General Motors Company (GM) Q2 2007 Earnings Report, Transcript and Summary

Welcome to the General Motors Corporation second quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Randy Arickx, Executive Director of GM Investor Relations and Financial Communications. Randy Arickx: Thank you very much. Good morning, everyone. Thanks for joining us this morning. I would first like to direct your attention to the legend regarding forward-looking statements and risk factors on the first page of the chart set. As always, the content of our call today will be governed by this language. I would also like to mention that to comply with the SEC's regulation G, we've provided some backup charts in order to provide reconciling data between managerial financial results as discussed today and the GAAP equivalent results that are in GM's financial statements. As always, GM is broadcasting this call live via the internet and the financial press is participating as well. This morning, Fritz Henderson, our Vice Chairman and CFO, will cover our second quarter earnings review. After the presentation portion of the call, about 30 minutes will be set aside for questions from security analysts, followed by a Q&A session with the financial press. I would also like to mention we have several other executives available today to assist in answering your questions. With us today are Walter Borst, Treasurer; Nick Cyprus, Corporate Controller and Chief Accounting Officer; David Meline, CFO of GM North America; and Paul Ballew, Executive Director of Global Market and Industry Analysis. Now I would like to turn the call over to Fritz Henderson. Fritz Henderson: Thanks, Randy. Good morning. Let me move right to page 2 of the earnings deck and talk about the highlights of the quarter. GAAP earnings, $891 million or $1.56 per share. On an adjusted basis without special items, $1.4 billion net income, $2.48 a share. The improvement in automotive results was about $0.4 billion from the second quarter of '06. It was an all-time record automotive revenue for us; it was not an all-time record revenue for us as much as in prior periods we had the consolidation of GMAC. But when you look at automotive revenue, automotive revenue was a record for us in the quarter. The share gains outside of North America helped us to a degree offset the North America share decline. With North America share decline driven in part by reduced rental sales, but also in part by frankly performance which was less than we were hoping for, certainly in the month of June, for example. Automotive operating cash flow was positive $1.1 billion in the quarter. Our liquidity increased to $27.2 billion. I'll have some charts to go through that later. Finally during the quarter, we announced the sales of Allison Transmission at a price of $5.6 billion. Through the deck you'll see that we have reclassified Allison as a business that's held for sale, and therefore accounted for it as a discontinued operation. We do expect that transaction to close in the third quarter. Chart 3 takes a look at our results on an adjusted basis. Let me focus on first the automotive operations. Total automotive in the quarter, $764 million, about a $400 million improvement from the second quarter of '06. I've got charts which will review each of the quarters, each of the operations a little bit later in the deck but you can see improvement across all four of the automotive operations and frankly all four of the automotives operations profitable in the quarter with North America slightly above breakeven. GMAC reported a profit in the second quarter, $139 million was our portion of GMAC's profitability, inclusive of the preferred dividends that we earn on our investment in GMAC. While down substantially year to year, it was good to see GMAC profitable in the second quarter. Corporate and other was substantially favorable. We actually have a chart that talks about that, but it was largely favorable tax items in the quarter and I'll talk about that a bit later. There you can see Allison coming in. So our total adjusted profitability $1.4 billion, $262 million favorable versus the second quarter of '06. Page 4. As I mentioned, corporate and other was favorable in an absolute sense as well as year over year. The amount was $400 million, $0.4 billion profitability, $0.5 billion favorable versus the second quarter of '06, again principally related to income taxes. We adopted FIN 48 on January 1st. FIN 48 required companies, including GM obviously, to account for their tax contingencies on a more likely than not basis. We applied that effective January 1, 2007. During the second quarter, we had a number of tax contingency items that were resolved; resolved satisfactorily such that some of our prior contingencies or our prior uncertain tax positions were now deemed more likely than not to be realized and so therefore we had favorable adjustments in the second quarter. We chose to maintain those favorable adjustments at the corporate center and these favorable adjustments were largely in North America as well as in Europe. We maintained them in corporate because in fact when we look at adjusted profitability, we look at adjusted profitability in North America and Europe at a targeted regional tax rate. And so therefore, any large adjustments like this we felt it was appropriate to maintain it in the corporate center. The other items within corporate and other would include things like legacy costs and divestiture units. There was a small amount of favorable there associated with the health care deal that we implemented last year, but the big story here in terms of the favorable year to year were these favorable tax items. Page 5 takes you from adjusted profitability to GAAP net income. You can see the largest item there is Delphi. I will have a chart to talk about Delphi, but we did adjust our reserve in the second quarter to the extent of about $575 million pretax, $374 million after tax, and that was driven largely by incremental health care costs that were assumed as part of the GM UAW Delphi labor agreement that was negotiated and then approved by the workforce in the second quarter. I'll have some further points to make about ongoing charges with respect to Delphi. We also had some restructuring and impairment in North America in the second quarter, which resulted in about $121 million in charges and then the rest of the world had a small amount, largely Europe and AP. So takes you from $1.4 billion to $891 million. As we talked about before, we look at earnings on an adjusted basis, because we think it's useful for management to measure the operations, how we look at the business. It also provides for the right kind of comparisons between reporting periods and we think it's important and useful information for you as well. Page 6, moving right into North America. You can North America revenues were down $1.3 billion. Our volumes were down 95,000 units. So you're going to see a little bit on the next chart what's going on with revenue per vehicle, but the decline in revenue was pretty much driven by, more than explained by the reduction in volume. Pretax profitability improved $322 million. Net income improved $172 million. Frankly, we operated the North American business in the second quarter at very, very close to breakeven. You can see the net margin at 0.3%. You also see, obviously, the income from continuing operations and Allison here. That's not included in the $78 million. When you look down, clearly, the market share down 1.3 points in North America was a function, again, as I said, of lower rental sales, but also lower retail sales as well, particularly in the month of June. Nothing really much more to say there. You can see our retail fleet mix at 26.7% in the quarter is in line with our strategy to basically bring our fleet sales into equilibrium, if you will, with retail. We're basically executing the strategy that we laid out and our inventory position in the dealers is down 114,000 units from the prior year. Revenue per vehicle. What we've shown here is revenue per vehicle on a managerial basis. We've also shown you what the GAAP revenue per units is. You can see some NAs in there. There will be some reconciliations later in the presentation on the website. The reason why we have some NAs in prior quarters was as a result of we basically pulled through Allison for the calendar year and we need to pull through Allison across the quarter. So we'll have the reconciliations, but this takes a look at on a comparable basis what's happening with both net revenue and revenue per vehicle. What you see in the second quarter of '07 is a continued move up, that $21,375. That compares to $19,800 so you're up over $1,500 year over year. Relative to the first quarter, we were $21,072 so a continued move upward in terms of revenue per vehicle, by and large driven by product mix and model option mix. A little bit of price, very little bit of exchange, primarily driven by product mix and model option mix, as well as the bit of the impact of retail fleet. Chart 8. I will spend a bit of time on this chart, which shows you the variance analysis both for the second quarter as well as the calendar year-to-date for North America. It starts out with adjusted earnings in '06 and moves to adjusted earnings in '07. Again, this is continuing operations only, so it doesn't include Allison. First thing you see is volume unfavorable both in the quarter and the calendar year. Mix substantially favorable in the second quarter as well as in the calendar year, although in the second quarter, mix was actually slightly in excess of volume. For the calendar year, the volume decline is in excess of mix, but mix favorable is good to see. Price and material net was a push in the quarter and frankly close to a push for the calendar year. What you've seen is some slightly favorable price and some slightly unfavorable material costs. The material cost is really being driven by higher steel prices, higher raw material prices in general, nonferrous, precious metals. It's very, very difficult out there in terms of material costs on the on the raw material side. Policy warranty campaigns in the second quarter unfavorable $0.5 billion; year-to-date, unfavorable $0.6 billion. What you see here is the absence of the large favorable adjustments that we had in the second quarter of last year. So to some extent, this is driven by the cost of our extended warranty program, our standard warranty power train warranty program. But the primary driver of this is last year in the second quarter we had substantially favorable adjustments to policy warranty campaigns, and you did not see the recurrence of that in the second quarter of this year. So policy warranty therefore year over year was unfavorable, not that our experience is bad, it's just that we had substantially favorable adjustments last year. Pension, health care and manufacturing, $0.9 billion favorable in the quarter, $2.2 billion calendar year-to-date so we believe we're on track to achieve our $9 billion cost reduction goals in North America, including the corporate center. Finally, exchange and other was unfavorable $0.4 billion year-to-date, unfavorable $0.6 billion -- what you have here is a couple things going on. You've got unfavorable exchange, largely the strengthening Canadian dollar versus the U.S. dollar. That's the primary driver. You have some unfavorable hedging in here as well as we implemented FAS 133; we actually restated for FAS 133, so that some unfavorable affect on us in the second quarter and the calendar year-to-date. We also had in actually both '06 and '07, you had some adjusted product liability. You had a favorable adjustment in product liability in the second quarter of this year, which lands in this category. You have some small changes in engineering costs, but the net of it, the single largest factor within exchange and other is unfavorable foreign exchange, but you do have a lot of other things going on in there. So when you look at the net income, $0.1 billion favorable for the quarter. $0.1 billion unfavorable year-to-date, an improvement year over year, but we're basically operating our North America business right around breakeven. Page 9, an overview of our other regions. It was actually a very good quarter for other regions. Strong growth outside North America in the quarter, adjusted profitability of close to $700 million, $1.1 billion year-to-date. Revenue up 16%, share up 0.2%. I remind you our revenue does not include our business in China, as we carry it on the equity method so you would not see the growth in our business in China showing up in revenue. So this is really only on a consolidated basis. Europe reported its best quarterly results since the second quarter of 1996, strong structural cost performance and favorable pricing. LAAM continues to leverage, it can only be termed explosive growth, reported the best quarter in ten years in both revenue and profitability. GMH reported a record second quarter adjusted net income with continued growth in China, India, and South Korea, as well as some improved performance in Australia. So a few comments on each of the regions follow. GM Europe page 10, takes you through some of the key data for GM Europe. You can see both on a pretax – you see first of all, the revenue increased $818 million. Some element of the revenue increase is driven by translation effect with a stronger euro, not necessarily a meaningful driver of the profitability, but certainly a meaningful driver, to some degree a driver of the increased revenue. You can see particularly with volumes off slightly. But what you have is substantial improvement in pretax profitability, net income, net income margin at 2.5% reminds us that our profitability levels in Europe, while improved, are still not adequate. 2.5% we certainly wouldn't consider it an adequate margin for our European business. When you look down below, the German market continues to be the single largest challenge for us. The industry itself is off year-to-date and certainly we lost a point of share, so it's been a challenge for us in Germany. U.K., the market has held in there pretty strong and our market performance in the U.K. this year has been quite good. Russia is a very fast-growing emerging market. 2.5 million units. It's actually fast approaching one of the largest markets in Europe, actually, getting very close to France, Spain, Italy in terms of its size; and the U.K., as you can see. Our market share is up almost 4 points in Russia year-to-date. So pleased to see the performance in Europe coming off what was a weak first quarter. So when you look at the performance for year-to-date, it was nice to see our European operations improve in the quarter. I would say good acceptance of our core, good acceptance of our launch vehicles, strong growth in Chevrolet and continued cost performance are what the drivers are for Europe. LAAM. You can see LAAM's revenue up $500 million, $4.3 billion. Pretax profitability up $111 million, net income up $58 million and our LAAM margins actually approaching 5%. A number of our operations in LAAM, particularly in the Middle East, operate with distributor margins. So, to see LAAM approach a 5% after-tax margin is very, very encouraging from our perspective. You see production is significantly up. Industry SAAR up from 5 million to 7.1 million units, so very, very strong and our market share is actually up 0.2%. Actually, we're running behind in Brazil, we're trailing in terms of market share in Brazil, but the driver of that is the market is up 50% in terms of its SAAR in the quarter. I would say the challenge in LAAM today is to keep up with the markets growth. The reason why our share is up 0.2 point is the markets where we have the strongest positions are growing the fastest. So markets like Venezuela, Colombia, and Brazil. Actually, what's happened is the markets that are the strongest, we have very strong positions in that country which has allowed us to actually offset the declining share we've had in Brazil and net-net, we've actually picked up share across the LAAM region. So a lot of records here, actually almost too numerous to recount. But good performance, solid performance, we're really pleased with LAAM and the prognosis for many of these countries remains favorable. It reminds us that LAAM can be volatile, but it's actually one of the few times in my career that we're seeing the markets are marching up and South Africa has got some softness, but we'll certainly take the market environment we have there. GMAP, page 12, you can see on a consolidated basis, GMAP revenues up from $3.7 billion to $5.4 billion; so we're up $1.7 billion. You can see pretax profitability up substantially. You can see our China JV equity income also up from $99 million in the second quarter of last year $122 million, so it's up $23 million. Our minority interest, the unfavorable impact of minority interest was $124 million a quarter versus $11 million in the second quarter last year. That is substantially higher profitability in GM Daewoo, and we consolidate GM Daewoo and then include the results the minority interest for the 49% of shareholders who are our partners in GM Daewoo. That's why you see that number, the unfavorable number rising because the absolute amount of profitability of GM Daewoo has increased. You can see profitability, $237 million, about a 4.4% margin. If you look down across the industries, Asia-Pacific strong. Our share pretty much held in, we were flat quarter over quarter, we're up year-to-date because we had a good first quarter performance. Frankly we're coming off a good second quarter performance last year so being flat, we were reasonably pleased with that, I would say. There's always room for improvement. China, you can see the SAAR is up from 6.7 million to 8.3 million units. Our market share has not kept pace, so we've had some competitive pressures there, but nonetheless we're still running pretty strong in China. GM Daewoo, you can see the production, these are the completely built up units, they wouldn't include kits but you can see a substantial increase, almost 50% increase in production of completely built up units in Korea. In Australia, we see actually the 1 million units the Australian market is a pretty robust market. The issue in Australia is really one of competitiveness and industry transformation really, as the market opens and consumer preference has shifted. Page 13. GMAC reported results yesterday, so you would have seen GMAC's results. They reported $293 million in net income on strong automotive finance and insurance results and improved ResCap results vis-a-vis the first quarter of '07, certainly versus the prior year's second quarter substantially worse. The ResCap loss is $254 million. It was a deterioration of $800 million versus the second quarter of '06. That quarter, by the way, was a robust quarter for the mortgage industry in general and we had a $259 million after-tax gain from the sale of a regional home builder, which didn't repeat itself this year. Our year-to-year improvement in other businesses, particularly auto finance was substantial. Auto finance, basically were up $245 million and excluding ResCap, GMAC's second quarter income doubled year over year. So we are seeing good performance in auto finance insurance. We're seeing the benefits of the action we took to sell 51% of GMAC. You see lower cost of funds, better access, and GMAC is able to improve its competitiveness. They're growing the used business, they're growing their business around the globe and it's frankly showing up in their financial results. Our portion of GMAC's profitability was $139 million. That included equity income of $118 million and preferred dividends of $39 million. The deterioration, as we said, versus the second quarter of '06 was driven mostly by ResCap. Page 14. A few words on ResCap. ResCap, we said when we released the first quarter results, ResCap lost over $900 million in the first quarter. We said that in the second quarter we expected that losses would narrow considerably and we expected better results. We did see that. Nonetheless, the $254 million is still a substantial challenge, it's the largest business challenge for the GMAC management team in terms of restoring that business to where it needs to be. But it's good to see the declining losses. We have sharply reduced our non-prime production, our non-prime exposure across warehouse lending, across some of our builder businesses. You saw run-off in the non-prime portfolio held for investment. We expect our run-off in the held for investment portfolio to be about $15 billion this year. So we're basically reducing our exposure to non-prime and at the same time, we are seeing increased service fee income and lower structural costs. So I would say the challenges continue here, but the first step in addressing the challenges is to stop deteriorating. The second step is to stop narrowing the losses. We're on that path and then obviously we need to see continued progress as we move into the second half of this year. Auto finance results remain robust, as I mentioned before. Insurance results, very strong. A favorable loss experience, everybody is watching the weather channel and the weather's been benign. We've seen pretty substantial continued positive performance in the insurance business and our liquidity position in these businesses -- both at GMAC and the ResCap level -- the liquidity end capital remained robust. I would say GMAC's absolute level of profitability in quarter is insufficient obviously, relative to what we would expect. It's good to see the business is performing -- outside of ResCap -- much better. The challenge continues to be to get our arms around the exposure of ResCap and get the residential mortgage business turned around. Liquidity, page 15. We finished the quarter with a strong liquidity position, $27.2 billion. That reflected a $1.4 billion in net proceeds from our convertible bond issuance in the second quarter. It also reflected a $1 billion payment that we made in the second quarter for our mitigation VEBA that was made in April, and reflected our operating cash flow, which I'll talk about in a moment. Beyond the $27.2 million, which includes $3.6 billion of readily available short-term VEBA assets, we had another $15.3 billion of long-term VEBA assets available to fund health care. The liquidity position in the quarter was improved and it was improved from what was pretty good position to start with. We have no additional U.S. term debt maturities in the year. Page 16 gives you the trend analysis that we typically show. I'm not going to belabor it. You just see the uptick from $24.7 billion to $27.2 billion in terms of growth liquidity. Net liquidity narrowed, but at a lesser rate in as much as we did borrow $1.4 billion of converts in the quarter. Cash flow drivers on page 17. Adjusted automotive operating cash flow was $1.1 billion, an improvement of $0.5 billion versus the second quarter of '06. That excludes $0.1 billion of operating cash flow generated by Allison transmission division. The second quarter results were driven by and large by positive earnings, lower cash payments relative to expense accruals, some of which we would expect to be timing related and reverse in the second half of the year, also affected by what I would say would be a seasonally low level of CapEx. I'll show you that on the next chart. But in the first half of the year we generally under-spend relative to the second half of the year. However, we are revising our capital spending target to the $8 billion range. Coming into the year, we felt it was going to be between $8.5 billion and $9 billion. We're revising that to $8 billion today. It's really driven by lower spending in non-product portfolio initiatives. We're taking a very lean approach to spending outside of product and it's showing up in the CapEx. We have not changed our product portfolio or our cadence. It's really about leaning out our approach to investments outside of product. Consistent with past years, we expect heavier actual spending in the second half. Our year-to-date adjusted automotive operating cash flow was $1.4 billion excluding Allison. If you step back from that, the $1.4 billion was achieved despite making $1.9 billion of OPEB cash payments in the first six months, and on top of that, another $1 billion of mitigation VEBA contributions. So $2.9 million of outflows associated with not only OPEB, but our contribution to the UAW VEBA. You might recall that we had a $1 billion contribution due in ’06, '07 and '11. This is the '07 entry. Page 18, a lot of numbers on this chart but it works you to the adjusted operating cash flow. You can see in the quarter, $1.1 billion. We did generate cash in the second quarter of last year as well. It is not unusual for us to generate cash. As a matter of fact, you would expect we should in the second quarter. You can see year-to-date, $1.4 billion versus year-to-date last year, $0.1 billion. I call your attention to the level of cap spending, basically $2.9 billion year-to-date, $1.7 billion in the quarter. Again, seasonally low and we would expect that to pick up. I do have some charts that detail what's happening in working capital as well as accrued expenses. I'll hold that. You do see in the second quarter and calendar year-to-date pension and health care, largely health care expenses, cash payments in excess of expense $0.5 billion in the second quarter, $1 billion in the calendar year-to-date. Moving below the operating cash flow line, you see Allison coming in as a discontinued operation. Asset sales in the second quarter of last year, we had sold our stake in Isuzu. This year we had some minor asset disposals. You can see cash restructuring costs both at the GM level as well as our contribution within the Delphi bankruptcy, which brings you to adjusted operating cash flow after special items, which were favorable $1 billion in the quarter and $0.6 billion for the year. If you look at non-operating flows, pretty much as you would expect. Dividends, change in debt was a net affect. We had a very small amount, like $100 million in maturities, in the second quarter; we had $1.4 billion of issuance in a convertible. You can see for the calendar year-to-date the GMAC purchase price adjustments. So on balance, our cash was up $2.5 billion in the second quarter. Page 19 gives you some further detail on what's happening behind accrued expenses and other as well as working capital We had accrued expenses and other of $1.4 billion favorable in the quarter and moving down the list, you can see it compared to $0.4 billion unfavorable. These numbers can move around a lot in a quarter. That's why we try to spend the time and take you through them. I'm going to focus my attention on the second quarter of '07. The tax benefit, if you will, didn't generate cash. These adjustments for FIN 48, for example, don't generate cash so you have a non-cash benefit so therefore used funds, interest accruals in excess of payments, sales allowance accruals in excess of payments in the quarter, policy warranty accruals in excess of payments. You can see last year that was unfavorable because we had a favorable policy warranty adjustment which doesn't generate cash in the short term. Delphi charge was non-cash related in the second quarter and so net-net, accrued expenses and other are $1.4 billion. Then if you look at working capital, actually working capital last year was more favorable, it was $1 billion. This year, basically working capital is close to a push at $0.2 billion favorable. Accounts receivable built up, particularly outside of North America as we were growing our business. Inventory was a source of funds at $0.4 billion and accounts payable was also a source of funds at $0.4 billion. That's was what's going on in accrued expenses and working capital. Delphi, page 20. We did accomplish a number of important things in the second quarter. The UAW Delphi GM agreement was reached in June as ratified by the UAW and approved by the bankruptcy court. It basically provides for the road map for labor transformation including wages and benefits, employment levels, and UAW's claims against Delphi. We did agree to pay $450 million to settle the UAW claim against Delphi. That payment is required upon execution of the final GM Delphi settlement agreement in confirmation of the Delphi reorganization plan. I'm going to talk in the next chart how we're going to account for that. But that's not included in the charge and as such, we expect over time that will be amortized. We're also going to fund a portion of other costs, but at this point the agreement's not -- I should say this agreement is done, but the Delphi bankruptcy is not completed, it is not emerged. So I would view this as an important step in the road to Delphi emerging from bankruptcy, but nonetheless, there's still some work to go. In July, post the end of the second quarter, Delphi announced that it accepted an equity purchase agreement from an Appaloosa-led investor group that was negotiated and announced, and Delphi is seeking expedited bankruptcy and court approval at the hearing on August 2nd; so a lot going on in Delphi. If you look at page 21, the charge we took in the quarter was $575 million pretax. That consisted of incremental Delphi retiree health care costs, which we assumed as part of the GM UAW Delphi labor agreement; reimbursement of labor costs of certain Delphi facilities; and frankly, a small amount of reimbursement of certain pension obligations for Delphi employees. That was what was included in the charge. The $450 million payment is expected to be amortized over time and over the remaining term of the UAW health care agreement in as much as the UAW has directed that they want those funds to be deposited in their VEBA. So it was the UAW's preference, we'll do it that way and that in part drives us to this accounting, all of which, as you look at the Delphi matter, not only do we have to finalize the entire agreement, but we need to finalize all the accounting. At this point our view this is the proper accounting and that's how we're treating it. We do expect continued additional ongoing costs in the form of wage subsidies and other payments over a finite period of time. There's nothing different here to announce from what we've disclosed previously. There will be ongoing costs. As I said, we are evaluating the accounting treatment so that as we finalize this matter or bring the matter to closure and bring GM's commitment to the Delphi matter to closure, that we frankly finalize the accounting treatment for all of it, but certainly at this point we believe that we've handled it the right way. Finally, the outlook for third quarter. I would say continued revenue growth in the strength of emerging markets. We have a number of important launches going on in the third quarter and in the second half, actually. Beyond simply the ramp-up, for example, of the Buick Enclave which has been very well accepted we have our new Malibu, our new CTS, the new Saturn Astra, Pontiac G8. These are products new in North America. We have launches in many other markets around the world as well. We do have some concerns regarding housing market weakness and frankly high in somewhat volatile fuel prices in the U.S. The challenge we have in North America and the U.S. remains foremost in our minds as we are able to grow in a number of other markets around the world that have more robust growth opportunities. For the calendar year, we do expect improvement in automotive earnings and continue to expect improved but negative operating cash flow. Again, some of the items we saw in the second quarter in operating cash flow are expected to reverse as we move into the second half, but not all of them. We did lower our capital spending and we do expect our capital spending forecast, largely driven by non-product spending, we expect it to be in the $8 billion range. So, summarizing the quarter: share growth and strong revenue increases outside of North America, improved earnings and positive automotive operating cash flow was good to see. Our liquidity strengthened further, the Delphi labor agreement with UAW was reached. We still have work underway with the IUE steelworkers, a number of Delphi labor unions. There's got to be continued focus on revenue and structural cost across the enterprise everywhere in the business, but particularly still here in North America and in Europe. Negotiations are underway on the UAW contract and I'm really not going to comment any further on that today. So thanks very much. Ready to take your questions.

(Operator Instructions) Our first question comes from Rod Lache - Deutsche Bank. Rod Lache - Deutsche Bank: On Delphi , I was hoping you could expand a little bit more. How large are the annual support? You had two different types of payments you were going to make on an annual basis, support and transition; are they steady, do they diminish over time, do they last through the end of the contract? How does that compare against that trajectory of $2 billion of annual savings that you've been estimating?

Sitting here today, I think the last 8-K we filed we talked about $400 million to $500 million per annum of labor support and subsidy payments and we still expect to be in that range. The period of time, we've said it's a finite period of time. You can expect, though, that it would go, many of these programs don't go into production until later on this decade so some of the subsidies could well last beyond 2010. We would expect them to continue. I would say the $450 million, this other item, what we need to finalize, our view is it is likely to be amortized over to six to seven years, actually. That was not in the $400 million to $500 million. In fact, at one point we thought that might actually be included in the charge and the conclusion was we would likely need to amortize that. Now in terms of the $2 billion, the way to think about the $2 billion is some portion of that would relate to businesses that Delphi is staying in and we'll negotiate parts prices for existing business. We'll negotiate basically market prices for new business and then we have Delphi's winddown businesses where we will basically resource and Delphi’s sales will negotiate with the buyer for those businesses. I think we would have about a $2 million material cost penalty. I think what you should think about is we don't have that exactly nailed down. At some point, as this agreement finally comes to closure, we'll nail all this stuff down and be able to talk about it in more concrete terms. Frankly, I see the purchase price reductions coming down in line over the next five years or so. It's not something that's going to be resolved in the next two years. It's going to take longer for it to work its way out. Rod Lache - Deutsche Bank: Is there an annual transition payment in addition to this, or was that the $450 million you mentioned already?

You've got $400 million to $500 million of some transition payments and then some labor subsidies. That's in the $400 million to $500 million. And this is how you amortize this $450 million payment, would be in addition to that. Rod Lache - Deutsche Bank: So net-net, initially, probably a drag, but then becoming neutral and then positive over the next couple years?

Correct. Rod Lache - Deutsche Bank: Can you just refresh us on the liabilities that you're absorbing? I think at the end of Q1, you put $4.5 billion of Delphi's OPEB into your OPEB. What's the gross number going to be ultimately be, and how do the liabilities work out?

The way I think about the gross number is we actually reclassified a portion of our charge into OPEB and that was associated with the employees who checked the box, retired GM employees, and therefore it was appropriate for us to reclassify it into OPEB. The way I think about the gross charge, we had taken about $6 billion in charges through March 31. This would put another $575 million on top of it. Over time, a large part of that will be OPEB; not all of it, because there are some labor transformation costs as well. Rod Lache - Deutsche Bank: So originally, at the end of last year, you had a $64 billion OPEB obligation, so it's like $6 billion on top of that, before adjusting for discount rates and things like that?

I'm trying to remember when we actually reclassified the check the box people, whether that was done at year end or not; I thought it was, actually. I'll quickly confirm here. I'm pretty certain we actually reclassified the people who had already checked the box as retired in last year's number, so you wouldn't add them again. Rod Lache - Deutsche Bank: One last one. Have you finalized the COAs with the UAW at this point? Do you have a sense how much savings could be achieved there, the plant by plant stuff?

I would say we've made good progress in COAs up to date, but I would say at this point with the commencement of national bargaining, I wouldn't say there's a lot going on in that regard. I would say there's been good emphasis, good focus by the operating teams, but at this point people have kind of shifted their attention to the national bargaining. For those areas where we don't have a COA, I'm quite confident we'll come back and get those. Just need to do it over time.

Your next question comes from Brian Johnson - Lehman Brothers. Brian Johnson - Lehman Brothers: My question relates to page 19 on accrued expenses. Can you take us through your accounting protocol for incentives in North America? Specifically whether this $600 million addition to sales allowance is a look ahead to summertime programs or is just a true up of what was on the books as of June 30?

It would be a true up of what's on the books as of June 30. It's basically what's in inventory and what we expect we'll have to spend in order to sell the vehicles. Brian Johnson - Lehman Brothers: But were the programs that were announced of June 30? Specifically, if you increased incentives in July we would have to accrue for --

The programs that were in effect as of June 30. Brian Johnson - Lehman Brothers: So we could expect some additional, perhaps, pressure from the zero percent five-year offer?

These numbers move all around and yes, that could very well happen. Brian Johnson - Lehman Brothers: Second question, back on Delphi, is there any intent in the original framework, there is a $2.4 billion EBITDA number and I didn't see that in the second one. Is part of the issue around the $2 billion and when you hit run rate reductions related to getting a number for EBITDA coming out of Delphi?

No. They're not linked at all. They are linked in terms of Delphi's profitability, but it's not as if we're triggering our negotiated price down based upon their achievement with their EBITDA level. There is nothing like that. Brian Johnson - Lehman Brothers: Is the goal to have mark, arm's length prices around all the parts pieces and any subsidies are below the line?

That is our objective. I'm not sure below the line, we will identify it. I would say we what we want to try to do is identify and manage to the extent we possibly can, the level of our labor subsidy and then over time move ourselves to market prices for all the parts. There will be a negotiation on the parts that are actually in production today. After Delphi's labor is transformed, we should expect and we will receive price downs in some of that business, because in fact we will have helped pay for part of their labor transformation. Going forward, as we source new business, it would be done generally on an arm's length price basis.

Your next question comes from Himanshu Patel – JP Morgan. Himanshu Patel - JP Morgan: Slide 8, mix quite powerful in Q2. Any outlook you could give us on the second half for both mix and the price material walk?

I would say mix was very favorable in Q2. As we actually ramp up our full production of full-priced pickups you're going to see more regular cap, more extended cab, less crews. I would say that the favorable mix in the Q2, particularly around pickups, you're going to see that abate in the second half of the year. You're going to see more of a normal production mix than you would have seen in the first half of the year. We do have some important launches, CTS and Malibu; but certainly the big driver of mix and the big driver of revenue per vehicle would be the pickups in the first half of the year. I'll let Paul make a couple comments here in a moment. Let me come back to price and material and then I'll have Paul make a comment on mix. Price and material, the pricing environment, we were slightly favorable in terms of price in the second quarter and calendar year-to-date. Material costs, if I knew how to predict those commodities, I would be a trader. Frankly, the truth is that they're just very volatile and they're very high. So we're not, frankly, planning on any recession from the high commodity prices we've seen in either steel or nonferrous. Obviously, we'll have normal negotiation in a number of these areas, particularly steel as we move into next year, but at this point the market is pretty inhospitable for raw materials. Paul, do you want to make a comment on mix?

I think Fritz hit it on the head. Probably a little bit less favorable in the second half than what we have seen in the first half. We do get a full ramp in the heavy duty pickups in the back end which will help us. We're also seeing mix hold up very well within categories. So for instance, on the large utilities we're still seeing strong mix within that level of production and some of the car lines as well. So probably a little bit less favorable in the second half, but there have been some pluses and there are some things still playing out that directionally help us. I would say heavy duty pickups, certainly the launches from the car side and then the large utilities and some other key categories are holding up pretty well. We're seeing Denali sales for instance, on Yukons, hold up pretty close to 50% of the mix. So there are some pluses, and that's favorable for us because the industry, of course, is really suffering from some headwinds on mix right now that we're starting to see show up a bit. Himanshu Patel - JP Morgan: Fritz, you had talked previously about wanting to reduce the leverage of the company. When you look at what's happening with the credit markets right now, has your view on your ability to fund the restructuring changed at all?

No. I would say a couple things. First, our liquidity position, we're pleased to build it. The way we fund the turnaround is to maintain a strong liquidity position. So nice to see some favorable operating cash flow, with the caveats I mentioned, that some part of it will likely reverse in the second half. Our timing on the convert was pretty good. I'm glad I wasn't in the market in the last three weeks. Frankly, it's probably a good idea to touch on Allison here. We do expect Allison to close in the third quarter. I said it at the front, I'll say it here. I would say I wouldn't want to be out trying to raise money in the current market. I like our liquidity position. So we feel like we have what we need in order to finance the turnaround. Himanshu Patel - JP Morgan: Europe, we saw this at Ford as well, obviously a pretty good set of results. Europe's historically been pretty volatile. Are you comfortable saying the level of profitability we're seeing now is a steady state we should think about over the next several weeks?

I'm not going to forecast European profitability. I would say one of the experiences I had running GM Europe is I used to wake up every morning almost in terror wondering if people bought cars in the third quarter. The third quarter is always tough in Europe with long vacations in a number of European countries sales fall off significantly, plants go down, and they actually do come back and they buy cars again in the fourth quarter, but I would say in Europe you have to have a good first half in order to have a reasonable chance of having reasonable results for the year. So if you look at our calendar year-to-date results in Europe, we're pretty much in line with where we were the prior year. I would say performance is okay. We were reasonably pleased with the second quarter, but frankly we've still got a lot of challenges ahead of us in Europe. Himanshu Patel - JP Morgan: Last clarification, slide 19; thanks for the walkdown there on accrued expenses. I want to go back to an earlier question, just to be clear, the July zero percent financing program on the pickups, has that been accrued for in the Q2 numbers or will that show up in Q3's P&L?

No, it would not be included in the second quarter and the cost will end up in the third quarter. By the way, while I got it, Rod had asked about the reclassification of OPEB, that reclassification was made at year end. We had reclassified over $4 billion of liabilities from the Delphi reserve to OPEB.

Your next question comes from Robert Barry - Goldman Sachs. Robert Barry - Goldman Sachs: Is it possible for you to provide some dimension around the impact of cutting the daily rental volumes in the quarter?

Well actually, I think about cutting daily rental volumes. You can think about obviously the lower level of volumes. I think about it as, how do we actually run the business so that the daily rental volume becomes a good part of our marketing mix? That's exactly what we're trying to get accomplished. What does that mean? It means over time managing it so we're in more of an equilibrium of good retail mix. I think as we're getting close to it, chart 6, retail mix at 26.7%, we're getting close to about where we want to be in terms of rental volumes, in terms of the importance of fleet to our total sales and the profitability of rental car sales goes up as a result, which is positive. Two, we're seeing it in terms of residual values in our cars. So when you see it in residual value of your cars, it affects cost of ownership to the consumer, which is good. It affects our ability to be more competitive on lease rates when we offer lease financing, which is good. So it's a bit of a virtuous cycle. It's finding the right equilibrium. If you do that, you like the fleet business, it's nice, it's profitable; it is not as profitable as retail, but nonetheless it is still good business and it has positive effects on the rest of your business. I would say as I look at the 26.7% in the quarter, we're getting close to where we think we need to be and the business has improved as a result. Robert Barry - Goldman Sachs: On slide 8 where you look at volume mix and pricing, clearly it had a negative on volume, but where is it showing up, in mix or price or a little bit of both?

It would show up in mix, actually. We capture retail fleet in mix. Robert Barry - Goldman Sachs: And you said most of the 0.7% was pickups?

I would say pickups. Frankly, we've had favorable model option mix as well as true mix and then fleet retail mix. It was actually a pretty powerful story. Pickups was a big part of it, but not exclusively, as Paul mentioned. For example, we still have very high levels of Denali penetration in Yukons, if you look at our revenue per vehicle, the revenue per vehicle is rising pretty significantly, so it is good to see that performance. We'd like to couple it with better volumes. Robert Barry - Goldman Sachs: I guess one reason I was asking, and I know it's hard to compare easily, but it seemed like Ford in its volume mix pricing equation saw a real significant lift from the cutback in daily rental. It seems like given the amount of volume in daily rental you are reducing, it's not having as much of a needle-moving impact. I don't know, maybe your daily rental was more profitable to begin with?

Well, I can only speak for our situation, but we've been doing this over the last couple years. We've been putting it into our marketing mix. I can't speak for Ford, but we've been seeing it and we do see there is a favorable effect of fleet retail that's included in the mix number. You've got a lot of pretty positive things in there. That's just one of them. Robert Barry - Goldman Sachs: Finally, are you tracking yet at the full $9 billion cost cut level, or is there still some step up to go?

No. We're confident that we'll achieve the $9 billion and actually by and large, it's pretty close to achieved, actually, as you look at the performance of the first half. This chart has North America $2.2 billion year-to-date. The $9 billion includes North America and the corporate sector, particularly the health care that carries the corporate sector. So by and large, we felt confident we would achieve the $9 billion and we're pretty close to achieving it now. Robert Barry - Goldman Sachs: Finally, is there any seasonality to the Allison business? I assume maybe it's weaker in the third quarter, but if we were to try and think about that on an annual basis?

I'm not sure. You got me. I don't know whether there's seasonality to the Allison business. I would say is what you have is some cyclicality to the Allison business and a lot of it runs to truck demand and emission. That's the more relevant factor than seasonality across a year.

Your next question comes from John Murphy - Merrill Lynch. John Murphy - Merrill Lynch: Good morning, Fritz. A question on Daewoo. Daewoo looks like it was incredibly strong in the quarter. If you look at slide 12 and look at the change or the backing out of minority interest in Asia-Pac, it went up tremendously. It almost indicates Daewoo is up $226 million year over year. Is that correct? Is Daewoo really doing that well? Can you think about using it as a greater production base than you currently are for Asia-Pac and Eastern Europe?

GM Daewoo -- I always put the word GM in front of it, actually -- I would say, yes. The single largest, or I think may well be the sole driver of minority interest would be GM Daewoo. It's a fair assumption to say that it is the substantial improvement in profitability; good to see. You see higher production. You can see it's using our base there not only to supply fully built up units around the globe, but frankly our kit business is actually very large. I would say the biggest concern that we have in our business in Korea; by the way, I digress a bit, but we've actually had better performance in the Korean market too, which we’ve been pleased to see. Our biggest concern is the strengthening of the wan. The wan has diverged from the yen while the yen continues with its incredible weakness, the wan has strengthened considerably and broke the historic link between the wan and the yen. The strong wan has been probably our biggest strategic concern. We have a substantial export business from Korea. We have managed the hedge position I think pretty intelligently in terms of understanding the importance of export to GM Daewoo, which basically allows us to start moving some of our footprint into some other locations. For example, we are tooling GM Daewoo product also in a number of lower-cost countries around the world, which not only allows to us grow the volumes in total, but to do so in a way that manages our foreign exchange risk. Coming back to Korea, though, what has been most interesting to us is just the competitiveness of the Korean supply base. It's very good. The competitiveness, and even with the strong wan, they've been very aggressive and very good. So Korea notwithstanding the strengthening of the wan has continued to be a favorable or a reasonably low-cost production source for our global needs. I would also say there's some benefit in the fact that we're shipping some product from Korea into Europe and so the strong euro has helped us as well. As we look at GM Daewoo, we're pleased. We acquired the business for $252 million in 2002, so we're pleased with what has happened. We have some issues, particularly around the wan that cause us to want to look at fully utilizing our facilities in Korea, but also look at intelligently tooling that product in other places around the world. John Murphy - Merrill Lynch: Fritz, if you look at this it is 87,000 units of an increase in the second quarter. Annualizing, that's roughly 350,000 units. That's more than a full plane of capacity. Have you added capacity? Is there more capacity coming on?

We had capacity there, which was selling a car which wasn't selling. So as we launched the Captiva and the Intera, we launched the new Epica, these cars have basically really sold well and so we are now very fully utilizing our capacity in Korea whereas before we were not. John Murphy - Merrill Lynch: Maybe just to switch gears to pension. Do you have a measurement of where you are on your funded status right now? Any comment on your ability to leverage that at this point, potentially to help out with health care, maybe in the course of negotiations or maybe just more naturally in pulling some of those funds out to pay for your ongoing retiree health care?

I don't have a remeasurement as of June 30. We haven't actually gone through the process of remeasuring our liability, so I don't have a specific number I can give to you today. Obviously, we do that at least once a year. I just don't have that today. The markets, as you know as well as I, have been quite volatile, actually. We were happy at mid-July and less happy by end of July. I would say our pension fund remains in a very good position, is the way I would put it. What we have to do in thinking about the surplus is interest rates have risen since we last measured the balance sheet as of December 31st in terms of the discount rate. Pension returns have been volatile, but on balance we've been pleased with how we've done. So I would say stay tuned. I'm putting a lot of words and not necessarily directly answering your questions because I don't have the numbers today and we're not going to disclose it. I would say in terms of how you might use a surplus, I would say stay tuned. The fact that in 2002 the hole we had blown in our pension fund was the single biggest corporate finance risk facing GM. The steps we've taken in order to restore the pension fund to its current status of being substantially over funded, we're pleased with the steps we've taken, we've borrowed heavily to do it. So I think we did mortgage, to some degree, our business in order to get that done and I would say over time how we might use the surplus, we'd obviously need to do it in accordance with applicable law. It does give us some options, but I don't have anything today that I can really comment on. John Murphy - Merrill Lynch: Lastly, there was no update on the third quarter production. Are we going to get an update tomorrow, or is this just a reaffirmation that you're still looking for plus 2% North America?

We'll update you tomorrow.

Your next question comes from John Steinmetz - Morgan Stanley. Jonathan Steinmetz - Morgan Stanley: If I can go back to slide 8 on price versus the material cost line item that was a push, I think you said it was slightly favorable on price, slightly unfavorable on material. Can you give the actual numbers on that to correspond with?

Yes, I can. It's like a two-tenths of a billion each way. Jonathan Steinmetz - Morgan Stanley: On the price side, given where you are on the pickup launch and the fact that you didn’t accrue for this new incentive program, I might have expected price to be even stronger. Are there things at the bottom end of the product portfolio that are constraining that? If so, what are they?

The market environment is pretty competitive. By the way, the two-tenths of a billion was in the quarter, to clarify, not for the calendar year-to-date. Paul, do you want to comment on that?

I think it's fair as we have talked about month to month, we've been trying to maintain incentive discipline in a market that's underperforming a bit and the competition is weighing in. As we move throughout the second quarter, we had to move in a couple categories. We moved a bit in full sized pickups as the quarter went along. We had to make some adjustments in some other categories as well as we ran into our Fourth of July program. Net-net for us, we feel like we've been able to maintain price in relationship to the market better than most manufacturers, but second quarter was a tough quarter for the industry. The industry ran at a running rate of 16.2 million units in the quarter for U.S. That shows up both in terms of volume and price. Jonathan Steinmetz - Morgan Stanley: Turning to Europe, Fritz, on slide 10, is it fair to say that Russia would have been the biggest driver of the year-on-year profit improvements?

No, no. As a matter of fact, a fair amount of Russia profitability could very well be found in the Asia Pacific results, because a lot of the product we supply to Russia, not exclusively, would come from GM Daewoo. So I would not say that the big driver of the European profit improvement was Russia. Really what it was was a better price, lower structural cost. Those are the key factors that drove the profitability improvement in Europe. Jonathan Steinmetz - Morgan Stanley: A balance sheet question. When we think about the possibility of trying to restructure the health care liability, you've got about $19 billion in the VEBA, you've got Allison proceeds, potentially some money from Delphi medium duty. Do you think from the actual GM balance sheet and the GMAC balance sheet, do you think there's any excess cash that could be swept from those places to start to help towards that restructuring, or do you think you need this much cash to run the business in both cases?

Well, I would say we're certainly operating above our minimum cash requirement today. It's the right thing to do in terms of financing the business; it's the right thing to do to preserve flexibility for us to do what we think we need to do. I would say not GMAC, there's no sweeping the cash out of GMAC. Frankly, the sale is done. GMAC closely monitors and controls its exposure to GM. So on the GMAC side, we are where we are. It's just nice to see GMAC return to profitability so we can hopefully at some point get back to a more normal dividend-paying situation, which we would like to get back to, we and our partner. The rest of the business, we've done as good a job as we can in terms of monetizing the assets on our balance sheet that could be monetized to give us the maximum flexibility. Beyond that, stay tuned.

Ladies and gentlemen, shortly we will conclude the analyst portion of the question-and-answer session. Following, we will proceed with the media portion of the question-and-answer session. (Operator Instructions) The next analyst question comes from the line of Chris Ceraso - Credit Suisse. Chris Ceraso - Credit Suisse : First question on FIN 48 and corporate and other, are there still a number of reviews pending on the tax positions and should we expect to see changes like this in subsequent quarters?

Well, we operate, I think, in 200 countries around the world and FIN 48 requires you to look at every one of your uncertain tax positions and every one of your tax jurisdictions in every year. So the answer is FIN 48, you're going to be constantly looking at your reserve positions every quarter; but they may not be favorable, by the way, either. They're going to bounce around and I think we're going to just have volatility. What we're going to try to do is be as transparent as we possibly can be, put it in one area. This particular quarter it was favorable largely as a result of resolution to matters in the United States and Europe. Other quarters, you could see this could be unfavorable. Chris Ceraso - Credit Suisse : With that said, Fritz, what do you think we should expect on a normal basis in the corp other bucket?

Goodness. I can't really say. FIN 48 was a lot of work to implement. It is actually a pretty good standard, actually, but it does introduce some volatility because it is more likely than not to have this kind of a clip test. If you pass it, you have it and if you don't, you don't. It's on/off, it's binary and you could have volatility, particularly as you start talking about uncertain tax positions in our larger countries. I just can't tell you. Chris Ceraso - Credit Suisse : Maybe think about it this way: absent a favorable or unfavorable FIN 48 adjustment, corporate other should still be running at a small negative, is that fair?

Yes, yes, exactly. Chris Ceraso - Credit Suisse : One other follow up on slide 8, the breakdown. Do you have the detail on pension OPEB manufacturing? I think last quarter it was $700 million OPEB, $100 million pension. What were the numbers for Q2?

Let me see, it was $700 million pension OPEB and two-tenths of a billion manufacturing performance and other in the quarter. Chris Ceraso - Credit Suisse : On the topic of sustainability of profits in Europe, maybe if you can just give us an update from a product standpoint, what's launching right now, what launches in the second half, what happens in '08 so we can think about mix and how that's impacting profits?

The Corsa enjoyed a very good launch in Europe and actually still growing, still quite popular. It has been a major driver of the improved price in GM Europe, the successful launch of the Corsa. I would say as we move into the latter part of this year and into next year, we have so the pretty significant changes underway for the Saab 93. The Saab lineup will get a pretty substantial change. We have a new Agila later in the year. Actually, that goes into next year, I apologize. We have more coming in Saab than we do necessarily in [inaudible]. Corsa's a very big launch. Interra and Captiva were just recently launched and they continue to grow. We're pleased to be back in the crossover segment and those vehicles, particularly the Captiva, have done well. Chris Ceraso - Credit Suisse : Last question on the inventory. Overall numbers look pretty good, but if you look at the full-size utilities and the full-size pickups, those are running pretty high. Paul's talked about that on the monthly calls, you're comfortable for now carrying excess stock there. How long can you carry excess stock? Will the incentives take care of all of that? Should we be worried about Q4 build in those trucks?

Well, we obviously took some actions and announced them yesterday in terms of what we needed to do on full-size pickups and now zero for 60, the selling rate in June was insufficient relative to where we wanted to be. Certainly we felt we needed to respond to the competitive activities and did. This is one where we'll have to see where we go as we go through the next several months. In total, we're okay. I would say pickups, particularly full-size pickups is the area of greatest concern for us, which is why we took the action we did. Chris Ceraso - Credit Suisse : First raise the incentives; if you're still running north of 100 days then we think about lowering the output?

I'll let Paul comment here.

Chris, just to be clear, we're a little long on large utilities, although the large utility inventory situation is a little different than full-sized pickups. Where we are running long right now is in the full-size pickup category, so it's important that we separate those two a bit. We'll continue to monitor, we have taken some actions both in market as well as what we're doing from a production standpoint. We'll see how things play out after Q3 and go from there.

Your next question comes from Ron Tadross - Banc of America. Ron Tadross - Banc of America Securities: Thanks, guys. Most of my questions have been answered, but let me just focus in on the fleet. The 26.7, can you give us an idea of the breakdown of corporate and rental. You've suggested that you're nearing where you want to be. Which one needs to come down more, the corporate or the rental?

First of all, actually, I'm not sure we need to come down a lot more from where we are. I'll let Paul give you the breakdown.

To be clear Ron, as we said, we're trying to continue to grow the non-rental side of the business. Probably given the weakness in housing and so on this year, we'll probably be down a little bit there, although still pretty close to the 400,000 units we've been talking about. We've been running in that range pretty comfortably here, but a little softness in some pockets affecting us. On the rental side, what that means is if we're just below 600,000 units we're running in that range we've been talking about, 550,000 to 600,000 on the rental side, about 400,000 on the non-rental side annualized. If you look at the quarter as a whole, we were down 40,000 units on the rental side for the quarter and we'll have some tough year-ago comps in the back end of the year. We'll probably finish the year down just about 120,000 units on the rental side and probably down a little bit less than 20,000 units on the non-rental side of fleet. We're actually hoping to hold the line there, but housing has been a bit of a head wind. Ron Tadross - Banc of America Securities: if you look at the Toyota Honda, they're running like 5% rental; maybe 5% to 7%. Honda is running 1%. You guys are running like 13%, 14% rental percentage-wise at that 550 rate. Why shouldn't you be able to take it down or why don't you want to take it down below 10%?

We didn’t say we weren’t going to look at where we are at, but from a business standpoint, the profitability has improved substantially in the category. There's a balance in the industry as a whole that we're getting very close to. If you look at those other manufacturers, they're being very aggressive going into the rental category, including Toyota who has seen a significant increase in the rental business as the financial dynamics of that category has improved. There's a variety of things that drive our decision there.

I would say from my perspective, I look at it as how do you find equilibrium? You know that if you are going to sell cars to a customer who buys 200,000 cars or 350,000 cars from you, you're going to have a different bargain than when you do them one at a time. That's just the way it works. My view is, the objective here is to make the business attractive and profitable. It will be less profitable than retail, but to make it profitable and if it doesn't damage retail, and once you reach equilibrium it really doesn't, why would we walk away from good rental business, why wouldn't we do both? Ron Tadross - Banc of America Securities: So what evidence are you seeing that you have gotten to a point where it's not damaging retail?

Look at our residuals. We still have some product lines where I think it probably hurts us, but if you look overall at our residual values, they are rebounding nicely and frankly we are seeing it in our off-lease rental, you see it in GMAC's results, you see it in our performance in our lease portfolio. We're starting to see that benefit and it's pretty encouraging. Ron Tadross - Banc of America Securities: On a dollar basis or percentage basis on residuals?

Both.

Our next question concludes the analyst portion of the question-and-answer session and comes from the line of Mark Alter - Credit Suisse. Mark Alter - Credit Suisse: Good morning, Fritz. Question on GMAC. In the first quarter, the market successfully separated GMAC from GM from a trading standpoint but then attached it to ResCap. Certainly, they made a lot of progress in fixing their book, but it didn't sound encouraging yesterday about the outlook for mortgages in the rest of the year. If ResCap can't improve itself and continues to have problems, would GM consider seeking to restructure the GMAC ResCap relationship to protect GMAC's ability to fund attractively going forward? , Is that so important?

Interesting point. If you look at the steps we have taken at ResCap, we've injected $0.5 billion of capital into ResCap in the quarter. These are steps, w are not the majority shareholder of GMAC; Cerberus is. They're 51%, we're 49%. This would be something where we would have to reach some agreement with our partner. I don't know of any such ideas even under contemplation today. I think it was about making sure that we get ResCap properly capitalized. Yesterday, we went through the liquidity available at ResCap which is quite strong. It's about really getting the non-prime exposure behind us and frankly allowing the good franchises in ResCap to come back into the profitability stream. I think that's what our 100% focus is as opposed to some sort of structural answer. Mark Alter - Credit Suisse: But is the prime directive from your standpoint in GMAC to have GMAC have low-cost sources of fund to help them finance auto sales?

Actually, I don't have one, I have several, but I do think they're mutually supportive. I think GMAC having low-cost funds to support auto sales and a successful GMAC are one in the same. We'd like to make sure our investment in GMAC earns a great return while we get lower cost of funds. I have not seen any evidence to-date that suggests that is threatened by certainly the cost of funds being threatened by ResCap. Haven't seen it. Mark Alter - Credit Suisse: On South America, you mentioned in the declining market share in Brazil that you were having a hard time keeping up with markets. Is that from a capacity standpoint, you just can't produce enough, or some other reason?

Yes. This falls into the category of number one list of good problems to have. The manufacturing team, everybody in the Brazilian organization are pushing like crazy to squeeze more capacity out of our existing production mills.

Our next question comes from the line of Jeff Green - Bloomberg News. Jeff Green - Bloomberg News : Looking at where things are going with the pricing, you mentioned some of the more mainstream products are coming online. Are we in a peak pricing point right now for you guys?

I wouldn't necessarily say that. We're dealing with a pretty weak overall market; soft is probably the way to put it. So I think the good news is our launches have gotten good reception from the consumer, we've been able to price them at the market and get more attractive pricing for them as the products have gotten better acceptance. We've been pleased by that, but I don't think you can separate the pricing environment from the overall industry environment, and the overall industry environment is pretty tough. Jeff Green - Bloomberg News : Your highest-profit vehicles are the ones that are in the mix right now and the vehicles that are coming in the next year or so tend to be lower profit.

It’s interesting. One of the things I learned about when I was in Europe, and it is not exactly analogous here, but in Europe, trying to launch a brand new Corsa and doing a great job with a Corsa, you can drive a lot of improved net revenue and price even on smaller cars with lower profitability per vehicle if you get the car right. On the margin, it can drive improvement in aggregate contribution margin. The difference in North America is just the size of the pickup truck volume versus some of our other individual volumes. My view is that a launch like the Malibu is one of the most important launches we have, not only in terms of image but in terms of generating more aggregate contribution margins on Malibu’s. Jeff Green - Bloomberg News : One question on cash flow. You reiterated you're going to be cash flow negative this year. I know third quarter is a bad cash quarter normally. Is it the whole second half of the year or is the bad spot concentrated in the third quarter for cash flow?

A lot of it will depend on individual production decisions we take. In general, the second half is tougher. The third quarter is always tough given the plant shutdown, but I would say this is one where timing of your individual production decision can have a significant influence on any given quarter's cash flow.

Your next question comes from Joseph Szczesny - Oakland Press. Joseph Szczesny - Oakland Press: What's your outlook? Have you altered your outlook for the rest of the year because of the mortgage problems? You seemed to do that when you reduced the output last week.

I'll let Paul talk about our outlook for the industry.

Joe, we'll give some additional guidance tomorrow when we talk about the industry, but we're unchanged from last month when we were talking about the industry in that 16.7ish range for the year. We want to get a reading on Q3, which obviously is an important summer selldown period. We're coming off this weak second quarter, many of the headwinds there, but no change in our industry guidance from where we were last month.

Your next question comes from David Wells -Business Week. David Wells - Business Week : A quick question I have on the warranty. It looked like costs were up $500 million. Is that the right way to read that? You mentioned something about reserves in there too, does that mean warranty costs were up?

Last year, actually, the driver of this was last year we had a favorable policy warranty adjustment in the second quarter of last year. This was basically with significantly favorable quality performance we adjusted the warranty reserves in prior years that, retro effect, if you will, that favorably affected the second quarter of last year didn't occur this year. We've brought ourselves to lower accrual rates and those have continued. What we had is, we did need to accrue for the revised power train warranty, which we did, but the driver of this $500 million unfavorable year to year is by and large the absence of last year's favorable adjustment to policy and warranty accrual. David Wells - Business Week : So in other words, you're having to set aside more money because of the extended power train warranty?

No. Actually, let me answer that question. Yes, of course you do. If you have an extended warranty, you need to make sure you set aside enough money to cover that, but I would say our overall quality performance continues to be reasonably satisfactory. So we're able to manage that within our overall accrual rates. What I'm saying is that the prior year when we had substantially favorable accrual rates from what we saw in 2006, 2005, 2004 model years, we needed to take that into account in our large reserve balance, we needed to favorably adjust it at that point because we no longer felt that was going to be necessary. David Wells - Business Week : Are your warranty costs up in the first half of the year and in the quarter?

Obviously, to the extent of the variances here. If you pull out the retro effect, I think the answer is they're pretty much the same.

Our next question comes from the line of Debora Steinberg - Wall Street Weather. Debora Steinberg - Wall Street Weather: I would like to know if GM will support universal health care, such as Medicare for All, in order for you to better compete with your foreign counterparts?

Well, you got me outside of my job description, but let me at least talk to you a bit about health care. Health care is the single biggest cost competitive issue we face as a company. It's something that we work on every day, not only in terms of cost control, cost management, we work on plan design, we work cooperatively with our unions in terms of restructuring a pretty unprecedented agreement in support of the UAW in 2005, which was approved in 2006. But in the end, notwithstanding all the excellent work, this remains, as I said, if you looked at the first half of the year, we spent $1.9 billion in legacy costs. That's over and above active health care. So this is the largest relative competitive disadvantage we have, which means it remains squarely on our radar screen. As to our policy position, if you will, we don't get into that because frankly we don't necessarily see that happening. Our job so to try to find solutions to this working with our people, working with our unions to try to make sure we address the challenge, because we can't wait. We need to address it. Debora Steinberg - Wall Street Weather: But you don't see that as a wider movement in the United States coming up in the next years' elections and working with other major corporations in order to reduce costs? Obviously, that would be a benefit for you and other major U.S. corporations.

We actively participate in activities around health care, particularly given the size of our health care bill. But our conclusion is we believe we need to work to find a way to try to solve this ourselves. We don't have a preferred solution. Our solution is we've got to find a way to get competitive. Debora Steinberg - Wall Street Weather: On a different track, will GM make more profitable, small, high mileage cars? If so, when would they be available?

I think the answer is yes. For example, our new Chevrolet Malibu which will enjoy good fuel economy, we're launching this year. We would expect it to be more profitable. All of our vehicles as we launch them, even our full-size utilities and our full-size pickups; we launched the full-size utilities for the customers who want those, we have industry-leading fuel economy. We launched our new full size pickup with industry-leading fuel economy, and as we bring in our cars, the Cadillac CTS will have direct injection V6 engines, which will be better fuel economy, maybe with 6-speed automatic transmission. Every one of our launches is targeted to produce vehicles with better fuel economies -- in many cases industry lead -- and we moved on to the small cars to the extent that consumers want them, or hybrids to the extent the consumers want them, whether it's the Saturn Aura hybrid, the Saturn View hybrid, we are committed to delivering consumers the kind of car they want with industry-leading fuel economy. Frankly, my job is to try to make sure that we're profitable with them as well.

Our final question comes from Rick Popely - Chicago Tribune. Rick Popely - Chicago Tribune : I wanted to know in the second half if you expect to have your restructuring charges and attrition, and plant closure charges, are those going to be higher or lower? Is most of it behind you already, or is there a lot more to come?

I would say we don't forecast it. I do know that we have a lot of activities in Europe that we have in front of us in the second half of the year. North America numbers, you get this amount of restructuring in the second quarter in North America, not unusual for the size of our business. So I'm not going to venture a guess as to what's going to happen in the second half. I do know Europe, we should see some higher charges in the second half because we have a number of programs underway that we expect to hit in the third and fourth quarter.

Gentleman, there appear to be no further questions at this time. I'll now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you very much, operator. Thank you, everyone for joining us this morning.