GM's Profit Falls as It Pulls Back Abroad to Bet on U.S. Market -- 2nd Update

By Mike Colias Features Dow Jones Newswires

General Motors Co. provided a clearer portrait of its future, revealing how big a bet it is placing on the continued strength of U.S. buyers.

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The company's financial performance, reported Tuesday, was dented by moves it is making to exit Europe and certain emerging markets. More than $1 billion in costs led to a 42% plunge in second-quarter earnings to $1.7 billion and overshadowed the underlying strength of its core North American operation.

The Detroit auto giant said the short-term pain is worth it, with Chief Executive Mary Barra saying that selling its money-losing Opel unit and shuttering operations in India and South Africa "will allow us to deploy resources and capital to higher-return opportunities." Topping that list: a new line of hulking pickup trucks due in 2018 and the revitalization of Cadillac's premium product line.

Ms. Barra has benefited from a strengthening U.S. market since taking GM's helm in 2014, banking record profits and fat margins that helped the company pay for costly safety recalls and jump-start its self-driving car efforts. In the second-quarter, North American margins exceeded 12%, among the healthiest anywhere in the global auto industry, as customers continued to snap up Chevy Silverados and Cadillac Escalades that are popular amid cheap gasoline prices.

Ms. Barra, however, faces one of her thorniest challenges in more than three years at the helm. She needs to maintain production discipline and hold incentives in check, a job that is complicated by the company's drastic pullback from selling to rental-car fleets that have long been Detroit's biggest customer.

GM's North America unit contributed nearly all of the company's $3.68 billion in operating profit in the second quarter, dwarfing the operating profit and equity income derived from its other key operations -- China and the GM Financial lending arm.

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The auto maker enters the second half of 2017 with excess inventory in North America, resulting from robust production schedules in the first six months of the year. Nearly 1 million unsold GM vehicles are sitting on dealer lots, representing 105 days of supply.

Inventories ballooned amid slower-than-expected sales of passenger cars, which prompted GM to begin cutting production at several U.S. factories. Other plants will be temporarily idled this fall so that assembly lines can be prepared for new sport utilities, pickups and crossover wagons, the hottest models on dealer lots.

GM Chief Financial Officer Chuck Stevens said the company will report weaker third-quarter earnings as a result of needed production cuts. He committed to whittling down excess stock by the end of the year.

Mr. Stevens said history is on the company's side. The strongest selling season for trucks is traditionally the second half of the year, a factor that could offset the negative impact of production cuts.

"The North American business model is proving to be very resilient to some of the challenges that we're facing," Mr. Stevens said. GM should finish 2017 with 10% pretax operating margin and could hit that level again next year, he said.

Barclays analyst Brian Johnson said GM "deserves credit" for sticking by its 2017 profit forecast of $6 to $6.50 per share even amid weaker-than-expected demand, and he believes the company could finish at the high end of that range. Still, he warned in a research note that next year could get tougher as falling industry sales pressure profit margins.

"The risk of negative earnings revisions of '18 estimates could pressure GM," he wrote.

For the second quarter, GM posted operating profit of $1.89 per share, breezing past Wall Street expectations of $1.69 per share. The per-share figure excludes results from GM's Opel business in Europe, which is slated to be sold to French car maker Peugeot by year's end.

China -- GM's No. 2 profit generator and top market by sales volume -- continued to provide steady income of about $500 million, even amid flattening consumer demand as sales of pricier SUVs and GM's Cadillac luxury line padded profits.

GM got a lift from a nascent recovery in South America, which has been a drag on the bottom line in recent quarters. The company trimmed its losses to $23 million, from $118 million a year earlier, and said it expects further improvements through the rest of the year.

Write to Mike Colias at Mike.Colias@wsj.com

(END) Dow Jones Newswires

July 25, 2017 15:59 ET (19:59 GMT)