GM reports healthy Q2 revenue of USD37 bil., adjusted EBIT margin at 10.0%
General Motors (GM) has reported a profitable second quarter with a strong EBIT-adjusted margin despite facing challenges of slowing US sales and pricing pressures in China. Beginning with the second quarter, GM is reporting its European division as discontinued operations. GM says that it is on track to achieve its 2017 EBIT and margin projections.
IHS Markit perspective
- Significance: General Motors (GM) has reported healthy overall second-quarter 2017 results, including an adjusted EBIT of USD3.7 billion and a global adjusted EBIT margin of 10.0%. However, lower deliveries in the US and other markets contributed to declines in revenue, while special items contributed to lower net income attributable to shareholders of USD1.7 billion.
- Implications: With the sale of Opel/Vauxhall to Groupe PSA due to be concluded by year-end, GM has with the second quarter begun shifting related financials to discontinued operations. However, a strong adjusted EBIT margin and ROIC demonstrate GM is able to remain profitable despite headwinds and significant structural change.
- Outlook: GM has returned a healthy result for second quarter and first half of 2017, weathering a sales slowdown in the US and pricing pressures in China, and continuing to take drastic actions for future profitability. Net revenue declined in the second quarter, though it was up in the year to date; volumes declined in the second quarter. The EBIT-adjusted margin remains strong globally and in the company's key North American market. With generally improving profitability, the company is focused on the future of mobility.
General Motors' (GM) results in the second quarter of 2017 have been impacted by lower sales volumes in the United States. GM remained profitable and showed a strong EBIT-adjusted margin and return on invested capital (ROIC) in the second quarter, but all three measures declined compared with the second quarter of 2016. GM also made a shift in financial reporting. Given the pending sale of Opel/Vauxhall, GM now reports those operations in Europe under discontinued operations, applied to figures for 2016 as well as 2017.
GM's revenue from continuing operations declined 1.1% to USD37.0 billion in second quarter 2017, from USD37.4 billion in the same quarter last year. GM reported a USD3.0-billion unfavourable impact of decreased wholesale deliveries in the second quarter; GM North America (GMNA) saw the largest impact, with wholesales down by 110,000 units. However, improvements in mix, price, GM Financial results, and currency fluctuations in South America offset most of the impact of reduced volume, and GM's global market share held steady at 11.5%. The reduction in volume cascaded to consolidated adjusted EBIT (earnings before interest and taxation), which declined by 4.5% to USD3.7 billion in second quarter 2017, compared with USD3.8 billion in second quarter 2016. Relative to EBIT, volume had a negative impact, while mix, price, and cost all saw improvements. GM's EBIT-adjusted margin slipped to 10.0% in second quarter 2017, compared with 10.3% a year earlier. GM reports that ROIC, a rolling figure covering the four quarters up to the present, remained strong and continues well above the company's floor of 25%. In second quarter 2017, that figure dropped by 2.1 points, compared with second quarter 2016, to 30.5%. The second quarter's wholesale deliveries declined by 7.2% year on year (y/y), with declines in GM North America (GMNA) and GM International Operations (GMIO), though an improvement in South America (GMSA). The automaker's business in Europe, formerly GME, is now discontinued operations and no longer included or reported. Over the first half of 2017, GM's capital expenditure of USD4.13 billion was less than the USD6.16 billion in net automotive cash provided by operations, which is the opposite of conditions in the first six months of 2016.
GM's global wholesale deliveries dropped 7.5% y/y to 1.21 million units in the second quarter of 2017. Deliveries dropped largely on ongoing efforts to reduce fleet sales, and GM's worldwide retail sales were down a more modest 0.8%; this figure includes the company's Chinese joint venture (JV) sales, while the wholesale figures do not.
In a company statement, GM CEO Mary Barra said, "Disciplined and relentless focus on improving our business performance led to a strong [second] quarter and very solid first half of the year. We will continue transforming GM to capitalize on growth opportunities and deliver even more value for our shareholders."
With lower sales in the second quarter of 2017, GMNA's net revenue decreased to USD28.4 billion, from USD30.2 billion in the second quarter of 2016. The region provided 77% of GM's revenue from continuing operations in second quarter 2017. GMNA provided 71% of total revenue in first quarter 2017, highlighting GM's dependency on the North American market is higher with the exit from unprofitable Europe. Wholesales through GMNA were down 11.0% in the second quarter and dropped 2.4% in the year to date (YTD). Retail sales over the first half were also down 0.8%, though GM says it has increased its US market share to 16.4%. GM attributes the sales volume decline to a reduction in its rental car fleet, but the sales performance of several GM passenger cars continues to be eroded in the retail market, on changes in consumer demand rather than particular product flaws. As a result, GM is reportedly considering the future of these products; they are expected to continue through their respective current lifecycles, but the next-generation models could be dropped or replaced with something more suitable for the market. Models reported to be at risk are the Chevrolet Sonic, Volt, and Impala, Cadillac XTS and CT6, and Buick LaCrosse. Additionally, launches planned for the second half are in popular sport utility vehicle (SUV) segments, and may provide a lift in the fourth quarter and leave the company better positioned for 2018. GMNA reported an EBIT-adjusted margin of 12.2% on EBIT-adjusted revenue of USD3.5 billion, an increase compared with second quarter 2016. The EBIT-adjusted margin is strong, though lower than 12.4% in second quarter 2016.
GMIO revenue declined from USD3.3 billion in second quarter 2016 to USD3.2 billion in second quarter 2017, though adjusted EBIT improved from USD190 million to USD340 million over the same period. GM reported that improved pricing and currency exchange more than offset lower volumes and macro-economic issues facing Middle Eastern operations.
GM South America (GMSA) accounted for USD2.29 billion in revenue in the second quarter of 2017, an increase of 40% y/y, as volumes improved significantly in the region. GMSA losses declined compared with the second quarter of 2016 on improved volumes. With a loss of USD23 million, Barra and GM chief financial officer (CFO) Chuck Stevens characterised the region as "effectively breakeven" during an analyst call on the company's latest results.
GM announced that it will sell Opel/Vauxhall to Peugeot-Citroën owner Groupe PSA by the close of 2017. With the reporting of GM's second-quarter 2017 results, Opel/Vauxhall operations have been discontinued, and not provided in detail.
GM's equity income in China was flat at USD0.5 billion, with expectations of ongoing pricing pressure in the country. GM's Chinese market performance showed JV wholesale deliveries were up 3.0%, on the strength of the Baojun and Cadillac brands. GM's Chinese JV wholesale deliveries increased to 887,000 units in the second quarter of 2017, from 861,000 units in the same period of 2016. GM reported an 8.3% margin for the JVs, down from 9.5% in second quarter 2016. GM's revenues and wholesale deliveries from the JVs are not reflected in the company's consolidated results. GM continues to offset slowing demand for smaller vehicles and pricing pressure in China with a greater mix of more-profitable SUVs and luxury vehicles, as well as focusing on cost efficiencies. GM continues to expect significant carryover pricing pressure in 2017 of around 5%.
Outlook and implications
GM has returned healthy results for the second quarter and first half of 2017, weathering a sales slowdown in the US and pricing pressures in China, and continuing to take drastic actions for future profitability. GM's net revenue declined in the second quarter, though was up in the YTD; a volume decline in the second quarter was on a slowing US market and efforts to reduce fleet sales. GM's EBIT-adjusted margin remains strong globally and in the company's key North American market. With improving profitability, the company is focused on the future of mobility. When reporting GM's second quarter results, CFO Chuck Stevens also stated that planned downtime for product changeovers will result in a weaker performance for the second half of 2017.
GM's strong EBIT-adjusted margin reflects more profitable sales, as the impact of declining volume on margin has been relatively small. GM's business is healthy in North America and the automaker is demonstrating continued strength from its Chinese JVs. GM's South American business is seeing a bit of light after a difficult several years, with improved deliveries driving increased revenue and a nearly breakeven second-quarter EBIT. North America continues to be GM's most significant market, delivering 76% of net revenue in the second quarter of 2017. The elimination of GME from GM's continuing operations also serves to increase its reliance on North America. With a healthy business in the North American region, the company is better positioned to withstand difficulties in other markets. The automaker's efforts to reduce costs are improving operational efficiencies. After declines so far in 2017, GM expects sales to improve later in the year, on several all-new SUVs. GM remains committed to matching supply and demand, and reductions in passenger car production reflect the strategy of discipline related to incentives and attempts to find a natural demand level for these products. GM's US inventory has been growing as the company plans for model changeovers later in 2017 and 2018, including full-size pick-ups and the Chevrolet Corvette; the company still expects to see inventory drop to about 70 days' supply by the end of 2017.
GM continues to strengthen the company, including investment in mobility business streams, as well as continuing to drive cost efficiencies. The second quarter saw the first Bolt electric vehicle (EV) with autonomous technology assembled on a volume production line and ongoing expansions of GM's Maven business. In a nod to Wall Street, GM has made technology and innovation as important as disciplined capital allocation, earnings growth and robust downside protection.
GM's fundamentals remain sound and the group is profitable. GM's cash position is favourable, with USD34.6 billion in liquidity at the end of second quarter 2017, and debt is manageable. GM returned USD4.8 billion to shareholders in 2016, and repurchased USD1.5 billion of common stock in the second quarter of 2017.
For 2017, the company says that it expects to maintain or improve adjusted EBIT, EBIT-adjusted margin and revenues; the company also expects to return up to USD7 billion to shareholders. Adjusted automotive free cash flow from continuing operations is projected to be about USD7 billion, higher than the USD6 billion predicted in earlier guidance and prior to the agreement to sell Opel/Vauxhall.
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