GM offers buyouts to cut costs after strong quarterly profit

DETROIT - 1 November 2018: General Motors Co (GM.N) on Wednesday stepped up efforts to cut costs in response to tariff and market pressures, even as it reported third-quarter profit that blew past Wall Street expectations.

The No. 1 U.S. automaker said on Wednesday it is offering buyouts to salaried employees with 12 or more years of service, as Chief Executive Mary Barra told them in an email: “Our structural costs are not aligned with the market realities.”

GM shares jumped more than 8 percent to $36.34, their highest in almost six weeks.

The Detroit automaker had previously promised investors it would cut $6.5 billion in costs this year, and the buyouts would add to that total, a company spokesman said on Wednesday.

The company said in a separate statement that it would consider layoffs after it sees the impact of the buyouts and other cost cutting efforts.

About 18,000 of the company’s 50,000 salaried employees in North America are eligible for the buyouts, the company spokesman said. They do not affect the hourly workers on GM’s production lines.

GM’s move to cut staff stood in contrast to an upbeat profit outlook and its recent success in raising prices, which boosted profit before tax by $1 billion overall in the quarter, mostly in North America.

In her email to employees, Barra focused on the fact that GM has burned through $300 million in cash in its automotive operations during the first nine months of 2018. She also noted that the company’s stock price is still stuck near the $33 a share price at which it debuted in 2010 after a bankruptcy restructuring.

HIGHER MATERIALS COSTS

For Detroit’s automakers, rising materials costs caused by new tariffs on foreign metals imposed by the Trump administration are converging with a slowly deflating U.S. market and a sharper falloff in China, the world’s largest auto market.

GM and rivals Ford Motor Co (F.N) and Fiat Chrysler Automobiles NV (FCHA.MI) have all in recent weeks forecast substantial hits from steel and aluminum costs driven by tariffs.

In the third quarter, GM said it was able to raise prices by $900 million in North America, in part because it is launching a new generation of its large pickup trucks, the Chevrolet Silverado and GMC Sierra. Ford, however, has an older product line, and said its net pricing in North America fell by $318 million in the third quarter.

The pricing gains are “absolutely sustainable,” GM Chief Financial Officer Dhivya Suryadevara said.

GM said it still sees a full-year profit in the range of $5.80 to $6.20 a share, but said it now expected to finish at the high end of the range with potential to finish even higher. It cited a favorable tax rate and its strong performance. Wall Street has been expecting $5.88 per share, according to I/B/E/S data from Refinitiv.

In July, GM lowered its full-year forecast, citing higher steel and aluminum costs due to tariffs.

The company said it still expects about $4 billion in free cash flow for the year before the impact of $600 million in pension contributions.

Excluding the effect of any cost cutting it achieves, GM’s Suryadevara reaffirmed GM’s commodity costs in 2019 will increase by $1 billion over 2018. Ford has said it expects tariffs to reduce profits by $1 billion in 2018 and 2019, and Fiat Chrysler has warned rising metals costs could cost it 850 million euros ($963 million) this year and next year.

PRESSURE INCREASE

The rise in materials costs is increasing pressure on automakers to cut costs ahead of a predicted decline in U.S. vehicle demand after an unusually long bull market.

Earlier this month, Ford said it would cut its 70,000-strong global salaried workforce by an unspecified number and hoped to complete the cuts by the end of June 2019. This week, the No. 2 U.S. automaker is holding three days of meetings to discuss ways to flatten the structure of its salaried workforce and get managers to oversee larger numbers of employees.

GM has cut production at car plants over the last two years and its hourly workforce fell by 4,000 workers last year, according to GM’s annual report. In addition, GM in June ended the second shift at its Lordstown, Ohio assembly plant, cutting 1,500 jobs.

In China, GM’s largest market by vehicle sales, the automaker said it booked a record $500 million in income from its joint ventures. That result was in spite of the sharpest industry sales drop in nearly seven years during September.

The impact of the sales drop hit harder in China’s interior, and demand remains strong in larger cities and for luxury vehicles, including GM’s Cadillac models, Barra said on a conference call with analysts.

GM reported third-quarter net income of $2.53 billion, or $1.75 a share, compared with a loss last year of $2.98 billion, or $2.03 a share. Last year’s quarter included a charge related to Europe.

Excluding one-time items, GM earned $1.87 a share in the third quarter, easily beating the $1.25 average analyst estimate, according to I/B/E/S data from Refinitiv.

Revenue in the quarter rose 6.4 percent to $35.8 billion, above the $34.85 billion analysts had expected.8826 euros)