Q2 2021 General Motors Co Earnings Call
Good morning, and walk on to the General Motors Company second quarter 2021 earnings Conference call.
During the opening remarks, all participants will be in a listen only mode.
After the opening remarks, we will conduct a question and answer session.
We are asking analysts to please limit yourself to 1 question and a brief follow up.
To ask a question press Star then 1 on your telephone keypad.
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As a reminder, this conference call is being recorded Wednesday August 4th 2021, I would now like turn the conference over to Rocky Gupta, Treasurer, and Vice President of Investor Relations.
Thanks, David Good morning, and thank you for joining us as we review Gm's financial results for the second quarter of 2021.
Our press release was issued this morning, and the conference calls on materials are available on the GM Investor Relations website.
Also broadcasting this call via webcast.
I'm joined here today by Mary Barra, Gm's, Chairman and CEO, Paul Jacobson G M CFO and Dan Berger President of GM financial.
As usual before we begin I would like to direct your attention to the forward looking statements on the first page of the charts at the content of our call will be governed by this language and now I will turn the call over to Mary Barra, Thanks, Rocky and good morning, everyone and thanks for joining US today, Paul and I will provide some insights into our record results and then talk about our <unk>.
Look for the second half as we announced earlier, we achieved EBIT adjusted of $4.1 billion in the second quarter and $8.5 billion in the first half including charges for recalls primarily the bolt EV I really want to thank our employees and the extended GM team, including our suppliers our dealers for helping us deliver such.
Consistently strong results everyone continues to demonstrate remarkable resiliency and adaptability in a rapidly changing environment.
In addition, our ROIC adjusted of 27, 3% in the quarter significantly exceeded our targets. This underlines how our strong returns enable us to reinvest in the future of this business. The reinvestment includes accelerated investments in our electric and autonomous strategy to build a future that is better for our customers and.
Better for the environment and we'll discuss this a bit more in a few minutes.
All electric is an important point of distinction because of the performance range flexibility and scalability of our LTM on hydro tech platforms, including the work we're doing to continually drive cost reduction, we don't need to depend on partial solutions like hybrids on electrified ice vehicles. Instead, we're primarily focused on it.
Investments.
But achieve the end solution of zero emissions more quickly.
Before we move on I will share my perspective on a recall of the 2017 to 19 model Your Bowl Tvs and then the status of the semiconductor situations.
So let's start with the bulk of it.
Across the company, we have made the product in workplace safety everyone's responsibility. Our focuses on prevention, but also moving with a sense of urgency when problems do arise when we learned of a potential of 2 new battery fires that were part of our previous recall population. We acted quickly we do.
Did an investigation and our engineering analysis identified 2 rare manufacturing defects in some cells manufactured by our supplier in the 17 to 19 time frame. So we instituted a second recall with the overriding priority of doing the right thing.
Because sells for 2020 and later vehicles were built using improved manufacturing processes. The recall does not impact newer bolt evs or E vs and since the recall, we have worked with our supplier and partner to make further process improvements just as important the recall doesn't impact the altium platform. It is a different battery system and our joint venture.
Plants that manufacture and altium cell will follow rigorous G M quality processes.
As for semiconductors, the situation does remain fluid and the supply chain continues to be impacted by advance like what is happening right now with the Covid Spike in Malaysia, while we informed our employees yesterday that some truck production will be impacted next week, even as we resume production at some crossover plans we remain confident in our team.
<unk> ability to continue to find creative solutions that minimize the impact on our highest demand and capacity constrained vehicles, including full size trucks and Suvs.
We are raising our guidance for full year EBIT adjusted to 11.5 to $13.5 billion.
And we are being cautious because of the uncertainty due to the delta variant and its potential impact on the supply chain, but we do believe that the combination of our safety protocols and the rising vaccination rates will help minimize disruptions, but we do have to note the situation does remain fluid.
We are also putting long term solutions in place to Derisk. Our supply chain. This includes collaborating with semiconductor manufacturers and continuing to enhance transparency throughout the entire semiconductor supply chain.
So now, let's turn to growth as I mentioned in my letter to shareholders. We're addressing the entire ecosystem to speed EV adoption and commercialization of self driving technology at scale, we will offer a full range of vehicles and services that make <unk> accessible to the largest possible customer base. It will also create job opportunities for thousands.
Of employees in our Altium cell joint venture. In addition, we will work to grow our businesses like break drop on star insurance, and other software and services, including subscriptions.
The cruise model for autonomous Rideshare is another great example of an inclusive solution because it will make all electric transportation more accessible and affordable.
Delivering on our E. D are all electric future requires a value change that is secure sustainable scalable and cost competitive to do this we are creating a diversified value chain of environmentally friendly and geographically diverse footprints through investments strategic partnerships and supply agreements for example.
We are working with suppliers to develop new sources in the United States for lithium are key battery cell component and accelerate the adoption of extraction methods, which have less of an impact on the environment.
We're taking a similar approach across other critical minerals needed to support our E b future and we're confident that our strategy will secure our supply in a sustainable way as we accelerate our transition to E b well.
We will share more about these key topics and others, including battery cost and business opportunities that we're creating with software at our Investor event on October 6th and seventh which we hope will be in person because we are so looking forward to having you experienced technologies like what's the freedom and the GMC Hummer EV pickup as well as Super cruise.
Which we are constantly advancing its capabilities just last month. For example, we demonstrated the latest version of Super cruise technology that will be featured on the Europe 1500, Denali late in the 'twenty 'twenty 2.
Model year. It will include the ability to trailer like while driving hands free. We will also update you on cruise, which continues to make excellent progress toward launching its first fully driverless commercial service GM remains a major accelerator of cruises mission with the purpose built origin, giving crews a huge competitive advantage.
I also want to take a moment to share some new insights into our plan to launch more than 30, Evs globally by 2025 and become the market leader in North America.
As we recently announced because we are increasing our 2020 to 2025 capital and engineering investment from 27% to 35 billion, we will add 2 new vehicles to our commercial portfolio. The first is a full size battery electric cargo van for Chevrolet, which will exceed the expectations of small business owners trades people and anyone else who has been.
Then well served by the Chevrolet Express.
The second is a medium duty truck that will put both altium and our hydro checked hydrogen fuel cell technology to work harder on service and utility vehicles, such as school buses bucket trucks Wreckers and more.
Both will complement bright dropping keep our commercial fleet market share growing and we'll share more details about these products as we move forward.
Now if you step back for a moment and think about what this means for the future of work.
In the greenhouse gas reduction from surface transportation, because when you say between these new trucks break drop EV pickups coming from Chevrolet and GMC and our work with web attacks on locomotives and Navistar on semi trucks, we will have electric solutions for almost any towing our Halloween jobs, you can imagine how.
<unk> is a very important part of the equation because it expands our reach into additional growth markets. We're already at work on our first production fuel cells, leveraging innovative manufacturing processes that can on lack of economies of scale and reduce overall cost. This technology, along with our 4 U S battery plants that we have announced in the.
A full portfolio of Evs, we are planning in addition to the customer experience, we're creating underscore once again, how determined we are to lead.
The determination reaches through the entire company and when I meet with our employees. They tell me how incredibly excited they are to be part of a once in a generation transformation that will truly change the world their tenacity and collective commitment to our vision are why we are delivering such strong business results and advancing our future so quickly.
So now for a closer look at our results and the outlook I'll turn the call over to Paul.
Thanks, Mary and good morning, everyone. We appreciate you taking the time to join US This morning.
Just experienced another very exciting quarter for the company with robust financial performance and we're taking advantage of opportunities to accelerate our growth strategy with the additional investments, we announced in EV and EV technology and that was Mary just outlined.
During the quarter, we announced expectations of first half EBIT adjusted on the 8 to 9 and a half billion dollar range, which we achieved despite an $800 million charge related to the bolt EV recall on $400 million primarily related to the side airbag recall late in the quarter, which were not included in our first half guidance range I'll get into.
The details of these results in a minute, but first really wanted to highlight the overall strength in the business driven by the incredible demand environment for our new and used vehicles, allowing us to deliver results that are better all in than we expected coming into the year. For instance, we saw an increase on our vehicle production in May and June versus what was projected on our earnings call in early.
You may and we were able to pull ahead. Some chip available availability into Q2 from Q3. This is all led to significantly improved performance in the first half of the year.
We're seeing new challenges in the third quarter due to global Covid outbreaks, including the current outbreak in Malaysia, resulting in closures of Assembly test and packaging facilities for semiconductors. This remains as we said a fluid and rapidly changing environment.
Given our first half performance and our expectations for the rest of the year, we are raising our full year EBIT adjusted guidance to an expected range of 11, and a half to $13.5 billion from the $10 billion to $11 billion previous range, while raw materials continue to be a significant year over year headwind as platinum group metals and steel prices have continued.
To increase this year, we had been mitigating the impact by managing several other factors, including pricing and mix go to market strategies record profit at GM financial and other cost efficiencies.
We are providing a wider guidance range than typical given the fluid semiconductor situation and expect our variability within the range to be primarily driven by production volumes. So let's get into the strong results of the quarter in more detail.
In Q2, we generated $34.2 billion in net revenue $4.1 billion in EBIT adjusted 12% EBIT adjusted margin $1.97 on EPS diluted adjusted and $2.5 billion on adjusted automotive free cash flow.
We exceeded expectations by driving strong price on mixed performance in North America through our production prioritization actions on our go to market strategy. Additionally, I used vehicle prices drove continued record results at GM financial.
So, let's take a closer look at North America and.
In Q2, North America delivered EBIT adjusted of $2.9 billion against the backdrop of strong pricing on our full size pickups and continued performance from the launch of our all new full size Suvs, partially offset by warranty charges in material and commodity costs, we generated a 10, 4% EBIT adjusted margin in the <unk>.
<unk>.
Our strong average transaction prices up over 14% year over year speak to the high demand for our full sized trucks and Suvs a big contributor to this increases the demand for premium trims are platinum sport in premium luxury trims on on Escalades doubled and on Yukon Denali and 84.
Represent more than 2 thirds of all you called sales.
Our volume has been constrained by very tight inventories, which we believe is having a temporary impact on market share in the region. We ended the quarter with approximately 212000 units in dealer inventory. We expect continued high demand in the second half of this year with continued low inventory into and through 2022.
Let's move to GM International Jim on EBIT, adjusted was up $300 million year over year, as we experienced positive price and mix benefits across the segments second quarter equity income in China was $300 million driven also by strong mix stabilization in pricing and material cost performance more than offset.
Netting headwinds due to the chips will supply shortage and higher commodity costs.
In addition, we received a $600 million dividend from our China automotive J vs. In Q2.
EBIT adjusted in GMI, excluding China was up $200 million year over year, as a result of favorable pricing and mix.
The underlying strength of the GMI business continues to improve as the team drives pricing mix and cost optimization. However, we do expect some challenges in the second half primarily due to semiconductor driven plant downtime.
Few comments on GM financial cruise and our Corp segment.
GM financial has continued to deliver with record Q2, EBIT adjusted of $1.6 billion and is benefiting from both strong used vehicle prices and continued favorable consumer credit chips.
We received $1.2 billion on dividends from GM financial year to date, and we anticipate additional dividends dividends to be paid in 2021 as we benefit from their record earnings.
Cruise costs in the quarter were $300 million on Corp segment, EBIT was a loss of $40 million, which was better than normal run rate due to mark to market gains on investments partially offsetting costs.
Now, let's turn to our 2021 second half outlook.
I'm thinking about the second half of the year performance. There are some fundamental pressures versus what we've seen in the first half we've seen commodity inflation continue to rise and while it's come down off the peaks, we expect second half commodity expense to be 1.5 to 2 point billion $2 billion higher than the first half of the year.
At GM financial we expect second half headwinds of 1 to $1.5 billion.
Versus the first half as we do not assume allowance adjustments experienced in the first half will repeat and we expect lower lease termination volume record high purchase rates are capping the games that contract residual value and the start of credit normalization.
We expect our growth initiative investments in the second half to increase by about $500 million in the first half also contained $400 million on mark to market gains on equity investments that we do not assume will repeat.
All of this adds up to about 3 and a half to $4.5 billion of headwinds in the second half of the year.
In addition, we expect north American volumes to be approximately 100000 units lower in the second half versus the first including some impact from our full size pickup truck and SUV plants, primarily as a result of some of the near term pressures in Malaysia impacting plants across North America.
Otherwise, we expect the robot robust demand and pricing environment to continue as we get into 2022.
From a full year perspective, we expect EPS diluted adjusted in the range of $5.40 to $6.40 in.
And adjusted automotive free cash flow guidance in the $1 billion to $2 billion range.
This semiconductor shortage as we've said remains fluid on the supply chain challenges continue in the second half of the year.
Our guidance assumes no year end work in process inventory related to vehicles produced without modules significant cash flows could shift from 'twenty to 'twenty 1 to 'twenty 'twenty 2 if we have these work in process vehicles.
At year end.
We continue to expect Capex for the year to be in the $9 billion to $10 billion range.
So in summary, we had a very strong first half of the year I think it highlights the strength of our underlying business. We have again demonstrated our flexibility our laser focus on execution and our ability to manage through a significant disruption while generating strong results and we don't expect that to change there are still some challenges ahead of us.
But we have the team and expertise to navigate this will not losing sight of our vision we.
We will continue investing in exciting new growth opportunities, including Evs battery supply and technology and software solutions that will drive growth as well as desirable and differentiated products and services for our customers. We look forward to sharing more around these opportunities at our Investor day on October 6th and seventh.
This concludes our opening comments and we'll now move to the Q&A portion of the call.
At this time, if you'd like to ask a question press star 1 on your telephone keypad to withdraw your question press the pound key.
And a reminder to analysts we are asking you to limit yourself to 1 question and a brief follow up so that we may get to everyone on the call.
Our first question comes from the line of Brian Johnson with Barclays.
Thank you.
Just wanted to get a little bit more into the second half and then also looking ahead to 'twenty 2 in terms of how these could repeat.
Maybe start with the decreased volume can you remind us of how much volume.
You lost in the first half and then what.
Why the conservatism around second half.
Good morning, Brian So in the first half our production was actually up year over year, which is not necessarily true of everyone. So I think we produced about 200000 more vehicles in the first half of 'twenty 1 than we did in 'twenty.
And that was I think really a function of.
How well the team performed so.
To be to be essentially flat to that level we.
We don't see as a material downgrade to kind of the trends that we've seen in the business right now.
What what Youre hearing from us is sort of a very.
Real acknowledgment of what we see out there with Covid now it may turn out to be less impactful than we think it is but I think the approach that we've taken through this has been pretty consistent quarter.
Quarter to quarter.
As we are cautious.
We started pointing out some of the challenges that we were seeing in the forward supply chain in Malaysia really going back into late May early June time frame and unfortunately, it just wasn't able to catch up.
On their vaccination rates, but they are making good progress. So we want to take a little bit of a cautious tone, because we want to maintain credibility around these ranges and if we see the environment improve.
Then I think we'll respond accordingly.
Okay, and just a brief follow on.
How should we think about the mix, especially in <unk>.
You have the downtime now at your 3 big pickup truck plants, that's a headwind youre, bringing on some of the more.
Mid range <unk> like the equinox or actually when do those come on line.
And also kind of related to that there's this whole issue.
Trucks in holding lots that are complete semi complete so the suppliers would've book for example, their axles, but are not shipped how are those going to enter into wholesale sales over the next quarter or 2.
Yes, so Brian I think if you look at if you look at our full size truck production.
We've actually been performing remarkably wells of the shutdowns that were announced yesterday are really the first one's kind of a full first full ones that we've taken on.
This year, so and it is it is somewhat short term.
That we that we see that and we're managing this week to week.
I think the bulk of when we look at the bulk of the 100000 units from first second half to first half is really in crossovers, we think truck production in full and full size SUV, a relatively stable over that time period.
Again, we're going on we're going to continue to watch that.
The vehicles that are built without the modules I think present for us as we've talked about before.
A strong option for us in fact, when we have downtime in the plants like we've announced we're actually using some of that where we've got availability of the chips that were slated for production that can't be produced we're redeploying those into some of those vehicles that had been produced earlier allows us to maintain a little bit of the wholesale.
Momentum going forward. So we're going to continue to watch that and we're going to continue to do it.
We're being careful to make sure that above all else, we're managing quality.
For the vehicles and the manufacturing and engineering teams have really done an amazing job of managing through the logistical difficulties of doing it but we continue to see that as a very useful tool for us to navigate this in the short run.
Okay. Thank you.
Your next question comes from the line of Dan Levy with Credit Suisse.
Hi.
Good morning, Thank you.
Wanted to just follow up on the comment on the second half guide and.
I guess the commentary on the volume piece.
As you know around cross sell parts on maybe you could just talk to expectations on on price and mix versus the first half.
Is it fair to assume that if your volume is actually coming down a bit and your inventory may even get tighter is there some incremental benefit on.
On price.
On potentially mix as well.
Well I think I think there is I mean, we we think we'll continue to see strong price and obviously on.
Color he referred to the strong mix that we have that's leading to these record hep's on I think it speaks to the on demand.
Demand for the products that we have especially full size trucks full size Suvs and frankly crossovers as well. So we think we're going to see a strong pricing environment continue.
Throughout the rest of the year end and into 2022, and so I think there's opportunities for Pat.
Okay, great. Thank you and then.
Just.
A longer term 1 and this is more so on ice versus EBIT profitability I'm sure you'll give a little more at the Investor day.
But.
Youre, reducing your investment on a nice programs that ice demand is actually.
Profit is quite strong so if I use demand remains intact can we actually see ice profitability expand in the coming years as you reduce investment.
And if that's the case, how do you mitigate that potential.
Profit or margin dilution as you shift your mix from ice to EV.
Well I think we're very well positioned from a nice portfolio because of the investments. We made in new vehicle platforms are full size trucks, midsize crossovers and full size Suvs et cetera. So we're really well positioned with a nice portfolio, which allows us to focus our investment on our electric a full electric.
<unk>.
And as we work to make to make that transition.
Yes, we see on it at the early days some pricing pressure due to battery costs, but that's why we're still aggressively taking battery working check battery costs down with multiple technology Roadmaps you will hear us talk more about that when we're together in October so, but then we also see filling that gap will be.
The strong foundation that we have to build on as it relates to software and subscription now that we have our vehicle intelligence platform, which allows for.
Full over the air updates in that we started launching that new VIP in 2019 with the <unk> 4 and the C. T..5 and then the corvette in it it continues.
That's going to give us a lot of opportunity for more software.
Services that we can provide that customers value and therefore, we will pay for as well as subscriptions. So if you think about it I see the opportunity we have and then I haven't even really talked about the growth opportunity have with leveraging the altium platform leveraging our hydro check platform as well as growing our commercial vehicle business and with a bright dropping some of.
The vehicles that we talked about today, so there's tremendous growth opportunity that will as we get battery costs down will be you know sitting on top of the strong margins. We have today. So we see it in the in the interim kind of filling.
The whole, but we're working quickly and I think we have a leadership position in battery cell cost. That's why we've announced the 4 plants. So I see a huge growth opportunity as we as we move through this transition.
Great. Thank you.
Your next question comes from the line of Rod Lache with Wolfe Research.
Good morning, everybody.
<unk>.
I was hoping just first.
To clarify what's happening to profitability in North America.
If you could just bear with me your costs were up $3.9 billion year over year in the quarter. It sounds like Theres a few unusual pieces there like the warranty, which you called out and I. Appreciate you talking about that $1.2 billion that wasn't and street expectations and I think you had about $1 billion year over year in Q2 from non recurrence of last year's austerity.
So that means that there's probably $1 billion 7 or so of commodities and other materials year over year.
And everyone's experiencing that so my question is.
Do you think that that means that actually some of it a significant part of the pricing that we're seeing in the industry.
We shouldn't think about that in isolation, we should think about that against the material on commodity because it's really just offsetting variable costs and if so just if you can just give us a sense of what you're kind of aiming for.
With regard to North American margins once the dust settles.
Yeah, good morning, Rod Thanks for that.
Hum.
I wouldn't attribute all you did a good breakdown of of some of the cost inflation in the warranties and what we saw on the recalls but I wouldn't attribute all the remaining to just inflation of the underlying materials because the other thing that's going on as we are producing a much richer mix with more options and features so material costs are up.
But those are positive margin accretive.
Sales. So we're actually encouraged by that going forward. So there's no doubt we've had we've had strong margin performance and I think what you said, what we've tried to facilitate for the for the guidance that we've put forward here is the underlying environment I don't I don't think we see any meaningful <unk>.
2 we expect it to change in terms of the demand in the in the short run and even into 2022, where we continue to see depressed inventories.
When the chip situation resolves itself, it's not going to probably be a massive sort of influx of manufacturing right out of the gate. So.
We do see continued tight inventories going into 2022, so I think 1 of the 1 of the cautions about the second half is to not read too much into it and extrapolate that as a 2022 performance well, we'll give more guidance on 2022 as we get through the budget process and towards the end of the year with what we saw.
But there's nothing fundamentally different about about demand that we see changing in the near term.
So just to clarify do you believe that once the dust settles.
10% plus margin is sustainable in North America and.
Secondly, just as we're thinking about that 2022, just starting from the midpoint of this year's guidance you have 12.5 billion. It looks like if we just look at the commodity.
Investment.
M F and Mark to market Delta that you laid out for the second half and offset that with the.
Non recurrence of recalls there's maybe.
2 and a half billion dollar drag into next year from those things can you just be a little bit a little bit more specific on what the recovery in volume actually means because this year, you're only going to do about 2 and a half million vehicles are we correct in assuming that a more normal run rate for you.
At this point is in the $3, $1.3.2 million unit range.
Yeah, well for the avoidance of doubt, yes, we do think that North America margins can be above 10% and that was what I was trying to get at in there. So I think you attributed some of the some of the headwinds, but like I said, we got to be cautious not to read into it. So for example, if you look at commodities we saw.
Some of the pressure in first half the lions share of it is hitting us in the second half, but commodity prices are down off their peaks. So while we'll see a little bit of pressure in the first half if prices stay at these levels, we would actually expect a little bit of uplift as.
As we go into the second half of 'twenty, 2 but theres, a long time between here and there.
We have to be cautious in production, we will certainly be higher next year as we hope and expect that the chips will normalize but like we said from the very beginning we've approached this thing with caution because I can't I can't tell you how fluid. It is Ben as we as we managed week to week, but.
I think when you look at the underlying results and what we've been able to produce in the first half of the year.
I think what you've got is a team that has executed incredibly well even versus some of our peers and competitors and I don't expect I don't expect that to change going forward.
I'm Gonna Selfishly just sneak in another just clarification on here as we think about 2022, we have to extrapolate something here should we be anticipating some kind of launch costs or additional spending and things like that as you start to approach the launch of some of these evs.
Well I mean of course, we're going into sort of a heavy cycle of launches as we get to the more than 30, Evs by 2025, which really begins with the Hummer EV later this fall and is and as we go into the to the lyric and various other launches. So there's certainly going to be some pressure from that.
And we will provide more details as we get into the 2022 plants.
Okay, but your 10% margin comment is.
Taking that into consideration or.
How should we it's kind of an important question how should we be thinking about that.
<unk>, Okay gotcha. Thank you.
Your next question comes from the line of Justice Spak with RBC capital markets.
Thank you everyone. Good morning, Paul maybe you can just help us out a little bit here.
Because when you communicated to the market.
I think mid June.
The 45 billion this quarter on on a 2 to 3 billion headwind in the second half versus the first half at that time I don't think the bolt recall it was out right now maybe you knew about that so maybe it was considered in that but because if we back out the warranty stuff you were talking about here, it's more like a $6 billion.
Over half headwind, so I just want to understand really some of the moving pieces and what might change maybe from your prior communication.
Yeah. So we've obviously provided more color Joe into some of the underlying and.
What we talked about more detailed today as to the particular nuances around GM apps. So when you look at used car valuations that reaches a point where.
You'll get to contractual value and you don't participate on the upside and Dan Dan is on the call too and he can provide more color in this space.
We also have a few.
Fewer leased vehicles coming on which was a function of of leases underwritten about 3 years ago.
In the second half of the year.
Then most importantly, you've got the from the credit performance. There is a component of that under the new accounting standards for accounting for credit reserves that is kind of a onetime adjustments going forward. So we see those pressures, but I think.
When you look at the underlying business. If you look at at pricing has remained consistent if you look at some material costs, which are coming with a higher trims.
We think that we're able to overcome some of these going forward. So.
Like I said Theres a lot of noise going on in the short term, particularly around how we're thinking about COVID-19.
And the Delta variant.
We've got to be cautious to not extrapolate too much out of this on the in the longer term.
Okay.
But just to be clear like I guess like if we look at the G. M. S N the higher commodity costs.
That's.
Sort of in line with what you were communicating prior like I agree we're getting more detail than we have some of the lower volumes I know you'd take more downtime.
It was probably expected back then but it does still I mean, it still seems like theres something else, especially if we sort of you know.
Back stock out some of that.
Warranty, which again I don't think it was considered in that first half on that second quarter number so.
I know you are pointing to growth and other things, but is there anything else that.
And we should consider and the variance.
I'm not sure.
So I guess I'm not sure what you're specifically referencing because I think we've been pretty clear about the moving pieces that make each 1 different than H 2 but then also talking about our confidence in the business.
With the margins in North America.
On the strong pricing power, we think we have so I guess I'm not sure. We're understanding your question here.
I guess, let me, let me try to I guess like maybe just put it this way when you sort of indicated the 4 to 5 billion for the second quarter. It was was the warranty stuff already included in that number.
It was not.
Okay.
Not the not the 2 recalls.
Right. So then then like if we back that out it just seems like the second half versus first half.
Variance is grew.
Greater than you previously indicated I understand youre sort of showing some of these moving parts.
But like the variance drivers you sort of call out don't seem to fully.
Add up to that number which would be more like 6 billion ex that warranty number.
Well and I think we can take this offline and work through it but I think the other variable here and it is volume and the fact that we're widening the range here intentionally given both sort of COVID-19 and sort of the situation that we're seeing in Malaysia. So I think the variability is probably just in.
<unk>, which is where we're intentionally casting a wide range given some of the near term uncertainty and we'll obviously clarify that is as we work through it but wanted to proceed cautiously because everybody's talking about the delta area of Covid right now and we want to make sure that we're mindful of hitting the goals that we put out there for the street.
Okay. Thank you that helps thanks.
Your next question comes from the line of code on Lincoln with Wells Fargo.
Oh, great. Thanks for taking my question just to follow up on that I mean expectations out there have been that the semi issue is kind of got was at its worst in Q2, and then sort of crawling out Q3 Q4.
Or are you basically saying Europe.
See a big concern that that has changed with this new variant coming out potentially shutting down some semi plants again is that sort of the messaging and that lower production outlook for the second half to some clear.
Come on I think on I think.
We just don't know I mean, you know everybody's learning more about the Delta variant what I am confident we have safety protocols that we know when we follow people are safe and that's why we instituted the mask reinstituted the mass requirement in the U S and some of our other operations around the world we never stopped wearing mask. So we think we've learned a lot on.
We're sharing our lessons learned across the globe with the supply base deep into the tiered suppliers. So they have the benefit that we think will help us keep keep the supply coming but I think you've heard several other.
Within industry and across just there are unknowns with the Delta Varian and that's why we're being appropriately cautious, but we do think this is a very different situation than it was 15 months ago, because we know how to keep people safe and our in our operations.
Got it alright, thanks for the clarification.
And then a lot of companies are talking about auto because I'm talking about sort of how the world may change coming out of this in terms of how your stock inventory and maybe pushing more on line.
Any update on your view on sort of what is the right level of inventory coming out of this to restock too.
And whether you know or I think you were already selling a lot of vehicles like the hummer online I mean is that going to be even a greater part of your strategy going forward too.
Absolutely. We you know we've learned a lot and big credit to our dealers. We've also given them tools that give them insight into the pipeline also using data analytics. So they are order I'm. The most optimal products that are going to move fast so I'm not going to give you a specific number because its going to depend by segment, but we believe that.
The optimized inventory level is higher than what it is today, but I think we'd all agree. It's it's you know pretty low but much lower than it has been with our historical levels and it's because of everything we've learned in the way we are approaching on settling.
On line, taking orders in some cases, but also we know there is a customer who wants to go to the dealer and drive off with a new vehicle, we want to service them as well and that's why I think some of the tools. We've put in place to help our dealers have the vehicles that they want on.
It's going to be very important so again, I think we're gonna be much more efficient and it'll be a true partnership with our dealers as we optimize on both ends.
Great. Thanks for taking my question.
Yeah.
Your next question comes from the line of Mark Delaney with Goldman Sachs.
Yes. Thank you very much for taking the question.
Super Cruise is something Thats come up on a couple of earnings calls consecutively now and it's something that's pretty interesting I think an opportunity not only to have a add on sale at the time of purchase.
But also a potential subscription future longer term. So maybe you could talk about the implications of the points Super cruise I think 22 models by the end of 2023 is the is the plan.
What sort of EBIT implications there can be as you start to play in a super cruise.
Yeah, well I appreciate your your excitement for Super cruise on as I think we've shared in the past over I think it's between 80 and 85 per cent of those really experienced super cruise day, they either must have it on their next vehicle are strongly desire it and I'm excited to have more people experience Super cruise sign we'll provide that opportunity at our Investor day.
So I do think there's a huge opportunity. We've also taken the cost down of what it takes to implement.
Implement super cruise on a vehicle as we are expanding its capabilities. The number of roads that are that our map to be able to leverage it and so this does give us an opportunity either to sell it or to provide it as a vehicle subscription service.
It's going to be significant and overall I mean, I'm not going to breakout supercool, specifically, but I will tell you when when we are in our Investor day, we will provide.
<unk> to the opportunity we see broadly in <unk>.
Connected vehicle services and subscriptions and then you know vehicle related services like Onstar insurance that is.
Is doing quite well as we expand that so I think there's a huge opportunity in the service space based on on that.
Connected vehicles that gives us a very different margin profile and a true growth opportunity and we'll frame that out for you in October.
That's helpful. Thanks, and for my follow up question on the company guided to some incremental investment in the second half of this year related to the 35 billion of total investment planned for Evs and Avs and so should investors think about the run rate you're seeing now on the second half is fully reflective of the of the added cost for this.
Program or should we be anticipating some additional step up.
On into next year, and if so can you help to frame that thanks.
When you said, we increased from 27 billion to 235 billion over the 'twenty to 'twenty 'twenty 'twenty 2 'twenty 5 timeframe.
And you know.
I think that represents the acceleration.
Not only on Evs, and we talked about a couple of new vehicles that we have we have obviously more more coming but then also our confidence confidence in EV growth debt, we announced the 2 additional battery cell plants.
So on.
When you talk about a run rate from a capital perspective.
You know I think we announced we're in the 9 to what was it 90.599 to 10 this year and I think we see similar ranges as we move forward.
But again in this acceleration period getting to E. BS and then we expect that will kind of come back down.
Your next question comes from the line of Adam Jonas with Morgan Stanley.
Oh you Mary.
So on insurance, you mentioned that but I would love.
If you could give us a bit more.
Where are you rolling out anything at all on take rate.
Because I'm thinking and correct me if I'm wrong Mary.
That when you connect the car and the OGA any insights coming off the current youre able to engage.
Our consumer directly on insurance services.
Through the call on pretty much right as the car as both the actuary in the agent is that correct.
I, Yeah, I, yes, Adam first of all Hello, there and yes, I do think that you're thinking about it correctly, we can engage directly because you can't take ownership Mary vehicles.
Yes can you hear me sorry.
Yes.
Okay, sorry, so so as we look at insurance first of all its going well on we're now in about 20 states.
D a.
Ability to pull information off the vehicle to help inform rates is actually.
Exceeding our expectations and so and we're expanding and as you as you mentioned and we are person cannot buy buy a vehicle without having proof of insurance. So we are right. There are able to offer it and not have to do a lot of the advertising that.
On other insurance companies have to do so we think we're well situated to disrupt auto insurance and I'm very pleased with the way our our rollout is progressing and we'll share more in October.
Great just 1 follow up again on insurance I think it's so interesting.
Where does that leave the dealer dealers make like the bed almost $1000.
Origination these policies and I'm wondering if this opportunity to go direct or engaged Iraq.
Can help save it.
Get some inefficiencies out and let's.
Let's say obviate the need to write this thousand dollars check to a deal or that's just not necessary when the cars doing the work.
You know Adam I'm, not sure where you're getting this thousand dollar check that's been written to the dealers on.
You know, we do have some dealers that provide.
Our insurance companies in but again I would look at this is totally disrupting them. The the way insurance is delivered to the customer and again I'm I'm not a I.
I don't think the information on the thousand dollar check written to the dealer is correct.
Yes, Mary on this this is Dan maybe I'll interject.
On the F&I that the dealer.
Earns is more extended warranties gap.
Other traditional point of sale product.
F&I income typically doesn't include any commissions on.
Private passenger insurance that we're talking to buffer on star. So this is totally separate than what the dealer already earns.
Thanks, Dan Thank you.
Your next question comes from the line of each time, a Kelly with Citi.
Great. Thanks, good morning, everyone.
Just on just to go back to the second half of the call a couple of clarifications, Firstly, you're able to share what you think your U S dealer inventory might come in but by year end, perhaps or a range just given the downtime in the second half and then just to clarify on the pricing assumption for the second half are you, assuming some moderation versus each 1 or maybe something on.
Some other assumption there.
So I'll take that so we are expecting inventory to decline.
A little bit further off of these levels, just given where we are in production and in the strong demand environment.
Environment and as we said in the earlier comments I think pricing remains strong both in terms of instead.
Incentives, but also in terms of the rich mix that customers are demanding right now.
We don't see anything in the short run horizon that is going to disrupt that.
And certainly the I think in that lower inventories are going to support kind of on the current pricing environment in the near term.
Great. That's helpful. And then my follow up maybe turning to cruise I think the release mentioned that theyre, making excellent progress towards commercializing on any additional color you can share in terms of the progress they've made and I think that.
The last day, we all received where the California disengagement reports.
I'll call you can share in terms of the progress to date there.
And we will share more on our at our Investor day, and I'm excited too to do that but I would say you know I and having conversations with Dan on a weekly basis, and we continue to see very strong progress in the technology.
That theyre doing and also readying the company from a commercialization perspective, and so I I get I'll I'll I'll say no more than I reiterate this is.
On quarters away not years away and the technology is is really progressing well.
Terrific. Thanks, a lot.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Yes. Thank you good morning.
Morning.
I was hoping you can give us a little bit more color around the expected keyed in on.
On the <unk>.
Production outlook, that's contemplated in your guidance, So North America production down about 100000 units in the second half.
Is it is going to be how should we think about it sequentially versus sort of what we've seen in the second quarter I think that some of the search party.
It's out there at least for the industry, we're assuming that the fourth quarter, we would come back to more normalized levels of industry production is that is that your view as well or are you.
Assuming that some.
Some of the disruption for the rest of the year.
So emmanuel.
I would say that it's the production.
Rates are skewed higher as we get through the year some of the near term issues that we've talked about with the with the short term shutdowns of the truck plants and and what we keep reiterating about semiconductors.
Yes, I think is it's a little bit of a different challenge than what we've seen before in just terms of broad semiconductor supply it's about throughput et cetera. So we have continued to believe that as we get into the fourth quarter. Some of the underlying semiconductor challenges are going to start to abate.
We don't know that it'll be fully resolved then, but we're being cautious and we're seeing signs for improvement and as we said that you can see light at the end of the tunnel as we're getting towards that so production rates naturally be higher in the fourth quarter than the third.
Okay and then another.
Last question, if I may on the around the second half.
Guidance.
I'm struggling to reconcile to the high end of your EBIT range.
You did have me on EBIT.
In the first half second half implied guidance.
<unk> 2.5 billion, but then you described sequential headwinds worse at least.
$3.5 billion, and then also moving volume which could be.
On Monday.
And at least so Dan.
I guess are there any positive offsets in the sequential walk there they should be to Europe.
Under what conditions co GM earned $5 billion in the second half.
Well I think as we highlighted in <unk>.
8 you're going through that table, because as we was we highlighted the headwind headwinds and that's in the investor deck, It's a 3 and a half to $4.5 billion range and I think to some of the earlier questions. If you take the X.
Recall run rate off of that.
$9.7 so you get to about the $5 billion.
Second half to maybe a little bit higher than that but that's where the production variability comes in and why we've been intentional about widening the range on that so what I would say is the upside could be observed.
Further improvement.
In consumer strength that we can we can capitalize on and then is there an opportunity to out produce the assumptions that are in our guidance and that's going to be a function primarily of a chip availability on COVID-19.
So.
I just want to emphasize the caution that we're putting into that and if the environment Abates and this this resolved quickly then I would I would expect that we would outperform the midpoint.
Understood. Thank you.
Your next question comes from the line of Ryan Brinkman with J P. Morgan.
Hi, Thanks for taking my question, which is on inflation I realize you are facing and working to offset the impact of higher commodity costs, which are expected to be a considerable headwind in the back half both year over year on sequentially versus the first half, but taking a step back how do you think the company is positioned overall for inflation, including if it were to Bruce.
To prove sustained or to track materially stronger do you think there's a scenario where you could actually stand to benefit from inflation applying broadly to your revenue, but more selectively to your cost structure. So for example, like DNA won't go up medium term from inflation, but instead only as you replace assets over time right.
Your substantial hourly labor costs in the U S where in 2019 already agreed upon through 2023. So you shouldn't be seeing the same pressure from wage inflation that other companies are likely to seek it given all of this I am curious if inflation could actually help margin at least near to medium term as opposed to hurt margin can you help us think through this dynamic.
Well I think he referenced a.
A handful of areas, where we won't be impacted by inflation, but I also think you have to look at overall, the customer's ability to pay and you know.
What they're going to allocate from a discretionary perspective, and so I think that tends to put a cap on it I would say we have an extremely strong portfolio out now and more very strong products coming but I think you do have to always keep in mind overall affordability and I think that might tapped out any of that on that disproportionate opportunity for our <unk>.
Industry.
It's helpful. Thanks, and then just as a follow up could you remind us of what hedging strategies, you may have or not have in place with regard to certain commodities in particular platinum group metals I'm not advocating 1 approach or another I realize 1 of your crosstown rivals.
Checkered experience there, but just curious what your approach is to this risk and if you've changed your approach at all given the current environment and then can you maybe talk to you about like how your commodity exposures are risk could change over time as you shift away from internal combustion engines with catalytic converters toward battery electric vehicles with their own set of different.
Exposures.
I'll take the second half and I'll, let Paul answer the specific on the hedging, but I think if you look at the comments that I made that were looking not only for semiconductors, but all for other critical.
Minerals and other critical materials that we need for our battery strategy to have long term.
Supply, whether it's investment that we make partnerships, we do or supply agreements and so I think when you look at that along with the fact on some of these.
Material on our precious metals, we're looking to reduce our need for them with the technology, specifically the chemistry in the battery so.
I think we're looking to manage that very carefully as we accelerate the move to Evs and then per the hedge out I'll turn it on I mean on the on the hedging we use some.
Options, just mainly as sort of a cheaper insurance against large moves. We also just have some embedded price sharing mechanisms in the supply chain agreements themselves, whether it's averaging et cetera. So we tried to manage that holistically I don't think we're overreacting to that because look.
Materials inflation is just an underlying cost of the business and our and we have to make sure that we can we can take the steps necessary. So for example, you know the engineering team as always.
Looking at ways to reduce material spend drive efficiencies into the business et cetera, and that's that's the most basic most important hedge because it results in a permanent <unk>.
Savings within the business. So I don't want to I don't want to rely too much on sort of financial derivatives too.
On a.
Delay or defer a problem that we need to be solving over the long term anyway.
Very helpful. Thank you.
Your next question comes from the line of John Murphy with Bank of America.
Good morning. This is aileen Smith on for John I. Appreciate you getting getting up on here at the last minute I wanted to follow up I think to <unk> question on the cost side of what current cost dynamics, we should be assuming is persisting into next year versus resolving we've heard from some suppliers this quarter that they've been somewhat successful in securing spot purchases of semiconductors.
So as not to impact their automaker customers and in those cases that automakers had been fairly receptive to absorbing or sharing that extra cost on Sundays is this consistent with how you've been working with your suppliers and taking on a bit more of that card and do you have any estimate what that might've been in the quarter in terms of incremental material or component costs.
Just trying to get a sense of how these costs might have be at the same time that volume come back and you get the benefit of operating leverage.
Well I certainly think that there there is there a short term supply and demand.
Implications out there to everything that's going on and I that doesn't surprise me about the stop market it well as well, but what I would what I would say is that the.
When you look at the overall cost of the vehicle. The chips are a small small piece of that so I don't see it as anything very material for us and I don't want to get into any details of how we're managing tactically to get through this other than to say that the partnership with our supply chain.
Up and down through all of our tiers and are on our global supply chain function as well as our engineering and manufacturing I believe are the best in the business at this and and you see that in the production results and the ability for us to keep the plants running as successful as we have throughout the year.
Okay. That's helpful. And then I wanted to follow up on Mary answer to an earlier question on the EV and EV spending target of 35 billion on.
First as a clarification is it fair to pull out or will there. So when we look at that Pie chart on slide 5 and say 1 third of it appears to be R&D and engineering expenses versus 2 thirds, maybe more capex related and more specifically if we compare the 35 billion dollar target to the prior $27 billion, 1 that was as of last year.
That increase was also largely a function of capex towards cell and vehicle plants, rather than what you see as being any major incremental investment on.
On R&D, whether on the technology or product side to commercialize a decent hate me no.
No I wouldn't say that I think we increased it and we said hey, it covers both on capital and engineering and I, probably wouldn't I mean, it's I would say the chart is directionally correct I think you shouldn't pull out your ruler but.
We're moving all aspects of its for whether it's the battery plants that we talked about capital to increase on the offerings that we'll have and then actual engineering on on the products themselves all along with continuing to support crews. So it's it. It's the chart is our app.
Alright, and how it we're spending across all of those.
Okay, Great. That's very helpful. Thanks for taking the questions.
Thank you.
Thank you I'd now like to turn the call over to Mary Barra for closing comments.
Well, thanks, everybody, we really appreciate your questions and for participating today and you know what.
I wanted to step back and say when we look at our team's dedication on to everything that we have been working to offset and accelerate our we are building a stronger and a better future.
Future for our company and for our stakeholders and the communities in which we live and work by exceeding our business targets, we have the resources to move more quickly toward creating.
When all EV future, an all EV future and when you look at the combination of our Altium battery platforms, our hydro tech platforms for fuel cells as well as our software platform that we've named <unk>. We really think that we have a strategy that will allow us to drive higher revenue on operating efficiencies and an improved an outstand.
And customer experience.
When you look at LTM. It does deliver better performance range and then it gives us flexibility and scalability that is.
It's going to allow us to accelerate the evs that we're gonna put into market across the entire portfolio and the work that we'll share more of what we're doing to continue to improve battery costs will also allow us to open up and 2 of them not only on more segments, but also markets outside the auto industry and then when you think about from.
The software perspective, the strength that we have advanced our ability to do over the air updates on.
And the work that we have from a processing power perspective in the vehicle as well as a cyber security perspective, we think we have an ecosystem that will increase and build on the leading.
Loyalty that we have will allow us to provide unmatched personalization will expand features like we've already talked about with Super cruise and really create new connected services.
I couldn't be more excited about the future of the business and the opportunities that we have on growth and margin expansion. When we look at all these different businesses. So we look forward to hosting you on October and we truly believe you will experience. This feature for yourself. So thanks, everybody again for your time and please stay safe.
That concludes the conference call for today, Thank you for joining.
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