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GM Posts Big Q1 Profit, Seeks Relief From Rising Material Costs

The auto maker will work to cut costs internally and improve supplier performance, a move that could include an appeal for lower component prices.

General Motors posts its fifth-straight quarterly profit since emerging from bankruptcy nearly two years ago, but also warns of higher commodity costs and says it could rebalance production in the coming weeks to meet a U.S. mix shift amid rising gasoline prices.

“Our first-quarter results can be best described as on-plan,” says GM Chairman and CEO Dan Akerson after announcing a $3.2 billion profit in the year’s first three months.

Akerson tempers the achievement, which includes revenue growth in all four global regions, saying the auto maker must take better advantage of its scale and the potential of its various brands.

“An important part of that is making sure we keep the breakeven (point) low in the United States and then take full advantage of expected industry growth,” Akerson tells journalists and Wall Street analysts in conference call.

A key element of that will be an “intense focus on cost containment” in the face of increasing commodity prices that must be offset through gains in other areas, Akerson says, such as improved supplier performance, higher car and truck prices and more efficient manufacturing and product-development processes.

GM’s 2009 bankruptcy helped reduce its breakeven point in the U.S. to industry volumes as low as 10 million vehicles by eliminating debt and slashing labor costs. During the industry’s heyday of 17 million-unit sales in its most important home market, the auto maker struggled to make a profit.

With first-quarter sales at a seasonally adjusted annual rate of 13.1 million units, GM posts its best quarterly result in more than a decade. A product mix that includes a fresh batch of fuel-efficient vehicles, in high demand as a result of soaring pump prices, also benefitted the auto maker.

But rising gas prices also mean the materials GM needs to produce vehicles are costing more. The auto maker offset the increase in the first quarter by following key competitors and raising car and truck prices 0.4%, or an average of about $123 per vehicle.

GM executives joining Akerson for the teleconference suggest more hikes could be in the works, saying vehicle pricing between the first and second quarter would be “favorable.”

“On the materials costs, we’re looking at the same set of parameters as everyone else is, so we would expect to have, presumably, a proportional impact,” says GM Chief Financial Officer Dan Amman.

The auto maker also says it will work to cut costs internally and hopes to improve supplier performance.

GM does not rule out an appeal for lower prices on parts and components, telling Ward’s in an e-mail after the call, “Our primary focus is to work with our suppliers to identify opportunities to reduce cost and gain efficiencies. However, as a matter of course, we continuously assess our sourcing to ensure we have competitive pricing with our suppliers.”

Akerson elaborates briefly on a multiyear effort to fine-tune the manufacturing and product-development processes, saying the auto maker is trying to break away from past practices in which cost was the driving factor in new-vehicle development, resulting in uncompetitive products and watered-down brands.

“We need to drive a brand perspective deeper into the organization,” he says. “We need to make our processes much more simple, get rid of some of the complexity in our product development, and that will also simplify our manufacturing processes.

“We can see really strong potential progress in both of these areas, and that is a significant departure,” he says. “I wouldn’t say the fruit is low-hanging, but it is not a far reach for it.

GM Fourth Quarter
2010 Financial Results
2011 2010 % Chg.
Sales $36,194 $31,476 15.0
Net Income $3,151 $865 264.3
E/S $1.77 $0.55 221.8
Unit Sales 2,327 2,085 11.6
Note: Dollar sales and net income stated in millions; unit sales in thousands. E/S is earnings per share. Unit sales are worldwide wholesale deliveries. Net Income excludes adjustments.

The auto maker also confirms reports it may rebalance a truck-heavy inventory in the coming weeks. GM closed April with an inventory of 576,971 vehicles, according to Ward’s data, comprising roughly 192,000 cars, 110,000 cross/utility vehicles and 275,000 trucks.

The auto maker’s month-end days’ supply of trucks, which includes CUVs, stands at 88 days, but inventories of individual fullsize pickup and SUV nameplates have soared above 100 days.

GM built 501,580 trucks in the first quarter, up 18.3% from the same period year-ago and 8.4% ahead of the fourth quarter, Ward’s data shows. At the same time, the auto maker built 284,481 cars in the first three months of 2011.

“We will continue to monitor truck inventories,” Amman says. “We’ll make adjustments to production schedules as we think we need to.”

GM reports first-quarter revenue of $36.19 billion, up 15% from $31.48 billion in like-2010. Net income more than tripled to $3.15 billion, pushing earnings to $1.77 per share from $0.55 in the same period last year.

The auto maker posts market-share increases across three of its four regions, including GM Europe, where restructuring and higher industry volumes pushed the unit $400 million shy of breakeven. GM continues to forecast the unit at breakeven for the year.

GM North America increased its earnings before interest and taxes to $2.9 billion, up from $1.2 billion year-ago.

The auto maker’s international operations, which include China, saw its earnings fall to $500 million from $900 million year-over-year, due to an unusually strong January-March in 2010.

GM South America earnings declined to $100 million from $200 million, as the auto maker’s market share dwindled after it chose not to match competitors on aggressive pricing.

GM says it finished the first quarter with $36.5 billion in liquidity, including $30.6 billion in cash, up from $27.6 billion in fourth quarter 2010.

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