Tags: GM | Profit | Automaker | Recalls

GM Chief Pledges Global Profit Gains as Automaker Looks Past Recalls

Wednesday, 01 October 2014 08:39 PM

General Motors Co. Chief Executive Officer Mary Barra outlined revised financial goals Wednesday as she works to shift the focus at the largest U.S. automaker from fixing recalled cars to making more money selling new models.

The operating margin at its North American unit will reach 10 percent and its European business will return to profit in Europe in 2016, GM said before a presentation to investors in Milford, Michigan. The automaker also plans global earnings margins of 9 percent to 10 percent by early next decade and will maintain similar margins at its Chinese unit as it works to improve operations in other markets outside the U.S.

“It’s about execution, and that’s what we’re focused on,” Barra told reporters before the presentation.

Barra has been hobbled by scrutiny from lawmakers, regulators and the public for most of her nine-month tenure as CEO because of a vehicle defect, linked to 23 deaths so far, that wasn’t fixed for a decade. She fired 15 people after an internal investigation of the 2.59 million-vehicle recall and has said Detroit-based GM may need as much as $600 million to compensate victims killed or injured because of the flaw.

The investor meeting Wednesday at GM’s automotive test facilities shows the company’s plans to shake off the recall, which Barra has blamed on a culture she’s working to change, and move forward, the CEO told reporters before the presentation.

The goal is “to make sure we become the most valued automotive company,” Barra said. “As you look at this year, this is really our first opportunity as a leadership team to really talk about the future of the company.”

Earlier Goals

GM previously set less specific goals of a 10 percent margin for adjusted earnings before interest and taxes in North America and returning to profit in Europe, both by mid-decade, without giving a year. GM reported about a 9 percent profit margin in North America in the second quarter, excluding recall costs.

“While we don’t expect GM to reach 10 percent margins, we believe the investor day could demonstrate that margins can in fact improve, even in the face of plateaued growth in the U.S. industry, driven by better cost and product improvements,” Brian Johnson, a Barclays auto analyst, wrote in a Sept. 24 report previewing Wednesday’s meeting.

Business Fixes

GM shares on Wednesday bucked a broad market sell-off, gaining 1.7 percent to close at $32.49 in New York. The stock has fallen 21 percent this year.

The margin gains will be fueled by improvements in North America, China and Europe, Chief Financial Officer Chuck Stevens told investors. South American and other international operations will lose money in the short term as GM works to fix those businesses, he said.

In North America, GM will generate additional revenue from new models and cut about $900 million in logistics cost savings in both 2015 and 2016, he said. The company can maintain a break-even point when annual U.S. industry sales are about 10.5 million cars and trucks, Stevens said. Industry sales are forecast to run as high as 17.5 million in 2016, he said.

In China, GM plans to grow faster than the industry and still maintain profit margins, Stevens said. Sales will increase 39 percent from 2014 to 2018 compared with 26 percent for the overall industry, Stevens said.

The return to profit in Europe will be fueled by a $1.5 billion swing in cost and revenue improvements including $100 million in fixed savings, $300 million from sales generated by new models, $400 million from an overall European market increase and the elimination of $700 million in restructuring costs from this year, he said.

GM’s second-quarter adjusted earnings before interest and taxes in North America fell to $1.39 billion from $1.98 billion, missing analysts’ estimates. Excluding recall costs, profit in the region rose to $2.4 billion, GM said.

European Outlook

The automaker, which has lost money in Europe since 1999, upgraded the outlook for the region in June to a return to profit by mid-decade from only breaking even, without specifying any dollar amount. GM’s second-quarter losses in Europe widened from a year earlier to $305 million from $144 million, with much of the increased costs associated with closing an assembly plant in the region.

GM President Dan Ammann said he expects the company’s new vehicles to drive stronger sales and profit during the next several years. The automaker started selling 21 new or freshened models globally in 2012 and increased that to 31 in 2013, followed by 30 this year.

Next year, the company will start selling 27 new or refreshed models before starting what Ammann called an “onslaught” with 38 in each of 2016 and 2017.

“There is tremendous potential for growth at GM,” he told investors at the meeting.

Fewer Parts

In 2015, about 27 percent of global sales will come from products new or refreshed within 18 months, rising to 38 percent in 2016 and 2017 and reaching 47 percent in 2019, GM said Wednesday in a statement. GM will also roll out a new system combining new welding technology and a mix of steel and aluminum that will allow lighter vehicles with 20 percent fewer parts.

GM will shift from about 14 common vehicles designs next year to only four by 2025 to save costs and make it easier to build cars and trucks, Mark Reuss, who heads up GM’s global product development, purchasing and supply chain, told investors Wednesday.

Refreshed Models

“This is the key to unlocking scale and specific customer requirements around the world,” he said, shortly before showing investors many of the new models that have not yet been introduced, including a new Chevrolet Cruze hatchback, Opel Corsa and Cadillac CT6.

The automaker also said it plans to invest $14 billion in China from this year through 2018 to open five new vehicle assembly plants and support annual sales of 5 million cars and trucks. GM plans to introduce 60 new or refreshed models in China in that period, including nine new sport utility vehicles.

GM said the plan to move Cadillac to New York as a separate business unit comes as the brand will have four new vehicles in 2015 and introduce nine new models in China in the next five years.

Standard & Poor’s Ratings Services raised its ratings on debt in both GM and General Motors Financial Co. to investment grade on Sept. 25, citing progress in Europe, healthy cash flow and limited damage to the company’s reputation and market share as a result of its record recalls. S&P cut GM to junk in 2005.

Dividend Plan

The company said Wednesday that it will increase dividends to shareholders in the future beyond the $2 billion average from 2011 through 2014. Stevens said Wednesday that he doesn’t expect any share repurchases in the next 12 months.

GM will reinvest in its business, maintain a “fortress” balance sheet and then return excess capital to shareholders, he said. GM has set a target of overall auto liquidity at the upper end of a range from $30 billion to $35 billion, including $20 billion to $25 billion in cash, Stevens said.

GM entered this year on a roll, with shares rising 42 percent in 2013 as the U.S. government gave up the last vestige of control it gained over the company in a 2009 bankruptcy. In January, GM said it would pay a dividend of 30 cents a share, the first quarterly payment since July 2008.

The automaker has since recalled almost 26 million cars and trucks in the U.S. for a variety of defects, the most by any automaker in a single year.

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General Motors Co. Chief Executive Officer Mary Barra outlined revised financial goals Wednesday as she works to shift the focus at the largest U.S. automaker from fixing recalled cars to making more money selling new models. GM shares rose in the face of a market sell-off.
GM, Profit, Automaker, Recalls
Wednesday, 01 October 2014 08:39 PM
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