GM posts higher profit, lowers outlook amid cost of metals
Auto maker says commodity expenditures were about $300M higher than a year earlier
Fallout from U.S. steel and aluminum tariffs hit General Motors Co.’s second-quarter earnings, and the nation’s largest auto maker on Wednesday lowered its profit outlook for 2018, saying it expects commodity price pressures to continue.
GM said raw-material costs— primarily for steel and aluminum—have increased well beyond what the company expected when it set its profit guidance at the beginning of the year. A combination of higher commodity prices and currency devaluation in Argentina and Brazil will result in a hit of about $1 billion more than what the company originally forecast.
GM reduced its 2018 earnings-per-share forecast to $6, from a range of $6.30-$6.60, lower than analysts’ forecast of $6.41. Shares fell about 6% in early trading, to $37.00.
“While we were expecting an end to earnings resilience, this is slightly worse than feared” for the quarter and 2018 outlook, Jefferies analysts said in a client note.
The downgraded profit outlook signals a likely end to GM’s three-year string of record adjusted-operating profits, which totaled $12.8 billion in 2017. GM originally had forecast this year’s bottom line to be in the same range as last year’s.
The rising costs and trouble in South America are blemishes on an otherwise healthy environment for the auto sector. The strong economy and job market have helped U.S. vehicle sales remain near record levels, while GM and other auto makers have benefited from a consumer shift toward larger—and more profitable—rides like pickup trucks and sport-utility vehicles.
But GM’s higher commodity costs took a $300 million bite out of its earnings in the second quarter, compared with a year earlier. GM finance chief Chuck Stevens didn’t directly blame the tariffs but said the increase was
“driven by a variety of market forces.”
GM buys the vast majority of its steel from domestic producers. But U.S. steel prices have increased in reaction to the 25% tariff that the Trump administration announced in March, analysts say.
They took effect June 1 along with a 10% duty on aluminum imports.
Steel accounts for about 53% of the material in a typical automobile and aluminum 11%, according to consultancy Ducker Worldwide.
Overall, GM’s second-quarter net income rose 44% to $2.4 billion
from a year earlier, when GM incurred hefty costs related to the company’s divestiture of its European business. GM’s adjusted operating profit fell 13% to $3.2 billion.
GM said second-quarter operating profit excluding one-time factors was $1.81 per share, surpassing Wall Street expectations of $1.78 per a share.
Mr. Stevens said GM will work to offset the raw-materials inflation in the second half of the year.
The rising costs especially hurt the North American business— GM’s biggest moneymaker— where operating profit dropped
23%, to $2.7 billion.
Mr. Stevens said it is too soon to determine how a 25% tariff on vehicles and auto parts might affect the company. The U.S. Commerce Department at the request of the White House is investigating whether the tariffs could be used on national-security grounds.
GM imported about 1 million of the vehicles it sold in the U.S. in 2017, roughly one-third of its total.
“It’s very complicated right now,” Mr. Stevens said.
GM was more pointed last month in written comments to the U.S. Commerce Department, when it voiced strong opposition to the Trump administration’s proposed tariffs on auto imports. The company warned that “broad-brush trade barriers” on vehicles and auto parts would raise its costs at home and abroad, lead to higher vehicle prices for consumers and ultimately cost U.S. jobs.
Bright spots during the second quarter included the company’s in-house lender, GM Financial, which posted a record $536 million operating profit. GM also posted a $536 million operating profit in China, where it sold a stronger mix of pricey Cadillacs and SUVs.