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Despite positive earnings, GM's 1st-quarter numbers disappoint

Katie Merx and Alejandro Bodipo-Memba From Free Press Business| May 04,2007

General Motors Corp. lost $85 million in its North American automotive operations in the first quarter, and despite burgeoning sales and profits in its emerging world markets, its corporate profit fell 90% to $62 million, down from $602 million in the same period a year ago.

The Detroit-based automaker's lower-than-expected corporate results were hampered by a $305-million loss at financial giant GMAC — in which it still owns 49% — and its North American automotive operations.

While it was the second straight quarter of positive earnings for the automaker, analysts were generally disappointed by GM’s earnings, which equated to just 17 cents a share, compared with analysts’ consensus expectations of 88 cents per share.

"Even if GM's share of GMAC hit the Street estimate of $175 million in net income (actual was a $115-million loss), GM would have only reported 68 cents per share," Bank of America Securities analyst Ron Tadross wrote in a note Thursday. "North American automotive net losses … and a slight GM Europe shortfall more then offset the better GM Asia Pacific and GM Latin America results."

Standard & Poor's auto analyst Efraim Levy lowered GM shares from hold to sell on the news, since GM North America reported more losses even though it is arguably at the height of product cycle.

"Although we view GM's recent product launches as well received, and see continued progress outside North America, we do not see a catalyst to support the company's shares," Levy wrote in a note to investors Thursday.

Analysts said GM's restructuring plans, in which the automaker expects to remove $9 billion in structural costs from its expenses this year, still haven't cut enough.

"Despite GM's $6.8 billion in annual savings in 2006 and over $9 billion total expected in 2007, operating cash flow remains suboptimal," Citigroup analyst Jon Rogers wrote.

GM North America's pretax profit improved only $100,000 to a $100,000 loss on $1.7 billion in union-related savings, he wrote.

GM CFO Fritz Henderson said production cuts and rising material costs cut into that savings.

"We were basically operating the business at or around breakeven in the first quarter," Henderson said.

"There are some things in there that were positive, but frankly it's not a number that we're satisfied with," Henderson said. "We do expect profitability to improve on a global basis year-over-year."

And while GM reported positive cash flow in the first quarter, Henderson repeated on Thursday that the automaker still expects to spend money faster than it makes it this year.

One of the places GM expects to direct significant funds is to resolve the Delphi Corp. bankruptcy.

Henderson said he expects "significant progress" in the next two months.

"We would like to bring this to resolution, I think all parties would, prior to the commencement of '07 bargaining," Henderson said. Negotiations of the GM, Ford Motor Co. and Chrysler Group UAW contracts is set to begin formally in July.

Henderson said he still expects GM's cost to settle the Delphi bankruptcy to be between $6 billion and $7.5 billion before taxes, but increased the estimate of GM's ongoing Delphi labor-support costs to $500 million in 2007, from earlier estimates of $400 million; ongoing expenses to range between $100 million and $200 million annually in future years; and wind-down costs to total about $100 million in 2008.

GM agreed to cover the retirement costs for some of Delphi's former GM employees as part of the 1999 agreement to spin off Delphi as an independent auto parts maker.

Excluding special items, GM's adjusted net income was $94 million, or 17 cents a share in the first quarter, compared with adjusted earnings of $350 million, or 62 cents a share, in the first quarter of 2006.

GM revenue for the three-month period ended March 31 was $43.91 billion, compared with $52.38 billion in the first quarter of 2006.

After losing $12.4 billion in the last two years, officials at GM still said they are improving, largely because of the company’s growing presence in emerging foreign markets – such as China, India, Russia and Latin America.

"The first quarter of 2007 marked another quarter of continued progress in GM's global automotive operations," said GM Chairman and CEO Rick Wagoner, in a statement. "We were able to expand vehicle sales and improve automotive profitability based on the progress in our turnaround initiatives in North America and Europe and our expansion strategy for key growth markets like China, Russia and South America."

GM said it sold a record 2.26 million cars and trucks in the first quarter of 2007, a jump of 3% when compared to the first three months of 2006. Asia Pacific vehicle sales increased by more than 20%, while GM Latin America, Africa and Middle East saw a 17% jump, followed by a 6% climb at GM Europe.

"Our strongest growth is in the Asia Pacific market, which is critically important as this will be the fastest growing region in the world over the next decade," Wagoner said. "We continue to build on our already strong footprint in China, take advantage of GM-DAT's great capabilities, and move aggressively in other important markets, like India."

GM stock was down $1.39, or more than 4%, at $31.04 as of 2:05 p.m. Thursday on the New York Stock Exchange.

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