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General Motors Corporation (NYSE:GM)

Q4 2006 Earnings Call

March 14, 2007 9:30 am ET

Executives

Randy Arickx - Investor Relations

Frederick A. Henderson - Chief Financial Officer, Vice Chairman

Paul Ballew - Executive Director, Global Markets and Industry Analysis

Walter Borst - Treasurer

Analysts

Chris Seraso - Credit Suisse

Brian Johnson - Lehman Brothers

Rod Lache - Deutsche Bank

Jonathan Steinmetz - Morgan Stanley

Robert Barry - Goldman Sachs

Himanshu Patel - JP Morgan

Ron Tadross - Banc of America Securities

John Murphy - Merrill Lynch

Jon Rogers - Citigroup

Media

Bernard Simon - The Financial Times

Jeff Green - Bloomberg News

Tom Krisher - Associated Press

Jim Mataya - The Chicago Tribune

Tom Walsh - The Detroit Free Press

Chris Isidore - CNNMoney

Michael Strong

David Welch - BusinessWeek

John Stoll - Dow Jones

Joseph Szczesny - The Oakland Press

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the General Motors Corporation fourth quarter 2006 and calendar year results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Randy Arickx, Executive Director of Investor Relations. Please go ahead, sir.

Randy Arickx

Thank you very much and good morning, everyone. Thanks for joining us as we review our 2006 fourth quarter and calendar year results that we sent to you earlier this morning.

I would first like to direct your attention to the language regarding forward-looking statements and risk factors on the first page of the chart set. As always, the content of our conference will be governed by this language.

I would also mention that to comply with FCC's Regulation G, we have provided some supplemental charts at the end of the package that we will be speaking to today 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.

I would also like to highlight that 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 provide a review of the fourth quarter and calendar year. After the presentation portion of the call, about 30 minutes will be set aside for questions from security analysts, followed by 30 minutes with the financial press.

I would also like to mention today we have several other executives available 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 Markets and Industry Analysis.

Now I will turn the call over to Fritz.

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Frederick A. Henderson

Thanks, Randy. Good morning. I have a considerable amount of material to go through today. We have actually extended the call to two hours, with an hour for going through the material and another hour for Q&A, so given how much we have, we thought we would do that to make sure we had time to cover all the things we needed to do this morning, so thanks for making the time.

Page two of the deck which was on the website earlier this morning highlights both the fourth quarter and the calendar year results for General Motors on a consolidated basis. In the fourth quarter, our GAAP EPS was $1.68, or $950 million, which was an improvement of about $7.5 billion from the fourth quarter of last year when we had a lot of charges in the fourth quarter results.

If you look at adjusted profitability without special items, $180 million in the fourth quarter, a $1.1 billion improvement, driven largely by $1.4 billion recovery in North America. Actually driven, more than explained by the $1.4 billion recovery in North America, I have a considerable amount of material to discuss on GMAC which will come a little bit later in the deck.

Total revenue, $51 billion. Our fourth quarter automotive revenue of $44 billion was a fourth quarter automotive record, so another quarter of solid revenue growth. Our adjusted automotive operating cash flow was positive in the fourth quarter, $0.3 billion. Not a large number but it was good to see us generate a small amount of cash in the fourth quarter from automotive operations.

The GMAC transaction closed in November 30th. I will spend quite a bit of time on that this morning.

In the calendar year, the GAAP loss was $1.978 billion, roughly $2 billion. GAAP loss improved $8.4 billion from last year -- 2005, I should say, excuse me. If you look at profitability on adjusted basis without special items, profit was $2.2 billion, which was a $5.4 billion improvement from 2005, so stepping back, earnings excluding special items was a little over $2 billion profit on a $207 billion consolidated revenue base. Including all the special items, we lost $2 billion on that same $207 billion revenue base.

Global share, 13.5%, down six-tenths of a point, driven by a 1.7% decline in North America. We did exceed our $6 billion structural cost reduction goal. We are on track to achieve $9 billion of savings in ’07, and we ended the year with a little over $26 billion.

Page three. We wanted to summarize briefly here the impact of the restatements that we have made on General Motors consolidated books. We do plan to file our 10-K tomorrow. The items are noted here that comprise the restatements. The first has to do with deferred tax liabilities and other tax-related adjustments.

The net effect of these adjustments, most of which dated prior to 2002, was an increase in stockholders equity of $245 million as of January 1, 2002, so these were items that were discovered as a result of our reconciliation process. They were aged and we needed to restate our books -- principally the beginning retained earnings as of January 1, 2002. The impact in the intervening periods, which you will see in the next chart, was not material.

FAS-133 is a result of fairly stringent documentation and assessment requirements for derivative accounting to be eligible for hedge accounting. We determined at the end of the year at both the GM and GMAC level that we had inappropriately applied hedge accounting. At the GM level, commodities and foreign exchange. At the GMAC level, some interest rate hedges on some callable debt. We basically had to unwind these hedges and mark them to market.

The accumulative effect of that was $249 million, which I will cover on the next chart, plus the volatility across periods, not only by year but even within quarters, is pretty substantial.

Finally, as a result of reopening our books, we chose to book all known out-of-period adjustments. These items were not material either individually nor collectively, but as a result of reopening our books, we booked those as well.

Page four shows you what the impact of the restatement was. It shows not only what the GAAP net income amounted to prior, and the chart includes the nine-month results through the end of the third quarter of ’06, going back to calendar year 2002. You see the impact of deferred taxes. These are the results in these calendar years, by the way, so for example, you would not see the impact of the deferred tax adjustment on the beginning retained earnings as of January 1, 2002 on this chart.

You can see FAS-133. You can also see that FAS-133 can be volatile. It had a favorable effect, for example, in 2002 of $334 million. It had an unfavorable effect in 2003, and then you see the impact of other miscellaneous adjustments.

So the numbers are as restated. For the first nine months of this year, $2.928 billion, which is a loss, excuse me -- a 3.2% improvement from the prior number. In the calendar year ’05, a 1.4% change improvement. Calendar year ’04, a 3.7% reduction in net income. In calendar year ’03, an 8.7% reduction in net income. In calendar year ’02, a 10.2% increase in net income, so you do see that these numbers can be volatile.

Page five. On page five, we show the calendar year adjusted results and what we have tried to show for you here is not only what the prior ’05 looked like but what the restated ’05 looks like as well, so you could understand what the restatement impact was on each of our regions, as well as the GMAC level.

It also shows you what the final ’06 calendar year number was. Looking at automotive profitability, $422 million profit, a small profit on an adjusted basis in our automotive business in ’06. A $5.7 billion improvement from the prior year.

North America drove that but was not the exclusive driver of that. $5 billion improvement in North America, but you saw an over $400 million improvement in GM Europe. GM Europe generating a profit on an adjusted basis for the calendar year for the first time since 1999.

GMLAAM was our most profitable region, $533 million, a $381 million improvement, and GMAP generated $441 million of profit, down from the prior year, which was more than accounted for by the fact that we sold the majority of our Suzuki shares in the first quarter of this year and therefore we did not have the equity income from our Suzuki investment.

So looking at automotive profitability, again $422 million, a $5.7 billion improvement.

GMAC, for the calendar year, profit was $1.5 billion. That is a decline of $1.2 billion from the prior year. I will spend some time in the upcoming charts on GMAC so I will come back to that.

The corporate and other was $0.25 billion favorable, a fairly positive, an almost $0.9 billion positive swing there, determined really by two factors: one, favorable impact of legacy costs on prior spin-off retirees and the impact of the healthcare deal for those people, which shows up in the corporate sector; and the second was favorable tax adjustments, most of which was booked in the third quarter of this year.

Worldwide production was up 130,000 units but I will come back to that when we talk about the individual regions.

Page six, the calendar year adjustment, takes you from an adjusted profitability of $2.2 billion down to the loss of roughly $2 billion. The key items are as noted here, again for the calendar year: restructuring and impairment, $4.4 billion. This is largely the charge we took as a result of the attrition program for pension curtailment as well as OPEB, again driven by -- not exclusively, but largely by the attrition program impact in North America.

We did in prior quarters impair our good will, a certain amount of the good will at GMAC, $695 million. The other impacts of the GMAC transaction in the calendar year were actually favorable, $344 million. I will come back to that.

Delphi-related, $233 million, which was pretty much explained by the additional charge we took earlier in the year to bring the Delphi reserve from $5.5 billion to $6 billion. This is the after-tax impact, and then some other minor adjustments in our Delphi accrual.

Gains on asset sales, which includes the gains on our sale of Suzuki stock, our sale of our Isuzu stock, as well as the sale of our proving ground, which closed in the fourth quarter, our desert proving ground in Arizona, and then the other minor items.

So this chart walks you from adjusted profitability, which management uses to measure operations not only period-period but versus budgets. It provides a very good comparison for us in terms of looking at how the businesses are performing and we think it is useful information for investors to measure and assess the company’s performance, but we also need to and do provide you here with a reconciliation of that number to GAAP net income.

Page seven takes you through the fourth quarter and when you look at the numbers again versus the restated data on a quarterly basis, you see frankly North America and Europe, very small losses. They in effect broke even for the size of these businesses.

North America, $1.4 billion improvement from the prior year. Europe, down $13 million, so in effect, a carryover for GM Europe. GMLAAM, you could see a pretty significant improvement year to year as GMLAAM continues to run strong. But the improvement at the automotive level, where we generated a profit of $228 million in the fourth quarter, was a little over $1.4 billion, driven by North America.

You can see GM’s earnings in GMAC here. We had a loss in the fourth quarter of $284 million, a deterioration of $833 million from the prior fourth quarter period, and as I said, I will come back to that. And the corporate other, again driven by both favorable legacy expense as well as some other smaller tax adjustments that were in the fourth quarter.

Page eight takes you through the special items in the fourth quarter from adjusted profitability of $180 million in the prior chart, down to our GAAP net income of $950 million. You can see the net effect to the special items in the fourth quarter was favorable, $770 million.

There were several items in GMAC, which I will come to, $712 million, so that in effect explained most of the $770 million, but you can see, you add numbers in and out. The gain on asset sale of $175 million was driven by the sale of our desert proving ground, which closed in the fourth quarter. We had some restructuring related charges. Again, we had some minor adjustments actually in the Delphi accrual in the fourth quarter and in other items.

So when you look at GAAP net income, it was a profit, $950 million, so close to $1 billion.

Moving into GMAC, the next series of charts takes you through what has happened, not only what is happening in GMAC but also how those results translate through into GM’s financial statements because the transaction itself is fairly complicated and how it affects GM financial statements, it is important I walk you through that because in the future, you will see GMAC reported in a different way than you have seen prior to November 30.

In the fourth quarter, we had a favorable impact on the GMAC transaction of $712 million, largely related to the following items.

First, we had a $394 million gain from the curtailment of pension and OPEB for unrecognized prior service costs for the salaried workforce. In effect, with the exception of very senior people at GMAC, the GMAC employees who are no longer with GM are no longer covered by GM OPEB, so there is a gain associated with those employees leaving our plan. That was $394 million.

Second, in the fourth quarter, GMAC sold the lion’s share of its marketable securities in the insurance business. That generated a $567 million gain. The GMAC insurance business I will talk to a little bit later. From an operating perspective, it is running quite strongly. Sanjit spent time on that yesterday, but in addition to that, GMAC did monetize its capital gains in the fourth quarter and that affected our results favorably. Partly offsetting that, however, $249 million was an additional loss on sale. Think of that as approximately 51% of the gains for marketable securities had in prior quarters been considered by GM when we determined the loss on sale, so in effect, if you net those two numbers, that is in effect our 49% of the net gains from the sale of marketable securities.

You need to look at those two numbers net. You also had some smaller tax items in the fourth quarter that affected the loss on sale, but I think it is important that you look at those two items and realize GM recognizes about 49% of our equity earnings in the sale of marketable securities. Since we had been carrying the fair value of those assets and other comprehensive income before, we were already taking that into account when we determined loss on sale earlier in the 2006 calendar year, specifically in the second quarter.

Lastly, as we have been doing through the year, we have not been depreciating operating lease assets, so what you have had -- this has not had any P&L effect through 2006, but what you have seen is we were carrying GMAC up to the closing date. We were not depreciating operating lease assets and then we were having a corresponding increase in loss on sales -- no net P&L effect.

So these were the items that affected our results for GMAC in the fourth quarter.

Page 10 looks at GMAC's results standing back. We introduced this concept of GMAC on a standalone basis. This is what GMAC would report in its own separate financial statements, as Sanjit took investors through yesterday.

On a standalone basis, net income for GMAC was $1 billion in the fourth quarter, $2.1 billion for the calendar year. Those results include a commercial finance good will impairment, as well as a favorable one-time impact from its LLC conversion, which I will talk to in a subsequent chart.

The operating results however deteriorated significantly, largely as a result of weakness at ResCap, partly offset by strength in insurance, not only in terms of underwriting performance but also due to higher capital gains.

The ResCap losses were driven by the slowdown in the U.S. residential mortgage market, with slowing home price depreciation and specifically the impact of non-prime credit issues rippling through GMAC's financial statements in the fourth quarter, which affected not only the November 30th closing date balance sheet but also the December 31st year-end balance sheet, as we had to go through two audited closes at GMAC at the end of the year.

Finally, the impact at the GMAC level of FAS-133 affected GMAC results -- the impact in the fourth quarter was $107 million unfavorable, after tax, $135 million for the calendar year. The GMAC restatements for FAS-133 relate to interest rate derivatives to hedge callable debt instruments.

Page 11 walks you through the numbers for GMAC on a standalone basis in the fourth quarter. What you can see here is again, GMAC restated in '05 versus '06 and then with the variances.

Automotive was down $33 million. The most notable number here you can see is ResCap off $769 million. ResCap lost $651 million in the fourth quarter. That was the principal driver of the weakness at GMAC.

You can see insurance up significantly, with this being explained by the capital gains that were realized in the fourth quarter.

Other is frankly comprised of a couple issues. First, results at GMAC Commercial Finance were down year to year. Second, in the fourth quarter of '05 we had earnings from our business, basically commercial mortgage business which was sold in the first quarter of '06 -- that is called Capmark -- and so therefore when you look at the fourth quarter of '06, you had minimal earnings for Capmark. When you look at the $126 million variance at the other line, it is driven by lower profitability in each of those lines of business.

You can see the impact of the LLC conversion. With GMAC no longer a taxpayer, those deferred tax liabilities are reversed. That does not affect GM on a consolidated basis, however, because we assume those liabilities. I will come back to that when we look at the impact of GMAC at the GM level.

Finally, GMAC in 2005 did have good will impairment charges.

When you look at the fourth quarter results for GMAC on an operating basis, down $326 million. At the net income level, an improvement from $112 million to $1 billion, or $900 million, driven by the absence of the good will impairment and a sizeable benefit from the LLC conversion.

Page 12 looks at GMAC for the calendar year, again on a standalone basis. This is what Sanjit would have would have walked investors through yesterday.

'05 restated -- $2.7 billion on an operating basis, $2.3 billion of net income. Looking at '06, $2 billion on an operating basis, $2.1 billion in net income, and you can see again, automotive finance down $89 million. As we looked at automotive finance, that is pretty much down as a result of we did repurchase some higher cost debt during the year, which had a cost. It is a good trade but we did have a cost. We incurred it in the 2006 calendar year.

The other elements of GMAC's automotive finance results were covered in pretty significant detail yesterday and I do not want to repeat that today.

ResCap, you can see the weakness -- $839 million, down year to year. It had a small profit for the calendar year of $182 million.

Insurance, you can see $1.127 billion -- again, good underwriting results but also the monetization of the capital gain.

And then again, you see other down year to year. Again, we sold our interest in the commercial mortgage business and lower results at GMAC commercial finance.

The other items below operating income are as I discussed on the prior chart, with one exception. You can see GMAC did impair the remainder of their good will in commercial finance in the calendar year '06. A portion of that was already recognized by GM when we determined our loss on sale earlier this year.

Page 13 begins to take you from GMAC standalone results to how these numbers are reflected in GM's results.

The fourth quarter of '06 is a transition period because we closed the deal on November 30th, so we have two months of GMAC's results consolidated in the fourth quarter of '06. We have 11 months consolidated in our '06 calendar year, and then we have one month in the equity method. As you look at '07, we will be carrying GMAC with the equity method and recognizing 49% of the profitability.

Let me just start with '06. The results, as I said, are reflected in the GM financial statements in three ways. I have already covered how they were consolidated through November, equity income. We also hold preferred stock in GMAC and so we will accrue dividends from that preferred stock.

The second thing that happens, our GMAC standalone results are adjusted for items that do not flow to GM. For example, the LLC conversion benefit is not a profit item at the GM consolidated level because we assume that obligation ourselves, so that is eliminated in consolidation.

The realized gains on the marketable securities we treat as a special item. We do not treat it in operating earnings. We treat it as a special item, and then finally some portion of the good will impairments were already recognized by GM.

We need to make certain adjustments to go from GMAC standalone to GM.

As I said before, going forward GMAC LLC will be carried on GM's books on the equity method. Not only does that effect what our income statement looks like -- it significantly effects what our balance sheet looks like because we de-consolidated GMAC from our results.

Finally, we left behind, as part of the transaction, approximately $4 billion of net book value of leased assets, primarily leased assets, which will wind down over time, over effectively the next three years. We will realize about $4 billion of cash flow over the next three years from those assets.

Page 14 takes you from what I just said in words and turns it into the numbers. You start out with GMAC's net income on the standalone basis for both the fourth quarter and the calendar year; $1.016 billion and $2.125 billion. Again, you take out the LLC conversion. We reduce it for the amount of the realized gain on marketable securities. You add back the good will impairment and you get what GMAC's net income is on a GM-adjusted basis.

We then roll through and say what were the results through November, fully consolidated? They are shown in the chart -- $288 million loss in the fourth quarter, $1.517 billion for the calendar year. You see our 49% interest in GMAC's December losses, $5 million and then finally, you see the impact of preferred dividends kicking in.

This is how we report GMAC's results into GM, and then beyond this in our finance and insurance segment, we will have earnings and cash flow associated with the lease carved out assets going forward, and that is pretty much it, actually.

Page 15 -- the final closing balance sheet as of November 30th was completed. As a result of that, GM will make a common equity injection back into GMAC of approximately $1 billion to restore GMAC's tangible equity balance to $14.4 billion.

When we closed the transaction as of November 30th, we closed on an estimated balance sheet basis with a mechanism in place between ourselves and the consortium, led by Cerberus, who bought 51% of GMAC. That mechanism was intended to true up the balance sheet for what its actual closing balance was as of November 30th when the audit was completed.

Largely as a result, but not exclusively as a result of the deterioration in ResCap’s books, but also in part because of the restatement at GMAC for hedge accounting, we had $1 billion in addition in the net worth as of November 30th and we needed to restore that, so we basically make a $1 billion payment back to GMAC, which will be done before the end of this month, to restore GMAC's tangible net worth to $14.4 billion, which was the basis upon which the transaction closed.

That is the sole mechanism in the transaction. That will be completed before the end this month.

Getting this done is a pretty significant milestone, both for GMAC to get focused on running the business going forward; for GM, in terms of making sure we got the transaction closed finally; and certainly for the investor group, because we need to all focus on going forward. How do we run GMAC's business? You know, the investor group with 51% but also, frankly, the balance sheet capital had to be restored. That is how the closing balance sheet worked.

I get to page 16, and I get to talk about the automotive business again.

North America fourth quarter adjusted results on page 16. You can see revenue, a little bit shy of $27 billion, slightly off from the fourth quarter of '05. You can see pretax profit, $1.6 billion improved; net income, $1.4 billion approved; net margin, effectively a break-even.

You can see that was achieved despite 174,000 units of lower volume in the quarter, so despite losing a substantial amount of volume, North America in effect broke even. I have a variance chart later that I am going to spend some time on.

Everything else is pretty much as we reported when we actually closed sales results, so I am not going to repeat that.

Page 17, we have been showing investors what has been happening with North America vehicle revenue per unit. On the line chart would be net revenues or gross revenues less sales incentives for vehicles, and then we show you also at the bottom of the chart what GAAP revenue per unit is, so you can see what both sets of numbers are.

You can see in the fourth quarter revenue per vehicle reached $20,779 -- about a $1,000 improvement over the fourth quarter of '05 and frankly continued the trend we saw through the year in terms of improving mix in our business.

When you look at the net effect of improving mix, it is really stepping back for the calendar year, as well as for the fourth quarter, largely due to the favorable impact of our new full-size utilities and some improved option mix.

Page 18 takes you through the variance in North America for both the fourth quarter and the calendar year -- a pretty important chart, so I am going to slow down here and take you through each individual line item.

Starting with volume; as I said before, volume was down for the year, largely concentrated in the fourth quarter. You can see volume was a drag on earnings of $0.9 billion in the fourth quarter, $0.8 billion for the calendar year.

Mix was favorable. Mix was favorable in the fourth quarter, $0.7 billion, and for the calendar year, $0.3 billion.

Third item, gain on lease residual reserves. Prior to the GMAC transaction, we would pay for residual support where we chose to provide a supported residual value, we would pay for it at the conclusion of the lease. As part of the GMAC transaction, we agreed with GMAC and the investor group that we would pay for that support at the beginning of the lease. When we negotiated that payment, it was negotiated on a discounted basis. That was $0.2 billion. That favorably affected our results for the year. Going forward, that is how we will handle lease residual support with GMAC.

Net price and other contribution margin -- actually for the year, it was a push. It was $0.1 billion favorable for the calendar year, $0.4 billion unfavorable for the fourth quarter.

Pension and healthcare -- again, this is for North America only, this does not include the corporate sector -- was favorable, $0.9 billion in the fourth quarter, $2.3 billion for the calendar year, which reflects a number of items: the UAW healthcare deal, the net effect of attrition plans, it also includes the changes we made in salary pension, salary healthcare, and finally, excellent returns on our pension plan, which I will cover later in the deck.

Manufacturing, which includes the impacted attrition plan in the fourth quarter, was $0.5 billion. For the calendar year, $0.8 of a billion.

Other structural costs, which includes engineering, marketing, tooling, and all other structural costs in the fourth quarter was $0.6 billion favorable, $1.3 billion for the calendar year.

Finally, one-time items for the fourth quarter were small, $0.2 billion unfavorable. For the calendar year, $0.8 billion favorable. The calendar year number is largely driven by items I discussed in prior earnings calls, favorable product liability and some impact actually of the restatements was in there, but you had favorable product liability in there as well.

This is the thumbnail explanation of the North America improvement. Again, a pretty significant improvement for the fourth quarter. We basically broke even in North America. For the calendar year, we significantly trimmed our losses but we still did lose money. We lost $0.8 billion on an adjusted basis. It is clear that we need to continue to drive North America forward because these results, while improved considerably, are still not at an acceptable level.

Page 19 walks you through what were our results of total structural cost reductions in North America. This does include the favorable impact at the corporate sector, largely from pension and healthcare, as we have been reporting it in prior quarters.

You can see the $6 billion goal that we set for 2006. We actually exceeded that. It was $6.8 billion. We believe we are on track to achieve our $9 billion running rate target in '07, so the way you should read that is we pulled forward some of the savings into '06 but we are not increasing the overall target for '07. That remains at $9 billion.

In terms of cash, we had previously said that of the $6 billion of savings in 2006, about $2.5 billion would be cash related. The lion’s share of the additional savings was cash. It was actually a little bit more than $3 billion, so a little bit more than $3 billion of the $6.8 billion was cash related. We still believe that $5 billion of the $9 billion will be cash related in the short-term. All of it long-term, particularly in terms of healthcare and pension, is cash but in the short-term, it is not.

Page 20 is my quick summary of three large businesses -- the overview of our other regions.

If you look at GME in the fourth quarter, essentially broke even, flat from the prior year. Strong structural cost performance but some continued pressures in material cost and some adverse foreign exchange actually affected GME in the fourth quarter.

GMLAAM results in the fourth quarter more than doubled on very strong industry growth. Fourth quarter revenue was up 12%. Significantly improved results at GM do Brazil.

GMAP, the fourth quarter results were virtually flat despite the loss of significant equity income from Suzuki. If you look at it, we continue to run strong in a number of the large countries, particularly China, in the region. We did have improved Holden performance. While not acceptable, we are making some progress in the restructuring there. We just need to keep at it.

A few observations again on the calendar year for these regions: GME, first adjusted profit in seven years, improved a little over $400 million; GMLAAM, our most profitable automotive region, over $0.5 billion of profitability on an all-time record revenue; and GMAP, another solid year with $441 million of profit, notwithstanding the loss of equity income.

So the next 3 charts look at those regions for the quarter only. I am not going to go back and talk about the calendar year. I am just going to look at the quarter only.

Page 21 shows GME. You can see it was a strong revenue quarter for GME but again, we did get effect. You can see pretax profit was improved $61 million. We had some unfavorable tax items hit us at GME in the fourth quarter of ’06 versus fourth quarter of ’05. Small, actually. When you look at GME’s results, in effect both at the pretax level as well as the net income level, we broke even.

Volume, flat; industry was up slightly, largely driven -- actually, it was up a million units, largely driven by growth in Russia and in Eastern Europe. We show on the chart what has happened. Germany actually finished stronger in ’06 vis-à-vis ’05, and you can see what happened with the U.K., largely a carry-over industry.

GMLAAM, revenue up in the fourth quarter, close to $4 billion in revenue for GMLAAM in the fourth quarter. You can see significant improvement, both in the pretax and the net income level. In the fourth quarter, we did have favorable taxes in both Venezuela as well as Brazil, as those businesses are generating a substantial amount of profit and cash flow. We ended up having favorable tax adjustments in each of those two countries.

If you look at profitability in the business, it was doubled at the net income level and up $26 million pretax. You can see the volumes, both at GMLAAM as well as in Brazil, with the Brazilian industry hitting on an SAAR basis, 2.1 million units in the fourth quarter. So we are pleased to see the Brazilian industry performing much better and frankly, the rest of GMLAAM is running very strong. Up to 2006, Brazil was the laggard. 2006, Brazil joined the party.

GMAP in the fourth quarter -- $4.5 billion of revenue, up $1.1 billion. You can see the improvement at the pretax level, $180 million. China JV equity income off slightly.

The minority interest in the fourth quarter is largely the minority interest we report for GM-DAT, where GM-DAT is solidly profitable but we share a little bit under 50% of the profit with the other investors in GM Daewoo, so there is where you see the minority interest kicking in. We do consolidate GM Daewoo, so we need to report the minority interest separately.

You can see net income essentially flat, and some of the other factors, as you move down: China in the fourth quarter ran at an 8.5 million unit SAAR. We had a little harder time keeping up. We ran at 10.8. For the calendar year, we ran about 12% market share for China but the market was very, very hot in the fourth quarter.

You can see the volume increases at GM Daewoo, and the Australian industry is as shown. Frankly, it was a tough year from our perspective in Australia, in terms of market share, with us losing 1.7 points. Not exclusively but largely driven by some contraction in the full-sized rear-wheel drive segment there in the Australian market. We have a strong position there but the segment itself was under pressure through the year.

Shifting gears from profitability moving into liquidity now, we ended the year with a strong liquidity position, $26.4 billion. Beyond that, we have $15.3 billion of VEBA assets available to reimburse us for healthcare costs going forward. In the $26.4 billion, there is $2.5 billion of readily available VEBA assets.

We remain committed to preserving a strong liquidity position. In the fourth quarter, we did a $1.5 billion debt offering, backed by U.S. Machinery and Equipment. That issuance was 2x oversubscribed.

We did close the GMAC transaction in the fourth quarter. We had heretofore said we expected to receive $14 billion of proceeds over three years from the GMAC transaction. Now, with the $1 billion common equity injection we are making back into GMAC, we will receive $13 billion instead of $14 billion. We did reinvest $1.4 billion in GMAC preferred as part of the closing.

Our near-term financial obligations are limited. We had some convertible bonds, $1.1 billion of them actually put to us on March 6th. We do not have any other U.S. term debt maturities in '07, and our U.S. salaries and hourly pension plans ended the year approximately $17 billion over-funded. I will come back to that.

Page 25 looks at automotive gross and net liquidity. You can see the $26.4 billion, up from 20.4 at the end of the year. We ended the year with net debt of $12.3 billion -- improved from the prior year but I think it is important that I point out a couple things.

First, in prior years, we have consolidated GMAC. At the end of '06, we have de-consolidated GMAC, so any amounts we have owing to GMAC, which in this case were $2.9 billion, we now include in debt. This is debt that is secured largely by floor plan, largely in Europe, Italy, U.K., and then some in Germany.

So what we have is some element of the floor plan for inventories is sitting on our books. We have debt payable to GMAC, which is included here, and again that is on a secured basis. In prior years, you would not have seen that in our net liquidity because we were reporting GMAC on a consolidated basis.

Then, the other thing we have done is we have included certain capital leases and industrial revenue bonds into net debt at about $1.7 billion at year-end and we have actually restated those for prior years.

Fourth quarter cash flow, page 26: as I said before at the beginning of the presentation, we did generate $0.3 billion in cash flow on an operating basis in the fourth quarter. It improved year on year by $1.4 billion.

We achieved operating cash flow improvements in all four regions. The big driver was in the higher net income at North America but it was not the exclusive driver, and the improvement was partially offset by adjustments of some non-cash elements of net income, which are primarily related to legacy liabilities, which I will come to when I go through the numbers on the next chart.

For the calendar year, we have earned $3.8 million of cash on an operating basis, a considerable improvement of $4.4 billion from the prior year but still certainly not an acceptable level. The improvement was driven by improvement in net income, largely in North America, but it was offset in part, for example, by the $1 billion payment we made to the Mitigation VEBA and some negative moves in accrued expenses and other, which I am actually going to spend some time on a little bit later in the presentation.

Finally, if you look at total cash flow, $6 billion favorable. The operating cash burn and restructuring costs were largely funded by asset sales and VEBA withdrawals, and then we closed the GMAC deal.

Page 27 has a lot of numbers on it but I want to actually touch on a few of them.

First, you can see the adjusted operating cash flow line in the fourth quarter, $0.3 billion in the calendar year, $3.8 billion cash burn. You can see the impact of D&A.

CapEx actually ran, at $7.5 billion ran less than we thought it was going to run, even the middle part of ’06. Part of that was timing, part of that was capital efficiency.

You can see a working capital -- frankly, in the fourth quarter, not much move in working capital. You can see some working capital drain $0.8 billion for the calendar year.

You can see that in the fourth quarter, pension and OPEB was unfavorable $1.1 billion. What is that? Basically payments in excess of expense in the fourth quarter. For the calendar year, it was favorable $3.4 billion. Again, earlier in the year, we had a very large pension curtailment charge and certain OPEB charges associated with the attrition plan, which are non-cash in nature, so therefore are added back when you look at operating cash flow on an annual basis.

You can see the Mitigation VEBA payment, $1 billion for the calendar year. As I said, I am going to come back and discuss what happened with accrued expenses and other at a later chart.

Moving down, proceeds from asset sales in the fourth quarter, this was largely the sale of our desert proving ground. Cash restructuring costs, both in the fourth quarter and in the calendar year, the cash portion of what we spent on Delphi so far, which takes you down to adjusted operating cash flow after special items. Again, close to a push, $0.2 billion red for the fourth quarter and then $4 billion for the calendar year, and you can see how that was financed.

With VEBA withdrawals, there was a very small amount withdrawn from the VEBA in the fourth quarter. You can see $4.1 billion for the calendar year.

You can see the increase in debt in the fourth quarter, which was largely the M&E deal I talked about before.

The GMAC-related close is detailed here. Again, we would not have reflected the $1 billion contribution we need to make back into GMAC. We will reflect that in our first quarter cash flow statement because we will make it before the end of March, so you see what the GMAC related flows were as a result of the closing.

Some movement around in the short-term VEBA and some other small changes in the other category.

Page 28; in prior calls, I have had a lot of questions on what is happening with accrued expenses and other, so we decided to actually detail a chart out for you. In the fourth quarter, the adjustment was $0.8 billion. It was frankly generated by a couple of things. One, cash was positively impacted by the add back of non-cash accruals for book taxes and interest expense, offset by a reduction in sales allowances and deposits from customers on daily rental.

As we reduce our daily rental sales, our cash flow is actually negatively impacted as a result of us net returning deposits to our daily rental customers. You can see that actually more powerfully in the next item when I talk about for the calendar year.

For the calendar year, accrued expenses and other was a $3.1 billion cash burn. What drove that? First item, $2.6 billion -- the tax benefit booked on overall results is not cash, and so you have a $2.6 billion add-back for tax benefit. You see the net effect of interest accruals. Here you see $1.6 billion reduction in our sales allowances. Again, as we reduce the amount of our sales allowances, earlier in ’06 we repositioned the lion’s share of the pricing in our North America product portfolio. We ran with less incentives through the year, so therefore we have less incentive accruals.

The next item, net reduction in daily rental sales, this is $1.1 billion. Think of this is a net repayment of deposits from our daily rental customers.

The attrition plan in restructuring, some portion of those were not cash during ’06 so that adds back $1.3 billion and everything else was $0.7 billion. So it takes you through what were the drivers of the $3.1 billion cash burn associated with accrued expenses and other.

Page 29, our U.S. pension expense. In ’06, we actually had pension income, $0.6 billion, but after the impact of interest expense associated with a borrowing for the debt we took in 2003 to make substantial deposits to our pension plan, we still accrued approximately $0.4 billion of net expense, including that related interest.

But a significant improvement vis-à-vis 2005, you can see basically almost a $2 billion improvement in pension. In this case, pension income or pension expense, and you can see the outlook for '07 is for a further favorable move. You can see we would expect to have slight net pension income for another $0.5 billion improvement in pension income for '07 vis-à-vis '06.

You see here we ended the year with a $17.1 billion funded status, an improvement from the $7.5 billion funded status at year-end '05. Our pension asset returns were 15% in the year. I am going to talk about the 8.5% assumption for '07 on the next chart but we made no contributions to the U.S. pension plan in 2006.

Page 30, given the over-funded status of our U.S. pension plan, GM has decided to adopt a more conservative long-term asset allocation policy. As part of that, the change involves a reallocation of approximately 20% of our planned assets from equity to fixed income exposure. What this is intended to do is reduce expected volatility of asset returns and the plan funded status and frankly lower the probability of any future contribution requirements. As a result of that -- well, I will come to that in a moment.

So what are the asset allocation targets after those adjustments? They are shown in the chart. Global equity will be about 29%; global bonds, about 52%; global real estate, 8%; alternative investments, approximately 11%. This reallocation has largely been accomplished already.

As a result of those new asset allocation targets, we have determined that we needed to revise our expected long-term annual return assumption for U.S. pension plans from 9% to 8.5%. Again, that compares with actual returns on the prior chart of 13% in '05, 15% in '06. The key obviously for pension returns is what do they achieve over the long-term.

Page 31 is a quick summary of our U.S. healthcare spending and OPEB expense. You can see at the top of the chart the year-end discount rates, as well as OPEB healthcare trend rate. The actual trend rate for '06 is not yet known. It will not be known for a little while but you can see the outlook for '07, 9%; slightly down from the '06 number.

When you look at OPEB expense, $5.3 billion in '05, $3.3 billion in '06, $2.1 billion expected in '07. The driver of this is largely from the changes that were made both for the UAW healthcare deal -- actually, also the IUE healthcare deal -- and then finally the changes we made in the salaried healthcare.

Funded status of OPEB, you have an OPEB liability of $64.3 billion; VEBA assets of a little less than $17 billion, $16.9 billion -- and think of that as both the long-term VEBA as well as the short-term VEBA, so $47.4 billion in net liability.

U.S. healthcare cash payments: active payments, $1.5 billion; retiree payments in the year, $3.3 billion; and beyond the $4.8 billion that was paid for actual healthcare, we made a $1 billion payment to the mitigation VEBA. As I said before, coming up to VEBA we withdrew $4.1 billion of assets from our VEBA in 2006.

Page 32, FAS-158, I have reviewed in prior calls, has a pretty significant effect on GM's balance sheet and GM's financial statements. We did adopt FAS-158 at December 31st. The net effect of adopting FAS-158 was a reduction in shareholders equity of $16.9 billion after tax. Our shareholders' equity did turn negative at the end of the year, $5.4 billion.

We early-adopted the new measurement data provisions of FAS-158. We took a “two measurement” approach to that. The net effect of that is outlined on the chart but what we wanted to do with OPEB is frankly have all of our plans measured as of 01/01/07 for purposes of going forward, having all the plans on the same measuring date. In order to do that, we needed to take the “two measurement” approach.

The net effect of those measurements are shown in the chart, with a $0.7 billion impact on beginning retained earnings for the first re-measurement, and then the second, a $2.1 billion adjustment to other comprehensive income as of 01/01/07.

The net effect, however, coming back of implementation of FAS-158 was a little less than $17 billion reduction in shareholders equity, which was at the low-end of the range that we told you in prior earnings calls.

The '06 financial statements also reflect curtailments and settlements in the fourth quarter, largely related to the GMAC transaction.

The chart on page 33 summarizes for you the status of Delphi. We have, in prior 8-K filings, updated investors actually of the framework support agreement that was signed on December 18th. There is not a lot of change to report here.

The framework established not only a -- I will call it a settlement framework but an exclusivity period within which we would continue negotiations to finalize definitive agreements. Part of that GM would receive -- by the way, if it is realized and this has to all be negotiated because frankly this is solely a framework agreement and it has to be turned into something which is more definitive, for which negotiations continue -- we would receive $2.6 billion in cash -- a limited, very small amount of equity. We would have somewhere between $1.5 billion to $2 billion of Delphi pension liabilities transferred to GM, for which we would receive a note.

The bankruptcy court reviewed that and approved it early January, negotiations continue.

With respect to our contingent exposure, the range for which is $6 billion to $7.5 billion, we have taken $6 billion in charges to date. We continue to believe that is a reasonable range. We continue to believe the expected outcome should be in the lower end of that range.

But we have reclassified $4.5 billion of the $6 billion out of that liability and moved it into OPEB for Delphi employees that flowed back to GM already. The restructuring does provide us with an opportunity over time to get at an expected purchase price premium of about $2 billion annually.

Pulling it together, outlook for the first quarter, we do expect lower North America production in the first quarter but we do also expect to have the full benefit of our structural cost-savings in the quarter. We have a strong product cadence, which includes continued rollout of our full-size pick-ups, our new Crossovers, continued growth in the emerging markets.

For the calendar year, we do expect improved earnings but we also expect volatility in our earnings, largely due to mark-to-market for derivatives. GMAC will have it until the extent it can re-establish hedge accounting for its callable debt, and we will have it with respect to our hedge positions.

We expect to have improved but still negative operating cash flow. We do expect capital spending to ramp-up in '07 to between $8.5 billion and $9 billion.

In summary, '06 on an adjusted basis, automotive operations improved over $1.4 billion in the fourth quarter, and $5.7 billion for the calendar year, largely on the strength of the turnaround in North America.

We had continued automotive revenue growth with record revenues for both the fourth quarter and the calendar year in automotive.

Our fourth quarter global share did decline marginally, largely in this case due to lower fleet sales in North America, but for the '06 calendar year, we were down in North America in part due to that but not exclusively due to that. We also did not perform as strongly as we would have liked in terms of retail share. Other markets, we had excellent share performance -- Europe was off slightly , GMLAAM and GMAP for the calendar year were quite strong.

Automotive liquidity ended the year a little bit over $26 billion but we remain very focused on improving our operating cash flow and maintaining strong liquidity. For example, just recently we announced that we are evaluating the strategic alternatives for Allison.

Finally, a key priority remains for us to finalize the Delphi negotiations.

At this point, I am going to stop and I think we can begin to take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Chris Ceraso from Credit Suisse. Please proceed.

Chris Seraso - Credit Suisse

That was impressive. You actually took exactly an hour, just like you said. I have a few items, as you might imagine. First, if you could just recap for us, that $259 million of other financing that was in the corporate other bucket, you said that was the legacy cost benefit and some tax. What does that look like on a normal quarterly basis going forward in the corporate other bucket?

Frederick A. Henderson

Corporate other, you would have in ’07 versus ’06, you will have a full year versus a half year of favorable legacy. That I know for sure. Taxes can move around, actually. I am not sure you could actually predict that with any certainty at this point but I think certainly we are going to have at least one more full -- we will have six months of favorable legacy. After that, we should be comparable, for example, ’08 versus ’07.

Chris Seraso - Credit Suisse

How much of that $6.8 billion that you showed for the full year in North America would have actually been classified in the corporate other bucket?

Frederick A. Henderson

North America, just thinking here out loud, I would say of the $6.8 billion for the year, I would say over $6 billion is North America, so you could think about the rest of it would be the corp sector. So the lion’s share of it is obviously North America.

Chris Seraso - Credit Suisse

This is related to GMAC and ResCap. What is your expectation for, beyond the capital injection but more on a go-forward basis, the adjustment to loss provisions at ResCap? How long do you think it will last? How much on a quarter-to-quarter basis? I know it is probably tough to tell because a lot of the loans may not have actually gone dead yet, but should we expect lower income coming out of GMAC on a go-forward basis because provisions have to keep going up?

Frederick A. Henderson

Good question. First of all, I am not the right guy to ask that question, but even if I was, I probably would give you the same answer. We certainly think our reserves are appropriate in accordance with GAAP at the year-end. We will have to work through what is happening in non-prime. I think it is going to be a constraining factor on ResCap profitability and therefore GMAC’s profitability through ’07 but I do not think we are in a position yet today to be able to talk in any sort of explicit terms about how much that might be.

Chris Seraso - Credit Suisse

So through ’07, we should expect at least some further increases in the provision?

Frederick A. Henderson

Well, if I look at the impact of non-prime more broadly on GMAC, it is really credit provisions on the held-for-investment. You have a pretty significant dislocation in non-prime held-for-sale, as well as securitization processes. Frankly, the market for that has gotten -- if there is one, it is very volatile.

Now, we have curtailed a lot of our origination. We have actually leaned away from it in the second-half of last year but we have to -- what we have left, we will need to securitize. We did a lot of that though in the last part of last year.

We will also need to look at the impact of overall residential origination levels in the mortgage industry, so you have a lot of different pieces that affect ResCap. The large piece is non-prime but it is not the only piece. I think on balance, we expect that ResCap’s profitability, if you will, will be constrained in ’07 and will have an effect at the GMAC level.

Chris Seraso - Credit Suisse

Okay, next on the -- not working capital but some of the other cash flow items that you outlined as it relates to daily rent and incentives. Should we expect a further hit to cash flow because you are continuing to take down the daily rent? Or have you sort of better balanced what is going out versus what is coming back in?

Then, on the incentives, if you normalize from here, does that headwind of $1.6 billion disappear in ’07 relative to ’06?

Frederick A. Henderson

On daily rent, we expect to reduce our daily rent sales further in ’07 versus ’06, so therefore you are going to have another step-down in that item.

And then, in terms of incentives, I do not think so. I think incentives, you would have seen the effect in ’06. I would not necessarily assume that in ’07, for example.

Chris Seraso - Credit Suisse

Last one, just to clarify on the Delphi, the $1.5 billion to $2 billion of pension liability, is that included in the $6 billion to $7.5 billion of contingent liability or on top of?

Frederick A. Henderson

Actually, the $1 billion to $2 billion, we would actually assume the liability but we would get a note which would be worth fair market value, so it is not really a cost, per se. It is simply a way of helping to fund Delphi’s pension plan and we would get a not for it, which would be -- think of it as trade at par.

Chris Seraso - Credit Suisse

So the $6 billion to $7.5 billion contingent liability is separate from that?

Frederick A. Henderson

Correct.

Chris Seraso - Credit Suisse

Thank you very much.

Operator

Our next question comes from the line of Brian Johnson from Lehman Brothers. Please proceed.

Brian Johnson - Lehman Brothers

Good morning. Where are we going -- where did we see in 4Q and where are we going to see going forward that lease book that you retained out of the GMAC sale, both in terms of the income and the cash flow?

Frederick A. Henderson

You will see it in the FIO sector and we will make sure we lay it out. We had one month of that in the fourth quarter. I think the pretax effect of that, looking at it, it was like $30 million or $40 million. But you are going to see that separately. We will certainly outline that for you going forward in terms of what the effect is.

Brian Johnson - Lehman Brothers

Okay, so that will be in that other and FIO?

Frederick A. Henderson

Correct.

Brian Johnson - Lehman Brothers

Second question, just a clarification -- does the OPEB measurement reflect the 9% trend rate or the 10% trend rate? The measurement of $60-some billion?

Frederick A. Henderson

At year-end, 9%.

Brian Johnson - Lehman Brothers

Okay, thanks.

Frederick A. Henderson

By the way, I am going to double-check that through this call because this is a pretty complicated area, so I am going to have somebody check that. I may come back and correct that.

Brian Johnson - Lehman Brothers

Okay, thanks. That’s it.

Operator

Our next question comes from the line of Rod Lache from Deutsche Bank. Please proceed.

Rod Lache - Deutsche Bank

I have a couple of questions. You are showing $3 billion of GAAP structural cost savings in the quarter, so since it is annualizing at $12 billion, why does this go down to $9 billion?

Frederick A. Henderson

We actually kind of pulled forward a lot of the cost into the fourth quarter, but it certainly would not be appropriate to multiply that by four and assume it is going to be 12.

Rod Lache - Deutsche Bank

Okay. So there was a one-time of some kind?

Frederick A. Henderson

Yes, you have timing of marketing savings. You have some timing associated with engineering spend. So some element of what we saw in the fourth quarter was timing-related, which is why we did not up the $9 billion.

Rod Lache - Deutsche Bank

Okay, and then I have a question on slide 31. It looks like your cash healthcare costs for retirees is going up in ’07 versus ’06, but you have the full-year benefit of the healthcare deal, so could you just explain what happened to the cash savings from the healthcare deal?

Frederick A. Henderson

If you actually put all the Delphi check boxes in that number, so what we did is -- I mentioned before that we actually reclassified a portion of the Delphi accrual into OPEB, and what you see is in that 3.4, you see all the cash payments associated with the people who actually checked the box and retired as a GM employee, which is why you do not see the continued downward reduction. Part of it is basically we are paying for the Delphi retirees now.

Rod Lache - Deutsche Bank

Okay, and the commensurate OPEB obligation, is that fully trued up for all the Delphi flow-backs that you are going to have?

Frederick A. Henderson

Well, we obviously have to negotiate the rest of the deal. What we have reclassified so far are the people who actually already checked the box and flowed back to us.

Rod Lache - Deutsche Bank

On slide S2, you are showing non-vehicle sales in North America up 50% to $15.5 billion. Can you explain what that is? And then, just on cash flow, any expectations for GMAC dividends this year and cash restructuring expenses here?

Frederick A. Henderson

GMAC dividends, what we have is we have agreed with the consortium that GMAC would be expected to about 40% of their LLC earnings, so it is basically going to be whatever LLC earnings are times 40% is what we would expect to receive as the dividend.

Your second question, Rod?

Rod Lache - Deutsche Bank

Is it 40% or 49% of the LLC?

Frederick A. Henderson

No, 40% of the earnings would be divided out. We get 49% of the earnings in our financial statement, so think of that as we get 49% of the earnings, 40% of which we would get in cash as a dividend.

Rod Lache - Deutsche Bank

Right, okay. And the cash restructuring expense in ’07?

Frederick A. Henderson

For ’07 for GM?

Rod Lache - Deutsche Bank

Yes.

Frederick A. Henderson

You have some cash restructuring expenses in Europe. You will have some further cash restructuring expenses in North America, but I would think that the large item in ’07 you are going to see would be just continued restructuring around GM Europe. I am not going to give you the exact number, but you will see some in '07.

The answer on the question on OPEB, I was right. It is 9%. It does ramp down over a period of time, as we have done in prior years, I think it is over six years to 5%, actually.

Rod Lache - Deutsche Bank

The last thing I had asked about was in the appendix here, it shows non-vehicle sales in '05 of $10.5 billion, going to $15.5 billion in '06, and I was wondering what that was.

Frederick A. Henderson

A couple things: one, Allison; two, OnStar; three, selling engines; and four, I already covered after sales. Those are the big items. Allison had strong sales. We had good strong outside sales in power train and OnStar continues to grow.

Operator

Our next question comes from the line of Jon Steinmetz from Morgan Stanley. Please proceed.

Jonathan Steinmetz - Morgan Stanley

First, starting out on slide 18, in the quarter the number that you gave on the net price and other contribution margin was a $400 million net income negative. Can you just talk a little bit about, in the quarter, the drivers on that? How much was price? Was there a raw material number that would have negatively affected that? Maybe a little more clarity on what caused that.

Frederick A. Henderson

Let me quickly turn myself to page 18. I actually think this is mostly price. You had pretty significant increases in some incentives in the fourth quarter. I will let Paul actually cover a couple items, but -- no, he is actually saying I got it right so I think I am in good shape. It is largely pricing.

The impact of let's say commodity costs and what not, I would not say it was particularly unusual in the fourth quarter. This was largely price.

Jonathan Steinmetz - Morgan Stanley

Okay, and then on the same page on the mix, you have a $700 million positive. On the surface of it, it looks like on production you were down about 8% on car, North America, down about 17% on truck. Is this just the impact of the new pick-up and the Crossovers coming through, because the surface level mix does not seem like it would be that big of a driver?

Frederick A. Henderson

New pick-ups, new Crossovers, the full-size use, and then richer mix across all three. We have very high option mix on all three; I mean, very high.

Jonathan Steinmetz - Morgan Stanley

Okay, and then turning on the cash flow on slide 27. You had an $800 million source of cash from accrued expense and other in the quarter. You kind of gave the walk for the year but in the quarter, what was the driver on that? Were taxes the biggest driver?

Frederick A. Henderson

Yes.

Jonathan Steinmetz - Morgan Stanley

Thanks, and then staying on that 27, the $3.5 billion inter-company flow between GM and GMAC, could you explain that a little deeper? Was that tying out some of the loans that had been extended from GMAC to GM?

Frederick A. Henderson

Exactly. As part of the deal, we agreed we would basically pay down a number of the inter-company exposures. We did. We paid down loans for company cars. We paid down some rental car loans. We paid down loans in Europe.

We basically met our obligations, if you will, under the purchase and sale agreement and reduced the inter-company exposure, in line with exactly what we said we were going to do.

Jonathan Steinmetz - Morgan Stanley

Okay, and just to be clear, the net liquidity number includes the $1 billion that needs to go back out to GMAC? In other words, the real net liquidity, so to speak, would be $1 billion light of that 26-plus figure?

Frederick A. Henderson

Correct.

Jonathan Steinmetz - Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Robert Barry from Goldman Sachs. Please proceed.

Robert Barry - Goldman Sachs

I wanted to follow up on a couple of things. One, just to clarify; that $64.3 billion OPEB liability, that does include the $4.5 billion from Delphi?

Frederick A. Henderson

Yes.

Robert Barry - Goldman Sachs

So it is possible, depending on how things settle out, that could go up another $1.5 billion to $3 billion?

Frederick A. Henderson

It depends on how we settle out with Delphi.

Robert Barry - Goldman Sachs

I wanted to also follow-up on the pricing question and I guess ask what you are seeing there. I guess it was a little disappointing to see the pricing be so negative, especially given where we are in the product cadence and what you have been doing from the incentive perspective, trying to pull back on the incentives.

Frederick A. Henderson

You have seen some volatility there. I must say, I tend to look at it as what did we do for the calendar year as opposed to then just the fourth quarter.

The fourth quarter was a little higher spending. It was not, from my perspective, that unusual. We had some moves around, for example, between fleet and retail which affected the number. I must say, I was not that concerned about what happened in the fourth quarter. I would say we have to see what happens in '07 but for the calendar year, we were reasonably pleased to see that number be flat.

Robert Barry - Goldman Sachs

What would make it really better in '07, just given the macro environment and given where you are in the product cadence?

Frederick A. Henderson

We know what could make it go better. I am not sure we can predict that though. The market has been, from a retail perspective, running below trend. It is not a bad market, but probably 600,000 to 700,000 units below trend.

We had a weak January. February was better for us. I have to see how we close out March, but the U.S. market has been okay but I would certainly not call it particularly robust.

What would really help a lot is selling back up to trend but that is not today our forecast.

Robert Barry - Goldman Sachs

Finally, whenever we were in Detroit, someone asked you about the Goodyear-style OPEB deal. I think your comment was that what happened there has not been lost on GM. Could you update us, if there is anything to update on, how you are thinking about that now?

Frederick A. Henderson

It remains not lost on me. As you think about '07 bargaining, I am not going to get into what our priorities and objectives are. I think at this point, we will have to just see how that goes as we go through this calendar year.

Robert Barry - Goldman Sachs

It has been speculated, or maybe this is a fact and I missed it, that in '05 the union actually brought this type of deal to GM as a possibility. Is that true?

Frederick A. Henderson

I am not going to comment.

Robert Barry - Goldman Sachs

Thank you.

Operator

Our next question comes from the line of Himanshu Patel from JP Morgan. Please proceed.

Himanshu Patel - JP Morgan

Slide 18, the $700 million positive mix for the fourth quarter and the net price contribution margin of negative $400 million, how should we think about that for 2007 for the full year?

Frederick A. Henderson

We would think our '07 mix should be even better than '06. That is our expectation, with the full year of the trucks. We launched the heavy duties. We have the Crossovers. We have the Enclave here shortly, Acadia has been strong. Outlook has been a little bit below our expectations for sure, but Acadia has been strong. We expect mix to be another favorable item for us in '07 versus '06.

The pricing is just going to be a function of what happens in the market, to be honest.

Himanshu Patel - JP Morgan

I guess I was thinking of the other non-price related items that go through there, whether it is freight costs or material costs, et cetera. Are you thinking those are kind of a wash '07 to '06?

Frederick A. Henderson

We talked about at the January meeting the impact of steel on us. We are going to have some headwinds in steel, which is going to I think clearly diminish our traditional material performance.

Commodities, and I will call it precious metals, non-ferrous, was a headwind. It has been very volatile, which by the way, introduces a lot of volatility in our statements because we no longer apply hedge accounting for our hedges.

We have seen some attenuation in freight. We will have to see what happens, for example, in terms of fuel prices because freight and fuel prices move pretty much in lock step.

We have already pretty much absorbed the steel increases. We know what those are, and commodities are going to be what they are. But we did expect, I think we outlined the impact of both steel and non-ferrous to be $1.5 billion of headwind in '07 versus '06 when we met in January.

Himanshu Patel - JP Morgan

A separate question, the variable contribution margin on the new Crossovers, without giving us an exact number, can you rank order or give us a sense on where it is on the hierarchy? Is it possible these are more profitable than the T900 pick-ups on a variable basis, or less profitable? Where would you say that?

Frederick A. Henderson

If you look at the Acadia, the Outlook, and the Enclave, I think when I talked about this before what I said is it is more appropriate to look at it versus our traditional mid-use. It is more profitable than our mid-use. It is not as profitable as our full-size use for sure.

Relative to pick-ups, it is a question of what the mix is. If you look at it versus the crew cab, the up-level crew cab, that is a very profitable business for us. If you moved down to let's say the single or extended cab work truck, it is going to be probably more than that. That is how I try to position it for you.

Himanshu Patel - JP Morgan

Two last questions, going back to slide 28 -- thanks for that walk-down, by the way, that was very useful, on accrued expenses -- when we think of 2007, the sales allowances. Help me understand that. That is a function of absolute incentive levels coming down, but that is also a function of existing dealer inventory stock changes as well, correct?

Frederick A. Henderson

Correct.

Himanshu Patel - JP Morgan

So to the extent that there are any changes in dealer inventory stock in '07, that would also be affected by that?

Frederick A. Henderson

While we expect inventory should be flat year-to-year, that is what we are planning on, typically you are going to see if your inventories go up -- and that is not our plan, by the way -- if your inventories go up, accrual goes up. If your inventory goes down, accrual goes down but in this case, if you looked at our inventories, they are pretty much flat year to year, so the reduction you see here is driven largely by lower levels of incentives.

Himanshu Patel - JP Morgan

Fritz, one last question; if the situation at ResCap was to deteriorate further, is there any chance of any further true-up payments of the sort you made in the fourth quarter?

Frederick A. Henderson

No. The closing balance sheet is closed. We basically put the $1 billion equity contribution back into GMAC and then, to the extent that ResCap continues to suffer, we will suffer with our 49% of it.

Himanshu Patel - JP Morgan

Great. Thank you very much.

Operator

Our next question comes from the line of Ron Tadross from Banc of America. Please proceed.

Ron Tadross - Banc of America Securities

Just two questions, and then maybe one housekeeping. Your numbers on pension and healthcare, if I look from '05 through '07, you are down about $5.6 billion on pension and healthcare. Now, as you look forward towards this 25% fixed cost percentage that you are trying to get to, should we expect a similar mix of your structural cost reductions coming from pension and OPEB?

Frederick A. Henderson

Let me turn to my pension and OPEB. So you are saying '05 to '07 from page 29, your $2.4 billion lower pension expense and OPEB --

Ron Tadross - Banc of America Securities

$3.2 billion.

Frederick A. Henderson

I think that is a fair way to look at it. But I think what we have done, you are not going to see further declines in those, per se, unless we actually do something else. That amount of net reduction structural cost is already reflected in our long-term 25% goal.

Ron Tadross - Banc of America Securities

So you are saying that you are going to get to the 25% by getting cost reductions from other places other than pension and OPEB?

Frederick A. Henderson

We have a lot of different plans but at this point, we do not have any other plans to change pension and OPEB. That has to be either considered or negotiated.

Frankly, if you look at the breakdown, we have to continue to run our plants as productively as possible. We have to continue to be efficient in our capital spend. We have to continue to be efficient in engineering. It is the full panoply.

I think it would be fair to say that if you look at the move from '05 to '07, a big piece of it was pension and healthcare. Going forward, we are going to have to do more in other areas.

Ron Tadross - Banc of America Securities

Yes, I mean -- it was upwards of 60%, was pension and healthcare, so obviously something -- what steps up? Of those things, what is the most important?

Frederick A. Henderson

The most important ends up being manufacturing because it is our biggest remaining cost item.

Ron Tadross - Banc of America Securities

Then, on your global share, you guys were down about 60 basis points globally on market share. Arguably, you are at the peak of your product cycle here. How do you reconcile that? The fact that you were down on share and your product cycle is pretty good here? What do you capacitize for globally in terms of share?

Frederick A. Henderson

We are down 1.7 points in North America and 1.7 points in the U.S., and '06 was in part due to lower rental sales but also part, we did not necessarily achieve all we wanted to achieve from a retail perspective.

When we announced our capacity reduction program end of '05, we talked about moving our capacity down a million units of capacity in order to bring us better in line. We are on track to achieve that. We have been pretty aggressive in Europe in terms of trimming our capacity and we will continue to do that.

Every place else, frankly, we are fully utilized. There may be a little bit of issue in Australia, for example, but your question about global capacity utilization, I would say our capacity utilization issues are largely in North America first and foremost, and we need to execute the plan we have announced, and then secondarily in Europe, and there we have been pretty aggressive in terms of taking capacity out.

Ron Tadross - Banc of America Securities

I guess that would apply then if you are running 13.5% share globally, that really would need to get below 13% or maybe even closer to 12% to get you to have to rationalize capacity again.

Frederick A. Henderson

Paul wants to step in and then I will come back.

Paul Ballew

Ron, I do think it is important to keep in mind this is a volume issue, and we were at 9.1 million units of sales globally and at record levels in three of four regions last year. So while you can talk about share, really for us it is volume in relationship to our capacity footprint.

Our entire volume reduction was due to the rental reduction in the U.S. last year. We continue to grow at a healthy pace, actually best in the market outside the U.S. As Fritz alluded to, we know we have a North American capacity issue. We have addressed it with the decisions we have made over the last 18 months.

In North America, our primary goal right now is, as we have talked about month-in and month-out, is retail sales around 3 million units in the U.S. and that is how we are capacitized.

Ron Tadross - Banc of America Securities

So as long as you can keep volumes flat in a somewhat growing market, you are okay with that?

Paul Ballew

Our goal is not to keep volumes flat outside of North America. We have been growing at a very healthy pace outside of North America -- in fact, faster than the industry.

Ron Tadross - Banc of America Securities

Just one other thing; in the $64 billion healthcare number, just to be clear, the $15 billion is in there, those concessions you got in the end of '05?

Frederick A. Henderson

Yes, it is net of that. If you looked at the '05 number, you can see it is down considerably.

Ron Tadross - Banc of America Securities

Can you just give us the fourth quarter, the breakout of the fourth quarter payments, pension and OPEB payments, just for the fourth quarter, if you have those? That is my last question.

Frederick A. Henderson

The answer on pension payment was 0 for the U.S. Let me turn to my cash flow page here. Fourth quarter -- I actually do not know that we made any contributions to pension plans in the fourth quarter of last year anywhere, that I know of.

I am just thinking about Canada or Australia, so I think whatever the payments are, are OPEB and it is pretty much -- think of that number as -- if you go to the OPEB expense chart, $0.9 billion.

Ron Tadross - Banc of America Securities

Okay. Thanks a lot.

Operator

(Operator Instructions)

Our next question comes from the line of John Murphy from Merrill Lynch. Please proceed.

John Murphy - Merrill Lynch

On Delphi, it looks like your proceeds are going to be about $2.6 billion. You are going to assume the under-funded UAW pension plan and receive a note for $1.5 billion to $2 billion for that. That note will be paid upon re-emergence. Will that have to be earmarked for the pension plan or can that come back into the core company outside of the pension plan?

Frederick A. Henderson

It can come back into the company.

John Murphy - Merrill Lynch

Okay, so you will actually realize that money in the company. How many flow-backs do you have from Delphi so far?

Frederick A. Henderson

Around 4,000, actually.

John Murphy - Merrill Lynch

Then just turning back to page 19, it looks like your run-rate is pretty strong on your structural cost saves. Should we be baking in or do you expect to get the full $9 billion in 2007? Because you are talking about it on a run-rate basis, but will it actually be achieved in 2007, given your expectations?

Frederick A. Henderson

Yes.

John Murphy - Merrill Lynch

Then, on the pension plan, I was wondering when that asset reallocation actually occurred, if it happened at the beginning of the year or a couple months in, because clearly the equity markets have had a pretty significant change since the beginning of the year. How much of that asset base is actually duration matched verses liabilities at this point? Or once you go through that reallocation?

Frederick A. Henderson

We accomplished it, you know, think of it as end of last year, early this year, number one.

Then, your duration matching -- tough question for me to answer actually because in fact, as we allocate assets, we know we have very long dated liabilities but we do not necessarily look at it that way. At least I never looked at it that way. I am sure I have some in my investment group that do look at it that way but I do not necessarily look at it that way.

But to answer your first question, we accomplished it largely I think late last year, early this year.

John Murphy - Merrill Lynch

So your timing was pretty good?

Frederick A. Henderson

So far, but never forget luck.

John Murphy - Merrill Lynch

You will take it any way you can get it. Then, if we look at GMAC, just getting back to the question of potentially any more capital infusions to GMAC, it sounds like you might not be on the hook to top up the equity any further.

Is there the possibility that you would make capital infusions to GMAC to help facilitate or maybe even accelerate the return to investment grade there? How do you think about balancing those capital contributions versus the cost advantage or the financing advantage you might have in GMAC, relative to an investment grade rating where you are now?

Frederick A. Henderson

Good question. We laid out our plan with the consortium when we did the deal last year. We talked about a 40% dividend, at least a part of which they actually re-invested in preferred, as I recall, their portion. Between us and Cerberus, we are committed to building the capital base at GMAC. We have re-invested, for example, our proceeds, $1.4 billion into preferred.

I think what we have tried to do is be intelligent and balanced in terms of looking at dividend withdrawals, and we have actually attenuated about 40% versus 70% in the out years, because we do want to build the capital base.

I would say we do not have any plans. We have not discussed it between ourselves and the consortium. It would be inappropriate for me to comment beyond that. I would say both we and Cerberus and the consortium are very committed to building GMAC's capital base.

We have as an objective, as does GMAC, to reestablish the investment grade rating.

John Murphy - Merrill Lynch

As long as you have no liquidity crunching in the core company, would it make sense to defer those future dividends to build that capital base? That is a decision you will have to make when you get to that point.

Frederick A. Henderson

Yes, that is a decision we would have to make when we got to that point.

John Murphy - Merrill Lynch

Okay. Thanks a lot.

Operator

Our next question comes from the line of Jon Rogers from Citigroup. Please proceed.

Jon Rogers - Citigroup

Just as a clarification; with the GMAC dividend, was it part of the transaction that the dividends would be reinvested for a two-year period, and then they would be cash dividends?

Frederick A. Henderson

Walter, do you want to comment?

Walter Borst

The deal was that we would take out 40% of the earnings as dividends in the first couple of years, so we would not take out the full earnings. Then, in years three through five, the consortium is re-investing some of their dividends back into the company.

There are three components. In preferred, we put in $1.4 billion. The consortium put in a little over $500 million up-front. We are taking less dividends over the first couple of years, and then in years three through five, we will get a fuller dividend at GM but the consortium will continue to re-invest some of their dividends in additional preferred.

Jon Rogers - Citigroup

Fritz, on the capital spending increase, I know it was a little light this year but given where you are in the product cycle, can you tell us what the driver of increased CapEx over the next couple of years is going to be?

Frederick A. Henderson

We have a couple things. One, we have we think a pretty formidable array of products that we are investing in to actually continue to launch into the market, particularly later on in this decade, number one. Many of them are global architectures which are being engineered today, being tooled in multiple markets and we intend to bring into the market.

The second point I would make is that we have a pretty substantial capital spend for power train in the plan. Our conversion from 4's to 6's, for example, is through this lifecycle, pretty substantial investments in moving from 4's to 6's, as well as frankly upgrading a number of our engine programs, including diesels and gas.

The third thing I would say is that emerging market growth requires capital. While we do not put a lot of brick and mortar into our capital budget, we are building a new plant in India. We are building a new plant in Mexico. We are building a new plant in Russia. Frankly, even when we are not building new plants, for example, in Korea and other places, we are continuing to re-invest in those businesses.

If you think about GM, including GM Daewoo on a consolidated basis, for example, a fair amount of capital spending just comes in to our statements as a result of the consolidation of GM Daewoo, which heretofore would have been included, for example, you would not have seen that.

Finally, we are investing heavily in China but you do not see any of that because it is carried in our joint ventures over there and funded by the profitability of our business in China.

Jon Rogers - Citigroup

Okay. Thank you very much.

Operator

Ladies and gentlemen, we will now proceed with questions from the media only. Our first question comes from the line of Bernard Simon from The Financial Times. Please proceed.

Bernard Simon - The Financial Times

I wonder if you could tell us about GM’s interest in Chrysler, or lack thereof.

Frederick A. Henderson

No comment, actually.

Bernard Simon - The Financial Times

Nothing at all?

Frederick A. Henderson

None.

Bernard Simon - The Financial Times

Okay. Thank you.

Operator

Our next question comes from the line of Jeff Green from Bloomberg News. Please proceed.

Jeff Green - Bloomberg News

I am just curious about Delphi. Is there any chance this could drag on into the fall negotiations and become part of '07 talks? July is the start of it, and we are almost there.

Frederick A. Henderson

A couple of things. First, I feel bad for Bernard. He wasted his question, actually.

Let me come back to your question. I do not think it is anybody's best interest to prolong negotiations at Delphi. They are complicated. There are multiple parties involved. I do not think either we or Delphi, nor actually do I think the unions are interested in having that happen.

This is a pretty complicated matter, but is there a chance? I guess. I mean, there is a chance for anything but I do not think anybody -- certainly GM, we are not working to that as our deadline. We are trying as much as possible to bring this matter to resolution quickly so that it does not become part of the '07 bargaining.

Jeff Green - Bloomberg News

Is there any kind of visibility you actually have that suggests you will get this done by July?

Frederick A. Henderson

I am not going to comment on what is happening at the bargaining table.

Jeff Green - Bloomberg News

Okay. Thanks.

Operator

Our next question comes from the line of Tom Krisher from Associated Press. Please proceed.

Tom Krisher - Associated Press

Just to clarify, did you make money selling cars worldwide in the fourth quarter of last year, and did you make money selling cars in the fourth quarter in North America?

Frederick A. Henderson

Cars and trucks?

Tom Krisher - Associated Press

Cars and trucks, yes.

Frederick A. Henderson

Yes, we did. If you go back to the adjusted profitability chart, I will just point you to it. Fourth quarter automotive profitability was $228 million, for the fourth quarter. For the calendar year, we made $422 million.

North America lost $14 million in the fourth quarter, so we basically broke even. North America lost $779 million for the calendar year, so it did not make money for ’06 in the calendar year.

Tom Krisher - Associated Press

Okay. Thank you.

Operator

Our next question comes from the line of Jim Mataya from Chicago Tribune. Please proceed.

Jim Mataya - The Chicago Tribune

Can you be any more specific on what you were talking about in terms of your outlook for the calendar year when it came to improved earnings?

Frederick A. Henderson

Actually, I can but I am not going to. I think what we said earlier this year, and I want to just continue, we do expect to continue to see improved earnings but we are not planning to re-establish guidance at this point.

Jim Mataya - The Chicago Tribune

With that results that you are reporting today, would that or should that have any effect on the impact with the UAW negotiations coming up later this year?

Frederick A. Henderson

I do not think so. We review the results of our operations with all of our unions on a regular basis, and have been committed to doing that in good times and bad. We will continue to do that.

I think the issues regarding '07 bargaining, which we will deal with at the negotiating table as opposed to now, I do not see what we are announcing today as being particularly important to those discussions, other than the fact that we still have a lot of challenges in our business. A lot of challenges that while we improved, we still lost money in North America and while improved, we still have massive healthcare liabilities, and while improved, we still have a lot of pretty significant strategic issues in front of us.

We will have to deal with those at the bargaining table when we get there.

Jim Mataya - The Chicago Tribune

Thank you.

Operator

Our next question comes from the line of Tom Walsh from Detroit Free Press. Please proceed.

Tom Walsh - Detroit Free Press

A quick clarification on cash flow -- you used the term automotive cash flow and then you said operating cash flow. Are those the same things?

Frederick A. Henderson

If you turn to page 27, what we try to do is start with automotive net income and corp other and kind of drive down the operating cash flow. This does not really include GMAC, so in effect, that is what we are trying to get accomplished.

Walter Borst

They are both true. It is automotive and it is operating.

Tom Walsh - Detroit Free Press

So automotive cash flow is that 0.3 positive in the fourth quarter, right?

Frederick A. Henderson

Correct, yes. Correct.

Tom Walsh - Detroit Free Press

So that is operating automotive cash flow. So if you got to positive cash flow in the fourth quarter, why are you predicting negative cash flow for calendar '07? What happened in the fourth quarter that will not be repeated the rest of next year?

Frederick A. Henderson

Well, we burned $3.8 billion for the calendar year in '06, $4.2 billion of which was in the third quarter. So it is -- cash flow can be seasonal, which is why we said we expect it to improve but we still expect to be negative.

Tom Walsh - Detroit Free Press

Okay, and you will not say how much you expect it to improve?

Frederick A. Henderson

No.

Tom Walsh - Detroit Free Press

When was the last quarter that was cash flow positive?

Frederick A. Henderson

We were around it earlier this year in the first and second quarter. Clearly you had, if you think about we burned $4.2 billion in the third quarter. The calendar year number is $3.8 billion. We generated $0.3 billion in the fourth quarter, so think about the first-half of the year at right around break even.

Tom Walsh - Detroit Free Press

Okay, thanks.

Operator

Our next question comes from the line of Chris Isidore from CNNMoney. Please proceed.

Chris Isidore - CNNMoney

If you can give a little more clarity on the sub-prime; you talked about ResCap having a $661 million loss. Was the loss in sub-prime even bigger than that, while the prime in other ResCap business made money? Or were all the lines unprofitable? Are you re-examining whether to stay in the sub-prime business?

Frederick A. Henderson

A couple things. First, yesterday GMAC went through a very extensive discussion of their results, which included a breakdown of their residential mortgage business. When you looked at it, and I am just turning to it now -- I will see if I can’t get to it real fast.

They did incur losses in their residential finance group. They made money internationally at ResCap. They also made money in their business capital group but they suffered pretty substantially in the residential finance group.

Underneath that, you have conforming prime, you have non-conforming prime, you have seconds, you have all kinds of different product lines but it was weighed down by performance issues in non-prime. But the other parts of ResCap, at least international as well as the business capital group, performed well.

Then, the rest of GMAC; insurance was strong, automotive finance was pretty much as I described. Even within ResCap, the residential finance group, you have servicing income, you have all kinds of other forms of income but frankly, they were in a net loss position largely as a result of adjustments taken for non-prime.

Chris Isidore - CNNMoney

So is pulling out of sub-prime something that you and GMAC are looking at?

Frederick A. Henderson

Well, we are a 49% shareholder of GMAC. The 51% shareholder I think is important in this discussion, as is the GMAC management team.

As they discussed yesterday, late last year, ResCap began to lean away from the non-prime market and there are different levels of non-prime. We have been in certain segments of non-prime; other segments, we have not been in. Other segments we have been a lesser player.

I would say a couple things: one, we have leaned away; two, we have tightened our underwriting standards, as have many others; and three, we probably had, on a relative basis, less exposure than some other lenders but obviously we had significant exposure, which is why we had substantial losses in the fourth quarter.

I would say it is really about tightening up underwriting standards than it is turning off or turning on a spigot. What you do is you tighten up the underwriting standards and then you see what happens with volume.

Chris Isidore - CNNMoney

Okay. Thanks.

Operator

Our next question comes from the line of Michael Strong from [Debt Wire]. Please proceed.

Michael Strong

Fritz, did I hear you correctly earlier when you said that you guys were going to handle the $1.5 billion to $2 billion in Delphi pension liability with some sort of note?

Frederick A. Henderson

Yes.

Michael Strong

Okay, and on a different point, just in general, you had mentioned that the Goodyear thing was still on your mind. Generally speaking, can you outline just the top two or three issues that would be problematic for you guys to do something like that?

Frederick A. Henderson

Actually, again, I cannot really get into what we are going to talk about or even not talk about in terms of bargaining. It would not be productive for me to do that this morning.

Michael Strong

Come on, you can tell us. Who are we going to tell?

Frederick A. Henderson

How about the other 970 people on this call?

Michael Strong

All right. Thanks, guys.

Operator

Our next question comes from the line of David Welch from BusinessWeek. Please proceed.

David Welch - BusinessWeek

The $9 billion, I think that was in one of the slides on CapEx going forward, is that going to be your ongoing spend here on out? Is that generally what you want it to be?

Frederick A. Henderson

About $8.5 billion to $9 billion, and certainly in the next several years that is what we are looking at.

David Welch - BusinessWeek

Does that include all of your R&D spend as well? There used to be a memo in the 10-K that had some additional spend on top of that, I believe.

Frederick A. Henderson

You will see tomorrow when we file our 10-K, we will outline out -- we call it R&D but think of it as engineering expense and no, that does not include that. This only includes capital spending that we actually capitalize, as opposed to engineering spend which we expense.

David Welch - BusinessWeek

Do you have that number on R&D and engineering spend?

Frederick A. Henderson

You will have it tomorrow.

David Welch - BusinessWeek

Yes, but I want it today.

Frederick A. Henderson

You are going to have to wait.

David Welch - BusinessWeek

Looking at the results for Asia Pacific and China, all the top-line numbers look good but the profits were, particularly in China, pretty flat. What is going on there?

Frederick A. Henderson

Profit was flat in China but flat at a very healthy level is the way I would put it. We have had a fair amount of pricing pressure and we have had some mix changes in China. For example, our [inaudible] business, where we have a 31% interest in that business, has been growing like crazy but it tends to have lower profit margins.

I would say on balance, we are overall pleased with not only the growth we have had in China but the level of profitability and cash we have generated there.

David Welch - BusinessWeek

One of your drivers was mix improvement in North America and you had some pretty significant vehicle launches. Do you have enough other vehicle launches to sustain that? Your early sales tend to be loaded up with all kinds of options, or is that going to start trailing off as the year goes on?

Frederick A. Henderson

It is true that your early adopters of your products, our mix has been very rich, whether it was our full-sized used, whether it was our full-sized pick-ups, our Acadias, for example. Then, over time you see the broader array of customers come into the product -- by the way, we are very happy with that because we basically get more product out in the market. We generate more volume on it.

I would say we have benefited from that so far. As I look at '07, we have a new CTF coming. Later in the year we have a new Malibu coming. We have heavy duty pick-ups that are basically being launched as we speak. We have a new Enclave.

The cupboards are not bare and we are frankly in the first full year of acceleration of our pick-ups.

David Welch - BusinessWeek

There has been some talk that this big overage you now have in the pension fund, you could possibly monetize some of that and some would probably come from whatever Delphi pays you as a result of that deal. Are there other ways that you can monetize at least part of that, or is that pretty much untouchable money?

Frederick A. Henderson

We talked about, you already touched on Delphi. I would say the pension funds are there. They are protected by ERISA and they stay there.

One of the things that we wanted to do is frankly reduce risk and reduce volatility, which is part of the reason why we actually changed the asset allocation, because it would provide greater -- I will call it lower risk and greater certainty over time of not having to make contributions and preserving the over-funded status of the plan.

Beyond that, I am just not in a position to be able to talk about it today. There are a lot of things that have to happen. There are provisions in the code which allow companies to use some parts of their over-funded pension plan but we are not at that level today.

David Welch - BusinessWeek

Is it something you are considering though?

Frederick A. Henderson

We are not close to that level today, so no. I think what we are trying to deal with today is to make sure we preserve the funded status that we have, make sure the funds are invested wisely and do it that way, and it will be a nice problem to deal with if we get out several years from now.

David Welch - BusinessWeek

Lastly, on the structural cost cuts, you are going to give it another $2.2 billion it looks like versus what you did for last year. You said something like $3 billion of the $6.8 billion were cash, so there has to be more cash help coming from structural cost reductions, but you still predict that you will be negative cash flow this year. What is the issue there?

Frederick A. Henderson

We burned $3.8 billion of cash in '06 calendar year and we cut it in half from the burn roughly in '05, but we still have a fair ways ahead of us to get to break-even, so yes, we do benefit from further cash savings but it is about generating cash not only in terms of structural costs but also in terms of contribution margin. Some portion of that is sales. Some portion of that, as I talked about in January, for example, is over time getting back to a more normal performance from a material cost perspective, which could include, for example, if we bring -- assuming we bring the Delphi matter to resolution, starting to take down some of our above-market prices on some of our components.

Operator

Our next question comes from the line of John Stoll from Dow Jones. Please proceed.

John Stoll - Dow Jones

Can you give me clarity to your attrition expectations for 2007 beyond what has already been accomplished? This special attrition program, are you able to forecast some kind of curve in 2007 beyond that?

Frederick A. Henderson

We do expect our attrition to be below normal in ’07, for certain. We knew that. When you look at the level of people who took the attrition plan, we were surprised that over 34,000 people took it. So we do expect to be below trend.

I actually think as I looked out, I do not remember the exact curves but by ’08, particularly by ’09, we start to get back to more normal attrition levels. But today I do not really have a forecast I can give you.

John Stoll - Dow Jones

So it would be below what the typical trend, say when we were going into 2006?

Frederick A. Henderson

Exactly.

John Stoll - Dow Jones

In the deal that was struck with the UAW, both GM and Ford seem to be somewhat --

Frederick A. Henderson

John, do you want to speak up? It is tough to hear you?

John Stoll - Dow Jones

In the deal with Ford and GM and the UAW that was struck with healthcare in 2005, it seems to be somewhat restrictive in further changes you can make to retiree benefits in healthcare until 2011. Is that something that is going to impact how much of changes you will see in UAW talks later this year?

Frederick A. Henderson

Again, I am not going to get into what our bargaining objectives are. What you are referring to is the class settlement protects the retirees through 2011 and we certainly fully intend to respect that.

John Stoll - Dow Jones

With that in mind, is it safe to assume that there are certain things you cannot do in this round of bargaining that maybe a lot of people are assuming you can do, such as large-scale changes to healthcare on the retiree level?

Frederick A. Henderson

I know what you would like to talk about but I am just not going to talk about what our bargaining objectives might be.

John Stoll - Dow Jones

Thank you. When you talk about mix improvement, was that year-over-year expectations for mix improvement again this year or somewhat where you were in 2006? In other words, will we see another improvement on a year-over-year basis in 2007 in North America?

Frederick A. Henderson

We expect to see continued mix improvements year over year ’07 versus ’06 in North America.

John Stoll - Dow Jones

Thank you very much.

Operator

Our next question comes from the line of Joseph Szczesny from Oakland Press. Please proceed.

Joseph Szczesny - The Oakland Press

When did you make the decision to change the allocations in the pension fund, and how did that discussion evolve?

Frederick A. Henderson

Later last year, and it involves the investment funds committee of the Board of Directors needs to look at and does look at recommendations from management and the pension investment group as to how appropriately manage the fund. That is how the governance works.

Joseph Szczesny - The Oakland Press

Where did that recommendation originate then?

Frederick A. Henderson

Frankly, it would have originated from our investment group, combined with myself and our Treasurer, and it was really about if you think about -- the way I think about, in a FAS-158 world where you have pensions and healthcare on your balance sheet at their present value, you need to be managing the funded status of the plan, consistent with the best interests of the participants.

Clearly you need to look after the best interest of the participants in the plan, but you increasingly focus your attention on how do you manage the funded status of, in this case, the pension plan. With the pension plan significantly over-funded, the issue is you want to stay that way because as you find, as we did find in ’02 and ’03, you can actually blow a hole in your pension plan real fast if you have pretty significant changes or dislocations in that case, equity markets.

So this was about reducing risk. You never get rid of the risk but it was about how do you manage the risk of your funded status going forward.

Joseph Szczesny - The Oakland Press

So you are not going to invest in ResCap securities then, is that it?

Frederick A. Henderson

There is over hundreds of billions of dollars in that pension plan. I am not going to comment on what they are investing in or not investing in.

Joseph Szczesny - The Oakland Press

All right. Thank you.

Operator

Mr. Arickx, there are no further questions at this time. Please continue with your presentation or closing remarks.

Frederick A. Henderson

Actually, I am going to make a few final remarks. I want to thank everybody for your patience. Two hours, we had a lot of material to cover. However, this was a primer for tomorrow. Tomorrow we plan to file our 10-K. In there, you will have well over 200 pages of information that will be at your disposal. I encourage you to read it. We will also talk about not only the impact of the restatements in more detail, we outline in there, for example, our management assessment of internal controls and material weaknesses. They are all outlined in there, and so I encourage you to read that and we expect to file it. Again, we very much appreciate everybody’s patience as we had to extend, for the second year in a row, the filing of our K. It is not something we wanted to do but between wrestling through restatements for FAS-133, handling tax issues, getting GMAC closed, having two closing balance sheets, it was a pretty rugged close.

I appreciate everybody’s patience with us. We will file that tomorrow and thanks very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.

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