GM Profit Falls on Recalls, but Beats Expectations -- 2ed Update

By Dow Jones Business News, 
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GM Profit Falls on Recalls, but Beats Expectations -- 2nd Update


By Jeff Bennett

General Motors Co. posted sharply lower first-quarter earnings on recall and other charges even as its results showed consumers are still willing to buy--and pay more--for its new cars and trucks despite troubling disclosures about past vehicles.

Its retail sales world-wide rose 2.3% to 2.42 million vehicles, representing gains in North America and China, its two biggest markets, and in Europe. Consumers so far have continued to embrace its new products despite a string of big safety recalls since January.

The nation's largest auto maker has been stressing the difference between its new cars and trucks and the mostly discarded brands and models that have been linked to at least 13 deaths. Top executives have continue to show up at industry events and have batted down calls for increased sales incentives by its dealers.

GM's shares on Thursday initially jumped on the results but moved lower after its finance chief said the company wouldn't lift its full-year outlook calling for flat margins and a slight uptick in profit compared with 2013. It was down 22 cents at $34.17 in 4 p.m. trading.

"We performed better than we expected in the first quarter. So we'll have to trim some of the expectations Q2 through Q4," Chief Financial Officer Chuck Stevens said during a conference call. He said it was too early to know if the company will require more recall-related charges this year.

The auto maker earned $213 million before preferred dividends after spending $1.3 billion to recall nearly seven million cars with faulty ignition switches and other defective parts. Its 29 cents a share adjusted profit exceeded analyst expectations for 4 cents a share earnings. Revenue rose 1.4% to $37.4 billion.

Morgan Stanley auto analyst Adam Jonas wrote in a research note that while the Detroit company faces strategic challenges, "there are some great--China, trucks--and recovering businesses--Europe--that can drive some surprises along the way."

The better than expected profit was driven by higher average U.S. sales prices for its vehicles. Its average sale last quarter hit $32,794, a $2,000 increase over a year earlier. Pickup truck sales jumped to an average price $38,675, a $5,000 jump credited to buyers choosing higher-end models.

Chief Executive Mary Barra said that the company is working through its investigation and a series of external probes. "We'll continue to face down every issue we have, both internal and external, and more aggressively pursue the opportunities, because there are challenges in the market place," she said.

Ms. Barra said compensation expert Kenneth Feinberg is pulling together a victims' compensation plan that should be done by June while Chicago attorney Anton Valukas continues his internal probe.

In a federal filing, GM confirmed for the first time that had received subpoenas and requests for information from the Securities and Exchange Commission, the U.S. attorney's office for Manhattan, Congress, the National Highway Traffic Safety Administration and an attorney general for a state it didn't identify. The outcomes could have a material adverse impact on its finances, it said.

The auto maker said it believes it is "cooperating fully" with requests for information from the investigating agencies; is faces fines for missing an April 3 deadline to respond fully to questions from the U.s. auto safety regulator.

GM said it spent $700 million on replacement switches and cylinders and $600 million on other recall items during the quarter. In all, recall expenses lowered GM's results by 48 cents a share.

It also took an about $400 million charge for its Venezuelan operations. "We are weighing our options very, very carefully there," Mr. Stevens said.

Venezuela is dragging down its South America unit. Overall, its South American unit's operating loss widened to $ 156 million from $38 million a year ago.

In North America, operating profit fell to $557 million, reflecting the $1.3 billion charge the company took for recall expenses. But

Its European unit reported a $284 million operating loss, compared with a $152 million deficit a year earlier, but the latest quarter included $200 million in restructuring charges. The results suggest GM could be ahead of its previous prediction for break-even results in Europe by 2016.

"Excluding the charges the losses would have been closer to $100 million versus $200 million in the first quarter of last year," Mr. Stevens said. "Fundamental core improvement in operations are being led by product there. Revenue was up significantly."

Profit at its GM International unit, which encompasses Asia, Australia, Africa and the Middle East, declined to $ 252 million in the first quarter from $472 million a year earlier. Without the support of China, where profit rose to $ 605 million from $550 million a year ago, the unit would have lost money. The business is wrestling with problems in Thailand and a costly recall in India.

Despite the overall sales gain, the auto maker's U.S. market share fell to 17% from 17.7% a year ago and its world- wide share slipped a fraction to 11.1% as its sales gains were below the industry average.

The company is buying replacement parts from supplier Delphi Automotive LLC, which has said it is operating one production line on multiple shifts. Two assembly lines will be added during the summer, said GM, allowing the Detroit auto maker to replace switches and cylinders on most of its recalled Chevrolet Cobalt, Saturn Ion and Pontiac vehicles by October.

A GM spokesman said it is bearing the brunt of the costs of replacement switch production but declined to say how much it would cost overall.

Write to Jeff Bennett at jeff.bennett@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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