General Motors Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 24, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to the General Motors Company Third Quarter 2023 Earnings Conference Call. During the

Speaker 1

call,

Operator

we are asking analysts to limit their questions to 1 and a brief follow-up. As a reminder, this conference call is being recorded Tuesday, October 24, 2023. I I would now like to turn the conference over to Ashish Kohli, GM's Vice President of Investor Relations.

Speaker 1

Call, please go ahead.

Speaker 2

Thanks, Amanda, and good morning, everyone. We appreciate you joining us as we review GM's financial results for the Q3 of 2023. Conference call materials were issued this morning and are available on GM's Investor Relations website. We're also broadcasting this call via webcast. Joining us today are Mary Barra, GM's Chair and CEO And Paul Jacobson, GM's Executive Vice President and CFO.

Speaker 2

Dan Burst, President and CEO of GM Financial will also be joining us Q and A portion of

Speaker 1

the call.

Speaker 2

On today's call, management will make forward looking statements about our expectations. These statements are subject to risks event identified in our filings with the SEC. Please review the Safe Harbor statement on the first page of our presentation as the content of our call will be governed conference call. And with that, I'm delighted to turn the call over to Mary.

Speaker 3

Thanks, Ashish, and good morning, everyone. Thank you for joining us. Call, I'd like to begin by thanking the entire GM team for once again delivering very strong results, including $3,600,000,000 of EBIT adjusted in the 3rd quarter. Our supply chain team and logistics partners in North America have done great work improving the flow of vehicles from our assembly plants to our dealers. Year our U.

Speaker 3

S. Dealers have helped us outperform the market from a share standpoint with strong ATPs and essentially flat incentives. Year, we were profitable in every region, including China. And GM International is on track to deliver significantly higher EBIT in 2023 compared to a year ago. Thanks to our operating discipline and the lift we're getting from successful vehicles like the Chevrolet Montana and the Trax.

Speaker 3

I'd also like to recognize our teams in Canada and Korea. They reached new competitive labor agreements and ratified them with little or no disruption to our operations. Because we are in a highly competitive cyclical industry, we have been laser focused on 4 fundamentals to strengthen our position. Call, they are delivering vehicles that customers love and are willing to pay for, a competitive cost structure, marketing efficiency and incentive discipline For example, GM has now led the industry in full size pickup sales for 3 consecutive years and we have led full size SUVs year for nearly 50 years. Our overall incentives have gone from consistently above the industry average to consistently below.

Speaker 3

And we are on track to exit 2024 with fixed costs that are $2,000,000,000 lower net of increased depreciation and amortization in 2022. And we're launching several new SUVs this year and next year that will be more profitable than the models they replace. Opening remarks, we're also taking immediate steps to enhance the profitability of our EV portfolio and adjust to slowing near term growth. These steps include moderating the pace of our EV acceleration in 2024 2025 to maintain strong pricing.

Speaker 1

The

Speaker 3

Let's dig a little deeper into the steps we're taking with our ICE portfolio to keep margins and EBIT strong during a very

Speaker 1

year. In a very competitive environment.

Speaker 3

Over the last several years, we have bolstered our position in high margin segments including full size pickups, full size SUVs and large luxury SUVs. We did this by managing capacity to meet demand, expanding the range of premium trim series that we offer year, we're pleased to announce that we're going to continue to deliver on our earnings release and with innovations like Super Cruise and the multi probe tailgate and factory lifted trucks. And we're not going to let up. Opening remarks, as I said, we're launching a wide range of SUVs that will have automotive gross margins up 5 points higher up to 5 points higher than the models they replace. The first two are the Chevrolet Trax and Buick and Vista.

Speaker 3

These affordable small SUVs are rapidly gaining market share And more than 50% of the Chevrolet Trax customers are new to GM. Then in the first half of twenty twenty four, we began launching the new Chevrolet Traverse, GMC Acadia and Buick Enclave, followed by the next generation of the ICE, Chevrolet Equinox and GMC Terrain, year, which begin launching mid year. Here are the profit drivers. 1st, they're in growth segments. The And the smaller SUVs compete in the industry's largest segment, which we expect to grow 9% to $3,400,000 over that same period.

Speaker 3

Opening remarks, they are outstanding products. They offer more comfort and interior roominess, better cargo space, enhanced safety features release, we have simplified the powertrain lineups where we're using 60% of the parts and we reduced build combinations by 80% to 90%. Now let's look at EVs. Our commitment to an all EV future is as strong as ever and we continue to plan to We have annual EV capacity of 1,000,000 units in North America as we exit 2025. This will allow us to participate in the EV market upside, Manufacturing joint venture in Ohio has made tremendous progress.

Speaker 3

The plant will be running at full capacity next month as planned call, at the same time, our battery module constraint is getting better, which helps us more or helped us more than double the Altium platform production in the Q3 compared to the Q2. And we are now in the process of installing and testing our high capacity module assembly lines, which will continue into the 1st part of next year. We are currently challenged getting some of the critical equipment components, but we have a dedicated team working with our suppliers to resolve all issues year and get these lines running at rate. By mid year, we expect that modules will no longer be a constraint and we will be focused on building to customer demand rather than setting new production targets. Software is another critical piece of the strategy and Mike Abbott and his team are actively engaged in the early assessment in each of these launches.

Speaker 3

Since he joined our team this summer, Mike has been moving aggressively to build a world class software organization experience from Apple, Google, Microsoft, Amazon, Uber and other leading tech companies heading up our Human Interface Design Group, our Product Software and Services Group, highest possible quality and customer experience, while positioning the company to drive significant revenue growth Equinox EV, the Silverado EV RST and the GMC Sierra EV Denali, each by only a few months. This will ensure their success. Year. We also expect to achieve significant margin improvement on our battery electric trucks through engineering efficiency and improvements, supplier cost and reducing order complexity, buildable combinations call, as well as Altium, our latest software and NACS, we will deliver an even better driving, charging and ownership experience year with a vehicle we know customers love. In the process, we are saving 1,000,000,000 in capital and engineering expense, substantially lower.

Speaker 3

This will be our first deployment in North America of LFP technology in the LTM platform. So now let's turn to Cruise. Since the early days of our company, GM has been defining the future of transportation and today that's more true than ever with Cruise. In February, we celebrated Cruise becoming the 1st company to eclipse 1,000,000 driverless miles. Fast forward to today and they have logged more than 5,000,000 miles In far fewer collisions than human drivers.

Speaker 3

This remains the focus of their ongoing discussions with government partners and regulators at the federal and state levels. And now let's talk about strikes. We know we have ongoing strikes at some of our U. S. Facilities.

Speaker 3

I know many of you are concerned about the impact of higher labor year. Let me address this head on. I'll start with the macro environment and then I'll cover how we're positioned to year. Positioning the business for success. It's been clear coming out of COVID that the wages and benefits across the U.

Speaker 3

S. Economy would need to increase because of inflation and other factors. This has been playing out in many sectors for some time now. And I believe that the offer we have on the table with the UAW year, we expect to continue to be in the range of $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000,000 to $1,000,000,000 The majority of our workforce will make $40.39 per hour or roughly $84,000 a year in salary by the end of this agreements term. It also includes a cost of living reinstatement, a 25% increase to the company's 401 contributions, world class healthcare with no out of pocket premiums or deductibles for our senior members and enhanced paid time off and several other benefits.

Speaker 3

Negotiations started this summer, we've been available to bargain 20 fourseven on behalf of our represented team members and our company. They've demanded a record contract and that's exactly what we've offered for weeks now. A historic contract with record wages opening remarks that have increases that are substantial, record job security and world class healthcare. It's an offer that rewards our team members, but update, we

Speaker 1

will continue to see a significant change in

Speaker 3

our outlook for 2019. Accepting unsustainably high costs that would put our future in the GM team members' job at risk call, we have work to do to ensure we achieve low to mid single digit EBIT, EV margins targets that we've laid out for 2025. The work has already begun and I'm confident we will achieve our target and grow from there. So when you add up all the things we've talked about so far, call, it should be more clear than ever that we have taken and will continue to take decisive steps to grow our revenue while sustaining strong 8% to 10% EBIT margins in North America through 2025. We are optimizing both our ICE portfolio and our cost structure to continue to deliver year, we are strengthening our EV business and then we will accelerate further.

Speaker 3

And we have assembled a world class team to deliver new high margin reoccurring revenue streams election from software defined vehicles. It does remain a truly exciting time for us. So now I'll ask Paul to take you through the Q3 financials in greater detail call, we'll move to Q and A.

Speaker 4

Thank you, Mary, and good morning, everyone. I'd like to start by thanking our team members for once again delivering strong results in the Your commitment to quality and passion to deliver great products to our customers. In Q3, the UAW strike had a roughly $200,000,000 EBIT impact. Year, we estimate the loss production has had an incremental $600,000,000 EBIT impact. Year, we estimate that the impact of the UAW strike to be approximately $200,000,000 per week based on the facilities impacted as of yesterday.

Speaker 4

We're not going to speculate on the duration and the extent of the UAW strike. And because of this uncertainty, we've chosen to withdraw our 2023 full year guidance metrics, year, even though our strong underlying business fundamentals were pushing us towards the upper half of the range prior to any strike impacts. Year, after we have a ratified contract, we will provide an investor update to quantify the final impact of the strike as well as labor costs moving forward. Year, we are already working to offset the incremental costs. Mary mentioned the great work the team is doing with the net $2,000,000,000 fixed cost program announced earlier in the year and the Winning with Simplicity initiative to drive further efficiencies and cost savings.

Speaker 4

Year, higher labor costs will make it even more imperative that we continue to focus on the most significant and margin accretive parts of the business. Let's move now to the Q3 results. Total company revenue was up 5% to more than $44,000,000,000 driven primarily by our consistent pricing year and higher wholesale volumes, which were up 2% year over year. We achieved $3,600,000,000 in EBIT adjusted, 8 quarter. Production volumes and pricing were up year over year.

Speaker 4

However, these benefits were more than offset from other parts of the business normalizing, including mix year end, GM Financial along with our continued investments in EVs and crews resulting in a $700,000,000 decrease year over year. Adjusted auto free cash flow was $4,900,000,000 up $300,000,000 year over year driven by the continued strength of our core auto operating performance. North America continued to deliver strong results with $3,500,000,000 in EBIT adjusted. Pricing continued to be robust year, we are starting to see the benefits of our fixed cost reduction program, realizing about $500,000,000 year over year savings in Q3 from lower people cost year and marketing savings. Expected headwinds from pension income, warranty costs and mix along with the impact of the UAW strike more than offset these tailwinds resulting in a $400,000,000 decrease year over year.

Speaker 4

As we shared in our prior quarter's update on warranty costs, the cost of repairing vehicles due to inflationary factors, we are committed to reducing the number of claims and finding efficiencies to minimize costs year, we continue to drive profitable market share growth with 0.7 year and reduced marketing spend by $200,000,000 year over year. We have completely modified our approach to incentives over the last few years. J. D. Power PIN data shows our 2021 U.

Speaker 4

S. Incentive spend as a percentage of ATP was 1 percentage point above the industry average of year, we are trending about 0.5 percentage point below the industry average of 3.7%. Year, this $1500 per vehicle relative performance improvement from 2021 to 2023 equates to more than $3,500,000,000 in annualized EBIT improvements and is attributable to our strong product portfolio and disciplined inventory strategy. Pricing momentum. Total U.

Speaker 4

S. Inventory has remained within our 50 to 60 day range with a slight sequential increase to 443 1,000 units at the end of Q3. This is a testament to the hard work of our team who have navigated through the continued logistics year of $350,000,000 which was consistent year over year. Despite a decrease of $150,000,000 in China equity income, year, which amounted to $200,000,000 for the quarter, GM International ex China EBIT adjusted was $150,000,000 year, we expect to continue to deliver profitable results, year including the actions in China to help mitigate some of the industry challenges. GM Financial year, we had a strong quarter with an EBT adjusted of $750,000,000 their 4th highest Q3 ever in spite of higher interest rates Corporate expenses were $300,000,000 in the quarter and consistent with the prior year.

Speaker 4

Cruise expenses were $700,000,000 in the quarter and we expect Similar quarterly run rate moving forward as they balance expanding operations with further efficiencies. A larger fleet of AVs and additional drove the incremental $200,000,000 of expenses year over year. I also want to highlight a few items Mary shared on our retimed EV volume and product production decisions. These actions will impact our previous EV production targets including the 100,000 EV target we had for the second half of twenty twenty three and cumulative 400,000 EVs from 2022 to the first half of twenty twenty four. We are not providing new targets, but are moving to a more agile approach to continually evaluate EV demand year, we expect to be able to flex our production between ICE and EVs.

Speaker 4

For example, our Ramos facility built both ICE and EV variants of the Blazer and the Equinox, along with SpringHill, which builds the Cadillac Lyric along with existing ICE vehicles. These actions prioritize Altium profitability versus volume, which helps solidify our North America EBIT adjusted margin target of 8% to 10% through 2025 and the cash flows funding our future in EVs, AVs, software defined vehicles and other new businesses. Given a more agile approach to our EV transition, we now expect to retime at least $1,500,000,000 of capital spending call, we'll provide more detail around EV profitability once we have clarity on labor costs. In closing, I want to emphasize that our EV momentum is building. We see it in everything from cell production to manufacturing to software.

Speaker 4

Example of the numerous challenges this team has tackled over the last few years and I remain confident we'll continue to execute and find solutions to grow EPS moving forward. Opening remarks, the cost initiatives we're implementing are not one and done, but rather a change in mindset that we expect will drive efficiencies for years to come,

Operator

Our first question comes from Rod Blasch with Wolfe Research, your line is open.

Speaker 5

Good morning, everybody.

Speaker 3

Good morning, Rod.

Speaker 5

I I was hoping, you could provide a little bit more color on the slower demand growth for EVs. Obviously, GM is just getting started now with mass market, opium products still the fastest growing segment within the market. And just at a high level, is this kind of an assessment of the premium that you think EV buyers are willing to pay? Are you less optimistic on the IRA becoming a point of sale benefit next year? And just given the investments that you're making, why wouldn't lower volume or pricing assumptions affect the 2025 EV earnings expectations.

Speaker 4

What I would say is, the The observation about slowing EV demand growth is something that everybody's been talking about. We've seen it in competitor earnings profiles etcetera. But I want to be clear, we're not seeing that in our portfolio right now. Year's Q4, we're making progress on increasing Ultium EV production with Ultium products up 2x3q versus 2q. So we are scaling, but what we've seen here is an opportunity to slow some of that scaling down year, we expect to continue to be opportunistic in the order book continuing to keep their orders on the books.

Speaker 6

Thanks, Paul.

Speaker 5

And just secondly, obviously, there's consequences to almost any change that affects the business. At a high level, do you think that GM will need to make adjustments to the company's product strategy To adjust for higher labor costs than some of your competitors. And can you clarify whether this $2,000,000,000 net fixed cost reduction kind of contemplates a scenario for UAW costs.

Speaker 3

Rod, this is Mary. Yes, we're committed to the $2,000,000,000 that we've talked about and we already have tremendous work underway to continue to take cost out of the business. So I don't really think this changes our product portfolio. As Paul said, As we get further into the transformation to EV, it's a bit bumpy, which is not unexpected. And so what we're moving to is something that we can react much more in a much more agile way to make sure that we Have the right vehicles and I believe our portfolio that we have, that looks at the most important segments And make sure that we have the right entries.

Speaker 3

I mean, we're already seeing strong demand for entries. I mean, we have EVs that people actually want to buy. So I think there's a lot of focus in the portfolio to have the right sales, but just to give ourselves more flexibility. And I think the Bolt EV versus the previous, AEV that we had in the portfolio is a great example. We were able to get the Bolt EV more quickly.

Speaker 3

Consumer enthusiasm that people have for the Bolt EV. So it's decisions like that where we're still going to have the right portfolio,

Operator

Thank you. Our next question comes from Italy Mikaeli with Citi. Your line is open.

Speaker 1

Great. Thank you. Good morning, everyone. Just first going back to the OPM targets in 2025, can you just review kind of the factors that are allowing you to maintain that low to mid single digit EV margin target, given the lower volume, maybe if you could touch upon any changes to the LG relationship from Maybe recent changes there. And also, if you can quantify a bit some of the engineering changes you alluded to that could enhance profitability.

Speaker 3

Sure. Thanks, E. J. And exactly as Paul said, we're taking steps to better position ourselves as we expand. But we are Very much committed to the low to mid single digit margin target in 2025 for our EVs.

Speaker 3

And there's it's not one thing, it's multiple things. So first, as I mentioned just a minute ago, it's having the right products in the right segments that have the right features, the right range, the right functionality, etcetera. That's number 1. And I think the Silverado EV is a prime example when you look at the range that vehicle has in bidirectional charging. So Also, the feedback that we're getting on the Blazer EV is outstanding as well.

Speaker 3

So those are just two examples. It's also the fact that we'll be well into the scale of the battery cells at that point in time. And I already mentioned how much the cost has come down just from Having one module to virtually having by the end of the year on plan, we'll have the Lordstown plant Fully ramped and then we're on track for the other plants. So getting the Ultium battery cells scaled will be another important piece. I talked about last time what we're doing with winnings with Simplicity and really, honing in and going to market In a simpler way that frankly we think is better for the consumer because they're not making they're not overwhelmed with the number of choices they need to make.

Speaker 3

And taking that kind of order complexity and build combination complexity out drops a tremendous amount of cost to the bottom line from Designing it, engineering it, sourcing it and planning for it to get line side. And then we've seen product improvements. With the Altium, it was our 1st generation. We learned a lot from the bolt that went into how we designed this first round of Altium product, But we're already seeing improvements we can make, in Altium and then improvements we can make to, beyond the EV platform in these vehicles That will make them more efficient. And it's appropriate application of things like gigacastings, which is already on the C8.

Speaker 3

We learned a lot on the CT the CT6. It will be a part of Celestiq and there's other vehicles that we haven't announced yet that it will be an important part of. So there's it's just it's Frankly looking at fundamentally everything, but we remain committed to get there and frankly the where lithium prices are trending is another enabler.

Speaker 1

That's all very helpful. And then as a quick follow-up, maybe wanted to touch upon Cruise. With Cruise really scaling out to multiple cities making a lot of progress, Any just thoughts on funding going forward as well as any strategic thoughts you can share as we kind of cruise kind of goes into the next stage of growth?

Speaker 3

Well, we're going to have a lot more to say about Cruise in the latter part of this year. Paul will be at Barclays conference, we also will have, Q4 earnings and then our Investor Day. So we do believe that Cruise has tremendous opportunity grow and expand safety will be our gating factor as we do that and continuing to work with the cities that we're deploying in. So we'll have more to say about that opening session at a later date, but rest assured we do have funding plans that will support Cruise's expansion.

Speaker 1

Terrific. That's very helpful. Thank you.

Operator

Opening. Thank you. Our next question comes from Joseph Spak with UBS. Your line is open.

Speaker 7

Call, thanks. Good morning, everyone. Just to follow-up again on the Altium strategy and some of these changes here. How flexible are you finding that program is to be able to sort of make these changes? And are some of these learnings you talked about that you plan to implement on Silverado Also scalable to the other products or should we think that basically should we think about there being a need for Like an Altium 2.0 platform in a couple of years versus sort of what we're seeing today in the market.

Speaker 3

Excuse me. As we've already said, the Altium platform is chemistry agnostic. And so we will continue to make look to make programs. And As we go forward, we will adapt. There'll be, I think, Altium 2.0 as we get into the latter part of the of this decade, explain without being in person and we'll do this when we're together at our Investor Day of the simplification that we can do to the vehicles that makes them easier to build And frankly, the mindset change we've had from a complexity perspective is pretty significant.

Speaker 3

So again, it's yes, there's going to be improvements. We'll continue to drive efficiencies in the Altium platform, but it's also broadly across the entire vehicle.

Speaker 7

Okay. And then Mary on the there was a comment about the Ohio battery JV being able to be at Full capacity by the end of this year, I think that's like 35 gigawatt hours, if I recall correctly. So how does that JV, which I know you're only a part owner sort of plan to balance that with GM's own EV demand. Is there going to be Like a continued ramp there and produce and maybe build some stock or look for additional offtake or and also does this revised EV timeline impact any of the other battery JVs coming online.

Speaker 3

No, we plan on having the ramp at Lordstown will continue as it is and the plant in Spring Hill comes online next year and then we have plant 3 in Michigan that follows and then the work with Samsung. We'll keep all of those on track because we believe strongly that we need those cells. Obviously, if we have to evaluate and Slow something down, but at this time we don't see a need to do that with the plans that we've outlined here.

Speaker 7

Okay. Thank you.

Speaker 3

Hey, Joe, just on that, we again, I want to reiterate, We're going to respond to demand and we're going to make sure we have the right products at the right time, but we're not overbuilding.

Speaker 7

Perfect. Thank you.

Operator

Thank you. Our next question comes from John Murphy with Bank of America. Your line is open.

Speaker 8

Good morning, everybody. Mary and Paul, when you think about the capital commitment that's going on in the business, It's always very large, but with EVs and things that are shifting on technology and products, product plans, It seems a little bit more uncertain, a little bit more dynamic than it has historically. I mean, you think about returns on capital As we shift into this EV world, can they potentially be higher and shorter dated? So they give you more flexibility to make changes like you just did with the BOLT? Or are we still thinking about sort of 7 to 10 year decisions Like we did on the ICE side, because I mean there's I think there's a lot of folks that think this is a real risk, but it sounds like it also might be an opportunity to be more flexible.

Speaker 4

Yes. Good morning, John. It's Paul. I think that's what we're aiming to and I think creating the foundation of Reducing complexity and buildable combinations and more simpler engineering design manufacturing, I think it's going to give us that agility going forward. I think the other thing that you're going to see us and I think the Orion announcement is a good example of this is, we're also engineering improvements on the fly.

Speaker 4

So I think if you look at the historical record, it would be you'd produce a vehicle, you'd identify some improvements, in customer features, etcetera and you'd wait for a mid cycle, model improvement to actually go in and implement those changes. And It's really more of a mindset that I would say more conducive to software that says here's an opportunity to really improve the profitability, the capability of the vehicle, let's go ahead and put it in line. So the Orion decision represents an early application of that, And I think it's going to make us more nimble in the future and ultimately lead to more consistent ROIC.

Speaker 8

And then just one follow-up on the strength in sales year to date. The U. S. Market really seems to be buoyed by fleet sales more than retail At the moment and you guys usually have a better line of sight and visibility into orders from your fleet customers. So I wonder if you could confirm that that has really been driven by fleet relative to expectations at the beginning of the year.

Speaker 8

And 2, is there visibility that this is going to last kind of like it did in 2010, 2011 and 2012 Sort of as a consistent driver of the upside of the cycle early in the cyclical recovery.

Speaker 4

Well, I think John, we've been consistently talking about pent up demand, from the last couple of years and that's been really evident in the fleet customers. But I would say that the retail share gains and the performance of the retail customer has been strong as well. In fact, we've seen gains in market share pretty consistently this year, both from fleet and from retail, While we've increased production, while we have kept incentives down and while we have reduced marketing spend. So I think it's a real estimate, especially to the North America team for what they've performed through and what they've done in the face of that strength. And while We hear reports out there in the macro that consumer sentiment might be weakening etcetera.

Speaker 4

We haven't seen that in demand for our vehicles and we've been pretty much more disciplined lens around margin improvement, as a result of what we've seen in that transformation.

Speaker 8

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank. Your line is open.

Speaker 1

Call, please go ahead.

Speaker 9

Thank you very much. Good morning.

Speaker 5

First, a couple of

Speaker 9

clarifications on the 2025 targets for the EV business. So lowtomidsimbledigits margin, I think when you initiated that guidance, this was excluding the IRA manufacturing credit, but I think including them, you could have gone to mid to high single digit. Is that still very much the case? Or are you saying that Now including IRA, you would be at the low to mid single digits. And then on the volume piece, so I guess the capacity piece, To the extent that your capacity is flexible between EVs and ICE, would you consider reducing the 2025 EV capacity target in the future if the industry dynamics or demand was weaker than expected?

Speaker 3

Well, first on the first question, we remain committed to low single digit margins Before IRA, nothing has changed there. And so as you said, it would be similar to ICE like margins with what we I believe we know the IRA to be. We still are waiting for final clarification from Treasury on a couple of aspects of that. And then, again, as Paul outlined, with the flexibility we have and Ramos with the flexibility that we have in SpringHill and our plants, I don't think it's that we'll adjust down the amount of capacity that we'll have. It's just that we're going to be able to respond very quickly to EV or AV depending on where the customers and what they demand.

Speaker 3

So I think we're going to need the capacity. And again, the flexibility that we have is, I think going to be one of the ways that GM is going to be better positioned to serve the market for both ICE and EV as we move in this transition

Speaker 9

period. Okay. That's helpful. And then I guess more broadly for the overall business, Just clarifying your net cost reduction target of $2,000,000,000 this is I assume this is before Any labor costs inflation expected from the new contract, but can you please clarify this? And assuming that this does not include That inflation in the net reduction, what sort of actions are you contemplating to try and offset that Labor cost inflation, what could be done above and beyond the $2,000,000,000 to offset any additional cost increases?

Speaker 4

Good morning, Emmanuel. It's Paul. What I would say is that the $2,000,000,000 is around controllable fixed costs And we remain committed to being able to do that. The implications of the UAW contract, when it is agreed to and ratified, will flow significantly and largely through cost of goods sold in our margin performance. So when you look at the ways that we have to offset that, those are things that affect the EV profitability etcetera going forward.

Speaker 4

So what we've got to do is make sure that number 1, we sign a contract that we know we can compete in the global marketplace, because we want to make sure that these are good jobs and they're good jobs for the next people as well, that are going We're protecting the brand, the company and the franchise in the future. So we're going to have to look at potentially reducing fixed Further, we're going to have to look at efficiencies across the board in engineering and designing the vehicles. And that's a little bit of Trying to get ahead of some of those inflationary pressures that we saw, with the steps that we've taken earlier this year. So we're going to continue to look at doing that. And we've got some work cut out for us, but we're committed to making it work.

Speaker 9

Great. Thank you very much.

Operator

Thank you. Our next question comes from Adam Jonas with Morgan Stanley. Your line is open.

Speaker 6

Hi, good morning. Mary, You've acknowledged for some time that the General Motors share price is not really getting any credit for the Cruise business. I think many would argue that at $29 the stock might even be implying a negative value for Cruise, which I think you reckon would be pretty ridiculous. So Mike, my question is, Besides continuing on growing and executing on the business,

Speaker 10

I know we're going to learn

Speaker 6

a lot in the next year. Is there anything else that your management team or Board could

Speaker 4

What do we do to unlock

Speaker 9

value for the Cruise business?

Speaker 3

Adam, first of all, I completely agree with you. I think the stock is undervalued Even if it was just an ICV and software company, I think the Cruise piece of it is further. I think as we continue to Expand Cruise in a very thoughtful way focused on safety. I think people will see and start to unlock. I mean, just last week, we announced the opportunity that we have with Honda and Cruise and General Motors in Japan.

Speaker 3

And so to be able to be involved in driving expansion not just the in the United States, but globally, I think it's going to be an important part of Cruise's mid to longer term future of success. So we do believe in the technology. As I said in my remarks, it is safer than a human driver and it's year. We're constantly improving and getting better and that's what we're focused on doing.

Speaker 6

It's really amazing to see the growth in San Francisco. I know people that use it every day. Just a follow-up for Paul. You guys have been very specific, I think within a range at least of a 2025 EV target of the mid to high single digit without IRA. You're You're obviously not disclosing where EV margins are today, so I'm not going to press you on that because you would have disclosed it.

Speaker 6

You're choosing not to. But I think in some of your comments, if I heard you correctly, Paul, you said you will you're not doing it today because of the labor situation or until you get the clearer But when we get through this standoff with UAW, can we expect That you will be specific of what the starting point is into next year, so we could understand the delta from how loss making the EVs are today. Clearly, they're loss making, But put a number on it so that investors can have greater transparency of the delta. Is that something you can commit to please?

Speaker 4

Yes. Good morning, Adam. First of all, just to clarify in your comments, the target is low to mid single digits ex IRA. I think you said mid to high in your question. I just want to correct that for the record.

Speaker 4

But yes, clearly, look, as we said year, repeatedly this year, the margins in EVs are just relatively nonsensical, mainly because we've got a big Scaled infrastructure with limited production across the board. So, we are absolutely committed to presenting that roadmap and we'll do that quarter at our Investor Day. And the decision to push out Investor Day was really we've got a lot of good strategic data points to put out there. We want to make sure that it wasn't something that was dominated by the UAW. So when the weather gets a little bit warmer in Charlotte In March, we'll have that Investor Day.

Speaker 4

We'll provide that roadmap including kind of where we've come from and where we're going to get to that low to mid single digit margin target and we're making good progress internally.

Speaker 11

Thanks, Paul.

Speaker 4

Absolutely. Thanks for the question.

Operator

Thank you. Our next question comes from James Picariello with BNP Paribas. Your line is open.

Speaker 4

Hi, good morning everyone.

Speaker 12

Curious to get your thoughts on incentive spending for the Q4 and just the overall pricing backdrop in North America, I mean, obviously, we have there are production limitations tied to the strike

Speaker 4

right now.

Speaker 12

Just how are U. S. Inventory day supply trending today relative to quarter end? And just any color there would be great. Thanks.

Speaker 4

Yes. Good morning, James. So in terms of incentive strategy, like I said in my prepared remarks, I think the team deserves a lot of credit for Really transforming the approach and the go to market strategies not just around incentives, but how we market the vehicles and Really across the board that has been a huge contributor to some of the profitability that we've had on the backs of the strength in the consumers and the products that we're producing across the board. So I expect that strategy to continue. Certainly as we looked quarter end inventories had trended a little bit higher and of course this varies on a product by product basis and we're watching that very closely in partnership with our dealers To try to make sure, in light of the work stoppage that we are getting vehicles to market where we have them.

Speaker 4

So we're going We continue to manage that very tactically across the board, but everything that we're seeing in the demand set right now It's pretty strong for our vehicles and we expect that to continue through the rest of the year.

Speaker 12

Okay. That's helpful. And then my follow-up, can you just confirm Materials and Freight impact in the quarter and just at a high level as we think about next year based on current commodity spot pricing, any visibility you might have in prior costs, just how we should how we can think about this cost bucket for 2024. I believe the 2023 guide, the prior For an expectation of mutual, any color there would be great. Thanks.

Speaker 4

Yes. It's a little early to get into that. We're We're very pleased with vehicles coming into North America from Mexico with rail challenges etcetera. I expect there will be parts where there's some inflationary pressure, but as we've said over the last couple of years, the amount that we spend on expedited logistics etcetera has been coming down as the chip shortage and some of the supply chain shortages have been tempered from the peaks in 2021 and 2022. I will say that there is a bit of concern on my mind in terms of the supply chain's ability to ramp up after the work stoppage.

Speaker 4

Obviously, we're focused on getting this finalized as quickly as we can. But it's important that we don't end up in a situation where We can't ramp up to full production because the supply chain has to rebuild etcetera. So we're watching that closely and making sure that we're in a position, But more to come on 2024 as we work through that and work through the budget.

Speaker 11

Thanks.

Operator

Thank you. Our next question comes from Dan Levy with Barclays. Your line is open.

Speaker 13

Wanted to start first with just a question on the volume versus price mix interplay. Pre COVID, you were at, call it 3 anywhere from 3,200,000 to 3,600,000 units of annual volume. And this year on some of the consensus numbers, Strike aside, you'll be closer to call it 3,000,000 units. Now you're absorbing more in the way of labor costs.

Speaker 12

I think we're waiting to

Speaker 13

see what happens with EVs, but most would view EVs to be a cost challenge. So you've already done a really good job opening remarks, I think that was something you alluded to in your prepared remarks and really business that you've in a way shown slight pivots away from volume. How much more do you think the business Can focus more on mix and profitable units and relatively reduce focus on volume?

Speaker 3

Well, Dan, appreciate the question. We really want to focus on both, but it's got to be profitable growth. When you look at the EVs And even our ICE vehicles, I just mentioned that the tracks, 50% of the customers for The new trucks are new to General Motors. So, from an EV point specifically, we think that along the coast where EV adoption is higher, that's And winning EV products that people want to buy. And so I don't I feel like your question is saying are you just going to shrink?

Speaker 3

And the answer is no, that's not our intent. Our intent is to be profitable and then grow and expand. And we think we have the opportunity to do that.

Speaker 4

And Dan, I think I'll add that I think the challenges of the last few years I think It taught us a lot about ourselves and about the quality of our products and it all starts with that. When you create products that customers love, You have an opportunity to think about the business. So while the profitability and the margins have gone up, we've been Really focused on that, but some examples of that are what we're doing with buildable combinations, what we've been doing with marketing spend, etcetera. It's really focused on driving at the unit level the margin improvement across the board. So focusing on those premium mixes where we know the demand is focusing on the premium vehicles where there is supply constraints.

Speaker 4

Those are lessons that we can take into the future going forward and are going to help us not just with ICE profitability and margins, but also help pave the way for earnings call, we have an EV strategy that is really focused on consistent margin performance going forward. So incredibly proud of what the organization has done Certainly, I think there's more to come. Now we've been doing all of this in a lower SAAR environment and feel Really good about our ability to continue that should we get back to more historical normal levels at higher volumes across the board. So I think it's been good lessons learned and you never let a good crisis go to waste and I think that's where we've seen Some really good long term permanent learnings for the organization.

Speaker 13

Great. Thank you. And then second question, wanted to just go into the dynamics behind the battery plants. Thank you for the commentary earlier that you're starting to run at capacity on Lordstown. SpringHill, that sounds like that's a slight delay.

Speaker 13

I think that was supposed to launch this year, saying it's 2024. Lance Singh is after that. Maybe you could just give us a sense on where the other two battery plants stand and to what extent Is the gating factor more on supply versus more so listening to the near term demand? And if you need to, you can delay some investment to ramp on the other 2 battery plants.

Speaker 3

So as I mentioned before, we We'll have the large town plant up full capacity at the end of this year, which then allows for it to have a full year next year. The Spring Hill plant will start early next year. There was a couple of weeks that pushed it in. It was supposed to originally start at the end of this year. It was a couple of weeks due There's some construction delays, but it now is on track and it will ramp with all the benefit of the learnings.

Speaker 3

And we fully believe we're going to need all the cells from both of those And then when you get to the Michigan plant, again, we think that there's going to be demand there as we continue to be agile and resilient and build to where customer demand is, we can obviously make some changes there. But right now, The cadence I talked about is when those plants start and the 4th plant will be likely very early 2026, drain of the industry. And so we're going to we think we're going to need all of those even with this ramp, change that we've made with Orion and on some of the other programs I mentioned it's just it's a couple of months in most cases.

Speaker 12

Great. Thank you.

Operator

Thank you. Our next question comes from Colin Langan with Wells Fargo. Your line is open.

Speaker 11

Great. Thanks for taking my questions. The UAW made a big deal about the concessions at the battery plant. Just wondering if you have any color there because I was a bit surprised because that's in a joint venture. So I wasn't sure how you actually could give concessions.

Speaker 11

Any color on what the nature of that agreement is and how you're able

Speaker 3

Right now, the Altium team that is a separate company is negotiating, the employees at Lordstown voted and we did put an offer on the table that would put the LCM cells under the scope of the master agreement. And we believe that the time that it would allow for, which it year, we must have benchmark economics and also operating flexibility because the battery cell plan is very different than some of the traditional operations we won right now. But at this point, that offer remains open, but the focus is on LCM getting their own agreement.

Speaker 11

Just we're still in early days at EVs. There seems like demand has eased already. And it's great that you have the flexibility to kind of switch Between EV and ICE, but the regulations in the U. S. Kind of push EV at least at some point in the future.

Speaker 11

Do you think there's any change in the Washington of potentially pushing out some of those targets, doesn't it become a bit of a challenge if consumers aren't interested in buying EVs and The only way to sell them would be to hit your margins, right?

Speaker 3

Yes. I mean, obviously, we provide regular input into the administration and the regulatory agencies, I've been very clear and on the record that the regulations can't get in front of EV demand, some of which is will be enabled by having a robust charging infrastructure. So we regularly have those conversations and We'll do what it takes to meet the regulatory environment as well.

Speaker 11

Got it. All right. Thanks for taking my questions. Sure.

Operator

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open.

Speaker 10

Good morning. Thanks very much for taking the questions. Very much appreciate the plan to be flexible on the cadence of the EV ramp and the opportunity for GM to implement some incremental cost reductions. But given that scale was one of the key inputs in EV profits, can you help us better understand if there is a certain minimum amount of volume that you may need to be at in order to reach Your low to mid single digit EV margin target in 2025?

Speaker 4

Yes. Good morning, Mark. So what I would say is it's a little bit of a step function, right. So as we build a plant or transform a plant, we've got to fill that up to maximize efficiency. Year, the decision to defer Orion is really an example of not rushing to build that full infrastructure before we know that we can So, ultimately it leads to more of an efficient transition.

Speaker 4

So what I would say is we've got good capacity at the facilities that we've already transformed and we're working to scale those to that capacity as quickly as we can. So it remains a big part of it. But I think you're going to see a little bit of step changes through the transformation as we bring that incremental capacity online. But that's part of our plans. It's all rolled into the targets that we've outlined on our ability to hit the low to mid single digit margins on EVs in 2025 and then grow from there.

Speaker 10

Thanks for that, Paul. And then on the international business, the company was profitable, including in China despite what's been a difficult market backdrop. Can you speak in more detail on how you think the international market will progress from here? Thanks.

Speaker 3

Well, if we first start with the GMI market ex China, again, we see really strong improvement across all of the countries that we're in from South America to the Middle East to Korea, etcetera. We're going to continue to focus on it. And the 1 again, it's operating discipline. It's also having the right products for those markets and understanding in some cases, especially in markets like South America, where we price for what's happening from a current foreign currency exchange perspective and we're seeing the products because of the strength of them hold up. So very pleased with where the GMI markets are.

Speaker 3

And as you focus on China, China is still we're looking for potentially a modest recovery continuing into Q4. But the real focus for General Motors in China is to make sure we get our Altium products out there, from a Buick and a Cadillac perspective, year, we expect to continue to focus on the right products from an SGM Wuling perspective. And then remember, we're also expanding for premium import And we think those three initiatives are going to position us well in an uncertain market that we're facing in China, but gives us a lot of optionality

Operator

open call, I'd now like to turn the call over to Doctor. Mary Barra for closing comments.

Speaker 1

Conference call, please.

Speaker 3

Well, thank you, Amanda, and thanks to everybody for joining the call today. It's clear that we're dealing with a lot of near term uncertainty. And then also, the I'll say the transition that to EVs that will have ups and downs. Year, we expect to continue to deliver a strong and profitable ICE business as well as a strong and profitable EV business for our future. In addition, I think if you look deeper into the organization that Mike Abbott has built from a software perspective, this is really foundational for us to be able to Capture additional revenue with a very different margin profile than some of the aspects of the vehicle and the business that we have today.

Speaker 3

Across not only this country working with our regulators to make sure we can deploy crews safely. I know the UAW contract is one of the biggest sources of uncertainty right now, but I want to remind you with what I said earlier, we will not agree to a contract that isn't responsible year. For our employees and for our shareholders, we need to make sure we have a contract that is going to allow us to compete and win in what is a challenging market for EVs and also allows us to support the business that we have with strong margins in our ICE business. And as Paul said, we will host our next Investor Day in March to go even deeper into the ICE, EV, AV and specifically our software plans. When you look at our growth businesses, especially Cruise and Software, we're at an inflection point right now and we see tremendous upside And so we look forward to discussing each of them with you in more detail as we move forward.

Speaker 3

So make no mistake, Jim is very committed Q2, we're not changing any of our goals there. We're just trying to make sure the company is more agile and resilient so

Operator

Thank you. That concludes the conference call for today. Thank you for joining.

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Earnings Conference Call
General Motors Q3 2023
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