General Motors Company (GM) — Q4 2019 Earnings Call Transcript

Well, welcome, everybody. I’m really excited to have this opportunity to share General Motors’ story today. The video you just saw captures our energy, our passion and our confidence as we transform the company and create a world with zero crashes, zero emissions and zero congestion. This vision drives every team member every day. And we are really enthusiastic about the opportunity we have created to refine the future, redefine the future of personal transportation and all the possibilities that come with it. Here’s a brief overview of what we’ll cover today. Mark will start and provide an update on the reinvention of the Global Product Development organization. He will also showcase some of our dramatic new launches, including Cadillac and the Escalade that was revealed last evening, and he’ll give us a preview of our electric vehicle strategy. Barry will cover our truck and full-sized SUV franchise and our 2020 launches as we’re very excited to launch the full-size SUVs from Chevrolet from GMC and from Cadillac. And Matt, President of our China operation, will cover his update and perspectives on the continuing and evolving macroeconomic situation in China as well as the measures General Motors China is taking to address them and the strong foundation we have and intend to build on, because we see a long-term opportunity in China. Now Matt arrived in the States late last week and out of an abundance of caution, we actually taped his remarks and we will show those to you and he will dial-in for the actual Q&A session. Steve Kiefer, who newly took over our GMI region, will talk about our team’s plan to improve performance in our GM international markets and give an update on the early days launch of our global family of vehicles product, the GEM product we’ve talked about. And then Dan Ammann is here, CEO of Cruise, and he’s going to provide an update on Cruise. He’ll talk a little about the news that we shared earlier this month with the Cruise Origin, and then also provide a framework for how we’re thinking about commercialization and how that translates into revenue and profitability. We’ll then take a break for lunch, and Dhivya will come up and she’s going to review the progress toward our key financial metrics. She’ll review 2019 performance and she’ll also provide an outlook for 2020. She’s also going to share and really hope you see – provide a unique – the unique positioning that General Motors has with our cash-generating franchises and also our accretive growth opportunities, especially in EV but in other areas as well. And because our fourth quarter earnings were announced today and we have our Capital Markets Day today, we will have one Q&A session and address all your questions there. Our goal today is to leave you with a clear understanding of our vision and our strategy for the future and how we’re operating the business. And we hope that you believe, as we do, that General Motors is uniquely positioned with all the elements to take the industry forward. Now let me pause before we go into the content of Capital Markets Day and talk about the coronavirus. Our thoughts and our focus has been on our people and then on the business, and our thoughts go out to everyone who has been impacted by the virus. We are working closely with SAIC, our joint venture partner, as the situation is very fluid. We’re focused on the health and safety of our employees, and we are taking all necessary steps to make sure they have full support and urgent access to any medical support they may need. Our supply chain and engineering teams are working around the clock to develop and execute contingency plans, and we are doing everything possible to mitigate the impact of the virus. Again, it’s a very fluid situation. As we learn more, we will provide updates. So now if we move back to Capital Markets Day, let’s go back to last year’s Capital Markets Day. There, we had recently made announcements for – and shared the major business transformation in November of the year prior, a transformation that was designed to strengthen our business. The cost savings from that transformation helped us mitigate the effects in 2019 of an increasingly volatile global business environment, including reduced volumes in two of our largest markets, China and the United States, as well as the work stoppage in the United States. The team has been working hard to restore lost production while ensuring our inventory is aligned to market demand, and Dhivya will speak on how we continue to not only realize the savings from the transformation but also how we’re looking at production and the ability to recover. In addition, as part of our transformation though, we were working to realign the workforce and our resources with our strategic priorities for the future. We have streamlined our vehicle portfolio to recognize customers’ overwhelming preference for SUVs, trucks, and crossovers. We are also investing heavily in the technology and innovation that will help us realize our vision. I truly believe that 2020 is the year when all of our work comes together and we move forward with integrated solutions that will be the groundwork for reinventing how we deliver mobility to our customers. There are ample evidence today that our customers are increasingly buying products and services from companies and brands they identify as improving their lives and improving the sustainability of the planet. They want companies to integrate environmental stewardship and sustainability into every aspect of the business. And it’s a business imperative because it’s a priority for our customers. It’s also a priority for our employees, and it’s a priority for you, many of our investors, and we believe it’s the right thing to do.

Well, good morning, everybody, and thanks, Mary. And I have to tell you, as an engineer, there’s a lot in the future. These are great days because I get to actually talk about what we’ve been working on and what we’re getting ready to execute. So, I’m really happy to be here. I’m happy you’re here and thanks for tuning in. Mary covered a lot of ground and I’m going to try to amplify some of her comments. But I’d like to point out one connecting thread woven through the tapestry of the subjects she covered, and that is this company is still doing what we said we were going to do. For instance, last year at this event, we said we were going to begin the transformation of our Global Product Group. We made a lot of progress. We took out a significant amount of structural cost and we’re still engineering and designing the future of everything every day. And we’re doing it in a new culture, Mary touched on this a little bit. Yes, we saved a lot of money, but the impact of this transformation goes beyond the bottom line by creating and sustaining this new corporate culture that we’re trying to foster right now. We consolidated teams. We integrated the propulsion and vehicle engineers, the hardware and software engineers and created a true one-team mentality. If you think back about this, our company has always had propulsion in a separate location from vehicle engineering and software engineering in another location. So we’ve done that. We knocked down the barriers between the groups and reorganized to keep them from being rebuilt. We created a strong centralized engineering workforce that can leverage talent from across the enterprise and across the globe. This eliminated the situations we faced before. We were actually competing internally for talent, especially in the software area. By the way, our product group’s workforce has gotten significantly younger, and more than 50% of our workforce has been with us for five years or less. Think about that for a minute. It’s a tremendous transformation. The new structure provides a framework for more easily shareable, smarter engineering processes. Overall, it helps us work smarter, faster, and simpler. Complexity reduction was a huge goal for 2019 and that continues into this year. Parts reduction, in particular, has been and remains a top priority, what we bring into our plants and put on our cars. Last year, we eliminated about 3,500 parts across the board or about 12% of our parts in plants. In 2020, we plan to eliminate a further 25% of parts in plants. We’ll accomplish that by eliminating more trim levels, exterior colors, engines, and transmissions, and by bundling more sourcing options to better serve our customer. The best example, for our next-generation compact crossovers, we’ll have more reused and shared parts. We will reduce total trim levels on Equinox and Terrain from eight to six, and we’ll reduce engine variance from eleven to five. We’ll reduce build combinations from 200 to less than 100 per program. We’ll see significant cost savings from the next generation of an already paid-for architecture that took the mass out that Mary talked about. This action will help us self-fund our electrification programs. We’ll continue to do all the big picture things like getting out of footprints that don’t make money, and Steve will talk a little more about this a little later. That also includes adjusting our engineering and design centers to maximize impact and profit, all while taking a more modern approach to shaping the future. A perfect example of this is the revolutionary new mid-engine Corvette we unveiled last summer, and we’re shipping to dealers and customers this month. In fact, we’ve made number one, which went for a lot of money at Barrett-Jackson, and that all went to the Detroit public school systems. So we started that here the day before yesterday and so we’re ramping up production. We asked our design and engineering teams to re-imagine and recreate what was and is an iconic American sports car, moving the engine behind the cockpit. All they did in response was come back with the greatest Corvette ever. The model run is sold out for the year, and I think it’s going to be a tough-to-get car for quite a while, and that is a good thing, a very good thing.

Thank you, Mark. Good morning, everybody. Thank you for being with us. In our time together this morning, I’d like to do several things. First, I want to give you an update on our 2019 share performance and talk a bit about how we’re navigating some of the segment shifts that are occurring in the industry. Then we’re going to deep dive into trucks to discuss how we’re thinking about and managing that really important part of the business. And we’ll end on what’s to come in 2020, including our full-size SUV launches. What we saw last year was a continuation of the segment shifts that are reshaping our industry. Customers keep moving out of traditional sedans to crossovers and SUVs as well as trucks and vans. GM’s strategy to manage these changes has been to pivot, discontinuing 10 car nameplates and reconfiguring our manufacturing footprint, while at the same time strengthening our lineup of crossovers, SUVs, and trucks. As a result of this proactive refocusing of our portfolio, we significantly reduced our 2019 retail car sales in the U.S. while increasing our sales in the other more profitable growth segments. In the case of crossovers and SUVs, we delivered record retail sales and share, further increasing our number one leadership position in this segment. Similarly, in trucks and vans, we also increased retail sales and maintained our number one leadership position. So in aggregate, our U.S. retail share was essentially flat year-over-year, maintaining our position as the best-selling OEM. I think we’ve managed to pivot pretty well. We were able to hold total retail share despite giving up a full point to discontinued cars and despite significant production losses, both from the strike as well as our full-size truck changeover. Now the reason that we’re so focused on the retail business is because we see it as the best barometer of true consumer demand and it’s generally more profitable than fleet. We’re committed to maintaining our position as the overall U.S. market leader. We’re particularly focused on growing our retail share and doing so in the most profitable segments. And one of those segments is crossovers, where we increased our U.S. retail sales last year by 10%, posting the industry’s largest share gain. Much of this growth can be attributed to the strength of our unrivaled product portfolio, which includes 14 nameplates with multiple entries in each of our four brands to give optimal market coverage across the subsegments. We’re leveraging common vehicle architectures and scale, now more than one million units per year in the U.S. alone to reduce complexity and lower cost of our crossovers. At the same time, we’re managing customer-facing content and styling to maximize brand and product differentiation. Up-level sub-brands and trims provide further differentiation and drive a richer, more profitable mix. Our crossover portfolio is one of the freshest in the industry. The average age will be just 1.6 years by the end of 2020. Examples of the new products include the recently launched Chevy Blazer, an all-new entry, which steadily gained share throughout 2019. Last year, we also introduced XT6, an important new Cadillac entry and an updated XT5, which is the brand’s best-selling model. Together with the segment-leading XT4, Cadillac now has the freshest lineup in the luxury crossover segment. Late last year, we launched an updated GMC Acadia. In 2020, this year, the new crossovers just keep coming. We’ll launch in the high-volume compact segment two completely new additions to the Chevy and Buick lineups, the Trailblazer and the Encore GX. Additionally, we’ll launch updated models of Chevy Equinox and Traverse, Buick Envision and Terrain, and I’m sorry, Envision and Enclave as well as the GMC Terrain.

Good afternoon, and thanks, everyone, for being here today. So in my section, I’d like to talk about two main topics. Firstly, I want to talk about our calendar year 2019 performance and our outlook for 2020; I want to give you more color on that. And importantly, I want to pull together what you heard today and give you a framework on how to think about our business in my second part of the presentation. So let’s get started. 2019 was an eventful year. We had a share of challenges, but I also think we had a number of opportunities that we capitalized on that allowed us to deliver the results that we did. So let’s take a quick look at what worked and what some of the challenges were. You heard a lot about trucks today and crossovers and the performance of our new launches. That was an important tailwind as we think about our performance in 2019. The cost savings we announced in November of 2018 remain on track. In fact, in the calendar year 2019, we were ahead of track and we remain on track for the rest of the calendar year 2020 to deliver what we committed to. GM Financial was a bright spot from a performance standpoint. The business continues to grow and generate record levels of profitability. And finally, from a cultural standpoint, I’ve been talking to you about cash and cash conversion for about a year now. And I think the results we have demonstrated and what we predict for 2020, I think really demonstrate the commitment of the entire team on this very important metric. And I’ll talk more about that later in the presentation. Let’s talk about the challenges. The strike had a meaningful impact on 2019 results. The China business you heard Matt talk about today and what we’re doing there to get that business back on track. South America was volatile – more volatile than what we predicted at the beginning of the year. And you heard Steve talk about the steps we’re taking there as well. I think the takeaway is, relative to what I talked to you about a year ago, there were a number of puts and takes. But the underlying business remains exceptionally strong and that’s what takes us into 2020 with a strong outlook. Let’s look at the actual results, the numbers. EPS, we delivered $4.82 against an outlook of $4.50 to $4.80. And from a cash flow standpoint, we generated $1.1 billion against our guidance of zero to $1 billion. Now, I think it’s important to also look at these results on a strike adjusted basis because it will help frame our 2020 performance and it will allow you to look at apples-to-apples comparisons. From an EPS standpoint, we generated $6.71 on a strike adjusted basis. You may remember our original guidance last year, $6.50 to $7, so in line with our original guidance one year ago. Free cash flow, we generated $6.5 billion of cash, excluding the impact of the strike. And when you compare that against our original guidance of $4.5 billion to $6 billion, it was clearly a strong performance that demonstrates our focus in this important area.

It’s a pleasure for me to speak with you today to give you an update on GM in China and to share with you our plan for sustained development here. After two decades of continuous growth, China’s vehicle market has entered a transition period with challenges that is putting pressure on our profitability, leading to lower equity income from our China operations. Regulatory pressures on fuel economy standards and new energy vehicles continue to increase. The investment required for our new energy vehicle programs and fuel-saving technologies is considerable. Although we haven’t seen a direct impact on our performance that is directly attributable to the prolonged trade tension between the U.S. and China, we know that it is hurting the Chinese economy and ultimately weakening consumer confidence. And China’s currency, the renminbi, remains weak versus prior years. This has had a negative impact on the translation of our earnings into U.S. dollars. While these challenges were widely anticipated, the recent coronavirus outbreak is unexpected and is likely to put further pressure on China’s economy. Prior to the virus outbreak, we had estimated the industry would be slightly down in 2020. We now expect additional near-term volume impact. GM’s target is to perform in line with the industry in 2020. Generally speaking, we expect to see earnings from our China business grow along with industry recovery. China remains the world’s largest vehicle market. Cyclical downturns are normal in mature markets, so it’s no surprise for cyclicality to develop in a market that has witnessed nearly two decades of continuous growth. Having said that, we still believe this market can grow to well over 30 million units annually in the coming years. We’re leveraging our strong business foundation built over the past two decades, combined with China’s scale, to achieve success for the long haul. With Chinese consumers purchasing power getting stronger, the pursuit of prestige will continue to drive the industry consumption upgrade. As a result, the demand for SUVs and luxury vehicles will remain strong. We’re bullish about our downstream opportunities as well. We have a strong presence covering after-sales with ACDelco, automotive financing through SAIC-GMAC, automotive leasing through SAIC-GMF, insurance through INSAIC and connectivity through OnStar.

Well, thank you for Matt’s recording, and welcome to all of you. A special welcome to our international sites that are joining us by webcast today. It’s really a pleasure and an honor for me to be leading this GMI team and to be here presenting to you. For these next couple of minutes, I’m going to talk a little bit about where we’ve been, what our plans are this year and where we’re headed in our GMI international markets. As Mary mentioned, I was named to this role in the fourth quarter of last year. Previously, I was leading our global purchasing and supply chain team and really interacting closely with all of our suppliers around the world. In my opinion, the best automotive supply base in the industry. And of course, we’re going to count on those suppliers as our partners as we move to profitability in all of these international sites. Just by definition, at General Motors, we define GM International as all of our operations outside of North America and excluding China. We participate in over 60 markets that stretch from one side of the globe to the other, including South America, some key strategic markets in Europe, Africa, Middle East, and of course, some key markets in Asia, again, excluding China. Every one of these markets is unique and every one offers us some very interesting opportunities.

So as you can see, we’re focused on growing our U.S. retail business and doing it profitably in crossovers, trucks and SUVs. Our product investments have focused in these segments and resulted in a very strong fresh portfolio. 2020 will be a good year as we benefit from the full-year impact of last year’s big launches and continue to add momentum with other important new vehicle introductions this year. We’re now going to take a 15-minute break, after which we’ll continue with our presentations. Thank you.

Good afternoon, and thanks, everyone, for being here today. So in my section, I’d like to talk about two main topics. Firstly, I want to talk about our calendar year 2019 performance and our outlook for 2020; I want to give you more color on that. And importantly, I want to pull together what you heard today and give you a framework on how to think about our business in my second part of the presentation. So let’s get started. 2019 was an eventful year. We had a share of challenges, but I also think we had a number of opportunities that we capitalized on that allowed us to deliver the results that we did. So let’s take a quick look at what worked and what some of the challenges were. You heard a lot about trucks today and crossovers and the performance of our new launches. That was an important tailwind as we think about our performance in 2019. The cost savings we announced in November of 2018 remain on track. In fact, in the calendar year 2019, we were ahead of track and we remain on track for the rest of the calendar year 2020 to deliver what we committed to. GM Financial was a bright spot from a performance standpoint. The business continues to grow and generate record levels of profitability. And finally, from a cultural standpoint, I’ve been talking to you about cash and cash conversion for about a year now. And I think the results we have demonstrated and what we predict for 2020, I think really demonstrate the commitment of the entire team on this very important metric. And I’ll talk more about that later in the presentation.