Saturday, April 22, 2006

GM's fix-it plan kicks in

Friday, April 21, 2006

GM's fix-it plan kicks in

Automaker cuts losses, increases cash hoard
Bill Vlasic / The Detroit News

With its losses narrowing and its cash reserves piling up, General Motors Corp. is ready to kick its turnaround plan into a higher gear in the second half of 2006.

The world's largest automaker said Thursday it lost $323 million in the first quarter, a $1 billion improvement over last year's results and a hopeful sign that GM may have turned a corner in its road to revival.

Even though it was the company's sixth consecutive quarterly loss, GM Chairman Rick Wagoner hailed the results as an "important milestone" in the recovery of GM's troubled North American auto business.

"Clearly we're moving in the right direction," Wagoner said in a CNBC television interview Thursday. "It's somewhat gratifying to see."

The quarterly results pumped some life back into GM's stock, which had been steadily declining in past weeks. GM's shares closed Thursday at $22.64, up $2.07 or 10 percent, on the New York Stock Exchange.

Wagoner and his executive team said more significant gains are projected in the second half of this year, when GM realizes substantial savings from the expected retirements of thousands of factory workers.

GM is rolling out an "accelerated attrition" program that offers buyout packages to more than 130,000 hourly workers at the automaker and at bankrupt Delphi Corp., GM's biggest parts supplier.

The unprecedented buyout program is designed to help GM shed 30,000 U.S. manufacturing jobs by 2008, and to bring its vehicle production capacity in line with its shrinking market share.
"The attrition program is a major enabler to achieving that goal (of cutting 30,000 jobs)," said Fritz Henderson, GM's chief financial officer.

Slashing jobs -- along with lower health care costs -- is an integral part of GM's strategy to reduce its bloated structural costs by $7.5 billion annually.

The bulk of the savings will materialize in the second half of this year, Henderson said. He said health care reductions and employee attrition could account for $2.1 billion in savings in the third quarter and another $2.3 billion in the fourth.

New products drive gains

The cost cuts should revitalize GM's balance sheet, and put the automaker on track to eventually return to profitability.

"The improvements we are seeing are real," said David Healy, an analyst with Burnham Securities. "There are a lot of basic improvements being made that will accumulate in the third and fourth quarters."

Highlights of GM's first quarter included a 14 percent rise in overall revenues to a record $52.2 billion.

The revenue gains were driven in part by the launch of GM's all-new, full-size sport utility vehicles, the company said. GM reported its revenue-per-vehicle climbed $1,000 to $19,960 in the quarter, as consumers paid higher sticker prices for new products such as the Chevrolet Tahoe.

But even with higher revenues and the introduction of several hot new products, GM's North American operations remained in the red during the first three months of the year.

The automaker lost $946 million in North America during the quarter, compared to $1.5 billion in the same period a year ago. The loss in this year's first quarter included $484 million of an overall $1 billion charge to fund retiree health care.

In its health-care agreement reached last year with the United Auto Workers, GM agreed to make three $1 billion contributions to a fund that will offset higher medical bills for retired workers. The next installments are scheduled in 2007 and 2011.

The improved results in North America overshadowed solid performances by GM in other regions of the world.

GM Europe reported earnings of $88 million in the quarter, the first time the division had a first-quarter profit in six years. The automaker also increased profits in Latin America and Asia, reporting a 76 percent increase in vehicle sales in China alone during the quarter.

Execs pleased with progress

After months of enduring grim predictions of a GM bankruptcy, company executives were understandably pleased with the progress displayed in the quarter.

"I wouldn't say that we're satisfied with any of the results," said Henderson. "But if you look at where we came from, there are signs that the turnaround is working."

GM lost $10.6 billion in 2005 as it gave up U.S. market share to foreign rivals such as Toyota Motor Co. and booked huge charges to pay for the planned downsizing of its North American manufacturing operations.

But despite calls for his ouster by some analysts and media organizations, Wagoner has remained firm in his belief that GM can be methodically turned around with better products, tighter costs and an infusion of cash from the sale of noncore operations.

Henderson said GM ended the first quarter with $21.6 billion in cash, including a $317 million gain in the quarter from the sale of most of GM's equity stake in Japanese automaker Suzuki Motor Corp.

The company expects to get another $10 billion in cash when it completes the sale of a controlling interest in its General Motors Acceptance Corp. finance unit later this year.
Building up cash is critical to GM's broad restructuring strategy, Henderson said.

"There is a sense of urgency about ensuring that we have a strong liquidity position in order to finance the turnaround," he said.

A portion of the cash will go toward funding buyouts ranging from $35,000 to $140,000 for hourly workers. Henderson said thousands of GM workers are expressing interest in the program, but declined to predict how many will choose to leave the company.

However, he said GM was hopeful that the bulk of its 30,000-worker reduction will be achieved in the current buyout program. "We want to frontload this as much as possible," he said.

Burning cash at rapid rate

The positive signs for a recovery, however, are still clouded by the uncertain situation at Delphi.
The bankrupt parts maker is seeking a major restructuring of its U.S. operations that includes slashing the wages of unionized workers and closing or selling 21 of its 29 plants.

Last month, Delphi asked a U.S. Bankruptcy Court judge to cancel its contracts with the UAW and other unions.

If the court approves the motion, the UAW has said it could launch a strike at Delphi that would cripple vehicle production at GM.

But Wagoner and other GM executives have vowed to work out a deal with Delphi and the UAW that averts a strike.

"We're committed to finding a solution," Henderson said.

"We have a vested interest in (Delphi) emerging from bankruptcy as a successful supplier."
But skepticism remains among some analysts who note GM is still burning through cash at a rapid rate.

"If we exclude the $2 billion in proceeds from asset sales, it appears that GM burned through approximately $1.2 billion in cash in the quarter," said Rod Lache of Deutsche Bank.

GM declined to provide any guidance about earnings for the rest of the year, primarily because of the uncertainty at Delphi. Wagoner also was careful to point out that GM has many more milestones to achieve before the turnaround is complete.

"We're optimistic, but there's still a lot of work in front of us," he said.

You can reach Bill Vlasic at (313) 222-2152 or


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