GM Falls After CFO Lowers Outlook on Remainder of 2014

A General Motors Co. Chevrolet Silverado Truck Sits in Detroit
Average transaction prices of its full-size light-duty Chevrolet Silverado and GMC Sierra pickups increased almost $3,000 to $35,652 in the quarter from a year earlier, according to a presentation by Alan Batey, head of GM’s North American operations and Chevrolet brand, in New York last week. Photographer: David Paul Morris/Bloomberg

General Motors Co. shares faded after an initial rally as the automaker said its first-quarter performance, which beat analysts’ estimates, pulled ahead earnings from later in the year.

Results for the first three months of the year beat analysts’ estimates by 25 cents a share after GM avoided posting its first quarterly loss in more than four years as higher prices on new pickups largely made up for the costs of recalls.

“We performed better than expected in the first quarter so we’ll have to trim some of the expectations Q2 through Q4,” Chief Financial Officer Chuck Stevens told analysts today on a conference call. Stevens reiterated the company’s earnings forecast for the year, which calls for modest improvement in earnings before interest and taxes.

GM shares fell 0.6 percent to close at $34.17 in New York after reaching a high of $35.70 shortly after the market opened. That leaves the automaker’s shares down 16 percent for the year.

“On a full-year basis, it shouldn’t matter to the long-term story, but those that want to game quarters would be disappointed by what was said today,” David Whiston, an analyst with Morningstar Inc., said today in a telephone interview.

Changing Shape

GM’s forecast in January was for an usually small portion - - 10 percent to 15 percent -- of the year’s earnings to come in the first quarter because of the timing of vehicle introductions and restructuring costs, Stevens said. The first quarter exceeded 15 percent of the year’s earnings, he said.

“We have not changed our view for the year which was overall, excluding the impact of recalls, we expected earnings to be up in aggregate, relatively flat margins,” Stevens said. “We’ve changed the shape of the curve.”

With its new Chevrolet Silverado selling for higher prices than the previous version, GM did better than analysts had predicted. The company has faced criticism for its slow response to complaints about small cars with ignition switches linked to at least 13 deaths. And with a $1.3 billion charge for the cost of recalling 7 million vehicles this year, some analysts had predicted that the Detroit-based automaker would lose money for the first time since 2009.

The stock reacted positively this morning “because they just didn’t post a loss -- it almost didn’t matter what the number was as long as it was above zero,” Christian Mayes, an analyst with Edward Jones, said today in a telephone interview. “Some investors are probably wiping their brow that it wasn’t a loss and thinking this is probably the worst quarter for these issues.”

‘Positive Response’

Profit excluding one-time items was 29 cents a share, GM said today in a statement, beating the 4-cent average of estimates compiled by Bloomberg. That compares with 67 cents a share a year earlier.

Improved pricing in North America, particularly from GM’s new full-size trucks, helped boost earnings, GM said. Profit fell to $213 million from $1.18 billion. North American adjusted earnings before interest and taxes fell to $557 million from $1.4 billion. The average of four analysts estimates was $522 million.

“The performance of our core operations was very strong this quarter, reflecting the positive response of customers to the new vehicles we are bringing to the market,” Mary Barra, who became chief executive officer on Jan. 15, said in a prepared statement.

GM’s revenue rose to $37.4 billion from $36.9 billion a year earlier, missing the $37.9 billion estimate of six analysts.

Recall Crisis

Barra has struggled to contain a recall crisis that erupted Feb. 13 with the notice about faulty Chevrolet Cobalt and Pontiac G5 compact cars that’s expanded to 2.59 million vehicles with potentially faulty ignition switches linked to the deaths of at least 13 people. Congress, federal regulators and the U.S. Justice Department are all investigating why it took the automaker more than a decade to recall cars with switches that allowed the key to slip out of the “on” position, shutting off the engine and disabling air bags.

Since the ignition-switch recall, 60 putative class actions suits have been filed against GM in the U.S. and Canada, the company said today in a filing.

“In the aggregate, these cases seek recovery for compensatory damages, including for alleged diminution in value of the vehicles, punitive damages and injunctive and other relief,” GM said.

Government Inquiries

The company also said its received “various inquiries, investigations, subpoenas and requests for information” from the U.S. Attorney’s Office for the Southern District of New York, Congress, NHTSA, the SEC, and a state attorney general.

GM took the $1.3 billion charge in the quarter for recalls of about 7 million vehicles so far this year. It spent about $700 million related to the ignition switches and cylinders in the 2.59 million small cars, including about $300 million for loaner cars, said Stevens.

Stevens declined to forecast future recall-related costs.

“That’s too early to predict,” he told reporters at GM’s headquarters. “The charges that we’ve taken in Q1 are based on what we know today. As issues come up, we’re going to deal with them aggressively and put our customers first.”

Lower Expectations

Even before the ignition-switch recall, GM was trying to lower expectations for the year. In January, the company said it expected adjusted earnings before interest and taxes to improve “modestly” this year as improved performance in the U.S. and China would be largely offset by $1.1 billion in restructuring costs. Adjusted Ebit would be softer in the first quarter because of losses associated with currencies and costs to roll out new trucks, executives said.

GM reported a $419 million one-time loss for Venezuelan currency devaluation and $8 million in other charges.

GM has lost market share in the U.S. as it has reduced dependence on fleet sales and big customer incentives.

Average transaction prices of its full-size light-duty Chevrolet Silverado and GMC Sierra pickups increased almost $3,000 to $35,652 in the quarter from a year earlier, according to a presentation by Alan Batey, head of GM’s North American operations and Chevrolet brand, in New York last week. Light-duty Silverado pricing improved by $6,000 to $36,431, helped by a richer mix of higher-end models being sold.

‘Very Pleased’

The higher prices helped offset a decline in U.S. sales during the quarter as fierce winter weather in January and February kept shoppers out of dealers’ showrooms. GM’s U.S. sales decreased 2.3 percent in the quarter after improving 4.1 percent in March, according to researcher Autodata Corp.

Improved pricing in North America, particularly from GM’s new full-size trucks, boosted revenue by $1.7 billion while costs for new the product’s materials rose $1 billion resulting in about $700 million of improved profit, Stevens said.

“We’re selling a higher penetration of up-level trim,” he said. “We’re very, very pleased with the performance of the trucks both from an overall mix perspective but also the level of content on the trucks.”

While sales in Europe showed signs of improvement during the first three months of the year, rising 0.7 percent, GM continued to lose money in the region. The adjusted Ebit loss grew to $284 million from a loss of $152 million a year ago, the company said. The average of four analysts’ estimates was a loss of $436 million.

Europe’s losses include about $200 million in restructuring costs related to closing a German assembly plant, Stevens said.

‘Strong Performance’

“Clearly the headline results are overshadowed by the recall campaign charges -- $1.3 billion -- but when you look underneath that we had strong performance across the board,” he said.

GM’s best sales results, a 13 percent jump in deliveries in China, were largely overshadowed by continued losses in other overseas markets. GM’s so-called International Operations unit, which covers essentially everything outside of the Americas and Europe, fell to an adjusted Ebit of $252 million, exceeding the $18 million average of four analysts’ estimates. A year earlier, the unit earned $472 million.

China provided $605 million in Ebit, up from $555 million a year earlier, Henderson said. That would suggest the rest of the group lost $353 million.


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