General Motors Q3 2007 Earnings Call Transcript
General Motors Corp. (GM)
Q3 2007 Earnings Call
November 07, 20079:30 am ET
Executives
Randy Arickx - Executive Director of IR and Financial Communications
Fritz Henderson - Vice Chairman and CFO
Walter Borst - Treasurer
Nick Cyprus - Corporate Controller and CAO
David Meline - CFO of GM North America
Mike DiGiovanni - Executive Director of Global Market and Industry Analysis
Analysts
John Murphy - Merrill Lynch
Brian Johnson - Lehman Brothers
Himanshu Patel - JPMorgan
Rod Lache - Deutsche Bank
Jonathan Steinmetz - Morgan Stanley
Joseph Szczesny - Oakland Press
Tom Walsh - Detroit Free Press
Joann Muller- Forbes Magazine
Michael Kunz - South Deutsche
Presentation
Operator
Ladies and Gentlemen, thank you for standing by. And welcome to the General Motors Corporation Third Quarter 2007 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session (Operator Instructions).
As a reminder, this conference is being recorded Wednesday, November 7th, 2007. I'd now like to turn the conference over to Mr. Randy Arickx, Executive Director, GM Investor Relations and Financial Communications. Please go ahead, sir.
Randy Arickx
Good morning, and thank you for joining us, as we review our 2007 third quarter results that we sent to you earlier this morning. I'd like to direct your attention to the legend regarding forward-looking statements and risk factors on the first page of the chart set.
Like always, the content of our call will be governed by this language. I should also mention that to comply with the SEC Regulation G, we provided some supplemental charts at the end of today's show charts that we'll 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 viathe Internet and that the financial press is participating. This morning, Fritz Henderson, our Vice Chairman and CFO, will cover our third quarter earnings review. After the presentation portion of the call, 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, 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 Mike DiGiovanni, Executive Director, Global Market and Industry Analysis.
Now, I'll turn the call over to Fritz Henderson.
Fritz Henderson
Thanks, Randy. Good morning, everyone. Let's turn to page 2 of the deck. Briefly, on the third quarter driven by the deferred tax assets valuation allowance, we had a $39 billion loss in the quarter, which was pretty much largely explained by the valuation allowance. We'll spend some time talking about this morning and then also go into what was going on in the rest of the business. Adjusted profitability was a $1.6 billion loss.
Our automotive results on an adjusted basis actually improved $0.6 billion versus the third quarter of '06. We did have a significant loss at GMAC, actually more than due to losses at ResCap related to the challenging U.S. housing market.
Automotive revenue at $43.1 billion, were a record for the automotive business in the third quarter. Our share, for example, in U.S. stabilized, with share growth of 0.5% in the other regions in the world, but our overall global share was down, largely because the markets outside of North America growing faster than North America. So, we basically lose on a regional mix basis. But in terms of our overall market performance, we were encouraged by what we saw in the third quarter.
And finally, we closed the quarter with $30 billion of growth liquidity, driven by an adjusted operating Op cash flow of $2.5 billion Red, which I'll talk about later is actually better performance versus the prior year, but then obviously the proceeds from the Allison sale of $5.4 billion in the quarter.
Page 3. Looks at our results on an adjusted basis, recall, we look at our adjusted results from a managerial perspective. We think it provides how we manage the business, and it provides useful information for investors. What we have done here, and I'm going to touch on this when I talk about the corporate sector. But the automotive results here are shown in '07, using the effective tax rates we established atthe beginning of the year.
So, we have held the effective tax rates for the automotive operations to insure comparability versus the prior year. I'll come back and talk about the changing effective tax rates when I talk about the corporate sector and special charges. But here in North America had a $247 million loss on an adjusted basis.
So for the company, for an operation the size of North America, a small loss base at the operating at or around breakeven, actually in this case, is the other side of breakeven and its $247 loss. But nonetheless, a $400 million improvement year-over-year in what is normally our weakest seasonal quarter.
GM Europe $90 million loss, also typically our weakest quarter. I'll talk about what the drivers were at GM Europe later. But that was $51 million wider than the prior period. GMLAAM, $340 million, this is a spectacular number. It's up $157 million from the third quarter of '06, which in and itself is a pretty good number. GMAP, $138 million, very solid profitability quarter, up $81 million, and then eliminations were $4 million in the quarter. So, when you move down GMAC, you could see the substantial deterioration year-to-year, $1.3 billion.
Corporate sector is down $1.3 billion; again, I'll talk about why later. In disc ops, we reported basically a stub period in '07 for Allison, whereas in '06 in the third quarter, we had the full quarter's results. So, when you move down to the adjusted loss for the quarter was $1.6 billion versus about $0.5 billion profit in the prior year.
Page 4. The corporate sector. The corporate other and other financing sector deteriorated $1.3 billion versus the third quarter of '06, largely due to tax related items. First of all, in the third quarter of '06, we carried about $0.4 billion dollars of various favorable tax items and benefits that were affecting our business around the globe.
The current period, let me move back up a step. What I said was, when we looked at our automotive operations, we chose to hold the effective tax rate for those, which we established at the beginning of the year, so we could look at their performance on a comparable basis, but when we computed the total adjusted net income, we actually revised our effective tax rate on a cumulative basis through the first nine months in order to reflect, frankly, the loss of the tax benefits in the U.S, Canada, and Germany.
The unfavorable impact associated with the loss of those tax benefits, in other words, the losses which are no longer tax effected, amounted to $0.7 billion of tax expense, which we chose to carry in the corporate sector for purposes of display and for looking at our results in the quarter.
As we look at both the fourth quarter and calendar year in '08 next year, we obviously need to look at our effective tax rates with the valuation allowances we've established for the U.S, Canada, and Germany, but in terms of understanding the results of operations on a comparable basis, again, we held the automotive results, we held the regional tax rates, and then we basically pulled through the entire impact for 2007 calendar year only.
On a cumulative basis, we pulled it through into the third quarter, and we put it into the corporate sector, which is why you have a very substantial unfavorable corporate sector inthe quarter.
Other factors included increased legacy expense related to pension and OPEB for Delphi retirees, for example, the Delphi checked the box retirees that came aboard last year drove higher legacy expense, higher interest expense and some impact of unfavorable currency and finally, just some higher expenses. But the key factor here was the tax adjustments. And then we had some higher legacy costs.
Page 5. Take you from adjusted net income down to the GAAP loss. You went from adjusted net loss of $1.6 billion, and again, that number did include the reversal of the '07 impact only of the loss of the tax benefits, as I mentioned in the prior chart. Then what you pick up is another $38.6 billion of valuation allowances, $38.3 billion largely relates to prior years, actually.
And then $250 million relates to tax benefits that were applied to special items in the first six months of this year. So, what we need to do, to the extent we had tax effected special items in the first six months of the year, which we had, we needed to reverse out and to establish an evaluation allowance associated with those special items.
So the $250 million related to the tax benefits that had previously been applied to the special items. The total valuation allowance then included in special items was $38.6 billion, and when you include the impact that's included in adjusted profitability, that's where you landed about a $39 billion impact of valuation allowances affecting our overall results in three different pieces, but in total, the impact was $39 billion.
Pension prior service costs, I'll talk about this, $1.6 billion in the quarter. I will cover this later, so I'm not going to belabor it here. Restructuring related costs inNorth America and Europe, $420 million in the quarter. We did adjust theDelphi reserve; I have a chart on that as well, by $350 million inthe quarter, and we pick up the Allison gain, and here we actually show Allison net of the tax.
We had previously disclosed that what the Allison gain would be, and candidly, as Allison was discontinued operations, we chose to tax effect it, and therefore, the DTA valuation allowance we took was lower as a result of the taxes. We do not pay any taxes associated with the Allison sale. But we are showing it here after-tax.
Again, the reason why we look at these results on this basis is we think it's useful for first, management to measure and compare operations across periods, and we think it's useful for investors to measure and assess the company's core performance.
Okay, next here, the charts talk about deferred taxes. This was laid out in our press release yesterday, but I'm going to go through it again here this morning. Accounting for income taxes is governed by SFAS 109, which provides guidelines for determining its valuation allowances are required against the deferred tax assets.
The basis for consideration of all available evidence uses a more likely than not standard for purposes of determining whether a valuation allowance is required. And in looking at the evidence, weight is given to both positive and negative evidence, and based on whether and frankly, the strength of that evidence is based on whether it can be objectively verified. For example, current or previous losses are given more weight than the future outlook, inasmuch as current or previous losses can be more objectively verified.
A three-year historical cumulative loss is considered a significant factor that is difficult to overcome, in the literature. And in accordance with FAS 109 in the third quarter, GM evaluated its DTAs; it actually had it before on a quarterly basis and did again, in the third quarter, determine if any valuation allowances were required.
Page 7. Allowances were previously not deemed necessary for our DTAs in the U.S, Canada and Germany based on several factors. These were the factors were laid out in our 2006 Form 10-K. But first, the degree to which the company's three-year historical losses during those periods were attributable to special items and charges, of which several were related to actions to improve future profitability.
And we took that into account as we assessed our DTAs in those prior periods. Second, we had an expectation of continued strong earnings at GMAC, as we had through 2006, and improved earnings in GM North America. And third, our DTAs and our loss carry forwards certainly a very long durations, over which they could be utilized.
Recent events that we saw in the third quarter provided evidence, whereby we concluded a valuation allowance should be established under FAS 109 guidelines. First, we looked at it; we had a three year historical cumulative loss in the U.S., Canada, and Germany on an adjusted basis. So, the basis upon which we were looking at was negative in the third quarter.
Second, we saw inthe third quarter results, the ongoing weakness at GMAC relating to our ResCap mortgage business. In other words, we had very sizeable losses from GMAC, which passed through to GMat 49%, given that GMAC is structured as an LLC, those pass through to GM, pass through to our U.S. business, and we saw inthe third quarter very sizeable losses.
And then finally, as we looked at the near-term outlook, and again, I stress near-term, the automotive market conditions in the U.S. and Germany remain challenging. And so, based upon these factors, we concluded a deferred tax assets valuation allowance was necessary in the third quarter.
Page 8. Therefore, non-cash charges of approximately $39 billion in the quarter were recorded against DTAs in the U.S., Canada and Germany. Canada was in a three-year cumulative loss position, but we actually also evaluate Canada on an integrated basis with the U.S., inasmuch as we run Canada as part of our GMNA operations. And our U.S. and our Canadian operations are basically run in an integrated way.
Once you determined a valuation allowance is required the full valuation allowance was taken, given that upon failing that more likely than not test and being in a three-year cumulative loss position on an adjusted basis, no one point estimate is better than another, when measured against an average three year loss.
In other words, once you're in that position, there is no one point estimate, which represents anything better. And so the conclusion in both theory and in practice is that 100% valuation allowances are established.
Our loss carry forwards, and frankly, other timing differences still exist and will be used and can be and will be used to offset future taxable income. So, the establishment of the valuation allowance doesn't change the tax attributes of our business. And a valuation allowance can be reversed in the future if there's no longer a three-year cumulative loss position, and we can pass the more likely than not test for future deferred tax assets utilizations.
For example, in the third quarter of '06, we reversed a prior valuation allowance for our Korean DTAs after three years of cumulative profitability of our Korean business.
In the fourth quarter of '05, we established a full valuation allowance for our Brazilian business as well. Since that time, our Brazilian operation has turned profitable; we have not reestablished the DTA related to Brazil at this point. But we are benefiting from a lower effective tax rate. And we'll continue to evaluate Brazil on an ongoing basis to see if that's warranted in the future. It's not a forecast today. But this is something that you continuously monitor each quarter.
The establishment of a valuation allowance does not reflect any change in the company's view of its long-term automotive financial outlook. But instead, really focuses on a historical test, in terms of determining, in terms of the weight of evidence that was used to reach this decision.
Page 9. Talk about Germany now and GM Europe. On August 17, Germany effected legislation to lower the statutory corporate tax rate, effective 1/1/08. And actually, in our prior disclosures, we talked about what the impact of this would be on our German DTA balance.
It anticipated that this tax change will result in a reduction of approximately 9 percentage points in the German corporate tax rate. And due to that lower tax rate, German deferred tax assets and loss carry forwards obviously have less future value, as the underlying tax attributes will be offset by future income taxed at lower rates.
The value of the DTA is based on tax rates expected to climb in the years in which they're expected to be recovered. So therefore, even apart from the valuation allowance, we would have written down our DTAs in Germany, to the extent of this 9 percentage point reduction in the corporate effective tax rate.
But based on our assessment of our operations in Germany, and specifically again, we were in a three year cumulative loss basis, on an adjusted basis, excuse me. We concluded that a full valuation allowance should be taken against our German DTAs and a related charge in the third quarter includes, therefore, both the reduction in the value of the German DTA from the tax rate change and the valuation allowance associated with the determination that it was not, we failed the more likely than not test.
Important to note, to the extent the valuation allowances are reversed in the future, the value of the German DTAs would still be reduced by the same $0.5 billion to reflect the lower tax rate.
Moving out of deferred taxes into pensions. Page 10. We made some changes in pensions in the third quarter. Pensions, specifically, how we reported pension expense. Prior labor agreements generally included both basic monthly pension benefit increases and pension lump sum payments.
Basic benefit increases have been paid from plan assets and have historically been amortized over the average service life of employees as part of pension expense. Lump sums have been paid out of operating cash and have historically been expensed upon ratification.
The 2007 labor agreement with the UAW granted basic benefit increases and lump sums. And the company concluded, as opposed to past practice, that the lump sums would now be paid out of plan assets and included in our projected benefit obligation or PBO.
In looking at this matter, we concluded that the life of the labor contract would be a preferable period of economic benefit for purposes of amortizing pension benefit increases.
So, these basic benefit increases and the lump sums included in the new contract will now be amortized over the next four years and would begin to affect our financials inthe fourth quarter.
So, just thinking about it conceptually, an average service life for an active employee could be 10 years. We would have historically amortized the cost of basic benefit increases over 10 years. And instead what we're planning to do is amortize the cost of both basic benefit increases and lump sums over the contract life for four years instead. And as part of adopting this approach, we chose, in the third quarter, to expense the remaining unamortized prior service costs of $1.6 billion that remained from the 1999 and 2003 agreements.
And we expensed those in the third quarter. And so this is how we affected, frankly, prior agreements. And then when we get into the fourth quarter, you'll begin to see the impact of how we account for the new agreement.
This $1.6 billion would have been expensed over time, as we historically had done, had we not made, had we not adopted this shift.
Page 11 and 12. Deal with Delphi. In July and August, the Delphi reached agreements with all of its remaining unions, patterned largely on the June UAW agreement. And GM agreed to provide similar support, as we did for the UAW-Delphi agreement, including coverage of OPEB and certain attrition program reimbursements.
The GM and Delphi Settlement Agreements were signed in September, and these were filed with the bankruptcy court, as part of Delphi's plan of reorganization. Settlement Agreements resolve all claims by and against Delphi and documents GM's support of Delphi's plan of reorganization.
Delphi subsequently announced it would delay hearings on its Disclosure Statement to provide more time to negotiate exit financing due to changes in the credit markets. The parties filed amendments to the plan, Disclosure Statements and the GM-Delphi agreement on October 29. Delphi announced on November 5, that it would again delay the Disclosure Statement hearing to continue discussions with the statutory committees.
Candidly, the company believed that not all conditions for the effectiveness of its planned investor agreements would be met prior to the scheduled November 8 hearing and our discussions with Delphi and with the other parties continue at this point.
Page 12. As I mentioned on October 29, the company did file potential amendments to its POR and Disclosure Statements reflecting a lower level of net debt upon emergence. The document filed included amendments to the Global Settlement Agreement and Master Restructuring Agreement between Delphi and GM, whereby GM agreed to accept an alternative composition of its settlement.
For example, as compared with its $2.7 billion in cash under the September 6 plan of reorganization, under the amended plan and related agreements, GM will receive the following consideration upon Delphi's emergence from bankruptcy, at least $750 million of cash, $750 million of second lien note reduced by the extent of cash received above $750 million, and then $1.2 billion of preferred stock convertible into common at $45 a share.
GM recorded in the third quarter a charge of $350 million, as a result of all of these agreements, as well as the final agreements with the labor union, and reflecting the GM-Delphi Settlement Agreements as amended, finally, also reflective of incremental Delphi retiree healthcare costs.
So, at this point, including a $350 million charge that we took in the third quarter, we would have taken a total of approximately $6.9 billion of Delphi related charges through the third quarter. At this point, we expect no material change to the ongoing period costs disclosures that we previously provided to investors.
Page 13. Other special items included in the quarter. First, the Allison gain on sale, the transaction did close in August; net proceeds were $5.4 billion. Actually, what we did is we collected $0.2 billion in receivables, around the closing, and so therefore, the $5.6 billion purchase price that was discussed was adjusted downward to $5.4 billion as a result of the fact that we collected the accounts receivable.
The gain on sale remained the same as $5.3 billion pre-tax, $3.5 billion after. And I already mentioned that it was subject to adjustments for changes in working capital and debt. And that was one of the reasons why we had this minor difference versus the $5.6 billion announced.
We also had restructuring related items, $262 million in Europe, related to separation programs offered primarily in Belgium, Germany and Sweden. And $158 million in North America, related primarily to adjustments to the plant closing reserve, as well as curtailment reserve adjustments related to the special attrition programs offered in 2006.
Page 14. Prior labor agreements and specifically the current labor agreements, included programs to provide personal legal services to hourly employees and retirees represented by the UAW, the CAW, and the IUE, Communication Workers in America. Typically, the annual expense associated with these programs has been approximately $35 million historically, per year, and expensed as paid.
Upon completion of the '07 UAW negotiations and a review of the accounting for all provisions of the contract, the company determined that the retiree portion of these programs should be accounted for instead as postretirement defined benefits, as opposed to PAYGO.
Benefits paid to active employees will continue to be accounted for as period costs on a "pay as you go" basis or PAYGO with additional accruals for defined benefit accounting as they accrue retirement benefits. But we did conclude that we felt that we should change our accounting for the retiree portion of these plans.
As a result of this, an immaterial adjustment of $211 million, which I'll talk about how, that was determined in a moment, was effected in GM's financial statements through a restatement of shareholders equity as of 1/1/2006, in the quarter. And in fact, what we'll do, as we file our Ks, we'll go back to the very first period beginning retained earnings and adjust that number, as we make our filings going into the calendar year, to reflect the impact of this change in accounting for legal services, basically, a prior period adjustment.
That $211 million is comprised of the $323 million liability, offset by $112 million tax benefit. And the tax benefit, obviously, is then rolled into the valuation allowance in later periods. Again, this immaterial adjustment is basically effected through a change in beginning balance of retained earnings.
When we looked at the impact of this program, it was considered to be immaterial in all prior periods between accounting for it on a PAYGO basis, which is how we historically recorded it, or/and versus the expense if we had accounted for it at OPEB. So, we looked at the degree to which this might have affected profits or cash flows in every quarter and in every year previously, and the conclusion was that it was immaterial in all periods prior to the third quarter.
And therefore, no change has been reported to our profit and loss or to our cash flow statements. And again, we will effect this change via prior period adjustments that will affect the beginning balance of retained earnings on the balance sheet. I will also note that the impact of this is also immaterial to the balance sheet.
Okay, page 15. Coming back to the automotive business, North America. If you looked at what happened in the quarter, again, I want to reinforce that we've held our effective tax rates, and we've looked at the adjusted profitability for each of the regions. You can see North America revenues basically flat year-over-year inthe third quarter were down $181 million.
You could see a significant improvement in pre-tax profitability, $624 million. After-tax profitability, $413 million. You see the net margin at 0.9% shows you how close we are to breakeven at this point, and you see the income from discontinued operations. So, in effect, profitability in the quarter improved significantly year-to-year.
On the other hand, we ran in the red. And so therefore, obviously, the results are just not acceptable. And even if we had turned to the right side of zero, it's still certainly not adequate for what the business should earn.
Our production volumes were down 30,000 units. Our market shares in North America were 24.3%. You can see, it was down 0.2% but you can look down below to the U.S., our market share in the U.S. 25.1%, flat for the quarter. The U.S. SAAR at 16 million units in the quarter, down 1.1 million units. So, in the quarter we saw, I think, the impact on the consumer. Not a terrible number, but frankly, certainly a number well below trend.
And it affected us as well as number of other manufacturers. Our fleet mix in the quarter actually was up 3.8 points, but if you look at us year-to-date, we're down 0.5%. And frankly, at the 27.8%, we are getting ourselves in alignment or equilibrium, if you will, between retail shares as well in our fleet mix.
And then finally, our dealer inventory at 896,000 units was down 107,000 units. So, we feel pretty good about where our inventories are landing, as we completed the quarter.
Page 16. Looks at vehicle revenue per unit. In the third quarter, I might add, by the way, you could see at the bottom of this chart, this is a non-GAAP measure. Vehicle revenues here are excluding items such as daily rental, accounting impacts, service parts, OnStar, other outside sales, try to give you some idea, what's happening with vehicle revenues.
In the third quarter, our number was $21,605, significant improvement from the third quarter of '06. But also, frankly, a continuation of what we saw in the first and the second quarter, where we've had, frankly, richening mix, largely model option mix, as well as some price driving better revenues per unit in our North American business.
Page 17. Takes a look at the variance analysis for North America profitability, both in the third quarter as well as calendar year-to-date. In the third quarter, volume was actually unfavorable $0.2 billion, mix favorable $0.3 billion, price and material net was $0.2 billion, policy, warranty campaigns was $0.3 billion. There are two things going on there, one, last year we had the retroactive effect of our revised warranty, powertrain warranty that adversely affected the third quarter of last year.
And then in the third quarter of this year, we had recoveries from Delphi, actually in warranty recoveries from Delphi, which were a little less than $200 million in the quarter. So, the net effect of those two resulted in better policy, warranty and campaign expense by $0.3 billion.
Pension, healthcare, manufacturing, basically $0.1 billion. Once you get to the third quarter, a year-over-year comparisons. We had by the third quarter of last year, run a substantial amount of costs out of our cost structure. When you look at the year-to-date, we are $2.3 billion calendar year-to-date favorable on this measure. But in the third quarter it was favorable, but only by $0.1 billion.
And then finally, engineering exchange other was $0.2 billion and a host of items going on in that category, none of which are frankly bigger than $100 million. But one thing that did affect us that is in there is the impact of exchange of C dollar to U.S. dollar. But there are a whole host of other factors; there's the Delphi costs in there, there are engineering costs in there. Favorable product liability reserve adjustment in the prior period a whole host of things, but none of them are more than $0.1 billion.
Overview of other regions. I'm not going to spend a lot of time in this chart, in as much as I have charts on each individual operation, but a couple general points. First, year-to-date through the third quarter, 58% of our unit sales were outside the U.S. About 36% of our automotive revenues were generated from outside of North America; it shows you still how obviously important our North America business is to us from the revenue and profitability perspective.
We had record third quarter volume in every region, in the other regions of the world fueled by share growth of 0.5% outside of North America. These contributed to year-to-date global share gains of 0.2%, and our revenues were up 28% with significant gains in every region.
GME volume was up 15%, as we leveraged our position inEastern Europe particularly Russia and gained share in most key Western European Markets. GMLAAM, volume was up 22% outpacing what was otherwise a very strong industry and almost doubling our debt to profitability, and then GMAP volumes were up 16%, and adjusted net income more than doubled, with strong results in China, Korea, India and some improved performance actually in Australia.
Moving to Europe, page 19. You see the impact of revenues in Europe, up a $1.278 billion. Let me stop and point out that, the business that we do in Russia is not exclusively done for GM Daewoo, but it's substantially done through GM Daewoo. And it is much as GM Daewoo, we have 51% of the business we consolidated but nonetheless we have obviously 49% minority shareholders.
We largely reflect the results of our Russian business in our Asia Pacific operations. And so, while you'll see the volumes in Europe, you generally see the revenues and the P&L affect associated with that, by and large concentrated in GMA Pacific.
You see, but nonetheless even quite apart from that you do see a sizeable increase in revenue in the quarter in part driven by volumes and in part driven by a strong Euro.
Pre-tax losses were wider by $70 million. Net income, the net loss was wider by $51 million, net margin a 1% loss. As we look at our European business in the quarter, in general, third quarter is tough in Europe. But I'd say, certainly relative to the third quarter of '06, a mild disappointment. It was not something that we would consider to be acceptable.
We have made good progress inEurope, calendar year-to-date. We've been okay, but I would say the third quarter was a tough quarter for GM Europe. Certainly, from a profitability perspective, we continue to growthe business and growth share, but we weren't satisfied with our financial results. If you looked at some of the key countries, you see Germany here loss as an industry, and that, frankly, understates the weakness of the German industry.
You've got higher fleet sales and deliveries in Germany. And actually, the retail market in Germany is off substantially. U.K. holding in there relatively strong, our share up by 1.6 points in the U.K. And then you see Russia, industry in Russia 2.8 million, units up 40% from the prior year, our share at a little over 9%, so we're up about two points.
GMLAAM; revenues almost $5 billion, pre-tax profits $375, net income $340 and the net margin almost 7% in Latin America, after Middle East; just a very good quarter for GMLAAM. Production volumes up substantially, industry up substantially, our share up substantially at 0.4%. So, we're growing faster than an otherwise very fast growing market. The biggest single market in LAAM remains Brazil. You can see the Brazilian market up 30% on a SAAR basis and our share down 0.2%. We're frankly pleased with how the Brazilian market is moving.
Page 21. GMA Pacific, continued strong growth in Asia Pacific, $1.6 billion increase in revenues. Pre-tax profitability swinging to the positive and improving by $180 million; you see the improvement in our China JV equity income. You do see more minority interest, more of an impact of minority interest in the third quarter of '07, driven by better profitability in Korea and GM Daewoo. So, we have better profitability in Korea, we have more minority interest reported in our Asia Pacific operations. You see the net income has improved $81 million, net margin improved by one point.
Looking down at some of the key markets, again, very strong growth in Asia; our share up 0.3% overall. The China market growing just still at a very fast pace. The SAAR in China, in the third quarter, 8.7 million units. Our share down 0.7% in China, in part reflecting, not been able to keep up with growth in some key areas, but also a lot of the growth has been in some of the very low or entry level segments where we're not as strongly positioned competitively.
So, our share-off a bit versus the third quarter of '06, but nonetheless at 11.3%, we feel pretty good about how we're doing in our business in China with our partners. Australia, you see a continued strong industry actually inAustralia. The Australian market has been going through a pretty significant transformation, and our job is to basically right size our cost structuring in Australia to deal with what is a different mix of sales; and that's what we have been focusing our attention on.
Finally, fully built-up units in Korea, 193,000 units up. It doesn't include our CKV business in Korea, which is also a substantial piece of business or kits I should say, excuse me.
GMAC. GMAC reported a $1.6 billion net loss in the quarter, actually more than due to ResCap, amidst the global dislocation in the mortgage and credit markets. ResCap's total net loss was $2.3 billion, including $455 million impairment of substantially all of its goodwill. The goodwill that was attributable to ResCap. Non-ResCap businesses continue to perform well. I'll talk about each individual segment in the next chart.
TheGM reported an adjusted net loss of $757 million that included our 49% of the net loss, partially offset by a preferred dividend, and this was versus, certainly the third quarter of '06, a significant deterioration of $1.3 billion.
In the third quarter of '06, we fully consolidated GMAC, and GMAC was profitable. Inthe third quarter of '07, we picked up 49% of GMAC when GMAC was unprofitable.
Page 23. Looks at the individual lines of business. You can see automotive finance up substantially, actually; so, good to see widening margins and improved results in Global Auto Finance. Insurance while down year-to-year at $117 million that's a good performance, in the prior year, we did have some capital gains in the insurance business.
So, the operating trends in the insurance business are positive. GMAC's other businesses, Commercial Finance and its equity interest and Capmark was favorable year-to-year. So, operating income, exclusive of ResCap was up $226 million or right around 50%. ResCap, however, you can see the wide losses [$108.9 billion] a swing at the ResCap level. And you can see in the third quarter of '07, $455 million of goodwill impairment.
In the third quarter of '06, GMAC reported goodwill impairment associated with the commercial finance business.
Page 24. Shift in liquidity. We closed the quarter with a strong growth liquidity position of $30 billion. It reflects an increase of $2.8 billion versus the second quarter of '07, which is more than explained by the net proceeds from the sale of Allison.
Our gross liquidity that we're measuring here includes $3.6 billion of readily available VEBA assets, i.e. our short-term VEBA. $2.6, an estimated $2.6 billion of this amount in short-term VEBA will be excluded as we move into year-end '07, due to the recent GM-UAW independent VEBA trust settlement.
In other words, this amount is readily available as of September 30th, '07, but as of December 31st, '07, we will no longer include as readily available.
Page 25. Looks at both gross liquidity as well as net liquidity with the improvement as a result of the Allison sale, you can see the reduction in net debt from $12.1 billion at the end of the second quarter of '07 to $9.9 billion at the end of the third quarter of '07. And over this time period, this will be the first time that our net debt position fell below $10 billion.
Page 26. Moving into cash flow drivers. We did have an adjusted operating cash flow of a negative $2.5 billion in the quarter, driven by scheduled production shutdown in July. This was $1.4 billion improvement from the $3.9 billion of negative cash operating cash flow reported in the third quarter of ‘06; I'll talk about why in a subsequent chart.
And then year-to-date, our adjusted automotive operating cash flow is an outflow of $1.1 billion, which is an improvement of $3.6 billion relative to the first nine months of 2006, with operating cash flow improvements achieved at all four GM regions.
Page 27. I'm going to focus my attention here on the third quarter of '07. You can seethe substantial loss due to reported net income line, and then you seethe substantial add back in accrued expenses and other as a result of the fact that the valuation allowance is a non-cash charge. And so, you can see that adjusted operating cash flow actually comes out at negative $2.5.
I'll talk about what's happening in working capital at a later chart. But you can seethe change year-to-year. Below the adjusted operating cash flow line, frankly, not much going on inthe quarter. You had the sale of Allison, and then you had some small moves in some of the other categories. But not really much going on in that regard.
Page 28. Looks at both, working capital as well as accrued expenses and other to try to give you some sense of what's going on in these line items. In the third quarter of '07, working capital is a $1.1 billion use of cash. And if you looked at it versus the third quarter of '06, really the only difference is in third quarter of '06, we had some acceleration of accounts receivable collections.
In the third quarter of '07, we frankly were flat. So, the changes that you saw in inventory and accounts payable were pretty comparable year-over-year in working capital. So, the change in working capital is driven by, frankly, the timing of collections of accounts receivables.
And then looking at accrued expenses and other, looking down, you see not much change in terms of net interest accrual. What you saw in the quarter is $0.6 billion use of funds. As we continue to reduce our sales to fleets, we do continue to pay back more customer deposits than we take. So therefore, we have a $0.6 billion use of funds.
Moving down to non-cash charges and other of $1.1 billion. What you see in that number in the quarter, you see the impact of the Delphi charge, which was non-cash, you see some of the charges and the restructuring charges that were taken in both North America and GM Europe are also non-cash.
So the $1.1 billion is almost entirely comprised of the special items that we outline, that are restructuring related in the quarter that were by and large in the quarter, non-cash.
Page 29. Looking at the outlook in the fourth quarter. We see ongoing revenue growth and strength in the emerging markets. We do have concerns over near-term U.S. economic conditions. The market, as I said, ran at a $16 million pace in the U.S. in the third quarter. Not a terrible number but certainly well below trend.
And while we're pleased with our share performance during recent months, excuse me, the overall pace of economic activity and primary demand in the U.S. market is certainly below our expectations, and it's something we need to be cognizant of. We do see the full benefit, for example, though, moving into the fourth quarter, of some very important product launches with our CTS as well as our Malibu Sedan, both very important for us, in terms of reestablishing brand and market momentum.
You'll also see in the fourth quarter, some further financial impact of the GM UAW labor agreement, including pension expense, active employee lump sum amongst other items. And looking ahead, we do expect to continue to leverage our strong position in emerging markets to maintain strong overall global growth. And then, we're going to continue to work with UAW to begin the process of transforming the workforce to improve the cost competitiveness of our North American businesses.
So on page 30, to summarize and close here, large loss in the quarter on a GAAP basis driven by the valuation allowance established for deferred tax assets. But even apart from that, we still had a $1.6 billion loss at the adjusted net income level, but also, a large part of that was also driven by tax-related adjustments.
Automotive operations delivered improved, but clearly, still not satisfactory results. Very strong global volume and revenue growth we saw in the quarter. We saw strong growth in net income results in Asia Pacific and LAAM. I mentioned GME results being somewhat disappointing. And North America, while delivering improved results, we're still in a loss position.
GMAC results were poor, more than explained by the significant losses at ResCap. And finally, we did make some progress at Delphi. And we did close the quarter with improved automotive liquidity of about $30 billion.
Thank you for your time. At this point, we'll take questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now proceed with the analyst portion of the question-and-answer session. (Operator Instructions) Our first question comes from the line of John Murphy from Merrill Lynch. Please proceed.
John Murphy - Merrill Lynch
Good morning, Fritz.
Fritz Henderson
Hi, John.
John Murphy - Merrill Lynch
Just a quick technical question, first, on a DTA tax allowances here. If you look at the technical measurement for this on a trailing basis, and we step forward, I mean, what are the ceilings on -- or what is the ceiling on future earnings? I mean, you've had some pretty big losses in 2005, so I would imagine the technical ceiling on earnings going forward, based on this 12-quarter measurement, is pretty high going forward. Is that correct?
Fritz Henderson
Did you say ceiling or feeling?
John Murphy - Merrill Lynch
Ceiling.
Fritz Henderson
Okay. Well, clearly, if you do a 12 quarter trailing average, the inclusion of '05 in any 12-quarter trailing average is a significant drag. But I'm not sure I got your question. So why don't you try again?
John Murphy - Merrill Lynch
So meaning that there is I mean, even if you had some massive improvement in pre-tax income in the US next year, there is the very good chance that this DTA allowance would not be reversed?
Fritz Henderson
Yeah. In order for us reverse the DTA allowance, let me see if I can't touch on this directly, we would need to see three-year cumulative historical losses turn into three-year historical cumulative profits. So that's the very first thing we would want to see. The second thing you'd want to see is you'd want to see some expectation of continued strong results. You'd want to have some expectation of continued favorable results before you would consider removing the valuation allowance.
John Murphy - Merrill Lynch
Okay. So, inthe interim, we'd look at a tax rate inNorth America of 0%, and that corporate other line would return to more normal level. Is that a correct assumption?
Fritz Henderson
Yeah. What we did here in the quarter and candidly, we need to consider how we want to handle the fourth quarter. So, I would say, stay tuned. But what we did here in this quarter is we held the tax rates in the automotive businesses constant so that we could provide some measure of comparability year-over-year.
We put the cumulative effect from '07 results in the corporate sector. But over time, we would expect to basically move that into the individual automotive sector and then disclose that to you. And North America, I mean there will be some taxes in Mexico, but by and large, North America will be very close to a 0% rate.
John Murphy - Merrill Lynch
Okay. And then, switching gears real quick to GMAC and the troubles at ResCap. It does sound like there's potential for a need or maybe a desire from Cerberus to commit more capital to ResCap. But given that business is ring-fenced and any mishaps at ResCap wouldn't necessarily directly impact the auto financing business. What's your resolve in potentially committing more capital to GMAC and ResCap, specifically, outside of GMAC really from your balance sheet directly?
Fritz Henderson
Well, a couple of things. First, reflecting back on the GMAC earnings release last week, GMAC itself actually did make an equity injection into ResCap during the third quarter. What the shareholders did, we actually disclosed this in GMAC's earnings results as well as subsequent to the close, but prior to the release the shareholders agreed to capitalize a portion of the preferred that was outstanding. In other words, we and Cerberus agreed to capitalize a pro rata portion of our preferred stock into GMAC.
We've not made nor do we plan to make any injections directly into ResCap, obviously. We're a shareholder of GMAC. And so far, our approach has been, with Cerberus, to capitalize a portion of our preferred. And then, we obviously have an interest in making sure that GMAC stays well capitalized and it continued to do a good job supporting the sale of GM cars and trucks. But I would say GMAC was taking the right measured approach to how we want to handle capitalization to ResCap.
And in terms of shareholders at GMAC from the GM perspective, the way we look at it, we certainly felt, with Cerberus, that the capitalization of the preferred was the right action for us to take at this point.
John Murphy - Merrill Lynch
Do you envision a point in time where Cerberus may want to commit more capital to help ResCap out? And you may not and you could get taken out of that equity stake at ResCap, specifically?
Fritz Henderson
Hypothetical question, which at this point, I don't think I can answer, actually. So I'd just prefer to defer that for a different day, if and when the subject comes up.
John Murphy - Merrill Lynch
Okay. And then just lastly, on the changeover of some of the products, on the Malibu, what do you think the incremental bearable profit is there, switching from the old product to the new product, just generally? And maybe even just the LAAM to CUVs versus the 360, 370s, on that same topic?
Fritz Henderson
Well, let me first talk about the Crossovers, the Enclave, the Acadia and the Outlook relative to the Trailblazer and Envoy. Actually earlier, maybe it was last year or earlier this year I was asked this question. And what I said then is true today is that the profitability of those vehicles is better than, let's say, the mid-utilities, the rate at which has been running recently, but certainly not as robust as the profitability that we have in our full size sport utilities.
But, nonetheless, we've been pleased with the market's performance. And these have been important contributors to both share performance, as well as improved financial results in North America. In terms of the new Malibu, I am not going to really go into the profit of this car versus the profit of the prior car. But I would say on this one, we're very encouraged by early market acceptance and we actually think we can do a fair amount more volume with this car than the prior car, at retail.
John Murphy - Merrill Lynch
Okay. Thank you very much.
Fritz Henderson
You're welcome.
Operator
And our next question comes from the line of Brian Johnson with Lehman Brothers. Please proceed.
Brian Johnson - Lehman Brothers
Good morning, Fritz.
Fritz Henderson
Hi, Brian.
Brian Johnson - Lehman Brothers
I'd like to focus on Europe as opposed to the housekeeping details on the accounting. Can you give us a sense of where you think the European turnaround really is? I'd actually been hopeful for some more profits in Europe this quarter.
And is the business configured, how much of what we saw was a weakness in the market versus a weakness in your positioning? And even if it was a weakness in the market, given BMW different business, 540 basis points this quarter, what's it going to take to get a Europe that can produce 2% to 3% operating profits, even in a flattish environment?
Fritz Henderson
Well, a couple of things. Impacting the quarter, I would say a lot of positive things have happened to our European business to date. But two things I would point to inthe quarter, which been tough for us to deal with. One, a very weak German retail market, and Germany is historically the largest single market inthe EU. Second, ithas historically been one of the most profitable markets in Europe, in as much as it tends to sell a richer mix of vehicles. And so therefore, both its contraction and then its even more severe contraction in retail are weighed pretty heavily on us, to be honest.
The second thing is, is that while we've been very, very pleased with the reception to our new Corsa, what we've seen is some adverse product mix. What we've seen is Corsa growing. And we've seen; I wouldn't say weakness in Zafira, but we've sold, on a relative basis, more Corsas than we have Zafiras. So therefore, certainly per unit, that's not a particularly good trade from a profit perspective. We would actually prefer to be selling more of both.
I would say those two factors, as I looked at Europe, combined with pretty continued challenges at Saab, are what really impacts us. And in Saab, a couple of things. One, we are in a difficult period from a product launch perspective. We got a lot of product coming, but we do not have a lot of new products in the market today. Second, shipping products from Sweden to the US and you still have about 30% of Saab's business that's in the US, is very tough sweating, given both the Kroner and the Euro versus the Dollar.
Last point I'd make Europe that has been weighing on us is FX, even intra-Europe. So we've had the impact of let's say, Euro/Pound, Euro/Turkish Lyra and Euro versus some of the Eastern currency countries and the Ruble, which has been a drag on margins. Because most of our manufacturing is actually in the Euro denominated countries and our sales growth, particularly have been in these other countries, both factors have all weighed down on GM Europe's profitability.
We've hit all of our cost targets. We've actually performed better in the market. I mentioned before that the profitability from Russia would largely be earned in Asia Pacific. But all of these are reasons but we're just not happy with our overall performance. And we understand why, but obviously we need to do a better job.
Brian Johnson - Lehman Brothers
Does this imply restructuring is needed at Saab? Or are you saying it is a product cycle issue?
Fritz Henderson
The Saab issue is in part product cycle. And over time, I think not only product cycle, I think we need to get… and here it's not really a Saab issue, but more of a corporate issue. We need to get a bit more in balanced in foreign exchange. We need to find more flows that go from US-based currencies back into Euro to give us a bit more of a hedge, naturally.
Brian Johnson - Lehman Brothers
And are there opportunities to expand Daewoo further into Eastern Europe?
Fritz Henderson
There are great opportunities to expand GM-Daewoo through Eastern Europe. We have, for example, moved into Uzbekistan. We've grown in Ukraine. We've grown very fast in Russia. And in fact, the engine for a lot of the growth, not exclusively by the way, we've done a huge amount of Opel volume into Russia as well, but the driver of growth has really been the GM-Daewoo product.
Brian Johnson - Lehman Brothers
Okay. And just accounting-wise, we see that in Asia Pacific revenue and profits?
Fritz Henderson
Yeah. You'll typically see it, I mean, the profit impact of the Chevrolet sales will be entirely in Asia Pacific.
Brian Johnson - Lehman Brothers
Okay. Thanks.
Fritz Henderson
Yes. Thank you.
Operator
And our next question comes from the line of Himanshu Patel from JP Morgan. Please proceed.
Himanshu Patel - JP Morgan
Hi. Good morning, guys.
Fritz Henderson
Hi, Himanshu.
Himanshu Patel - JP Morgan
A couple of questions on the accounting here. On the pensions, I think you mentioned that the pension basic benefit increase previously was amortized over about 10 years, the lump sums were expense. And it sounds like now both of them are going to be amortized over four years. Just some rough, back of the envelope math, does that roughly sort of $700 million, $800 million per annum incremental expense that you may recognize now?
Fritz Henderson
I'll answer that question, Himanshu, when we get to the fourth quarter. But I also, I mean, one thing you have to take into account is the fact that we've expensed the '99 and the '03 contract in the third quarter. So that will no longer be expensed over that period. So we really did three things. One, rather than doing lumps up-front, we will spread those over four years. Two, instead of doing basic benefit increases over 10 years, we'll go four years. And three, we take the '99 and the '03 remaining prior service costs and expense it in the third quarter.
Himanshu Patel - JP Morgan
I see. So that's an offset.
Fritz Henderson
Correct.
Himanshu Patel - JP Morgan
That is correct. Okay. Going back to the DTAs. So if you were to, let's say, become profitable, at least on an earnings basis in some future period after, let's say, all of the UAW contract savings were recognized. It sounds like you would not be a tax payer, at least in the first couple of years of that, on the assumption that '07, '08 and '09 would still be a loss position in the US. Is that a fair characterization?
Fritz Henderson
Yeah. If you look at, well, it obviously depends on the extent to which our pre-tax profits grow, but let me step aside from that, because I'm not going to forecast profitability today. If you look at the components of our DTAs, our annual report had them; our actual NOL is actually very large. And so, we would not anticipate actually being a cash taxpayer for quite some time. And then, once you've exhausted that, then you've got timing differences you got to deal with. But first things first, we had some pretty substantial loss carry-forwards in the US, but also not just US, in Germany and Canada.
Himanshu Patel - JP Morgan
Okay. And then, you mentioned that the third quarter results, when you showed the adjusted net income for the automotive division in the individual regions, you had held the previous managerial tax rate. And you've kind of reconciled that in corporate/other.
Fritz Henderson
Correct.
Himanshu Patel - JP Morgan
What did you do for GMAC's contribution, in terms of tax treatment? Because I think when the earnings flow from the LLC to GM, I think there is a tax impact, right on at least the auto and ResCap portion of the GMAC earnings.
Fritz Henderson
All in the corporate sector.
Himanshu Patel - JP Morgan
All captured in corporate/other. Okay. And then lastly, just the change in accounting treatment on how you look at the legal service expense on how you treat the lump sums. A lot of this doesn't sound like, I mean, I'm wondering what triggered you guys to change this now. It sounds like you've taken a more conservative accounting approach to this. Is there something that came up in some of the reviews that you guys were doing on the accounting front over the last couple of years that sort of prompted this change? Or was it just the treatment of these items in the new UAW contract that forced that change?
Fritz Henderson
Well, let me just kind of take them one at a time. First on pensions, we took a look at our pensions, and frankly, we looked at a past history. We've done it correctly, so we're not concerned about our prior accounting. But we just thought it would be preferable to expense the benefits that were negotiated in any given contract over the life of that contract. That's why we chose the approach.
And that was just frankly something that is as we went into the '07 contract, we finished it, we did a review of it and our collective judgment, my judgment, my Controllers, Chief Accounting Officers, and frankly, with support of our auditors. We concluded that than rather having lump sums in one period, 10-year life, and then we come back, and we have prior service costs, we just felt that the preferable approach would be to expense it over the life of the contract, because we negotiate these benefits over the contract.
Then, on legal services, as we looked at it, frankly, you might imagine at $30 million to $35 million per year. It doesn't necessarily come up on the radar screen all the time. And when we looked at all of the agreements that were in the 2007 labor agreement, whether it's what we need to do with the VEBA, how we want to handle pensions, where we're going with OPEB, all of these other things we looked at everything.
We frankly we took an opportunity to look at every single provision of the contract to make sure that we were confident and comfortable with how we're handling it. As we looked at this -- as I said, it's an immaterial adjustment. But we frankly thought that the more correct accounting was to take the retiree portion of it and handle it as OPEB. This is something; this is a benefit that is equally available to actives or retirees, actually.
And frankly, you don't really determine who uses it. It's equally available to anybody. So if it wound up that 90% of the people using it were actives, we wouldn't be having this discussion. But as we looked at the facts, we looked at it in about a big piece of the services were used by retirees. And our conclusion was, this is more appropriately accounted for at OPEB. And when we looked at its materiality, we chose to handle it this way.
Himanshu Patel - JP Morgan
Okay. And then last question. Can you talk a little bit about the tax implications, of both cash and GAAP, of the VEBA deal? Because, I mean, there's the practical implementation of it, where there's a large contributions made over the next two years. But then, it sounds like, from an accounting perspective, you're using the smoothing mechanism with negative plan amendment accounting. I'm wondering, how does that impact the taxes going forward?
Fritz Henderson
Well, as long as we're in a three-year cumulative loss position, we'll just be reporting our results almost, in effect, on a pre-tax basis. So you really wouldn't have any effect. Once you determine that you were in a three-year cumulative profit position, if we actually got to the point where we reestablished the DTA, then, we would be tax effecting that and likely with any element of our earnings for our North American business.
So I wouldn't say that there's any special treatment that would be accorded the labor agreement or the VEBA deal. I think it would just basically go into the pre-tax number.
Himanshu Patel - JP Morgan
Just to be clear, when you measure whether or not you're in a cumulative three-year profit, are you including in there the benefit of the amortization of the negative plan amendment? Is that captured as part of profit? I know it is captured as part of GAAP profit. I just want to make sure the same treatment here.
Fritz Henderson
Yeah. The negative plan amendment that we have from the '05 healthcare deal has been included in our measurements to date. We have not included any negative plan amendment from our '07 healthcare deal because that doesn't really kick in until 2010.
Himanshu Patel - JP Morgan
Okay. And maybe one last one, if I could sneak it in. Any directional thoughts on mix in North America, how we should think about that? It's been holding up pretty well in '07, but as we look out into '08?
Fritz Henderson
Well, we've had last year, if I think about '06, we were heavily impacted by model option mix for things like our full size utilities. This year we've benefited pretty significantly in North America from the richer mix on our new full size pick-ups, as well as the Acadia, Outlook, Enclave. As I look into next year, therefore, all of that would have already been baked in. And so what we'll have is things like the new CTS, things like the new Malibu. But this is pure guesswork; obviously, the market will determine what our mix is.
But I think we've seen, you wouldn't expect to seethe same kind of substantial move on mix in' 08 that you've seen in prior periods, because what you've seen in '06 and '07 is largely driven by these major launches of very high-volume vehicles, and we don't necessarily have that replicated next year.
But stepping back to the question of the mix, we think that we'll be able to hold what we've done. We've been quite pleased with the results to date, and we don't see, necessarily, any reason why we should slip.
Himanshu Patel - JP Morgan
Okay. Thank you.
Fritz Henderson
You're welcome.
Operator
(Operator Instructions) Our next question at this time comes from the line of Rod Lache from Deutsche Bank. Please proceed.
Rod Lache - Deutsche Bank
Good morning, Fritz.
Fritz Henderson
Hi, Rod.
Rod Lache - Deutsche Bank
Your comments in the presentation about conditions being more challenging in the US, are you signaling that your outlook is worse than what you're seeing currently? Or can you just elaborate on that a little bit?
Fritz Henderson
Well, actually, I guess what I'll say is it's pretty much we've seen 16-1. For example, in October, the market has run right around 16-1, 16-2, 16-0. We candidly think that will continue. So I wouldn't say we're signaling significant weakness from where it's been. I'm just saying, today it's certainly well below trend.
Rod Lache - Deutsche Bank
Okay. Got it. And can you just give us a little bit of help on the other income level, excluding these tax adjustments, which I guess, you haven't finalized how you're going to treat that. But just adjusting for the pension and lump sums, these adjustments that you're making, what would you estimate the ongoing level to be in there?
Fritz Henderson
Well, I was actually not planning to go through that today. I was going to go through that when I got into the fourth quarter when we've done all of our re-measurements. So if you'd just permit me, I want to hold off on answering that question for at least a little while.
Rod Lache - Deutsche Bank
Okay. Let me then ask you, on the North American price and material being a positive, can you just give us a sense of how that looks, price versus material? And what's your outlook for material as you go out to '08?
Fritz Henderson
Yes. Let me, I'll give you my outlook for material when we go through our '08 results, typically in January is when we would provide that. But if I look at, I'm just trying to get to it here for a second. Material was frankly slightly unfavorable. So frankly, the entire amount of that price material was priced favorable. Material was slightly unfavorable. And largely driven by a continuation of what we've seen, anything that's a metal, so whether it's steel, precious metal, nonferrous metals, the level of inflation we've seen in those commodities has been horrific. Now, the question is where do they go in '08? If I knew that, I'd be trading them.
Rod Lache - Deutsche Bank
Okay. Let me just get one last one in here. Just broadly speaking, some of the thinking behind the sale of GMAC and ResCap was to improve the borrowing costs, and obviously that hasn't happened, at least at this point. Is there any thought being given by GM to changing that structure in anyway at this point? Or are you basically at the mercy of the markets and waiting for this mortgage situation to settle out?
Fritz Henderson
Well, let me speak to one at a time. First, in terms of lower borrowing costs, we have seen it in the auto finance business, actually. And the reason you've seen substantial improvement in automotive finance profitability has been the margin expansion not volume driven. Margin expansion driven by lower borrowing costs, I mean GMAC's rating, for example, is five ratings higher than GM. It's been volatile, obviously impacted in part by mortgages. But in general, we've achieved our goals, in terms of automotive finance and better margins in that regard. But as I said, it's been a bit of a volatile ride.
Now, we don't have any, I think you said is there any, are we thinking about any change in structure? The simple answer to that is no. We think that what we foresaw, in terms of the benefits of the deal, in terms of improved GMAC access to funds, cost competitiveness we're actually seeing in the automotive business what we obviously didn't foresee is what was going to happen in the mortgage business. And I guess it depends on your benchmark, but had we not done the deal, our costs would be a lot worse than they are today.
Rod Lache - Deutsche Bank
Okay. Thank you.
Fritz Henderson
Thank you.
Operator
And our next question comes from the line of Jonathan Steinmetz from Morgan Stanley. Please proceed.
Jonathan Steinmetz - Morgan Stanley
Hi, thanks. Good morning.
Fritz Henderson
Hi, Jonathan.
Jonathan Steinmetz - Morgan Stanley
Hi. Just to follow-up on the North American profit walk on page 17. If you could talk about a little deeper on mix, it was $300 million net favorable in the quarter, but it ran 1-1 I guess, in the first half of the year. And I would think, with the full pick-ups and the Acadia and all that stuff, it wouldn't be really decelerating. So, can you talk on that year-on-year, what the bad guys were, so to speak?
Fritz Henderson
Let me see. It's interesting. Since I looked at the third quarter what you did see in the third quarter is you saw the full array of our pick-ups hitting the market. So earlier in the year, our pick-up mix was especially rich. And then, what you got out as you got out to the third quarter is you saw, certainly much more traditional, you had more work trucks versus crew cabs. I think you had what you saw, you said a slowdown, I think it's right. Your rate of improvement certainly slowed. It was driven by, frankly, a much more normal mix of distribution of full size pick-ups than what we saw in the first half.
Jonathan Steinmetz - Morgan Stanley
And were the large SUVs showing any kind of fading as they aged in life?
Fritz Henderson
Actually, our penetration of the segment, I think, last month hit 77%, 80%, sorry, I'm wrong. So, we like our position. The issue is the segment itself is obviously been under pressure. And it is what it is, but in terms of our product competitiveness, we haven't lost a beat.
Jonathan Steinmetz - Morgan Stanley
Okay. And staying on that slide, on the policy and warranty, I think you mentioned in the $200 million favorable related to Delphi, what was the pre-tax amount? And is there anything left to bleed out there? Or is that sort of a one-off?
Fritz Henderson
It's actually a little less than that. It rounded to that, but it was a little less than that. That was largely the result of a number of items that were included in the comprehensive settlement. Last year we had this $100 million unfavorable effect in the third quarter of last year associated with the move to the new power train warranty, which didn't repeat itself. And those two factors pretty much explained the variance on policy and warranty in the third quarter.
Jonathan Steinmetz - Morgan Stanley
Okay. And finally, on LAAM you're running at a 7.6% pre-tax, can you give a little bit more color on sort of was there anything unusual in the Middle East, as perhaps unsustainably propping that up? Or just, I guess you're very familiar with the region. Is that a margin level that you think can be sustained over the next two or three years? Or are you leery of saying that?
Fritz Henderson
It's interesting. I am very familiar with the region. I love the place. But three years ago, we're making this presentation and LAAM was challenged. I think what's happening in LAAM is you see a couple things. One, if you kind of go back to the growth in China and the global growth in economies, particularly in China, it's really pulled a lot of commodity-based economies forward.
So you've seen countries like Argentina continue to improve. Brazil, while it has done a very good fiscally managing its economy, has also begun to see significant growth, in part, driven by China. So many of the commodity-related countries, South Africa, although they're recently constricted credit.
But if I think about the Latin American economies, Venezuela has been remarkably driven by oil, obviously, but when you look at Latin America, one of the few times, certainly, in my career where you've seen such consistent strength across all the Latin American countries and a common driver of that has been commodities, global growth, or in the case of Venezuela, oil.
So therefore, the sustainability of it you have to ask yourself the question, is what's the sustainability of long-term demand and growth in places like China, and what's happening with oil and commodity prices? So, as I look atLatin America actually, the reason I'm focusing on Latin America, Latin America is what's driving the significant swing in the profitability of LAAM.
We run our Middle East business very, very well, but it's a distribution business and generally an earnings distributor margins. So when you see significant margin expansion ina place like LAAM, it's generally Latin America or inSouth Africa. South Africa, as I said, hasn't been akey driver of LAAM's profitability.
But I would say, we arein an environment in LAAM where you have to always be vigilant because it can be a volatile place. But we like our position, we like our share, we like our market positions, we've been there along time, we have great brands there. And frankly, the economies are growing, and we're taking advantage of it.
I think that the key, over time, in terms of sustainability, is going to be a function of what happens with these global demand drivers, because I think as long as they're robust, the LAAM countries can stay robust.
Jonathan Steinmetz - Morgan Stanley
Thank you.
Fritz Henderson
You're welcome.
Operator
Our next question comes from the line of Joseph Szczesny from the Oakland Press. Please proceed.
Joseph Szczesny - Oakland Press
Fritz, what arethe prospects for more losses from ResCap at this point. I mean you were sort of surprised by the $757 million loss from GMAC in this quarter, what's the outlook going forward for that business, and how much more is there; how much more liability do you see out there?
Fritz Henderson
I would say Joe, the outlook as I look at it, it's been very volatile, and it's interesting as we exited the second quarter, and we saw a significantly narrower loss in ResCap and improved profitability in GMAC. We were feeling better about market condition as we exited second quarter. And then we had a very rude August and September as did the entire market. At this point, I think you have to say that the outlook for the mortgage industry in general is challenging.
I'm not good enough, nor smart enough, nor prescient enough to predict it actually. I think what we've tried to do with our partner Cerberus is develop a game plan, and they've been -- Cerberus has been very good to work with. We've got management team on the ground. The focus has been on restructuring the business, refocusing the business, moving away from some of the businesses that have generated the lion share of losses today, try to shrink the size of the losses, work very aggressively to do it, shrink the balance sheet. We basically tighten a lot of our underwriting criteria and try to cope with what has been a highly uncertain market.
Liquidity has improved the GMAC. Liquidity has improved the ResCap. But in terms of the outlook for profitability, I can't really give you a good solid prognostication. I just got to say today is just a challenging market that we need to watch everyday, every month and every quarter.
Joseph Szczesny - Oakland Press
And when do you expect to see some of the gains from the labor contracts begin to impact your bottom-line, and how much of your labor cost come down do your estimates?
Fritz Henderson
Well, I'm not going to answer your second question because we're just not in a position to do that today. What we'll see is the impact of the healthcare agreement, you would not see really until 2010 as we talked about when we went through the contract, I guess it was a month ago or so.
The other related elements of the contract, though, we can't work together with the UAW to begin to transform our workforce to make ourselves more competitive. And we plan to do that with the UAW, ASAP on an aggressive basis. There is a cost associated with some of transformation, however, so one of the reasons we've been reticent to talk about what the savings potential is at this point, we talked about what the potential is, certainly given the demographics of our workforce etcetera.
But there is thecost associated with the transformation, and we don't want to talk about what the benefits are until we actually can communicate what thecost are of achieving it.
Joseph Szczesny - Oakland Press
So the transformation is going to take a lot longer then?
Fritz Henderson
No. I didn't say that. I actually said, if I think about the healthcare related part of it that doesn't kick in to 2010, that's exactly what we said before. With respect to the operating related savings whether it's second-tier, non-core, competitive operating agreement, frankly this is on our agenda for now and in 2008.
Joseph Szczesny - Oakland Press
Okay. Thank you.
Fritz Henderson
You're welcome.
Operator
And our next question comes from the line of Tom Walsh with the Detroit Free Press. Please proceed.
Tom Walsh - Detroit Free Press
Morning, Fritz.
Fritz Henderson
Hi, Tom.
Tom Walsh - Detroit Free Press
Following up on Joea little bit. The net loss in North America is still there. Was that higher than you expected in this quarter as it, and if so is that a result of slightly higher fleet numbers, or is it about where you were thinking it was?
Fritz Henderson
Actually, if I look at our North American profitability, it was improved year-over-year. Third quarter is historically our toughest quarter. If you look at page 15, our pretax losses were improved by $624 million. We pretty much got the business very close to breakeven but obviously not on the right side of breakeven.
So even if we were above breakeven we still wouldn't be satisfied with it. I would say, our market performance has been good. Certainly inthe third quarter, I wouldn't say it's been great. I mean we would like to actually even improve from here, but if I look at our US share, it's hung right in there. Primary demand has been a challenge.
I would saythe things that have surprised me this year is North America that have been a drag on profitability, one, has been the strength of C dollar. It's not something that we saw certainly coming into the year and the speed with which it appreciated. Second is, metals escalations we knew was going to be tough. It's just been really tough. And if I think about those two factors, and frankly at $60 million of market, which we didn't necessarily see coming into the year, those three factors have been the major headwinds that I did not see nor did we see as we came into '07.
Tom Walsh - Detroit Free Press
So you're still expecting to be a cash flow negative for the year and how much beyond that?
Fritz Henderson
Yeah. We said earlier we came into the year, we expected operating cash flow to be improved, but negative. And we still expect that to be the case.
Tom Walsh - Detroit Free Press
Okay. Thanks.
Fritz Henderson
You're welcome.
Operator
And our next question comes from the line of Joann Muller from Forbes Magazine. Please proceed.
Joann Muller- Forbes Magazine
Hi, Fritz. I just wondered if, regarding this valuation allowance, if you can help us, help the lay person understand, what should they conclude about GM's view of its future chance of profits over the next few years.
Fritz Henderson
Okay. Joann, good morning. I think what we've tried to do is portray that that's the primary way of evidence that was used for purposes of determining whether valuation allowances required is a look in our rearview mirror. In other words, we look at it three-year historical loss position, as being the primary weight of evidence as we said in our press release. A three-year cumulative loss, and in our case on an adjusted basis, is very difficult to overcome in terms of negative evidence.
And so, as we looked at it, one, this is a very clear test. You do apply some judgment about it because as we said before we looked to our adjusted profitability, we look at the actions that we've taken, but when we applied that methodology on a consistent basis, combined that test with the level of losses that we saw coming in from ResCap in the third quarter, we moved into what we saw was a substantial three-year cumulative loss position in the third quarter.
We obviously have at this point an uncertain outlook with respect to ResCap and therefore, its impact on our US profitability. Our near-term view of North America, I mean we like our position, but the North American business and particularly US market is challenging. A $60 million of market, as I said before, we are not looking for great steps down from that, but that level itself is a very challenging market, substantially below trend.
I would not read anything at all into this vis-à-vis our longer term automotive outlook. We think that what we're doing from a products and brand perspective combined with what we can do on the cost side and implementation of our labor agreements, we feel good about our long-term prospects.
But in terms of looking at this test, Joann, you need to first put a lot of weight on things that are objectively verifiable, i.e. actual historical results. And second, you do need to use some judgment about outlook, but as we looked atthe outlook inthe short-term it's uncertain, for example, inthe case of ResCap, and frankly, it's challenging.
Joann Muller- Forbes Magazine
Okay. Thanks.
Fritz Henderson
You're welcome.
Operator
And our next question comes from the line of [Michael Kuntz] from Süddeutsche. Please proceed.
Michael Kuntz - Süddeutsche
Hello, I am Michael Kuntz. I am with the Süddeutsche Zeitung in Germany based in Munich. Could you explain us the impact of German tax reform on the result?
Fritz Henderson
Sure, Michael. Good morning. Two things; one, since we have a deferred tax asset position associated with our German operation that basically think of it as a loss carried forward, by and large, it's a loss carried forward. It's an asset we carry in our books. When you lower the tax rate, as Germany did, that asset is worthless because it will be used to shelter. I mean, it was created at a higher tax rate, then, it will be used. And so, therefore, as we disclosed in our second quarter head Q, for example, even quite a part from a valuation allowance.
We expect that they have to write down by about $1.5 billion I believe the impact of our deferred tax asset in Germany, directly as a result of the fact that we had this non-operating loss carry forward or deferred tax asset position. We then though, in the third quarter as a result of frankly evaluating the outlook and looking at a three-year cumulative loss position on an adjusted basis in Germany, our conclusion was as it was in the US and Canada that we are in a three-year cumulative loss position and that we need to establish evaluation allowance on the entire amount of balance. Not simply the portion that would have been reduced solely by virtue of the tax rate reduction.
I know that's a mouthful, but I guess the way I would put it is, if you have the deferred tax asset, if tax rates are lowered, it lowers the value of the asset.
Operator
And our next question comes from the line of Mickey Maynard from New York Times. Please proceed.
Mickey Maynard - New York Times
Thank you very much. Good morning, Fritz.
Fritz Henderson
Hi, Mickey.
Mickey Maynard - New York Times
I have a question for you about the timing of the charge yesterday, is this something that's up to GM or is there something in IRS requirements that required you to do it at this particular point on the year?
Fritz Henderson
It has nothing to do with the IRS. It's basically the termination that we've been doing this evaluation on a quarterly basis because we are required to under US GAAP. The GAAP for this is covered under Statement of Financial Accounting Standards Number 109. There are criteria that need to be applied for purposes of looking at this. We've been applying these criteria in a consistent basis.
And then in the third quarter, again, as a result of being in the three-year historical cumulative loss position on an adjusted basis, the losses that we saw coming in from GMAC and this uncertain near term outlook, our conclusion was that a valuation allowance was required. And it was required under accounting guidelines that really doesn't have anything to do with the IRS.
Mickey Maynard - New York Times
Okay. The other question I had was to your point on trend. When you put the restructuring plan together, were you assuming trend volume at around $70 million? I'm just trying to get a handle for how far off this might put you, if we have a 16 million market going into next year, some people are predicting.
Fritz Henderson
I don't know what assumption was for the market in 2005 when the restructuring plan was put together. My sense is, we certainly weren't looking at 16 million-unit market at that time. We would often -- and if you looked at primary demand in '05, it wasn't bad. So, I think, in general, at that point running over 17 million units or close to 17.3, 17.4 trends probably what was used for the purpose of looking at the business planning. We certainly did not foresee that point a 16 million of market. We didn't see what's happening in housing.
Mickey Maynard - New York Times
And so are there further adjustments that you have to make just to reflect trend, this 16 million number not the old trend number?
Fritz Henderson
See, Mickey, we have been very aggressive at making adjustments in our business certainly year-to-date, because in the end, the objective is achieving satisfactory results. And so I think we've shown an ability to make adjustments and increase the level of cost reduction or improve our capacity utilization or work with UAW, for example, on a new labor agreement that will provide us the ability to become cost competitive and be more flexible.
I think what we've shown some ability to adjust, but we have to, because in the end we need to, I think, base the business on the reality of today, '08 is tough. Actually, I should say a 16 million of market is tough. And I think we like our penetration, we like our products and what we're doing with our brand, but we got to get the job done on both the revenue and the cost side.
Mickey Maynard - New York Times
Thank you.
Fritz Henderson
Welcome.
Operator
At this time, we will conclude the question-and-answer session. I would now like to turn the call back to you. Please continue with your presentation or closing remarks.
Fritz Henderson
Okay. Thanks very much, operator, and thanks for everyone's time this morning.
Operator
And 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.
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