General Motors to put $2.9bn in strike damage behind it
While the real cost may only be felt in the fourth quarter, an upbeat GM says if demand holds up in 2020, it will have capacity to boost output
Southfield — General Motors (GM) is looking to put a six-week strike that cost about $2.9bn in the rear-view mirror as it ramps up production of high-profit margin trucks.
The vehicle maker said on Tuesday that the walkout by unionised workers at US plants, which ended last week, eroded free cash flow and forced it to lower its 2019 earnings forecast by $2 a share. But the damage was not as severe as some analysts predicted, with third-quarter results handily beating the average estimate, and GM shares rising the most since June.
“The underlying business was very strong,” CFO Dhivya Suryadevara told Bloomberg Television, noting that absent the strike, GM would still be on the target it set in January for full-year earnings of $6.50 to $7 a share. “That’s what we’re focusing on as we move forward.”
Adjusted per share profit for the third quarter, which added back losses from the strike and other one-time charges, was $1.72 a share, beating analyst estimates of $1.29. GM’s shares rose 5.4% at 9.52am in New York.
The company is banking on strong demand for its new Chevrolet Silverado and GMC Sierra pick-up trucks, which are big money makers. Sales of higher-volume, light-duty versions of those trucks rose 18% for the Chevy and 38% for the Sierra in the quarter.
As part of the new labour deal, GM will give workers a 3% raise, $11,000 ratification bonuses for tenured workers
“Simply, the strike did not significantly alter GM’s steady state financial profile,” Dan Levy, analyst at Credit Suisse, wrote in a note to clients.
Cash flow cut
The labour action hit GM’s profit by $1bn in the third quarter alone, the company said in a statement. That contributed to a cut in its full-year adjusted earnings per share estimate to a range of $4.50 to $4.80, down from the earlier projection of $6.50 to $7 a share.
The labour action started on September 16 at the tail end of the quarter, chopping earnings by 52c a share, so most of the damage will come in 2019’s final three months. By the time the year is over, GM said the impact would reach $3.8bn to $4bn earnings before interest and taxes.
Suryadevara told reporters in a briefing that GM lost 300,000 vehicles of production to the strike and that its ability to quickly make that up “will be limited”, but she added that if demand holds up in 2020, GM will have additional capacity to boost output.
The work stoppage depleted GM’s cash flow, as the company cut 2019 guidance to zero to $1bn. It had earlier projected cash flow of $4.5bn to $6bn for the year.
The walkout wasn’t the only thing taking a toll on the car maker. GM also repriced its stakes in Lyft and French car maker Peugeot, which lowered profit by another 15c a share. GM owns 6.7% of Lyft and has warrants in Peugeot.
For GM, the strike’s impact is two-fold: it not only hit profits for this year but also adds $100m a year to its labour costs, according to an estimate from Credit Suisse.
As part of the new labour deal, GM will give workers a 3% raise, $11,000 ratification bonuses for tenured workers, and reduce the amount of time entry-level workers need to get to top pay. The deal also sets some limits on the numbers of temporary workers that can be hired.
The settlement with the United Automobile Workers (UAW), while adding costs, benefits both sides, Suryadevara told Bloomberg TV. “They share in the success of the company and, from a company standpoint, we retain our flexibility” to invest in plants and new products, such as electric vehicles.
If not for the strike, GM would have turned out a record quarter. Its full-size trucks are finally getting some momentum after a year-long roll-out. Chevrolet Silverado sales rose 18% and the GMC Sierra was up 38% in the quarter. GM said its trucks gained retail market share in all three months in the quarter.
The vehicle maker’s Chinese operations are still struggling, though. GM’s income from its joint ventures in China fell to $282m in the quarter from $485m in the same period a year earlier. GM acknowledged in a statement that it “underperformed” in the Chinese market, where industry-wide sales fell 11% in the third quarter.
GM also lost $251m on its Cruise self-driving car business. The unit is still in start-up mode and has no revenue. The business lost $214m a year earlier.