Highlights from GM's Q3 Conference Call: Solid Quarter with Best Results in N. America and China

This morning, General Motors (NYSE: GM) reported Q3 EPS of $1.03, $0.07 better than the analyst estimate of $0.96. Revenue for the quarter came in at $36.72 billion versus the consensus estimate of $36.66 billion. Shares are trading down 8.57% today.

Highlights from GM's Q3 Conference Call:

• (Daniel F. Akerson) In summary, we produced a solid quarter generating our best results in North America and China.
  
• Having said that it's also courier we have a lot more work to do, especially in Europe, which is being hurt by challenging economic conditions and in South America.
  
• Our deliveries were up 9% to $2.2 million units and net revenue was up 8% at $36.7 billion. It's always nice to outpace the market, which we're able to do with our global share increasing to 12% including gains in North America and China. We delivered $2.2 billion in EBIT adjusted down $100 million versus the prior year.
  
• We saw higher volume and better pricing, but that was offset by increased cost which were mostly engineering and marketing expenses as well as unfavorable vehicle mix.
  
• Despite of $300 million improvement versus a year ago GM Europe lost $300 million in the quarter reflecting the weakened vehicle market there which itself is a manifestation of Europe economic morass. GMIO reported EBIT adjusted of $400 million, down $100 million from a year ago levels mainly due to increased engineering expenses at our fully consolidated units.
  
• During third quarter, we continued to make good progress strengthening our fortressed balance sheet. Yesterday, we announced the establishment of the Canadian Healthcare Trust reducing our OPEB liabilities by $3 billion. In the third quarter, we generated $1.8 billion in automotive cash flow from operating activities and $300 million in automotive free cash flow.
  
• Away from the numbers, we had a very busy third quarter indeed accomplishing a number of things that bodes well for the company's future. First and foremost among them of course was completing a four-year labor agreement with our UAW partners.
  
• Another News since I last spoke to you, GM is seeing some very important corporate credit rating upgrades. Both S&P and Moody's, now have us just one notch below investment grade.
  
• We also signed an agreement with LG Group to jointly design and engineer future electric vehicles.
  
• (Daniel Ammann) Net revenues were $36.7 billion for the third quarter of 2011, up $2.6 billion versus the prior year.
  
• Operating income was $1.8 billion, up $100 million versus the prior year. Net income to common stockholders is $1.7 billion which includes approximately $200 million reduction related to the allocation of undistributed earnings to the Series B mandatory preferred under the two class method.
  
• Earnings per share was $1.03 on a fully diluted basis compared to a $1.20 from the prior year. The reduction versus the prior year was driven primarily by the dilutive impact of the issuance of the series be mandatory preferred of $10.0. The dilutive impact of the 60 million shares contributed to the U.S. pension plans of $0.04 and the reduction of earnings available to common of $0.03.
  
• Moving to the non-GAAP metrics on the bottom of the page, EBIT adjusted was $2.2 billion for the third quarter of 2011, down $100 million versus the prior year. Automotive free cash flow was $300 million, down $1.1 billion versus the prior year. In summary, while our consolidated results were solid, we clearly have more work to do towards our goal of achieving long term sustainable performance.
  
• Equity income was $400 million primarily due to our share of income earned by our JV's in China. Non-controlling interest represents primarily GM Korea into the third quarter of 2011, this was zero on a around basis.
  
• Non-operating income was also zero for the third quarter of 2011, down $300 million from the prior year. This decrease is due to absence of favorable foreign exchange experience last year. This totals to EBIT of 2.2 billion for the third quarter of 2011 down 100 million from the prior year.
  
• GM Financial reported pre-tax results of 200 million and Corporate & Eliminations were 200 million unfavorable for the third quarter versus flat for the prior year mostly reflecting unfavorable foreign currency movements. This led to an EBIT and EBIT-adjusted of 2.2 billion for the third quarter of 2011.
  
• For the third quarter of 2011, our global deliveries were approximately 2.2 million vehicles, up more than 180,000 vehicles from the prior year. The improvement was a result of the 700,000 unit increased in the industry as well as the success of our fuel-efficient product offering globally. For the third quarter of 2011, our global market share was 12%, up 0.6 percentage points from the prior year.
  
• Mix was unfavorable due primarily to higher compact car volume in GM North America. Price was favorable $400 million for the quarter. Costs were unfavorable $400 million, which includes $300 million in increased engineering, $200 million in increased marketing, and $200 million in increased commodity and freight costs, partially offset by $300 million lower depreciation and amortization expense.
  
• GMNA deliveries were 745,000 vehicles for the third quarter of 2011, up 85,000 units from the prior year. The increase was driven by 230,000 unit increase in the North American industry and a 1.1 percentage point increase in GMNA market share to 18.8%. U.S. market share increased 1.4 percentage points to 19.7%, it was down slightly from the second quarter. This decline was related primarily to decreases in fleet volume as our retail share remained flat at 17.6%.
  
• For the third quarter of 2011, our U.S. retail share was 17.6%, up 1.4 percentage points versus the prior year and equal to the second quarter.
  
• Our incentive levels on an absolute basis have declined approximately $400 per unit from the prior year, a bit of increase from the second quarter as we entered our model year sell down and incentive levels increased across the industry.
  
• On a percentage of ATP basis, our incentives were 9.8%, down 1.2 percentage points from the prior year. This puts us at 102% for the industry average levels for the third quarter essentially flat versus the prior year in the second quarter. For October, our retail market share was 16.5% and our incentives were 8.9% of ATP, which is just above the industry average for the month.
  
• U.S. dealer inventory was 558,000 units at the end of the third quarter or 67 days supply. This is a 47,000 unit or six-selling day reduction from June levels. Based on our current industry expectations, we anticipate we will end the year at dealer stock levels on the high 500,000 and this includes meeting our goal of approximately 200,000 full size pickup trucks or approximately 90 days' supply at yearend.
  
• GMNA's EBIT was $2.1 billion for the third quarter of 2010. The middle section of the slide details the $100 million improvement in GMNA EBIT. Volume and mix was unfavorable $400 million. This includes a $300 million improvement in volume driven by 6% increase in the industry and a 1.1 percentage point increase in market share partially offset by 70,000 units in lower stock builds.
  
• GME deliveries totaled 407,000 units in the third quarter of 2011 up 18,000 units versus the prior year. The increase in deliveries is attributable to 225,000 increase in the European vehicle industry offset by 0.1 percentage point decline in market share.
  
• Third quarter 2011 market share was 8.6% in Germany up one percentage points from the prior year and 11.9% in the U.K. down 0.7 percentage points versus the prior year compared to the second quarter market share decline of 0.3 percentage points in Germany and 1.4 percentage points in the U.K. and 0.3 percentage points across the region.
  
• GMIO deliveries totaled 816,000 units in the third quarter of 2011, up 71,000 units versus the prior year. The increase was driven primarily by 120,000 unit increase in the industry and 0.7 percentage point increase in market share to 9.4%. GMIO third quarter market share benefited from year-over-year gains in key markets. In China, market share increased 0.5 percentage points to 14.1% and India market share increased 0.7 percentage points to 3.7%.
  
• Regarding the flooding situation in Thailand, we do not anticipate a material impact at this time.
  
• Consolidated operations were adversely affected by GM Korea which incurred foreign exchange losses as well as increased engineering spends. China JVs margin percentage decline as a result of cost associated with launching the new Baojun brand and increased sales incentives in the mini commercial vehicle market.
  
• GMSA's EBIT was a breakeven for the third quarter of 2011, down $200 million versus the prior year. Revenue was $4.4 billion, up $400 million due largely to increased volume of $100 million, favorable mix of $100 million, favorable pricing of $100 million and $200 million favorable foreign currency translation. GMSA's EBIT adjusted margins declined 5.1 percentage points to a negative 1% due primarily to increased costs. On slide 23, we provide the major components of GM South America's $200 million reduction in the EBIT versus the prior year. The impact of both volume and mix was flat versus the prior year.
  
• After deducting capital expenditures of 1.5 billion, our automotive free cash flow was $300 million, 1.1 billion reduction from the prior year approximately $600 million of the reduction is driven by increased capital spending net of depreciation and amortization.
  
• Our U.S. subprime financing has increased over the prior year to 6.6% and continues to exceed the industry average. Our U.S. lease penetration of 11.4%has also increased over the prior year but is down versus the prior two quarters and trails the industry average. So we have opportunities to increase our overall lease penetration in the U.S. market. Lease penetration in Canada has continued to improve.
  
• GM Financial saw strong credit performance in its loan portfolio with annualized net credit losses of 3% for the quarter better than the 5.4% annualized loss rate from the prior year. Earnings before tax were $178 million for the third quarter of 2011.
  
• (Q&A) Can you elaborate a little further on the GM Korea engineering cost burden and as you integrate GM debt into your smaller product architecture globally and when should that unit start seeing some of the benefit? (A) Well, the engineering expense is something that we measure on a global basis and allocate that out on the global basis. So the whole engineering function globally is run as the global entity including the Korean operations currently. So it's fully integrated clearly as we talked about before going back to the business conference back in August we have substantial opportunities and initiatives underway to improve our overall engineering effectiveness to make sure that we're getting more out of the system for less input into the system and that benefit as its realized or accrued over the regions around the world.
  
• Okay. Moving to pensions, you mentioned you took advantage of some of the pension relief for the U.S. plants. I understand you are going to give further details later-on, but just broadly how does this change your funding strategy near-term because many of us on this call would be expecting you to contribute on order a $5 billion or more of cash in the coming quarters. Is that materially changed given the pension relief? (A) No. What the pension relief does is it really takes any required contributions from being a long-way out to a really, really long-way out. So it doesn't change the way that we are thinking about the fundamental strategy or simply an opportunity that was there that made sense for us to take advantage off. But more generally on pension, we have continued with the strategy that we articulated on the de-risking side of the plan will be moving consistently in that direction from when we started talking about that last year and I would say and this is as far as when I go to this point that with our de-risking strategy has benefited us through the period of market turmoil relative to if we had not been pursuing that strategy.
  
• But as far as voluntary contributions, I mean, does that change -? (A) No, no change to - and again we haven't articulated a specific plan for voluntary contributions. From my point of view the de-risking is as a more important than the fully funded compartment of our strategy right now, so we want to make sure that we are getting the assets and liabilities of the plan better aligned to taking all of the de-risking initiatives that we can and will continue to fund the plans over time as needed.

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