The Wall Street Journal-20080118-GM Sees End to Bleak Era- CEO Projects Profit On Rise in 2-3 Years As Strategy Pays Off
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GM Sees End to Bleak Era; CEO Projects Profit On Rise in 2-3 Years As Strategy Pays Off
General Motors Corp. Chief Executive Rick Wagoner said the auto maker could see "significant" profit increases in two to three years, a rare bright outlook in an industry grappling with soft sales and economic concerns.
Mr. Wagoner, whose three-year-old plan hasn't yet brought GM back to profitability, asked investors for more patience despite the company's sliding share price and worsening economic expectations. He told Wall Street analysts yesterday that the improved results in coming years would result from a new labor contract and growth in overseas sales.
GM also said lender GMAC Financial Services, in which it owns a 49% stake, could return to profitability.
Mr. Wagoner said that if U.S. volumes remain low, GM may make additional capacity cuts, as it wants 100% utilization of its operations in regions with high labor costs, such as the U.S. and Western Europe.
Added GM Chief Financial Officer Fritz Henderson: "We certainly feel very good about the opportunities that we have for cost reduction, for brand improvement, for returning our business in North America and Europe to better levels of stable, sustainable profitability and then growing and growing our revenue, profit and cash flow in emerging markets."
Auto sales in the U.S. this year are expected to reach their lowest point in a decade as the weakening housing market, falling consumer confidence and high oil prices have customers rethinking new-car purchases. GM in particular has been hurt by its exposure to the U.S. lending market through its stake in GMAC.
With its forecast, GM suggested the tough stretch won't last, but it also suggests the company could cut further if it does.
In a note to investors, Lehman Brothers analyst Brian Johnson said hints of deeper cost-cutting were positive, but he said GM's view of this year is "a little out of sync with the current economic environment."
Leveraging its new contract with the United Auto Workers, GM expects to cut thousands of additional hourly jobs through buyouts and early retirements and realize billions of dollars in labor and material cost savings by 2011, Mr. Wagoner said. GM, he predicted, will be helped by an upturn in the U.S. industry that he expects next year, and further growth in emerging markets such as China and Russia.
The upbeat view comes after a steep decline in GM's stock price in the past few months, on slow sales and mortgage woes at GMAC. Yesterday, it fell one cent to $22.84 at 4 p.m. in New York Stock Exchange composite trading, amid a broadly lower market. Last October, its shares climbed to a high of $42.64 after the UAW made concessions.
"We understand the 2008 outlook is challenging," Mr. Henderson said. He noted the company faces risks, including concerns regarding oil costs, a dramatic decline in the housing market and a potential recession, and he expressed frustration with GM's stock price, saying "it has not been a favorable period for our shareholders."
GM's market cap is $13 billion, about a third of its level at the beginning of the decade and half of the value of its current cash and liquid reserves.
GM built its restructuring plan for a U.S. market far rosier than it is facing now, and it expected profits from GMAC. Instead, with sales sagging, GM is saddled with excess capacity, particularly in trucks and SUVs, while GMAC is mired in losses.
Mr. Wagoner said the company expects to cut labor costs by as much as $5 billion by 2011 thanks to the UAW deal. The contract is buttressed by clauses that allow GM to hand over its enormous hourly health-care liability to the UAW and replace workers with hires who earn lower wages and benefits.
An attrition plan will be offered to 46,000 workers next month. By 2012, GM expects fixed structural costs to represent 23% of revenue. It also expects to arrest the punishing inflation in material costs.
Much of GM's hope hinges on a rebound in the U.S. market. Even though the company argues its liquidity and financing are in good enough shape to weather a significant downturn in the U.S., its chances of finding black ink in a smaller U.S. auto industry are bleak.
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Terry Kosdrosky contributed to this article.
