July 25, 2013 / 11:40 AM / 6 years ago

GM profit beats Street on aggressive cost-cutting in Europe

DETROIT (Reuters) - General Motors Co (GM.N) posted a higher-than-expected second-quarter profit on Thursday as aggressive cost-cutting helped the U.S. automaker narrow its losses in Europe.

The U.S. flag flies at the Burt GM auto dealer in Denver June 1, 2009. RTEUTERS/Rick Wilking

Higher prices on new models such as the 2014 Chevrolet Silverado pickup truck and Impala large sedan boosted results in its core North American market. Executives said those results will improve further in the second half thanks to other new high-margin vehicles.

“The biggest news in the quarter is just Europe is not as bad,” said Guggenheim Securities analyst Matthew Stover, who has a “neutral” rating on GM’s stock.

Europe, where auto industry sales hit a 20-year low in the first half, remains “very challenging,” GM Chief Financial Officer Dan Ammann said. He added it was too soon to call any sort of improvement there.

That was in marked contrast to U.S. rival Ford Motor Co (F.N), which on Wednesday reported a smaller-than-anticipated loss in Europe and said the region could be stabilizing.

GM executives aren’t ready to go that far. “A demand-driven recovery (in Europe) isn’t in sight yet,” GM Chief Executive Dan Akerson said on a conference call.

GM’s money-losing European unit has been a key focus for investors since the automaker went public in the fall of 2010 following a bankruptcy reorganization and a $49.5 billion government bailout. In November 2011, Akerson charged Vice Chairman Steve Girsky with overhauling the European operations, which have suffered 13 straight years of losses.

GM’s net income in the second quarter fell to $1.2 billion from $1.5 billion a year earlier, hurt by higher costs related to the rollout of its redesigned full-size pickup trucks and losses in Asia outside of China.

Excluding one-time items, mostly related to the acquisition of preferred shares in GM Korea, the automaker earned 84 cents a share, 9 cents above the average forecast of analysts polled by Thomson Reuters I/B/E/S. Second-quarter revenue rose 4 percent to $39.1 billion.

(For a graphic on GM earnings, click on link.reuters.com/faq89t)

GM shares rose 1.5 percent to $37.70 in early trading, their highest intraday price in two and a half years. They gave back those gains later and were down 25 cents at $36.89 in afternoon trade. Analysts said investors locked in their gains. Through Wednesday, GM’s shares had risen almost 30 percent this year.


GM kept a tight grip on costs in Europe in the second quarter, cutting spending by $400 million. Ammann said the company continues to be aggressive in those efforts.

GM Europe had an operating loss of $110 million in the quarter, almost one-third smaller than Wall Street expected. The company lost $1.8 billion in Europe last year.

While GM’s sales and market share in Europe fell in the latest quarter, Morgan Stanley analyst Adam Jonas said the improvement in financial performance was two years ahead of his expectations.

The automaker has said it is targeting a return to break-even results in Europe by mid-decade. Ammann did not change that goal when asked whether GM Europe’s strong performance in the second quarter meant it could reach break-even in 2014.

“Obviously, what we don’t control is the European macro-environment that remains very challenging, but we’re making good progress despite that,” Ammann told reporters at the company’s headquarters in downtown Detroit.

He said GM remains focused on executing plans previously outlined in its alliance with PSA Peugeot Citroen (PEUP.PA) but has no plans to put more money into the French automaker. GM paid $423 million for its 7 percent stake in Peugeot but in February wrote down about half of that investment.


GM’s North American business had operating earnings of almost $2 billion in the latest quarter, easily beating the $1.75 billion that nine analysts polled by Reuters had expected.

GM was able to get better pricing in North America, accounting for an earnings gain of $300 million. That was offset by a $400 million increase in costs related mostly to the introduction in June of the 2014-model Chevrolet Silverado and GMC Sierra trucks, key profit generators for the company.

Akerson said the launch of the new trucks, which went on sale in June, has gone well and the timing was perfect, given the recovering U.S. housing market. Officials said it was too early to say whether continued strong demand for the 2013-model trucks could result in even better pricing than GM initially thought for the new models.

Costs associated with the truck launch will ease in the fourth quarter and into next year, GM said.

The company’s international operations, which include China, reported a disappointing second-quarter profit of $228 million, down 64 percent from a year earlier. Ammann cited pricing pressure in Australia and Southeast Asia, as well as cost headwinds in India. But he said operating earnings in China increased and will remain strong going forward.

Ammann reaffirmed GM’s forecast for industry-wide sales in China to rise 7 percent to 9 percent this year.

In discussing the company’s Cadillac brand, Akerson said GM was targeting a 10 percent share of China’s luxury auto market by the end of the decade.

Reporting by Ben Klayman and Deepa Seetharaman; Editing by Lisa Von Ahn and John Wallace

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