General Motors (NYSE:GM) said that its second-quarter income fell 2.8% to $2.4 billion, as solid results in the U.S. and China were offset by higher costs, currency headwinds, and the ongoing changeover to all-new full-size pickup trucks in the U.S.
But concerns around commodity pricing and exchange rates led GM to cut its full-year guidance, sending its shares sharply lower after the news was released.
GM earnings: The raw numbers
|Metric||Q2 2018||Change vs. Q2 2017|
|EBIT-adjusted margin||8.7%||1.3 ppts lower|
|Net income||$2.4 billion||(2.8%)|
|Adjusted automotive free cash flow||$2.6 billion||$0.2 billion lower|
|Adjusted earnings per diluted share||$1.81||(4.2%)|
Why GM cut its full-year guidance
CFO Chuck Stevens opened an early morning media briefing by confronting the cost issues head-on: "I would say that the [earnings] headline would be that we delivered very solid results at an enterprise level, despite some fairly significant macro challenges that have been building as we've moved through the year."
Stevens went on to say that GM is facing two sets of "macro challenges" that have cut into its full-year profit expectations. First, the rising costs of key commodities, especially steel and aluminum, have raised GM's costs in ways that are not easy to pass on to consumers. Second, currency devaluations in Argentina and Brazil offset the gains that GM has been able to make in its South American operation over the last year or so.
During GM's earnings call, CEO Mary Barra said that GM has been taking action to offset those challenges, reducing costs elsewhere and looking for ways to hedge against further increases. But the higher commodity prices hurt GM's second-quarter result by about $300 million -- and those higher prices, plus the South American currency issues, will add up to a roughly $1 billion hit to GM's full-year earnings even after the mitigation efforts outlined by Barra.
GM has revised its guidance accordingly. It had previously expected its full-year adjusted earnings per share (EPS) to be roughly equal to the $6.62 it earned in 2017; it now expects adjusted EPS of about $6 for 2018. It also lowered its expectations for adjusted automotive free cash flow, to about $4 billion from "roughly equal" to the $5.2 billion it generated in 2017.
How GM's business units performed
GM has revised its internal structure. It now reports results for four business segments: North America, International, GM Cruise (its self-driving subsidiary), and GM Financial (its in-house bank). GM also reports results for a catchall "everything-else" category it calls "corporate and eliminations."
Here are the second-quarter results for each. Note that these are all presented on an "EBIT-adjusted" basis, excluding the effects of interest, taxes, and special items.
GM North America earned $2.67 billion, down from $3.48 billion a year ago. Two big factors weighed on earnings: the higher commodity costs and GM's full-size pickup selldown. GM is selling off its inventories of 2018-model-year Chevrolet Silverados and GMC Sierras as it prepares to launch all-new models later this year; discounts have been increased, and supplies of higher-profit crew-cab versions have been tight. (Stevens noted that the ramp-up to the launch of the new trucks is proceeding on schedule.)
GM North America's EBIT-adjusted margin, a closely watched figure, was a healthy 9.4% despite the increased costs.
GM International earned $143 million, down from $317 million a year ago. The good news: Equity income from GM's joint ventures in China rose to a record $592 million from $509 million a year ago, on stronger sales of higher-profit Cadillac and Buick models. The not-so-good news: The devaluation of the Argentine peso and Brazilian real hurt the overall results by about $300 million.
GM Cruise lost $154 million, a slight improvement over a $157 million loss a year ago. That's no surprise and it's not a concern. Cruise is developing a self-driving vehicle based on the electric Chevrolet Bolt; it plans to deploy that vehicle at scale as an urban taxi starting next year. In line with its guidance at the beginning of the year, GM still expects to spend about $1 billion on Cruise in 2018.
GM Financial earned $536 million, up from $357 million a year ago. Revenue rose to $3.49 billion from $2.99 billion a year ago on portfolio growth and better residual performance.
Corporate and eliminations isn't usually newsworthy, but there was one thing of note in the second quarter: GM marked up the value of its investment in ride-hailing company Lyft by about $140 million.
Cash and debt
As of June 30, GM had $16 billion in cash, down from $19.6 billion at year-end. (Much of that is an on-paper change: Following Softbank Group's (NASDAQOTH:SFTBF) investment in GM Cruise in May, GM allocated $2 billion of its cash to its subsidiary -- up from zero at year-end.) GM (including GM Cruise) had an additional $14.1 billion in credit lines available, unchanged from the end of 2017, for total available liquidity of $32.1 billion.
The upshot: Good execution overshadowed by tough external factors
GM's longer-term efforts continue to be on track. The effects of the pickup-truck changeover in North America were in line with expectations, and were largely offset by continued strong sales of GM's revamped line of crossover SUVs. In China, results were strong thanks to new products and ongoing strong demand for GM's premium and luxury models.
In the near term, commodity costs and the currency devaluations in South America remain concerns. The good news is that investors now have some clarity around the likely 2018 impacts; the bad news is that the impact will be significant.
I think the headline suggested by Stevens is a reasonable takeaway: GM continued to execute well despite external headwinds. How it fares in the second half of 2018 will depend largely on the ongoing strength of those headwinds.