Bye-bye, Hummer? GM Targets $15b Cash Boost

CFO Young, CFO-turned-president Henderson detail $10b liquidity target from div suspension, pay, cap-ex cuts, with $4-7b from asset sales.
Roy HarrisJuly 15, 2008

With Wall Street looking for General Motors to react strongly to long-term auto, truck, and SUV woes, GM didn’t disappoint. CFO Ray Young and former finance chief Fritz Henderson, now its president, detailed a $15-billion liquidity program introduced earlier in the morning by Chairman and CEO Rick Wagoner.

In a presentation to analysts, the three executives said that what Wagoner euphemistically called the “challenges of today’s U.S. auto market” would be countered by $10 billion in cash-boosting internal actions through 2009, including immediate suspension of the cash dividend, a 20-percent slashing in salaried employment costs, and other operating adjustments. Another $4 billion to $7 billion would come from asset sales, and financing activities that could include “a significant secured debt offering or multiple offerings,” in excess of what it had targeted in its earlier plans.

Such financing efforts in global markets — it specifically mentioned tapping assets through such things as stock sales in foreign subsidiaries, brands, a stake in GM Acceptance Corp., and real estate — could produce $2-3 billion of the latter amount. The assets to be tapped, the automaking giant said, are part of its current “gross unencumbered assets of over $20 billion.”

Of possible asset sales, the executives singled out the Hummer brand, where outside advisors are performing a strategic analysis. Said CFO Young, “We have received quite a bit of interest with respect to the Hummer brand, actually.”

Wagoner, who elevated Henderson from the CFO’s job in March and moved Young to finance chief from finance vice president, said the liquidity plans were being based on assumptions about light vehicle industry volumes that were “significantly below trend.” The assumptions also involve a U.S. market-share reduction to 21 percent, and fuel price estimates based on $130-to-$150-a-barrel oil by 2009. Young noted, however, that the assumptions also foresee “spikes of a potential of up to $160 a barrel” in that time frame.

Thus, the liquidity plans are designed to reduce structural cost while generating cash. Said Young, “This will provide ample liquidity through 2009.”

GM shares were reported to be trading up 7 percent, at about $10, in the hours after the announcement and the conference call. The stock has wallowed at its lowest prices in 50 years recently, with liquidity concerns being part of the reason.

Among its other attacks on the problem announced Tuesday, GM said it would eliminate health-care coverage for once-salaried retirees over 65, effective Jan. 1, with those retirees and spouses getting a pension increase “from GM’s over-funded U.S. salaried plan to help offset costs of Medicare and supplemental coverage.” On top of that, there will be a further reduction in the company’s U.S. and Canadian headcount this year, through attrition, early retirements, and separation agreements.

Noting that GM executives will also be hit by its pay moves, the company added that no annual discretionary cash bonuses will be paid in 2008. With those cuts, and incentives now relying on long-term compensation driven by GM stock-price performance, “GM’s executive group will have a significant reduction in their cash compensation opportunity for 2008.” Indeed, the opportunity for the cash component will be reduced 75 percent to 84 percent.

The company measured those pay changes as cutting cash costs more than 20 percent, or $1.5 billion, in 2009. Structural cost savings will add about $2.5 billion more to cash positions, with truck capacity and component capacity, for example, being lowered to reflect U.S. industry volume. A reduction of another $6-7 billion will come from holdling engineering spending to levels of the last two years, “substantially lower than original plans.”

Capital spending budgets are being reduced by about $1.5 billion, with cap-ex now targeted at $7 billion in 2009. (Not included is the $1 billion in cap spending planned both this year and next in China, part of some self-funded GM joint ventures.) Leading to much of the cap-ex reduction: a delay of next-generation pickup and SUV programs, and V-8 engine development.

CFO Young and Henderson talked at length of the areas not being cut, including “powertrain spending,” which will be higher “to support the development of alternative propulsion and fuel-economy technologies and small displacement engines.”

“Working capital is an area that’s probably a little more gray,” Young told analysts, adding that “we’ve discovered there were a lot of opportunities” for reductions. The main thrust is the reduction of inventories, he said. The target is to improve working capital by about $2 billion in North American and Europe, according to the company, with improvements in raw material, work-in-progress, and finished goods inventories leading the way.

As for the suspended dividend, Henderson calculated that $144 million per quarter will be saved, boosting liquidity by $800 million through next year.

While not commenting specifically on the second quarter, Henderson and Young prepared investors for bad news: a “significant” loss, driven in part by the negative impact of strikes and continued wearer U.S. auto markets, and especially the “adverse vehicle segment mix” as far as GM is concerned.

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