GM Expects Profit-Busting Recalls to Slow; $400M Set Aside for Victims

General Motors CEO Mary Barra says the automaker’s record surge in U.S. safety-defect recalls should taper off in the coming weeks and months, a crisis that has cost the company $2.5 billion so far this year and in the second quarter deflated earnings 85%.

Barra also reveals in a conference call to detail financial results from the April-June period that a compensation program for victims of the 2.6 -million-unit ignition-switch recall will cost approximately $400 million and the automaker booked an $874 million charge to cover potential recall costs over the next 10 years.

The charges and an additional $1.2 billion in expenses related to recalls in the second quarter, which pushed the automaker to a record year-to-date 60 safety campaigns affecting 29 million North American-built vehicles, reduced earnings in the period to $190 million from $1.26 billion. Revenue rose 24.1% to $39.6 million from $31.9 million.

Shares of the automaker’s stock tumbled 3% on the news during morning trading.

The earnings swoon also reflected difficulties in international markets, specifically South America, where economic headwinds are affecting sales, and in Europe, where GM continues to book losses as it restructures its business there.

Strong core performances in GM’s two largest markets, the U.S. and China, and total global vehicle sales of 2.5 million units could not offset the negatives in the quarter.

Barra says despite the recalls and uneven global results, “We had strong operating performance… We stayed on plan.”

Addressing the automaker’s recall crisis, Barra says a fresh focus on safety has resulted in a new aggressiveness toward initiating recall campaigns. Of the 29 million vehicles recalled so far this year, she notes, two-thirds of the cars and trucks no longer are in production. Some campaigns affect vehicles dating back as far as the 1990s, and 12 callbacks of newer vehicles covered fewer than 1,000 units. Another five of the campaigns targeted fewer than 100 vehicles.

More than 12 million of the recalled vehicles will be fixed through replacing or modifying the ignition-switch key, Barra adds, saying she expects the activity to soon slow.

“This work is now substantially complete and I believe we have now addressed the major outstanding issues,” she says. “But if we see new (safety) data, we will address it.”

Small-car ignition-switch repairs accelerating, Barra says.

Addressing the small-car ignition-switch recall, which mostly affects the defunct Chevy Cobalt and Saturn Ion, Barra says 550,000 repairs have been made to affected vehicles. She also says production of ignition-switch replacement kits has accelerated and the automaker should complete fixes on the entire population of cars by early October.

The compensation program for victims of crashes related to that defect begins Aug. 1. Although GM expects it to cost $400 million, the automaker has said the plan has no financial cap. GM says that dollar figure represents its “best estimate” to the cost of the program and warns it could take another $200 million to fully compensate the victims.

GM also reveals in the conference call a plan to change in the third quarter how it accounts for the financial impact of future recalls, a switch that will put the automaker more in line with common industry practices.

“Going forward we expect future recall expenses to normalize at levels higher, but not materially so, than levels prior to the first half of 2014,” says Chief Financial Officer Chuck Stevens.

Stevens says the automaker also will begin identifying safety defects earlier, which could result in the frequency of recall campaigns to increase from historical levels.

“But the number of vehicles per recall and the cost per recall event will be down,” he adds.

In a piece of noteworthy news outside of recalls, GM says today it expects its loss-making European operations, recently put under the control of a newly formed Opel group under the direction of CEO Karl-Thomas Neumann, will reach profitability by mid-decade. GM previously expected the operation to reach break-even by mid-decade.

Looking ahead, Barra says GM plans to build on the changes it has made to its business in the first half of 2014.

“We’ve demonstrated resilience as we’ve gone through this, but I want to make it clear that we have a lot more work to do and we are focused on it,” she says.

GM’s second-quarter result comes on the same day rival Ford reports a 6.3% increase in quarterly earnings to $1.3 billion.

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