far as rivals go, the 2024 Envista might be playing in the sandbox alone, because it’s both premium and affordable.

At the same time, our EV volumes and market share are growing as cell production rises and our teams’ master new hardware, software and manufacturing technologies that we are deploying. As Paul and I have shared, we plan to produce 400,000 EVs over the course of ’22, ’23 and the first half of 2024, including 50,000 EVs in North America in the first half of this year and double that in the second half. So far this year, we’ve built more than 2,000 Cadillac LYRIQ, and production will continue to rise to help us meet pent-up demand. Both GMC HUMMER EV models are shipping from factory zero, and production is scaling. Our production ramp is carefully cadenced as we add additional trim series to the HUMMER EV pickup and began production of EDITION 1 SUV.

The team at KMI has now built more than 500 BrightDrop Zevo 600 vans, and the Zevo 400 begins production in the second half of the year, and we’ve added Purolator and Ryder as customers. We already have 340 fleet customers for the Silverado EV, and the team at Ramos Arizpe is making great progress preparing for the launches of the Blazer EV and the Equinox EV in the second half of the year. All of this is enabled by rising production at Ultium Cells in Ohio, which we expect to reach full capacity at the end of the year. Everything we learned in Ohio will be applied to our next-use LTM cell plants, including in Tennessee, where we will begin hiring and training production workers in a matter of weeks. Work also continues to transform our assembly plant in Orion Township, Michigan to build the GMC Sierra EV and the Chevrolet Silverado EV.

We have progressed so far, that it’s now time to plan to end the Chevrolet Bolt EV and EUV production, which will happen at the very end of the year. When Orion EV assembly reopens in 2024 and reaches full production, employment will nearly triple, and we’ll have a company-wide capacity to build 600,000 electric trucks annually. We’ll need this capacity because our trucks more than measure up to our customers’ expectation, and we’ll demonstrate that work and EV range are not mutually exclusive terms for Chevrolet and GMC trucks. So stay tuned. As we scale EVs, we will lower fixed costs and will continue to drive margin improvements we outlined at Investor Day. This includes optimizing our pouch cells for energy density, range and cost using new approaches pioneered at our Wallace Battery Center and by our technology partners.

And we announced this morning that we’re also working with Samsung SDI to add cylindrical and prismatic cells to our portfolio. Having multiple strong cell partners will allow us to expand into new segments more quickly, grow our annual EV assembly capacity in North America significantly above 1 million units and integrate cells directly into battery packs to reduce weight, complexity and cost. Reducing vehicle complexity and expanding the use of shared subsystems between ICE and EV programs is another priority. For example, we are reducing the overall complexity of our software configurations and related hardware on all future ICE and EV products. One important part of our efforts includes the reduction of infotainment screen configurations by 60% across our entire portfolio.

By reducing complexity, we can focus on delivering new and improved digital experiences much more quickly. We also expect that our supply chain will be an even bigger competitive advantage starting in ’26 and ’27, because of the direct investments we’ve made in lithium, nickel and other commodities as well as CAM, which will allow us to purchase significant quantities of material on favorable commercial terms. All of this is coming together in a way that will fundamentally change the narrative that traditional automakers can’t deliver competitive EV margins. We have a lot of work to do, but we have the right trajectory, and I believe we can get there much faster than people think. Now before I turn the call over to Paul, I would like to invite Kyle to share an update on Cruise, which continues to expand the scale and scope of its operations.

Kyle, over to you.

Kyle Vogt: Thanks, Mary. I’d like to give a brief update on our progress. Since last quarter, our driverless fleet has increased by 86% from 130 to 242 concurrently operating AVs. We’ve completed over 1.5 million driverless miles, and the pace continues to accelerate. Our first million miles took us about 15 months to complete, while the next million miles will likely take less than three. We’re also regularly completing over 1,000 driverless trips with passengers every day, and we’re seeing strong retention from our early users. This is significant quarter-over-quarter growth in our services well liked, but we’ve had limits on when and where it operates. But today, I’m excited to share that right now, a small portion of our fleet is now serving driverless rides 24 hours a day across all of San Francisco.

For us, this is a milestone years in the making and represents that our driverless fleet has real commercial value. We’re completing the work needed to roll it out to the rest of our driverless fleet as soon as we can. Another key part of rapid scaling is a readily available supply of vehicles. Fortunately, our purpose-built and cost-optimized AV, the Cruise Origin, will be testing in Austin soon. This vehicle has been validated almost entirely in simulation, reducing our historical reliance on expensive and time-consuming supervised test-mile collection. The launch of the Origin is a critical step on our path to profitability as well and towards hitting $1 billion in revenue in 2025. We remain on track and slightly ahead as of today. Thanks, Mary.

Back to you.

Mary Barra: Well, thanks, Kyle. And now I’m going to turn it over to Paul for a deeper dive into the quarter.

Paul Jacobson: Thank you, Mary, and thank you, Kyle, and good morning, everyone. Thank you for joining us today. I’m pleased to report a strong start to the year as the team continues to execute on our transformation. We’re strategically transitioning the business, while at the same time, leveraging our important ICE portfolio with new and refreshed products, driving continued robust demand for our vehicles while pricing has remained stable. We’re also excited to bring on incremental EV volumes, particularly in the second half of the year, as we increase battery cell production at Ultium Cells. And as Mary mentioned, we took initial steps in Q1 towards implementing our $2 billion cost initiative, of which we now expect to realize about 50% in 2023, with the majority of this benefit occurring in the back half of the year.

The performance-based exits in roughly 5,000 individuals, who participated in the voluntary severance program, will drive approximately $1 billion towards this target. But people cost is just one of several areas we’re focusing on. The remaining $1 billion will come from the following initiatives: actions to reduce complexity across the portfolio and throughout the business, in everything we do from vehicle design to engineering and manufacturing; prioritizing our growth initiatives. We simply cannot do everything. We’re focusing on projects like crews, bright drop and software-defined vehicles, which offer the biggest returns on revenue and margin. And lastly, we’re being tactical on overhead and discretionary costs, including corporate travel, IT costs and marketing spend.

These actions will have a near-term impact on costs, but we also outlined a number of additional medium- to long-term opportunities at our Investor Day in November last year, which we are aggressively pursuing. For example, we are developing a fully integrated battery ecosystem and taking a portfolio approach to battery raw materials. We will source from a mix of established and early-stage miners, giving us both security of supply and lower pricing volatility. These are meaningful advantages as we scale into the back half of the decade. The Treasury Department’s recent guidance on the clean energy consumer purchase incentive also validated our battery supply chain work with our entire fleet of EVs under the MSRP cap qualifying for the full $7,500 incentive this year.

Now let’s discuss another important topic, dealer inventory. As we mentioned on the last earnings call, our plan is to balance supply with demand, and that’s exactly what we did this quarter. Early in the year, production improved as supply constraints started to ease and began to outpace proactively plan some downtime, which allowed us to end the quarter with U.S. dealer stock flat compared to December, while we gained 1.3 points of share and increased volumes 4% year-over-year. These production actions were contemplated in our 2023 guidance metrics laid out at the beginning of the year. We are still planning to a 15 million unit SAR and targeting to end 2023 with 50 to 60 days of total dealer inventory, although seasonality production schedules and timing of fleet deliveries may take us out of this range from time to time.

Now let’s get into the Q1 results. Revenue was $40 billion, up 11% year-over-year. We achieved $3.8 billion in EBIT-adjusted, 9.5% EBIT-adjusted margins and $2.21 in EPS diluted adjusted. Total company results were down only $200 million year-over-year, despite a combined $800 million headwind from lower pension income and lower GM financial earnings, providing more evidence that the underlying business remains quite strong. Adjusted auto free cash flow was essentially flat year-over-year, driven by higher capital expenditures related to our EV investments, seasonal working capital headwinds and GM Financial dividend timing. However, we used our strong balance sheet to repurchase $365 million of stock in Q1, retiring 9 million shares and early retiring $1.5 billion in debt maturing later this year.

Given the strong Q1 results and our current outlook, we are increasing our full year guidance to EBIT-adjusted in the $11 billion to $13 billion range, EPS diluted adjusted to the $6.35 to $7.35 range and adjusted automotive free cash flow in the $5.5 billion to $7.5 billion range. I’ll provide more details on this after I cover the regional results. North America delivered Q1 EBIT-adjusted of $3.6 billion, up $400 million year-over-year, and EBIT-adjusted margins of 10.9%. Results were primarily driven by higher pricing and volume, partially offset by mix, lower pension income, warranty reserve adjustments and higher commodity and logistics costs. We saw a $1.3 billion pricing tailwind year-over-year in the quarter, driven largely by the price increases in 2022 carrying into 2023.

We expect this year-over-year pricing benefit to moderate as we progress through the year. However, we anticipate pricing performance on our all-new midsize pickups and refreshed HD pickups to partially offset this headwind. Demand for our full-size pickups remains strong, with increased year-over-year total sales of our Silverado and Sierra full-size pickups up 3%. We also gained 0.3 percentage points of total market share to continue our number one position in full-size pickup sales. Encouragingly, April-to-date performance is also trending well as demand remains healthy, inventory levels are essentially flat, pricing has been consistent, and we’re seeing a steady increase in industry volume. GM International delivered Q1 EBIT-adjusted of $350 million, largely flat year-over-year, despite the fact that equity income in China was down $150 million due to lower volume and pricing pressure, partially offset by cost actions.

The environment in China has been very challenging as the industry navigates continued COVID-related impacts, regulatory changes for both EV and ICE vehicles and greater-than-expected competitive pricing actions. The China team is taking aggressive actions to offset. However, we don’t expect an improvement in equity income until the second half of the year. EBIT-adjusted in GM International, excluding China equity income, was $250 million, up over $150 million versus last year. The successful turnaround the team has executed over the past few years continued with another record quarter. The results were driven by higher pricing, volume and mix, partially offset by commodity and logistics costs and foreign currency headwinds. For the full year, we expect pricing to be up on a year-over-year basis, leveraging the strength of the portfolio and more than covering FX headwinds.

For GM International, we anticipate moderately improved full year 2023 results relative to ’22. The strong results and momentum for the rest of GM International are anticipated to more than offset continued headwinds in China. GM Financial delivered first quarter EBT adjusted of over $750 million, down $500 million year-over-year, as expected, primarily due to the expected decrease in net leased vehicle income, driven by lower lease sales mix as a result of reduced new vehicle production since Q3 2021 and lower net gains on lease terminations. Also, while higher cost of funds impacted results versus 2022, it was partially offset by higher effective yields on new originations and growth in the loan portfolio. GM Financial’s key metrics, balance sheet and liquidity remained strong, providing them the ability to support the GM enterprise across economic cycles.

We’ve seen no material impact due to the recent banking crisis. In fact, earlier this month, we were able to renew our $16 billion revolving credit facilities while also receiving a ratings upgrade of GM and GM Financial bonds from Moody’s. This upgrade should improve credit spreads on future bond issuances and improve cost of funds as their debt portfolio reprices. GM Financial also paid a $450 million dividend to GM in Q1. Our full year GM financial expectations of EBT adjusted in the mid $2 billion range and dividends similar to 2022 have not changed. Corporate expenses were $300 million in the quarter, down slightly year-over-year as we continue to invest in growth initiatives. Crews expenses were $550 million in the quarter, up $250 million year-over-year, driven by an increase in operating spend as well as by the inclusion of stock-based compensation expense this quarter versus Q1 2022.

As we look forward to the rest of the year, our goal is to remain agile and adapt to the dynamic macro environment. Our updated guidance assumes that the pricing benefit we saw in Q1 is neutralized over the rest of the year as we cycle price increases taken in 2022 and incentives gradually increase. Commodity and logistics costs have been stickier than originally estimated, primarily due to higher steel prices on market index contracts. For the full year, we now expect commodity and logistic costs to be essentially flat year-over-year versus our prior expectation for a modest tailwind. Our expectation to realize at least $300 million EBIT-adjusted benefit in 2023 from the clean energy production tax credits is unchanged. And while we continue to experience parts availability and logistics challenges as we did in Q1, we expect these issues to gradually improve over the next few quarters and are, therefore, still expecting 2023 year-over-year wholesale volume to increase 5% to 10%.

As Mary mentioned, we are making great progress towards our goal of 1 million units of North America EV capacity in 2025. As we scale and launch multiple high-volume EVs in strategically important segments, we will see the benefits of the Ultium platform expand and help us deliver margins in the low to mid-single digits by 2025. In closing, I also want to say how proud and thankful I am for all of our amazing team members for their tireless efforts. They’ve executed quarter after quarter and delivered two consecutive years of record profits despite many external challenges. Needless to say, my optimism for GM’s long-term potential remains very high. This concludes our opening comments, and we’ll now move to the Q&A portion of the call.

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Q&A Session

Operator: Our first question comes from John Murphy with Bank of America. Your line is open.

John Murphy: I just wanted to — Paul, you mentioned that the first quarter pricing would reverse through the course of the year, and that’s something close to neutral. But it seems like there are some lessons that have been learned for the last couple of years on creating mix and price upside and managing the business to be more profitable over time. So I’m just curious if you can talk about maybe the lessons that were learned, the products that are being launched. Because I mean, it seemed like the pickups and the HD refresh, you’re leaning into higher mix. But then Mary, you mentioned four crossovers below 30,000, that’s kind of going in the other direction. I mean, how do you think about managing this going forward? And do you think this current price level is something that you might be able to maintain even though you give back what you gained in the first quarter in the face of what sort of an increasing threat from one large player, Tesla, that is cutting price aggressively in the market.

Paul Jacobson: Yes. Thanks for kicking us off today. I think there’s a lot to unpack in your question. I’ll just start by saying we need to be very conscious of the macro environment around us. And as we said, going into the year, we were planning I think somewhat conservatively in recognition of that macro. So about a 15 million units SAR with some normalization of incentives and pricing to a little bit lower demand, we certainly hadn’t seen that in Q1. And despite that forecast, we’re still comfortable taking up our guidance, because I think we’ve we reflected some of that in the back half. And certainly, if we see demand hold up, I would expect that we can outperform these results across the board. But we want to make sure that we’re very conscious of the macro.

When you asked about lessons learned, I think we certainly have really focused on vehicle margins. And I think one of the important steps this quarter, that I’m not sure that the market digested all that well, was when we took down capacity for a couple of weeks at a plant to balance production to demand. And I think when you look back on that decision to have inventories flat while we gained share and increased volumes over the time period, I think, is one of those really valuable lessons learned that we can take to the future going forward. So, on the trim side, clearly, what we are seeing is strong demand for the higher-end trims. Mary mentioned in her remarks, the demand for the Denali Ultimate. This is a trim level that didn’t even exist a year ago, yet customers were asking for it, and you see they’ve responded with their orders.

So, I think there’s lots to look at, lots of encouraging signs for how we think about the business going forward.

Mary Barra: Yes. I would just add, John, that we also — you have to have the right portfolio for the market. We’re doing really well at the very high end, especially in trucks that Paul mentioned. But having the Trax and the Envista, the Buick Envista at affordable levels, and we’ve been able to do that profitably because of the work we’ve done to reduce complexity leverage the scale of components across the vehicles. For instance, the Trax only has 1 powertrain. So, I think when you talk about mix, I think the opportunity, you still have to cover the market for what people can afford but doing it in a way that you’ve really reduced complexity, I think, is one of the big lessons learned, and we’re going to continue to drive that not only across the ICE portfolio, but the EV portfolio as well.

John Murphy: And maybe if I could just ask one follow-up. The CAPU of 96% in North America that was outlined in the financial data, it was based on a two-shift straight time. That’s given where absolute lines are. That’s actually much higher than I would have thought. Taking that higher is going to require adding extra shifts. I mean, how do you do that? And how do you sort of balance sort of this maybe step up in volume that you might execute on later this year? Do you add third shifts? I mean, you just — you get into thing where you’re seeing like drop. You’re managing the business very optimally right now. And if you start growing volume, I think you’re going to become a lot less optimal as you start adding third shifts, particularly with that 96% CAPU number?

Paul Jacobson: Yes, so John, it obviously varies by vehicle type and where we are and we’ve been running pretty much as flat out as we can on full-size SUVs and pickup trucks over time. So there’s a little bit of the margins, but that’s something that we’ve got to really manage aggressively across the board. So, there are opportunities to be able to do that. Should we see demand pick up? But balancing it to demand, I think, is the most important piece of that as we can. So, if we need to take down to moderate some of the growth, I think you’ll see us do that. Opportunities to make up for it are really centered around making sure that we’ve got those shift capacities as well as the parts and components and logistics to be able to move the inventory when it’s finished, too.

John Murphy: But fair to say that’s all variable cost that comes in?

Paul Jacobson: Absolutely.

Operator: Thank you. Our next question comes from Itay Michaeli with Citi. Your line is open.

Itay Michaeli: Just two questions for me. First, maybe, Paul, I was hoping you could maybe talk a bit about the — how we should think about the cadence for North America earnings for the rest of the year, particularly with the strong start you mentioned in April, an intense in the production and any product ramp that you’ll have for the trucks? And then secondly, maybe for Mary and Kyle, congrats on the 1.5 million driverless miles, hope you can share a bit of, a, where you’re seeing safety metrics on those miles and performance metrics relative to expectations? And how the experience is informing you on future scaling plans for Cruise?

Paul Jacobson: Yes, thanks for the question. So, on the cadence side, I think we alluded to on the full year guidance. The original guidance was that we thought the second half was going to be more challenging. So as we lap the price increases of last year as well as building there are any downturns in demand, that’s where we kind of see it. So, I would say it’s a little bit of a first half, second half story. We still got time to be able to manage the second half. We’re watching it closely. As we said in the prepared remarks, April has been very strong for us as well and has continued to be strong. So, I would say that the risk still lies a little bit in the second half, but it’s one that even with that out there, we felt comfortable raising our guidance today.

Mary Barra: And Kyle, do you want to take the question on Cruise scaling?

Kyle Vogt: Sure. Yes, I can do that. So we are in this rapid scaling phase right now. And on the safety side, our performance is strong. We’re very happy with how that’s going. We’ll have some more to share on that soon. But for scaling, we’ve almost doubled our fleet size just in the last quarter, and we expect that kind of rate of improvement to continue. And as we do that, it surfaces just one bottleneck up or another that we continuously burn down and move out of the way so we can keep scaling up the fleet.

Operator: Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open.