GM Posts US$3.18-bil. Q2 Net Loss Due to Restructuring Costs; Revenue and Operating Profit Rise

GM’s Q2 Operating Profit at US$1.2 bil.

General Motors (GM) has reported a second-quarter net loss of US$3.18 billion, which included one-off charges that totalled US$4.3 billion. Revenue for the quarter rose to a record US$54.4 billion, a 12% rise compared with US$48.47 billion, year-on-year (y/y) on the quarter. Adjusted operating profit (excluding charges) for the quarter was of US$1.2 billion. Special items included the previously announced US$3.7 billion after-tax charge related to the successful attrition programme, in which 34,400 hourly employees leave GM's books. Other special items included a loss related to the pending sale of 51% of GMAC, a gain on the disposition of Isuzu stock, and restructuring charges, according to a company release.

Wagoner: Turnaround - "Accelerating into High Gear"

Chairman and chief executive officer (CEO) Rick Wagoner said in the release: “Our turnaround has not just gained traction, it’s accelerating into high gear,” adding: “While significant work still remains, our ability to identify and initiate $9 billion in cost cuts over the course of the past year is unprecedented in this industry." “We’re particularly pleased with the speed with which our people have implemented our turnaround plan. Conventional wisdom is that you can’t turn a ship as big as GM around quickly. We aim to prove that conventional wisdom wrong,” Wagoner said.

GM Automotive Operations

GM’s global automotive operations showed a US$1.3-billion y/y improvement, recording a US$362-million profit on an adjusted basis, excluding special items. This is due primarily to significant improvement in GM North America and continued profitability improvement in other regions. Although GM's global market share fell dramatically y/y on the quarter to 13.8% from 15.1%, it still represents an improvement from 13.1% in the first quarter and is largely attributable to the lack of a repeat of the volume-grabbing incentive campaign in the United States this summer.

Wagoner: U.S.Retail Sales Gaining Momentum

"Actually, we're beginning to see some momentum in our retail sales, and hopefully July will reconfirm that," Wagoner told WJR. He noted that GM posted its best sales volume performance in June, despite reporting a 26% drop in total sales compared with the prior year, due to June 2005's discount-driven sales rate. GM will report July sales results on Tuesday next week (1 August).

GM Europe posted operating profit, excluding special items, of US$124 million for the quarter, an improvement of US$94 million compared with earnings of US$30 million in the second quarter of 2005. The improved earnings reflect favourable material costs and improvements in pricing. “Our European operations continue to gain momentum, posting a second consecutive profitable quarter, excluding special items,” Wagoner said, adding: “We are pleased with Saab’s global market performance, posting a sales increase of 24 percent for the first half of the year, and the continued growth of the Chevrolet brand in Europe. We are also encouraged by the response to the new Opel/Vauxhall Corsa, unveiled at the recent London Motor Show and scheduled to arrive in showrooms this fall.”

GM Asia-Pacific posted earnings of US$167 million in the second quarter, on an adjusted basis, excluding special items, down slightly from last year’s earnings of US$183 million. The difference is more than accounted for by the loss of equity income from Suzuki following the reduction in GM’s equity stake. Market share in the region increased to 6.7% in the second quarter of 2006, up from 6.2% during the second quarter of 2005, driven by strong sales in China.

GM Latin America, Africa and Middle East posted adjusted earnings, excluding special items, of US$156 million, a significant increase of US$131 million compared with last year’s second-quarter results of US$25 million. This reflects an increase in volume and improved pricing.

General Motors Acceptance Corporation (GMAC) reported record net income of US$898 million for the second quarter of 2006, up by US$82 million from second-quarter 2005 earnings of US$816 million. GMAC’s mortgage business ResCap reported increased results, while the Automotive Finance and Insurance businesses reported lower earnings. “GMAC continues to perform well despite pressure on profit margins from rising interest rates,” Wagoner said. “We remain on track to complete the sale of 51 percent of GMAC to a consortium of investors in the fourth quarter.” GMAC’s Automotive Finance operations reported earnings of US$251 million, down by US$115 million from US$366 million earned in the second quarter of 2005. The decrease is due to a combination of continued margin pressures, lower remarketing results in the United States and Canada, and higher consumer credit provisions, slightly offset by certain favourable non-U.S. tax rate changes and increases in investment income.

Outlook and Implications

GM has been gaining considerable traction with its turnaround programme in North America, as demonstrated by the second-quarter results and is on course to show considerable improvement in the region in the coming months. Not that the way is clear of obstacles, but GM is looking like it has the strategy to overcome most of them.

GM's global operations also showed positive signs and GM's European operations can look forward to some volume success with the sharp-looking new Corsa entry to the B-Segment unveiled at the U.K. Motor Show. Although Wagoner explained at the show that they have no current plans to import the vehicle to the United States, the model is exactly what GM North America could do with in the current climate, rather than the somewhat mundane Daewoo-derived Chevrolet Aveo. However, currency exchange rates and the U.S. automakers’ fear of the Corsa being only a hatchback in its current form will ensure that it will not cross the Atlantic in the near future.

Concerns about the continuing rise in fuel costs affecting GM's North American sales were flagged yesterday by Standard & Poor's (S&P) rating agency as it said that it might still revise GM for another downgrade in its investment status, on what it sees as GM's poor product mix. Fuel costs are indeed reaching a critical point, but current wisdom maintains that the price will have to rise even further before consumers start changing buying decisions en masse.

The forecast shift from large and mid-sized sports-utility vehicles (SUVs) to crossover utility vehicles (CUVs) is part of the reason for the high falls in the truck segments. The impact of high fuel costs is seen as causing consumers to delay buying decisions or swapping to CUVs, rather than swapping segments, or downsizing altogether. Much of the fall in the full-sized pick-up, SUV and mid-sized SUV segments has been largely attributable to these factors. Research indicates that consumers still require vehicles with a similar overall footprint to existing SUV segments, and will not migrate to smaller vehicles, as has happened historically in times of high oil prices. However, the point at which this rationale may change is getting closer, with the average price of a gallon of fuel hitting over US$3 per gallon, but current wisdom indicates that this can still be assimilated into household budgets without the need to downsize.

GM is relying heavily on its new range of GMT 900-based SUVs and pick-ups due out at the end of this year/beginning of next year. Although these segments are currently shrinking and represent a potential threat, the new model activity will mean that GM achieves a larger slice of the shrinking pie, with the likely biggest losers being Ford's F-150 and Chrysler's Dodger Ram models, both of which are well into their respective model cycles, and therefore will not hurt GM in the short term.

Improved profitability in its U.S. sales, further acceleration of its cost-cutting programme by a further US$1 billion this year, and some important new model releases away from the GMT 900 platform, not least the new full-sized CUV entries such as the GMC Acadia, will help GM to maintain its current momentum going forward. Although it still has to address the lacklustre sales of its sedan ranges, the immediate future appears to be secured away from talk of alliances with other manufacturers.