GM Quarterly Profit Falls 38% as Europe Woes Seen Lasting

General Motors Co. (GM), struggling to turn around its money-losing Opel unit, said second-quarter profit slid 38 percent as losses widened in Europe where the auto market is heading toward its fifth year of sales declines.

Net income declined to $1.85 billion from $2.99 billion a year earlier, Detroit-based GM said yesterday in a statement. Excluding dividends and other costs related to preferred stock, profit slipped to 90 cents a share, down from $1.54 a year earlier. That beat the 75-cent average estimate of 15 analysts surveyed by Bloomberg.

GM, which rebounded from bankruptcy three years ago to become the world’s No. 1 automaker in 2011, now faces rising losses in Europe and a stagnating China market. The overseas challenges threaten to undercut the company’s recovery even as its domestic market is on pace for the best year since 2007.

“Europe continues to be extremely challenging which makes our outlook for the year uncertain,” Dan Ammann, GM chief financial officer, said yesterday during a conference call with analysts.

The operating loss before interest and taxes in Europe, including Opel, totaled $361 million compared with a $102 million profit a year earlier, GM said. While the performance beat the $440 million average operating loss estimate of four analysts surveyed by Bloomberg, Ammann wouldn’t predict second- half results or when the unit will return to profit.

GM’s revenue declined 4.5 percent to $37.6 billion. The average estimate of six analysts was for $38.6 billion. GM said the decrease reflected the strong U.S. dollar.

European Losses

The revenue at GM Europe plunged $1.57 billion, 21 percent, during the quarter to $5.89 billion. About $800 million of the decline was because of lower vehicle sales, Ammann said on the call.

“We’re taking a lot of very decisive actions around Europe and we have been for a number of quarters now,” Ammann told reporters earlier. “If we’re talking about the general European economy and the industry overall, we continue to see a very challenging environment in the second half.”

The company’s second-quarter European vehicle production fell 29 percent from the year-earlier period to 230,000 vehicles. GM’s market share dropped to 8.8 percent from 9 percent, the company said.

“European losses were better than we expected, but we suspect due in large part to inventory build that must come out” during the second half of the year, Adam Jonas, an analyst with Morgan Stanley, said yesterday in a note to investors. Second-quarter results “may trigger some relief, but we don’t think the numbers mark a strong enough inflection to offset macro concerns.”

‘Gain Traction’

GM saw a benefit of $100 million in material and manufacturing costs in Europe as “our cost actions gain traction,” Ammann said on the call. The company was also able to offset volume and mix losses from the introduction of higher priced vehicles, he said.

“We still have work to do on both the dealer and the company-owned inventory and we expect to address that through the third and fourth quarters,” Ammann said.

GM fell 2.6 percent to $19.14 yesterday in New York. The shares have tumbled 42 percent since its November 2010 initial public offering.

The second-quarter results, GM’s 10th straight profitable quarter, were helped by continued profits in North America and Asia where sales have been growing. Adjusted operating profit in North America fell 13 percent to $1.97 billion and in Asia slid 2.8 percent to $557 million. GM had an operating loss in South America of $19 million compared with a profit of $57 million in the year-earlier quarter.

North America

After dividends and other costs related to preferred stock, GM reported a second-quarter profit of $1.5 billion attributable to common stockholders.

GM’s North America operating profit declined because of lower truck production during the quarter and less pension income, Ammann said. Automakers record revenue when vehicles are produced and shipped to dealers.

The automaker is monitoring whether demand in its home market may weaken, its North American chief said.

“The concern is there” about a slowdown in the U.S. economy and auto market during the third quarter, Mark Reuss, president of GM North America, said in an interview. “The volatility here is big. It’s election time, it’s all of that stuff. We’re looking at what the Fed’s doing.”

Delayed Spending

GM’s North American profits rose 17 percent from the first quarter. The company said the sequential gain was because some spending was delayed to the third quarter. GM said it expects the average adjusted earnings of the second and third quarters to be comparable to the first quarter. Its forecast in May was that all three quarters would be similar.

GM ended the second quarter with $32.6 billion in cash and marketable securities, the company said. That’s an increase from $31.5 billion at the end of the first quarter.

Stemming losses in Europe is just one challenge before Chief Executive Officer Dan Akerson. He’s also grappling with declining market share in the U.S., slowing growth in China and the ramifications of ousting his chief marketing officer, Joel Ewanick, this week. At least four top executives at GM’s Opel unit, based in Ruesselsheim, Germany, are being replaced.

“People want to get a sense for how bad Europe is going to get,” Colin Langan, an industry analyst at UBS Securities LLC, said in a telephone interview. “I don’t think many people will disagree it’s going to be negative for at least several more years. But it’s a question of how negative and how much of a drag it’s going to be.”

‘Embedded Value’

Hedge-fund manager David Einhorn, chairman of Greenlight Capital Re Ltd. (GLRE), said on a conference call this week that GM is poised to rebound because there “is further embedded value.”

GM’s $18.80 close on July 25 was the lowest since the IPO. The U.S. Treasury Department sold 28 percent of GM at $33 a share in the offering and still holds a 32 percent stake, acquired as part of the $50 billion bailout by the Obama administration.

“The biggest fear is the unknown of the macro economy as it relates to Europe,” Ammann said in an interview on Bloomberg Television’s “Surveillance.” “No one knows what the bottom is as it pertains to Europe.”

GM lost $16.8 billion in Europe since 1999 through the first half.

Langan, the UBS analyst, increased estimated full-year losses for GM Europe to $1.6 billion from $1.3 billion earlier this year.

‘Five Years’

“I’m baking in a loss in Europe for the next five years,” he said. “They have a long way to go in Europe. The problem with Europe is that maybe the market itself won’t collapse this year but it’s probably not going to recover so it’s going to be stagnation.”

Morgan Stanley’s Jonas also increased his estimate for GM losses in Europe this year to $1.4 billion, he said in an interview last week. He previously lowered the projection to $1 billion after starting the year at $1.2 billion to $1.3 billion.

European economic weakness may affect the second half of the year, Akerson said June 28 in Chicago.

GM’s global sales rose 2.9 percent to 4.67 million vehicles during the first half of the year. The automaker was helped its Chevrolet brand, which had its best quarter on record, the company said, with global sales rising 2.3 percent to 1.3 million during April through June.

GM’s pace of growth isn’t fast enough to keep ahead of Toyota Motor Corp. (7203) globally. Toyota’s worldwide sales surged 34 percent in 2012’s first half to 4.97 million, putting the Toyota City, Japan-based company on pace to regain the top spot.

“Most of our key metrics were unfavorable compared with a year ago,” Akerson said yesterday. “That’s not acceptable to this leadership team.”

To contact the reporter on this story: Tim Higgins in Detroit at thiggins21@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.