Tuesday, August 01, 2006

GM fix-it plan gains traction

Thursday, July 27, 2006
GM fix-it plan gains traction
Surprising $1.2B operating profit suggests rebound is real; Cost-cutting goal increased to $9B; Foreign operation posts solid profits
Bill Vlasic and Brett Clanton / The Detroit News

DETROIT -- Surprisingly strong second-quarter sales and operating profits provided hope Wednesday that the long-awaited turnaround of General Motors Corp. is picking up steam.

GM, the world's largest automaker, reported a loss of $3.2 billion in the April-to-June period primarily because of massive one-time costs incurred for the buyouts and early retirements of more than 34,000 hourly workers.

But the bottom-line loss couldn't obscure the steady progress that GM has made in cutting costs, growing internationally and stabilizing its troubled North American auto operations.

GM said Wednesday that, excluding restructuring and other charges, it earned $1.2 billion in operating profit in the quarter and increased its global revenues 12 percent to $54.4 billion.

The results stunned Wall Street skeptics and sent GM stock soaring to a 10-month high of $32 a share.

GM's positive performance provided the first tangible evidence that Chairman Rick Wagoner's methodical turnaround strategy is working.

"Our turnaround has not just gained traction, it's accelerating into high gear," he said in a statement.

The results may also ease the immediate pressure on Wagoner to enter into a global alliance with foreign automakers Renault SA and Nissan Motor Co.

Billionaire shareholder Kirk Kerkorian is pushing GM to consider a linkup with Renault-Nissan, despite reservations on the part of Wagoner and other senior executives.

GM's board approved preliminary talks with Renault-Nissan earlier this month, and discussions between the two sides have just begun, said Fritz Henderson, GM's chief financial officer.

Results could be ammo

But the more progress GM shows toward fixing its core business, the better chance its management can fend off an unwanted deal, according to one analyst.

"This moves the needle a bit more back toward GM, where management could draw the line on stewardship and control," said Glenn Reynolds of the credit research firm CreditSights Ltd. "In other words, they are getting the job done, so why mess with that?"

GM's performance came in sharp contrast to Ford Motor Co.'s surprising $123 million quarterly loss last week, which signaled deepening trouble at the Dearborn automaker and is spurring a ramped-up restructuring plan.

Yet while GM's second-quarter results blew past analysts' forecasts, the automaker still has a long road ahead before it can claim the turnaround is solid.

Of the $1.2 billion in operating profit, nearly $900 million was contributed by General Motors Acceptance Corp., the company's highly successful financing arm that GM will sell a 51-percent controlling interest in to outside investors this year.

And while GM made money in its European, Asian and Latin American regions, the company still posted an $85 million loss in North America in the quarter.

GM's global market share in the second quarter was 13.8 percent. That's up from 13.1 percent in the first quarter, but down from 15.1 percent last year.

Henderson said Wednesday that GM is "not satisfied" with the North American results, despite the fact that they represented a $1.1 billion improvement over the same period in 2005.

"The objective here is to build a successful business and not simply to break even," Henderson said in a conference call with analysts and reporters.

Henderson said GM has a dual focus on cutting costs and boosting revenues, and both areas could see substantial improvement in the second half of this year.

Wagoner said Wednesday the company had increased its target for reducing annual costs in North America to $9 billion from $8 billion this year.

He said GM expects to realize $6 billion in cost savings this year, about $4.5 billion of which will come in the next six months. GM is also expecting improved sales when it launches a new line of full-size pickups this fall.

"We have to get the job done on both fronts," Henderson said.

Tahoe, Escalade sales strong

GM had success in the second quarter with sales of its new full-sized sport utility vehicles such as the Chevrolet Tahoe and Cadillac Escalade.

Those vehicles helped GM rake in $500 more per vehicle on average than it did a year ago in the same period.

"The Yukon, Yukon Denali, Escalade, Tahoe, Suburban, Avalanche (pickup) -- we love them," Henderson said. "So do customers, that's even more important."

Analysts, however, question whether gas-hungry SUVs will continue to sell well if fuel prices stay above $3 a gallon.

"The North American strength is predicated on higher selling prices and volumes which look unsustainable in a difficult" second half of 2006, said Jon Rogers of Citigroup.

But another industry expert said GM has finally weeded out its oldest models and replaced them with a fresher lineup of vehicles.

"The power of new product is definitely alive and well at GM," said Michael Robinet, vice president of forecasting at CSM Worldwide in Northville. "There isn't a lot of old and tired product in GM's portfolio right now."

Despite the gains in sales and operating profits, the second quarter mostly will be remembered for the historic downsizing of GM's hourly U.S. work force.

In March, GM offered buyouts or early retirements to all 113,000 unionized workers, and the acceptance rate far exceeded company estimates.

Henderson said Wednesday that a total of 34,410 employees participated in the "special attrition program" -- 29,945 retirements and 4,465 buyouts.

To pay for the program, GM took a $3.7 billion charge in the second quarter, including $1.4 billion for cash payments to employees who have already left the company or will depart by the end of this year.

Warranty costs to fall

Other one-time charges in the quarter included a loss related to the pending sale of GMAC, a gain on the sale of Isuzu stock and other restructuring costs.

But GM said the charges were partially offset by a $300 million drop in vehicle warranty costs, which the company suggested were a clear sign of the strides it has made in improving quality in recent years.

Despite the improved earnings and other bright spots in GM's numbers, a major Wall Street credit rating agency said Wednesday it may still cut the rating on GM's debt further into "junk" territory.

"Cost savings sharply improved GM's second quarter North American net income," Standard & Poor's said in a statement. "We remain concerned, however, about the potential for negative revenue and product mix developments in North America for the remainder of 2006 in light of high gas prices and an unstable pricing environment."

S&P currently assigns GM a corporate credit rating of "B," five levels below investment grade. More downgrades could jeopardize the sale of a majority stake in GMAC to private investment firm Cerberus Capital Management -- a deal that is expected to close by year end and steer $14 billion to GM over three years.

Another potential risk to the automaker's turnaround is a strike at bankrupt auto supplier Delphi Corp., GM's biggest parts supplier.

While a walkout appears less likely than it did a few months ago, United Auto Workers president Ron Gettelfinger last week said he would not rule out a strike if Delphi wins court approval Aug. 11 to impose wage and benefit cuts. A strike could bring GM factories to a halt within days.

Yet a bigger question is what will become of discussions GM is having with Nissan and Renault. Though it is unclear what value, if any, a partnership would add to GM, which already is in most international markets, Henderson said a 90-day internal study of the proposal will go forward.

He said he had only just begun to meet with counterparts at Nissan and Renault, and that his sole focus at this stage is to explore the "industrial logic" of a tie-up.

It is too early, he said, to discuss cross-ownership possibilities, or to enter into an exclusive agreement barring the foreign automakers from seeking out other partners while in talks with GM.

But he declined to elaborate, in keeping with the automaker's pledge to keep the talks private.

You can reach Bill Vlasic at (313) 222-2152 or bvlasic@detnews.com.

© Copyright 2006 The Detroit News. All rights reserved.

What's next

GM will study a possible alliance with France's Renault SA and Japan's Nissan Motor Co.

The UAW and Delphi, GM's
largest supplier, have yet to work out a deal on pay, benefit cuts; a strike is possible.

The sale of 51 percent of its GMAC finance unit must be finalized, which would mean $14 billion in cash over three years.

It must manage the departure of some 24,000 of the 34,400 workers taking buyouts or early retirements without factory disruptions.

It's preparing for the critical launch of redesigned full-size pickups -- huge money-makers.

Source: Detroit News research


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