通用汽車 (GM) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Motors Q2 2010 results.

During the presentation, all participants will be in a listen-only mode.

As a reminder, this conference is being recorded Thursday, August 12, 2010.

I would now like to turn the conference over to Randy Arickx, Director of Investor Relations and Communications at GM.

Please go ahead.

Thanks, Operator.

Good morning, and thanks for joining us as we review our 2010 second-quarter results.

As you know, our press release was issued earlier this morning and the conference call material are available on the Investor Relations website.

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

Before we begin, I'd like to direct your attention to the legend regarding forward-looking statements on the first page of the chart set.

As always, the content of our call today will be governed by this language.

I would also like to mention that during this call, we will not be discussing or taking any questions regarding any potential initial public offering.

This morning, Chris Liddell, GM Vice Chairman and CFO, will review our second-quarter results.

The presentation portion of the call will be followed by a Q&A session for both analysts and media.

I would also like to mention that we have several other executives available to assist Chris in answering your questions.

With us today are Nick Cyprus, Vice President, Controller and Chief Accounting Officer; Daniel Ammann, Vice President and Treasurer; and Chuck Stevens CFO, North America.

Finally, at the conclusion of the Q&A session with Chris, Ed Whitacre, GM Chairman and CEO, will give some closing remarks and take a couple questions from members of the media.

With that, let me turn the call over to Chris Liddell.

Thanks, Randy, and good morning, everyone.

Before we begin, I wanted to talk briefly about our approach.

As I mentioned to you last quarter, we've standardized and simplified the information that we share with you.

You'll notice that the second-quarter results are presented in a near-identical format as the first quarter.

The only difference is we've supplemented the standardized information with additional information based on your feedback, in particular, regional EBIT bridges -- that's earnings before interest and tax -- bridges from the first to the second quarter.

As with the last quarter, I would ask you to focus your questions on the major trends in the business and to direct your more detailed questions, for example, to enable you to populate your financial models, to the investor relations team after the call.

Having said that, now let's review the material.

Slide two provides a summary of our financial results for the first and second quarter of 2010.

We'll focus our discussion today on the second-quarter results and compare to the first-quarter results to provide additional perspective.

For the second quarter of 2010, we recorded $33.2 billion in net revenues, up $1.7 billion from the first quarter.

Operating income was $1.8 billion, $600 million over the first quarter, and net income attributable to common stockholders was $1.3 billion, an improvement of $400 million from the first quarter.

On a fully diluted basis, our earnings per share were $2.55 for the second quarter.

To highlight a few non-GAAP metrics that we believe are important, EBIT adjusted was $2 billion for the second quarter, an increase of $300 million from the first quarter, and free cash flow was very strong at $2.8 billion for the second quarter, an improvement of $1.8 billion from the first quarter.

In summary, the second quarter was another good quarter for General Motors.

The Company has posted its second consecutive quarter of positive earnings and cash flow, and I'm very pleased with our progress towards our goal of achieving financial strength.

Slide three walks operating income to earnings before interest and tax and EBIT adjusted.

As we reviewed on our prior slide, our operating income was $1.8 billion for the second quarter.

We reported equity income of $400 million, which is our proportionate share of income earned by our equity method on [vestige], primarily our joint ventures in China.

Non-controlling interest was $100 million deduction, and is related to the non-GM-owned proportional share of the positive results of our consolidated entities, primarily GM Daewoo.

Non-operating income was a loss of approximately $100 million, primarily related to a recognition of a loss on the sale of our interest in the GM Fiat powertrain joint venture.

This walks us down to a second-quarter earnings before interest and tax or EBIT of $2 billion.

We have no adjustments for the quarter, so EBIT and EBIT adjusted are the same at $2 billion.

We did have restructuring costs of $200 million in the second quarter, but as we mentioned on the last quarter's call, we did not intend to adjust for these restructuring costs.

Slide four shows second-quarter earnings before interest and tax by region.

I'll provide more detail on each region in the following slides, but before we move on, you can see both GM North America and GM International operations were well in the black and posted positive EBIT for the second quarter of $1.6 billion and [$0.7 billion], respectively.

GM Europe recorded a loss of $200 million on an EBIT basis, and we had corporate expenses and eliminations of $100 million in the second quarter.

That totals to our EBIT of $2 billion, and with no adjustments, our EBIT adjusted, also $2 billion.

Slide five provides a summary of our global deliveries and market share for the fourth quarter of 2009 through the second quarter of 2010.

As noted on the bottom of the slide, these figures include vehicles sold around the world under GM and joint venture brands.

For the second quarter of 2010, our global deliveries were approximately 2.2 million units, an increase of 154,000 units from the first quarter.

The increase in deliveries is attributable to increased global market share and higher industry volumes.

Our global market share was 11.6% for the second quarter, up 0.5% over the first quarter as we experienced share gains in every region during the quarter.

The global vehicle industry grew approximately 450,000 units for the quarter to [18.5 million] units.

On a seasonally adjusted annualized rate, the second quarter global industry was approximately 71.3 million units.

As you can see on slide six, GM North America deliveries was 716,000 units for the second quarter, up approximately 152,000 units over the first quarter.

The increase was driven by a 0.9% increase in market share to 18.7% as well as a 650,000 unit increase in the North American vehicle industry.

As noted within the bars on the slide, Chevrolet, Buick, GMC and Cadillac deliveries totaled 708,000 units for the second quarter, up 157,000 units from the first quarter.

Non-core brand deliveries were just 8,000 units.

At the end of the second quarter, there was only approximately 1,100 units of discontinued brand vehicles remaining in US dealer inventory.

Total US market share increased from 18.4% in the first quarter to 19.4% in the second quarter.

US share of our four core brands of Chevrolet, Buick, GMC and Cadillac, increased as well from 18.1% in the first quarter to 19.3% in the second quarter.

In the second quarter, fleet accounted for 34% of the US Four brand sales versus 30% in the first quarter.

As we move to the second half of the year, we expect our fleet penetrations to moderate and approach approximately 25% to 27% for the year.

Turning to slide seven, we provide what we believe are important key performance indicators in GM North America.

The top-line in the graph shows total US market share for GM; the next line shows the combined market share of our four core brands; and the bars are GM's average US retail incentives for the four brands based on J.D.

Power [and] data.

We've also provided at the bottom of the slide GM's average US retail incentives for the four brands as a percentage of the industry average.

While there is a great deal of information on this slide, there are a few underlying trends I would like to point out.

As you will note, total US share has stabilized and begun to improve for the second quarter.

Market share for our four brands has improved as well.

We're making good progress reducing our incentives, which averaged $800 lower in the second quarter versus a year ago.

More recently, incentives are increased as we've introduced programs clearing out our model year 2010 inventory.

Comparing average US four-brand incentive spend into the industry average tells a similar story.

For the second quarter, our average incentive spending was approximately 115% in average industry levels, down 18 percentage points versus a year ago, up approximately 10 percentage points versus the first quarter.

Part of the reason that our incentive spending is running higher than the industry is that, on average, our vehicles transact at higher prices.

This past month, our sales teams introduced a metric that tracks our incentive spending as a percentage of our average transaction prices.

For the second quarter, the average core brand retail incentive was approximately 10.9% of our average transaction price, or 103% of industry average levels.

On slide eight, we provide more color on our retail transaction prices.

This slide provides average US retail transaction prices for cars, trucks, and crossovers for the second quarter of 2009 and 2010, based on J.D.

Power [end data].

In [addition] to the average transaction price data points, we also provide an estimate of how much the increase is related to mix versus changes related to price and content.

Looking at cars, our average retail transaction price for the second quarter was $25,900, an increase of $2,100 on a year-over-year basis.

Of this increase, approximately $1,700 is related to the mix of cars we sold this year and $400 is related to price and content improvements on the nameplate-by-nameplate basis.

A key component of the price and content increase is our recently launched Buick LaCrosse, which has a significantly higher transaction price, as this is the vehicle that replaced some $7,800 on a year-over-year basis.

For trucks, our average retail transaction prices are up $1,800 on a year-over-year basis.

Mix accounts for $200 of this increase while price and content changes account for $1,600.

On a nameplate-by-nameplate basis, average transaction prices were up across the board with improvements on the Chevrolet Tahoe and Silverado, driving a large portion of the increase.

On crossovers, average retail transaction prices were up $3,000 per [31/100].

Mix is unfavorable 100 in this case on a year-over-year basis, and that's primarily due to our success of Chevrolet Equinox as a larger proportion of our crossover sales are from the Equinox, which transacts at a lower price point than the average crossover.

However, the Equinox's average retail transaction price is up approximately $4,200.

This is the model that replaces -- and is a major contributor to the $3,100 increase in price and content.

Turning to slide nine, GM North America net revenue was $20.3 billion for the quarter.

The $1 billion increase in net revenue was primarily driven by increased volume.

US dealer inventory was 438,000 units at the end of the second quarter, an increase of 10,000 units over the first quarter.

However, day's supply dropped from 70 at the end of the first quarter to 67 at the end of the second quarter due to increased selling rates.

Slide 10 produces GM North America's second-quarter earnings before interest and tax of $1.6 billion, up $400 million versus the first quarter.

We'll review the key drivers for the sequential improvement in the second quarter results on the next slide.

However, before we move on, I wanted to comment on the progress in North America.

As I've said before, we've restructured the business here to be breakeven near the bottom of the cycle.

In the first two quarters of 2010, we're running at US seasonally adjusted annualized rates of 11.2 million and 11.5 million units respectively, and clearly produced solid positive earnings at that level.

Slide 11 walks the major components of North America's EBIT improvement for the first quarter to the second quarter.

As you look to the left part of the slide, you can see that North America posted EBIT of $1.2 billion for the first quarter; the middle of the slide walks the $400 million EBIT improvement over the first quarter by key drivers to derive our second-quarter results, $1.6 billion.

$600 million of the improvement was related to improved volume and mix in the second quarter, and of this, approximately $900 million is related to increased North American industry volume; $300 million related to increased North American market share, partially offset by the negative impact of $500 million due to lower dealer inventory builds in the second quarter.

In the second quarter, we also increased GM North America inventory approximately 7,000 units versus a 68,000 unit build in the first quarter.

Price was unfavorable $300 million due to increased incentive spending in support of the 2010 model year sell-down.

Cost was unfavorable $100 million, primarily due to increased marketing spend.

Other was favorable $200 million, attributable to the impact of favorable lease residual adjustments of $200 million; $400 million favorable exchange related to the weakening of the Canadian dollar and our net liability position there, partially offset by the impact of the windshield washer fluid recall of negative $200 million, and the absence of $100 million restructuring reserve adjustments experienced in the first quarter.

Turning to slide 12, GM Europe deliveries for the second quarter totaled 442,000 units, up 38,000 units over the first quarter.

The improvement was the result of a 5% or 244,000 unit increase in industry volume and an improvement in Europe market share, 0.3 percentage points to 8.8%.

The improved GM Europe market share is related to a 1.7 percentage point gain in the UK market share to 13.7%, partially offset by a 0.2% reduction in Germany to 8%.

As you will note, we've provided the split of deliveries between Chevrolet and GM Europe excluding Chevrolet.

Chevrolet deliveries for the second quarter were 127,000 units, an increase of 22,000 units for the first quarter.

This is a result of increased industry volumes and an improvement in Chevrolet market share in Europe of 0.3 percentage points.

This is in line with our strategy to increase Chevrolet penetration in Europe through strong products like the Spark, Captiva, and Cruise.

GM Europe deliveries excluding Chevrolet were 350,000 -- 315,000 units for the second quarter, up 16,000 units for the first quarter.

The increase was primarily related to increased industry volume as Europe market share, excluding Chevrolet, held steady at 6.3%.

Slide 13 provides GM Europe net revenue and production.

Net revenue was $6 billion for the second quarter, an increase of $500 million from the first quarter.

The improvement in revenue was primarily related to the impact of increased volume of $800 million, partially offset by unfavorable translation exchange as the euro weakens versus the dollar.

As can be seen on slide 14, earnings before [interest and] tax was a loss of $200 million for the second quarter.

This, however, is an improvement of $300 million from the first quarter and we'll review the major drivers on the following slide.

That slide, 15, which details the improvement -- as you can see, the EBIT impact of volume and mix was favorable $200 million over the first quarter, related primarily to increased industry volume.

Pricing and costs were both in line with the first quarter.

Other was favorable approximately $100 million, driven by favorable foreign exchange, mainly due to a stronger British pound.

Before I move on, I also wanted to provide you with an update on the restructuring efforts in Europe.

The restructuring plan is focused on significantly lowering our breakeven point through cost savings and continued product innovations.

In May, we announced that we've reached agreement to offer separation packages to employees at the Antwerp production facility, and we'll participate in a search, led by the Flemish government, for an outside investor.

If an investor cannot be found, we plan to cease production at Antwerp by the year-end.

As of June 30, approximately 1,300 employees have been separated and we expect the remaining 1,300 employees at that facility to be separated by the end of December if the facility is not sold.

We also plan to achieve further employment reductions from other planned rationalizations and separation programs.

In total, our plan comprehends an 8,300 employment reduction by 2013 with the majority occurring by the end of 2011.

Also, in May, we reached an agreement with the Works Council on a EUR265 million in annual employee cost concessions.

As far as product introductions, we plan to introduce 14 new Opel or Vauxhall products by 2014.

This includes products targeted at mainstream, high volume segments such as the Astra Sports Wagon and the new Zafira.

We also plan to add products in segments we previously did not compete, such as a small SUV built in Korea.

Finally, we plan to introduce alternative propulsion vehicles such as the Opel Vauxhall Ampera scheduled to launch next year.

Based on this plan, we expect Europe's breakeven level to be lowered to approximately 14.5 million unit Western European industry on an EBIT before restructuring basis by next year.

Turning to slide 16, GM International operations delivered 995,000 units for the second quarter, down 36,000 from the first quarter.

This decrease was primarily attributable to a reduction in the GM IO industry.

The industry declined approximately 450,000 units from the first quarter, primarily driven by reductions in Japan and China.

GM IO market share, however, was up 0.1 percentage points to 10.3% for the second quarter.

The increase in share is mostly attributable to country mix, due to the significant decrease in the Japan market in which we have a relatively small market share.

Focusing on China, our deliveries for 586,000 units for the second quarter, a reduction of 38,000 units from the first quarter.

The decrease was driven by 5% or 210,000 unit reduction of the industry, as well as a 0.2% decline in our China market share to 13.1%, resulting in a slowdown in the light commercial vehicle market where we enjoy strong market share.

GM's market share in Brazil also decreased 1.5 percentage points to 18.4% and share in India decreased 0.2 to 4% for the second quarter.

In Brazil, the decline in market share was due to aggressive pricing actions by certain competitors, which were not fully matched by us, as well as some competitive product launches by our competitors.

The market share decline in India was primarily attributed to new product launches by our competitors in the high-volume, mini-car segment.

On slide 17, you'll see that GM International operations net revenue was $8.6 billion for the second quarter, an increase of $500 million over the first quarter.

This improvement is primarily attributed to the fully consolidated production increases, 40,000 units related to inventory builds, as well as increased export sales of key GM Daewoo launch products, including the Cruise and the Spark.

Turning to slide 18, International operations earnings before interest and tax, was $0.7 billion for the second quarter, a reduction of $500 million from the first quarter levels.

Equity income, primarily related to our Shanghai GM and SAIC GM Wuling joint ventures, held constant at $400 million.

EBIT at our consolidated entities decreased by $500 million.

Slide 19 provides the details and major components of that reduction, where you see volume and mix was favorable, approximately $100 million, largely due to increased GM Daewoo volume.

Price was unfavorable, however, approximately $100 million, primarily due to increased sales allowances in response to the expiration of government-based incentives at the end of the first quarter in key markets such as Brazil.

Cost was unfavorable approximately $200 million, primarily related to high engineering and product development costs in support of future launches.

Other was unfavorable $300 million, primarily related to $100 million of unfavorable mark-to-market adjustments on derivative instruments; $100 million in provisions for receivables and inventory adjustments; and $100 million related to the absence of favorable adjustments experienced during the first quarter.

Now let's look at cash flow.

Slide 20 provides a walk from net income attributable to common stockholders to free cash flow.

Focusing on the second quarter and net income attributable to common stockholders, as we've said before, was $1.3 billion.

After you add back non-controlling interests as well as preferred dividends, net income was $1.6 billion.

Non-cash depreciation and amortization expenses totaled $1.7 billion in the second quarter and exceeded our capital expenditures by approximately $600 million.

The combination of working capital and other was $600 million positive.

Our production volume was higher in the second quarter in all regions compared to the first quarter.

We did build inventories in Europe and IO as we prepared for the holiday shutdown and to accommodate higher demand.

Additionally, we received approximately $600 million in net cash dividends from our China joint ventures.

This walks us down to a net cash provided by operating activities of $3.9 billion for the second quarter.

After we deduct our capital expenditures of $1.1 billion, free cash flow was $2.8 billion for the quarter.

We expect capital expenditures to continue to accelerate for the remainder of the year and are targeting approximately $5 billion to $5.5 billion for the entire calendar year.

Slide 21 provides our key balance sheet metrics.

We maintained a strong liquidity position at the end of the second quarter with a cash and marketable securities balance of $32.5 billion.

Total debt had a face value of $9.7 billion or $8.2 billion book value in the second quarter.

The $6 billion decrease in book value versus the first quarter is primarily related to the $5.8 billion we paid down to the US Treasury and the EDC debt, and a $200 million paydown, and the $1.3 billion GM/Daewoo revolving credit facility.

Preferred stock issued at the UAW VEBA Trust and the United States and Canadian governments remains unchanged.

Global underfunded pensions were $26.4 billion for the second quarter, and the $500 million reduction versus the first quarter is primarily attributable to planned contributions of $200 million as well as the translational impact of foreign currency exchange, partially offset by the negative impact associated with a re-measurement for our German pension plans.

OPEB obligations were valued at $9.3 billion at the end of the second quarter.

The $100 million decrease is primarily attributable to the payment of benefits in excess of expense and does not reflect the impact of any planned re-measurings.

So let me close on slide 22.

The second quarter marks two consecutive quarters of profitability and positive cash flows, which are clear signs that we're making progress towards our goal of achieving financial health.

I do expect our results to moderate for the second half of the year.

We had some favorable items in the first half -- for example, the favorable lease residual adjustments, the FX impacts, and some inventory build that I mentioned.

Having said that, I still expect this year overall to show solid profitability, reflecting how much progress we've achieved in a short period of time.

In particular, we continue to deliver on all major business objectives.

We increased market share in all regions relative to the first quarter; we launched world-class vehicles such as the Cadillac CTS Coupe and the Buick Regal in the US during the second quarter, as well as the Opel Vauxhall Meriva in Europe and the Buick Excel in China.

We're now selling more vehicles in the US with four brands than we were last year with eight and with lower incentives.

We're executing on a European restructuring plan and we're making important strategic initiatives, such as the acquisition of AmeriCredit.

And last, despite increased production volume, we continue to maintain our cost discipline.

So with that summary and those introductory remarks, let me take some of your questions and I'll hand back to Randy for that.

Okay, thanks, Operator.

If you could please open it up for questions from the analyst community, we'd appreciate it.

(Operator Instructions).

Rod Lache, Deutsche Bank.

I guess my first question is -- North America seems to have had a very large impact from the volume change sequentially that you highlighted.

Could you just walk through that with us again?

And in Q1, you commented that there were some unusual items in support of the profitability in that division.

Would you make the same comment about what you're showing in Q2?

Or is this nearly 8% margin that you're showing here what you would consider normal at this level of volume and mix?

Yes, sure, Rod.

A couple things.

Firstly, the industry was up overall, as you know.

So, first quarter, we were running at around 11.2 million; the second quarter, 11.5 million.

So, a little lift in the industry, plus our market share was up from 17.8% to 18.7% in the second quarter.

So the combination of those two positive impacts is the resulting revenue and volume increase from our point of view.

In terms of your questions on the first and second quarter, both quarters had some positive impacts.

For example, in the first quarter, we had a very strong inventory build.

In the second quarter, we had some favorable lease residual adjustments.

So with the strength in the used car market, we were able to reverse some of the provisions that we made from leases that we wrote two or three years ago.

So, those were some positive impacts that I don't necessarily expect will happen in the second half.

So I'm assuming that the second half will be lower than the first half.

You'll see a moderation.

Having said that, clearly, in particular in North America, we've lowered our breakeven point to the extent that as long as the industry is at or around our current levels -- or better, for that matter -- we'll still be profitable; perhaps not as much as we saw in the first half, however.

I guess just to clarify, Chris, you had a $600 million improvement sequentially that you're showing here in your slide 11.

And you had something like a 63,000 unit increase in production.

It's a pretty impressive incremental margin per unit.

Is there something unusual there that's driving that?

Or is that the kind of sensitivity that you would have to an increase in volume?

Well, again, I point to -- I don't think you can do it on an absolutely marginal basis, because there's some other items -- you know, lease residuals that I mentioned, that was a $300 million or $400 million impact.

So you need to back out some of those to get a true sense of the marginal benefit from the vehicle addition.

Having said that, clearly, we're in a fortunate position that, having lowered our breakeven to where it is, marginal sales are relatively profitable from our point of view, in terms of the contribution that you see.

So I don't think you can do the math quite as simply as you did, but directionally, you're correct.

And just lastly, if you can give us some color on your outlook for the international ops ex-China and Europe, just broadly speaking, what are you seeing from a macro perspective?

If I start with China -- I know you said ex-China -- but China, we are seeing some price pressure there and inventories have definitely built in the first half.

So we're still overall, obviously, very positive on the trends in China, but you saw the industry slow from the first half, when it was up some 70% to 80%; it's up 50% for the first half.

So it's slowed somewhat, but it's still obviously very healthy growth, albeit with some price pressure.

So, again, we think we're in a good position; we're certainly profitable there with great market share.

In the second half, we could have a little bit of price pressure.

On our other international operations, it's more of the same.

So, South America was up, depending on the market, somewhere between 15% and 30%; no reason to suspect that's not going to be the case there afterwards.

So, most of the international markets outside of North America and Europe remain relatively healthy.

Okay, thank you.

Brian Johnson, Barclays Capital.

Yes, Chris, what would you say was in the bucket of the sort of known good news and perhaps maybe some of the negatives, even if modest, in the quarter that developed?

And on that latter point, what kind of corrective actions are you going for?

Well, I think most of -- the quarter really unfolded to a large extent how we expected, albeit at the top end of expectations.

So sales were very good in North America and they certainly continued very well.

You saw that in our market share numbers.

Europe, despite the fact that we lost money there, we lost around $200 million, but there were restructuring costs in that number.

So, if you exclude that, we're getting close to a breakeven situation in Europe, at least in the quarter.

And then the international operations -- we had a little weakness in market share, as I mentioned in the prepared remarks, in places like Brazil and India, but we still, in particular in South America, have very strong position and China continued well.

So I would say there wasn't anything in the quarter that was particularly negative that required corrective actions from our perspective.

Clearly -- you know, the overall market conditions are reasonable but they're not favorable.

So we're still having to work very hard for the sales that we do get; but if we continue to see progressive recovery in North America, which is what our underlying assumption is, then we like our position at the moment.

And there's nothing, from my perspective, that needs significant change in direction from what we're doing in the first two quarters.

So a couple drill-downs.

In Europe, even though headcount was down, we didn't see it on the cost line.

Is that because restructuring costs or the timing of the headcount reductions [flooded] not the flowthrough?

Correct.

Yes.

As I said, we had the best part of $200 million of restructuring costs.

So we are in a transition phase in Europe.

And you're continuing to see those restructuring costs through the second half as well.

We're likely to have $200 million to $300 million of restructuring costs in each quarter in the latter half of the year, as the people actually physically leave.

So we're in transition there and you will not see the net positive impact of that until next year.

And in Brazil, the pricing actions of competitors in the product mix -- is there anything in your product cadence that's going to get better over the next, say, six months to a year to offset some of that?

Not significantly, but we think it's stabilized down there.

So there's nothing that we think directionally is going to be significantly positive; but at the same time, we just think that was a one-quarter event.

So we're not concerned on the overall position.

And we do have a couple of product launches over the next year.

So I think the Brazil situation was a one-quarter events, not a trend.

And nothing funny around the Daewoo earnings stream?

Because I know that manufacturing profits that are often booked in other -- the full profitability is often booked in the other regions.

No, nothing unusual there to note at all.

It was a rather good quarter from GM Daewoo's perspective.

Okay, next question, please.

Himanshu Patel, JPMorgan.

Hi, Chris.

Wonder if you could just comment for the next two or three years how we should think about, just directionally, the pace of costs to add back into the North American business?

Do you sort of view it as fairly steady and gradual with volume?

Or is there sort of a level on the US SAAR, after which fixed costs add-backs become fairly abrupt?

In fact, we're in a reasonably good position there.

Our overall operating level is about 90% at the moment, so we obviously have the ability to go to 100%.

And that's on two shifts.

So we have the ability to add a third shift on our current footprint.

So for very modest levels of Capex, we can accommodate a SAAR that certainly takes us to trend line or perhaps above.

So, you aren't going to see any significant additional fixed costs over and above what you're seeing at all.

In fact, we're in a very favorable position as we sit here today.

So we could add 30% to 40% on our current capacity levels without any significant change in our capacity.

Now, having said that, obviously, the exact footprint isn't necessarily exactly aligned with the market.

We're short on some vehicles and long on the others.

So we may need to change the configuration around a little, but in terms of our aggregate capacity level in North America, we're in extremely good shape for anything we're likely to see in the next two or three years.

And then there was some discussion on international markets.

I'm wondering if you guys could update us on just your thoughts on the US market?

I mean, there's been some -- a bit of a slowdown in July US auto sales.

I don't know how you're feeling about August; but I mean, have you guys perhaps moderated your view on the pace of economic recovery in the US?

No, we're still looking at US SAAR for the year of [11.5 million] to [12 million], which is pretty much what we started the year with.

And July was a modest increase, was only 1% or 2%; but remember, July last year, we had the Cash for Clunkers comparison.

So the fact that we actually had a increase year-over-year, I think was positive.

And when you look at the quality of that increase in July, retail sales were up strong.

I think the retail SAAR was 9.5 million to 10 million units compared to sort of running in the [8's] in the first half.

So, retail was up strong and pickups were up, too.

So the quality of the sales in July was actually pretty good and it was an increase over a pretty hard comparable last year.

So, it's still modest.

We're still talking about steady gradual recovery in the US, but there's nothing to suggest that the level of recovery is going to turn down at this stage.

Now, clearly, what happens in the overall economy we can't be insulated from at all, but also remember we're still only running at 11-point-something million SAAR; it's still well below trend.

And then last question, just wanted to clarify, I think you mentioned your target was EBIT breakeven in Europe at 14.5 million Western Europe industry.

Was that a Western Europe SAAR number you guys were quoting?

Yes.

Okay.

Thank you.

Okay.

Next question, please.

The final question from the analyst portion will be from Ravi Shanker with Morgan Stanley.

Please proceed.

Actually it's Adam Jonas from Morgan Stanley.

(multiple speakers) The $300 million sequential reduction in price in North America -- is that all attributable to seasonal factors and the '010 run-outs?

Or was there anything else there?

Just want to confirm that.

There's nothing unusual.

It was essentially all in the incentive program, which we showed on one of the charts.

And that incentive program was primarily driven around cleaning out the '010.

(multiple speakers)

Great.

Is the industry still behaving then?

Well, certainly in terms of what we're doing.

We're still disciplined in what we're doing.

Understood.

I was -- a second question -- I was surprised to see the tax rate at 23%, given the $19 billion of NOLs.

Can you just confirm, are you paying taxes in the US right now?

Or is that rate that we're seeing -- is there a non-cash element to that?

Any visibility there?

Yes.

No, we're not paying income tax in the US but we do pay tax in other jurisdictions where we don't have tax losses -- for example, the profitability we make in Brazil and some other countries around the world.

So the tax rate you see is an amalgam of all of those impacts.

Okay.

You're correct -- we're still in a strong, large NOL position in the US and not paying -- currently paying tax here.

Okay.

And then finally, just the dividend stream from the equity affiliate, I didn't hear you very well -- did you say it was sort of $600 million in the second quarter?

Yes, that's correct, $600 million.

And essentially, there's a one-year lag so we tend to pay out the earnings from previous years.

So that reflects the level of profitability that we had in those joint ventures from last year, but a strong $600 million [dividend].

So we can just look at -- so this magnitude will -- we can look at last year, lag at a year, and each quarter you'll be getting that on a quarterly basis?

It's not quarterly; it tends to come in in lumps once a year.

Okay.

So this is the lump then?

Correct.

So we won't have this for the rest of the year then?

That's correct.

In the second quarter of each year, you can expect a one-off impact from (technical difficulty) and [breaking] positive.

Okay.

Thanks very much.

I think we're going to hand over to media at this stage, so we'll take media questions, I believe.

Operator, we're all set for the media questions, if you are.

Thank you.

We'll proceed with the media portion of the question-and-answer session.

(Operator Instructions).

Our first question comes from the line of Kevin Krolicki with Reuters.

Please proceed.

Hi, Chris.

Wonder if you could tell us where you are with the bank credit facility?

Yes, there's nothing public that we're talking about.

There's obviously been some reports in the paper, but if I just talk about conceptually what we're trying to do with the balance sheet, consistently through this year, we've been looking to [re-strengths] in the balance sheet and put it on a sustainable basis.

So we look to pay down the direct US government and Canadian government loans.

Earlier this year, as you know, we're building cash backup and a revolving credit facility is a logical part of that.

So you will see us through the course of this year continuing to put the building blocks in place for what I'd describe as a very strong and sustainable balance sheet.

Thank you.

Todd Lasso, Motor Trend.

Good morning, Chris.

You spoke about the fleet percentage remaining somewhere around 25% to 27%.

Is that right?

Yes, that's for the year.

It was higher than that in the first half -- I think it was around 33% for the first half, but we expect it to moderate in the second half and get down to that 25% to 27% level for the full year.

Can you can talk a little bit about how that mix breaks up between, say, pickup truck, construction fleet, and rental, daily rental fleet?

I'm going to hand that one to Chuck Stevens, who runs our North American operations.

Yes.

When you look at overall fleet, about two-thirds of it is daily rental fleet and one-third goes into commercial and government.

And within the daily rental, we sell across a broad spectrum of products, obviously, but primarily mid-sized sedans and small compact cars.

So the fleet or the truck portion of this is really over in the commercial side of the business.

And we haven't seen a significant increase in that yet, vis-a-vis recovery in the construction market, which is somewhat tempering our second half of the year on fleet.

Okay.

No significant change.

Okay, thank you.

Thanks.

Next question, thanks?

I believe it is our last.

Tom Krisher, Associated Press.

Hi, Chris.

(multiple speakers) I was wondering, if you had to pick a single factor in the turnaround from the second quarter of last year, what would it be?

Transaction prices, the lowered expenses?

Capacity utilization?

Well, it is a situation where it's all of those things and there really isn't one single factor.

I think that's the remarkable and very pleasing factor here.

It's no one single factor; it's all of the issues that you've mentioned.

Clearly, it's been better transaction prices, but better transaction prices in turn reflect higher gross prices and lower incentives.

So you've got two factors inside that.

Lower costs and costs -- that's really across the board; that's helped by capacity, but it's also helped by the fact that we've got four brands rather than eight that we're spending all of our marketing and other money associated with.

And then, clearly, on our balance sheet side, we have a restructured debt position and a strong positive cash.

So, it's all of those factors rolled into one.

There isn't really one single one at all.

Okay.

And I suppose I can indirectly ask this question about the IPO.

I'm supposed to have a vacation day tomorrow.

Should I take it?

(laughter) Well, that is the most creative way I've ever heard of anyone asking about it.

I'm trying.

No, it's very much no comment on the IPO, as Randy said at the start of [his comments].

So thanks very much for the question anyway.

It was worth a try anyway.

Okay, Operator, I think that concludes this segment of the Q&A.

And with that, I'd like to turn the call over to Ed Whitacre, GM Chairman and CEO, for some brief remarks.

Ed?

Okay, thank you, Chris, and thank you, Randy, and good morning, everyone.

I hope you enjoyed hearing those great results as much as I did.

Results like these make it clear that the new GM is on the right track with good momentum behind this and a bright future ahead of us.

And also it gives me a lot of confidence to begin transitioning in new leadership at General Motors.

So this morning, I am pleased to announce that, effective September 1, I will step down as CEO of GM.

Dan Akerson, who currently serves on the GM Board, will become CEO at that time.

I will remain Chairman of the Board until the end of the year, and then Dan will assume that role as well.

Now this is something that the Board and I have been contemplating literally since I joined GM.

At this stage of my career, it was obvious that I was not going to be at GM for the long haul.

My goal in coming to General Motors was to help restore profitability, build a strong market position, and prepare this iconic company for success.

Today, we are clearly on that path.

We have put a strong foundation in place, so I am very comfortable with my timing.

I'm also very comfortable with the Board's decision to make Dan Akerson the next CEO and Chairman.

Dan has played a big role in the key decisions and changes at the new GM.

Dan brings broad business experience, decisive leadership, and continuity.

The transition will be smooth, and he will build on the positive momentum we established since we came here in July of 2009.

I am excited about this.

I know Dan will do a terrific job of leading this Company forward.

He has a great team around him and the complete support of the GM Board and employees, who are the best in the business.

In fact, Dan is on the line with us this morning and I'd like to turn the call over to him for a few quick words.

After that, we'll be glad to take a few questions.

So, Dan, you please go ahead?

Thank you, Ed, and good morning, everyone.

It's a pleasure to be with you today.

I wanted to take a couple of minutes to express my gratitude to Ed Whitacre and to the Board for their confidence and this opportunity at this point in time.

As many of you know, I joined the GM Board in July of 2009 after a long career in telecommunications and finance.

I've been actively involved, as Ed noted, in the decisions that are now helping the new GM move forward.

Since joining the GM Board, my admiration for this Company and my appreciation for this industry have grown tremendously.

So when the opportunity came to serve as CEO, I was proud to say yes.

I continue to be impressed with the strength of our Company, the quality of our products, and the dedication of our employees, dealers, and other stakeholders.

I've watched GM regain momentum in North America, tackle head-on the tough challenges in Europe, and continue our rapid growth in China, Brazil, India, and other key markets.

We still have important work ahead of us, but I'm confident that we are building the foundation for GM's long-term success.

Personally, and on behalf of the Board, I'd like to thank Ed for restoring GM to profitability, building a strong market position, and giving this iconic company a bright future.

GM is very fortunate that he came along when he did and I am glad that he's staying on as Chairman.

He's still at the helm of the Company, so at this point in time, I think it would be premature for me to discuss my plans or vision for the future of GM.

That means that it's probably fair to say that we, Ed and I, share a common vision of the goals and objectives for the Company.

I will say this -- Ed's vision of simplifying the business, of giving people the authority and accountability to do their jobs, and keeping them focused on designing, building, and selling the world's best vehicles, has served the new GM extremely well.

I expect this will continue to drive our success going forward.

Let me now turn it back to Randy for any questions you might have.

Okay.

Thank you, Dan.

Thank you, Ed.

Operator, we're ready for a few questions from the media.

(Operator Instructions).

Greg Garner, Detroit Free Press.

Okay.

Obviously, my initial question's kind of changed gears, but I'll stick with it.

Okay -- of the 2,000 people increase in hourly employment, how many of those were new hires at the lower wage and how many were simply called back from being on lay-off?

I think what we'll have is Chuck Stevens provide some perspective on that.

Yes.

Fundamentally, the increase in our hourly employment is a recall of employees on lay-off to (multiple speakers).

(multiple speakers).

Go ahead, Greg.

Okay.

And then, can you give some guidance on what will happen to incentive costs in the second half, given that 2010 clearance activity typically is fairly strong in August and September?

Greg, I'll take that question off-line and I'll give you a call off-line.

Okay.

Operator, if we could go to the next question, please?

Chris Isidore, CNN Money.

I was wondering how much Mr.

Akerson has been involved in day-to-day, up to this point, with his time on the Board and how much this will be a new experience for him?

Well, let me try to take that.

Ed, would you like me to take that?

Dan, this is Ed Whitacre.

Dan and I have been close for a number of months.

He's been on the Board.

He's been very involved.

I think the transition will be very smooth.

He's aware of the things going on at General Motors, so I think this will be a very smooth transition.

Thank you.

David Shepardson, Detroit News.

Ed, can you tell us why you decided this was the right time to for you to leave, given there's a lot of work that's left to be done?

And why did the Board choose Dan as opposed to looking outside the Company or picking someone else with auto experience?

Well, as I said earlier -- and the Board has been aware of this since the day I became CEO -- it was my plan all along -- and the Board was aware -- it was my public duty to help return this Company to greatness and that I didn't want to stay a day beyond that, really.

So I think we've restored the profitability; we've built a strong market position; we've positioned the Company for success, and things look good.

There's a foundation in place, a good foundation.

So I see no reason to delay.

The Board has been aware of this since the day I took the CEO.

I believe we've accomplished what we set out to do.

Dan has been involved every step of the way.

He knows this business from a Board perspective and also from personal conversations.

So I think he's absolutely the right choice.

Did you consider anyone else for the job?

And Dan, could you talk a bit more about how you might change gears when you take over in a couple weeks?

Well, I can answer the first part of that.

As I said, the Board's been aware of my plans since the day I accepted the position.

There obviously have been discussions, but the Board was ready to act when I told them that I thought the timing was right for me to step down as CEO.

So we're going to have a smooth, seamless transition here and I'm very comfortable with it.

And Dan can certainly talk to it but I know he's comfortable also.

My perspective on this, as I noted in my comments, Ed and I share a vision, a common vision for the Company -- where it is today, where we hope to take it into the future.

Rather than kick off a number of priorities or areas of focus, I think that would be a bit premature.

Ed is still at the helm.

And once the transition is made in the September timeframe, I'd be in a better position to articulate specifics.

Okay, Operator, I think we're ready for the last question.

Thank you.

Our final question comes from the line of Tom Krisher with Associated Press.

Please proceed.

I got two; it's a pretty good day.

Dan, do you have any management changes in mind?

Would there be something else coming?

Or would you kind of figure continuing the present course?

Well, in fairness, I know the management quite well.

I think Ed has made significant changes in his period, his tenure as CEO.

I think this is a broad and deep bench across the front of the Company.

And I think the next level of management, as I have been able to perceive, is quite good.

This is a great Company with great people.

And at this stage, the biggest management transition is me.

I have to get in, get my feet on the ground, and get a day-to-day operational perspective on the business before I'd be prepared or willing to discuss that particular subject.

Okay.

But it doesn't sound like there would be any drastic changes?

You wouldn't foresee any drastic changes, because you feel the Company is headed in the right direction now?

On that, I think that's a fair assumption.

Very good.

Thank you.

Okay.

Thank you, everyone, for your time today.

We appreciate it.

We look forward to Q3 earnings.

Thank you.

Thank you, all.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you very much for your participation and ask that you please disconnect your lines.