General Motors Co.'s second-quarter profits dropped roughly 40% year-over-year amid nagging supply-chain disruptions, even as the Detroit automaker forecast production improvements in the second half of the year and maintained its full-year earnings guidance.
GM on Tuesday reported $1.7 billion in net income for the April-June period, down from $2.8 billion in the same period last year. But the automaker generated $35.8 billion in revenue in 2Q, up from $34.2 billion in the second quarter of 2021.
Executives said the quarter's results reflected the impacts of supply-chain disruptions that were particularly acute in June, a predicament that is expected to abate in the second half of the year and enable the automaker to boost production.
"It is clear we are operating in a dynamic market that presents both challenges and opportunities for our company, and we will continue to rise to them," CEO Mary Barra wrote in a letter to shareholders. "We have been operating with lower volumes due to the semiconductor shortage for the past year, and we have delivered strong results despite those pressures."
And amid signs of an economic slowdown and high inflation, executives said they are modeling for various economic headwinds in the months ahead, pausing some hiring and discretionary spending — but not planning any layoffs or seeing signs of cooling consumer demand.
"There are concerns about economic conditions, to be sure," Barra wrote. "That’s why we are already taking proactive steps to manage costs and cash flows, including reducing discretionary spending and limiting hiring to critical needs and positions that support growth. We have also modeled many downturn scenarios and we are prepared to take deliberate action when and if necessary. Regardless of the circumstances, we will continue executing from a position of strength."
Ford Motor Co. reports second-quarter earnings Wednesday after the market closes. Stellantis NV will report first-half earnings Thursday.
Second-quarter results
GM reported $2.3 billion in adjusted earnings before interest and taxes for the period ending in June, down from $4.1 billion year-over-year.
Still, the automaker reaffirmed its full-year guidance of net income of between $9.6 billion and $11.2 billion, and adjusted EBIT of between $13 billion and $15 billion. And executives said they expect to see improvements in production and deliveries in the second half of the year, with a 25% to 30% year-over-year increase in wholesale volumes still expected for the year.
The company previously said it had about 95,000 vehicles built but awaiting installation of some components. Executives said Tuesday they have made some progress and still expect to deliver those units to dealerships before the end of the year.
In North America, GM reported adjusted EBIT of $2.3 billion, down $600 million year-over-year.
The automaker's international segment, meanwhile, reported adjusted EBIT of $209 million for the quarter. GM Financial reported adjusted EBIT of $1.1 billion. And Cruise LLC, the autonomous-vehicle company in which GM holds a majority stake, reported a $543 million adjusted EBIT loss.
The company saw a $100 million equity loss in China, driven by COVID-19 lockdowns there, but executives said they saw recovery starting in June.
GM's stock was trading down Tuesday. In a note following the earnings report, Wedbush Securities analysts Dan Ives and John Katsingris noted that the results were largely in line with analyst expectations but said the automaker needs to "start walking the walk."
"Barra & Co. have a very strong and detailed EV vision for GM over the next decade with the company planning to invest $35 billion in EV/AV product development over the coming years as GM transforms to an all-EV strategy towards the end of the decade," they wrote.
"That said, it's time to walk the walk and not just talk the talk for GM as patience is wearing thin on the Street around the name," they added. "This is a major 'fork in the road' 6-9 months ahead for GM to show strong execution on its key EV strategy despite macro headwinds and a supply chain crisis that remains front and center. Any further shortfalls and stumbles could start to derail the broader EV strategy as the company heads into a pivotal year ahead."
Meanwhile, investment research firm CFRA Research on Tuesday lowered its 12-month price target on GM's stock by $6 to $36 per share and downgraded its rating from "buy" to "hold."
"GM's Q2 disappointed and we now see full year results coming in at the lower end of guidance as it struggles with inflation, supply chain issues, and weaker volumes than a year ago," wrote Garrett Nelson, vice president at CFRA Research. "With the stock down 41% (year-to-date) and 14% since Mary Barra assumed the CEO reins more than eight years ago, we think still more patience is going to be required of investors before shares begin to turn the corner — and its EV transition could see some speed bumps."
Looking ahead
GM executives said they're closely monitoring the macroeconomic environment and modeling for different downturn scenarios.
“We’re watching a lot of data points around the consumer, around inventory, around pricing levels," Chief Financial Officer Paul Jacobson told reporters. "We’ve got some really good insight with GM Financial on the credit side of the business. All of those indicators are pointing to still a lot of strength in our consumers.”
Inventory levels have not risen despite production increasing, indicating there is still a lot of pent-up demand for the company's products, he said. GM's dealer inventory in the U.S. remains tight, with about 250,000 units in stock, representing about a 10- to 15-day supply.
"Even as we operate our truck plants at near-full capacity, our inventory has remained extremely low due to continued strong demand," Barra told investors. “The facts are, the customers are there for our vehicles. They’ve been waiting, and all indications are, they remain ready to buy."
Meanwhile, executives said they're forging ahead with GM's electrification plans.
The automaker on Tuesday announced several battery raw material sourcing agreements, meaning it now has contracts in place for all the raw materials it needs to meet a 2025 goal of having 1 million units of annual electric-vehicle capacity in North America. In the meantime, the automaker is targeting production of 400,000 EVs in North America between 2022 and 2023.
Battery cell production is slated to start in August at an Ultium Cells LLC — a joint venture between GM and LG Energy Solution — plant in Warren, Ohio.
The Ohio plant is slated to increase capacity by 20% each quarter, and to reach full production capacity in the fourth quarter of next year, Barra said. Meanwhile, construction work has begun on an Ultium Cells battery plant near Lansing. A battery cell plant in Tennessee is slated to open next year, and Barra said the company will announce the location of a fourth plant before year's end.
GM has launched the GMC Hummer EV pickup truck and the Cadillac Lyriq electric crossover. It is planning to launch an SUV version of the electric Hummer, the Chevrolet Silverado EV, an electric Chevrolet Blazer and an Equinox EV.
“The first half of the year, we’ve seen strong strong pricing and continue to see a recovery in volumes. We’ve executed well on the things we can control and we remain focused on our growth opportunities," said Jacobson. "We’re starting to see the benefits of the EV and battery investments made over the last several years, and vehicles such as the Cadillac Lyriq, GMC Hummer EV pickup, validate that we have transitioned our engineering and manufacturing expertise to EVs.”
