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General Motors Corporation (NYSE:GM)

4Q07 Earnings Call Transcript

February 12, 2008 9:30 am ET

Executives

Randy Arickx – Executive Director IR

Fritz Henderson – Vice Chairman, CFO

Analysts

John Murphy – Merrill Lynch

Himanshu Patel – J.P. Morgan

Rod Lache – Deutsche Bank Securities

Christopher Ceraso – Credit Suisse

Brett Hoselton – Keybanc Capital

Brian Johnson – Lehman Brothers

Jeff Green – Bloomberg

Joann Muller – Forbes Magazine

Rick Popely – Chicago Tribune

Terry Kosdrosky – Dow Jones

David Welsh – Business Week

John Stoll – The Wall Street Journal

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the General Motors 2007 calendar year earnings conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press the one followed by the four on your telephone. As a reminder this conference is being recorded Tuesday, February 12, 2008. I would now like to turn the conference over to Randy Arickx, Executive Director GM Investor Relations and Financial Communications. Please go ahead sir.

Randy Arickx

Thank you operator and good morning everyone. Thank you for joining us as we review our 2007 fourth quarter and calendar year results that we sent to you earlier this morning. I’d like to first 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’s regulation G, we’ve provided some supplemental charts in order to provide reconciling data between managerial financial results as discussed today and the GAAP equivalent results that are in GM’s financial statement.

I would also like to highlight that GM is broadcasting this call live via the internet and that the financial press is participating as well. This morning, Fritz Henderson, our Vice Chairman and CFO will cover our fourth quarter and calendar year results. After the presentation portion of the call, about 30 minutes will be set aside for questions form security analysts followed by questions from the financial press. I would also like to mention that we have several other executives available to assist in answering your questions. With us today are Ray Young, Group Vice President Finance, Walter Borst, Treasurer, Nick Cyprus, Corporate Controller and Chief Accounting Officer, David Meline, CFO of GM North America and Michael DiGiovanni, Executive Director Global Market and Industry Analysis. Now I’d like to turn the call over to Fritz Henderson.

Fritz Henderson

Thanks Randy, good morning. I’ll turn your, we have quite a few charts I plan to speak for about 45 minutes and then we will cover questions. Chart 2 reviews the highlights of the fourth quarter of the calendar year. We touch on the fourth quarter GAAP loss of about $700 million. Adjusted net income around break even at $46 million excluding special items. Very importantly and actually where you’ll see we’re going to focus our time today, adjusted automotive earnings before taxes were down eight-tenths of a billion dollars.

In effect in this quarter as I mentioned at our analysts meeting in January, we’re going to be reporting our automotive results internally and then externally we’re going to be reporting them on an earnings before tax basis including equity income and minority interests and we’re going to be reporting taxes on one line item at the corporate level. So the presentation you see in here, this will be the first time you’ve seen this presentation is done on that basis.

Automotive revenues were $46.7 billion which is an all time automotive record and adjusted automotive operating cash flow was a $1.3 billion outflow in the fourth quarter. For the calendar year, very large loss, a little bit less than $39 billion driven by the valuation allowance taken in the third quarter for deferred taxes. Adjusted net loss of about a break even, again though focusing on adjusted automotive EBT, it improved about nine-tenths of a billion dollars on the strength of largely LAAM and GMAP. Global market share, 13.3%, down two-tenths of a percent, [unintelligible] share outside of North America up four-tenths of a point versus calendar year 06.

Our automotive OCF was a $2.4 billion outflow, which is about a $2 billion improvement from 2006 and we ended the year with $27.3 billion of gross automotive liquidity. Page 3, this looks at the calendar year results, next chart I go through the quarter, but we’ve shown here is the results 05, 06 and 07. Again I’m going to spend quite a bit of time going through 07 versus 06 in the fourth quarter but stepping back here you see the automotive earnings before tax at a $553 million level globally in the 2007 calendar year.

That was an improvement of $892 million from 06 and you see the drivers basically North America, about $1.5 billion EBT loss was in line with slightly better than 06. GME at $55 million well the second consecutive year of being in a profitable position was actually down, I’ll take you through a bit more detail this quarter on what happened in GM Europe it was down $300 million. You could see the drivers of our profitability on an annual basis on automotive were LAAM and AP with LAAM’s number $1.3 billion an improvement of $800 million from 06 and then GMAP at $744 million, so an improvement of 341.

GMAC had quite a few charts on GMAC but GMAC, our loss from GMAC earnings in 2007 was $1.1 billion, again that’s on a pretax basis. The corporate sector was favorable for the year, I’ll spend a minute of time on that. We do report taxes this year on one line item at $1 billion favorable impact in 2007 and moving down you see how you get after you include Allison’s discontinued operations and this is not the gain on sale this is actually the earnings we had in Allison prior to the closing brings us to about a break even on this basis.

Next chart. Okay, moving to the fourth quarter. I am going to drill into each of these a bit more later but North America’s loss of $1 billion in the fourth quarter was a tough quarter for us, I will take you through the reasons for it. But we were off about $900 million from the fourth quarter of 06. GME lost about $215 million on this basis in the fourth quarter, off again versus a breakeven level in the prior year, off about $200 million. GM LAAM $424 million of profitability, a significant improvement versus 2006, five or six fold. GMAP $72 million, I’ll touch on that. Down from the fourth quarter of 06 largely driven by some timing issues which I want to come back to.

So you move to automotive earnings before tax, we lost $800 million, $803 million in the fourth quarter, compares with breakeven level in the fourth quarter of 06 so we were off $800 million and that’s a key driver as we look at the performance of the business in the fourth quarter, that’s the key, what I will spend the rest of my time really talking about as I go through the charts. I go through GMAC later but here you see GMAC’s loss in the fourth quarter, $394 million. This was our portion of their losses. That was actually improved from the fourth quarter of 06 but nonetheless still a fairly large loss that’s impacting our bottom line.

See the corporate sector unfavorable, I’ll talk about that on a subsequent chart and you move down including taxes and you get to about a breakeven. But the key in terms of earnings before tax was about $1.6 billion loss in the fourth quarter of 07 versus about a $600 million loss in the fourth quarter of 06, so it’s off about $900 million, $934 million from the fourth quarter of 06. Taxes, page 5. Third quarter we did establish a valuation allowance for deferred tax assets in the US, Germany and Canada.

As we look at our tax provision in the fourth quarter of 07, we needed to take into account really three things. First, we re-measured our pension and OPEB liabilities which resulted in frankly some very large pension and OPEB related gains which are not booked in the profit and loss statement but in fact our booked directly in the other comprehensive income. But their booked directly in the comprehensive income net of income taxes, so you need to allocate income taxes to that line item.

The gain in OCI basically moves in the balance does not hit the P&L. FAS 109 sets forth guidelines in truck period tax allocation and requires that tax expense on discontinued operations or in our case Allison where we had a very substantial gain on the sale and OCI where we had a very substantial gain on the reduction in pensions and healthcare. Those liabilities need to be reduced to the level that tax benefits from continuing operation.

So think about our 07 results should carry given the gains that we have in OCI and discontinued operations, our 07 results should carry the benefit in the 2007 calendar year of our continued operation NOL. We did have substantial current period NOLs and so therefore we needed to do the allocation between continued ops, discontinued ops in OCI and so therefore in the end, the tax benefit on our 07 results were recognized even when a valuation reserve was established. So as a result, when we got done with this process, we reported a tax benefit of $1.6 billion in continued operations in the fourth quarter. I point out like in the third quarter, this doesn’t involve any cash at all.

This is basically a process that we need to go through to allocate income taxes, doesn’t generate any either cash receipt or cash disbursement, it’s just a process we need to go through and a complication is really driven by a number of factors but notably by the significant changes in other comprehensive income as well as the substantial gain on Allison.

Next chart, page 6, walks you through from adjusted net income down to the GAAP net loss. For the fourth quarter, moving from about from the $46 million level, we had a series of special items here which are shown on a pretax basis. We’re keeping taxes in one line as I mentioned before and so these numbers are the pretax numbers both for the fourth quarter and the calendar year. Delphi, I will spend some time on later but we adjusted our reserve by about $622 million in the fourth quarter.

We also reported some charges for Delphi employee pension benefit improvements that were negotiated as part of the 07 negotiations. We had some restructuring charges of $290 million and we had some impairments of $126 million in the quarter. You can see down below here that we actually in the third quarter when we reported the Allison gain we tax affected it at the marginal 35% rate. Here what you see us doing is providing a proportionate benefits in the tax allocation to the Allison gain so it was an $800 million improvement in the fourth quarter and brought our net Allison gain to $4.3 billion for the calendar year.

Page 7. Pretty much covers what I just covered. You can see we had previously booked the Allison gain at a $1.8 billion tax provision, we lowered it as a result of the inter period tax allocation to $1 billion. Finally we did have a $25 million adjustment in the fourth quarter related largely to purchase price adjustments for post closing working capital. Page 8, Delphi, in the fourth quarter. We recorded a charge of $622 million as a result of amendments to the GM Delphi settlement agreements. Support of Delphi’s sale businesses, updated estimates at Delphi retiree healthcare costs and finally possible support based on our ongoing discussions with Delphi, that brings our total charges taken to date to $27.5 billion.

We’ve also tweaked our estimates if you will for the combined annual labor related and transition payments, we revised them downward by $100 million going forward to between $3-$400 million per year through 015 and that’s recognized not as part of the charge but in the future risk period costs. Finally in the fourth quarter, we did report a charge of $552 million. When we negotiated the 07 labor agreement, the pension increases that were provided to GM retirees also provided to Delphi retirees and the cost of that in present value terms is estimated at $552 million and we took a charge for that in the fourth quarter.

Non cash in nature since the GM pension plan actually absorbs the payment obligation but from an accounting perspective, we elected to expense at a front instead of amortizing since the payments are to be made to individuals who are not GM employees. So that’s why we handled this differently than we handled the pension increases that were went to GM retirees which we in the end amortize over the four year life of the contract.

Couple other comments on Delphi on page 9, the bankruptcy court did approve Delphi’s disclosure statement in December and included some amendments to GM Delphi settlement agreement where we agreed to accept the reduction in our preferred stock recoveries from $1.2 billion to $1 billion. The bankruptcy court confirmed Delphi’s plan of reorganization in January but sitting here today, Delphi is seeking exit financing to support its planned consummation but the market conditions are very difficult and its proven difficult to obtain the planned financing levels. At this point, GM is exploring alternatives with Delphi in the event that the planned financing levels can’t be achieved and nothing really more I can say other than we’re monitoring the situation and cooperating with Delphi as well as the planned investors.

Page 10, fourth quarter other items, we had about $300 million of restructuring related charges, largely at GME, $200 million for separation programs in Belgium, Germany and Sweden. Another tenth of a billion in North America largely related to adjustments in our plant closing reserve. We had a tenth of a billion dollars of impairment primarily related to a vehicle specific impairment in North America. Corporate other deteriorated by about two-tenths of a billion dollars. This is not a special item but I thought I’d take the opportunity to explain what happened in corporate other here. We had about a tenth of a billion dollars related to higher central office expenses and about a tenth of a billion related to increased legacy expense related to additional Delphi flow backs and continued healthcare inflation.

Page 11, moving to North America, in the fourth quarter, North America revenues $28.1 billion was off $395 million but production was actually off 65,000 units from the fourth quarter of 06. You can see our market share off five-tenths of a percent but even underneath it, it was a reasonably encouraging retail performance in the US. We did have lower fleet volumes and we had some challenges in Canada but on balance underneath that number, a more encouraging result for US retail share. The SAAR for the year ran at 16.5 million units, so it was down from 06 about four-tenths of a million units. Our retail fleet mix, 23.9% in the fourth quarter of 07 versus 25.8 in the fourth quarter of 06, so more retail mix as a percentage of the total. And then finally we finished the year with dealer inventories of a little over 900,000 units which is, we trimmed our dealer inventories by about 150,000 units from year end 06 to year end 07.

Page 12, revenues per unit, what we see here is a continuation of the trend we’ve actually been seeing over quite some time in the fourth quarter. Our revenues per unit on a vehicle basis, not total GAAP revenue per unit, this is revenues on a vehicle basis, we do provide reconciliations later, but amounted to $21,915. The chart also shows you what that number was in the third quarter of 07, the second quarter of 07, first quarter of 07. And really what we’re seeing is about $1,100 improvement year over year versus the fourth quarter of 06 largely driven by favorable model and option mix which reflects I think the richness of the content levels in our newest vehicles.

Next chart, page 13, I want to spend some time and slow down here on 13 and 14 and take you through the drivers of North America’s results. This is the comparison of North America’s results from the fourth quarter of 06 to the fourth quarter of 07. First, volume, volume was off about five-tenths of a billion dollars, you can see in the box on the chart our dealer stock reduction was about 40,000 units in the fourth quarter, that cost us about $300 million. About a 30,000 unit reduction in daily rent. That cost us about $200 million. And then the industry was actually lower which cost us on a pro rata basis about $100 million.

You’ll note that the three of those add up to more than five-tenths of a billion and that’s because our retail share was actually favorable so that would have contributed a favorable tenth of a billion dollars. So volume was off five-tenths of a billion dollars. Mix was favorable, three-tenths of a billion dollars, you’ll see on the next chart mix was actually favorable for the year, $2 billion, this is a continuation again of the trend, largely driven by model and option mix.

Price was unfavorable about four-tenths of a billion dollars and that was driven by and large by a larger stock adjustment for a higher full sized pickup inventory versus the fourth quarter of 06. I’ll spend a minute on this, fourth quarter of 06 we were launching our new pickup truck, we had fairly low levels of incentive activity on them. Fourth quarter of 07, our product had been launched for over a year, we had what I would say is a competitive level of incentive activity on those, those trucks and therefore when we provide for incentives in stock basically provide for incentives and reserves at year end, we reserve for all vehicles in dealer inventories and therefore we would have reserved for a higher amount in the fourth quarter of 07 versus the fourth quarter of 06 based on the programs that were in effect or expected to be in effect at that time.

Material and other contribution costs was a tenth of a billion unfavorable. I’ll spend a bit more on the next chart talking about material and contribution costs. Policy and warranty campaigns was a push. Manufacturing costs in pension and OPEB was a push, you had three-tenths of a billion dollars in manufacturing performance offset by two-tenths of a billion dollar increase in pension driven by the labor contract and about a tenth of a billion dollars that FX related. Finally engineering exchange and other was three-tenths of a billion unfavorable.

About $300 million of that was commodity hedging, think about the fourth quarter of 06 when we restated for FAS 133, we actually pulled into the fourth quarter of 06 the mark to market on a number of our commodity hedges so we had a favorable impact in the fourth quarter of 06, we did not have that in the fourth quarter of 07, we actually had a slight unfavorable. The net swing there was $300 million unfavorable. Engineering was up fourth quarter of 07 versus 06 by two-tenths of a billion and other went the other way. So this is the walk from the fourth quarter of 06 to 07.

Page 14 now takes the same categories an blows them up for the calendar year. The move from $1.6 billion loss in 06 to a $1.5 billion loss in 07. Volume was $2.7 billion unfavorable in terms of the variance and you can see the same categories in the box, about 160,000 unit dealer stock reduction, that’s in North America versus just the US, that’s the North America number. You see a daily rental decline of about 108,000 units.

You see a lower US industry impact and then our share did decline year over year, so that cost us five-tenths of a billion dollars. Mix, you see the very substantial favorable mix impact in 2007 calendar year, about 1.5 billion of that was model and option mix and about four-tenths of that was product mix. Price was net favorable four-tenths of a billion for the calendar year so we were actually had positive net price, a small amount of positive in net price. Would have liked to have done better but the market was pretty competitive in 07.

Material and other contribution costs were unfavorable by six-tenths of a billion dollars year over year, where our material performance was more than offset by about $1 billion of steel and non ferrous cost escalation. Policy warranty and campaigns was unfavorable by five-tenths of a billion, year over year. Last year, 2006, we had some favorable adjustments in our policy and warranty accruals. As a result a favorable experience. We did not have such adjustments in 07, it was the absence of favorable adjustments in 07.

We also had a little higher policy and warranty expense associated with our new power train warranty, but partially offsetting that was favorable campaign expense year over year. In other words we had fewer campaigns and lower campaign costs. Net net, policy and warranty and campaigns were five-tenths of a billion unfavorable. Structural costs if you will, pension, OPEB and manufacturing was favorable $2.8 billion year over year. $1.8 billion of which was pension and OPEB related. $1 billion of which was manufacturing productivity and attrition.

Finally, engineering exchange and other was $1.3 billion unfavorable. Engineering was up for North American operations by six-tenths of a billion year over year. Commodity hedging, the total annual impact of what I mentioned on the prior chart was about $0.5 billion. You can see three-tenths of a billion of that was in the fourth quarter alone. And foreign exchange was actually unfavorable three-tenths of a billion. This is largely driven by the strengthening C dollar versus the US dollar and the impact on our balance sheet through the 2007 calendar year.

Moving away from North America to the other regions, on page 15, automotive revenues up 23% in regions outside of North America, about 40% of our revenue in 2007 was generated outside of North America, about 54% of our unit sales. The market share outside of North America continued to grow, we were up three-tenths of a point in the fourth quarter and four-tenths of a point in the calendar year. GM Europe’s volume and share were both up in the fourth quarter despite weakness in Germany which did significantly hit our profitability and I’ll touch on it in a minute.

GM was the fastest growing manufacturer in Europe in 07. Our volume and share in Russia for example, our volume was up 40% and our share was up 2.6 points. In Chevrolet, driven largely by continued high levels of imports in GM, they will continue to grow in Europe. I would point out as I did at the January analyst meeting that a significant amount of GM Daewoo’s operating profit attributable to sales in Europe are actually reported in our results in GM Asia Pacific.

GM LAAM revenues were up over 50%, it’s a good number and our earnings before tax is up over five fold versus the fourth quarter of 06 on strong industry growth and better pricing environment. Finally, Asia Pacific continues to deliver some strong volume and share growth, the moderating financial results, we were down year over year in the fourth quarter was largely driven by the timing of some engineering spend to support our product development but we had some ramp up in engineering spend in the fourth quarter which affected GM Daewoo’s results.

Our volume and share in China was up 22% and six-tenths of a percent respectively in the 07 calendar year. GM Europe, page 16, you see the revenue increase of $1.7 billion, part volume driven, part exchange driven because we did have a stronger Euro versus the dollar. I’ll take you through the loss comparison in a moment. You look down across the major, some of the major markets in Europe, our production volume was actually up slightly 14,000 units. The SAAR in Europe in the fourth quarter was very strong driven largely by as you’ll see later, Russia.

The German SAAR was actually off substantially in the fourth quarter of 07 versus the fourth quarter of 06, it was a 3.6 million unit rate but we also did lose some penetration in Germany. UK was pretty much even and we picked up a point of share and then you see Russia SAAR at 3.1 million units in the fourth quarter was phenomenal and our share in Russia was up to 10.1% in the fourth quarter, so it was up 2.6 points. Page 17 is a walk of the GM Europe profitability in the fourth quarter and the calendar year.

What we’ve done here is isolated the impact in the German market and this is basically our contribution margin that we earned in Germany. It was off three-tenths of a billion from the fourth quarter of 06 and off six-tenths of a billion for the calendar year. This is really driven by lower volumes, weaker mix and tougher pricing. And the combination of that meant that Germany which is historically the most profitable market in Europe was under substantial profit pressure through the year, at least in our case.

Foreign exchange was unfavorable a tenth of a billion in the fourth quarter and the calendar year. This is largely as a result of the fairly sudden devaluation of the pound versus the Euro. Volume mix and price outside of Germany was actually favorable in the fourth quarter by a tenth of a billion and four-tenths of a billion for the year and then finally material and structural costs in total was favorable in the Q4 and favorable in the calendar year by two-tenths of a billion.

So in the end, Europe, the European business for the calendar year was slightly above break even on an adjusted basis and it was really a tale of the German market weighing it down while we try to make some progress in a number of the other markets. But Germany is really important and frankly it was not a particularly good year for us there.

Page 18, LAAM. LAAM revenues are up $2 billion, so LAAM revenues in the fourth quarter were a little over $6 billion. Our margins here were, these are again earnings before tax, margins were 7 points, so they were up 5 full points. When you look at some of the markets, our total production volume, excuse me, was 253,000, so up 38,000, actually LAAM in 07 joined the million unit club actually. And it was nice to see that business go over a million units for GM. You see the industry SAAR, 7.4 million, so it was up substantially over 1.2 million units. Our share actually declined in LAAM in the fourth quarter was we struggled to keep pace with the growth in the industry, a good problem to have and one that we actually like to go to work on in 08.

The Brazilian industry you see ran the 2.7 million unit clip in the fourth quarter, up from 2.1 million. Here you can see we lost share as we struggled to keep up. Argentina actually ran about six-tenths of a million unit SAAR in the fourth quarter, up substantially. In the Andean markets, Venezuela, Columbia, Ecuador actually the total SAAR was over a million units in those markets substantially up from the prior year and our share in those markets is a little over 30%. So we benefit pretty substantially from growth in those countries. Very good year for LAAM and a very good fourth quarter for LAAM.

GMAP, $5.5 billion in revenues so we’re up a billion dollars, again these are consolidated revenues so those would not include China for example which we carry in the equity method, we don’t touch on China in the next chart. You can see pretax income was off. You do see China equity income was up slightly versus the fourth quarter of 06. Minority interest was off and think of that as, as we had lower profitability in GM Daewoo in the fourth quarter of 07 versus 06 from these engineering costs, we’re obviously going to have lower minority interest which is what you see here.

Earnings before tax was off, our earnings before tax margin was also off by a point. Looking at the key volumes, SAAR in Asia Pacific was 21.7 million units. So it was up pretty nicely in the fourth quarter versus the fourth quarter of 06. China SAAR actually ran at a 9.2 million unit pace. Our share in the fourth quarter was about 12%, so China continues to grow at a very healthy pace. Australia was 1.1 million units. The Australian market continues to be strong, but our share was well off and the Australian markets gonna changing, has been changing before our eyes in the last three years and frankly it’s a very different market from what it was five years ago but nonetheless total market actually is a pretty attractive market, it’s just changed in its structure.

Finally GM Daewoo’s volumes actually and these are of complete units not necessarily of kits, not of kits excuse me, was 250,000 units in the quarter so a very good volume for GM Daewoo. China, page 20, China industry volumes continue to show explosive growth. Volume up 20% for the calendar year 07 versus 06. GM with our partners actually became the first global OEM to sell over a million units in China in 2007. Our volumes were up 18% in the calendar year and 22% in the fourth quarter which was actually in this case and the case of the fourth quarter, actually ahead of the industry growth.

We did realize for the calendar year $425 million of equity income in GMAP, principally, almost entirely driven by our China joint ventures. Our job in China is to continue to work aggressively with our partners to keep pace with the industry. We’re leveraging multiple brands, we’re frankly updating our products, we have five new or updated products to launch across our core brands in 2008. Last point I would make here I would note that our businesses in China have been not only profitable, they generated cash, we do expect to spend in China in our joint venture it’s about a billion dollars a year through 2010 to support out strong product and technology development. That cap ex is not included in GM’s numbers because in fact it’s funded by our joint ventures.

Page 21, GMAC. In the fourth quarter GMAC reported a seven-tenths of a billion dollar net loss due to continued ResCap losses. ResCaps loss of nine-tenths of a billion was driven by asset write downs and impairments, restructuring costs and weaker, frankly a weaker consumer credit environment. Global automotive finance remains profitable but reported lower results due to lower gain on sale of receivables in North America, largely driven by that. Insurance results were down from the fourth quarter of 06 but that was predominately due to lower capital gains.

In the fourth quarter of 06 we actually structured our investment portfolio and realized a substantial amount of capital gains as we looked at the insurance business, the underwriting ratios, the underwriting performance is generally in line with what was otherwise a very good fourth quarter of 06 as well. Our earnings before taxes realized by GM was a loss of four-tenths of a billion in the quarter. And looking back at the calendar year, we do have some charts on this so I won’t spend a lot of time here, clearly you had auto finance and insurance performing reasonably well and ResCap generating substantial losses. Our realize loss from our investment in GMAC was $1.1 billion for the calendar year. And GMAC did end the 07 calendar year with a liquidity position of a little bit less than $23 billion which by historical measures is a pretty good number.

Page 22 takes you through in more detail what I just covered in summary form. You can see fourth quarter of 06 versus 07, insurance again what you see is a substantial amount of those capital gains were realized in the fourth quarter of 06. You also had the fourth quarter of 06 you had the automotive finance number includes the gains from the LLC conversion which you don’t have in the 2007 fourth quarter. So if you just sit down and look at the fourth quarter before ResCap, we generated a little less than $200 million in the fourth quarter of 07, down substantially from the fourth quarter of 06 but as I said before, fourth quarter of 06 was very heavily affected by the gains from the LLC conversion and the gain from the capital gain realization.

ResCap results on the other hand went substantially the wrong way on an operating basis. ResCap’s losses in the fourth quarter of $921 million, a substantial deterioration from the fourth quarter of 06. I’d point out though the fourth quarter of 06 also included gains from the LLC conversion in ResCap. So that $128 million number was actually substantially worse without the LLC gain. We did show you on the chart what the LLC conversion impact was, $791 million and what the capital gains were. And then the fourth quarter of 07, we did incur about $131 million restructuring charges largely at ResCap.

For the calendar year, auto finance up, insurance off, again driven largely by the capital gains. Other was actually improved in 2006 we actually recorded a substantial amount of impairment for example on commercial finance that was not replicated in 2007. So other turned out to be a $70 million contribution. So the 2007 GMAC results before ResCap was a $2 billion profit, a substantial improvement from the prior year but actually on an operating basis was even better than that. ResCap though, you can see, lost $4.3 billion in the calendar year 07 versus a $700 million profit in the calendar year 06.

So the GMAC results were very heavily weighed down by about a $5 billion unfavorable move at ResCap 07 versus 06. I’ll be prepared to take some questions and last week GMAC actually released their results and went through a fair amount of detail but stepping back and looking at the results I’d say losses in the fourth quarter were smaller than those in the third quarter which I think in part showed that the actions that were being undertaken in 07 are starting to produce some results. They’re still not acceptable but they are starting to produce some results.

We restructured ResCap, we tightened lending standards, the balance sheet has been substantially reduced. We’ve accelerated the auto finance originate to distribute model which is in part a business model and in part a funding model for the auto finance business. But in the auto finance business we have seen the improvements that we’re looking for as a result of the sale of 51% to Cerberus. But nonetheless we still have a lot more we can do in auto finance. We took the appropriate impairments and reserves and we’re holding cash and liquidity at a relatively high level. From a strategic perspective, both GMAC and ResCap are focusing on our core strengths.

We’re trying to maintain scalable platforms to capitalize on a larger share of retail and commercial auto finance and frankly leverage the unique relationship between GMAC and GM to create real value. GMAC does forecast to return to profitability in 08 where profits from the auto finance and insurance business would be able to offset the substantially lower levels of losses at ResCap. And finally our liquidity is at a relatively high historical level and from a GM perspective we believe that GMAC remains adequately capitalized.

Moving away from GMAC to liquidity, our auto liquidity position we ended the year at $27.3 billion, that includes about six-tenths of a billion dollars of readily available VEBA assets, I’m going to come back to VEBA assets in a bit. That’s about a nine-tenths of a billion increase from the year end 06. And really what that reflects are the proceeds from the sale of Allison, partially offset by negative adjusted automotive OCF and other non operating flows. Our net automotive liquidity was $12.1 billion net debt position at year end 07.

Page 26 shows you the trends of both gross cash including the short term VEBA and net liquidity. You can see we ended the fourth quarter of 07 largely in line with the fourth quarter of 06. Page 27, the fourth quarter key cash flow drivers are automotive OCF burn was $1.3 billion in the quarter driven by negative earnings before taxes, traditionally higher capital spending and ongoing legacy payments and that was partially offset by some favorable working capital performance and I’ve got a chart on that in a bit. For the calendar year, we did have a $2.4 billion OCF burn but that was $2 billion improved form the calendar year 06.

Page 28 walks you through our cash flow statements and the components of starting with OCF you can see on the chart the numbers that I just mentioned. We start with earnings before taxes which includes automotive and corporate other. You can see cap spending was generally in line in 07 versus 06 but you see the fourth quarter ramp up. Receivables, payables and inventory for the fourth quarter and the calendar year, you didn’t have a lot of moves actually in this. You had what I would call it more regular moves in working capital in 07 versus 06, sometimes in, sometimes out but frankly it’s a pretty big balance sheet and these numbers can move around like this on a quarterly basis but nothing particularly special on that.

Pension and OPEB I have a separate chart on which I want to take you through and I also have a separate chart on accrued expenses and other. Moving down below in the fourth quarter, you see some cash restructuring costs. I will spend some time talking about the VEBA but we did take the $2.7 billion withdrawal from the VEBA in the fourth quarter of 07. We had some debt maturities coming due. You can see we’re reporting the change in the short term VEBA as an unfavorable flow here since we include short term VEBA assets as liquidity simply taking withdrawal from the VEBA doesn’t generate cash, so it doesn’t generate liquidity excuse me so we actually back it out down below, that’s what the $2.9 billion is, it’s the change in the short term VEBA. And in the end versus the third quarter of 07, we were off $2.6 billion at year end 07.

Okay, next charge, accrued expense and pension and OPEB. Top of the chart shows the movements in accrued expenses and other. Our sales allowances in the fourth quarter in the calendar year in 07, the fourth quarter we actually had net pay downs of three-tenths of a billion. Year over year it was basically a push. No movement there. Non cash charges were $1.4 billion in the fourth quarter and $3 billion for the calendar year. And then finally net tax refunds and I caution you these are global numbers, so these are net tax refunds on a global basis were four-tenths of a billion in the fourth quarter and seven-tenths of a billion in the calendar year.

Our variances in pension and OPEB were driven largely by the changes in pension and OPEB expense. Looking down below here you see pension expense in the fourth quarter of two-tenths of a billion, $1.7 billion for the year. Again that’s largely driven by some of the charges we took for the 07 contract. Pension contributions were two-tenths of a billion in the fourth quarter and nine-tenths of a billion for the calendar year. Once again I caution those are global pension contributions so we would make contributions in Canada, Australia, Sweden, UK and a number of other countries around the world but not in the US. I do have a separate chart of the US. You can see our total OPEB payments for the calendar year are $3.6 billion versus our OPEB expense of 2.1. So the chart, what we try to do here is take you through what the components are, the movements in these key categories.

US pension expense, page 30. We actually were on a pension income position in the US for 2007 of $1.1 million, $1.1 billion excuse me. We did have some interest expense and this relates, this is an amount we’ve been carrying in North America’s results, largely in North America’s results but also some in the corp that has to do with the borrowings that were undertaken in 02 and 03 in order to fully fund the pension plan.

Our year end funded status ended the year for our US hourly and salaried plan on a FAS 87 basis is overfunded by $20 billion. I’ve shown the split here between hourlies and salaried. Our year end discount rate is 635. Our actual asset returns for the 07 calendar year were 10.7% which compared with the assumption of 8.5% so another good year in terms of investment returns. Our contributions to the US pension plan were zero. Looking at 08, with using an actual asset return assumption of 8.5%, we’re projecting that our US pension income will actually improve slightly from $1.1 to $1.4 billion.

Page 31, healthcare and OPEB. Our year end OPEB discount rate was determined to be 6.35. You can see our trend rates, the 07 trend rate was 9%, our outlook for 08 a year one trend rate is 8.25%. Our OPEB liability actually shrunk year to year from 47.7 to 43.2, driven by the higher discount rate. Our cash payments are as shown in the chart for these numbers are US healthcare cash payments alone. So OPEB typically includes life insurance and some other matters.

This is just healthcare. Payments for actives were $1.3 billion in 07 calendar year down from 06 and payments for retirees were $3.3 billion in line with 2006. And then finally you can see on the chart that in 06 we made a $1 billion contribution to the UAW mitigation VEBA. We did so again in 07. Our contract, our 05 healthcare agreement called for us to make billion dollar contributions in 06, 07 and 011. We don’t have one scheduled for 08.

Page 32, the GM UAW healthcare settlement. I mentioned at the analyst meeting in January that we were finalizing negotiations around turning the MOU into a comprehensive settlement agreement. Negotiations with the UAW and class counsel are progressing well. We expect to complete those negotiations shortly and file the settlement agreement with the court. We don’t anticipate delays in the court approval process but there are two developments where we have agreements in principle that I wanted to brief you on. First has to do with a note and the second has to do with the convertible note.

Page 33, in the fourth quarter of 07 GM withdrew $2.7 billion representing the residual salaried and hourly 06 healthcare paygo capacity. So we basically withdrew monies from our VEBA that we were entitled to withdraw. Post withdrawal, the UAW related portion of the hourly VEBA was estimated at $14.5 billion at year end 07. Under the GM UAW MOU, we agreed to set aside $18.5 billion up front as part of the negotiation. We reached an agreement in principle with UAW and class counsel to fund that $4 billion difference by way of a short term note maturing in January 2010, carrying a 9% interest.

A win win in our judgment for both the UAW, GM and the plan participants. From a GM perspective, it enhances our interim liquidity, our liquidity benefit from the deal actually takes place after its implementation so it begins largely in 010 and beyond. And so what we did by structuring it this way is to provide interim liquidity for GM until we actually get the full benefit of the agreement and for UAW and the plan participants, they get a 9% return on that money which they found attractive in terms of providing the right kind of return for the beneficiaries going forward.

Page 34, the other key thing that changed from the MOU was UAW and class counsel approached GM for an adjustment to the terms of the convertible note, excuse me. In the spirit of cooperation and as part of an overall settlement agreement process we agreed in principle to an effective conversion price on the note moving to 36 versus 40 and we’re doing this through the execution of derivative transactions. The way the derivatives are structured, the maximum potential value provided by GM would be eight-tenths of a billion dollars.

If the GM stock price reaches $63.48 after three and a half years. The agreement or the derivatives, excuse me, provide a mechanism for GM to recover some additional economic value if the stock actually prices between $63.48 and $70.53. The fair value of these two legs of derivatives if you will today is approximately two-tenths of a billion dollars and what we showed here on the chart is how the derivatives provide value to the trust over time at varied stock prices and again this is a single point in time, three and a half years from now.

Okay, finalizing, I’m going to drink some water here, 2007 recap automotive metrics versus 06. We began 07, excuse me, [unintelligible] we began 07 we outlined some expectations for the automotive business and this kind of recaps it. I started to touch on this at our January analyst meeting, this finalizes it. We said at the time to expect that the industry to increase in 07. It did. We expected our revenues to increase in 07, they did. We expected net material performance to be roughly flat, it was actually slightly unfavorable. We expected structural costs to decline, when we did this we were doing it in nominal terms, in other words in dollars.

Actually there was a slight increase in dollars driven largely by the foreign exchange and the stronger international currencies versus the dollar but as a percentage of revenue we were actually down, so we were pretty much on plan. We expected adjusted earnings to improve and they did. We expected cash flow to improve but still be negative and it was and our cap spending which at that time we thought was going to increase, actually came in at flat.

Looking into 08, we do expect globally more revenue growth for GM. We do see continued improvement in material costs and structural cost metrics in the 2008 calendar year. We are carrying a US industry outlook in the low 16 million unit range. What we saw in the month of January to us only reinforced that that was a reasonable outlook for us to have. This is one of those years where we’re going to be taking it one month at a time but January was, I would call it, it was a weaker month but it was in line with the low 16 type number and frankly we were encouraged by our performance.

We, our liquidity cushion as we end the year we felt was sufficient and even in the event of further US industry decline as I mentioned at the January meeting, [unintelligible] possible downturn we would typically want to target at least $18-$20 billion of liquidity and access to $4-$5 billion of credit line. We ended the year with $27.3 billion of liquidity and access to approximately $7 billion in undrawn credit lines.

I mentioned in January that a 1 million unit downside in the US industry except that we were to participate in that downside on a pro rata basis, we would have a negative liquidity impact estimated in the $2-$3 billion range, largely driven by lower contribution margins but also with some [more] from capital roll on. So as we look at the automotive outlook 08 to 07, global automotive revenues, we do expect to continue to increase actually in 08 with revenue growth in all regions, particularly in emerging markets. Emerging markets are going to continue to be the driver of our revenue growth.

Net material performance, we expect to be favorable in 08 versus 07 driven largely by footprint optimization and lower commodity increases and fewer majors. You might recall the January meeting I showed you a chart that shows the impact of majors on our materials cost. We expect that to abate somewhat in 08. Structural costs as a percentage of revenue, we expect to continue to decline here down in all regions, particularly in AP and LAAM as we drive revenue growth. This number obviously is most easily driven when you’re growing very fast and you control the rate at which your structural cost rises.

And then in the more mature markets this is all about doing the tough work of taking structural costs out of the business which is what we need to do as well. Adjusted pretax earnings, we do expect to continue to improve in 08 versus 07. Again driven by the strength in emerging markets. Cap spending, we expect it to be up in 08 versus 07 driven really by product as advanced technology spend. And we expect operating cash flow again this is adjusted to operating cash flow on an automotive basis to be about flat versus the two four we saw in 2007 where we have improvement in earnings but it’s going to be offset by higher cap ex and frankly probably less favorable working capital.

Page 38, this morning we announce with the UAW our special attrition plan phase two. In December of last year we announced agreement of phase one where we offered an attrition plan to all service parts facilities and five other plants. Today we announced a comprehensive attrition plan to be offered to all UAW represented GM employees. Eligible employees with 30 or more years of service may choose, actually have three choices but the retirement choice would provide for pension incentives of $45,000 to $62,500.

The funding for the retirement pension incentives would come from the GM hourly pension plan given its funded status. Similar to the 06 SAP, there are three other options that are offered and usually satisfactory early retirement, pre retirement leave and cash buyouts. I think the total number of people eligible here is about 46,000 people. We don’t have a projection to date as to what the acceptance rate might but this is a fairly large program for us.

Page 39, looking out beyond 08 to the midterm outlook, call it 2010, 2011, again as we reviewed at the January meeting, we do see some opportunities to continue to further improve our business. Full impact of the labor contract as well as Delphi related cost reductions can generate some very substantial savings, both in material and structural costs. With the labor contract itself, providing the opportunity with healthcare and pensions for $4-$5 billion further improvement in our structural cost.

If the US industry were to return to trend which is different from the first two items, the first two items are items we actually can work on, the third one is more of a projection of what happens if the US industry returns to trend, but that could generate a further $1-$1.5 billion of profitability and we have a whole host of other opportunities available to us whether it’s pricing for a stronger brand, material cost reductions, getting GMAC out of the position it’s been in and improving their performance and then frankly we do continue to see further growth in emerging markets.

But the outlook you need to weigh that with the downside risks we do see the continued risk of industry mix shift, we’ve seen the shift in the US for example, to more passenger cards. Certainly in 07, we’ve seen significant shifts in individual segments of the US market which does pose some, pose risk number one that if you don’t get it right, you can actually lose out in the segments that are growing and number two, even if you do some of the segments may be less profitable than the segments they’re replacing. Regulatory cost increases will be a significant additional factor going forward and then finally the competitive environment is not going to get any easier for sure.

So to summarize it, the 07 results were improved but there are still a number of near term challenges. Our adjust automotive earnings before tax, again this is the key measure from our perspective, did improve nine-tenths of a billion for the calendar year, driven largely by strength in AP and LAAM. Our fourth quarter adjusted earnings before tax actually deteriorated by eight-tenths of a billion largely driven by the pressures and the challenges we’ve seen in the US and in Germany.

But the share growth story in the emerging markets continues to be a positive one. In 08, again on a pretax basis we expect automotive earnings to improve versus 07 on continued growth in emerging markets and a focus on significant cost performance in the mature markets. We expected adjusted automotive operating cash flow to be about flat despite higher cap ex and we enter the year 08 with a liquidity position of about $27.3 billion and with undrawn credit lines of about $7 billion.

So, tough environment but we’ve been trying to manage our liquidity positions as much as possible on a conservative basis to be ready for not only financing the turnaround but also dealing with the potential downside risks. Finally I guess as we look at it, we see the opportunities, certainly in 010 and 011 for some pretty significant earnings improvement but obviously the job is to manage the business in 08 so that we can get there. At this point, happy to 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. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. In the interest of time, please limit your questions to one per line. One moment please for the first question. And our first question comes from the line of John Murphy from Merrill Lynch. Please proceed with your question.

John Murphy – Merrill Lynch

Good morning, given the pressure that you’re facing in North American which seems to be increasing. Is there the ability if you get a large number of buyouts to potentially accelerate the capacity cuts or maybe make incremental capacity cuts?

Fritz Henderson

Well, let me just kind of touch on that. I would say [audio interrupt].

John Murphy – Merrill Lynch

Hello?

Fritz Henderson

Whoops, somebody muted us. I’m sorry John, are you there?

John Murphy – Merrill Lynch

Yes I’m still here.

Fritz Henderson

Alright, sorry about that. Somebody walked into the conference room and muted us. I was suddenly red. Anyway, if I look at the 07 contract, it provides us with the flexibility to be able to adjust production volumes and capacity to be more in line with demand. So I would say as we look at the situation, certainly the contract is the enabler, the attrition plan, you know we don’t have a projection today as to what the take rates might be, what the savings might be but certainly we do believe that we have the capability to be able to adjust our production volumes capacity to be in line with demand.

And I think we’ve tried to, we’ve shown an ability to be able to do that. At this point trying to forecast what the acceptance rate is, what portion is capacity related versus what portion would be replaced with second tier or noncore employees, I really can’t say. We just have to see but we certainly believe that we have the capability to adjust ourselves to be in line with demand and we’re committed to doing that.

John Murphy – Merrill Lynch

But it’s a safe assumption to assume that 2008 is a lot tougher than you’re looking for that you will accelerate your restructuring actions in general though right?

Fritz Henderson

Well, first I’m not sure that I would accept the premise that 2008 is going to be a lot tougher than what our projections are. I mean obviously we’ll just have to see. But certainly our view is if they are going to be tougher we’ll take whatever actions we need to do in order to bring ourself, bring our capacity in line with demand.

John Murphy – Merrill Lynch

Okay then just quickly on Delphi, it looks like you guys were supposed to get about $2.25 billion when the company emerges from bankruptcy. Is that something that you may use to help with the exit financing or may that be something that you would help out with to get through that process?

Fritz Henderson

John on the Delphi negotiations, we did here obviously is we updated our accruals. At this point our discussions are fluid is the way I would put them and really wouldn’t be appropriate for me to comment as to what we might do but we clearly are very interested in having Delphi exit bankruptcy and we’ll just need to, we need to consider alternatives but at this point I really don’t have anything I can really comment on specifically.

John Murphy – Merrill Lynch

Okay and then just lastly real quickly, the $4 billion note that’s due 2010 to the UAW independent VEBA trust, is that something you could potentially take out of your excess pension assets at the time if you’re overfunded enough?

Fritz Henderson

No.

John Murphy – Merrill Lynch

Okay, thank you very much.

Operator

Our next question comes from the line Himanshu Patel at J.P. Morgan, please proceed with your question.

Himanshu Patel – J.P. Morgan

Fritz I had a question on the attrition program. What was the motivation behind making the size of the buyout packages more generous than the last attrition program?

Fritz Henderson

Well we weren’t the first to announce an attrition plan, actually and you know we just needed to react to be honest Himanshu. And we didn’t necessarily want to do that but frankly it was a negotiated amount, so we’re okay with it, but it was part of what the negotiation was what was our last attrition offer and part of it was what were the alternatives available in other companies. That was how we arrived at the number.

Himanshu Patel – J.P. Morgan

Okay and then just conceptually I know you don’t want to get into numbers on take rates but is it fair to say that the goal of this program is to enable the implementation of the tier two workforce but also to see some overall net headcount reductions?

Fritz Henderson

Yeah, I mean I think it’d be fair to say that because in the end what we need to do is. We have a substantial amount that we can do in terms of transformation of the workforce, for sure. And the second thing is we want to dry up jobs banks where we have excesses, we want to be able to deal with those. You know for example we launched phase one, we had some of the [spow] plants we had some closed plants, there’s a fair amount that we can do, that we want to do in terms of adjusting our workforce to our need to run if you will, but a large part of it would be the transformation of the workforce as well.

Himanshu Patel – J.P. Morgan

Okay, one last question on the attrition itself, the cash buyout options of $70,000 and $140,000, I know the take rates on those tend to be low but what do you actually do with the VEBA deal, do you go back and retroactively adjust the liability based on the number of people who take the cash buyout option?

Fritz Henderson

No we wouldn’t do that.

Himanshu Patel – J.P. Morgan

Okay, separately Daewoo, you mentioned there was higher engineering cost, anyway to quantify how much that was in the quarter year over year?

Fritz Henderson

Well as I looked at the year over year comparison Himanshu it was about equal to that, so I mean as I looked at the reduction it was in line with the higher engineering and as I looked at that it was more timing related than it was anything else. I tended to look at our AP results the year to year comparison, the fourth quarter was influenced by the timing of some of the engineering spend.

Himanshu Patel – J.P. Morgan

So I mean I guess when we look out to 2008, I mean you mentioned you know emerging markets profit growth as a big driver here. Should we expect Asia Pacific to start seeing profit growth for full year 2008 versus full year 07?

Fritz Henderson

One of the things I said at the January meeting, you might recall is, we expect foreign exchange to be unfavorable in Asia Pacific 08 versus 07. And this is largely in 07 we had some substantial, actually 06 we had substantial hedge gains in Korea. 07 we had substantial hedge gains. We expect the hedge gains to be actually less in 08 because we basically been rolling off our hedge positions. That will be the single biggest challenge in terms of showing year over year improvement.

Himanshu Patel – J.P. Morgan

Okay and then lastly, slide 14, where you give a full year walk from North America, can you conceptually help us with a walk for 2008? You know, volumes I’m assuming you’re thinking down but how are you thinking about mix, pricing, materials slash other contribution cost?

Fritz Henderson

Well, let me just take volume for a second, first, if our projection of the industry holds, you know we don’t anticipate we’d have to replicate the reduction in dealer inventories. So you know I think that’s one. The second is we think we’re in equilibrium roughly in terms of our daily rent so we wouldn’t replicate that. And you know what our share is going to be a function of how we perform. But at least on the volume side, two things that hit us in 07 we wouldn’t necessarily see as replicating in 08. As I think about mix, mix has been very favorable, I’m just trying to remember my chart from the January meeting.

Mix has been very favorable in 07 versus 06 and 06 versus 05. I think you’re going to see some moderation in the favorable moves of the mix. Price, we would work very hard to try to basically operate at right around neutral if we could. I think it’s going to be a function of what happens with the competitive environment and then obviously the other things in terms of costs I think we’ve just got to make some more progress on our fixed costs for example. I guess what I would also say is if you go back and look at the January analyst meeting, nothing has changed today which would cause me to change my opinion from what I said at the meeting.

Himanshu Patel – J.P. Morgan

Okay, great, thank you.

Operator

Our next question comes from the line of Rod Lache from Deutsche Bank Securities, please proceed with your question.

Rod Lache – Deutsche Bank Securities

Good morning everyone, could you talk a little bit about what you’re doing to improve the performance in Europe which also fell off quite a bit in the fourth quarter and any comments on the outlook for 08?

Fritz Henderson

I would say a couple things, one, Europe, I mean the first thing is obviously to work hard to try and improve our competitive position in the German market because that’s been the biggest challenge but if the market doesn’t show any improvement you just have to, we’ll have to take some more costs out of Europe. We have been looking at and as you can see in 07, 06, 05, we’ve been fairly aggressive in terms of restructuring. We will continue to do that. I think we’ll continue to drive our footprint into some lower cost countries in Europe. I think we can also grow in the emerging markets in Europe. I’d point out that at least our growth in Russia, although the profits of that lands in AP not necessarily in Europe, but I would say in GM Europe’s case we just got to take some more cost out of the business.

We have the opportunity to launch our insignia late this year, it actually comes late this year, it’ll have more of an effect in 09. It’s an important product for us as I think about the GM Europe product portfolio I typically think about Corsa Meriva, Astra [Zaphura] and then you know the replacement of the midsized car, today’s Vectra. And those three products need to be successful and right now the third isn’t, so you know we get a chance to actually rectify that as we launch the new car. So, more cost, foot driving material costs, footprint to lower cost locations, growing in the emerging markets and then we do have a pretty important launch coming at us.

Rod Lache – Deutsche Bank Securities

Okay and in North America can you reconcile this price and mix issue which you know on your year over year bridge it’s kind of a wash but average transaction prices are up very meaningfully. So how should we be thinking about that?

Fritz Henderson

When we measure mix Rod, a lot of the average transaction price increases are captured in our mix calculation. We’ve done it this way, when we look at price we look at kind of pure price including changes in incentives, we look at a comparable model, what’s happening with price and it’s a pretty strict measure and then frankly where you see improvements in the richness of the option content, let’s say crew cabs versus single cabs, you know better trim level versus base, we capture all of that in mix. And so that’s why we’ve ended up, because with our average transaction prices going up as much as they have, you see some pretty substantial increases in mix.

Rod Lache – Deutsche Bank Securities

Yeah it just seems like, I mean for over a million units of production and over $1,000 of average transaction price improvement. It’s surprising that there’s not really much coming to the bottom line from price and mix. [Overlay].

Fritz Henderson

Well, you also, as I mentioned in January, there’s a fair amount of additional content going into those cars as well so it’s not just pure profit. So you do get better transaction prices but it doesn’t necessarily follow that all of that flows to the bottom line.

Rod Lache – Deutsche Bank Securities

Okay and was there a UAW bonus in the quarter or anything unusual like that?

Fritz Henderson

We would have amortized, we basically amortized the costs of both pensions and the lumps actually beginning in the quarter. So you did have some impact of the labor contract hitting on the fourth quarter. The piece I actually called out was the pension piece on the charts but yes we would have factored in the impact of the labor contract into the fourth quarter results.

Rod Lache – Deutsche Bank Securities

Okay and just one last one to the extent that the Delphi emergence is delayed, does that also delay your support payments and savings and that sort of thing or does that sort of proceed without them emerging?

Fritz Henderson

The way all the documents are written, they’re all focused on Delphi’s plan emergence and so to say what would change if they were materially delayed, that would be speculation but right now everything’s set up to basically trigger both our support payments as well as our savings when they emerge.

Rod Lache – Deutsche Bank Securities

Alright, thank you.

Operator

Our next question comes from the line of Chris Ceraso from Credit Suisse, please proceed with your question.

Christopher Ceraso – Credit Suisse

Thanks, good morning, couple of things. First, how should we think about taxes on a go forward basis? I know it depends on how much you earn and which region but is there any way to kind of put a stake in the ground and say this is roughly what to expect from a tax standpoint?

Fritz Henderson

Well, I’ve spent a lot of time in the last year working on taxes. It’s highly complicated, fairly technical, lots of big numbers, very little cash. And I’ve learned that you know the best thing to do is to focus on pretax which is why all of our management results are being, that’s how we’re actually driving the business internally. What we’re going to do is have taxes reported on the same line item. Clearly in places like AP and LAAM, we do have tax accruals that we book but even in LAAM we took an NOL valuation allowance in our Brazilian operation in 05 so even the LAAM tax rates are distorted as a result of that. You know so as I look at North America, it’s close to zero. If I look at Europe, you know with Germany in a valuation allowance position it’s certainly, it’s not zero but it’s fairly low.

So our tax rates are really quite volatile which is why we’re trying to focus internally in management on the pretax numbers and why we presented all of our numbers on the same basis here. The other thing that we’ve got that effected 07, we had the Allison gain which I wish it could be recurring but it’s not which effected tax allocation. And then the final thing which really affected our tax numbers in 07 was the major swing, favorable swing in OCI, I don’t know what’s going to happen in OCI in the future because it’s a function of discount rates and pension returns and everything else. So you know it’s to some degree guess work actually until you get to the fourth quarter. Again another good reason to focus on pretax.

Christopher Ceraso – Credit Suisse

Okay. Can you elaborate on the comment from slide 24 where you were talking about GMAC, the GMAC tightened lending standards. How would that manifest in terms of you know what percentage of people that applied for a loan let’s say last year, how many of those would now be excluded under the new terms?

Fritz Henderson

Well, first thing I would say is that this is a comment about GMAC in general which includes ResCap, okay. And if you look at ResCap for example and you look at the production volumes of ResCap and basically we’ve fundamentally dried up our production pipeline in are originating largely both conforming conventionals as well as jumbo conventional and there’s very little if any non-prime for example. So you know a massive change in the underwriting standards being applied to ResCap which is logical.

I would say in terms of GMAC, you know I would say certainly the credit environment for consumers is a tougher one so you’ve seen some moves in some of the credit scoring but I wouldn’t call it there’s been a seat change at this point. And you know I would say historically GMAC has done some sub-prime lending, we do it through a special subsidiary, we know how to do it. We’ve done a pretty good job with it over the course of years. This is one where you know we know how to counsel, we know how to underwrite, we know how to follow up. There’s been some changes in this area to tighten up a bit but again in automotive lending what I would say is we’ve tightened on the margin to make sure that we’re getting the right kind of credit. On mortgage lending, we’ve not just tightened up, we’ve shut it off.

Christopher Ceraso – Credit Suisse

But on the motor side you’re saying it’s kind of at the margin, is it 5% of the people that would no longer qualify under your standards for car loans, not home loans?

Fritz Henderson

I mean I don’t even know that number. What I would say is it’s really tightening in the margin and you know it’s a prudent thing to do. It’s the type of thing that GMAC has historically done moving into any period where consumer credit is a little tougher. So you know I would say our job is to work with them to try and be creative, try to get customers qualified who are legitimate and can afford the cars and trucks but I wouldn’t say I could put a number on it at this point.

Christopher Ceraso – Credit Suisse

Okay last one, I think you mentioned with regard to the buyouts that you were using pension money to fund that? Is that right and can you explain how you’re doing that?

Fritz Henderson

Yeah what we’ll do is we’ll have, if an employee chooses the pension option they would receive either a $45,000 payment up to a $62,500 payment, they would get that. It would be no later than July 1. They would have an option to actually roll that into a 401k or accept it just as a regular payment. So it does provide them with some options that if we paid it from corporate cash it wouldn’t necessarily provide them those same options. So we thought it was the right thing to do from a corporate perspective and it provides the retiree some options that they didn’t otherwise have.

Christopher Ceraso – Credit Suisse

Does that trigger any kind of a change to the plan or an amendment that’s going to impact income going forward or is it all just sort of a onetime effect?

Fritz Henderson

I think what we’ll have to see is we’ll have to see what the impact is of take rates, attrition, these lump sum payments and then assess whether or not we need to make a re-measurement of them or not. At this point I can’t really say. We have done re-measurements for example after the 06 attrition plan, we did a re-measurement because the take rates were very, very high. So you know if we get a very high take rate we probably will do another re-measurement but at this point I can’t really say.

Christopher Ceraso – Credit Suisse

Okay, thanks Fritz.

Operator

Our next question comes from the line of Brett Hoselton from Keybanc Capital, please proceed with your question.

Brett Hoselton – Keybanc Capital

Good morning Fritz, can you hear me okay? Thank you, first question and let’s assume that the Delphi deal doesn’t come off the way it’s scheduled. My question to you is there’s a lot of puts and takes between GM and Delphi. If, let’s assume, General Motors were to want to undertake this funding for Delphi by itself without any external sources. Considering all those puts and takes, what would actually be the net obligation from General Motors to Delphi?

I mean currently you’re looking for $3.5 billion in the market, but obviously there’s some cash and some preferred stock and some other things that are changing hands, I’m wondering what the net of all that might be such that if you guys decide to ante up yourself, would it be like a billion, two billion, I just don’t remember off the top of my head.

Fritz Henderson

Brett, actually you’ve now taken me into a realm of speculation that I can’t provide you the clear answer to a speculative question. I think this would be something that if we get to this point, I’d need to talk about it more explicitly but I’m really not in a position to do that today.

Brett Hoselton – Keybanc Capital

That’s fair Fritz. Second question for you, what is the average payout for the employees? I kind [unintelligible] around $100,000 per person, is that a fair number or would you use a lower number or high number? [Overlay].

Fritz Henderson

You mean for an employee who takes a buyout?

Brett Hoselton – Keybanc Capital

Yeah.

Fritz Henderson

That’s a fair number, yeah that’s a reasonable number.

Brett Hoselton – Keybanc Capital

So if 46,000 people were to take it hypothetically, that’d be $4.6 billion. Where would that cash come from? Is that something that you’d just take out of your coffers and pay it or is that something that you would borrow money for, something like that?

Fritz Henderson

Remember, first of all 46,000 people is the total number of eligible. It’s not going to, I’d be very surprised actually, number one. Number two, the number of people who take the buyout option, like in the last attrition plan was about 15% of the total, if I recall correctly. It was about 4,500 people. And you know so this, we were actually surprised it was that high. So you know I think the fast majority of the people will take the pension option so they would receive their lump sum form the pension plan.

Some portion of the people will take the pre retirement leave package and they would basically get a certain amount per month until they actually hit the retirement date and then some number of people are going to take a buyout but it wouldn’t be right to multiply 46,000 times $100,000. You’d be more right to probably multiply 2,000 times that or whatever. You know it’s just we don’t know, I can’t really speculate as to what the take rates would be but I just want to make sure you’re not using that as kind of a baseline assumption.

Brett Hoselton – Keybanc Capital

No, I think that’s very fair, so the question is then, where would the money come from? From your coffers? [Overlay].

Fritz Henderson

No, no, if we, let’s assume for a second, let’s just use your math. 2,000 people, 1,000, $100,000 a person, $200 million it would come from corporate cash. But to the extent that they take the pension option it’ll come from the pension fund.

Brett Hoselton – Keybanc Capital

Okay that works and finally if I understand your math correctly, ignoring taxes because you guys are going to be non taxpaying in the United States for like forever, the UAW savings looks like it amounts to about $8.00-$9.00 a share in terms of earned cash earnings improvement, that $45 billion, these are very rough numbers, but the North American volume it looks like you’re kind of thinking maybe around $3.00 cash per share and the Delphi volume it looks like maybe or the Delphi is about $0.5 billion, roughly about a buck per share, something like that. If I start off with a baseline of zero and I understand there’s a bunch of puts and takes that you discussed already but just using those three elements, kind of gets me to $12.00-$13.00 a share. Am I completely misunderstanding that or is that kind of what you’re suggesting? And again I’m assuming that you’re not taxed paying so I’m trying to looking at it from a cash basis.

Fritz Henderson

I would say first on cash flow, you’re right to assume that we’re not taxpaying. So I think we should be focusing on pretax as you’ve done. Second, what we tried to do in the chart is provide what are we think are some meaningful upside as well as some other opportunities which we didn’t quantify and some downside risks. So I mean I think you know as you looked at it you did the math, it’s pretty straightforward in terms of the first three items. You need to consider frankly the other factors when you come to your own judgment about it but the way to think about pretax and cash flow is absolutely right because we’re not expected to be in a cash taxpaying position.

Brett Hoselton – Keybanc Capital

Okay, Fritz, thank you so much for your time I appreciate it.

Operator

Ladies and gentlemen as a reminder, shortly we will proceeding with the media portion of the question and answer session. At this time we do invite the media to queue up for the questions by pressing one followed by the four. And our next question comes from the line of Brian Johnson from Lehman Brothers, please proceed with your question.

Brian Johnson – Lehman Brothers

Good morning Fritz, back on 12 and 13 and 14, just to complete the kind of variable contribution line of thought we’ve been going down, you mentioned mix is includes options and product mix. Price has been really sort of pedantically adjusted it sounds like. Does the cost of those options in the [richer] program, how is it split between material and other and then this engineering line?

Fritz Henderson

It’s not in engineering. [Overlay]. Yeah you typically have, but you typically have a lot of it in mix too. Because if we sell, crew cab for example versus a single cab, the higher material cost associated with a crew cab versus a single cab is going to l and in the mix calc not necessarily the material cost calc.

Brian Johnson – Lehman Brothers

Okay so mix is really a variable contribution from the option mix.

Fritz Henderson

Yeah, a good way to think about it.

Brian Johnson – Lehman Brothers

Okay and then on the engineering cost, we’ve been hearing a lot about your lower cost footprint and white collar cost saves, yet we seem to have negative year over year costs in engineering, can you give us some color around that?

Fritz Henderson

Well we, you know our engineering spend did go up year over year. I mean part of it was we have been driving our footprint in our growth in emerging markets whether it’s been in India or China or Brazil. We manage our engineering footprint by the way globally. What we also had is a situation where our engineering cost in 07 was pretty significantly impact on the global basis by stronger currencies. So our total costs were up in terms of the work being done.

We also had some higher advanced technology spend which we needed to include but we also had higher US dollar based costs in these emerging markets and many other markets in part driven by FX. And we allocate those costs across our sectors so even North America would still bear some portion of those cost increases. But I would say three things, one we did more work, two we did some more advanced technology spend and three our engineering spend in gross terms was actually influenced to a degree by currency translation.

Brian Johnson – Lehman Brothers

And do you include those in your structural cost estimates and where do you think those are going to go over the next couple of years?

Fritz Henderson

We include all engineering in our structural costs estimates. And you know, we haven’t necessarily provided guidance regarding where engineering costs are going to. I would say given what we have to do in terms of advanced technology, we’re going to be pushed in terms of our engineering spend. I wouldn’t foresee significant further increases in engineering spend but you know I think we’re going to be challenged to maintain the levels. We do bounce around in this area by the way. We can be driven by the [tonding] of major programs, whether it’s full sized pickups or other different programs. So this number could be a little volatile but it tends to be, when I say a little volatile, you know we’re not talking billions of dollars, we’re talking about hundreds of millions of dollars in a given year.

Brian Johnson – Lehman Brothers

And is this all run through cap ex or is this over and above what’s run through cap ex?

Fritz Henderson

Engineering is not included in cap ex. Capital, cap ex is basically largely vendor tools, tooling for our plants, capital for the plants, it doesn’t include any engineering.

Brian Johnson – Lehman Brothers

Okay and just a clarification on the cash flow around the buyout programs. If an employee who is retiring and eligible and collects the lump sum cash, is that cash actually distributed from the pension trust or from corporate cash?

Fritz Henderson

No actually if they took buyout, you know the third option, it would be from corporate cash actually.

Brian Johnson – Lehman Brothers

No the retirement eligible in lieu of getting it into their 401k.

Fritz Henderson

Oh okay then in lieu, then they would get that money from the pension fund.

Brian Johnson – Lehman Brothers

Okay, so it’s really only the non eligibles who are hitting the corporate cash.

Fritz Henderson

Correct, the 70 and 140.

Brian Johnson – Lehman Brothers

Okay, thanks.

Operator

Ladies and gentlemen as a reminder, if you are from the media only, please press the one followed by the four to queue for a question. And our first media question comes from the line of Jeff Green from Bloomberg, please proceed with your question.

Jeff Green – Bloomberg

Can you guys hear me okay? Okay can you just talk a little bit more about North America or actually sort of the hits or misses that you did for 2007. The structural costs rose but fell as a percent of revenue and you also have a flat capital expending versus an increase. Is that a concern in terms of if you were wanting to increase capital spending and you kept it about the same in your structural costs rose and you’re going to have to do something to get your 08 goals?

Fritz Henderson

Hey Jeff let me see if I can’t clarify because you’re kind of mixing global with North America and so let me see if I can’t be real crisp. If you turn to page 14, I would just do this in the calendar year. What you have is a situation where our structural costs were favorable bye $2.8 billion. They were down $2.8 billion, driven by pension, healthcare and manufacturing. So our total structural costs in North America fell in nominal terms.

What we said was on a global automotive basis, our total structural cost actually went up in nominal terms but down as a percentage of sales. What you have is some structural costs increases in emerging markets and then you have a pretty substantial increase in for example the US dollar translation of our European structural costs driven by a weaker dollar. So if you want to talk about North America you’ve got to stick on page 14. If you want to talk about total structural cost and total capital spend, that’s a global number, not a North American number.

Jeff Green – Bloomberg

And what about the cap ex, is it a factor of your [inaudible] some cheaper or are you cutting back on things [inaudible].

Fritz Henderson

I think that the cap ex, it was in line with, we were actually, I mean part of it is timing Jeff, part of it is also our non [unintelligible] continues to be pretty carefully controlled. We do expect our cap ex to rise, I think in January we said it’d be between 8 and 8.5 which would be up from the $7.5 billion level that we spent in the last two years. We actually thought capital spending was going to be a little higher in 07 than it turned out to be in part driven by timing and in part driven by pretty significant control over non product spend. But we expect our product spend to rise certainly in 08 versus 07.

Jeff Green – Bloomberg

And I mean the last question is North American results seem to be the biggest surprise compared to what expectations were. I mean without that $1.6 billion tax change it probably would have looked worse I mean overall for the quarter. Is there something going forward that’s going to make North America look better than it looked in the fourth quarter. I mean do you see anything about what we should expect there?

Fritz Henderson

The key to North America is [base] at the executing the operating plan. Forget about taxes and focus on pretax. It’s about, you know it’s the base that’s been driving [unintelligible] contribution margin while continuing to reduce our structural cost. It’s that simple, there’s nothing else really there. I mean we’ve got to get the job done on both sides in order to improve our results in North America.

Jeff Green – Bloomberg

So just wait for the buyouts to flow through or is there other stuff [inaudible, overlay].

Fritz Henderson

No I mean it’s, I think the buyout impact and the impact on structural costs is one thing but you know we have to get the job done. In order to get North America sustainably profitable and generating cash, we need to execute all of our structural cost actions and we need to win in the market. And we’ve started to see some evidence of that in 07 which was encouraging, it’s good to see. We need to frankly step on the gas in terms of how we’re performing in the market as well. Because in order for us to get North America sustainably profitable and generating cash, we must get the job done on both sides, revenue as well as cost.

Jeff Green – Bloomberg

Okay, thanks.

Operator

Our next question comes from the line of Joann Muller from Forbes Magazine, please proceed with your question.

Joann Muller – Forbes Magazine

Hi Fritz, on your summary slide you talk about the potential for significant earnings improvement in the 010 or 10 and 11 timeframe. I’d like to know what significant earnings improvement means, are you going to be, are we going to see a rapid acceleration here, are we talking about substantial numbers and what’s the basis of that conclusion?

Fritz Henderson

Joann if I turn your attention to chart 39, these are the key factors that I think are going to be able to drive our medium term outlook. What we tried to do in the January meeting and then again today is say, what are the factors that might allow us to drive the business to better levels of profitability and cash flow and they are right here on this chart.

Joann Muller – Forbes Magazine

So for instance the first one on the labor contract, how, are you assuming that you are now having a substantial number of people at the second tier wage or is this just the flow through of people leaving, the shrinking of the company?

Fritz Henderson

Think about the key pieces of labor, one transformation of the workforce in terms of what you just talked about. Two, [overlay].

Joann Muller – Forbes Magazine

When you say, you’ve used that phrase a few times I just want to be clear, do you mean transformation means to second tier workers?

Fritz Henderson

Yes.

Joann Muller – Forbes Magazine

Okay, thank you.

Fritz Henderson

Second, getting yourself to your need to run. So you get the right level of manpower and you get your capacity adjusted. Third, let’s not forget that the 07 agreement did include a somewhat important change in healthcare going forward which will generate a massive amount of savings and an even bigger amount of cash flow savings post 010 which gets included in our total manufacturing cost. So I would say it’s about the second tier wage, it’s about getting to the right levels of manning and then finally it’s about dealing with healthcare in a permanent way.

Joann Muller – Forbes Magazine

And so what do GM profits look like in 10 or 11?

Fritz Henderson

Joann, good question but I’m not going to give you an answer.

Joann Muller – Forbes Magazine

Okay.

Operator

Our next question comes from the line of Rick Popely from Chicago Tribune, please proceed with your question.

Rick Popely – Chicago Tribune

Hi, good morning. I didn’t quite catch what you were talking, when you were talking about taxes during the Q&A here is I thought you said we’re not expecting to be in a taxpaying position and can you just clarify that as to what you meant by that?

Fritz Henderson

We don’t, our US, Canada and Germany, we have net operating losses which are very large and so therefore we don’t expect to be in a tax paying position and in fact in the third quarter we actually had to set up an evaluation allowance and frankly reduce the carrying value of our tax loss carry forward in those three countries, hence the $38 billion charge in the third quarter. But we do, that did not at all affect the actual tax attributes of our businesses. So even if we turn profitable, we do not expect to be paying taxes in these jurisdictions because we have substantial loss carry forwards to use for the foreseeable future.

Rick Popely – Chicago Tribune

Okay, alrighty, thank you.

Operator

Our next questions comes from the line of Terry Kosdrosky from Dow Jones, please proceed with your question.

Terry Kosdrosky – Dow Jones

Good morning, just wanted to try to get an idea of, since your goal is to get a lot of the people who do accept these offers out about mid year in July, what kind of, what’s the level of savings you might see even this year if any from that move?

Fritz Henderson

We haven’t quantified it, that’s a good question. The reason we haven’t is because we need to determine what the acceptance rates are and I’ll be in a position once the program is pulled together to be able to quantify that but I can say from a timing perspective you would start to see certainly the savings flow in the second half of 08 and into 09. You would not see a substantial amount of savings in that regard for example in the first half of 08. But in terms of the actual amounts I’m just not in a position today to provide you some guidance on that because I need to see what the acceptance rates are.

Terry Kosdrosky – Dow Jones

Okay so this is, another question, would you maybe give more specific guidance for the rest of the year, I mean even directional guidance after you do get an acceptance rate here?

Fritz Henderson

Well typically in terms of earnings, what you see on page 37 is the extent to which we provide guidance. It is done on a global automotive basis. Now I hasten to add that North America is the largest operation in our global automotive business but it’s not the only one. For example in 07, you know LAAM and AP generated $2 billion of earnings before tax, so these are very substantial and highly profitable businesses. That said, the acceptance rates in what happens in North America is a key part of how we reach these judgments. If we needed to update them we would but at this time I don’t anticipate doing anything further than you know staying with what we’ve provided here.

Terry Kosdrosky – Dow Jones

Okay and then, little question, LAAM just went kind of gangbusters really this year, is that a kind of level that you know the numbers we’re seeing from that, is that sustainable in the near term do you think?

Fritz Henderson

Well, good question, having worked in LAAM myself it’s rare that you see all of the operations in LAAM going well at the same time and that’s what we’ve seen in 07. A number of the LAAM countries are also fairly volatile, but you know what you have is a situation where the LAAM countries are benefitting, not just LAAM but also AP, China growth, commodity increases, higher oil prices have various generally positive effects on a number of the LAAM countries. Different, you know for example agriculture affects Argentina, oil affects Venezuela, but in general the drivers of LAAM in 07, the industry, are still there in 08.

And so you know our outlook for LAAM for example is relatively positive in 08 but we realize both of us have actually worked in these operations that they can turn. But the drivers, you know if I think about Brazil for example, the governments done a fine job, the economy is actually performing very well, some of the imbalances you would historically see in a Brazil economy you don’t see today and the Brazilian market’s actually responding very favorably. So you’ve got to consider each one but you k now we’re pretty encouraged by the situation in LAAM in 08.

Terry Kosdrosky – Dow Jones

Okay so it sounds like you’re encouraging even though you have a tough comp.

Fritz Henderson

Yeah [overlay] tough comp because it was a great year. So our LAAM team has it as their challenge to keep doing better but they are working against a tough comp for sure.

Terry Kosdrosky – Dow Jones

Okay, thanks a lot.

Operator

Our next question comes from the line of David Welsh from Business Week, please proceed with your question.

David Welsh – Business Week

Good morning Fritz, I think you said 46,000 people are eligible for these buyouts, is that right?

Fritz Henderson

Yes, be eligible for the program is I guess the way I would put it, yes.

David Welsh – Business Week

And what kind of numbers do you hope actually accept because I mean, in other words, how many people are going to actually take this and you could still run the factories that you need to keep running?

Fritz Henderson

David you know we just announced it today, I’m not in a position to be able to make an estimate today. As we get closer to the end of the period we’ll have some sense but I just can’t give you that today.

David Welsh – Business Week

But you guys, you haven’t modeled how many people you’d like to see go and kind of how much capacity you want to keep, that sort of thing?

Fritz Henderson

We’ve done, yeah, of course we’ve done that but we just need to see, these are individuals who get to make choices and so you know we need to respect that choice and just be prepared to react. You know if I think about 06 for example, the take rate, the acceptance rates were much higher than we actually foresaw when we went into the program and then we adjusted and adapted. We’ve just got to be ready, based upon what the take rates are here.

David Welsh – Business Week

Okay and how many people or how many jobs I should say could you fill at the new wage rates over the next couple of years as people go out?

Fritz Henderson

We, as part of the negotiations actually I think the number I quantified was about 16,000 people were actually, actually it was equal to or greater than 16,000 people, but it’s in that range that would be frankly negotiated as noncore jobs, second tier wage and we would plan to actually move people, new hires into those jobs at the second tier wage.

David Welsh – Business Week

[Unintelligible] the number of contractors on top of that, three or four, or is that [unintelligible, overlay].

Fritz Henderson

Yeah you also have housekeeping which I think was another 1,700 on top of that. So you had a fair number of other things but in terms of the noncore jobs if you will or the second tier jobs that were identified, it was the 16,000 number.

David Welsh – Business Week

Okay and pretax, the loss in North America was about $1.5 billion, right?

Fritz Henderson

For the year, yes.

David Welsh – Business Week

And so if you take away the tax benefits from Allison, you’re basically saying that North America would have lost about $3 billion, am I reading that correctly?

Fritz Henderson

No. North America lost $1.5 billion on a pretax basis.

David Welsh – Business Week

Okay so explain where the tax windfall from Allison kind of comes in [overlay].

Fritz Henderson

It doesn’t come into pretax. I mean that’s the point of focusing on pretax is that you don’t have any Allisons, you don’t have any OCI, you don’t have any [overlay].

David Welsh – Business Week

So it’s a pure $1.5 billion loss?

Fritz Henderson

Exactly, there’s no tax impact in that $1.5.

David Welsh – Business Week

And could you explain that $1.6 billion windfall I still kind of, forgive me, I don’t understand exactly where that’s coming from.

Fritz Henderson

You don’t have to be forgiven, it’s fairly complicated. But I would say, if I come back, see if I can’t do this in a concise a fashion as I possibly can, see if I can’t summarize a month’s worth of work into a sentence. But I would say what we have is very large gains on the sale of Allison, very large gains from the movement of other comprehensive income, at least the latter of which by the way, you know you can’t really predict or forecast until you actually do your re-measurements at the end of the year.

That, you know, what happens in the future I don’t know but you basically have that large gain, the Allison large gain, the net operating loss that we have on continuing operations and we frankly ended up with a situation where under FAS 109 we could actually use in the current period, 07, our net operating loss, even with a valuation allowance, we can still use in 2007 calendar year our net operating loss, which is what we did when we finally closed our books and in order to achieve that we booked a fairly favorable adjustment in the fourth quarter. That’s the $1.6 billion, that was what was necessary in order to put our continuing operations on the basis where they fully benefited from the NOL in 07. I do hasten to add that it’s not like we got a big tax receipt, this is all non cash, but that’s how you got to it and I apologize if that’s not terribly simple but it’s not a simple process.

David Welsh – Business Week

Okay, that clears it up. And one thing I’m looking at here Fritz I mean, you’re looking at $4-$5 billion in benefits in the labor contract but not until really the turn of the decade. It looks like until then it’s going to be a couple years of struggle because it’s going to be a tough market for you guys to really make any kind of gain in, you know pricing was favorable for the year but not by a huge amount of money. Am I reading this right here, I mean you’re just going to have two years of really still struggling with profitability and cash flow before the contract really starts to help you out.

Fritz Henderson

I wouldn’t concede that, I think there’s things we can do in 08 in terms of structural costs. It starts with getting ourself right sized and you know running a attrition program and trying to, you know, frankly, realize the full benefits of the labor contract from an operating perspective quite apart from healthcare as soon as we possibly can, number one. Number two, you know while we certainly see more risks than upside in the 08 projection for the US industry, we are I think running at our second or third year below trend which means we are starting to build up some pent up demand.

And so you know if you start to see some recovery in the second half of 08, you know we could see a better market in 09. We don’t have a projection for 09 today. But I certainly see as I look at 08, we need to look at 08 with a sober view of the world and frankly go at our costs as hard as we possibly can, sell well, do the best we can in the market. There’s a lot of things we can do in the market, but I wouldn’t, at this point I’m not conceding, first of all we’re not conceding 08 because I think certainly on a global basis as we’ve said on later chart we think we can actually improve from 07. And then 09, we just have to see what the market gives us in 09.

David Welsh – Business Week

Okay, pretty good, thanks Fritz.

Operator

Our final question comes from the line of John Stoll from The Wall Street Journal, please proceed with your question.

Fritz Henderson

Hey John you better come off mute.

John Stoll – The Wall Street Journal

Can you hear me now? Yeah my questions have been covered so thank you.

Fritz Henderson

Alright, thank you. Operator are we all set?

Operator

That completes the question and answer session.

Fritz Henderson

Okay thank you everyone for your time today.

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 line.

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