General Motors Company Morgan Stanley's 14th Annual Laguna Conference

All right. Good morning, everyone. For those that don't know me, I'm Andrew Percoco. I cover autos here at Morgan Stanley. Pleased to be joined by Paul Jacobson, CFO of General Motors, for the next session. Before we get started, just a quick disclosure here. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. All right. With that out of the way, Paul, I just want to pass it to you. If you got any opening remarks for the audience in terms of the setup for the remainder of the year and kind of how you see the business evolving over time.

Yeah, great. Thanks, Andrew. Thanks for having us. Thanks to everybody for being here today and for those joining the webcast. This year's been a pretty interesting one as we started. I think I said in January or February that the year had gotten off to a pretty calm start, then suddenly Iran happened and it's been a lot of uncertainty. But the team continues to navigate really well. I think the story of the year has to be the consumer, has been remarkably resilient in the auto space, and we've seen that over the last couple of months of industry demand. Probably been a little bit stronger than we even thought, coming into the third quarter. But the business held up well. I think we are doing quite well on production.

Remember, as we think about where SAAR is and so on, remember we're a wholesale business, so we don't necessarily get affected by the day-to-day. It helps with the inventory and management. But what we're really looking for is to really chart that course and as we sunset the pickups and go into the next generation of pickup trucks next year, I'm pretty optimistic about where things are going.

That's great. Maybe just picking up there, you mentioned the third quarter's been stronger than you expected. SAAR has held up better. What does that mean? I think initially you were expecting 3Q to look similar to 2Q. Has that changed at all versus your expectations? Just curious how the quarter is shaping up. As we think about going to the fourth quarter with the changeover happening- I think you had communicated a heavier seasonal weakness in the fourth quarter than normal.

Has that changed at all, just given the resiliency that we've seen in the consumer, or is all that still your expectation there?

No, the quarter's tracking pretty consistently with where we thought. As you see little upticks in demand, keep in mind that we're max production pretty much everywhere across the system. So when we're wholesaling vehicles, that's really the driver. So inventory might go up and down, but what that strong demand allows us to do is maintain consistency in pricing and incentive levels and making sure that we're continuing with our inventory discipline that we've seen so things don't get out of balance. I think the team has executed well. As we look at the fourth quarter, fourth quarter's typically seasonally weaker than Q2 and Q3. This year it's compounded by the fact that, as we disclosed on our last call, we'll lose about 35,000 trucks with the changeover. Ultimately, a long-term good thing, but we'll have that little headwind.

I would just say seasonality less that 35,000 units is about the right way to think about Q4.

Okay, that's super helpful. Obviously it's 2026, you guys have navigated it tremendously well, I think better than anyone was expecting sitting here last year. So kudos to you for the execution. Now, of course, the natural evolution of that conversation is what does 2027 look like and how does the consumer break? What does this kind of look like as we walk into next year? On the last call, you committed to, or at least tentatively are guiding towards growth in revenue, EBIT, and free cash flow next year. Just hoping you can just break that down for us in terms of what are the biggest puts and takes, positives and negatives that you're expecting as we roll forward into 2027.

Yeah. Appreciate the comments about 2026 being better than a lot of folks expected, but 2025 was better than people expected, 2024 was better than people expected, and it's something that we've tried to take a lot of pride in, and really execute towards. As we're looking at 2027's going to have its own headwinds, right? We still have some tariff uncertainty out there, as deals are continuing to be negotiated and continuing to evolve. We continue to see signs of inflation out there, whether it's DRAM or just general other commodities, fuel prices, et cetera. They haven't come down the way that a lot of people were expecting post conflict. The conflict continues to rage, and we continue to see price inflation, particularly around logistics and so on.

That's not to say that we've come off of what we said in 2Q, because I think when you look at 2027, for us, it's a lot of things that are in our control. We have the new truck platform, that should be good for pricing. As you roll off the last year of the trucks, there probably, I would argue, never been a more successful final year of a truck generation than what we're seeing in our portfolio right now. That means there is pricing potential. It's not that giant steep ramp-up that we've seen historically because of the performance of the outgoing truck. We've got to execute on that. We've got a number of sort of capacity initiatives with Orion coming up to speed and some of the onshoring that we've done. There's a lot of opportunity there, as we see that.

There's opportunities in the portfolio, particularly around continuing to narrow EV losses, continuing to improve on warranty. Then lastly, growing digital revenue, a little bit of growth in the defense business, et cetera. You look at all those controllables, and that's where we felt good going into 2027. As we round out our budget preparation and get into the beginning of next year, we'll have more color on the specific ins and outs, but we feel pretty good about that. The cash flow story, I think you look at how consistent we've been over the last five years, and we've got a chart out on our IR website that looks at the last 10 years of free cash flow, and it's a tale of two half decades.

The 10 years ago, we were looking at an average of probably about $3 billion a year of free cash flow. In the last five, we've averaged more than 10. This year, it's been a little bit about using that free cash flow to rightsize and fix some of the EV production challenges and capacity as we rationalize some of that capacity. Next year, we should be largely free of that. We think it's a really good cash flow story heading into 2027 as well.

That's great. I want to double-click on a few things that you mentioned right there. First, starting with the truck changeover.

You guys have managed that quite well. We haven't seen inventory ballooning, incentives.