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General Motors Corporation. (NYSE:GM)

Q2 2008 Global Sales Conference Call

July 23 2008 09:00 am ET

Executives

Mike DiGiovanni - Executive Director of Global Markets and Industry Analysis

Jonathan Browning - VP Global Sales Service and Marketing

Analysts

Brian Johnson - Lehman Brothers

Patrick Archambault - Goldman Sachs

John Murphy - Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GM second quarter Global Sales Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded Wednesday, July 23rd, 2008.

I would now like to turn the conference over to Mike DiGiovanni, Executive Director of Global Markets and Industry Analysis. Please go ahead, sir.

Mike DiGiovanni

Thank you, operator. Good morning, good afternoon, and good evening, from wherever you are joining us on this call. Joining me today is Jonathan Browning, Vice President Global Sales, Service, and Marketing. John recently crossed the pond after John Middlebrook retired. So we are pleased to have John be part of this call going forward, in terms of bringing the wealth of marketing experience that he has. John.

Jonathan Browning

Thanks Mike. Good morning, good afternoon, good evening, everybody. It is a pleasure to join you on this call and look forward to the conversation.

Mike DiGiovanni

Thanks, John. Today we are going to review GM's second quarter 2008 Global Sales performance. The press release and data sheet we issued a few minutes ago has all the brand and regional specific data for your reference. As is customary on this call, we will have a brief overview of the global market, and macroeconomic factors, and then we will take a look at sales performances after the brands in each of the regions.

After our remarks, we will open the call to questions, first from analysts, and then from the media, who are joining us today. The operator will give you instructions on how we will facilitate those questions. Without further introduction, let's look at the global vehicle market economy.

Overall, the global market remains very strong about 18.5 million vehicles were sold in Q2 of 2008, which is a growth of about 1.6% compared with 2007. We anticipate the market to hit about 72 million vehicles sold in 2008, which would represent growth of about 2.5%. Not surprisingly, most of the growth is in the brick market, as we call them, Brazil, Russia, India and China, where Q2 industry volume was 4.7 million vehicles, which was up nearly 20% compared with a year ago.

Strong economic growth and rapid urbanization in China were the drivers there. Q2 industry sales in China totaled nearly 2.5 million units, which were up 14% from last year, to set a new record for the quarter. High commodity prices and easy credit helped Russia and Brazil to set new sales record as well. Russia sales of 920,000 vehicles were up 34%, Brazil sales of 759,000 increased 29%. Strong economic growth in India boosted sales in that country, and Q2 reported sales of 509,000 vehicles, or up almost 13%.

So to recap, the emerging markets, Russia up 34%, Brazil up 29%, China up 14%, and India up 13%. Conversely three of the largest and more mature markets, Japan, Western Europe, and US, experienced volume declines in Q2 2008, and the short-term outlook remained challenging. In the US the headwinds are well known, including gas prices, housing weakness, and the subprime mortgage issues, and very importantly, more recently declining consumer confidence.

In Japan as we saw in Q1 it is the result of weak domestic demand, near record low consumer confidence and long-term issue of an aging population, which has caused vehicle sales to drop to lowest levels since 1982. In Western Europe domestic demand was weak as well. Combined these three mature markets which still account for more than half of all global vehicle sales saw industry sales drop 700,000 vehicles or 7% in the second quarter.

In summary, while the verge in trends exist between mature and emerging markets, the global markets of cars and trucks remained strong, and we anticipated growth at 2.5% in 2008. We expect about 1.7 million more vehicles to be sold around the world in 2008, than in 2007, resulting in a new global sales record of 72 million units. This will be the seventh-consecutive record year.

Certainly the biggest risk is the US economic downturn and potential spill over effects on the global economy. The growth momentum in emerging markets is still strong, and ample upside potential remains. For GM, we also benefited from the growth in emerging markets. However, there was not quite enough volume in the second quarter in these emerging markets to offset weakness in North America, more specifically, in the US market. In the second quarter GM sold 2.28 million vehicles, a decline of 5% compared with a year ago, when we sold 2.40 million cars and trucks.

GM sales outside of North American region, however, grew 10%. They were up 116,000 vehicles outside of North America. Our total second quarter sales reflected continuing economic pressures and labor disruptions in the US market, which pushed North America sales down 236,000 vehicles compared with 2007. So a total of 1.5 million vehicles or 65% of all GM vehicles purchased, were delivered in countries outside the United States, a reflection of the continued growth in the emerging markets, combined with softer demand in North America.

For the first half of the year GM sold 4.54 million vehicles, keeping us on track to exceed 9 million vehicles for the fourth-consecutive year. Sales outside of North America grew by 209,000 vehicles in the first half of 2008. On year-over-year basis GM total global sales were down 3% for the first six months of 2008, primarily reflecting the economic pressures I mentioned and labor disruptions, as well as, planned fleet sale reductions in the US.

Let's take a look at some of how our brands performed. Chevrolet continued its strong growth internationally in the second quarter, with sales growth in Europe, Asia Pacific, and Latin America, Middle East, nearly able to offset the sharp decline in North America. Chevrolet sales globally totaled over 1.1 million units, nearly half of GM's total volume.

Chevrolet sales in Asia Pacific, the second largest region, grew 27% compared with the second quarter of a year ago. Chevrolet sales in China were up 33% and in India they were up 9%, which powered much of this growth. The Chevrolet brand was recently introduced in Vietnam, a new market with strong growth. In the Latin America, Africa and Middle East region a traditional Chevrolet strong hold, sales grew 18% compared with the second quarter of 2007.

Chevrolet sales performance in Brazil largely accounted for most of its growth. Chevrolet sales in Europe also contributed to the brands solid second quarter results growing 19%. Chevrolet sales in North America were down 16%, however, although demand for the new midsized Malibu sedan continues to be strong. We have scheduled additional Malibu and Cobalt production to meet demand for these fuel efficient vehicles. Sales of Cadillac outside North America grew 14% in the second quarter, supported by strong growth of the brand in Latin America, Africa and Middle East, which was up 28%, Asia Pacific up 11%, and Europe, which was up 7%.

So in summary, we are setting records in three of our four regions, and our volume brand Chevrolet is seeing strong growth in the Asia Pacific, Europe, and Latin America, Africa and Middle East regions. On a year-over-year basis GM total global sales were down 3% for the first six months of 2008.

North America and more specifically, the US market, continues to be challenging because of the headwinds we discussed. We are closely monitoring the situation and managing accordingly. The production changes Rick Wagoner announced in early June and its comments last week, reflects how we are aggressively addressing the shifting customer demand.

So with that, I would like to turn the call back over to the operator, who will give you our listeners a chance to ask questions. Operator.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now proceed with the analyst portion of the question answer session. (Operator Instructions). Our first question comes from the line of Brian Johnson from Lehman Brothers. Please proceed with your question.

Brian Johnson - Lehman Brothers

Good morning.

Mike DiGiovanni

Hi, Brian.

Brian Johnson - Lehman Brothers

Good morning. Can you give us a sense of what you are looking of the sales pace through the quarter in western and Eastern Europe, and maybe different between the two? And then, how in your team at Opel and you are subsidiaries there are thinking about the second half of the year and into '09?

Mike DiGiovanni

I am going to let John Browning take that one, since he is just come from there.

Jonathan Browning

I maybe look at the full first half of the year in total and I think the way Mike characterized the difference between the mature and the growth markets globally, very much applies in western and central and Eastern Europe. If you look at just Western Europe, the total industry was off by around 3% for the first half of the year, and you can trough that to Central and Eastern Europe that was up by 25%.

So a very different picture in Western Europe to Central and Eastern Europe and within Central and Eastern Europe -- Russia, and the other former Soviet Union markets were very much driving that regional growth with a growth of over 30% in Eastern Europe, so very much a microcosm of the global picture between, the Western and Central, Eastern European markets.

Brian Johnson - Lehman Brothers

The next question is, as we look to second half is Western Europe likely to maintain minus 3% pace or many of the clients I talked are worried we could see declines in Western Europe similar to the US and Japan?

Jonathan Browning

I mean, there are some common themes across Western Europe in terms of consumer confidence, some of the macroeconomic factors, some of the pressures that we see here in the North American market. However, there are also some specific local issues, when you look at the Western European market you see certainly the Spanish market and the Italian market are feeling the most pressure.

You see some small amount of growth in Germany. You see the UK pretty much flat. So we tend to talk about Western Europe as a block. There is some difference between those markets. And I would say we do not see major change in that profile of market-by-market development as we go through the balance of the year.

Mike DiGiovanni

And just to echo what John said, in terms of the economic outlook in the second half for Western Europe. There is some fundamental differences between the Western Europe and what is going on in the United States, and while there are housing issues in certain parts of Western Europe, like Spain, UK. It did not really reach as deep into the subprime market problems like we had in the US. That is one big difference that we are obviously, working our way through here in the US that caused us some liquidity concerns in the banking system.

Second thing is oil prices, and while oil prices have risen strongly in euros, they have not risen as strongly as they have in the US, and it is an economy that is more accustomed to higher energy prices. So when we look at it from an economic standpoint, we do see the weakening John mentioned. We do not see the decline being as aggressive, as it is here in the US.

Brian Johnson - Lehman Brothers

Okay. I assume Eastern Europe is what is the Chevy sales split between east and west?

Mike DiGiovanni

If you look at Europe in total for the first half of the year, Chevrolet sold for the first time over a quarter million units in the first half of the year. So the first half sales were close to 270,000 units for the first half of the year. Of those 180,000 were in Central and Eastern Europe.

Brian Johnson - Lehman Brothers

Okay. Thank you.

Operator

At this time, we welcome all analyst and media to queue up for questions. (Operator Instructions). Our next question comes from the line of Patrick Archambault from Goldman Sachs. Please proceed with your question.

Patrick Archambault - Goldman Sachs

Hi. Yes, good morning.

Mike DiGiovanni

Good morning, Patrick.

Patrick Archambault - Goldman Sachs

I guess two questions, number one, is there any color you can provide on the industry so far, how things have been trending in July, and now that you have said, you yourselves were tracking close to last month. However, would be curious just to get your thoughts on the broader market?

And then secondly, wanted to see if there was any kind of anecdotal feedback you could provide as to the impact of declining oil prices on spending psychology. I realize that there was a bit of lag and how that translates to potential decline in gas. However, wanted to see if that was having any impact on customer buying activity at all?

Mike DiGiovanni

Yes, in terms of your first question in July, we are continuing to see a challenging month as we saw in June. The total vehicle sales in the US market in June came in at seasonally just annual rate of about 13.9 million. So we are seeing – it is hard to predict where it is going to come out as you know, in the last ten days when nearly half of the sales are made, is really where we really finally determine where the market comes in. So we are flying a little bit here blind at this point.

However, early indications to the first two-thirds of the month are that it is going to be another challenging month. We look at part of this as I mentioned in the US Sales Call last month, we are estimating about 200,000 to 300,000 of that challenge and seasonally just the annual rate right now. That is the conservative numbers by the way, could be higher. It is due to just lack of availability of smaller vehicles, particularly compacted small vehicles and to some extent midsized vehicles.

So it is a little but deceiving right now, because we know that as we move into the second half of the year, our sales and announcements we’ve made on adding, additional production, for example in on Cobalt and Malibu, and we know our competitors are doing the same thing. Just the fact you can have more supply availability of what consumers want to buy in a high-fuel price world, will increase the seasonally adjusted annual rate.

That said our latest outlook for the US economy for total vehicle sales is in the mid to upper-mid $14 million range. I mean we’ve adjusted our outlook, and the reason for that as I have been stressing overtime has been oil prices. That was the big thing that nobody saw coming back in January. The increase has been dramatic, as you all know, and that is hurt mix, caused some of the supply disruptions, I mentioned. And has obviously, contributed to weaker consumer confidence along with the issues around housing, where the consumer has been affected as well.

So these things have all come together. That said, as we move into the second half of the year, and we look -- again we’ve been looking at this data very closely, we continue to believe about the first quarter of 2009 we are going to reach the trough of the housing crisis. We are going to start seeing housing sales, housing starts, start to bottom out and turn positive as we move into '09. It is a very important development.

Secondly, to your point on oil prices, this is a point I have been making, the most important thing with oil prices right now is stability. That they just, consumers need to see them not continue to go up, that they at least stabilize. And as you said they have fallen back here in recent days, which is nice. However, it is most important that they stay at least stable in this $130 a barrel range. If they can do that, people start to adjust to it. It reduces fear of oil prices continuing to rise.

So this has been a very positive development that oil prices really have stayed in this 127, 140-ish, low-140ish range now for a couple of month. It is the first sign of stability we’ve seen in a long time, and that is a positive development. So we think if that can remain so, and as the housing crisis reaches its trough, we expect in the second half of the year it'll be not a great gang buster growth. We see gradual improvement, than we see as we move into '09 some more improvement. However, clearly, oil prices were the tipping point that set this whole thing off in my opinion. Thanks.

Jonathan Browning

And just to add a comment to that as well, Mike. I mean the qualitative data that we’ve not just, obviously in terms of the quantity of data on purchase patterns, but also vehicle usage. The qualitative input we’ve from around the organization shows that people are changing their vehicle usage behavior with the current environment. And we definitely see lower mileage being driven, and we see sectors and segments like the pickup segment a greater impact than say in the low partition, whereas the compact vehicles. So it is not just about consumer behavior and how they change purchase patterns, but also in terms of usage patterns. So there is clearly a shift in terms of consumer behavior responding to some of these factors at the moment.

Mike DiGiovanni

Yes, it is a really good point, John, and it is really a global phenomena. China lifting its subsidies, India, Malaysia, some of these countries really already had an effect on reducing demand, as people have to pay more for oil in these countries. And that is I think mitigated some of the increase in oil prices recently, and as John mentioned people are driving less clearly because of that, US, China, other places it is starting to bite. So hopefully, we get the stability I mentioned, because I think that is the most important thing right now. People see the price stays in some finite range they start to feel better about the future.

Patrick Archambault - Goldman Sachs

And I guess as a quick follow-up. Can you clarify just the incentive package that you have had on for most of the month? I think you end ended last month with fairly big 72-hour sale, which was extended through the July fourth weekend. And then, it seemed just from reading some comments on it I think you had changed it to require a trade-in and then changed it so that you did not. And I just wanted to get a better sense of what the incentive package is, if it is the same as what we saw at the end of June that is still on right now?

Mike DiGiovanni

Patrick, I probably not going to get into that one here today, that is probably material for the sales call, we will do at the end of July. So I really do not want to comment on that right now.

Patrick Archambault - Goldman Sachs

Okay, great. That is all I have.

Mike DiGiovanni

Thank you.

Patrick Archambault - Goldman Sachs

Thanks, guys.

Operator

Our next question comes from the line of John Murphy from Merrill Lynch. Please proceed with your question.

John Murphy - Merrill Lynch

Good morning, guys.

Mike DiGiovanni

Good morning, John.

John Murphy - Merrill Lynch

Mike, give me some real interesting comments about the success of Cadillac and Chevy overseas, and clearly, those are two strong brands for you. I was just wondering if there could potentially be some brand consolidation, and rationalization overseas. I know you stated very clearly that you believe that your brands in the US are intact other than the HUMMER. However, is there the potential for this brand consolidation overseas, and what are the differing hurdles? Because my understanding is that the relationship with the dealers is very different overseas, I mean might not that be as bigger hurdle in this rationalization process as it might be in the US?

Mike DiGiovanni

I am going to let John comment. However, my only segway will be that we are seeing strong growth overseas because of use of our brands in places like China, Russia, in using multiple brands. However, I will let you comment more, John.

Jonathan Browning

Sure. I think it is clearly the discussion the review that we are undertaking on HUMMER is a global one. So let me put HUMMER to one side as a subject that applies around the globe, not just in North America. If you put HUMMER to one side, the brand portfolios that we’ve in each of the other regions are slightly different. However, certainly do not offer the -- I would say the complexity and the variety of the brand footprint that we’ve in North America. So we start from a very different position. And if I just summarize very quickly.

In Europe we essentially run with four, five brand portfolio with Chevrolet, Opel/Vauxhll, Saab, Cadillac, and on HUMMER. For Latin America very focused around the Chevrolet brand, a massive majority of the business is the Chevrolet brand as for Latin America and Middle East, somewhat closer to the European footprint with their selection of brands. And then Asia Pacific and particularly in China, we are developing the brand footprint, it is obviously historically been built around Buick.

However, we are growing the Chevrolet business, we started growing Wuling, we are growing the Cadillac business. So in each of the other regions you have really got up to four or five brands as the footprint in those regions. I think that is a pretty balanced picture for the other regions. And I think the benefit of that is shown in terms of the momentum, the growth that we’ve just been talking about. And each of the other three regions are showing double-digit growth in terms of the experience we’ve seen over the past years, and continue to show in the first half of this year. So the portfolio is working for us in each of the other regions.

John Murphy - Merrill Lynch

So if we think about the cost of supporting Saab outside of North America and Europe, and the cost of supporting Buick outside of North America and Asia Pacific. Is it possible to scale back Saab or eliminate it from the Latin American and Asian-Pac market, and conversely maybe take Buick out of Latin America unit, the volume there is incredibly large. Just wondering if there were any great costs or those are sort of just plain central volumes that are showing up in those regions?

Mike DiGiovanni

I would say two comments. First of all, I think when you talk about Buick it is really a focus on the US and China, and not really a global brand presence. So it is a very specific case of US and China, unlike Saab where there is a more global footprint albeit in a number of markets quite a small one. However, really do not want to get into the specifics of the presence and the alternative futures that you might like to speculate around.

John Murphy - Merrill Lynch

Okay. Thank you very much.

Mike DiGiovanni

You are welcome, John.

Operator

(Operator Instructions). That does conclude our question-and-answer session for today. Mr. DiGiovanni, I will now turn the call back to you.

Mike DiGiovanni

Thank you very much. I appreciate everybody joining us today. We will look forward to talking to you next quarter. Thank you.

Jonathan Browning

Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask you to please disconnect your line. Have a great day, everyone.

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