GM's strong first-half results clouded by concerns over UAW talks

General Motors Co. might have boosted its guidance for a second time this year after a strong first half of the year, but concern about the company's future seems to be lingering among investors as contract talks continue with the United Auto Workers.

GM shares closed Tuesday down 3.5% even after executives told investors they expect to amass $12 billion to $14 billion in operating profit, up from the $11 billion to $13 billion guidance announced during first-quarter earnings; that was an increase from a previous outlook of $10.5 billion to $12.5 billion. GM's net income for the year is expected to be $9.3 billion to $10.7 billion, up from the previous outlook of $8.4 billion to $9.9 billion. GM also increased its adjusted automotive free cash flow to between $7 billion and $9 billion, compared to the previous outlook of $5.5 billion to $7.5 billion.

For the first half of 2023, GM's net income was up 7% year over year at $4.9 billion on revenue of $84.7 billion, which was up 18%, including second-quarter net income of $2.5 billion.

Still, the positive earnings and outlook appeared to be overshadowed by concern about a potential strike by UAW members against the Detroit automaker. A 40-day strike in 2019 against GM cost the automaker billions and cut deep into inventory right before the COVID-19 pandemic forced factory shutdowns. On top of worries about a potential work stoppage, GM leaders alerted investors to a supply issue with automation equipment that's affecting the automaker's EV production ramp-up.

"The earnings look very good with strong free cash flow indicating no problems with earnings quality, so it’s a shame the stock is down ... I can only speculate, but either the market is worried about a UAW strike or the supplier problem," said David Whiston, an autos equity strategist for Morningstar Research, in a statement. "I think they’ll rectify the supplier problem soon enough, and there’s so much EV portfolio expansion coming from GM, plus new hype soon from the Aug. 9 Escalade IQ unveiling."

GM's improved guidance assumes the company successfully negotiates new labor agreements without a strike, GM CFO Paul Jacobson said. The company and the UAW kicked off negotiations last week, while talks with Unifor, the Canadian autoworkers union, begin Aug. 10.

During an earnings call with investors, CEO Mary Barra addressed the labor negotiations: “We have a long history of negotiating fair contracts with both unions that reward our employees and support our long-term success of the business. Our goal this time will be no different. That's the best possible outcome for all of our employees, plant communities, dealers, suppliers and investors. And we look forward to constructive talks."

The UAW's contracts with the Detroit Three automakers expire Sept. 14, and Unifor's expire four days later.

In response to GM's earnings report, UAW President Shawn Fain said in a statement: “General Motors has made mind-boggling profits over the last decade. ... It’s long past time for GM to pony up, end tiers, pay their employees competitive wages that keep up with the cost of living and provide everyone the ability to retire with dignity.”

More cost-cutting

GM previously announced a $2 billion cost-savings program, but is now aiming to save $3 billion through 2024, Jacobson said. The automaker is reducing costs by lowering its salaried workforce headcount, removing vehicle complexities, cutting spending in sales and marketing, and lowering administrative and travel costs.

The automaker offered a buyout program to most of its salaried employees earlier this year and approved about 5,000 buyout applications, enabling the automaker to achieve about $1 billion of cost savings. Jacobson said the further $1 billion in cost savings that GM’s targeting “doesn't contemplate any additional reductions beyond what I would consider to be normal attrition.”

Beyond the buyout savings, Barra said Tuesday the company cut $800 million in sales and marketing expenses. "We're not done by any stretch," she said, adding that she's asked GM's recently hired new marketing director to take a "fresh review" of the company's marketing costs.

Beyond that, GM's product teams are now using a new strategy called "winning with simplicity," which "will reduce design and engineering expense, supplier cost, order complexity, buildable combinations and manufacturing complexity," said Barra, adding the automaker is targeting a 50% reduction in trim levels for both EVs and internal combustion engine products.

"Our next-generation, full-size pickup and SUVs will show just how powerful winning with simplicity will be," Barra told investors. "We're investing significantly less capital and expect to deliver vehicles that will have much higher levels of customer-facing content and even better margins than today."

GM's efficiency measures led the company on Tuesday to revise its projected capital expenditures to $11 billion-$12 billion, compared to the previous outlook of $11 billion-$13 billion.

Second-quarter results

GM's second-quarter net income of $2.5 billion was up 52% year-over-year on revenue of $44.7 billion, which was up 25% year-over-year. GM’s operating profit for the quarter was $3.2 billion, up 38% year-over-year.

GM’s results were affected by a $792 million charge related to the 2021 mass recall of electric Chevrolet Bolts. GM battery supplier LG Electronics Inc. previously agreed to pay $1.9 billion for the recall costs, but the automaker says it's now covering some of that cost as part of new agreements it has with LG Electronics and LG Energy Solution.

“The charge reflects the conscious decision we made during the Chevrolet Bolt EV and Bolt EUV recall to serve our customers in ways that go beyond traditional remedies, and we are taking new steps that will reduce GM’s costs and improve our EV margins over time,” Barra wrote in a letter to shareholders.

GM recalled more than 141,000 electric Bolts for potential fire risk. Some owners received software updates to fix the issue, while others were offered a battery module replacement. GM has replaced 85,000 batteries, representing more than 80% of the total affected, the automaker said.

Despite all this, Barra announced Tuesday the coming of a next-generation Bolt, a lower-priced electric vehicle that GM originally planned to stop producing later this year.

Meanwhile, GM's net income margin for the second quarter was 5.7%, up from last year's 4.7%. Pre-tax earnings in GM North America totaled $3.1 billion in the quarter for a 39% year-over-year increase. GM International's pre-tax earnings were $236 million for the second quarter of this year, up 13% from last year’s second quarter.

GM's positive results came after the Detroit automaker reported a 19% year-over-year increase in its second-quarter auto sales. The automaker, according to analysts at Cox Automotive, had a record average transaction price of $52,451 in the quarter despite a significant incentive boost of 14% year over year.

GM has been focused on keeping inventory levels to 50-60 days while trying to maintain discipline on incentive spending.

Jacobson told investors GM is still "operating somewhat cautiously."

"As we said from the beginning of the year, we're not assuming major increases in pricing or in average transaction prices going forward," he said. "As long as we see demand continuing to be as strong as it is for our vehicles, we think we're going to continue to perform."

This is a breakout year for GM’s EVs, with electrified versions of the Silverado, Blazer and Equinox all launching. GM is aiming to produce 100,000 EVs in North America this year and reached 50,000 in the first half.

Module woes

While GM's pushing to meet its stated EV production goals, the automaker is battling an unspecified issue with automation equipment supply for battery module production, which is slowing its electric vehicle production ramp-up, executives told investors on Tuesday.

Barra explained that the automaker has experienced "unexpected delays" because an unnamed automation equipment supplier has struggled with "delivery issues that are constraining module assembly capacity."

GM has sent manufacturing engineering teams to help the automation supplier improve its delivery. The Detroit automaker has also added manual module assembly lines at its EV plants.

"While there is some near-term noise with EV production, we believe the overall EV growth and transformation story is set to kick into its next gear for GM into 2024," said Dan Ives, managing director and analyst at investment firm Wedbush Securities, in a statement. "Barra & Co. have put out the golden strategic vision and we view this quarter as another step in the right direction for the GM story with a turnaround in the works for the 313 stalwart."

Barra noted GM is installing additional module lines first at its Factory Zero Detroit-Hamtramck Assembly Center and Spring Hill, Tennessee, plant this summer, then at its Ramos Arizpe plant in Mexico this fall, and lastly its CAMI plant in Ontario in the second quarter of 2024.

The supplier situation should be resolved by the end of the year, if not before then, she said, calling it "disappointing," and telling investors she's "personally been reviewing the lines."

"We'll get this behind us," she said. "I'm very confident of the teams we have in place."

Stellantis NV, maker of Ram trucks and Jeeps, releases its earnings Wednesday, and Ford Motor Co.'s come out on Thursday.

khall@detroitnews.com

Twitter: @bykaleahall