By on August 12, 2010

GM has released its Q2 earnings, and it’s pulled off a $1.3b net profit on improved North American revenue, and narrower losses on GM Europe. Revenues for GM International, however, were down to about half of their Q1 level. Despite over $1b in capital expenditures last quarter, GM  managed to improve free cash flow from $970m in Q1 to $2.834b in Q2. Full chart packet available in .doc format here, presentation slides available in PDF format here.

GM’s North American deliveries rose to 716,000 in Q2, and were composed almost entirely of “core brand” sales (old brands totaled 8k deliveries). Market share in NA rose to 18.7% (from 17.8% in Q1), wile US core brand share rose from 18.1 to 19.3%. As the slide above shows, volume increases were spurred on by incentive spending, but GM insists that incentives are mostly aimed at clearing out 2010 inventory. Moreover, GM insists that retail transaction prices are up considerably, although they are compared to Q2 2009 numbers, and there’s no indication that the Q2 jump in incentive spending has been accompanied by a rise in transaction prices over the same period.

And then there’s the fleet issue. Averaged over the first half of this year, GM says its fleet business runs at about 33 percent of deliveries, which is actually slightly higher than the number given recently by Automotive News [sub]. GM says the plan is to bring its fleet business down to 25-27 percent for the full year. But perhaps more damning than sheer fleet volume alone is the kind of fleet volume GM delivered. Two thirds of its fleet business went to daily rental fleets, which are largely considered to have the worst effects on resale and brand equity. GM says compact and midsized cars make up the bulk of that business.

Overseas, GM still faces some serious challenges. GM Europe continues to log consistent losses, and though GM insists that GME is approaching break-even at current industry volumes, it says that restructuring costs will keep GME in the red on a quarterly basis for the rest of the year. Expect $200m-$300m in quarterly losses, which are considerably lower than previous GME losses. But the European woes were expected… slowdowns at the previously white-hot GM International are more surprising.

With the Chinese market down five percent, and GM’s market share there down two percent, The General reckons inventories and price pressure are building in China. Nobody’s freaking out about a bursting bubble, but Chinese-market news had a strangely sober tone. Same with Brazil, where GM admits that competitors beat it with new products and unexpected deals, dropping GM’s market share by over one point. Indian market share fell from 4.2 percent to 4 percent. Still, GM expects healthy growth from its International division and the markets it serves.

Overall, GM expects its financial performance to moderate over the second half of the year. Strong inventory builds in Q1, and strong lease return adjustments in Q2 were singled out as contributing to GM’s strong H1 performance, and CFO Chris Liddell warned that these factors should not be expected to play a role in the second half. Capital Expenditures increased from $800m in Q1 to $1.1b in Q2, and GM expects to shell out $5b-$5.5b in CapEx over the course of 2010. GM did say that it can expand capacity by 30-40 percent without major fixed-cost increases, which puts it on a steady course for growth.

All told, GM appears to be on a solid footing, although major issues remain. With the announcement of Ed Whitacre’s retreat from power, the question is whether GM’s new Chairman/CEO will enjoy solid North American performance, and can wean GM off its daily rental fleet sales and still-high incentives. Meanwhile, Europe remains an open wound with little sign of improvement in the short-to-medium-term, and GMIO is showing the first signs of weakness in years. The temptation at this point is to minimize the impacts of these challenges and keep GM cruising along at a solidly profitable rate, but sustainable success requires a clear vision of problems looming on the horizon and proactive solutions to them. Whether Dan Akerson can provide this still remains very much to be seen.

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18 Comments on “GM Announces $1.3b Q2 Profit...”

  • avatar

    Ah – must be nice to look profitable when most of your debt you accrued has basically been forgiven along with some of your most encumbered assets. How long before the UAW clamors for higher salaries b/c they now are back in the black.

    • 0 avatar

      That’s the basic principle behind chapter 11 — the only difference to the airline industry, for example, is that GM is actually able to generate a profit after emerging, whereas most airlines still struggle to be viable.

      How sustainable those profits are is anyone’s guess though.

    • 0 avatar

      With the great restocking of late’09/early’10 bowed out of the stage (see all those ‘pent-up’ demand from corporate and fleet customers) and the employment picture anemic at best, how will the second half work out? Ah…, I see why they try to control the inventory at dealers so tightly recently.

      Is it smoke and mirror to include the sales of Wuling into GM’s own sales? Does Wuling use any GM platform or powertran tech? If not, what kind of ‘control’ can GM exercise over its SGMW?

  • avatar

    If you did your “shotgun bankruptcy” (brokered by BHO) correctly, they you’d better be profitable.

  • avatar

    Don’t trust them, Enron type accounting will be the norm for them until there is a final day of reckoning and the game ends.

  • avatar

    I am with MikeAR.

    GM is doing the typical $1B/quarter profit, until an “one-time” write off of $20B occurs every year.

    This can be done in many ways, like counting shipment to dealer as sales, like offering big discount on lease while deliberately over estimating residue value …

    But what it doesn’t change is the fact that GM is losing money and heading to another bankruptcy.

    I can only be convinced otherwise, if GM posts profit for 5 consecutive years without a single “one time” write-off. Why 5, you may ask. That’s because GM received $50B from bailout. I figure, if they do $20B write off per year, collect $5B profit per year and refinance $5B from suckers per year, then their net loss would be $10B per year and will have to ask for more bailout in no more than 5 years.

    • 0 avatar

      GM’s profit and funding issues aren’t anything a few taxpayer ‘bridge’ loans can’t fix.

    • 0 avatar

      This is an excellent point. Zero adjustments in this quarter means GM is trying to sail into the IPO without acknowledging the Opel, Daewoo and pension “situations.” Post-bailout-bankruptcy GM can turn a profit in these economic conditions (albeit with incentive and fleet issues) and is flush with cash and a Wall Street revolver… why sweat the billions piling up on the horizon? Unless, by the time the financial hammer comes down, the cash has been spent on expensive new vehicles that have only just held off their brand’s resale and image decay.
      Then it will be back to D.C… only in EVs this time.

  • avatar

    Interesting list, shows Opel sells more cars than all GM brands in NA taken together (excluding trucks) and they are all soundly trounced by the Chevrolet International which is presumably mostly China. Since all Chevrolet cars in China seem to be re-badged Daewoos, Daewoo is way way more important for GM than I thought.

    Somebody mentioned in a comment of a post few days ago there are so many China related posts lately but it seems Bertel is just introducing us to how the decades to come will feel like.

    • 0 avatar

      that is crazy…who would have thought little Daewoo would have grown so much? If they sold this many cars with their badge on it, they would probably be bigger than Honda. Note that all Chevrolet’s in Europe are Daewoo’s, also.

      They’ve achieved a lot of sales with relatively poor product. They can offer greater value in China and Europe than Toyota or Honda. But so can Hyundai, and Hyundai is building way better product now, and doesn’t suffer in China from the Japanese culture-hate. Chevrolet in China is going to get spanked by Hyundai over the next 5 years.

  • avatar

    On the same day as GM reported a monster profit, and one day before a rumored IPO filing, CEO Ed Whitacre is stepping down.

    He will officially leave his position September 1.

    Perhaps he’s heading to run HP?

    Read more:

  • avatar

    GM is now playing musical chairs with its CEOs. They think if they keep on changing the head position with an assortment of GM lifers looking to retire soon – we won’t notice the problems they have. GM runs b/c of GM’s culture. That was never changed with the gov’t backed bankruptcy.

  • avatar

    And also, you have to remember that it wasn’t just US cash for clunkers boosting the numbers. Our program may have ended last year, but many programs in Europe have been ongoing, and Im pretty sure a few are still in place. The car scrappage schemes were most definitely conducted on a concerted global basis to prop the industry overall, and not all at once, since you can see that they were staggered across countries, ours being first because, uh, we’re No. 1!! (oy)

  • avatar

    GMIO Revenue Q1 2010: $8.1b; Q2 2010: $8.6b (slide 17), an increase of $500m.

    The numbers above are rolling predecessors and the column you appear to have referenced is for six months. GMIO EBIT was down 42% – if that’s what you meant fair enough, but is obvs not the same as ‘revenue down by half.’

    Interestingly, all of the slowdown is related to China (56k fewer vehicles sold over Q1). Perhaps a sign of things to come in China as their government warned yesterday?

  • avatar

    Is there a corporate finance expert here who can explain to us how exactly GM cooked the books…?

  • avatar

    Yes, a tough pill to swallow for the TTAC crowd. Don’t worry as you can use the standard rationale- “must be all fleet sales” or “they cooked the books” etc.

  • avatar

    Great news (I’ll assume the books are cool). Now pay me back, and then the debate can be on product alone.

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