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GM expects bigger profits once its all-new 2016 Chevrolet Malibu is on the market later this year, its CFO said. Source: General Motors Co.
Back on April 23, General Motors reported net income of $945 million for the first quarter.
That was a significant improvement over the $213 million it earned a year ago, but it was less than Wall Street expected, and GM's shares fell about 3% on the news.
GM missed analysts' estimates primarily because of some unfavorable exchange-rate moves, weakness in some overseas markets, and taxes that were higher than expected.
But there was plenty of good news, too, including a big boost in profits in North America. During the earnings call, CEO Mary Barra and CFO Chuck Stevens wanted to make sure that good news was heard -- and that Wall Street's expectations were set fairly.
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Here are five key points Barra and Stevens made during the call.
GM wants to make and sell more pickups and SUVs -- but there's a catch
Sales of GM's pickups and of its big, truck-based SUVs like the Chevy Tahoe and Suburban have been booming lately-- so much so that demand may be greater than GM can supply.
Those are hugely profitable products for GM, and the company would love to sell more. That means making more, and Barra detailed how GM plans to do that. But as Barra explained, they're not going to make too many more, because the company wants to be very careful not to make big investments in new factories that might not be sustainable. Instead, it's looking to increase production in existing plants, adding shifts to those factories that aren't currently working around the clock.
"When you look at our full-size truck [production] capacity right now, our primary focus is on breaking bottlenecks," Barra said. She continued:
Not only in our plants, but also in supplier plants, to make sure that we're providing not only the maximum capacity without installing any new brick-and-mortar, because I think there's still a lot that we can do there, but also get the mix to be exactly what customers are looking for.
And so, we have a very -- a dedicated team that works on that. We've already made tremendous progress. In midsize trucks, we are -- because of strong demand for both the midsize trucks and the vans adding the third shift to [GM's plant in Wentzville, Missouri, where the company makes commercial vans and its midsize pickups] again, focusing on what we can do without capital spending on brick-and-mortar.
New models like the Malibu will boost margins and profits
Stevens said GM saw some weakness in retail "pricing" in North America in the first quarter that hurt profits to the tune of about $200 million compared to a year ago. Generally speaking, GM has been doing a great job of improving its pricing in the U.S., building much better vehicles that can be sold with fewer discounts. And those big sales of high-profit SUVs and pickups have helped a great deal recently.
But right now, two of its biggest-selling cars -- the Chevy Cruze and Malibu sedans -- are nearing the ends of their model runs, with brand-new versions due soon. As is common with outgoing models (from GM or any other automaker), discounts are needed to keep sales going. Those discounts hurt profits.
Stevens expects the full-year impact on pricing to be flat -- or put another way, he expects the all-new models coming this fall to make up the difference by the end of the year. In fact, GM has said that it expects each sale of the new 2016 Chevy Malibu to generate an average of $1,500 in profits more than sales of the current car.
Is that realistic? Here's what Stevens said when asked:
[D]o we expect pricing to able to hold on new model launches? We have one proof-point so far. That's the Corsa in Europe as an example where we said that the next generation -- because it's a significantly better vehicle than the one it replaced, it would generate better incremental profitability. Thus far, that's holding.
When you look at the next-generation Malibu, we've got a larger car than the one that it's replacing, you've got a car that weighs 300 pounds less and drives significantly higher fuel economy. And our expectation is for that car and others coming in the Chevrolet portfolio is that we will be able to hold that price when we have clearly segment-leading vehicles that we're launching into the market.
GM isn't counting on these "mix" gains continuing
While pricing was a "headwind" in North America during the first quarter, GM saw nice gains from "mix" -- the mix of more-profitable to less-profitable products in its overall sales.
Put another way, GM sold a lot of well-optioned (and thus very profitable) pickups and SUVs during the first quarter. That helped boost earnings to the tune of about half a billion dollars -- but Stevens isn't counting on truck and SUV sales growing a whole lot more from here. Instead, he said GM's gains over the next couple of years will come from new products, including the new Malibu -- and some new products that GM hasn't yet announced:
Looking forward, to 2016 [...] from a volume perspective with full-size trucks and full-size SUVs, they'll be up but not significantly up on a year-over-year basis. The real driver of, catalyst for earnings improvement in our product perspective [in North America] will be products that we have not sold before plus the replacement of some of our core Chevrolet portfolio.
Competition is squeezing profits in China, but GM has a plan to offset that
China's new-car market has boomed for years, but lately, there are signs that it's "maturing" -- or put another way, growth is slowing down. Meanwhile, the domestic Chinese automakers have improved their products, and they're competing more fiercely with the biggest foreign automakers -- namely, Volkswagen and GM -- that have long dominated the market.
That's squeezing prices. As Stevens put it:
The pricing dynamics that we've seen and that we're anticipating this year, negative 3-plus percent net price on carryover, that's the same dynamic that we saw last year and the year before. The market's slowing. There's a lot of competition. It's maturing.
But GM anticipated that pressure, and it's responding with more higher-margin products and careful cost management.
What we said, and recognizing that that was a headwind, was that our launch strategy, more SUVs coming into the market, [a big boost in luxury brand] Cadillac, and continued cost efficiency was going to offset those pricing headwinds and enable us to maintain margins. And we're executing that.
I'll give you an example, the [Buick] Envision [SUV]. It has just had outstanding performance since we launched that, as has the Chevrolet Trax [SUV]. And when we look at crossovers and SUVs versus passenger cars, they're more profitable by $1,000, $1,500 a car.
So, I think the pricing dynamic is going to continue to be challenging in China. We're planning around it being challenging. But we're executing to the plan that's going to offset that.
GM has no interest in merging with Fiat Chrysler
Fiat ChryslerCEO Sergio Marchionne has made lots of headlines recently with his repeated calls for industry consolidation -- and hints that he would like to find a merger partner for FCA.
But Barra made it clear that that partner won't be General Motors:
We've been very clear. We laid out a very comprehensive plan that takes us through the early next decade with milestones next year and beyond. We think there's tremendous opportunity for us within the business as we look at efficiency measures, as we look at truly achieving the scale that we should have, because we're already in that top tier of the auto industry among the largest OEMs.
So we have a very well-articulated plan. We're in the middle of the executing that and we're not going to entertain anything that distracts us from accomplishing that.
The article 5 Things General Motors' Management Wants You to Know originally appeared on Fool.com.
John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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