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UPDATE 3-GM posts strong profit on U.S. demand, improvement in Europe

Ben Klayman and Deepa Seetharaman
Wednesday, 30 Oct 2013 | 12:05 PM ET

DETROIT, Oct 30 (Reuters) - General Motors Co on Wednesday posted a better-than-expected third-quarter profit as the U.S. automaker's new lineup of pickup trucks and other revamped models boosted North American results, and revenue rose in Europe for the first time in two years.

The strong showing in North and South America and the improvement in Europe offset the decline in Asian markets outside China, including India and Southeast Asia.

GM Chief Financial Officer Dan Ammann said the No. 1 U.S. automaker's European unit remains on track to achieve its target of breaking even in the next year or so. GM has lost money in Europe for 13 straight years.

"The story in Europe overall is really consistent with the plan we laid out," he told reporters. "Our overall objective of getting to break-even by mid-decade, clearly we're well on track toward that."

GM recently said it would shift the reporting of its profitable Russian market to the European unit from the international operations, but Ammann said that does not change the break-even timetable.

Excluding one-time items related to the repurchase of preferred stock and an impairment of goodwill in the company's South Korean operations, GM earned 96 cents a share, 2 cents more than analysts polled by Thomson Reuters I/B/E/S had expected. GM's shares rose some 3.7 percent to $37.38 in midday New York Stock Exchange trading.

Europe has been a key focus for investors since GM went public in November 2010 following its bankruptcy reorganization and a $49.5 billion government bailout in 2009.

GM's progress in Europe during the third quarter echoed comments made by its smaller U.S. rival Ford Motor Co last week. Ford painted a brighter picture in Europe and forecast turning a profit there by 2015.

GM's European results continued a trend from the second quarter, when its loss in the region was almost one-third smaller than Wall Street analysts expected.

"We believe management is ahead of plan to be break-even in Europe by mid-decade," Buckingham Research analyst Joseph Amaturo said of GM in a research note.

GM MARGIN TARGET SEEMS CREDIBLE

GM has set a goal of hitting 10 percent profit margins in North America by mid-decade. In the third quarter, GM's margin in the region jumped to 9.3 percent, the highest in two years and up from 7.7 percent last year.

The 9.3 percent margin "adds credibility" to GM's 10 percent target, Citi analyst Itay Michaeli said.

GM's U.S. finance chief Chuck Stephens said the margin would decline sequentially in the fourth quarter, but rise on a year-over-year basis. When asked about a future that includes the rollout of more new vehicles, he said analysts should not extrapolate a full-year margin based on the third-quarter result.

Ford's North American profit margin in the third quarter was 10.6 percent.

Also on Wednesday, Japanese automaker Honda Motor Co and Chrysler Group both reported strong U.S. sales in the quarter.

GM also saw a $400 million benefit due to higher vehicle prices in North America in the third quarter. Amaturo predicted the automaker's pricing gains would accelerate next year with the introduction of GM's heavy-duty pickups and full-size SUVs.

Stephens said he does not expect the same magnitude of price increases in 2014 as the Detroit automaker saw this year versus 2012.

GM's third-quarter net income attributable to common shareholders fell to $757 million, or 45 cents a share, compared with $1.48 billion, or 89 cents a share, in the year-ago quarter. But operating earnings rose almost 15 percent to $2.64 billion.

Revenue rose 3.7 percent from last year to $38.98 billion, but that was short of the $39.49 billion analysts had expected.

"So much for the profits warning that was worrying the market," Morgan Stanley analyst Adam Jonas said in a research note, adding the results may cause Wall Street to raise 2014 profit estimates slightly. "(Third-quarter) results for GM were more treat than trick."

GM's operating earnings in North America jumped 27 percent to a better-than-expected $2.19 billion. Analysts polled had expected $2.13 billion. Gabelli & Co analyst Brian Sponheimer credited strong sales of high-profit vehicles like the new Chevrolet Silverado pickup truck and Impala sedan.

Stephens acknowledged production of the new full-size pickup trucks suffered slightly in October due to a shortage of axles from supplier American Axle, but the automaker expects to make up that lost output in the current quarter. He also said the issues would have no impact on next year's launch of related large SUVs.

The loss in Europe fell by more than half to $214 million from a loss of $487 million last year as GM squeezed out $400 million in costs and boosted revenue year over year for the first time since the third quarter of 2011. Analysts had expected a loss of $267.7 million.

Ammann said GM will incur "significant" restructuring costs for closing its assembly plant in Bochum, Germany, by the end of 2014 and some of the charges may affect financial results as early as the fourth quarter of this year. He did not outline what the expected savings form the move would be.

He also reaffirmed GM's breakeven target does not include any material impact from savings generated by the company's alliance with French automaker Peugeot.

The company's South American profit jumped 79 percent in the quarter to $284 million, more than the $102.9 million analysts had expected.

The results in North America and Europe helped to offset weaker-than-expected earnings in GM's international operations, which include China. While China's earnings slightly improved and GM's China partner SAIC Motor Corp posted a stronger-than-expected profit, markets outside China were a hindrance due to more competitive pricing by competitors, Ammann said.

Analysts said Japanese automakers were taking advantage of the weaker yen to offer deals.

GM's international earnings tumbled 61 percent to $299 million. Analysts polled by Reuters had expected a profit of $329.2 million.