Good morning, and welcome to the General Motors Company's Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded Wednesday, August 4, 2021. I would now like to turn the conference over to Rocky Gupta, Treasurer and Vice President of Investor Relations..

Thanks, Tabitha. Good morning, and thank you for joining us as we review GM's financial results for the second quarter of 2021. Our press release was issued this morning, and the conference call materials are available on the GM Investor Relations website. We are also broadcasting this call via webcast.

I'm joined here today by Mary Barra, GM's Chairman and CEO; Paul Jacobson, GM's CFO; and Dan Berce, President of GM Financial. As usual, before we begin, I would like to direct your attention to the forward-looking statements on the first page of the chart set. The content of our call will be governed by this language.

And now I will turn the call over to Mary Barra..

Thanks, Rocky, and good morning, everyone. Thanks for joining us. Today, Paul and I will provide some insights into our record results and then talk about our outlook for the second half.

As we announced earlier, we achieved EBIT adjusted of $4.1 billion in the second quarter and $8.5 billion in the first half, including charges for recalls, primarily the Bolt EV. I really want to thank our employees and the extended GM team, including our suppliers and our dealers, for helping us deliver such consistently strong results.

Everyone continues to demonstrate remarkable resiliency and adaptability in a rapidly changing environment. In addition, our ROIC adjusted of 27.3% in the quarter significantly exceeded our target. This underlines how our strong returns enable us to reinvest in the future of this business.

The reinvestment includes accelerated investments in our electric and autonomous strategy to build a future that is better for our customers and better for the environment, and we'll discuss this a bit more in a few minutes. All-electric is an important point of distinction.

Because of the performance, range, flexibility and scalability of our Ultium and Hydrotec platforms, including the work we're doing to continually drive cost reduction, we don't need to depend on partial solutions like hybrids and electrified ICE vehicles.

Instead, we're primarily focused on investments that achieve the end solution of zero emissions more quickly. Before we move on, I will share my perspective on our recall of the 2017 to '19 model year Bolt EVs and then the status of the semiconductor situation. So let's start with the Bolt.

Across the company, we have made both product and workplace safety everyone's responsibility. Our focus is on prevention but also moving with a sense of urgency when problems do arise. When we learned of a potential of 2 new battery fires that were part of our previous recall population, we acted quickly.

We did an investigation and our engineering analysis identified 2 rare manufacturing defects in some cells manufactured by our supplier in the '17 to '19 time frame, so we instituted a second recall with the overriding priority of doing the right thing.

Because cells for 2020 and later vehicles were built using improved manufacturing processes, the recall does not impact newer Bolt EVs or EUVs. And since that recall, we have worked with our supplier and partner to make further process improvements. Just as important, the recall doesn't impact the Ultium platform.

It is a different battery system, and our joint venture plants that manufacture Ultium cells will follow rigorous GM quality processes. As for semiconductors, the situation does remain fluid, and the supply chain continues to be impacted by events like what is happening right now with the COVID spike in Malaysia.

While we informed our employees yesterday that some truck production will be impacted next week, even as we resume production at some crossover plants, we remain confident in our team's ability to continue to find creative solutions that minimize the impact on our highest-demand and capacity-constrained vehicles, including full-size trucks and SUVs.

We are raising our guidance for full year EBIT-adjusted to $11.5 billion to $13.5 billion. And we are being cautious because of the uncertainty due to the Delta variant and its potential impact on the supply chain.

But we do believe that the combination of our safety protocols and the rising vaccination rates will help minimize disruptions, but we do have to note the situation does remain fluid. We are also putting long-term solutions in place to derisk our supply chain.

This includes collaborating with semiconductor manufacturers and continuing to enhance transparency throughout the entire semiconductor supply chain. So now let's turn to growth. As I mentioned in my letter to shareholders, we are addressing the entire ecosystem to speed EV adoption and commercialization of self-driving technology at scale.

We will offer a full range of vehicles and services that make EVs accessible to the largest possible customer base. We'll also create job opportunities for thousands of employees in our Ultium Cells joint venture.

In addition, we will work to grow our businesses like BrightDrop, OnStar Insurance and other software and services, including subscriptions. The Cruise model for autonomous rideshare is another great example of an inclusive solution because it will make all-electric transportation more accessible and affordable.

Delivering on our EV all-electric future requires a value change that is secure, sustainable, scalable and cost competitive. To do this, we are creating a diversified value chain of environmentally friendly and geographically diverse footprints through investments, strategic partnerships and supply agreements.

For example, we are working with suppliers to develop new sources in the United States for lithium, a key battery cell component, and accelerate the adoption of extraction methods which have less of an impact on the environment. We're taking a similar approach across other critical minerals needed to support our EV future.

And we're confident that our strategy will secure our supply in a sustainable way as we accelerate our transition to EVs.

We'll share more about these key topics and others, including battery cost and business opportunities that we're creating with software, at our investor event on October 6 and 7, which we hope will be in person because we are so looking forward to having you experience technologies like Watts to Freedom in the GMC HUMMER EV pickup, as well as Super Cruise, which we are constantly advancing its capabilities.

Just last month, for example, we demonstrated the latest version of Super Cruise technology that will be featured on the Sierra 1500 Denali late in the 2022 model year. It will include the ability to trailer while driving hands-free.

We will also update you on Cruise, which continues to make excellent progress towards launching its first fully driverless commercial service. GM remains a major accelerator of Cruise's mission with the purpose-built origin, giving Cruise a huge competitive advantage.

I also want to take a moment to share some new insights into our plan to launch more than 30 EVs globally by 2025 and become the EV market leader in North America.

As we recently announced, because we are increasing our 2020 to 2025 capital and engineering investment from $27 billion to $35 billion, we will add 2 new vehicles to our commercial portfolio.

The first is a full-sized battery electric cargo van for Chevrolet, which will exceed the expectations of small business owners, tradespeople and anyone else who has been well served by the Chevrolet Express.

The second is a medium-duty truck that will put both Ultium and our Hydrotec hydrogen fuel cell technology to work, powering service and utility vehicles such as school buses, bucket trucks, wreckers and more.

Both will complement BrightDrop and keep our commercial fleet market share growing, and we'll share more details about these products as we move forward.

Now if you step back for a moment and think about what this means for the future of work and the greenhouse gas reduction from surface transportation, because when you say between these new trucks, BrightDrop, EV pickups coming from Chevrolet and GMC and our work with Wabtec on locomotives and Navistar on semi trucks, we will have electric solutions for almost any towing or hauling jobs you can imagine.

Hydrotec is a very important part of the equation because it expands our reach into additional growth markets. We're already at work on our first production fuel cells leveraging innovative manufacturing processes that can unlock economies of scale and reduce overall costs. This technology, along with our 4 U.S.

battery plants that we have announced and the full portfolio of EVs we are planning, in addition to the customer experience we're creating, underscore once again how determined we are to lead. The determination reaches through the entire company.

And when I meet with our employees, they tell me how incredibly excited they are to be part of a once-in-a-generation transformation that will truly change the world. Their tenacity and collective commitment to our vision are why we are delivering such strong business results and advancing our future so quickly.

So now for a closer look at our results and the outlook, I'll turn the call over to Paul..

Thanks, Mary, and good morning, everyone. We appreciate you taking the time to join us this morning.

We've just experienced another very exciting quarter for the company with robust financial performance, and we're taking advantage of opportunities to accelerate our growth strategy with the additional investments we announced in EV and AV technology, that which Mary just outlined.

During the quarter, we announced expectations of first half EBIT adjusted in the $8.5 billion to $9.5 billion range, which we achieved despite an $800 million charge related to the Bolt EV recall and $400 million primarily related to the side airbag recall late in the quarter, which were not included in our first half guidance range.

I'll get into the details of these results in a minute, but first, really wanted to highlight the overall strength in the business driven by the incredible demand environment for our new end-use vehicles, allowing us to deliver results that are better all-in than we expected coming into the year.

For instance, we saw an increase in our vehicle production in May and June versus what was projected on our earnings call in early May, and we were able to pull ahead some chip availability into Q2 from Q3. This has all led to the significantly improved performance in the first half of the year.

We are seeing new challenges in the third quarter due to global COVID outbreaks, including the current outbreak in Malaysia resulting in closures of assembly, test and packaging facilities for semiconductors. This remains, as we said, a fluid and rapidly changing environment.

Given our first half performance and our expectations for the rest of the year, we are raising our full year EBIT-adjusted guidance to an expected range of $11.5 billion to $13.5 billion from the $10 billion to $11 billion previous range.

While raw materials continue to be a significant year-over-year headwind as platinum group metals and steel prices have continued to increase this year, we have been mitigating the impact by managing several other factors, including pricing and mix, go-to-market strategies, record profits at GM Financial and other cost efficiencies.

We are providing a wider guidance range than typical, given the fluid semiconductor situation and expect our variability within the range to be primarily driven by production volumes. So let's get into the strong results of the quarter in more detail.

In Q2, we generated $34.2 billion in net revenue, $4.1 billion in EBIT adjusted, 12% EBIT-adjusted margin, $1.97 in EPS diluted adjusted and $2.5 billion in adjusted automotive free cash flow.

We exceeded expectations by driving strong price and mix performance in North America through our production prioritization actions and our go-to-market strategy. Additionally, high used vehicle prices drove continued record results at GM Financial. So let's take a closer look at North America.

In Q2, North America delivered EBIT adjusted of $2.9 billion against the backdrop of strong pricing on our full-size pickups and continued performance from the launch of our all-new full-size SUVs, partially offset by warranty charges in material and commodity costs. We generated a 10.4% EBIT-adjusted margin in the region.

Our strong average transaction prices, up over 14% year-over-year, speak to the high demand for our full-size trucks and SUVs. A big contributor to this increase is the demand for premium trims, our platinum sport and premium luxury trims on Escalades doubled. And on Yukon, our Denali and AT4 represent more than 2/3 of all Yukon sales.

Our volume has been constrained by very tight inventories, which we believe is having a temporary impact on market share in the region. We ended the quarter with approximately 212,000 units in dealer inventory. We expect continued high demand in the second half of this year, with continued low inventory into and through 2022.

Let's move to GM International. GMI EBIT adjusted was up $300 million year-over-year as we experienced positive price and mix benefits across the segment.

Second quarter equity income in China was $300 million, driven also by strong mix, stabilization in pricing and material cost performance, more than offsetting headwinds due to the chip supply shortage and higher commodity costs. In addition, we received a $600 million dividend from our China automotive JVs in Q2.

EBIT adjusted in GMI, excluding China, was up $200 million year-over-year as a result of favorable pricing and mix. The underlying strength of the GMI business continues to improve as the team drives pricing, mix and cost optimization. However, we do expect some challenges in the second half, primarily due to semiconductor-driven plant downtime.

Few comments on GM Financial, Cruise and our Corp segment. GM Financial has continued to deliver, with record Q2 EBT adjusted of $1.6 billion and is benefiting from both strong used vehicle prices and continued favorable consumer credit checks.

We received $1.2 billion in dividends from GM Financial year-to-date, and we anticipate additional dividends to be paid in 2021 as we benefit from their record earnings.

Cruise costs in the quarter were $300 million and Corp segment EBIT was a loss of $40 million, which was better than normal run rate due to mark-to-market gains on investments, partially offsetting costs. Now let's turn to our 2021 second half outlook.

When thinking about the second half of the year performance, there are some fundamental pressures versus what we've seen in the first half. We've seen commodity inflation continue to rise. And while it's come down off the peaks, we expect second half commodity expense to be $1.5 billion to $2 billion higher than the first half of the year.

At GM Financial, we expect second half headwinds of $1 billion to $1.5 billion versus the first half as we do not assume allowance adjustments experienced in the first half will repeat and we expect lower lease termination volume. Record high purchase rates are capping the gains at contract residual value and the start of credit normalization.

We expect our growth initiative investments in the second half to increase by about $500 million. And the first half also contained $400 million in mark-to-market gains on equity investments that we do not assume will repeat. All of this adds up to about $3.5 billion to $4.5 billion of headwinds in the second half of the year.

In addition, we expect North American volumes to be approximately 100,000 units lower in the second half versus the first, including some impact from our full-size pickup truck and SUV plants, primarily as a result of some of the near-term pressures in Malaysia impacting plants across North America.

Otherwise, we expect the robust demand and pricing environment to continue as we get into 2022. From a full year perspective, we expect EPS diluted adjusted in the range of $5.40 to $6.40 and adjusted automotive free cash flow guidance in the $1 billion to $2 billion range.

This semiconductor shortage, as we said, remains fluid and the supply chain challenges continue in the second half of the year. Our guidance assumes no year-end work-in-process inventory related to vehicles produced without modules. Significant cash flows could shift from 2021 to 2022 if we have these work-in-process vehicles held at year-end.

We continue to expect CapEx for the year to be in the $9 billion to $10 billion range. So in summary, we had a very strong first half of the year. I think it highlights the strength of our underlying business.

We've again demonstrated our flexibility, our laser focus on execution and our ability to manage through a significant disruption while generating strong results, and we don't expect that to change. There are still some challenges ahead of us, but we have the team and expertise to navigate this while not losing sight of our vision.

We will continue investing in exciting new growth opportunities, including EVs, battery supply and technology and software solutions that will drive growth as well as desirable and differentiated products and services for our customers. We look forward to sharing more around these opportunities at our Investor Day on October 6 and 7.

This concludes our opening comments, and we'll now move to the Q&A portion of the call..

[Operator Instructions]. Our first question comes from the line of Brian Johnson with Barclays..

Just want to get a little bit more into the second half and then also looking ahead to '22 in terms of how these could repeat. Maybe start with the decreased volume.

Can you remind us of how much volume you lost in first half? And then what -- why the conservatism around second half?.

So in the first half, our production was actually up year-over-year, which is not necessarily true of everyone. So I think we produced about 200,000 more vehicles in the first half of '21 than we did in '20. And that was, I think, really a function of how well the team performed.

So to be essentially flat to that level, we don't see as a material downgrade to kind of the trends that we've seen in the business right now. I think what you're hearing from us is sort of a very real acknowledgment of what we see out there with COVID. Now it may turn out to be less impactful than we think it is.

But I think the approach that we've taken through this has been pretty consistent quarter-to-quarter as we're cautious.

We started pointing out some of the challenges that we were seeing in the forward supply chain in Malaysia really going back into late May, early June time frame, and unfortunately, just wasn't able to catch up on their vaccination rates, but they're making good progress.

So we want to take a little bit of a cautious tone because we want to maintain credibility around these ranges. And if we see the environment improve, then I think we'll respond accordingly..

Okay. And just a brief follow-on. How should we think about mix, especially in 3Q? We -- you have the downtime now at your 3 big pickup truck plants. That's a headwind.

You're bringing on some of the more mid-range CUVs like the Equinox or, actually, when do those come online? And also kind of related to that, there's this whole issue of trucks in holding lots that are complete, semi-complete, so the suppliers would have booked, for example, their axles, but are not shipped.

How are those going to enter into wholesale sales over the next quarter or 2?.

Yes. So Brian, I think if you look at our full-size truck production, we've actually been performing remarkably well. The shutdowns that were announced yesterday are really the first ones kind of the full -- first full ones that we've taken this year. So -- and it is somewhat short term that we see that. We're managing this week to week.

I think the bulk of -- when we look at the bulk of the 100,000 units from first -- second half to first half is really in crossovers. We think truck production and full-size SUV are relatively stable over that time period. But again, we're going to continue to watch that.

The vehicles that are built without the modules, I think, present for us, as we've talked about before, a strong option for us. In fact, when we have downtime in the plants like we've announced, we're actually using some of that where we've got availability of the chips that were slated for production that can't be produced.

We're redeploying those into some of those vehicles that have been produced earlier, allows us to maintain a little bit of the wholesaling momentum going forward. So we're going to continue to watch that, we're going to continue to do it.

We're being careful to make sure that above all else, we're managing quality for the vehicles, and the manufacturing and engineering teams have really done an amazing job of managing through the logistical difficulties of doing it. But we continue to see that as a very useful tool for us to navigate this in the short run..

Your next question comes from the line of Dan Levy with Credit Suisse..

Wanted to just follow up on the comments on the second half guide and I guess the commentary on the volume piece around crossovers. So maybe you could just talk to expectations on price and mix versus the first half.

Is it fair to assume that if your volume is actually coming down a bit and your inventory may even get tighter? Is there some incremental benefit on price and potential mix as well?.

Well, I think there is. I mean, we think we'll continue to see strong price, and obviously, Paul referred to the strong mix that we have that's leading to these record ATPs. And I think it speaks to the demand for the products that we have, especially full-size trucks, full-size SUVs and, frankly, crossovers as well.

So we think we're going to see a strong pricing environment continue throughout the rest of the year and into 2022. And so I think there's opportunities for both..

Okay, great. And then just a longer-term one, and this is more so on ICE versus EV profitability. I'm sure you'll give a little more at the Investor Day. But you're reducing your investment on ICE programs. The ICE demand is actually -- and profit is quite strong.

So if ICE demand remains intact, can we actually see ICE profitability expand in the coming years as you reduce investment? And if that's the case, how do you mitigate that potential profit or margin dilution as you shift your mix from ICE to EV?.

Well, I think we're very well positioned from an ICE portfolio because of the investments we made in new vehicle platforms, full-size trucks, mid-size crossovers, full-size SUVs, et cetera. So we're really well positioned with an ICE portfolio, which allows us to focus our investment on electric -- full electric products.

And as we work to make that transition, yes, we see, at the early days, some pricing pressure due to battery costs, but that's why we're so aggressively taking battery -- working to take battery costs down with multiple technology road maps. You will hear us talk more about that when we're together in October.

But then we also see, filling that gap will be the strong foundation that we have to build on as it relates to software and subscriptions.

Now that we have our vehicle intelligent platform, which allows for full over-the-air updates and that we started launching that new VIP in 2019 with the CT4 and the CT5 and then the Corvette and it continues, that's going to give us a lot of opportunity for more software services that we can provide that customers value and, therefore, will pay for as well as subscriptions.

So if you think about it, I see the opportunity we have, and then I haven't even really talked about the growth opportunity we have with leveraging the Ultium platform, leveraging the Hydrotec platform as well as growing our commercial vehicle business and with BrightDrop in some of the vehicles that we talked about today.

So there's tremendous growth opportunity that will, as we get battery costs down, will be sitting on top of the strong margins we have today. So we see it, in the interim, kind of filling the hole, but we're working quickly and think we have a leadership position in battery cell cost. That's why we've announced the four plants.

So I see a huge growth opportunity as we move through this transition..

Your next question comes from the line of Rod Lache with Wolfe Research..

Was hoping, just first, to clarify what's happening to profitability in North America. So if you could just bear with me. Your costs were up $3.9 billion year-over-year in the quarter. Sounds like there's a few unusual pieces there like the warranty, which you called out, and I appreciate you talking about that $1.2 billion.

That wasn't in Street expectations. And I think you had about $1 billion year-over-year in Q2 from nonrecurrence of last year's austerity. So that means that there's probably $1.7 billion or so of commodities and other materials year-over-year. And everyone's experiencing that.

So my question is, do you think that, that means that actually that some of the -- a significant part of the pricing that we're seeing in the industry, we shouldn't think about that in isolation. We should think about that against the material and commodity because it's really just offsetting variable costs.

And if so, just -- if you can just give us a sense of what you're kind of aiming for with regard to North American margins once the dust settles..

Yes, Rod, thanks for that. The -- I wouldn't attribute all -- you did a good breakdown of some of the cost inflation and the warranties and what we saw on the recalls.

But I wouldn't attribute all the remaining to just inflation of the underlying materials because the other thing that's going on is we are producing a much richer mix with more options and features. So material costs are up, but those are positive margin-accretive sales, so we're actually encouraged by that going forward.

So there's no doubt we've had strong margin performance. And I think what you said, what we've tried to facilitate for the guidance that we put forward here is the underlying environment.

I don't think we see any meaningful reasons to expect it to change in terms of the demand in the short run and even into 2022, where we continue to see depressed inventories. I think when the chip situation resolves itself, it's not going to probably be a massive sort of influx of manufacturing right out of the gate.

So we do see continued tight inventories going into 2022. So I think one of the cautions about the second half is to not read too much into it and extrapolate that as a 2022 performance. We'll give more guidance on 2022 as we get through the budget process and towards the end of the year with what we see.

But there's nothing fundamentally different about demand that we see changing in the near term..

Okay. So just to clarify, do you believe that once the dust settles, a 10%-plus margin is sustainable in North America? And just secondly, just as we're thinking about that 2022, just starting from the midpoint of this year's guidance, you have $12.5 billion.

It looks like if we just look at the commodity investment, GMF and mark-to-market delta that you laid out for the second half and offset that with the nonoccurrence of recalls, there's maybe a $2.5 billion drag into next year from those things.

Can you just be a little bit more specific on what the recovery in volume actually means? Because this year, you're only going to do about 2.5 million vehicles.

Are we correct in assuming that a more normal run rate for you at this point is in the 3.1 million, 3.2 million unit range?.

Yes. Well, for the avoidance of doubt, yes, we do think that North American margins can be above 10%, and that was what I was trying to get at in there. So I think you've attributed some of the headwinds, but like I said, we got to be cautious not to read into it. So for example, if you look at commodities, we saw some of the pressure in first half.

The lion's share of it is hitting us in the second half, but commodity prices are down off their peaks. So while we'll see a little bit of pressure in the first half, if prices stay at these levels, we would actually expect a little bit of uplift as we go into the second half of '22.

But there's a long time between here and there that we have to be cautious. And production will certainly be higher next year as we hope and expect that the chips will normalize. But like we said, from the very beginning, we've approached this thing with caution because I can't tell you how fluid it has been as we manage week to week.

But I think when you look at the underlying results and what we've been able to produce in the first half of the year, I think what you've got is a team that has executed incredibly well even versus some of our peers and competitors, and I don't expect that to change going forward..

Paul, I'm going to selfishly just sneak in another just clarification in here. As we think about 2022, we have to extrapolate something here.

Should we be anticipating some kind of launch costs or additional spending and things like that as you start to approach the launch of some of these EVs?.

Well, I mean, of course, we're going into sort of a heavy cycle of launches as we get to the more than 30 EVs by 2025, which really begins with the Hummer EV later this fall and as we go into the LYRIQ and various other launches. So there's certainly going to be some pressure from that, and we'll provide more details as we get into the 2022 plan..

Okay. But your 10% margin comment is taking that into consideration? Or how should we -- it's kind of an important question.

How should we be thinking about that?.

Absolutely..

Your next question comes from the line of Joseph Spak with RBC Capital Markets..

Paul, maybe you could just help us out a little bit here because when you communicated to the market in, I think, mid-June, the $4 billion to $5 billion this quarter and then the $2 billion to $3 billion headwind in the second half versus the first half, at that time, I don't think the Bolt recall was out like maybe you knew about that, so maybe it was considered in that.

But because if we back out the warranty stuff you're talking about here, it's more like a $6 billion half-over-half headwind. So I just want to understand, really, some of the moving pieces and what changed maybe from your prior communications..

Yes. So we've obviously provided more color, Joe, into some of the underlyings, and what we talked about more in detail today is the particular nuances around GMF.

So when you look at used car valuations, there reaches a point where you get to contractual value and you don't participate in the upside, and Dan's on the call, too, and he can provide more color in this space. We also have fewer lease vehicles coming on, which was a function of leases underwritten about 3 years ago in the second half of the year.

And then most importantly, you've got the -- from the credit performance, there's a component of that under the new accounting standards for accounting for credit reserves that is kind of a onetime adjustment going forward. So we see those pressures.

But I think when you look at the underlying business, you look at pricing has remained consistent, you look at some material costs, which are coming with the higher trims. We think that we're able to overcome some of these, going forward.

So like I said, there's a lot of noise going on in the short term, particularly around how we're thinking about COVID and the Delta variant, that we've got to be cautious to not extrapolate too much out of this in the longer term..

Okay. But just to be clear, like I guess, like if we look at the GMF and the higher commodity costs, that's, I guess, sort of in line with what you were communicating prior, like I agree, we're getting more detail and we have some of the lower volumes. I know you take more downtime than was probably expected back then.

But it does still -- I mean, it still seems like there's something else, especially if we sort of back out some of that warranty, which, again, I don't think was considered in that first half or that second quarter number.

So I know you're pointing to growth and other things, but is there anything else that we should consider in the variance?.

I'm not sure, Joe. I guess I'm not sure what you're specifically referencing because I think we've been pretty clear about the moving pieces that make H1 different than H2, but then also talking about our confidence in the business with the margins in North America, the strong pricing power we think we have.

So I guess I'm not sure we're understanding your question here..

Well, I get -- let me try this.

I guess, like maybe just to put it this way, when you sort of indicated the $4 billion to $5 billion for the second quarter, was the warranty stuff already included in that number?.

It was not. But not the two recalls..

Right. So then like if we back that out, it just seems like the second half versus first half variance is greater than you previously indicated. I understand you're sort of showing some of the moving parts.

But like the variance drivers you sort of call out don't seem to fully add up to that number, which would be more like $6 billion ex that warranty number..

Well, and I think we can take this off-line and work through it. But I think the other variable here is volume and the fact that we're widening the range here intentionally, given both sort of COVID and sort of the situation that we're seeing in Malaysia.

So I think the variability is probably just in production, which is where we're intentionally casting a wide range given some of the near-term uncertainty. And we'll obviously clarify that as we work through it but wanted to proceed cautiously because everybody is talking about the Delta variant of COVID right now.

And we want to make sure that we're mindful of hitting the goals that we put out there for the Street..

Okay. That helps..

Your next question comes from the line of Colin Langan with Wells Fargo..

Just to follow up on that. I mean, expectations out there have been that the semi issue is kind of got -- was at its worst in Q2 and then sort of crawling out Q3, Q4.

Are you basically saying you see a big concern that, that has changed with this new variant coming out potentially shutting down some semi plants again? Is that sort of the messaging in that lower production outlook for the second half, just so I'm clear?.

Colin, I think we just don't know. I mean everybody is learning more about the Delta variant.

What I am confident about, though, is we have safety protocols that we know when we follow, people are safe, and that's why we instituted the mask -- reinstituted the mask requirement in the U.S., and some of our other operations around the world, we never stopped wearing masks. So we think we've learned a lot.

We're sharing our lessons learned across the globe with the supply base deep into the tiered suppliers, so they have the benefit that we think will help us keep the supply coming. But I think you've heard several other within industry and across, just there are unknowns with the Delta variant, and that's why we're being appropriately cautious.

But we do think this is a very different situation than it was 15 months ago because we know how to keep people safe in our operations..

Got it, all right. And then a lot of companies are talking about -- a lot of automakers are talking about sort of how the world may change coming out of this in terms of how you stock inventory and maybe pushing more online.

I mean any update on your view on sort of what is the right level of inventory coming out of this to restock to? And whether -- I think you're already selling a lot of vehicles like the Hummer online.

I mean, is that going to be even a greater part of your strategy going forward, too?.

Absolutely. We've learned a lot and big credit to our dealers. We've also given them tools that give them insight into the pipeline, also using data analytics so they order the most optimal products that are going to move fast. So I'm not going to give you a specific number because it's going to depend by segment.

But we believe that the optimized inventory level is higher than what it is today. But I think we'd all agree, it's pretty low but much lower than it has been with our historical levels. And it's because of everything we've learned in the way we are approaching selling online, taking orders in some cases.

But also, we know there's a customer who wants to go to the dealer and drive off with a new vehicle. We want to service them as well. And that's why I think some of the tools we've put in place to help our dealers have the vehicles that they want is going to be very important.

So again, I think we're going to be much more efficient, and it will be a true partnership with our dealers as we optimize on both ends..

Your next question comes from the line of Mark Delaney with Goldman Sachs..

Super Cruise is something that's come up on a couple of earnings calls consecutively now, and it's something that's pretty interesting and I think an opportunity not only to have an add-on sale at the time of purchase but also a potential subscription feature, longer term. So maybe you could talk about the implications of deploying Super Cruise.

I think '22 models by the end of 2023 is the plan.

And what sort of EBITDA implications there can be as you start deploying Super Cruise?.

Yes. Well, I appreciate your excitement for Super Cruise. As I think we've shared in the past, over, I think, it's between 80% and 85% of those who have experienced Super Cruise say they either must have it on their next vehicle or strongly desire it.

And I'm excited to have more people experience Super Cruise, and we'll provide that opportunity at our Investor Day. So I do think there's a huge opportunity. We've also taken the cost down of what it takes to implement Super Cruise on a vehicle as we're expanding its capabilities, the number of roads that are mapped to be able to leverage it.

And so this does give us an opportunity, either to sell it or to provide it as a vehicle subscription service that I think is going to be significant.

And overall, I'm not going to break out Super Cruise specifically, but I will tell you when we are in our Investor Day, we will provide the opportunity we see broadly in connected vehicle services and subscriptions and then vehicle-related services like OnStar Insurance that is doing quite well as we expand that.

So I think there's a huge opportunity in this service space based on the connected vehicle that gives us a very different margin profile and a true growth opportunity. And we'll frame that out for you in October..

That's helpful. And for my follow-up question, the company guided to some incremental investment in the second half of this year related to the $35 billion of total investment planned for EVs and AVs.

And so should investors think about the run rate you're seeing now in the second half as fully reflective of the added cost for this program? Or should we be anticipating some additional step-up as you go into next year? And if so, can you help to frame that?.

So we increased from $27 billion to $35 billion over the '20 to '25 time frame. And I think that represents the acceleration of not only EVs, and we talked about a couple of new vehicles that we have out. We have obviously more coming, but then also our confidence in EV growth that we announced the 2 additional battery cell plants.

So when you talk about a run rate from a capital perspective, I think we announced we're in the $9 billion to, what was it, $9.5 billion -- $9 billion to $10 billion this year. And I think we see similar ranges as we move forward. But again, in this acceleration period getting to EVs and then we expect that will come back down..

Your next question comes from the line of Adam Jonas with Morgan Stanley..

Mary, so insurance, you mentioned it, but I would love if you could give us a bit more.

Where are you rolling it out? Anything at all on take rate? Because I'm thinking, and correct me if I'm wrong, Mary, that when you connect the car and the OTA and the insights coming off the car, you're able to engage a consumer directly on insurance services through the car pretty much, right, as the car as both the actuary and the agent.

Is that correct?.

Yes, Adam. First of all, hello there. And yes, I do think that you're thinking about it correctly. We can engage directly because you can't take ownership of vehicle....

Mary? Hello?.

Yes.

Can you hear me?.

Sorry. Yes..

Okay, sorry. So as we look at insurance, first of all, it's going well. We're now in about 20 states. The ability to pull information off the vehicle to help inform rates is actually exceeding our expectations. And so -- and we're expanding. And as you mentioned, we -- a person cannot buy a vehicle without having proof of insurance.

So we are right there able to offer it and not have to do a lot of the advertising that other insurance companies have to do. So we think we're well situated to disrupt auto insurance, and I'm very pleased with the way our rollout is progressing and we'll share more in October..

Great. Just one follow-up, again, on insurance.

I think it's so interesting, where does that leave the dealer? Dealers make like almost $1,000 originating these policies, and I'm wondering if this opportunity to go direct or engage direct can help save -- can get some inefficiencies out and, I'd say, obviate the need to write this $1,000 check to a dealer that's just not necessary when the car is doing the work..

Adam, I'm not sure where you're getting this $1,000 check that's being written to the dealers. We do have some dealers that provide insurance companies in. But again, I would look at this as totally disrupting the way insurance is delivered to the customer.

And again, I'm not -- I don't think the information on the $1,000 check written to the dealer is correct..

Yes. Mary, this is Dan. Maybe I'll interject. The F&I that the dealer earns is more extended warranties gap, other traditional point-of-sale products. That F&I income typically doesn't include any commissions on private passenger insurance that we're talking about for OnStar. So this is totally separate than what the dealer already earns..

Your next question comes from the line of Itay Michaeli with Citi..

Just to go back to the second half, just a couple of clarifications. First, are you able to share what you think your U.S.

dealer inventory might come in by year-end but perhaps a range, just given the downtime in the second half? And then just to clarify on the pricing assumption for the second half, are you assuming some moderation versus H1 or maybe some other assumption there?.

Itay, I'll take that. So we are expecting inventory to decline a little bit further off of these levels, just given where we are in production and the strong demand environment. And as we said in the earlier comments, I think pricing remains strong, both in terms of incentives but also in terms of the rich mix that customers are demanding right now.

And we don't see anything in the short-run horizon that, that is going to disrupt that. And certainly, the, I think, lower inventories are going to support kind of the current pricing environment in the near term..

Great, that's helpful. And then my follow-up, maybe turning to Cruise. I think the release mentioned that they're making excellent progress towards commercializing it. Any additional call you can share in terms of the progress they've made? I think that the last data we all received were the California disengagement reports.

Any additional color you can share in terms of the progress to date there?.

We will share more at our Investor Day, and I'm excited to do that. But I would say I am having conversations with Dan on a weekly basis, and we continue to see very strong progress in the technology that they're doing and also readying the company from a commercialization perspective.

And so again, I'll say no more than I reiterate, this is quarters away, not years away, and the technology is really progressing well..

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank..

I was hoping if you can give us a little bit more color around the expected cadence of the production outlook that's contemplated in your guidance. So North America production down about 100,000 units in the second half.

Is it going to be -- how should we think about that sequentially versus sort of what we've seen in the second quarter? I think that some of the third-party estimates out there, at least for the industry, were assuming that the fourth quarter would come back to more normalized levels of industry production.

Is that your view as well or are you assuming that some of the disruptions could continue for the rest of the year?.

So Emmanuel, we -- I would say that it's -- the production rates are skewed higher as we get through the year.

Some of the near-term issues that we've talked about with the short-term shutdowns of the truck plants and what we keep reiterating about semiconductors, I think it's a little bit of a different challenge than what we've seen before in just terms of broad semiconductor supply, it's about throughput, et cetera.

So we have continued to believe that as we get into the fourth quarter, some of the underlying semiconductor challenges are going to start to abate. We don't know that it will be fully resolved then, but we're being cautious and we're seeing signs for improvement.

And as we've said, you can see light at the end of the tunnel as we're getting towards that. So production rates naturally be higher in the fourth quarter than the third..

Okay. And then another math question, if I may, around the second half guidance. I'm struggling to reconcile to the high end of your EBIT range. I think you did $8.5 billion of EBIT in the first half, second half implied guidance is $3 billion to $5 billion.

But then you described sequential headwinds worth at least $3.5 billion and then also in volume, which could be another $1 billion headwind at least.

So I guess, are there any positive offsets in that sequential walk that I should consider? Under what conditions could GM earn $5 billion in the second half?.

Well, I think as we highlighted, and I appreciate you going through that table, because as we highlighted the headwinds and that's in the investor deck, it's a $3.5 billion to $4.5 billion range.

And I think to some of the earlier questions, if you take the ex-recall run rate off of that, the $9.7 billion , so you get to about the $5 billion second half to maybe a little bit higher than that. But that's where the production variability comes in and why we've been intentional about widening the range on that.

So what I would say is the upside could be the further improvement in consumer strength that we can capitalize on. And then is there an opportunity to outproduce the assumptions that are in our guidance? And that's going to be a function primarily of chip availability and COVID. So I just want to emphasize the caution that we're putting into that.

And if the environment abates and this resolves quickly, then I would expect that we would outperform the midpoint..

Your next question comes from the line of Ryan Brinkman with JPMorgan..

My question, which is on inflation. I realized you are facing and working to offset the impact of higher commodity costs, which are expected to be a considerable headwind in the back half, both year-over-year and sequentially versus the first half.

But taking a step back, how do you think the company is positioned overall for inflation, including if it were to prove sustained or to track materially stronger? Do you think there's a scenario where you could actually stand to benefit from inflation applying broadly to your revenue but more selectively to your cost structure? So for example, like D&A won't go up medium term from inflation but instead only as you replace assets over time, right, and your substantial hourly labor costs in the U.S.

were, in 2019, already agreed upon through 2023, so you shouldn't be seeing the same pressure from wage inflation that other companies are likely to see. Given all these, I'm curious if inflation could actually help margin, at least near to medium term as opposed to hurt margin.

Can you help us think through this dynamic?.

Well, I think you referenced a handful of areas where we won't be impacted by inflation. But I also think you have to look at, overall, the customer's ability to pay and what they're going to allocate from a discretionary perspective. And so I think that tends to put a cap on it.

I would say we have an extremely strong portfolio out now and more very strong products coming. But I think you do have to always keep in mind overall affordability, and I think that might tap down any of that disproportionate opportunity for our industry..

That's helpful. And then just as a follow-up, could you remind us of what hedging strategies you may have or not have in place with regard to certain commodities, in particular, platinum group metals? I'm not advocating one approach over another. I realize one of your crosstown rivals has had a checkered experience there.

But just curious what your approach is to this risk, and if you've changed your approach at all, given the current environment.

And then can you maybe talk to about like how your commodity exposures or risk could change over time as you shift away from internal combustion engines with catalytic converters toward battery electric vehicles with their own set of different commodity exposures?.

So I'll take the second half and I'll let Paul answer the specific on the hedging.

But I think if you look to the comments that I made that we're looking not only for semiconductors but for other critical minerals and other critical materials that we need for our battery strategy to have long-term supply, whether it's investment that we make, partnerships we do or supply agreements.

And so I think when you look at that, along with the fact that some of these material or precious metals, we're looking to reduce our need for them with the technology, specifically the chemistry in the battery. So I think we're looking to manage that very carefully as we accelerate the move to EVs. And then for the hedge, I'll turn to you, Paul..

Yes. I mean, on the hedging, we use some options just mainly as sort of a cheaper insurance against large moves. We also just have some embedded price sharing mechanisms in the supply chain agreements themselves, whether it's averaging, et cetera. So we try to manage that holistically.

I don't think we're overreacting to that because, look, materials inflation is just an underlying cost to the business, and we have to make sure that we can take the steps necessary. So for example, the engineering team is always looking at ways to reduce material spend, drive efficiencies into the business, et cetera.

And that's the most basic, most important hedge because it results in a permanent savings within the business. So I don't want to rely too much on sort of financial derivatives to delay or defer a problem that we need to be solving over the long term anyway..

Your next question comes from the line of John Murphy with Bank of America..

This is Aileen Smith on for John. I appreciate you getting us in here at the last minute. I wanted to follow up, I think, to Rod's question on the cost side of what current cost dynamics we should be assuming as persisting into next year versus resolving.

We've heard from some suppliers this quarter that they've been somewhat successful in securing spot purchases of semiconductors so as not to impact their automaker customers, and in those cases, that automakers have been fairly receptive to absorbing or sharing that excess cost on semis.

Is this consistent with how you've been working with your suppliers in taking on a bit more of that cost? And do you have any estimate what that might have been in the quarter in terms of incremental material or component costs? Just trying to get a sense of how these costs might abate at the same time that volumes come back and you get the benefit of operating leverage..

Well, I certainly think that there are short-term supply and demand implications out there to everything that's going on, and that doesn't surprise me about the spot market as well. But what I would say is that the -- when you look at the overall cost of the vehicle, the chips are a small, small piece of that.

So I don't see it as anything very material for us.

And I don't want to get into any details of how we're managing tactically to get through this other than to say that the partnership with our supply chain up and down through all of our tiers and our global supply chain function as well as our engineering and manufacturing, I believe we're the best in the business at this.

And you see that in the production results and the ability for us to keep the plants running as successful as we have throughout the year..

Okay, that's helpful. And then I wanted to follow up on Mary's answer to an earlier question on the EV and AV spending target of $35 billion.

First, as a clarification, is it fair to pull out our rulers when we look at that pie chart on Slide 5 and say 1/3 of it appears to be R&D and engineering expenses versus 2/3 maybe more CapEx-related? And more specifically, as we compare the $35 billion target to the prior $27 billion one that was as of last year, that increase is also largely a function of CapEx towards cell and vehicle plants rather than what you see as being any major incremental investment on R&D, whether on the technology or product side to commercialize EVs and AVs..

No, I wouldn't say that. I think we increased it and we said it covers both capital and engineering. And it probably wouldn't -- I mean, it's -- I would say the chart is directionally correct. I think you shouldn't pull out your ruler.

But we're moving all aspects of it for whether it's the battery plants that we've talked about, capital to increase the offerings that we'll have and then actual engineering on the products themselves, along with continuing to support Cruise. So it's -- the chart is accurate in how we're spending across all of those..

I'd now like to turn the call over to Mary Barra for closing comments. ..

Well, thanks, everybody. We really appreciate your questions and for participating today.

I want to step back and say, when we look at our team's dedication to everything that we have been working to offset and accelerate, we are building a stronger and a better future for our company and for our stakeholders and for the communities in which we live and work.

By exceeding our business targets, we have the resources to move more quickly toward creating an all-EV future and all-AV future.

And when you look at the combination of our Ultium battery platforms, our Hydrotec platforms for fuel cells, as well as our software and platform that we've named Ultifi, we really think that we have a strategy that will allow us to drive higher revenue, operating efficiencies and improved and outstanding customer experience.

When you look at Ultium, it does deliver better performance range, and then it gives us flexibility and scalability that is going to allow us to accelerate the EVs that we're going to put into market across the entire portfolio.

And the work that we'll share more of what we're doing to continue to improve battery costs will also allow us to open up into not only more segments but also markets outside the auto industry.

And then when you think about, from a software perspective, the strength that we have of OnStar, our ability to do over-the-year updates and the work that we have from a processing power perspective in the vehicle as well as the cybersecurity perspective, we think we have an ecosystem that will increase and build on the leading loyalty that we have will allow us to provide unmatched personalization.

We'll expand features, like we've already talked about, with Super Cruise and really create new connected services. So I couldn't be more excited about the future of the business and the opportunities that we have for growth and margin expansion when we look at all these different businesses.

So we look forward to hosting you in October, and we truly believe you will experience this future for yourselves. So thanks, everybody, again, for your time, and please stay safe..

That concludes the conference call for today. Thank you for joining..