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NEW YORK (CNN/Money) -
Embattled automaker General Motors Corp. skidded deep into red ink again Wednesday, reporting second quarter results far worse than Wall Street forecasts despite strong sales in the period.
The world's No. 1 automaker lost $318 million, or 56 cents a share, in the second quarter, excluding special items, compared with earnings of $1.4 billion, or $2.42 a share, a year earlier.
Analysts surveyed by earnings tracker First Call had expected earnings to fall to a 3 cents a share profit in the period.
Including special items the company's net loss was $286 million, or 51 cents a share.
The loss followed a first quarter loss of $839 million, or $1.48 a share, excluding items. The company has not given any guidance of when it will return to profitability.
Shares of GM (down $0.57 to $36.26, Research), a component of the Dow Jones industrial average, lost as much as $1.52, or 4 percent, in morning trading before recovering some but not all of those losses by midday.
Selling more cars for less money
The company said it increased global market share to 15.2 percent from 14.7 percent a year earlier, as its vaunted "employee discount" sales program resulted in increased U.S. June sales.
The number of vehicles sold in the quarter rose to 2.6 million from 2.4 million a year earlier. But much of those increased sales came out of existing inventories, as GM worked to trim the supply of 2005 models in the pipeline.
Even as sales increased, the number of vehicles built in the quarter fell to 2.3 million from 2.4 million a year. The drop in production was one of the key factors leading to the loss, Chief Financial Officer John Devine told investors. The lower production resulted in North American plants operating under capacity, and less profitably.
He said that if the plants had stayed busy enough to keep inventory levels unchanged, then GM's North American auto unit wold have broken even in the quarter.
"But that was not an option for us," he said, saying that GM needed to reduce the supply of 2005 model vehicles.
Even with the rise in units sold, revenue from auto sales fell by more than $1 billion to $40.2 billion. Still, that beat First Call's revenue forecast of $38.9 billion. Total revenue at the company fell to $48.5 billion from $49.3 billion as revenue from its finance arm, GMAC, improved.
Bernstein analyst Brian Johnson, who forecast the 56-cent-a-share loss that GM reported, said he thinks the consensus estimate of a narrow profit had not taken into account the sharp drop in production of profitable vehicles such as large sport/utility vehicles and other light trucks.
"The revenue side is going better than it was six months ago," Johnson said. "But they need to address the costs in order to live with a new lower revenue amount. Even while revenue stabilized, it stabilized at a lower level."
The company's core North American auto operations lost $1.2 billion, compared with earnings of $355 million in the second quarter a year ago. The company saw its European auto operations return to profitability for the first time in five years. Profits narrowed in its Asia Pacific region, although that area had the best results of any auto unit at the company, earning $176 million. Profits improved in the company's Latin America-Africa-Middle East region.
While the overseas performance and results at GMAC were seen as a positive, it wasn't enough to give analysts much to cheer about.
"They've got to do some of the same things in North America they've been doing in Europe – cutting the hell out of capacity and bringing in some hot new models. That's easier said than done," said David Healy, analyst with Burnham Securities. "Things will get worse there before they get better."
Devine characterized the employee-pricing sales program as "probably the most successful incentive program we've run," and said it had worked better than expected. But the success of the program only demonstrated a larger problem for the company, said University of Maryland professor Peter Morici.
"GM's 'employee discount' promotion established GM can sell vehicles if it sets prices at what consumers are willing to pay and makes those prices clear," said Morici, a harsh critic of the company's management. "Unfortunately, the public is not willing to pay what it costs to make GM cars and trucks."
Chairman and CEO Rick Wagoner said the company was pleased by sales performance, but conceded that the company's announced efforts to trim costs, especially health care expenses for employees and retirees, fell short.
"We are not yet making the progress we need on the cost side of the business," he said.
The company is making an effort to win changes in health care benefits from the United Auto Workers, which has thus far resisted management efforts to reopen the contract that runs through fall of 2007.
Merrill Lynch analyst John Casesa said Wednesday's worse than expected results increase pressure on the union to agree to changes, but it's still an uphill fight for GM.
"The UAW doesn't want to solve GM's cost problem if management can't solve its revenue problem," Casesa wrote in a note to clients Wednesday.
Asked by reporters to characterize how the talks are going, Devine responded, "I don't want to put any color on any union discussions. I can't say anything. I'll tell you when we know something."
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