GM's fourth-quarter 2014 results were encouraging, after the heavy effect of recall expenses in earlier quarters; Although the company was profitable for the full year, revenues were flat and EBIT adjusted took a significant hit from the recall and other effects.
IHS Automotive perspective | |
Significance | General Motors (GM)'s earnings before interest and tax (EBIT) increased 27.2% in the fourth quarter of 2014. However, EBIT declined in the second and third quarters, and is down 24.3% for the year. Net income after tax fell 14.3% in the fourth quarter and 44.8% for the year. Worldwide deliveries increased in the fourth quarter, although declined in the second and third quarters. Revenues fell in the fourth quarter, but gained slightly for the year. Net cash from operating activities increased in the fourth quarter, although it was not enough to offset declines earlier in the year and that metric fell 8.1% for the full year. |
Implications | The fourth quarter saw USD900 million in special items, largely a redemption of series A preferred stock. However, for the year, impairment charges, recall campaign catch-up adjustment, the ignition switch recall compensation programme, flood damage to Warren Tech Center in the third quarter, and Venezuelan currency devaluation also had an effect. Fourth quarter revenue decreased on fewer wholesale deliveries, although increased average transaction prices helped enable a slight increase in full-year revenue, despite lower wholesales. Results for each region were largely consistent with the headwinds faced by any automakers dealing in the regions, and the decline in wholesales also effected by the wind down of Chevrolet in Europe. |
Outlook | GM delivered stronger profit in the fourth quarter of 2014 than in earlier quarters, maintaining its profitability streak, but full-year results were battered by the recall, restructuring in Europe along with the elimination of Chevrolet in the region, and South America's currency exchange issues and declining industry sales. However, the increase in EBIT adjusted indicates the business is performing well, aside from the recall and currency exchange expenses. CEO Mary Barra says the company is on track for financial targets laid out in October 2014. |
General Motors (GM) closed out 2014 with another profitable year, but the ignition switch recall and Chevrolet's elimination from Europe were among the issues that dragged down performance. GM's fourth-quarter 2014 revenues declined to USD39.6 billion, on lower deliveries. GM came out of a difficult 2014 with revenues up less than 1%, to USD155.9 billion. The fourth quarter saw an increase in net cash from operating activities (USD3.8 billion, compared with USD2.8 billion in the fourth quarter 2013), although 2014 closed with a USD900 million decrease in cash from operating activities, to USD10.1 billion. Free cash flow for the year was down (USD3.1 billion), and up for the last quarter of 2014 (USD1.8 billion).
EBIT adjusted increased in the fourth quarter, from USD1.9 billion a year earlier to USD2.4 billion. A USD300-million improvement in mix and USD1.4 billion improvement in pricing were greater than the effect of increased materials costs, recall-related costs, currency exchange issues, and the lower number of deliveries. Quarterly EBIT adjusted reached 6.1% of revenue – a notable jump from 4.7% in the fourth quarter of 2013. However, for the year, EBIT adjusted saw a 24.3% decline, to USD6.5 billion. The USD2.1-billion decrease was affected by lower wholesales, increased materials costs, restructuring activities in Europe, recall-related issues (USD2.8 billion), and currency exchange issues. Favourable effects from improved mix and stronger pricing were not enough to offset the effect of the recall.
Global wholesale deliveries fell by 380,000 units for the year, to 6.03 million units, although the increased transaction price, specifically in North America, meant that revenue stayed essentially flat in 2014. Worldwide retail sales increased 2.1%, from 2.39 million to 2.45 million units. Global market share in the fourth quarter was flat, although for the year it increased from 11.4% to 11.5%. GM improved its US retail/fleet mix in 2014 as well, from 26.4% in 2013 to 29.5%.
In a company statement, CEO Mary Barra said, "A strong fourth quarter helped us deliver very good core operating results in 2014 despite significant challenges we and the industry faced. By keeping our customers at the center of all our decisions, we addressed those challenges head-on and outlined a customer-focused strategic plan that will guide our company well into the future."
GM's global financial performance, Q2 and full year | ||||||
| Q4 2014 | Q4 2013 | % Change | Full-year 2014 | Full-year 2013 | % Change |
Worldwide wholesales (000) | 1,578 | 1,651 | -4.4 | 6,033 | 6,413 | -5.9 |
Worldwide retail sales (000) | 2,553 | 2,472 | 3.3 | 9,925 | 9,722 | 2.1 |
Revenues (USD bil.) | 39.6 | 40.5 | -2.2 | 155.9 | 155.4 | 0.3 |
EBIT, adjusted (USD mil.) | 2,414 | 1,899 | 27.2 | 6,494 | 8,578 | -24.3 |
Net income, after tax (USD mil.) | 1,987 | 1,040 | -14.3 | 2,949 | 5,346 | -44.8 |
Cash provided by operations (USD mil.) | 3,786 | 2,752 | 37.6 | 10,132 | 11,021 | -8.1 |
Debt (USD bil.) | (9.4) | (7.1) | 32.4 | (9.4) | (7.1) | 32.4 |
North American wholesales fell 14,000 units in the fourth quarter of 2014 while materials costs increased; the effect of those on EBIT adjusted for the region was offset by improved mix and pricing. North America saw EBIT adjusted increase from USD1.9 billion in the fourth quarter of 2013 to USD2.4 billion in the same period of 2014. Over the course of 2014, the North American region bore the weight of USD2.3 billion in recall-related expenses, which dragged down the first and second quarters, and ultimately the full year. As a result, North American EBIT adjusted for 2014 declined 12%, to USD6.6 billion from USD7.5 billion in 2013. Market share in North America was strongest in the second quarter of 2014 (17.2%), and fell to 16.9% in the fourth quarter, although that was an improvement over the fourth quarter of 2013, when market share was 16.7%.
General Motors International Operations (GMIO) accounted for USD400 million of the company's adjusted EBIT in the fourth quarter of 2014, up from USD200 million a year earlier. EBIT adjusted increased from USD228 million in the fourth quarter of 2013 to USD396 million; however, for the year, GMIO's EBIT adjusted declined slightly, to USD1,222 million from USD1,255 million. The decline was tied to a decrease in wholesale deliveries of 266,000 units, although market share increased from 10.0% in the fourth quarter of 2013 to the 10.5% in the fourth quarter of 2014. Revenue from the China joint ventures is not included in GM's overall results, but net income/revenue for the market increased to 8.7% for fourth quarter 2014 from 7.6% the same period in 2013. However, that was a step back from 10.0% in the second quarter and 11.2% in first quarter 2014. GM's South American division saw a USD100 million EBIT-adjusted return, compared with breakeven in the fourth quarter of 2013, as the favourable effect of increased pricing offset increased costs and the effect of currency exchange issues. With the price increases as well as declines in the major markets of the region, wholesales declined from 260,000 units in fourth quarter 2013 to 249,000 in 2014.
For the fourth quarter, Europe saw slightly higher losses in 2014 (USD393 million) than in 2013 (USD365 million); for the year, EBIT-adjusted losses increased restructuring charges and currency exchange expenses, from USD869 million in 2013 to USD1,369 million in 2014. GM says the business is getting stronger on improved Opel sales and better cost controls. Market share fell to 6.3%, with wholesale deliveries up to 303,000 from 287,000 in the fourth quarter and to 1,163,000 units for the full year. GM reiterated that wind-down sales of the Chevrolet division affected sales and share, Opel/Vauxhall's share increased, and the newly introduced Corsa's orders are ahead of projections. GM has not changed its expectation for regional profitability mid-decade. GM moved Russian operations out of GMIO and in July 2014 created Opel Group, which absorbed operating responsibility, and financials for Russia, effectively rebranding GME externally.
Outlook and implications
GM delivered stronger profit in the fourth quarter of 2014 than in earlier quarters, maintaining its profitability streak, but full-year results were battered by the recall, restructuring in Europe along with the elimination of Chevrolet in the region, and South America's currency exchange issues and declining industry sales. However, the increase in EBIT adjusted indicates the business is performing well, aside from the recall and currency exchange expenses. Revenue was down for the fourth quarter, on fewer wholesale deliveries, but stronger pricing helped bring in more in revenue throughout 2014 than in 2013.
Increased average transaction prices in North America, as well as full-size sport utility vehicles (SUVs) in the Middle East, were able to offset most of the effects of declining deliveries and prevent revenue from declining. Including GM Financial, global revenues in the fourth quarter were USD39.61 billion, and North America's USD25.3 billion contributed 63.4%; for the year, North America generated 64.2% of the company's USD155.9 billion in revenue. Globally, full-year wholesales fell by 5.9%, or 380,000 units. Wholesale deliveries increased in General Motors North America (GMNA) and General Motors Europe (GME), but slipped in GMIO and General Motors South Africa (GMSA). Retail sales increased in North America, declined in Europe on the Chevy drop, increased in GMIO on gains in China, and fell in GMSA.
Aside from issues surrounding the recalls, which affected 2014's full-year results by USD2.4 billion, GM's fundamentals in the United States remain sound and the company continues to be profitable. Its cash position is favourable and debt is manageable. Although applications for the victim compensation fund were due on 31 January 2015 and the cost of that fund may become clear in the first or second quarter of 2015, the full effect of the ignition-switch recall remains murky. GM still faces a myriad of civil lawsuits and possible criminal charges from the US Justice Department, as well as various state and congressional investigations.
In January 2015, Johan De Nysschen announced plans for eight new Cadillac vehicles by the end of 2020. Despite Cadillac's gains in China, its US sales are challenged. In Europe, the execution of GM's recovery plan is on pace, although Opel CEO Karl-Thomas Neumann also suggested that profitability in 2016 may be at risk (see Europe: 22 December 2014: Opel CEO says 2016 profit target is under threat). The transformation of GMIO is a "multi-quarter journey", and getting the right product into the right markets is incomplete. GM indicated earlier that it could be into 2016 before GMIO strengthens.
On an analyst call discussing 2014 results, Barra indicated the company is on track for financial targets announced in October 2014, including 10% margins in North America by 2016, sustaining strong margins in China, profitability for Europe by 2016, and mid-single-digit margins for South America and GMIO in the longer term. The company is also looking to balance its use of cash to maximise long-term shareholder return, including reinvesting in the business, maintaining the fortress balance sheet, and returning capital to shareholders. During the analyst call on 4 February 2015, Barra also announced that the company plans to increase quarterly dividend by 20% beginning in the second quarter of 2015.