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Executives

Randy Arickx - Executive Director Investor Relations and Financial Communications

Frederick A. Henderson - President, Chief Operating Officer

Ray G. Young - Chief Financial Officer, Executive Vice President

Walter Borst - Treasurer

Analysts

Himanshu Patel - JPMorgan

Rod Lache - Deutsche Bank

Christopher Ceraso - Credit Suisse

John Murphy - Merrill Lynch

Douglas Carson - Banc of America

Mark Warnsman - Calyon Securities

Media

Tom Krishner - The Associated Press

Jeff Green - Bloomberg News

Robert Snell - The Detroit News

David Welch - BusinessWeek

Joann Muller - Forbes Magazine

Brian Johnson - Lehman Brothers

General Motors Corporation (GM) Q2 2008 Earnings Call August 1, 2008 9:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GM second quarter earnings conference call. (Operator Instructions) I would like now to turn the conference over to Randy Arickx, Executive Director Investor Relations and Financial Communications. Please go ahead, sir.

Randy Arickx

Thank you very much and good morning, everyone. Thanks for joining us as we review our 2008 second quarter results that we sent out earlier this morning. I’d first like to direct your attention to the legend regarding forward-looking statements and risk factors on the first page of the chart set. As always, the contents of our call will be governed by this language.

I should also mention that to comply with SEC’s Regulation G, we’ve provided some supplemental charts at the end of the charts that we’ll be speaking to today in order to provide reconciling data between managerial financial results and the GAAP equivalent results that are in GM's financial statements.

I would also like to highlight that GM is broadcasting this call live via the Internet and that the financial press is participating as well.

This morning, Fritz Henderson, GM President and Chief Operating Officer, will open with a brief overview of operational highlights and strategies, followed by Ray Young, GM's Executive Vice President and CFO, who will review our Q2 earnings results.

After the presentation portion of the call, approximately 30 minutes will be set aside for questions from security analysts, followed by 30 minutes for questions from the financial press.

I would also like to mention we have several other executives available to assist in answering your questions, including Nick Cyprus, Corporate Controller and Chief Accounting Officer; Mike DiGiovanni, Executive Director of Global Markets Industry Analysis, and Walter Borst, Treasurer.

Now I’d like to turn the call over to Fritz Henderson.

Frederick A. Henderson

Thanks, Randy. Good morning. Chart two, a quick review of operational highlights in the second quarter. Global market share, 12.3%, down nine-tenths of a point versus the second quarter of ’07, driven by North America. Our share outside North America was up three-tenths of a point, with gains flat in Europe or gains in every region, so the share erosion was concentrated in North America.

Our automotive revenue was down sharply, more than explained by the North American decline, due to industry volume and mix. Ray will have more to say about that but as I look at the revenue base in GM North America, down over 30% from the second quarter of last year.

North America continues to demonstrate strong cost performance driven by improvements in manufacturing productivity, the attrition program was executed in the U.S. with just about over 90% of the people out by July 1st, positioning us for continued manufacturing cost performance going forward. Finally, the labor agreement, a labor agreement, excuse me, was negotiated with the CAW in the second quarter and work stoppages related to American Axle and certain local agreements -- excuse me, certain local negotiations were resolved satisfactorily in the second quarter.

Page three -- [inaudible] back to the announcements we made on July 15th. A couple of points I want to make here; first, the results you are seeing today, and Ray will talk about this and we actually have some information where we can reconcile, if you will, but the results that are being announced today were comprehended when we developed our plan on July 15th. So we knew what was coming in these results and we knew what we needed to do to respond and react.

On the 15th of July, you’ll recall, we announced a series of actions predicated upon a set of assumptions regarding the U.S. industry. They were intended to be conservative assumptions regarding the U.S. industry -- light vehicles, for example, 14 million units in ’08 and ’09; our share approximately 21% in each of those two years; oil prices staying at or around today’s levels, varying, seeing 120 at the low end in ’08 to 150 in ’09; and continued erosion in the percentage of sales composed of large pick-ups and full sized utilities with 12.7% in ’08 and 12.3% in ’09, versus 17.2% in ’07.

These assumptions were set for liquidity planning purposes in order for us to develop a game plan around a tougher industry environment and drive aggressive operating actions that we would implement quickly in order to respond. Importantly, what we’ve done is front-end loaded the management actions and certainly more heavily weighted them relative to the capital markets to make sure that we gave ourselves the highest opportunity to execute and the lowest risk of execution.

Finally, after sales and debt financing elements of about $5 billion in total were also incorporated in that plan.

The intent of the plan that you see on page four was to generate total incremental liquidity through year-end ’09 of $15 billion, operating actions, $10 billion, North America restructuring cost, $2.5 billion, combined with salary and employment and healthcare savings of $1.5 billion -- you would have seen announcements on all of this already rolling in the last two weeks -- capital expenditure reductions of $1.5 billion, bringing us in ’09 from about 8.5 to about 7, and in ’09, with the expectation going forward we’d be able to run the business on a global basis between 7 and 7.5. I do remind everybody that doesn’t include our spending in China, which is financed by our business and our joint ventures in China.

Working capital improvements, $2 billion -- $1.5 billion of which is focused and concentrated in North America; deferral of payments we would have made to restricted cash accounts for the VEBA, $1.7 billion through the end of ’09, and then finally the suspension of the dividend as approved by the board of directors. The total of those actions, $10 billion, and you can see a range for [inaudible] and capital market activities which would generate a further $5 billion of liquidity.

Page five -- what we have been doing in the last 60 days is rolling out a set of actions intended to drive the business, preserve liquidity, and frankly maintain key product cadence, even in response to a weaker U.S. industry, or certainly in response to a weaker U.S. industry.

In terms of capacity and costs, you’ve seen the announced production cessation of four truck plants, shift reductions at two additional truck plants. We’ve announced the actions on salary, manpower, and compensation, elimination of post 65 sellers, retiree health care, and we are moving aggressively on reduction in sales, marketing, and overhead expenses as well.

Beyond that, in the cash area, clearly capital spending and inventory, deferral of the VEBA contribution, suspending of the dividend, so all of those have been announced and are rolling. And then finally, because the market is changing and we want to make sure we respond and drive ourselves over time to be able to anticipate that we’ve added shifts at two key new car plants -- two car plants, excuse me. A new global Chevrolet small car was announced, the next generation Aveo was announced, a new high efficiency four-cylinder engine for production in the U.S. was announced. In our history, I don’t know that we’ve ever built a 1.4 liter four-cylinder engine in the United States, so it is a pretty significant action on our part to make sure that we drive our vehicles in our portfolio for fuel efficiency and fuel efficiency leadership.

Production funding for the Chevrolet Volt was also approved and finally, we announced that we would move to review the Hummer brand.

Page six, looking at the financial results, a $15.5 billion loss in the quarter, composed of about $9.1 billion to special items and $6.3 billion of operating earnings. Ray will take you underneath this but when you look at the $6.3 billion, the $6.3 billion includes approximately $2 billion related to lease impairments and lease reserve adjustments, the total of which was approximately $2.4 billion at the combined GM and GMAC level, and Ray has some excellent charts to take you through where that landed.

Automotive earnings before tax were $4 billion loss, down $5 billion versus the second quarter of ’07, largely on weakness in North America. GMAC’s results recognized by GM or our 49% interest was a $1.2 billion loss. Automotive OCF was a $3.6 billion cash burn in the quarter, and we did conclude the quarter with gross automotive liquidity of $21 billion and a further $5 billion of credit lines on top of that.

At this point, I will turn it over to Ray.

Ray G. Young

Okay, thanks, Fritz. Good morning, everyone. If you look at chart number seven, we’ll start looking at the second quarter results, adjusted results. Just a couple of comments -- in our adjusted results, we actually have a lot of special factors in these numbers which I will highlight as we go through each of the sectors. Take a look at North America, $4.4 billion EBT loss. Again, as Fritz indicated, we did put in our lease reserve adjustments through the North America sector here as opposed to considering it as a special item. About $1.6 billion of that is lease reserve adjustments.

Europe, you can see profitable; LAAM, extremely profitable, we’ll go in more detail; Asia-Pacific, a loss, negative $65 million. That includes, and we’ll talk about this more, about $285 million hedge accounting adjustments there for the Asia-Pacific results.

GMAC, it was discussed yesterday, our portion of their loss is $1.2 billion. That again, our portion of their lease impairment charge is about $300 million and I’ll go through that in more detail.

Corporate and other, probably worth spending a few moments here, negative 851. In this number, there is also two special factors there. We do have a lease impairment charge related to the asset that we retained when we separated GMAC. There’s a lease impairment charge of a little over $100 million there.

In addition, there’s also a provision for a litigation settlement, one-time in nature, approximately $300 million that we put into that as well, as non-recurring. If you look at that particular line item, going forward you would typically see us have an expense of about $300 million, $400 million per quarter in corporate other.

Taxes, negative 300 -- again, that’s due to our tax provisions related to entities that are tax paying, so that walks us to basically a negative $6.4 billion net income loss on an adjusted basis there.

Chart number eight, adjustments to income, our special items, special attrition program, $3.3 billion, I’ll go through in more detail there; the North American restructuring related, negative 1.1, I have a chart to go through that as well; CAW contract related, same thing, negative 340, I have some charts to walk through that; American Axle related, negative 197 -- this is just a refinement of the estimate. We had initially indicated about a $215 million settlement. As we refined our estimates in terms of how much of the OPEB repayments that actually will provide back to GM refined the estimates, so currently a negative $197 million adjustment there. GMAC investment, I’ll have some charts to talk about the valuation adjustments we did on our holdings. Delphi, similarly, we’ll have some charts to go through that. All other, that’s just primarily related to some Asia-Pacific and GM Europe restructurings. So about $9.1 billion of special charges that will walk us to a negative $15.5 billion.

I have a chart to kind of lay out the cash and non-cash components, a few charts in the future.

Chart number nine, special attrition program, again this is negative $3.3 billion. As you know, about 19,000 hourly employees accepted the program. About 90% have elected to leave by July 1, which will really help us out in the second half of the year as we take this cost out of our structural cost.

The $3.3 billion pretax charge, 2.4 is related to pension curtailment expenses, non-cash in nature. About $600 million related to people who elected to retire, taking the retirement incentives from our [over-funded] hourly pension plan, and about $300 million related to the cash incentives from our operating cash flow, and I’ll lay that out in a future chart.

Just an FYI, we expect our plan to remain over-funded even after the execution of this special attrition program, based upon the assumptions that we have.

Chart number 10, North American restructuring related, a little over $1.1 billion. This is to reflect the announcements that we’ve made with respect to idling of the our truck facilities in the United States and Canada, the idling of the Windsor transmission plant as well as the cessation of four full-sized truck plants, including two previously announced for shift reductions only. So the $1.1 billion pretax charge reflects the estimated wage and benefit costs associated with the employees impacted by these actions. It includes a Canadian pension curtailment charge.

Chart number 11, CAW contract related. We took a $340 million charge. This is really related to recognizing immediately the unamortized prior service costs related to Canadian pension benefit increases. Here we are just basically outlining our accounting to what we did on the 2007 UAW labor contract in the United States.

Chart number 12, impairment of our holdings of GMAC preferred and common; as you know, in the first quarter we took an impairment charge based upon valuation of GMAC, based on market conditions, looking at market comparables of automotive finance companies as well as mortgage business. We did a similar valuation in the second quarter, at the end of the second quarter, determined fair value of these assets. Taking in consideration of the continuing deterioration in the mortgage business and consumer credit markets, and the more challenging North American automotive financing environment, we elected to take a charge, an impairment charge in our common, about $700 million, which reduced our carrying value to $3.5 billion. And same thing on the preferred to about 600 -- a $600 million impairment, bringing our carrying value down to about $300 million.

Chart number 13, a Delphi related item, we recorded second quarter adjustment of $2.8 billion to our Delphi reserve, primarily due to updated estimates related to the ongoing reorganization of Delphi, again reflecting higher expected obligations as the net pension liability transfers, and additional uncertainty around the nature, value, and timing of any GM recovery related to any reorganization.

Again, as Fritz indicated, the factors from this charge were fully comprehended in our liquidity plan announcement on July 15th.

Chart number 14, worthwhile spending a moment here to kind of walk through our cash and non-cash impacts of the special items. You can see that of the $9 billion in charges, about $6.4 billion is really non-cash in nature. Looking at the near-term, that is ’08, ’09, about $1 billion of those charges are cash. North America SAP program, again that’s the cash incentives that we’re paying from operating cash flow for those that we could not pay from the over-funded pension plan. North America restructuring, that’s some -- again, some of the cash incentives [inaudible] from operating cash flow. Axle related, those are the two payments we will make to Axle of our operating cash flows. Delphi related, some flows that will come from OCF as well, and then some minor other cash flows. So about $1 billion in the ’08, ’09 timeframe. Post ’09, about $1.7 billion.

So again, just want to again reiterate that the majority of our special charges are non-cash in nature here.

Chart number 15, an issue that’s gotten a lot of attention over the past month, or especially the past several weeks, lease residual impacts. This is clearly deteriorating U.S. industry conditions, especially on vehicle mix, driving an overall decline in used car values, particularly in the area of SUVs.

Deteriorating used car values and residuals can impact us in three different ways. First of all, in terms of residual support that we provide associated with leases and the associated risk sharing arrangements with GMAC. We basically analyzed our incentive accruals and adjusted quarter to quarter to reflect the estimates of used car values based upon what we are seeing in the auctions.

Secondly, we do retain a lease carve-out facility from the separate of GMAC to the extent that we need to adjust reserves or do impairments, we’ll capture that through our GM account here.

And then finally, our 49% ownership interest in GMAC, to the extent they are adjusting reserves or taking impairments, we’ll take 49% of those charges.

We’ve been actively taking steps to reduce our exposure to leasing. Fritz will talk about this at the end. I know there’s a lot of attention to this issue but fair to say that we have significantly reduced the amount of 24-, 27-month leasing over the past several years and over the past couple of months, leasing only represents about 10% of our retail sales, and so we are aggressively taking actions to address this issue here.

Chart number 16 shows our adjustments to either our lease reserves or our lease asset impairments. At the North America level, we’ve made about $1.6 billion of adjustments to the lease reserves that are flowing through adjusted earnings. Again, I just want to emphasize, we’re not special item-ing any of these. Again, this is a combination of residual support, risk sharing with GMAC, risk sharing with our GM, the asset carve-out facility, and stock adjustments there. It’s about $1.6 billion flowing through. There’s about 100, a little over $100 million related to asset impairments related to the assets that we have retained on our books. There’s about $4 billion worth of assets, lease assets that are on our books.

And then at the GMAC level, as you heard yesterday, they took an impairment charge, a little over $700 million. Our portion, a little over $300 million. So when we look at the impact to GM of these combinations of reserve adjustments as well as impairments, it’s about a $2 billion impact for us in the second quarter.

Now, when you look at GM and GMAC on a group basis, assuming 100% of GMAC, it’s about a $2.4 billion impact on the group. And then if you’re just looking solely at impairments, what GMAC impaired, what they announced yesterday, in combination with their asset carve-out facility, about $100 million in our own asset carve-out facility, is about $800 million in terms of group impairments.

I know yesterday I was looking at some of the analyst reports in terms of just trying to understand what GMAC provided in terms of their discussions on residual risk sharing and residual support. Just for clarification, the numbers that GMAC reflected yesterday indicate really the balance, that is the receivable they have from GM related to risk sharing and residual support. That’s the $750 million to $800 million. That’s different than the $1.6 billion that we show here because our number here is really a reserve adjustment, that is the change in balances. So just for clarification.

GMAC also talked about $350 million related to other lease related support. That’s really a payment that we made back in May 2006 associated with the original separation, so therefore the cash impact has already flown to GMAC and what they’ve indicated there is about $350 million of basically reserves that they still have in order to cover future changes in terms of residual values. So that’s just a clarification point there.

So chart number 17, North America, you can see the results here, negative $4.4 billion in EBT. Again, includes the $1.6 billion in terms of the lease reserve adjustments. You can see production volume down 308,000 units. Clearly American Axle had an impact in that but again, recognizing the challenging marketing conditions, if we didn’t lose these units through the Axle strike, probably a majority of that would have been lost over the course of this calendar year.

It is important to note that our inventory levels have come down dramatically, that is our dealer stock. You can see that compared to last year at the same time, down 267,000 units. When we take a look at our inventory draw down in the second quarter, we’re down 87,000 units in terms of dealer stock. At a 788,000 unit level, that’s getting down to a pretty low level of dealer stock, and so looking forward to the rest of this year, don’t really anticipate to see any further significant dealer stock draw down, so just something to note as you analyze the second quarter results here.

Chart number 18, the revenue per unit -- without Delphi, the change in mix has a significant impact in terms of average vehicle revenue per unit. The $17,940 per unit also includes the impact of all the reserve adjustment as well. When we adjust reserves, that actually flows right into the revenue line as well, so that’s why you see the box. Excluding the lease related reserve adjustments, about $19,700 per unit. Still a major reduction versus second quarter of last year. Again, this is indicative of what we are seeing in terms of the mix changes in the second quarter.

Chart number 19, worth spending a few moments here, in terms of North America adjusted EBT, last year similar in the second quarter, about $100 million of positive adjusted EBT. You can see volume reductions this year, combination industry decline, segment, mix related, the inventory draw downs, and share performance, about $2 billion there.

You know, mix, $1.5 billion there related to product line mix, model, option mix. Price, it’s interesting, up to $1.7 billion in price but $1.6 billion is really related to our lease reserve adjustments that we talked about. We did have good performance in terms of costs, positive material offsetting even some commodity cost increases. Pension OPEB manufacturing, again the impact of manufacturing, cost reductions, attrition, flowing through again in the second quarter. And then hedging exchange and others, basically a wash. Some small exchange in commodity hedging gains offset by some other expenses there.

On a year-to-date basis, I won’t spend much time on the chart. Basically the trends I talked about in the first and the second quarter flowed through in terms of the calendar year impacts, the second quarter being the main driver for these variances here.

Looking at the other regions, again looking at automotive revenue outside of North America, strong performance again, up 10% versus second quarter last year. You know, 55% of global automotive revenue generated in the three regions outside of North America; 65% of unit sales outside of the United States, so again we’re seeing the combination of growth in a lot of these emerging markets having a positive impact in terms of our revenue and sales mix of the company.

About $0.5 billion worth of EBT outside of North America. I’ll talk a little bit about the Asia-Pacific hedge accounting adjustment. LAAM continues to deliver very, very strong results.

Chart 22, just a chart showing how we are doing on the BRIC countries as well as total emerging markets -- strong industry growth in the first half of the year. Strong share performance -- we basically gained share in all these regions, all these countries. China, down a little bit. If you’ll recall in the first quarter broadcast, we talked a little bit about the fact that first quarter ’07 was an exceptionally strong quarter for China for GM. On a first half basis, still down. When you look at the second quarter, China was actually up six-tenths of a point versus last year, so we expect China to -- China market share performance to remain strong for the second half of the year.

You also see the industry growth outlook for ’07 - ‘012 -- pretty strong in all these BRIC countries, as well as total emerging markets.

Chart 23, European results, and again I just wanted to highlight -- European results do not really reflect the profitability of the Chevrolet Europe sales. Those profits are more or less booked in the Asia-Pacific region and at GM-DAT, with export both SUPs and CKVs to the European operations.

You see $99 million EBT. The fact that it’s down $246 million versus the similar period last year can be more than explained by foreign exchange, which I’ll go through the next chart. In terms of market share, stable market share in Europe, in Germany, in U.K. Russia, some strong market share growth for the GM operations there, up one point. In terms of an industry that actually gained on the [inaudible] close to a million units versus last year.

You know, Pound, Euro again a big factor in terms of results. The Pound actually weakened 14% versus the Euro in the second quarter of this year compared to the second quarter last year, and as you know, the U.K. being one of our strongest markets in the European operations, where most of the costs, most of the vehicles come from the continent, so therefore the strengthening of the Euro really did hurt us on a transactional basis there.

You see that on chart 24, exchange impact both second quarter, year-to-date, negative versus the similar period last year. We did have some good cost performance in the first half of the year to offset part of the exchange impact, but again just slightly down on a year-to-date basis versus the similar period last year.

Chart 25, LAAM results, and another exception quarter for the Latin America Africa Middle East operations. Margin expansion, volume expansion, improvements in mix -- again, you see the Brazil industry strong. Market share slightly down. Again, the Brazilian operations and the Argentine operations, they are actually capacity constrained, and you may have noticed that during the second quarter, we did announce a series of capacity moves in terms of power train, adding additional shifts to our plants. This will allow us to more fully take advantage of the growth in the South American markets in the second half of the year.

Andean region, margin -- market share expansion in a relatively stable industry there.

Chart 26 says some more statistics on LAAM -- again, strong industry growth, all-time sales records in many of these countries. Strong revenue growth, so when we look out to the second half of the year, we see continued growth in the LAAM regions and continued profit and cash flow generation for our operations there.

Asia-Pacific, again you see earnings before tax, a loss of $65 million. You see the asterix that reflects a $285 million impact of hedging related adjustments. Just a little bit of background there -- at GM Daewoo or GM DAT exports, [inaudible] 90% of its production overseas, so it’s very much exposed to foreign exchange risk. They run a pretty active hedging program to protect themselves against this transactional exposure.

Over the course of the quarter, we discovered that they may have over-hedged themselves in some of these exposures. What we did is we elected to de-designate some of these hedges and basically take the losses accumulated in the OCI into income in the second quarter, and so that’s what we did.

Fundamentally, a weak WON is good for that business because it improves the export competitiveness of GM Daewoo. So we made that one-time adjustment in the second quarter.

The other factor impacting the results in Asia-Pacific is clearly some mix deterioration in some markets, such as Australia, as well as some of the mix deterioration on some of their exports, particularly the Western Europe related to some of the products.

But setting that aside there, profitable operations again in the second quarter.

On GMAC, chart 28, GMAC reported their results yesterday -- again, a $2.5 billion loss. Clearly North American auto finance negatively impacted by some of the charges that they took. International auto finance strong. International insurance business remains strong. I think they also walked through res cap, clearly the challenges in the European housing market impacting res cap results in the second quarter. So therefore, taking their results into their -- our 49% interest, about $1.2 billion was booked in our accounts in the second quarter.

Chart 29 is just the business line results. Again, I won’t go over this in detail. We saw this yesterday.

Chart 30, just talk about liquidity. We did finish up at the end of June with $21 billion of liquidity, including $0.5 billion of the readily available VEBA assets. It’s down about $3 billion from the prior quarter and it really reflects the adjusted negative -- adjusted automotive OCF probably in North America, related to the volume reductions.

In addition, we have access to about $5 billion of undrawn committed U.S. credit facilities at the end of June, so therefore we had about $26 billion of available liquidity at the end of the second quarter. I should note we have subsequently provided notice to draw about $1 billion under a secured revolver. This is really to cover some of our seasonal requirements in North America after the summer shut down.

Our net liquidity, $19.5 billion, $3.3 billion lower than our prior quarter, resulting primarily from lower second quarter cash balances. You see that in chart 31 in terms of our net liquidity position, as well as our gross liquidity position, basically again down from $23.9 billion at the end of the first quarter ’08 here.

If you go to chart number 32, just some comments in terms of our credit facility profile. You can see that at the end of the second quarter, we had committed lines of $6.8 billion, of which $5 billion was available. We did draw on our GMAC lease -- or our asset carve-out facility, as well as some of the securitization programs.

When you add some of the overseas operations, some of the committed/uncommitted lines, we had about $7.5 billion of unused facilities there.

Chart 33 shows our debt maturity profile over the remaining part of the second half, as well ’09, ‘010, ‘011, ‘012. I think most of you folks are fully aware that our U.S. term debt maturities, some capital leases, the convertible debt -- you know, overseas we have debt maturing as well, but those generally get refinanced in those operations based upon their strong cash flows.

‘010, as you know, we do have the VEBA obligations that are due, about $4.8 billion, including interest, as well as $1.7 billion that we deferred from ’07, ’08 into -- from ’08, ’09 into ‘010.

Chart 34 is [just about] cash flow. As you can see, negative $12.6 billion EBT for automotive and corp other. You can see D&A add back $2 billion in the second quarter, less CapEx at negative 2.2, some positive generation of cash flow and working capital. Pension OPEB, I’ll walk that through in the next page, as well as accrued expenses. Some minor cash restructuring charges there.

Non-operating related, some VEBA withdrawals, some cash from the liquidation asset carve-out facility. Net cash flow, negative $2.9 billion for the second quarter. You can also see the year-to-date results there, year-to-date. Net change in cash and cash related, negative 6.3.

Just a comment on D&A, I know some people were asking about what do we expect D&A to run at. I think that $2 billion per quarter is a good estimate of what we think D&A should be running at for this company going forth.

Chart 35, pension OPEB, you take a look at the net flows there for second quarter ’08, the big add backs really related to the North America SAP, really the curtailment expense, which is a non-cash item, so that’s the major add back to our cash flows. The CAW settlement, same thing. That’s really related to the accounting adjustment, so that’s an add-back. It’s a non-cash expense.

Looking at accrued expenses, probably again the Delphi charge, again the non-cash expense in the second quarter, and some of the restructuring related expenses for North America there.

You look down net sales allowance lease reserve adjustment, add back of $1.3 billion. Again, the $1.6 billion is a non-cash in the quarter. There were some -- offset by some $300 million related to cash outflows due to reduced dealer stock levels, in terms of our sales allowance account.

Chart 36, global cash management, we believe that our current cash requirements on a global basis to be between $11 billion and $14 billion, considering global supplier payments, [inaudible] receives cash not readily available, for example, some cash in our JVs, and just variability of some of our cash flows month to month.

Seasonal factors such as the July shutdown can be met through our secured revolver. That’s the reason why we put the secured revolver in place.

With respect to working capital, on July 15th we announced that we were targeting about $2 billion of working capital improvements in North America and Europe through 2009. Actually, our plan is to achieve that through 2009. We’re actually encouraging all of the operations to accelerate that as much as possible, because we believe that we can actually bring down the -- especially inventory levels down significantly in the near-term. A lot of focus on productive material reductions, estimated at $1 billion, driven primarily by a large partner reducing raw material stocks, optimizing buffer or safety stocks, as well as volume related impact of capacity actions and market factors.

In addition, finished goods inventory, U.S. and Mexico, a lot of focus in bringing down our company-owned stocks, company-owned vehicles, and optimizing our distribution systems.

Lastly, a big focus on service parts inventory, non-productive material. These targets have all been assigned, people are working on it. A big high focus, a lot of attention within our organization to generate this cash. Similarly in Europe, undertaking similar measures to generate $0.5 billion there in liquidity through these working capital actions.

With that, I’ll stop. I’ll turn it over to Fritz.

Frederick A. Henderson

Thanks, Ray. Page 38, just to summarize, and I do want to talk about leasing in the next chart but if I look at what our priorities are, our number one management priority is strengthening liquidity and managing the business for cash flow. As I think about managing the business for cash flow, the most important thing we need to do is continue to rebuild our revenue base and driving retail sales, because the most important thing in terms of driving cash flow is your retail performance. We understand that the market, particularly here in the U.S., is decidedly weaker. We understand the mix is fundamentally changing. We just need to understand if that is our market environment, how do we perform better in the segments where we are launching vehicles, preserve our traditional strength in trucks and SUVs, but in the end when you looked at the variances earlier in the presentation, it’s pretty clear that this is a game about rebuilding our revenue base, recognizing that the North American and particularly the U.S. market is decidedly tougher. It is what it is. What we have to do is perform better at retail in the U.S. and the North American market in order to win.

And then the second part of it is obviously driving down costs, managing the balance sheet aggressively and being lean on our working capital, and that’s the recipe for managing the business for cash flow.

The plan that we announced on July 15th did contemplate the weak second quarter results and the challenging U.S. environment. From a cost standpoint and a break-even perspective, we can leverage the attrition plan to reduce manufacturing cost, facilitate the planned capacity actions. We’re moving quickly on salary, manpower, and other structural cost reductions, and frankly we have an opportunity to significantly improve capital efficiencies via globally managing CapEx and reducing inventories.

Finally, the growth outside of North America provides us confidence in our strategy to manage the business globally. If we look at the global growth in emerging markets, it’s phenomenal but it’s not just done on it’s own in a vacuum. It’s part of managing the business globally, making sure we resource those markets, making sure we support them in terms of product and capacity, even while we are managing the business for cash flow, which we think we can do.

Next page, and we look at -- a lot of questions about leasing, which I thought I would cover here. The industry conditions are driving up both the risks and the costs associated with leasing. Let me stop here and just talk about the costs for a second. Clearly when you look at historically the cost of leasing, it is our most expensive incentive program -- always has been, in part because -- in large part because you have to actually incent the residual financing, and so leasing as an economic tool is important for certain customers but it is our most expensive form of financing.

The risks of it obviously involve residual risk, number one, and number two, financing the lease receivable, both receivables itself as well as the residual. So when we look at the current market environment, not only resale value of cars, or in this case SUVs and trucks, but also the capital markets and the difficulties associated with financing leases. It’s obviously driven up the cost of leasing.

We’ve seen a significant industry volume decline and that has been, at least in our case, heavily concentrated in leasing. The residual value impact, when you looked at, particularly in the second quarter the impact of residual values and SUVs, was just dramatic. And as we developed our reserve and lease impairments, we used the most recent observable inputs for determining what our liabilities and our impairments might be, i.e. we did not assume they were going to improve from where they are today.

Obviously this is very closely correlated with fuel prices. If fuel prices stay where they are today, we expect that the residual values or SUVs, particularly [body and frame] SUVs will stay under pressure.

We’ve already taken steps to reduce the percentage of our business that’s retail leasing. We curtailed the highest risk leasing areas beginning really in late ’06 and certainly in ’07. Leases today represent approximately 18% of our calendar year-to-date ’08 retail sales and 24- and 27-month leasing terms have declined, basically been halved from what they were in ’06 to where they are calendar year-to-date. So we had purposefully moved away from 24- and 27-month leasing while reducing our leasing penetration because we felt that was the highest risk part of the leasing portfolio.

GMAC announced it will exit incentivized leasing in Canada August 1st. When you look at the Canadian environment, when I talked about cost and risk, it’s not just a U.S. phenomenon. It’s also a significant phenomenon in Canada. Here, Canada is actually a market where, more than the U.S., leasing has been the predominant form of financing in Canada. Approximately 40% of the industry, if not a little higher. We have been approximately in line with the industry of recent date.

What we will do is we will work with our dealers to be as aggressive as we can and frankly repurpose our incentive dollars into APR financing and cash and manage the environment that we have. We’re not the only competitors facing the situation though in Canada and what we’ve seen is other competitors have taken similar actions because they are facing the same pressures we are.

What we are doing in the U.S. are implementing other initiatives to reduce the risk of our leasing portfolio, along with GMAC. This is something that’s being done together with GMAC. We fully expect that we will see further reductions in the volume of new lease originations going forward. Yesterday on the call I noticed Bill talking about a 50% reduction in U.S. leasing volumes. With what we’ve done with them, that’s a reasonable expectation on our part. What we will do is purpose our dollars toward the customers who most heavily use leases, which are traditionally premium customers, and you are certainly going to see significantly less leasing in trucks and SUVs.

I mentioned we do plan to offer leasing. We will stay in the market. We will obviously continue to monitor both residual values as well as the capital markets in terms of our ability, or GMAC’s ability to finance these. GMAC yesterday took pains to talk about when we restructure our credit facilities, they were restructured with specific carve-outs intended to facilitate the financing of leases, so we have the wherewithal to do it. We simply want to work with GMAC in order to very carefully and purposefully use our resources to provide leasing only where it’s a maximum advantage to win at retail, and then frankly repurpose our dollars into cash and APR.

So wrapping it up, looking ahead, we do see continued volume and mix pressures in the U.S. A little later today, we’ll talk about July sales but certainly a tough month, and we’ll let Mickey talk about that a little later this afternoon.

Our ’08 industry outlook has been updated to the mid-14 million unit range, which implies a second half SAR of about 14 million units in total. Our structural cost savings will begin to accelerate in the second half of the year. We do see continued strength in the emerging markets in the second half of the year, including Central and Eastern Europe and Russia.

Our product launches, we have 18 of our next 19 launches are passenger cars and crossovers. That was obviously planned some time ago. It’s now rolling today. The Chevy Traverse here in North America, the Opel Insignia in Europe. That’s -- the latter is notable for two reasons, one extraordinarily important for the Opel brand; two, it is the first launch of our first global architecture, or the fruits, if you will, of changes that have been made in the GM vehicle development process that began in ’04 and then accelerated in ’05. You are now seeing the first cars roll out from that process now in Europe and you will see that this product and products from this architecture launched in every single region around the world in the next several years.

And the final point is we will manage and execute both the structural cost and the cash flow initiatives within the liquidity plan to achieve our goal for the $15 billion reduction, including $10 billion from operating actions, supplemented by a combination of capital markets and asset sales activity.

Thanks very much. We now have time for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Himanshu Patel with JPMorgan.

Himanshu Patel - JPMorgan

A couple of questions -- was the revolver drawn down last year during the summer shut-down period?

Randy Arickx

I think what we’ll do is ask Walter Borst, who’s on the call, to answer the question. I think we have Walter on the line. Actually, I think the Operator hasn’t taken our Treasurer off mute.

I believe we did not draw it down last summer, but Walter can confirm that.

Walter Borst

Yeah, we did not draw last year. We had stronger cash balances at this time last year.

Himanshu Patel - JPMorgan

Okay, and then on slide 16, where you break out the various leasing hits, can you just delineate for us which one of these is sort of cash that you actually pay to GMAC versus foregone revenue? And I guess when is -- for the cash that’s actually paid, when is that cash actually paid? Is it paid up-front or is it paid when these leases terminate?

Ray G. Young

They are actually paid when they are terminating. It’s actually going to be based upon what the actual residual values will be when these things roll off. As Rob Paul indicated yesterday in the GMAC call, we took basically the end of June data point as the basis in order to do the reserve adjustments. The June numbers are actually a pretty severe number in terms of residual values. We actually believe it’s a fairly conservative estimate but it was an observable data point that we use in order to do the valuation adjustment.

So the actual payments will occur when the leases roll off and based upon the actual values that we’ll see in the market on used car prices.

Himanshu Patel - JPMorgan

Okay, and then Ray, I wanted to go back to your comment; I think Fritz, you suggested that lease penetration rates for GM could, or GMAC could fall by about 50%. YTD, it’s at about 18% but Ray, did you say the last two months were running at 10% already?

Ray G. Young

Actually, down in the lows -- I think July, for example, is about 10%.

Himanshu Patel - JPMorgan

So the sort of impact from the lost sales that you could see for lower leasing, is it fair to say that a lot of that was in the last two months already, or would there be a greater impact that we should expect in the subsequent months?

Ray G. Young

I would say -- you know, we’ve looked at it. It’s impossible to answer that question with precision but as we’ve looked at June and July, I would say a big piece of it is already being felt in our results. I think we will probably see a bit more into the second half of the year but we were already seeing the impact in June and July for sure.

Himanshu Patel - JPMorgan

Okay, and then can I jump lastly to slide 20, where you give the North American bridge. I want to focus on the net materials line. Two items there; one, I think commodities, on the box on the right, you’re saying YTD in North America was a hit of $100 million. I think on July 15th when you did your liquidity call, you sort of gave that, the global net purchasing, net materials forecast for the full year and I think globally for full year ’08, it was about a, if I remember, like a $1 billion estimated hit. You’ve seen $100 million in North America through the first six months of the year. What’s the disconnect? Does that mean in the second half there’s a huge step up or is it the $1 billion forecast is too conservative?

Ray G. Young

Well, a couple of things; first, Europe, because we’ve actually had a fair amount of impact in Europe; the second thing is yes, we will have a pretty significant headwind in the second half. We still think that number is a good estimate.

Himanshu Patel - JPMorgan

Okay, and then one last question, Europe contribution margins, to the extent there is a downturn there next year, any guidepost you can give us? Should we think about that business as sort of having similar fixed cost and labor inflexibility, if you will, versus North America, or would you say it’s better or worse?

Ray G. Young

I think there’s a couple of factors. I mean, we are going to be launching new products, like the Insignia, at the end of the year. As you know, new products generally help the contribution margin issue.

The other factor is where exchange rates are going to be. The Pound/Euro relationship is going to be very important in terms of the contribution margins. We are taking proactive steps right now in order to try to protect the contribution margin. You’ll see that the U.K. operations have raised prices to offset some of the foreign exchange impacts. You’re seeing it in the Russian market, Central, Eastern Europe are very much focused on mix as well.

So I guess there’s different factors that will impact us next year and clearly we’d like to expand our contribution margins from where they are right now.

Frederick A. Henderson

One thing I want to add on leasing -- my comments related to the U.S. I think we will start to see, we will have more of a pronounced impact in Canada as we go into the third quarter. We’ll just have to see. We’ve already repurposed our incentive dollars. Now we’ll just have to see what the impact is.

Himanshu Patel - JPMorgan

Great. Thank you, guys.

Operator

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

Brian Johnson - Lehman Brothers

Good morning. I want to drill down on some aspects kind of flowing out of slide 36, which was helpful clarification of the treasury positions. First of all, can you give us some color, or actual numbers, better yet, on where, what amount of the cash and marketable securities are U.S. housed versus rest of world? And in particular, what overseas cash is not considered readily available? Where is that and of what magnitude?

Frederick A. Henderson

I think in terms of what our disclosure would be, I think about 45% at the end of the second quarter of our cash was in the United States, if I recall. I think Walter can confirm that.

Walter Borst

That’s about right.

Frederick A. Henderson

And generally, when we take a look at the cash that we have overseas, the majority is fairly flexible in terms of movement. The ones that are really at the JV level whereby it’s more difficult in order to move the cash around. I’m not going to provide a specific number but I would have to say the majority of our cash around the world, we can move it fairly easily using our liquidity pools.

Brian Johnson - Lehman Brothers

Okay, and if we look at the regions, which regions are -- in the second quarter generated cash and which, in addition to North America, were users of cash?

Frederick A. Henderson

Clearly the Latin American operation is generating cash, Asia was generating cash. The European operations are more or less kind of flat right now.

Brian Johnson - Lehman Brothers

Okay, in terms of Latin America, you view that cash as readily repatriable up to the U.S.?

Frederick A. Henderson

Yes.

Brian Johnson - Lehman Brothers

Okay, and in terms of your second half cash flow, where are your numbers versus what S&P suggested, which was about a -- looked like about an $8 billion, $9 billion burn, second half?

Frederick A. Henderson

Again, I know they came out with some report this morning or yesterday evening. Haven’t had a chance to go through it in detail. Just a couple of observations in terms of cash flow burn in the second half of the year that you need to factor in. First of all, we did have a significant inventory draw-down in the first half of the year in North America. We don’t expect to have that in the second half.

Secondly, as Fritz indicated, with the SAP program, 19,000 or 90% of the 19,000 people have left by July 1st, so our structural cost performance in North America will improve significantly, and this is cash for us. So just a couple of things for you to think about as we analyze second half of the year.

Brian Johnson - Lehman Brothers

And based on your flow out of the Delphi charges, it doesn’t look like you are contemplating any cash going into Delphi in the second half, potentially to help them refinance their debt?

Ray G. Young

Well, what we’ve done, Brian, I think I said on July 15th, our cash forecast had assumed, and still does, that the cash that we would have otherwise paid them had they emerged, would be paid, even though we haven’t done it yet but we are assuming that we would. And then alternatively, we are assuming zero recoveries, so those are the assumptions that we built into our cash flow forecast. Still good assumptions.

Brian Johnson - Lehman Brothers

Okay, but not any refinancing on the GM side of the 3.8 of the outstanding debt?

Ray G. Young

No, we haven’t built that into our forecast.

Brian Johnson - Lehman Brothers

Okay, so is the $1.1 billion that you have out there in 2010 and beyond, is that just the exit subsidies that were in the original plan, or is that some new potential support you might be providing post hopeful emergence?

Ray G. Young

Those are just basically future recoveries, which as Fritz indicated, we are going to zero out.

Frederick A. Henderson

Yeah, that’s exactly what we did. We basically have at this point, since it’s uncertain when they will emerge and it’s uncertain what the value of the firm will be, even though a large claimant in the bankruptcy and we’ll preserve that and we’ll aggressively negotiate to maximize our claim, our view is at this point the best thing to do would be to frankly fully reserve whatever the recoveries are and we will see what they are when they emerge.

Brian Johnson - Lehman Brothers

Okay, thanks.

Operator

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

Rod Lache - Deutsche Bank

Good morning. Just to follow up on that question on the cash flow, are you suggesting that the second half cash burn will be less than the first half, even with the payments to GMAC and Delphi?

Ray G. Young

I’m not providing any guidance here. I just want to provide a couple other data points for you folks to kind of think through the second half of the year.

Rod Lache - Deutsche Bank

Right, but I mean, this is pretty important. I mean, you’ve burned through $7.2 billion or so in the first half of this year. You’ve got these additional calls. Obviously you do have a lower headcount with this attrition program. Can you give us any sense at all of the magnitude or a range around the cash burn in the back half or some parameters around, for example, the GMAC payments that would come in in the back half?

Ray G. Young

Right now, we’re not providing any guidance in terms of earnings or cash flows. Nick emphasized that when we developed our liquidity plan on July, we did contemplate what we thought would go on in terms of North America and the rest of the world, so the second half cash flows are fully baked into our plan here.

Rod Lache - Deutsche Bank

Is the Delphi cash-out still 650? Is that right?

Frederick A. Henderson

Actually, we had 650 through September 30 but we actually have more in our cash forecast for this year than that for the fourth quarter, so certainly at this point our commitment to Delphi, I’ll call it in our separate -- I think it’s a separate [debt] facility actually is the 650. That was sized consistent with what we thought we would need to pay through September 30th. We did have expected and we do have expected cash flows in our fourth quarter forecast as well, which would take us beyond the 650.

Rod Lache - Deutsche Bank

So can you clarify how much cash goes to Delphi in the back half of this year, approximately?

Frederick A. Henderson

So far, we have none. We actually have a small amount but I think in our forecast, we had 650 that’s in the projection through September 30 and I think the total for the year, Rod, is a little less than a billion.

Rod Lache - Deutsche Bank

Okay, and the -- for GMAC, 750 of risk sharing and 800 of residual support, over what period of time does that get distributed, approximately?

Ray G. Young

As you know, there’s an agreement with GMAC in terms of the amount of risk and how we pay it back. This is something that frankly, we’re still working through the exact numbers because as GMAC indicated, this was just an estimate from their part. So we’re still working through the actual exposure and then once we’ve got that number, then we’ll work with GMAC in terms of making the arrangements.

Rod Lache - Deutsche Bank

Okay, and the $100 million charge on the retained lease portfolio looks relatively low, just as a percentage relative to what GMAC had. Could you just address whether there were any different criteria placed on measuring that? And lastly, can you comment on the funded status of the pension at mid-year?

Ray G. Young

We’re using basically the identical assumptions of GMAC in order to value our own asset carve-out facility. I think the fact that it’s lower just is reflective of the composition of the lease assets there, relative to the GMAC lease assets.

Walter Borst

I just would add obviously that portfolio was also as of a couple of years ago and a significant portion of that asset carve-out portfolio has rolled off in the meantime.

Rod Lache - Deutsche Bank

And the pension?

Frederick A. Henderson

In terms of the over-funded status, as I indicated on the hourly plan, as of May it remains over-funded.

Rod Lache - Deutsche Bank

What’s the performance year-to-date?

Frederick A. Henderson

It’s -- I guess we’re not going to disclose that but as you know, we have executed a derivative strategy on our pension plans that basically protect us against more of the equity movements in the marketplace, so clearly relative to the equity indices, it’s outperformed all the equity indices.

Rod Lache - Deutsche Bank

Okay. Thank you.

Operator

Our next question comes from the line of Chris Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

A couple of follow-up items -- the volume and mix effect in North America looks a bit worse than we expected. I think some of that is because of model and option mix. Can you just maybe explain that a little bit and was there any building and holding of vehicles in the quarter that may have hurt that number?

Frederick A. Henderson

Well first of all, we don’t build and hold. We don’t build for inventory, our company inventory. Secondly, I think it’s just reflective of the fact that we did -- with the American Axle strike, we did draw down a lot in terms of our profitable vehicles, in terms of the production mix there.

Christopher Ceraso - Credit Suisse

But on a per vehicle basis, it looked like it was quite a bit worse than the first quarter when you did outline the axle impact.

Frederick A. Henderson

In the first quarter, actually what was interesting is the reduction in SUV production was not that significant in the first quarter. Most of the units that came out in the first quarter were more the pick-up trucks. In the second quarter, with respect to the Axle strike, the impact was more tilted towards SUVs.

Christopher Ceraso - Credit Suisse

Okay. I know there’s been a lot of discussion about cash and Delphi but maybe if we take a step back for a minute, can you just frame for us, out of the $11 billion that you’ve reserved so far, over time how much of that eventually becomes cash versus how much is other allowances that are non-cash and won’t become cash?

Frederick A. Henderson

Well, let me see if I can’t deal with that -- one, the portion that is OPEB related, which is the lion’s share of it, it was comprehended in our VEBA, so it is comprehended in the amount of resources that GM was going to need to contribute to the VEBA. The people that were expected to -- that did flow back or would be covered under the benefit guarantee were included when we sized the VEBA, so it’s already in the VEBA fund. There’s not something on top of it.

Second, the 414L that we would do would be -- this is the pension transfer -- would be non-cash, because we would basically move folks over and obviously use the pension fund as part of that transaction.

Those two things are a big part of the $11 billion. Then you’ve got support payments, which is cash. Over time, you’ve got facility wind-down payments, which is cash over time. And it goes out frankly for three, four years, you’ve got an impact that happens every year. I think we’ve disclosed an annual impact of $400 million or so is what we thought would be the period cost impact of our labor and wage subsidies and production cost cash burn. So there will be cash associated with that. That’s more in period costs than it is in the reserve. The reserve is really driven by and large by healthcare or OPEB, which is by the way the FAS-106 liability, not the amount that we are going to -- that’s included in sizing of the VEBA, so it’s a very large FAS-106 liability, which is basically settled as part of the VEBA settlement and in the 414L. Those are the two big pieces of the $11 billion.

Christopher Ceraso - Credit Suisse

Okay, that’s real helpful. And then the last one, just about Europe with regard to foreign exchange -- are there any actions that you can take near-term, or should we expect the profitability to be impaired over the next few quarters if exchange rates stay where they are?

Frederick A. Henderson

Well, we can -- what we are doing, we’ve raised prices in the U.K. We actually as a company have made some decisions to keep production in the U.K. vis-à-vis some other facilities because we wanted to try to -- I’ll call it reduce our relative imbalance of our footprint, but we’re still -- the U.K. is actually our largest market in Europe and candidly, there’s not much you can do other than frankly over time, make adjustments in pricing and hopefully it drives revenue and profitability into some of the other markets. But we’re frankly going to stay competitive in the U.K. market because even with substantially reduced profitability, and it is a very substantial reduction as a result of about a 15% movement in the Pound certainly year over year. We’re going to stay there. I think what we have to do over time is try to improve the profitability of our U.K. business by driving retail, frankly taking some actions on price, trying to richen mix. But there’s no silver bullet on this one.

Christopher Ceraso - Credit Suisse

Okay. Thank you very much.

Operator

Our next question comes from the line of John Murphy.

John Murphy - Merrill Lynch

Good morning. On slide 36, you guys are talking about $11 billion to $14 billion of cash necessary to run the business. I mean, that number seems to be cranking down pretty consistently over the last few conference calls that you’ve had. What’s really driving that? Is it the cost-cutting or is there something else going on here?

Ray G. Young

I think that we’ve taken a very, very hard look in our business globally in terms of based upon the volumes we see, based upon the pattern supplier payments, based upon our ability to move cash around the world. We determined this is the reasonable estimate in terms of our cash requirements in order for us to run the business.

Walter Borst

If I might just jump in, if you’re referring on prior calls to when we’ve indicated $18 billion to $20 billion, that was going into a downturn, so we would have had monies in there available for the downturn as well. Obviously we’re in a downturn now, so we’re building it more from the bottom up for you guys.

John Murphy - Merrill Lynch

So this is thinking that we’re somewhere in the middle of the downturn and at some point in the next six to 12 months, we’re going to recover?

Walter Borst

I wouldn’t say that. I would say it’s what we need to run the business.

Frederick A. Henderson

It’s just like a minimum cash balance.

John Murphy - Merrill Lynch

Okay, and then when we think about the credit facilities that are backed by your leases, is there anything changing on the availability of those credit facilities based on the recent impairments, or anything we should think about there?

Walter Borst

There’s nothing there that I’m aware of that you should be concerned about.

John Murphy - Merrill Lynch

Okay, and then just staying on these asset or these lease impairments, on the GMAC call yesterday, there was a fair amount of confusion -- at least I was confused -- on the risk sharing and residual support and the cash payments that might need to be made to GMAC over the near term, and they were talking about $1.5 billion above and beyond the $350 million that you’ve already made. And there appears to be some kind of limit, either $1.5 billion or $2.2 billion. I just wonder if there’s an absolute cap on the cash payments that you might have to make to GMAC because of these lease impairments or if there’s a relative or -- I mean, how should we be thinking about this?

Frederick A. Henderson

It is disclosed that there is a $1.5 billion exposure cap. That’s why I made the comment that both parties are estimating what the current exposure is. Once we’ve determined what the actual exposure is, us and GMAC will work through in terms of the mechanism by which we bring ourselves down to the cap.

Walter Borst

There is a mechanism in -- there’s two pieces here. There’s really residual support and then there’s risk sharing, and on the residual support, it basically takes care of the difference between what a customer would pay if they just did it directly from GMAC and the additional support that we provide, so that can’t be more than the difference. And on the risk sharing, there is a limit to how much risk sharing GM would absorb in that equation. We do typically disclose both of those amounts in our Qs and Ks.

Ray G. Young

It seems to me as I look at it, probably part of the confusion is we have two different caps. The $1.5 billion cap is a cap that applies to multiple receivables that GMAC has from GM for lease, for retail -- I mean, basically things that happen in the ordinary course of business. That was a number that was negotiated at the time of the sale, it’s a number we track ourselves against, and it’s a number we intend to -- you know, to the extent that as a result of these adjustments, we’re in excess of that, we’ll bring ourselves back in line with that.

That is not lease specific. That is a generic --

Frederick A. Henderson

Or enterprise, like an enterprise cap.

Ray G. Young

And then with respect to leasing and specifically risk sharing, there is also a cap associated with that and that frankly applied on a kind of a portfolio basis to limit GM's liability. That’s probably why the confusion arises, because there’s two different forms of caps.

John Murphy - Merrill Lynch

So what is the limit, the cash payment that needs to be made to GMAC for lease impairments? I mean, is there an absolute cap here? That’s what I’m trying to figure out.

Ray G. Young

Yes, there’s two caps, one for residual support and one for risk-sharing.

John Murphy - Merrill Lynch

So the absolute cash cap is what? What number?

Frederick A. Henderson

You’ve lost me with the question, actually.

John Murphy - Merrill Lynch

Well, I mean, they’re talking about $1.5 billion in cash payments that need to be made to GMAC over the near term, so relatively over the next two to three years. I mean, is there an absolute cap to those cash payments? Is that it? Are we capped at $1.5 billion?

Walter Borst

I think they indicated at year-end, the caps were $1.2 billion for the residual support and $1.2 billion for the risk sharing. Those numbers are probably more like $1.4 billion each would be the maximum I think for the quarter rate.

John Murphy - Merrill Lynch

Okay, and then lastly on capacity utilization, you guys were at 71% for the quarter. Clearly that’s pretty low but you are adding more shifts on the car side and clearly cutting capacity on the truck side. I’m just wondering if you could give us a split between car capacity utilization and truck capacity utilization, and if there may need to be some further structural shift in capacity from truck to cars?

Frederick A. Henderson

Let me see if I can’t deal with this -- a couple of things; first, the announcements we made in July we pretty much have our plan ready to go on reducing, very significantly reducing truck capacity, increasing production, taking shifts out of the plants that are still running. We are adding shifts in the pass car plant. It’s our expectation today based upon our view of where the market is going that we don’t have to undertake any major conversions from truck to car. Obviously to the extent this basically means we think we have adequate car and crossover capacity in order to do this, we clearly aren’t interested in simply investing for investment purposes for investment sake in order to convert something. We think we have adequate passenger car and crossover capacity by fully utilizing our plants and/or moving them to three shifts, while we execute the reduction in truck capacity.

So obviously the second quarter was very low levels of capacity utilization and certainly our expectation that as we take the capacity out on the truck side, we will certainly substantially improve it.

John Murphy - Merrill Lynch

Great. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Douglas Carson with Banc of America.

Douglas Carson - Banc of America

My question relates to the revolver. You drew down $1 billion because the cash balance is getting a little bit lower. Could we expect throughout the year as we burn more cash that that could go to $2 billion or $3 billion in draw, or is this kind of like a one-time, seasonal event?

Frederick A. Henderson

Well, first of all the revolver was set up for us to draw. I mean, it’s not really just a back-up facility. We use this as part of our cash planning tools that we have within the company. Typically we do have a seasonal downturn due to the two-week shut-down period in the United States in the month of July, so therefore we elected to draw in order to help us cover some of the requirements.

Over the course of the year, we see some variability in cash and so therefore, with the variability, it’s something that we will utilize in order to cover our requirements in the U.S. operations.

Ray G. Young

Interesting fact -- each year, our seasonal low points generally occurs on either August 1st or August 2nd, and we sit here today on August 1st.

Douglas Carson - Banc of America

Okay, great and then I think in the 1Q info in May, you drew down 775 of $1.3 billion revolver, I think it comes due in August ’09. Is that still drawn?

Walter Borst

Yes, it is. It’s a separate revolver.

Douglas Carson - Banc of America

And then finally, medium duty truck, is there any update on -- I know you really can’t comment much on it but are you still in the process of marketing that business?

Ray G. Young

I think you answered your question, actually. We can’t really comment. I apologize. We’re just not in a position at this point, given the confidentiality agreement, to say anything.

Douglas Carson - Banc of America

Okay, and I’ve got one quick last one -- on slide 35, you comment on the individual line items of this accrued ad back of 5.9. As we think about when the cash kind of hits the balance sheet from that 5.9, would it make sense to look at slide 14 and think that could be around $2 billion? That’s an add back. Sooner or later, some of those will be cash charges.

Frederick A. Henderson

On the charges, I think in charge 14 we said ’08/09 of $1 billion of cash flow related to the special items. Most of the things in chart 35 are related to the special items that we outlined on that chart there.

Douglas Carson - Banc of America

Okay. All right, that’s it for me. Thanks.

Operator

The following question will conclude the analyst portion. Following this question, we will proceed with the media portion of the Q&A session. (Operator Instructions) The final analyst question comes from the line of Mark Warnsman with Calyon.

Mark Warnsman - Calyon Securities

Good morning. Regarding sales antennas in the U.S. market, regardless of whether those incentives are delivered as lease invention or as APR, has your go-to-market strategy changed, or will it change going forward, given the present market conditions?

Frederick A. Henderson

I would say it’s going to change, yes. We’re going to repurpose certainly our incentive dollars for both cash and APR to stay aggressive in the market, but we for sure will change our marketing mix accordingly.

Mark Warnsman - Calyon Securities

But do you see the absolute level of dollars that you are spending on incentives in the U.S. market increasing going forward?

Frederick A. Henderson

It depends on the market. The highest cost incentive we have by far is leasing, so I think what we have to do is adjust and see what our competitors do, see what the impact is on primary demand by segment. We’re frankly moving into an environment we haven’t seen before. In the end though, as we come out of this with significantly less leasing, it’s significantly less costly to us but we just need to see what the impact is at retail and it depends a lot on the market.

Mark Warnsman - Calyon Securities

Great. Thank you.

Operator

Our next question comes from the line of Tom Krishner with Associated Press.

Tom Krishner - The Associated Press

I’m going to rephrase an earlier question and see if I can get an answer -- you say 19,000, the bulk of the 19,000 blue collar workers have left. That’s behind you, so your structural costs are lower. That means cash. And then the inventory reduction’s behind you, and that also means cash, so does that not mean that we could expect a lower cash burn than the $1 billion a month or so that you’ve burned up so far this year?

Frederick A. Henderson

It will really be a function of how the second half of the year unfolds in terms of the industry. I think Mickey will have some comments in terms of where July ended up but our business is volume-dependent, very volume-dependent. So therefore, that’s the reason why we’re not going to provide any guidance in terms of the cash flow. These two factors would be positive factors relative to the first half of the year; that is the inventory draw-down that won’t exist in the second half and then the lower structural costs.

Tom Krishner - The Associated Press

Okay, and then I heard one other thing -- I believe I heard this correctly -- the American Axle strike, I think somewhere along the line, you said that the sales that you lost through that strike probably would have been realized anyway because of the way the market deteriorated through the year. Is that correct?

Frederick A. Henderson

That’s correct. I mean, we saw the market deteriorate rapidly on trucks and full-sized SUVs, especially in the second quarter. So in the absence of a strike, we probably would have to take an inventory take-down on that.

Tom Krishner - The Associated Press

Thank you.

Operator

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

Jeff Green - Bloomberg News

Good morning. I wanted to go back to the liquidity discussion; you talked about the $11 billion to $14 billion you need at the end of the month to sort of pay the bills, and you’ve referenced back to the 18 to 20 in cash and 4 to 5 in credit lines that you were talking about for going into a downturn. I know you’re not talking about cash flow but unless you get some more liquidity or significantly slow your cash flow, it looks like you are about three quarters away from being outside of that range, just to make that $14 billion. Can you say anything about that? I mean, you said you have enough cash through 2009. You’re kind of bracketing yourself. It seems like you’ve almost given us a cash forecast already, and that’s what really everybody wants to know -- does GM have enough cash to keep going in the current market conditions and --

Frederick A. Henderson

Jeff, just a couple of things, and I think the -- you actually put two good pins into the map, if you will, the $18 billion to $20 billion plus unused credit lines going into a downturn is what our objective is. We ended the second quarter at 21, plus our credit line is unused, so -- and I think we certainly feel like we’re in the midst of a downturn. 11 to 14, which Ray touched on, is what we view as minimum cash to run the business, so you could safely say that that’s a level we don’t want to fall below.

The actions that we announced a couple of weeks ago were really intended, as we said, to derive $10 billion of further incremental cash improvements out of the operations through ’09 and then supplement that with a combination of asset sales and/or capital market activities to raise another $5 billion. That’s intended obviously to provide us with a liquidity cushion to keep us above that minimum cash requirement.

I mean, you’re right -- I think many people would like and are asking questions to try to drive us to provide guidance regarding both earnings and cash flow, particularly cash flow. I’m not going to do that, just given the uncertainties we face in the industry but certainly what we tried to do with the actions we announced several weeks ago was get ahead of it as much as we can and be able to preserve our financial flexibility and our cash and our liquidity position even with a decidedly tougher market and not test that $11 billion to $14 billion minimum cash balance.

Jeff Green - Bloomberg News

So we shouldn’t really be thinking about the 18 to 20 anymore and just be looking at that 11 to 14 as sort of the stress test for your cash?

Frederick A. Henderson

Actually, what’s interesting, I heard the question before from the first quarter call. Actually, we’ve never provided -- we’ve been asked about 100 times what minimum cash is to run the business. We’ve talked about $18 billion to $20 billion being the desired level of cash, plus our unused credit lines going into a downturn. Today, after frankly a fair amount of work, what we just concluded is now we should answer the question -- what do we think the minimum cash is required to run the business, which is why we’ve articulated it.

I think both numbers are relevant. They are just two different things.

Jeff Green - Bloomberg News

Right, okay. I just wanted to clarify that. [I think what] we care about now is that $14 billion, that’s what you really need versus -- so it’s the comfort level --

Frederick A. Henderson

You faded out, Jeff.

Jeff Green - Bloomberg News

That answers my question.

Operator

Our next question comes from the line of Robert Snell with The Detroit News.

Robert Snell - The Detroit News

Good morning. Not knowing how consumers will react long-term to fuel prices, what do you say to concerns that the shift in product mix to more fuel efficient vehicles [will come just in time for when consumer preferences change again]?

Frederick A. Henderson

Do you mean what’s the risk that we zig when they are zagging? I think as we look at it, you have to sometimes just take a view and we just decided with respect to oil to take a view that oil is going to stay, as we showed in the chart earlier to 120 and 150. A fair amount of volatility but I think about three years ago, if oil moved $0.50 or $1.00 in a day, it was big news. Now if it moves $4.00 to $6.00 in a day, it happens all the time. So I think our view is oil is going to remain volatile. We should plan the business to stay in this range. If it turns out that oil and gas prices were to fall lower in that range, I’m quite positive we will be able to react. But our view is the best thing for us to do is to plan on staying in that range.

The consumer -- you know, it’s interesting. When the switch flips, we’re not exactly sure but certainly we think we’ve seen a significant change in the U.S. consumer. We think that fuel economy as a reason for purchase has sky-rocketed up the list from where it was before, in terms of reasons to buy, and we’ve seen a sea change in segment mix right in front of us in the second quarter.

So our view is we should plan on this basis and candidly, if fuel prices were to fall significantly, I am 100% certain that we will be able to react.

Robert Snell - The Detroit News

Thank you.

Operator

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

David Welch - BusinessWeek

A question on leasing -- how long of a tail is this going to have? Are we going to see every quarter these things sort of cropping up the way we did with mortgages, with res cap? Do you guys have any clairvoyance into how long this is going to go on?

Ray G. Young

I think in terms of the reserve adjustments that we took, as well as the impairments that GMAC took, as well as what we took on our own assets, again we think that we -- you know, we used a data point of June 30th, or the end of June in order to value used car prices. As GMAC indicated in their call yesterday, they believe it’s a conservative viewpoint.

If used car prices don’t deteriorate any further from the end of June, then we won’t expect any further adjustments in terms of the reserves. In fact, if used car prices increase from the end of June levels, you may actually see some gains in terms of the lease portfolio.

So everything is a function of where we think used car prices are going to go in terms of any potential further impairments or adjustments in terms of reserves. We believe we’ve taken a conservative viewpoint at this point in time.

Frederick A. Henderson

I would add to that; I think Ray’s right. David, I think you’re probably sitting there saying where have I heard this before.

David Welch - BusinessWeek

Exactly.

Frederick A. Henderson

But if I look at resale values on pick-ups and utilities, or frankly any car, it’s a pretty efficient market. The auction runs regularly. We get data on it monthly. You don’t have long gestation periods. The car comes back, it’s resold. We don’t hold cars. We just put them right through the system, and so the significant reduction you’ve seen in the price of used vehicles occurred, particularly in SUV cases you saw in the GMAC chart yesterday, April, May, and June, very, very fast. We used the June data point to set the reserve and candidly, all of the actions we’ve taken from a sales and marketing perspective, first thing we did is we moved away from 24- and 27-month leasing; second is we began to curtail leasing as part of our marketing mix several years ago; third, you know, if I look at the volume, for example, of Trailblazer Envoy coming at us in terms of resale, it’s declining because we actually had moved away from that several years ago. So supply and demand, I feel better about it than I would have let’s say a year ago.

So a couple of points; one, quite efficient in terms of how resale values are basically reflected in the market, and you see the data much more quickly than you saw housing; two, it is very much a function of supply and demand, and at least I know in our case is the supply of products that we’re going to be having come back at us is going to decline; three, it’s a function of the mix of vehicles and the mix of leasing. We’ve already moved away from 24- to 27-month where you have the maximum volatility around the lease residual value.

So feel pretty good about it and I would say it’s a much more rapid adjustment feature than you’ve seen in housing. Can you guarantee things? No, but I think this is one where if we’re wrong, we’re going to find out pretty fast. This isn’t one that we’re going to be waiting two years to figure it out.

David Welch - BusinessWeek

Okay, but do these actions you’ve taken, does that sort of price your entire lease portfolio? Are there still other leases, particularly of SUVs or pick-up trucks in there that we’ll sort of see where the pricing falls down the line and what kind of hit you might take when those cars are going to come back?

Ray G. Young

Well, what you’ll see, if you looked at the GMAC charts from yesterday, I don’t know if you saw them but they showed you what the percentage is of ALG and you should think about the impairment as marking those lease assets down to that level. In other words, it’s the assumption that that will take place not only for the leases that are coming due today but everything that’s in the portfolio. That’s how the impairment analysis was done.

So if you think about it conceptually, if that percentage is what is applied to all the vehicles that come back, we won’t have any further adjustments. To the extent that things improve, we’d have a favorable adjustment when those vehicles come back. To the extent that there’s further deterioration from that level, we could have further mark to market, if you will. It’s an impairment test as opposed to mark-to-market but you shouldn’t be thinking that’s only the vehicles that we have in the pipeline. That’s everything, okay? And then we basically, we just have to adjust if that percentage were to go, were to change.

David Welch - BusinessWeek

Okay. All right, very good. Thanks, guys.

Operator

Our final question comes from the line of Joe Muller with Forbes Magazine.

Joann Muller - Forbes Magazine

I have a question about revenue. The North American revenue decline was pretty stunning, down by about a third. And I’m wondering -- you talked about that being one of the big challenges, besides obviously the liquidity. How do you see that recovering under the circumstances that we find the market in right now, and how are you going to be able to rebuild that and how much of it can come back?

Frederick A. Henderson

A couple of comments -- the revenue line is impacted by the lease reserves that we took, so you need to factor that $1.6 billion in reserves, additional reserves we took on leasing and residuals that impact that revenue line.

Secondly, we talked about the fact that in the second quarter, we did draw down inventory. I don’t expect us to draw down inventory further from where we are right now, so therefore the revenue line in the second quarter was negatively impacted by the dealer stock draw-down.

Thirdly, we were constrained in the law of products in the second quarter. For example, passenger cars, there’s certain models that frankly our stock levels were pretty low. In the second half of this year, we will have additional production, as we have announced additional shifts for key passenger cars where clearly there’s demand for those products. So we will have additional sales in the second quarter for those particular products.

But ultimately, I mean, we’re going to have to basically grow the business. Even in a tough market, we’re defending our truck share even though the truck segment has come down, this remains a very, very important segment for our company and so we’ve been able to demonstrate that we’ve been able to defend and grow segment share in that segment.

And then with the challenges in leasing, we understand those challenges but we are going to be very, very innovative in terms of how we come to market in order to mitigate any of the impacts that may come by cutting back leasing.

Joann Muller - Forbes Magazine

So for instance, on the revenue per vehicle, do you see that bouncing back up again a little bit as the second half of the year goes on?

Frederick A. Henderson

Again, clearly based on what I just described in terms of the fact that we are not having inventory draw-down of the dealer stock level, our mix of production should get back to a more reasonable level.

Joann Muller - Forbes Magazine

Okay, thanks.

Operator

And that does conclude today’s Q&A session. Gentlemen, please continue with your presentation.

Frederick A. Henderson

Okay, just to conclude, we appreciate everyone’s attention to this call, the second quarter. Hopefully we’re able to provide more transparency in terms of the numbers. I mean, there’s a lot of data, there’s a lot of special items in the adjusted line. There’s a lot of special items in the special items line. Again, our investor relations group is here at your disposal should you want any further clarification in terms of the numbers we presented today. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.

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