General Motors' (GM) CEO Mary Barra Hosts Investor Day (Transcript)

General Motors Company (NYSE:GM) Investor Conference Call November 26, 2018 10:30 AM ET

Executives

Rocky Gupta - Treasurer and VP of IR

Mary Barra - Chairman and CEO

Dhivya Suryadevara - EVP and CFO

Analysts

Itay Michaeli - Citi

John Murphy - Bank of America

Brian Johnson - Barclays

Joseph Spak - RBC Capital Markets

David Tamberrino - Goldman Sachs

Colin Langan - UBS

Operator

Ladies and gentlemen, thank you for standing by. Welcome to today's Investor's Call. [Operator Instructions] As a reminder, this conference call is being recorded Monday, November 26, 2018.

I would now like to turn the conference over to Rocky Gupta, Treasurer and Vice President of Investor Relations.

Rocky Gupta

Thanks, Dorothy. Good morning and thank you for joining us. Our press release was issued this morning and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast.

I'm joined today by Mary Barra, GM's Chairman and CEO; Dhivya Suryadevara, GM's Executive Vice President and CFO; and a number of other executives.

Before we begin, I'd like to direct your attention to the forward-looking statements on the first page of the chart set. The content of our call will be governed by this language.

I will now turn the call over to Mary Barra.

Mary Barra

Thanks, Rocky, and good morning, thanks everybody for joining on short notice.

Today we announced new actions to accelerate the transformation of General Motors building on the comprehensive business strategy we shared in 2015. In addition to demonstrating our continued cost efficiency mindset, these actions support our ongoing work to make General Motors more agile, resilient and profitable, while giving us the flexibility to invest in the future.

To accomplish this we are taking proactive steps to improve our core business performance, capitalize on future mobility opportunities, improve our downturn protection and create shareholder value. We will reorganize our global product development organization and work as processes to improve quality and speed to market.

We will align our product portfolio and manufacturing capacity with shifting customer preferences and we will transform our global workforce to ensure we have the right skill sets to win today and in the future. I’ll talk more about each of these in couple of minutes.

We are taking these actions now while the company and the economy are strong to stand front of a fast changing market and to capitalize and growth opportunities as we push to achieve a vision of a world with zero crashes, zero emissions and zero congestion.

Let me walk you briefly through each of our actions. In our global product group, we will accelerate cost efficiencies by sharing high quality component across the portfolio, using more virtual tools and integrating vehicle and propulsion engineering teams in addition to other activity.

To capitalize on future mobility opportunities, we expect engineering resources allocated to electric and autonomous vehicle programs to double by 2020. We will continue to maintain our strong line of our crossovers, SUVs and trucks that will prioritize future vehicle investments in our next generation battery electric vehicle architectures.

We plan to take several actions in addition to optimize our product portfolio to align it with consumer demand and we will also increase our capacity utilization. Based on the consumer shift towards crossovers, SUVs and trucks, market conditions require that five North American assembly and propulsion plants will be unallocated product by the end of 2019. This is affecting the Chevrolet Cruze, Volt, Impala, the Buick LaCrosse and the Cadillac XTS and CT6 sedans.

We will seize operations in two additional plants outside North America next year. And we are committed to work with GM's union consistent with our obligations and agreements and we'll also work to continue to address the competitiveness of wages and benefits at all of our plants across the global.

As we transform our workforce for the future we are in the process of reducing salaried staffing by 15% and executive positions by 25%. We will achieve this through a combination of voluntary and involuntary programs.

Before I turn it over to Dhivya, I want you know that we are intensely focused on generating cash and creating shareholder value. I believe today's actions demonstrate our ongoing commitment to mitigate market challenges with resolve and discipline.

So now I will turn it over to Dhivya.

Dhivya Suryadevara

Thanks Mary, and good morning everyone.

The actions we are taking today transforming the business, focusing on cost discipline and driving efficiencies will help us deliver better business performance, makes us more resilient to the cycle and allows us to focus on growth opportunities. This team is committed to continually identifying offsets, and capitalizing on opportunities to manage through a rapidly changing environment. You've seen us execute actions to expand margins by delivering commercial and technical savings, as well as material cost efficiencies.

The actions we are announcing today represent another important step in that journey. Let me get into the details. Through the actions we are taking today, we expect to increase our annual free cash flow by approximately $6 billion including cost reductions of $4.5 billion and lower CapEx annual run rate of almost $1.5 billion by 2020.

As Mary mentioned, contributors to the cash savings include transforming our product development process, better aligning manufacturing capacity with shifting customer preferences, and reorganizing our global workforce. We will record restructuring charges of $3.0 billion to $3.8 billion because of these actions.

The majority of these charges will be recorded in the fourth quarter of 2018 and the first quarter of 2019. The charges comprised of $1.8 billion of non-cash asset write-downs and pension charges and up to $2 billion of cash expenses. The vast majority of the cash payments are expected to be paid by the end of 2020.

The majority of these charges and cash payments will be treated as special for EBIT adjusted, EPS diluted adjusted and adjusted automotive free cash flow purposes. We expect to pay back on these actions to be under one year. We expect to fund the restructuring actions through a new credit facility that will further improve our strong liquidity position and enhance our financial flexibility.

With our continued focus on cash flow and through the actions we're taking today, we have an opportunity to strengthen our long-term cash generation capability and narrow the gap between earnings and free cash flow on a continuing basis.

To provide you with more insight into our strategy and our expected 2019 performance, we will be holding a Capital Markets Day on January 11 in New York. We look forward to seeing you there.

That concludes our formal remarks and we will now move to the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Itay Michaeli with Citi.

Itay Michaeli

Just a few points of clarification on the $4.5 billion, is that a net from cost savings target or a gross customer to how do you previously outlined your prior cost savings plan?

Dhivya Suryadevara

Itay this would be $4.5 billion of new cost savings in addition to what we've talked about before and we expect to achieve that by the end of 2020, does that answer your question?

Itay Michaeli

Yes, but maybe I’ll ask in a bit of different way. I guess related to 2020 maybe talk about the overall levels roughly of free cash flow you think the company could be generating. And then also how this relates to the prior 10% our core EBIT adjusted margin targets that you have out there before?

Dhivya Suryadevara

Yes, so I would think about this as flowing through to the bottom line on a net to cash basis, so think of the $4.5 billion as additional to what we have talked about before. But Itay I would remind you there are puts and takes as we look at 2019 and beyond. And we will be providing guidance about 2019 in January. So this is clearly a tailwind and positive to the overall results but you need to look at this in the context of the overall macro environment, as well as the other puts and takes.

Itay Michaeli

And just lastly and I'll pass along, in a rough sense - maybe you’ll talk about this more in January but how much of this flows through in 2019. It sounds like a lot of the actions are occurring in the earlier part of 2019 or if you kind of break that down to the extent you can on the $4.5 billion?

Dhivya Suryadevara

Yes, we’re going to push to achieve as much of these savings as we can in 2019. There are some items which will spill-over into 2020. So you’ll see portion of that in 2019 and portion in 2020 and again will be able to provide more color between the two years the breakdown when we see you in January.

Operator

Your next question comes from the line of John Murphy with Bank of America.

John Murphy

Just a first question on the payback period, I mean it is very fast and it is a multiple of what you're spending. As far as the three buckets of product development capacity rationalization or alignment I should say, and workforce. Is there any way you could kind of give some sort of breakdown there and certainly this is a big fast payback we're not really that use to seeing?

Mary Barra

Yes John, we’re not providing specifics on the breakdown but what I will say to your point on the payback is there are items that have obviously restructuring cost associated with them but some others are just savings from an SG&A perspective for example compression of our global footprint, and actions that do not specifically have a cost associated with them. So if you think about as a range John, I would say some items have a instance payback all the way to a year and a half and the weighted average of that is under one year.

John Murphy

And when you think about this Dhivya in context of the breakeven level bps, you guys have reported around 11 million units for USR. I mean is some of this - I’m just trying to understand the motivating factor here once again it is good to this near the peak. But I mean is a motivating factor here is to continue to spend on all your initiatives and position the company for the future even through a downturn or is this really short of pure incremental that would take your breakeven even lower than the 11 million unit number?

Mary Barra

So from a transformation perspective we absolutely want to make sure that we're prepared through the cycle and the core business to be able to continue invest in the transformative technologies, be it electrification, autonomous vehicle connectivity et cetera. So definitely that is something we want to be well position to do because we think there is a huge opportunity to drive shareholder value there.

Dhivya Suryadevara

And from a breakeven perspective I would say clearly if you look at our fixed cost space the component - the major components within that whether it’s manufacturing or engineering or SG&A or IT, the actions we're taking directly address our fixed cost base. So it would have a positive effect on our breakeven. And again as we go through this exercise and give you more clarity on the timing and all of that post January we will able to add more specifics to the breakeven point.

John Murphy

And then just lastly as we look at the growing relationship with Honda particularly around AVs but also maybe on the car side. Could you mean a little bit more heavily on partners for the car side of the equation if necessary in the long run as you focus more on SUVs, crossovers and trucks?

Mary Barra

We have a - as you pointed out a very strong relationship with Honda working with many years starting with [few thousands] and now electrification and autonomous. We’re going to continue to explore all opportunities that allow us to be more efficient with our investment, more efficient with our capital but I don’t have anything specific to share at this time.

John Murphy

No change in the GM's strategy yet?

Mary Barra

No, actually we’re very excited about the GM program, we’ll start launching that next year and we think this is going to be very important for the key markets China, South America and Mexico for these new products that will be coming out.

John Murphy

And just one last quick thing on housekeeping, Dhivya how large is the revolver to pay for this is it just the 2 billion that you’re allocating to this or is it large or revolver we should think about?

Dhivya Suryadevara

So John you should think about the revolver as unchanged the original base revolver that we have of $14.5 billion that's unchanged. And what we’re doing is we’re adding a supplemental facility to that revolver that will be used to pay for the restructuring charges here and as you pointed out the payback is quick. So we do expect that we will pay down the revolver as the saving start to come in.

Operator

Your next question comes from the line of Brian Johnson with Barclays.

Brian Johnson

Couple of questions, first and it kind of goes back to the first question around the net impact. With the 4.5 billion of cost saves there is probably some variable production profits that are given up. Can you give us a sense of kind of the magnitude of vehicles, production cost that you are expecting from this and then what else set to the 4.5 billion from variable contribution on - or is that included in that 4.5?

Dhivya Suryadevara

Yes Brian you should think about this as inclusive of those numbers, the amount of variable production related to headwinds against this is pretty minimal. So I would think about the 4.5 as after accounting for that.

Brian Johnson

And then I guess to ask another question again sort of, is this needed to get you to your 10% in light of other market headwinds or is this and so it's just something that you give us greater comfort in getting to that 10% or is this sort of recognition that you wouldn't - sort of you could go higher to handle that there are additional pressures that could come in lower?

Dhivya Suryadevara

Yes, I would think about as this as an enabler and it certainly helps and we have been and as you know Brian on the path towards improving our margin year-over-year and this will certainly accelerate that. And again we’ll provide more details on margin trajectory for 2019 and beyond when we see you in January.

Brian Johnson

And final question, when you talk about competitive wages - the last [UAW] contract was mildly inflationary. Is this kind of announcement and this kind of statement slightly different tone for the 2019 discussions?

Mary Barra

So Brian we work together with our UAW and other unions around the world and obviously competitiveness is very important for the company, it’s a very important for every single member of the General Motors team to make sure that we are well-positioned to compete not just in the next few years but well beyond and that will be the conversation that will be having in those negotiations but I don’t have any further to comment other than that.

Operator

Your next question comes from the line of Joseph Spak with RBC Capital Markets.

Joseph Spak

First question is, there was also some I guess press reports that indicated there would be a halting of some passenger car production. I didn't hear that in the prepared comments is that true in the interim as well?

Mary Barra

Well its part of un-allocating the plants and there will be at different times throughout 2019 that will mean that there will be some cars that will no longer be available in the marketplace in the United States, and I should say in North America more broadly.

Joseph Spak

Right, and what about certain programs and also there were some trace amounts of those programs made in Mexico or somewhere else is there potential for that to be re-allocated or already those programs go away?

Mary Barra

We're evaluating specifically for Chevrolet Cruze, sedan and hatchback for other markets around the globe but none of those products will be shipped to the United States.

Joseph Spak

Okay. And I just wanted to maybe if you could spend a couple of minutes just on the comment about integrating vehicle, Bosch and engineering teams. So - is that just in order to accelerate and potentially increase the amount of sort of advanced propulsions or is there a savings associated with that as well, just what are the pros of that strategic move?

Mary Barra

Well, I appreciate you're asking because I think this is very significant in the transformation. If you look at again the strong architectures that we have for crossovers trucks and cars in some markets around the world, we’re well-positioned, and so pulling the propulsion in the vehicle engineering together does give us an opportunity to really streamline and also really focus on how future vehicles are going to be designed and engineered when you think about the significant of software in these vehicles. Significant today will become even more significant as we go forward.

So this really transformation global product development allows us to get synergies from how we're going to be developing vehicles and also speed. So it’s very significant and we think it's really going to help us as we bring new products into the marketplace.

Operator

Your next question comes from the line of David Tamberrino with Goldman Sachs.

David Tamberrino

For the CapEx reductions, can you kind of just breakdown how much of that is incremental versus what was expected after you launched the pickup truck and got through the GM's platform?

Dhivya Suryadevara

Yes David you may remember that we had referenced a $1 billion decline by 2021 in our previous remarks. So think of this as 500 million higher than that a year sooner than that.

David Tamberrino

Okay. And is there anything specific to call out other than those two programs and kind of your prepared remarks - we like the high level but a little bit more into the details would help us and get us a little bit of comfort on the ability to achieve it?

Dhivya Suryadevara

For CapEx or for the overall…

David Tamberrino

My comment was more overall but I am really asking about the CapEx?

Mary Barra

From CapEx we actually gone into great detail, we have been working on this for a period of time now where we went through every program and as we look at opportunities to reuse we look at efficiencies of the architecture. There is a very detailed plan behind this, so we have great confidence in achieving and delivering this CapEx reduction.

And I look at it as a CapEx optimization because we still are going to be operating into the marketplace as we compete around the world a very competitive and leading portfolio.

David Tamberrino

Understood. And of the couple of plants in the U.S. I think when we are looking at IHS forecast certainly not yours, somewhere around the 350,000 production mark for those. It sounds like that's going to be reallocated to different plants and you are not expecting to lose that significant amount of wholesales on an annual basis?

Dhivya Suryadevara

With the other products that we have available we're going to look to make sure we have in each of our dealer showrooms a very competitive offering and the right product portfolio. So we think there is a huge opportunity to have our customers buy other product across the North America region.

David Tamberrino

And my words not yours but taking the implied comments from today, it seems like you're probably getting to almost a net cash, zero dollar versus debt when you're going to this program as you're borrowing and paying out some of this. But you would expect by 2020 with free cash flow adjusted running around $10 billion per year from the 4 billion this year plus 6 billion that you'll be back to a significant net cash position at that point in time?

Dhivya Suryadevara

This will be accretive overall to our free cash flow. Again I would reiterate David that we got to think about this in the context of all the puts and takes and we've mentioned this during the last earnings call for example, as we look at 2019 there's a number of headwinds as well as tailwinds that we’re looking at and this is certainly solidly the tailwind category. And so that's we’ll have more to share in more details in January but think of this as certainly being additive to our overall free cash flow.

Operator

Your last question comes from the line of Colin Langan with UBS.

Colin Langan

Thanks for taking my question and squeezing me in. I apologize if I miss this, so I just want to make sure I understand what official - did you say the Cruze will no longer be available in the U.S. I assume with two of the plants being closed the Impala is also not available. And the Malibu is that still around, I think it’s a different plant is that we are going to be in production is that all?

Mary Barra

The Malibu will continue to be in production it’s built at our Fairfax assembly plant in the United States. When we seize or stop building Cruzes in our Lordstown facility and that facility becomes unallocated, a point in time after that then the Cruze will not be available in the United States.

Colin Langan

And the Impala as well, [will still be available]?

Mary Barra

The Impala will - each of these plants are seizing and will become unallocated we’ll start building production in different times through the year. So there is a period of time where the Impala will still be available.

Colin Langan

And how should we think about the lost profits from those vehicles, I mean I assume there is reason they're getting cut I mean is it going to be - is there positive contributions so the margin goes up but it’s a $1 billion negative or are these actual losing money today and this will be truly dollar and margin positive?

Dhivya Suryadevara

The lost variable profits on these Colin are factored into the overall cost savings that we’re talking about. So think of the 4.5 as net of whatever variable profit losses we would have. And from a mixed perspective you are correct, these tend to be the lower margin vehicles and therefore the remaining portfolio would be left with a higher margin set of vehicles.

Colin Langan

And any sense on where utilization is today and where you'll be by 2020 with these closures, so get us something to hopeful to see?

Mary Teresa Barra

Today we are around 70% as we look at North America and as we look at how the feature utilization will be, it's hard to exactly project in 2020 but we can share more about that in January.

Operator

Thank you. I’d now like to turn the call over to Mary Barra for her closing remarks.

Mary Barra

Well I want to thank everybody for joining the call on short notice. We definitely are in a very dynamic industry and I hope you see that the team at General Motors we're very focused on executing with speed to transform the companies that we’re well prepared not only for tomorrow but into the future and very focused on increasing and creating shareholder value. So thanks again and we hope to see you in New York on January 11.

Operator

Ladies and gentlemen that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your line.

Source : https://seekingalpha.com/article/4224729-general-motors-company-gm-ceo-mary-barra-hosts-investor-conference-call-transcript

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