GM's Q3 '96
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GM's Q3 '96
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
GENERAL MOTORS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> ALEXANDRIA, Va., Oct. 20, 1996/FOOLWIRE/ -- General Motors Corporation reported on October 15 that consolidated income from continuing operations for the third quarter of 1996 totaled $1.3 billion, or $1.57 per share of GM $1-2/3 par value common stock, compared with $396 million, or $0.39 per share, in the year-ago period.
"The third-quarter results from continuing operations clearly show momentum as we continue to rebuild our strength in North America and grow our business in key international markets throughout the world," GM Chairman and Chief Executive Officer John F. Smith, Jr., said. "We're pleased that our North American assembly plants are on track with their launch of 15 new cars and vans in this milestone model year for our North American operations," he said.
The third-quarter-1996 results include a nonrecurring favorable adjustment of $409 million pretax, which is $253 million after taxes, or $0.34 per share of GM $1-2/3 par value common stock, reflecting a previously announced reduction to the corporation's plant closing reserve. The reduction was required based on the decision to utilize GM's Wilmington, Del., facility for the assembly of a new generation Saturn vehicle. There were no special items in the year-ago period. As previously announced, GM completed the split-off of Electronic Data Systems Corporation (EDS) on June 7, 1996, and accordingly, the third-quarter financial results exclude EDS. In the 1995 third quarter, income from the discontinued operations of EDS totaled $246 million.
Significant highlights of third-quarter-1996 results from the automotive sectors included the following:
o The combined net income for GM North American Operations (GM-NAO) and Delphi Automotive Systems totaled $515 million in the third quarter of 1996, including the favorable impact of the previously mentioned adjustment to the plant closing reserve. That compares with a combined net loss of $93 million for the third quarter of 1995. This is the first profitable third quarter for GM-NAO/Delphi since 1986.
o GM International Operations (GMIO) reported net income of $323 million for the third quarter of 1996, versus net income of $111 million in the year-ago period.
Highlights of the third-quarter-1996 results for GM's major subsidiaries included the following:
o General Motors Acceptance Corporation (GMAC) reported net income of $307 million in the third quarter of 1996, compared with $254 million in the year-ago period. This represents GMAC's most profitable third quarter since 1991. GMAC's improved credit rating helped results in the quarter.
o Hughes Electronics Corporation reported third-quarter earnings in 1996 of $252 million, compared with $256 million in the third quarter last year. The company achieved a higher operating profit from last year but showed essentially flat net profit because of a higher effective tax rate. Rollout of DirectTV brought some front-loaded expenses into the profit & loss statement.
GM CONSOLIDATED FINANCIAL DATA (with GMAC on an equity basis)
The corporation's pretax income from continuing operations was $949 million in the third quarter of 1996, compared with a pretax net loss from continuing operations of $70 million in the third quarter of 1995.
The corporation's effective income-tax rate in the third quarter of 1996 was 2.8 percent. The low effective income-tax rate resulted mainly from the favorable resolution of items related to GM's tax returns for prior years, overall foreign tax rates that were lower than the U.S. statutory rate, and reinstatement of research-and-experimentation credits for the last half of 1996. The corporation's net-profit margin -- income from continuing operations as a percent of net sales and revenues -- was 3.7 percent in the third quarter of 1996, compared with 1.3 percent in the comparable 1995 period.
The corporation's cash position improved by $1.5 billion over the June 30, 1996, balance with cash and marketable securities totaling $14.5 billion at Sept. 30, 1996. That compares with $8.2 billion at Sept. 30, 1995, and $13.0 billion at June 30, 1996. Contrary to third quarter historical performance, cash increased in the third quarter.
Fully consolidated net sales and revenues from continuing operations (including GMAC) in the third quarter of 1996 totaled $39.1 billion -- an increase of 10.7 percent compared with the year-ago period. During the third quarter of 1996, GM dealers delivered 2,085,000 cars and trucks worldwide, resulting in a 16.1-percent worldwide market share. That compares with deliveries totaling 2,060,000 and a worldwide market share of 16.9 percent in the 1995 third quarter.
GM NORTH AMERICAN OPERATIONS (GM-NAO)/DELPHI
GM North American Operations, including GM's Delphi Automotive Systems, reported net income of $515 million in the third quarter of 1996, an improvement of $608 million, compared with a net loss of $93 million in the year-ago period. This represents the first profitable third quarter since 1986. GM-NAO/Delphi's net-profit margin was 2.1 percent in the third quarter of 1996, compared with a net-loss margin of 0.4 percent in the same period in 1995. "We still have our work cut out to improve our margin performance," Smith said. "Although we're pleased that the margin did improve year over year, it's still well short of our goal of achieving an average annual net-profit margin of 5 percent over the automotive business cycle."
"The success we've achieved in strengthening our North American operations is a result of our continuing efforts to reduce costs and improve our competitive position," Smith said. "The success of our products in the marketplace is a reflection of our intense focus on the customer. Meeting and exceeding the expectations of consumers in this key market is critical as our North American plants are currently launching 15 new cars and vans for sale here and overseas. This affects nine of our North American assembly plants, including the Lansing, Mich., Craft Centre where GM's first production electric vehicle, the EV1, is being produced," he explained.
Production of GM's new full-size vans at the Wentzville, Mo., assembly plant, and the new Saturn coupe in Spring Hill, Tenn., have reached full line speed. Production acceleration is on schedule at the remaining plants that are launching new vehicles, except for the Buick Century in Canada. "We're bringing to the market more new vehicles in the 1997 model year than any other manufacturer, and more than during any year in our recent history. We're pleased that the launches are on track, especially considering the challenges of our tough vehicle-introduction schedule."
"As we aggressively move into the market with these new cars and trucks," Smith said, "we are demonstrating that our turnaround in North America is real and it's based on business fundamentals -- providing consumers with exciting new products and improving product quality, while making good headway in reducing our costs and taking all necessary steps to become more competitive."
"Delphi continues to move into new markets to serve its customers worldwide," Smith said. In the first nine months of 1996, Delphi undertook 20 new business initiatives, including 10 joint ventures, four all-new operations, and six acquisitions. Delphi is now involved in almost 50 joint ventures worldwide. Over 35% of Delphi's revenues now come from non-NAO sales. New products include Traxar, a system which improves vehicle stability in a variety of driving conditions; a new safety-oriented seat currently built into the Grand Prix; and side-impact airbags, which are being built into 1997 Cadillacs.
GM vehicle deliveries in the United States in the third quarter of 1996 totaled 1,182,000 units, resulting in a 30.4-percent share of the U.S. vehicle market, down from 1,235,000 units and a 32.2-percent share in the third quarter of 1995.
GM INTERNATIONAL OPERATIONS (GMIO)
GM International Operations reported net income totaling $323 million in the third quarter of 1996 compared with $111 million in the third quarter of 1995. The net-profit margin for GMIO was 3.9 percent for the third quarter of 1996, compared with 1.6 percent in the comparable prior-year period. International Operations' results compared more favorably, year-to-year, in the second half, and unfavorably in the first half.
"The higher net income for the quarter was primarily due to increased volume, and favorable year-over-year currency exchange," Smith said. "Our International Operations continued to expand and gain access to the fastest-growing world markets," Smith said. "Our initiatives in important expanding markets such as China, Thailand, Poland, Argentina and India reflect our conviction that the potential in these markets provides a significant opportunity to leverage GM's global resources and enhance our competitive position throughout the world."
Volume totaling 792,000 deliveries in the third quarter of 1996 resulted in a 9.1-percent market share, compared with third-quarter-1995 deliveries totaling 718,000 and a market share of 8.9 percent.
GM's automotive operations in Europe reported net income of $75 million in the third quarter of 1996, an improvement of $173 million, compared with a net loss of $98 million in the third quarter last year. Net income for the remainder of GMIO, including Latin American Operations and Asian and Pacific Operations, totaled $248 million, compared with net income of $209 million in the prior-year period. Latin America is a much tougher competitive environment today than it was two or three years ago.
Asia/Pacific's profitability was quite good compared with last year's results. In Japan, GM was the leading importer last year, with more than 46,000 units sold. Strong Opal sales led the performance. GM has a 37.5% equity interest in Isuzu (the world's largest heavy truck and diesel engine manufacturer) and a 3.5% equity interest in Suzuki. Isuzu plays a major role as a GM strategic partner in both the region and worldwide. In SE Asia, GM has a mixture of local assembly and sales operations. In Taiwan, the company assembles the Opal Astro, sells the rest of the Opal range, and sells selected N. American products. Taiwan was the first international market for Saturn, which was introduced in 1993. Asia/Pacific Operations also assembles vehicles in Indonesia: the Asta and a right-hand-drive version of the US Chevy Blazer. This version of the blazer was introduced last year and has become an instant success. Opals are also sold in Malaysia, Thailand, and Singapore. In Australia and New Zealand, Holden is the GM brand offering in locally-produced vehicles as well as on Opal-sourced vehicles.
ASIA/PACIFIC STRATEGY
In South Korea, the company intends to become much more aggressive because the growth potential it sees there. In China, the company is establishing a distribution network and is finalizing plans with Shanghai automotive as well as developing a new product plan for its truck joint venture in northern China. Between now and the year 2005, GM believes that the Asian market for new automobiles will grow more quickly than the market in Europe and the combined markets of North America and Latin America.
Developed markets, such as Japan and Australia, will show a steady, annualized growth rate of 2% per year, resulting in volume growth to 1.7 million units by the year 2005. These markers would then still account for more than half of the region's volume. Newly-industrialized countries, such as Taiwan and S. Korea, will offer a higher growth rate of approximately 3.3% per year. Under such a growth rate, volume would increase by 1 million units by 2005. Developing countries such as China, Thailand, and the Philippines are projected to grow at 7.2% per year, resulting in another 2.5 million units in the year 2005. In total, annualized growth for the region is projected to be 3.6%, resulting in a regional market of 18.7 million units by the year 2005.
Mass motorization on a national scale is probably 20 years away. However, China's high growth rate of GNP offers opportunity in certain provinces such as in the coastal areas. GM and Isuzu sold 624,000 units in Asia/Pacific last year, giving GM the number eight position with a 5% market share. Opal, GM's core international brand, sold 75,000 units and are set to triple by the end of the decade. 80,000 of those are projected to be sold in Japan. The goal for the Japanese market is 100,000 vehicles. Saturn is set to introduce a right-hand-drive vehicle in 1997. The company has set its regional long-term objective as achieving 10% market share.
The company will use more local engineers in vehicle development for the region so that local tastes and needs will be taken into account. Increased local production will also strengthen the company's regional position. The company has plans to construct a $750 million manufacturing facility in Thailand, which will be the cornerstone of the region's manufacturing effort.
QUESTION AND ANSWER SESSION
European demand for the year-to-date was actually stronger than expected after a slower start to the year. The company believes that the Vectra and Corsa especially strengthen their product lineup.
Grand Prix production facilities are all on track right now. Dealer product acceptance has been outstanding.
Overtime is up somewhat at the moment with start-ups, at about $40 per unit, but production is above forecast.
Fourth quarter incentives this year may be above last year's, but the company has to wait and see what availability looks like.
GM is moving away from the daily rental fleet sales. The company expects those sales to be down year-over-year. Fleet deliveries have an unusual lumpiness due to availability of models. Profitability differences between retail sales and fleet sales are narrowing, but that difference looks much better today, compared with 1992 (in relative terms and in margin terms).
On balance sheet changes in the following areas: accounts/receivable, non-consolidated affiliates, down $1 billion; other investments and miscellaneous assets, down $500 million from Q2; and accrued liabilities, up $1 billion, the company said there are no unusual circumstances to explain those changes. Plant closing reserve now stands at $1.9 billion. The company's targeted assembly capacity is 5.6 million units. The more pressing issue is deciding upon truck capacity vs. passenger car capacity.
The entire executive corps has been through RONA (Return on Net Assets). Improvements on that measure are a significant factor in executive compensation. Individual plants aim to control inventories, optimize capital spending, and control expenses in maximizing RONA.
In the absence of the labor situation, the company would expect very strong cash-flow in the fourth quarter. Improved net income and higher-quality income, in terms of cash flow vs. income, have resulted from the company's RONA efforts.
The Latin American markets are the most volatile in the company's view. Argentina will be coming online in 1997 and 1988 and GM hopes that Venezuela will start to show improvement and that Mexico and Brazil show continued recoveries. In Europe, the company believes that there is likely more economic upside than downside.
Headcount reduction was masked by temporary help during the summer. Salary headcount and hourly headcounts are both trending down. Productivity improves as attrition continues.
Advertising expenditure in the fourth quarter may be slightly exaggerated due to the number of new models coming into the market. As engineering and manufacturing expenses in Q3 were probably the peak for the year, reduced expenditures in this area during Q4 may offset some of the marketing expense increase.
SG&A (sales, general, and administrative) expense was up in the quarter due to Hughes' DirectTV launch as well as the company's seasonal marketing expense patterns. The company's SG&A expenses in Q4 will definitely be up in Q4 due to its heavy model launch schedule. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |