General Motors Company (GM) Earnings Call Transcript & Summary

Okay. Great. Thanks, everyone, for joining. My name is Rajat Gupta. I'm a member of the Automotive Equity Research team at JPMorgan. Very pleased to have with us CFO of General Motors, Paul Jacobson. Paul, thanks for being here. I believe you have a quick opening remark and then get into Q&A.

Yes. Thanks for having me, and it's great to see such a great crowd here and a beautiful building, first time in the building. I was -- Raj, I miss that little auditorium with the tables and the microphones on there and spent a lot of time in that room, but it's great to be here with everybody today. Just a couple of opening comments. You're coming off our [indiscernible] as you know, the first half of the year has gone remarkably well for us. We were able to raise our guidance for the full year. That I would say, is fairly consistent with what we expected going into the year, aside from the IEEPA refund and then a little bit of the outperformance. But I think when you look seasonally between the first half and the second half, as we've talked about, there are some pressures that are adversely affecting the second half of the year. But I think everything really is pretty much in line with where we thought coming into tumors held up remarkably well across the board. That's true for our GM Financial captive, and we have some of our GM Financial colleagues here in the room today, but also on the new purchase side and the trucks, the SUVs have held up despite a lot of public affordability concerns and reports of affordability concerns, I think the consumer has been pretty strong for the year for us. And that's led to what I would say is just more consistent results across the board. We have had a few announcements in the last couple of weeks and I wanted to just touch on those really quickly. First, you saw that we were able to reach an agreement to extend our joint venture China with SAIC. We're very pleased with how that restructuring has gone [indiscernible] talked about. And while China may not get back to the $2 billion annually, I hope it does, but if it doesn't, it's okay, the effect of the restructuring has made it so that we can self-fund it can be consistent profitability. We've applied a lot of the inventory discipline in a lot of the lessons that we've learned over here to that business over there, and it's performed well. I will tell you with China having some internal struggles economically with the consumer there. We're really, really grateful that we did the restructuring when we did. And I think it's a really good position relative to a lot of the other foreign automakers that are operating in China really pleased and really proud of the team there, both on the GM side, but also on the SAIC side for the hard work that they put into that. And I think the business is relatively healthy, considering was. And that's the foundation for us to be able to extend that partnership and move forward together. So we're excited about what the next 20 years can bring together and capitalize on what we've done. The second announcement, you may have seen that Samsung, we reached an agreement with Samsung SDI to work on future development, but most importantly, take that battery plant in Indiana and let them have that. It's really important to note that this was factored into our second half accruals and our charges. The deal was [ subsea ] at that point, which allowed us to go ahead and take that charge. So there's nothing new coming out of that. and very, very consistent with what we've said, which is reduce our capacity, make sure we maintain a lot of our partnerships and our relationships so that we can be there as EV demand grows and we continue to see EV penetration grow, albeit probably much more slowly than what the market thought 4 or 5 years ago, given the changes in the right [indiscernible] support, et cetera. So no, I would say no real news there from that standpoint, but it is a big step forward. And what it allows us to do is consistently think about the EV restructuring, as we've said from day 1, which is get it behind us so that we can focus on entire value chain on tomorrow rather than thinking about yesterday. And I think where you look at where we stand competitively. I think we're way ahead of all of our major competitors that are out there in terms of putting our best foot forward and looking ahead to where we can make the improvements in EV profitability and grow as the market grows. And that discipline, I think, is evident in everything that we've done on the EV front. And then lastly, the purchasing commitment or a purchasing facility that we announced last night, this morning, $4.5 billion facility allows us to strategically throughout the world ramp up some inventory. What you've seen over the last several years has been disruption after disruption, whether it's geopolitical, it's act of God, act of nature or you've seen supply shortages, et cetera. What this does is it really gives us in an effective way and ability to get supply chain continuity over the next few years. We think this is going to be a really important step. It will add a little bit of cost to us on the interest line. But as you look at the facility overall, it was a really well-structured facility led by JPMorgan and Santander. We're appreciative of their partnership in working through it. But what it will allow us to do is essentially maintain that continuity of cash flow despite the fact that we're going to build up a fairly sizable inventory allow us to maintain production even in the midst of some of the global disruptions that we've seen over the past few years. So really excited about that, more to come on it, but I thought that was a really well done structured by our treasury team, our supply chain team and through our banking. So we're excited about that. And I think it's just more evidence of the forward thinking sort of risk mitigation of the past to try to get consistently more profitability and continuity and margin performance more stable than what we've seen in decades past, and I think more of the story of what's exciting to come about General Motors. So really looking forward to the conversation. Sorry, those remarks were long, but...

We'll double click on some of those through the conversation.

Maybe just to start with the first one into the second half including -- so there are a lot of items to watch in the second half. You step up in commodity inflation, you have more onshoring costs. You have some launch costs. With structural levers you think are tracking ahead or behind plan? And -- and what is the pacing item to hold these margins as the next launches materialize over the next 6 to 9 months?

Yes. I think a lot of this gets caught up into what 6-month period are you measuring? And when you think about the business over a long trend we've got a lot of transition costs, as you said, as we cut over to the new truck, which will ramp up through '27 until we get to full capacity. But those costs as you're transferring losing some volume and cutover you're hiring people for Orion and the onshoring work that we're doing there. There's a little bit of structural inefficiency in the short run to get to the longer run answer. So I think everything is on track. I think especially when you look at. And again, not looking at 6 months, 6 months, 6 months, but looking over the long run, we're transitioning to a new truck same time that the existing trucks in their last year of production are doing extraordinarily well. I think if you look back historically, and we've challenged the commercial team to look at their past heuristics and pricing models, et cetera, you would typically see this massive falloff in realized price as you ramp up incentives on the outgoing model. And I think discipline, the inventory, everything that we've done is just evidence that you look at this program and its last year production. It's just done amazingly well and continues to do so. So while we're excited about the new truck, and we've started to slowly reveal it, and we'll start to see them in showroom floors in December. We're excited about the truck platform as a whole and what this can do 2027, '26 has been remarkable considering where we are in the cycle.

And some of the residual changes changeover drag? I mean, we say it carries on to 1Q. Like do you think when you think we hit a normalized run rate?

Yes. So a couple of things. One, when you're looking at the trucks, you'll be ramping up production. So you have probably a little bit of a richer mix, but volumes aren't going to be where they are until you get up. At the same time, we're doing the new engine platform. So it will ramp up through the year. We'll get more clarity on that as we give to 2027 guidance. Same for Orion. That's going to -- with the new facility and the changeover from EV to ICE with the escalated production, et cetera, that's going to take a little bit of time to ramp up. So it should gain momentum through the year in '27.

Got it. And so like just -- I know we'll get official guidance later this year or early next year. So just a little bit double think a little bit on '27. I mean, should we view '27 as more of fundamentally a pricing mix, cost execution story or of a volume story? What carries like the top line margins in '27 as you see today?

Yes. I think whether it's '26, '27 or even '28, '29, I think it's about execution. There's always going to be disruptions. There's always going to be hiccups out there in the macro world or the geopolitical world. And I think when you look at what this team has accomplished over the last several years, it's kind of what we call no excuses. Let's just keep our head down, figure out what we need to adjust, pivot and move on. And when you look at the track record that we've tried to establish here of expanding our margins, it took us probably, what, about 18 months to get our margins back after being saddled with $3 billion in tariffs. So that's the type of adjustments that we see. So I look at '27 every bit as much as I have in the last couple of years, which is really let's execute. Let's figure out what needs to be done and go...

And maybe just on commodities. You obviously said second half is going to be bigger than the first half. As you stand today, with spot rates, I mean, it picked up in second quarter, it's come back down a little bit. How should we think about commodities, maybe you can throw in like memory and DRAM in there in '27.

Yes. So it's too soon to talk about '27 because it will change probably 100 times between now and then. And but we're looking at it as potentially a year where we could see a little bit of the pressure in the war in the Middle East slows down and we start to see a normalization. You could see that be a tailwind. You could see something flare up and you could see it become a headwind. So that's why it's just a little bit too early to talk about. But based on where we sit now, I think we would expect to potentially be more stable than what we've seen this year, but you've got uncertainty on what Mexico and Canada bilateral deals look like on side, et cetera. So it's just a little bit too soon to talk about it. When we gave some of the color on our earnings call, it was really meant to let people know that while we've talked about warranty tailwind, we've talked about EV improvement and all of the things that -- those are multiyear things forward. We're not going to solve all of the warranty increases that we see over the past few years and 1 year, but we do see a trend line that's starting to improve, as we've talked about. We've flattened out the monthly spend. As that plateaus, you'll start to see, hopefully, and come down, you'll start to see the warranty accruals lag that. So we see this as a multiyear journey going forward, and that's what we're testing ourselves.

Got it. Since we're on the warranty topic, clearly, you've done a phenomenal job executing on that this year. Can you talk us through like what's changing in terms of the benefits you're seeing there, have the accruals in the new platforms? I mean, how do you see that changing? Any guidance on that? Like are they already starting to come in at lower accruals than the previous ones?

Yes. So well, I appreciate your description of it is phenomenal. I'm a little bit less bullish internally on that. We have a lot of work to do. I mean we look at war [indiscernible] as a function of revenue. First of all, so much of our revenue uplift over the past few years has been on pricing, which really shouldn't affect warranty, right? So I think it's stepped out from where it's been historically stepped out even more when you think that it really should be volume driven and not really tied to anything on the price side. Some of that has been inflation. We've talked about the inflationary pressures at dealerships some of it, I think, has been driven by some pretty big supplier skills as we've seen over time with [indiscernible] 87 and things like that. I feel like we're coming over the hump on that which is where it starts to get a little bit better. So while we are seeing $1 billion to $1.5 billion improvement year-over-year. We've got to do better than that. We got to do better than the customer because that ultimately affects their experience, their willingness to purchase another vehicle, et cetera. So it's important that we get the accruals down and we get the liability down it's even more important that we get quality up and continue to drive value for the consumer. As we think about their next vehicle and their vehicle after that. So the team has done a really good job of focusing, redirecting inventory and parts to the customer care department, which has actually hurt us on production. But it's more important that we get the vehicles out there back on the road for our customers than it is that we produce a new one. in some cases. So I think the team is doing a good job, but I think we need to continue to drive better improvement in...

Got it. So just moving on to some of the other bridge items. I mean, obviously, there's so many moving pieces in '26 that can change in '27 and one of them is tariffs. You've talked about this $900 million level continuing for the remainder of the year. But you do have oriented Fairfax, Springhill coming online. How much of this gross tariff number you thing starts to fall away these as these [ cities ] ramp, maybe '27, [ '28 ].

Yes. Well, I think we set those up under where we are in the current world. I think we'll start to see some goodness, I think, in '27, too soon to tell on whether that means that tariffs will be flat, lower or higher for '27 as part of an official guide, but it's all else being equal, we would start to see some tariff load come down, but we'll see when the new rates get , et cetera. So like I said, too soon to put any guidance out there. But as we ramp up more of that domestic production, and we get to the 2 million units as we get through '27 into '28, we should see some of the benefits.

Got it. I'll just pause here for like a second to see if there are any questions in the audience.

Quiet group today.

I think maybe a little later. I'll just move on to the other items on the bridge, just onshoring costs. So what are the primary manufacturing milestones between here and volume production at Orion? And how do they rank in terms of what shows up in the P&L first. How much automation investment translates into just more measurable labor or savings versus like just quality outcomes?

Yes. So where we are right now is we've put a lot of the infrastructure costs in and all the retooling and everything. A lot of that has come. Now we're in the process where we're hiring people and getting them trained to start production. So that's an efficiency lag because you're hiring the people, but you're not actually ramping up production yet. So that's where we see a little bit of pressure second half, that should start to unwind as you start production but you're still going to be at a little bit of an efficiency low point until you are able to ramp production up and get the plant running where we know it's going to do that. So that will continue to be a little bit of an efficiency drag into 2027 and as we ramp up production get better as we get towards the second half of '27.

Got it. And then one more item from the bridge is the EV losses. You touched upon it a little earlier. I think what you've communicated is that you'll see improvement in '27, but maybe at a slightly lower base, you're ramping up, you're expecting more volumes. And then you have a larger step change in '28 with the LMR battery and some more architecture changes. Can you decompose the $1 billion, $1.5 billion between fixed cost capacity actions and just pure volume mix effects and given only one persist if volumes recover, what is the clean like run rate we should think about in terms of EV losses?

So as we talked about, 2025 EV profitability was worse than '24. And a lot of that really was driven by the fact that we were constantly chasing demand reductions going in. And when you create that kind of churn in the supply chain, it creates frictional cost board. So that's why we -- at the end of '25 and what we've done in the first half of '26 has really gone hard after, let's level set across the entire supply chain. Let's do it quickly to make sure that we don't have any slack capacity sitting out there because producing a couple of hundred thousand EVs against a capacity of 1 million is never going to lead to the type of efficiency and so on. So as I've said before, you don't writing off capital investment is not the best thing and the funnest thing to do for a CFO. But sometimes you've really got to look at the seismic shift in the environment around you and understand what happen. And that's what the regulatory environment was. I mean, we were basically capacitized up to 1 million units a year in anticipation of the stringent curves coming up in '27, '28 ultimately 50% by 2030, and that was not going to be tenable for us or the entire supply chain after the political environment changed. So being able to bring down that excess capacity, as I said, maintain the relationships because, number one, we want our supply base to continue to innovate. We want them to find efficiencies, although with a smaller scale where we can get material cost savings where we can get architectural and structural savings on the vehicles themselves. Ultimately making the vehicles more efficient, which should provide significantly more profitability as we ramp up volume and production. So '26 has been about much lower production, so therefore, much lower variable losses on that at the same time that we've gotten out of this sort of serial shift of restructuring charges or supplier claims for reduced volumes. '27 should be a year where it's a little bit more stable. We'll see what happens to volumes I suspect that maybe they'll be a little bit higher because we have seen EV adoption in the 5% to 6% range, and it's -- we're seeing a little bit of increase, albeit pretty slow. Then we get into '28, where we get the LMR changes and so on. And we expect that we'll make some really, really good progress towards profitability. So the goal is to continue to bring down that loss, which ultimately brings enterprise EBIT and margins where we think we can get -- we're working ultimately to get to EV profitability. And when we do that, and hopefully, we can do it in advance of any significant ramp in adoption that will put us really, really well positioned competition with our ICE portfolio, which is performing incredibly well and an EV portfolio that's outperforming everybody else.