GM Warns of Tougher Second Half With U.S. Market Past Peak

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  • Earnings to drop as truck plants retool, car shifts are cut
  • Facing ‘same old problem’ of doubts profit can be sustained

GM CFO Says Product Mix Drives Revenue, Profit Outlook

General Motors Co. is gearing up for a tougher second half of the year as it slashes production to bring inventory back in line and prepares for new pickup and SUV models.

Both production and earnings will slip in the second half as GM temporarily closes North American factories being retooled to make fresher trucks and sport utility vehicles, Chief Financial Officer Chuck Stevens told reporters at the company’s headquarters in Detroit. Car plants, meanwhile, are cutting shifts as demand plunges for sedans like the Chevrolet Malibu.

Chief Executive Officer Mary Barra has prepared GM for a downturn by improving the health of the company’s business beneath the surface, pivoting away from a longtime reliance on bulk shipments of discounted sedans to rental-fleet companies like Hertz Global Holdings Inc. and Avis Budget Group Inc. GM has still struggled to entice investors who have been skeptical the company is going to be able to keep posting record earnings as it becomes more reliant on a North American market that looks past its peak.

“At the end of the day, it’s the same old problem of being at the top of the cycle and having good numbers,” David Whiston, an auto analyst at Morningstar Inc., said by phone.

Richer Mix

GM shares rose 0.7 percent to $36.08 as of 11:48 a.m. Tuesday. The stock has trailed the 11 percent gain for the benchmark Standard & Poor’s Index this year.

Adjusted earnings of $1.89 per share in the three months ended in June beat the average analyst estimate of $1.70 a share. The largest U.S. automaker sold a richer mix of sport utility vehicles and trucks to retail buyers and cut costs during the quarter in North America.

The results elicited a lukewarm reaction from the market, despite “a number of positive surprises” in the quarter, Barclays analyst Brian Johnson wrote Tuesday.

“While we think GM deserves credit for fine performance, it wouldn’t surprise us to see a muted response from GM stock, as we’re not sure what changes the narrative from this print,” he said. “The cyclical still dominates the secular -- and while we think GM deserves better credit from investors on managing on these fronts, investors don’t seem willing to offer much respect.”

Factory Downtime

GM has scheduled 13 weeks of downtime in the second half of this year at plants that will be retooled for updated models, including its all-important full-size pickups, the Chevrolet Silverado and GMC Sierra. GM will build about 150,000 fewer vehicles in North America in the second half than in the first six months of the year, Stevens told reporters.

The downtime at factories should help reduce GM’s elevated inventory levels. The company started the second half of the year with an excess of 100 days’ worth of vehicle supply on dealer lots in the U.S., about a month more inventory than the industry average.

GM has cut a shift at four passenger-car assembly plants, and a fifth is scheduled for September. Weak demand for sedans like the Malibu has undercut total industry sales, which dropped each of the first six months of the year.

The automaker has “taken very specific actions on passenger cars where we see continued weakness and taken significant production out in the first half,” Stevens said in an interview with Bloomberg Television. “We’ll continue to do that.”

GM CFO Chuck Stevens discusses second-quarter results with Bloomberg Television.

GM Financial is also bracing for headwinds in the second half. The auto-lending unit’s profits will decline as used-vehicle prices fall and drag down residual values, Stevens told reporters, adding that he still expects full-year improvement. Going forward, he said growth will come from buyers with prime credit and loans for sales, rather than from leases or subprime borrowers.

The unit’s second-quarter earnings before taxes surged 67 percent to $357 million on a 40 percent increase in revenue.

Overseas Efforts

As GM curtails less profitable aspects of its business at home, Barra also has led a years-long effort to exit foreign markets where the company fails to earn consistent profit.

For the first time, GM reported European units including the Opel and Vauxhall brands as discontinued operations. The company expects the sale of those operations to PSA Group will close before the end of the year and that costs of the transaction will contribute to a special charge of about $5.5 billion.

In May, GM said its Chevrolet brand will exit the India market and that its operations there will refocus on exports. Isuzu Motors Ltd. is taking over GM’s manufacturing operations in South Africa, adding to departures under Barra from the Venezuela and Russia markets.

— With assistance by Keith Naughton

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