May 3, 2007
TRANSCRIPT SPONSOR
Executives
Randy Arickx - Director IR and Financial Communications Fritz Henderson - Vice Chairman and CFO Paul Ballew - Executive Director of Global Markets and Industry Analysis
Analysts
Himanshu Patel - JP Morgan Jonathan Steinmetz - Morgan Stanley Rod Lache - Deutsche Bank John Murphy - Merrill Lynch Brian Johnson - Lehman Brothers Robert Barry - Goldman Sachs Chris Seraso - Credit Suisse Jon Rogers - Citigroup Ronald Tadross - Banc of America Securities Mark Warnsman - Prudential Eric Feli - JP Morgan Jui Chakravorty - Reuters David Wells - BusinessWeek John Stoll - Dow Jones Tom Crutcher - Associated Press Jeff Green - Bloomberg News
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the General Motors' First Quarter 2007 Earnings Call.
During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.
(Operator Instructions). As a reminder, this conference is being recorded Thursday, May 3, 2007.
I would now like to turn the conference over to Randy Arickx, Director, GM 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 2007 first quarter results that we sent to you earlier this morning.
I would 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 content of our conference call will be governed by this language. I should also mention that to comply with the SEC Regulation G, we've provided some supplemental charts at the end of these that we'll be speaking to today in order to provide reconciling data between managerial financial results as discussed today and the GAAP equivalent results that are in GM's financial statements.
I would also like to highlight that GM is broadcasting this call live via the internet and that the financial press is participating as well. This morning, Fritz Henderson, our Vice Chairman and CFO, will cover our first quarter earnings review.
After the presentation portion of the call, about 30 minutes will be set aside for questions from security analysts, followed by 30 minutes of question with the financial press. I would also like to mention, we have several other executives available to assist in answering your questions today.
Included are Nick Cyprus, Corporate Controller and Chief Accounting Officer; David Meline, CFO of GM North America, Paul Ballew, Executive Director of Global Markets and Industry Analysis and Walter Borst, Corporate Treasurer. I would like to now turn the call over to Fritz Henderson.
TRANSCRIPT SPONSOR
Fritz Henderson
Thanks, Randy. Good morning, everyone.
Turn your attention to chart two, a quick look at the first quarter highlights. GAAP net income, $62 million, from a standing back it was slightly above breakeven for the corporation.
Adjusted profitability of $94 million pretty much the same message there. Automotive results improved $0.3 billion versus the first quarter of '06.
North America was $0.2 billion of that. But in the automotive business, we also had quite a record net income at GMLAAM, strong results at AP, Europe was off slightly.
And I'll talk about that when I get to the Europe chart. Record Q1 revenues for both GM Europe and LAAM and all-time quarterly record revenue for GMAP Global share was virtually flat, as anticipated in North America, reductions largely as a result of both inventory and fleet, and I'll talk about those numbers a little bit later.
Up 15 by all the other regions and from a cash flow perspective, we generated positive adjusted automotive operating cash flow of about $0.3 billion. Page 3.
Just some accounting or reporting matters to bring everybody at the speed on. First, we had implemented FAS-158 this is the accounting for pensions and healthcare.
We early adopted the measurement dates to bring us to January 1st, while all of our plans that resulted in $0.8 billion net increase to stockholders equity as of 1/1/07. Second, we adopted FIN 48, which requires a more-likely-than-not tax with respect to contingent tax exposures.
We recognized the impact of FIN 48 as of January 1st and that resulted in a $137 million increase in retained earnings as of that date, with corresponding decrease in tax reserves. And then, we have made two revisions to our income statement with the sale of 51% of GMAC.
We bring GMAC to the equity method of accounting in the first quarter of this year. What we did as a result is we place revenues and expenses for Finance & Insurance Operation shown as separate line items, as one line items, one for revenue one for expenses.
We think provides a better visibility into our core automotive operations, we also have added other automotive segments to capture eliminations related to sales between automotive regions. So, that's something, we wanted to point out that you are going to see in the result and you will certainly see in more detail, when we file our Q.
First quarter, page 4, looks at automotive profitability on adjusted basis. North America at an $85 million loss of $166 million improved from the first quarter of last year Europe, $42 million profit, frankly slightly above break even, $89 million deterioration from the first quarter last year and again, I will talk about some of the drivers for these later.
GMLAAM $201 million all time record first quarter for GMLAAM, very solid performance, as was GMAP $150 million, the $53 million improvement was achieved despite the fact that we did not record in the first quarter of '07 equity earnings from our investment in Suzuki. We sold our investment Suzuki in March last year.
So, a good result for AP. Automotive at $304 million improved $264 million year-to-year.
GMAC off $610 million from last year our portion of the losses at GMAC, over $115 million in the first quarter this year versus the $495 million profit in the first quarter of last year. So, the swing at the GM level was $610 million, I have a few more things to say.
Corporate other, improved $90 million largely as a result of lower legacy cost. We also have earnings from massive carve outs that are actually captured in that category.
And, you'll see earnings per share as a result. Production on a global basis was down 75,000 units, but I will take you through what that was by region, as I get to the chart.
Page 5. The adjustments income, actually not many of them this quarter, you can see the net adjustments for special items $32 million unfavorable in the first quarter of this year, relative to the first quarter last year, you can see, first quarter of last year, we had $143 million of restructuring related charges.
But we also had the gain on the majority of our stake in Suzuki, which was a little under $400 million in the first quarter of last year. So, you could see that at the GAAP net income line, this year $62 million pretty much a breakeven result from last year's $602 million.
I remind the folks participating here that we do look at our earnings both on an adjusted and the GAAP basis. And the reason we look at the adjusted earnings is because we think, first of all, how we will manage the business.
Second of all, it's useful in terms of looking at ongoing performance and with comparison to cost reporting period. So, we provide both types of data.
Next chart page 6, scale in North America. You can see North America revenue up $2.4 billion, pre-tax profit improved, net income improved and you can see the net margin is 0.3% in the first quarter, again pretty much operating at a lot breakeven.
We were down 192,000 units of volume in the first quarter of '07 versus the first quarter of '06. Two primary drivers of this, in the first quarter of '06, we build a little over 100,000 units of inventory, which we customarily do actually between December, 31 and March 31.
We did not do that this year. And so, about 100,000 units was a result of an inventory build in the first quarter of last year which did not take place this year.
Second, we were down about 66,000 units of the daily-rental sales and that was part of our conscious strategy to bring our sales to daily-rental, frankly to improve their profitability. And then do it as part of an overall marketing strategy, sales and marketing strategy, which is intended to provide the right balance of sales to rental companies’ vis-à-vis retail within North America.
And all of you commented about this a little bit. But those two factors were the primary reason why volume was down year-to-year.
Our market share down 1.1 points which is largely driven by this specific choices we made around retails. If you look at the US, the US market in the first quarter ran about 17 million units.
Not terrible, not great. But generally, in line with what we thought the industry might run at for the year as we came into the year.
We'll have a few comments to say about mix and Paul Ballew is here with me today. So, questions about that, I can have Paul come in later during the Q&A.
Market share is down for the same reasons, I mentioned before. You can see the change in retail fleet mix.
Fleet was 25.5% of sales in the first quarter of '07 versus 30% last year. So, when you look at our retail market performance, we were pretty much in terms of volume, slightly above where we were in the first quarter of last year.
So, in terms of our retail performance, we're not overjoyed with our results. I think we were encouraged by what we saw.
Dealer inventory. As I mentioned before, we did not build in the first quarter of '07 relative to year-end '06.
And we were down there in terms of dealer inventory about 91,000 units year-over-year. Vehicle revenue per unit.
We were up a little over $1,000 in the first quarter of '07 versus the first quarter of '06. This continues to trend that we've seen certainly over the last five quarters.
We are able to improve both model and option mix, in part due to the success, actually in large part due to the success of many of our launched vehicles. So, we were encouraged by this.
We'll talk about what that impact was in the P&L in a chart or two. But, when we look at performance from a revenue perspective vis-à-vis volume, we are encouraged to see continued progress in terms of improved revenue per unit.
You can see on the chart, we've got both vehicle revenue per unit as well as the GAAP revenue per unit. You can see, on that basis results will significantly improve.
Page 8, walks you from the first quarter of '06 profitability for North America on an adjusted basis to the first quarter of '07 from $0.3 billion to $0.1 billion or $0.2 billion improvement, with some big moving in parts. First, volume down 192,000 units was $1.1 billion, unfavorable.
Mix was $0.4 billion, favorable. Mix is really a function of three things.
One, higher margin option content and I will call it, term mix. Second, model mix.
And third, higher mix of retail versus fleet of our total sale. So, three different elements of mix, which contributed or at least attenuated the volume loss partially about $0.4 billion.
Other contribution margin was $0.10 billion, unfavorable. And what you'll see in terms of profitability clearly as you see continued effect of commodity prices with signals earlier this year or at our Analysts Meeting that we expected.
Commodity prices and steel to be unfavorable and be ahead with for us this year and we do see that in our results. But that $0.10 billion is a function of pricing, incentives, material costs and number of other factors.
Net-net it was a $0.10 billion, unfavorable. Pension, healthcare, manufacturing and attrition was $1.3 billion in total with $1 billion in pension and healthcare and $0.3 billion in manufacturing and attrition.
So, pick of that is $1.3 billion of structural cost performance. And then finally, other costs $0.3 billion, the other way as you might expect there are lots of ins and outs, but one other thing that you'll see both in North America and Europe, when we restated our results in '06 for FAS 133.
We pushed hedge gains and losses into various quarters. In the first quarter of '06, we had hedging gains in our results in North America in the first quarter '06 as a result of mark-to-market and restatement.
We did not have those in the first quarter of '07. So, by and large the principal driver of $0.3 billion was foreign exchange and specifically hedging.
Next chart. Other regions, market share growth in all regions outside of North America, GME's profitability was down slightly from the first quarter of '06, due largely to again unfavorable commodities hedging and what that is that we had gains in the first quarter of '06, when we mark those to market, when we didn't have gains in the first quarter of '07.
So, therefore, you add an unfavorable swing, year-to-year. Also, we've had a higher sales mix of smaller cars relative to large vehicles, higher price vehicles and we've had more of our sales in Central and Eastern Europe and specifically, Russia vis-à-vis some of the more traditional Western European Market.
So, Europe, we've seen some modest negative mix affecting us. LAAM adjusted net income tripled to set an all-time record for any quarter.
Revenues were up 13% with share gains in a very strong industry. AP adjusted profitability was up 55% despite the loss of the Suzuki equity income and revenue was up 35% on a consolidated basis.
Volume was strong. China recall is not consolidated because we've operated, it is essential, but it's certainly a driver of volume and market share.
Looking more closely at GM Europe, you can see both on page 10, a down tick in both in terms of pretax profitability and net income. Basically GM Europe operated in a lot breakeven.
It had a 0.5% net income margin. When you look at the volumes across Europe, up and when you look at Germany and the UK.
Germany was slightly down year-to-year. UK was slightly was up year-to-year.
We've broken out here Russia for the first time to give you a sense of what's happening in the Russian market, it went from 1.8 million units SAAR in the first quarter of '06 to 2.3 million units SAAR in the first quarter of '07. Our market share went from 5.3% to 9.5%.
So, we are growing relatively quickly in Russia. We look at the profit change year-to-year.
A couple of things, one, I would say there is an unfavorable mix effect that's affecting GM Europe relative to the first quarter of '06. And second, where the commodity hedging which I have already mentioned, in the first quarter of '06, we had some commodity gains which were spread in to the first quarter, which didn't repeat themselves in the first quarter of '07.
And those two things were the primary drivers of the year-to-year downtick in the GM Europe profitability. GMLAAM, my favorite chart of the presentation this morning.
GMLAAM had $3.6 billion of revenues, pre-tax profit $255 million, net income 201 million, over 5% margin. You can see the volumes are very strong.
We have showed you the Brazilian market, but frankly GMLAAM in Latin America up to Middle East, it's rare that all the countries are pulling at the same direction at the same time at least through my carrier. This is a quarter when all the countries were pulling in the same direction at the same time and positively.
So, you had strong industry volumes in Brazil, Argentina, Venezuela, Columbia, Ecuador and moving up is Latin America, strong volumes in the Middle East, strong volumes in Egypt, strong volumes in South Africa. So in general, the LAAM business is going strong.
You could see our market share. We actually picked up 0.2% across the region.
So, volume is growing, revenue is growing, and good to see profit growing. GM Asia Pacific.
You see a significant up tick in revenue in the first quarter of '07 versus '06 over $1.2 billion. You see an improvement at the pre-tax income line as well, over $128 million.
We also showed you here, China JV equity income up $48 million. So, we made $127 million in the first quarter on our equity income in China and again our portion of our 50/50 joint ventures in China.
Minority interest is unfavorable year-to-year, largely as a result of improved profitability of GM Daewoo. Therefore the minority interest elimination is larger.
So, as GM Daewoo is increasing improving its profitability, we have more minority interest that needs to be recognized. Net income was at $250 million, up $53 million.
When you look underneath the volumes in Asia Pacific, the SAAR ran at a 20.5 million unit rise in the first quarter, versus $19.3 last year. Our market share, we picked up 0.8% in the Asia Pacific region.
China ran at a high topping 8.4 million units SAAR in the first quarter, up from 7 million units the year before. So, the law of large numbers hasn't caught up with China yet.
It continues to grow at a very, very attractive pace. GM Daewoo, we've also shown you here what happened with production, these are basically completely built units, up 40,000 units year-to-year The Australian market was strong.
Our share was down year-to-year. But frankly, our Holden operation narrowed its losses in the first quarter.
And frankly, that was a help to the improved performance in the Asia Pacific region. GMAC, page 13.
GMAC reported yesterday a $305 million net loss and continued weakness in the mortgage business. It’s a deterioration of about $800 million versus the first quarter '06 it is more than explained by $1.1 billion negative variance at ResCap.
There were other businesses at GMAC, particularly Auto Finance $0.2 billion year-over-year. When you move it into, what GM realizes, we realized a loss of $115 million in the quarter, that number includes not only our 49% interest in the loss at GMAC, but is also includes GM portion of preferred dividends, as well as, a minor amount of tax benefits we recognized for the losses at the LLC unit.
So, when you take GMAC's results in GM, you need to not only take 49% of that, but you also need to pick up our, per rate of portion of the preferred dividends we earn. Moving to liquidity in the balance sheet.
Our gross liquidity position at the end of the quarter remained strong at $24.7 billion beyond that we have $14.6 billion of long-term VEBA assets available to fund healthcare cost over the long-term. The $24.7 included $3.6 billion readily available VEBA assets.
So, we had cash $3.6 billion of readily available VEBA assets of $24.7 billion. Our near-term financial obligations are limited, we had up little over $1 billion of maturities, scheduled in General Motors in '07 those were in the first quarter actually, $1.1 billion of convertible bonds were put to us on March 6.
And we have no additional US term debt maturities in '07. For your interest, we did make our second $1 billion mitigation VEBA contribution on April 30th, that wasn’t in the first quarter it was in the end of the month of April, so it's in the second quarter.
This is the second installment payment associated with the GM-UAW 2005 retiree healthcare agreement. We had a payment that was due in 2006; payment due in 2007 and we have the final payment due in 2011.
Chart 15, looks at the gross and net liquidity overtime. You could see $24.7 billion down from $26.4 billion.
I'll walk you through what the drivers of that are; I guess the cash flow statements. But our overall liquidity position remains relatively strong and clearly we need it in order to make sure that we can finance our turnaround.
Cash flow drivers on page 16. Adjusted automotive operating cash flow amounted to $0.3 billion in the quarter, which has improved about $1.5 billion year-over-year.
We achieved operating cash flow improvement in all four regions. First, in the first quarter of '07 our working capital was neutral.
In the first quarter of '06, there was a working capital burn. So, which you had in a situation you'll see there is some work, last year working capital build-up consumes cash in the first quarter, this year it was neutral.
Second, beyond operating cash flow, our net cash flow was $1.7 billion negative and we drove that one, we had $0.9 billion for cash restructuring cost which includes both at the GM level and as well as for Delphi that we settled, basically paid-off the convertible bonds that were put to us in March. And then finally, we made our $1 billion equity injection back into GMAC at the time of the final balance sheet true up, which we talked about when we released our calendar year earnings.
So the decline in net liquidity from December 31 to March 31 is driven by these factors. Page 17 walks you down the cash flow statements.
It's a relatively simple quarter from that perspective; $0.1 billion of automotive and corp/other net income; depreciation and amortization, $2 billion; CapEx, $1.2 billion. Clearly if you look at $8.5 billion to $9 billion number, even $8.5 billion, you see that our timing of our CapEx was low in the first quarter and you'll re-correct.
We would expect that to ramp up through the rest of the year. You can see that receivables, payables and inventory were neutral in the first quarter of '07 versus a $1.6 billion outfall in the first quarter of '06.
One element, by the way, of the first quarter of '06 that I would point out is, when we implemented our pricing strategy in January of last year, we had significant reduction in incentives and incentive payables. And so, that frankly consumed cash in the first quarter of '06 vis-à-vis certainly in the first quarter of '07.
That was one of the factors. But net working capital was neutral in the first quarter of this year.
I have a chart on pension and healthcare. So, I'll come back to that in the next chart.
The accrued expenses and other, frankly there wasn't a big driver of cash flow in this particular quarter of the $0.1 billion unfavorable versus $0.9 billion last year. So, it was not a big mover in this particular quarter.
Looking at asset sales proceeds last year in GM Suzuki, sale coming at $2 billion. You'll see the cost restructuring costs kicking in.
And then finally if you look at non-operating flows, you'll see the change in debt which is paying off the convertible and then the refund of prior to GMAC distribution. So, finally the change in short-term VEBA, $1.1 billion, but they said, they went from $2.5 billion at year end to $3.6 billion at the end of the first quarter.
And so that's moving cash from one area to another, but it's all cash and liquidities. Page 18; we thought we'd spend a minute talking about pension and healthcare to try to show not only the P&L affected this, but the cash flow affected this in the quarter.
What we've shown here is both US pension and US healthcare. The first line in the table, US pension income, we are in a position in the first quarter of '07 where we have pension income not pension expense.
That's a result of the over-funded nature of our pension plan and relatively attractive returns on investment. We generated $300 million of pension income in the first quarter versus $0.1 billion of pension expense last year.
But, pension income however doesn't generate cash, because in fact it's churned in the pension funds. So, it's actually a use of cash when we go to the cash flow statement.
Healthcare expense in the quarter was $0.5 billion versus $1.5 billion last year. The reason that's down so significantly is the UAW healthcare deal.
OPEB payments, $09 billion. So, what we've shown you here is that OPEB expense is clearly less than our OPEB payments.
And then finally, the item here, outside of US, pension and OPEB adjustments, where we had expense in excess of cash and the primary driver that is Canada actually. So, when we look at the cash flow statement, pension and healthcare was $0.5 billion use of cash in the cash flow statement this year versus $0.6 billion for reserved for cash last year as we are reconciling net income to cash flow.
Delphi, page 19. There have been continuous negotiations, this is the best way to put it, between GM/Delphi investor groups and the various constituencies and the bankruptcies since January.
Delphi did announce an anticipated negotiating changes to agreements with planned investor and changes to the Framework Support Agreement. GM remains committed and we remained involved in trying to reach a consensual resolution and we'll work with all the involved parties on the changes that are required to the Framework Support Agreement.
I pointed out that this deal, longer term, gives us the ability to address in part and overtime, substantial part in overtime the purchase price premium we paid for Delphi parts which were about $2 billion annually. We will however update our disclosures.
First, the continued exposure estimate remains in the $6 to $7.5 billion pretax range. We did not make any adjustments in our reserves in the first quarter.
We did not think those were appropriate at this point. Again negotiations continue, but we still believe that, that range is reasonable and we think that the expected outcome is likely in the lower end of that range.
But obviously, pending any changes to any agreements which might impact them because negotiations continue. One thing we did change however is we changed our estimate of ongoing period costs; you'll see that's in our Q when we file it.
Period costs, which would include reimbursement for certain labor and operating expenses, we increased what we think our subsidies might be required going forward. Labor expenses or subsidies if you will, could amount to in the range of $500 million in '07 prior to that we talked about $400 million being the number for '07.
And ongoing expenses would be a limited duration but would be between a $100 and $200 million annually thereafter. Before our prior disclosures talked about being less than a $100 million.
So, what we try to do is update our disclosures for a more, what we think is more realistic assessment or what our ongoing responsibilities might be in this regard. Again, this does not talk about part pricing, which overtime we will move to a competitive level, in substantial parts.
Finally, we do anticipate some wind down in another transition cost in certain businesses, and that cost could be in a range of $100 million in 2008. All the Delphi numbers remained preliminary obviously, because the deal is not finalized.
Complicated negotiation takes considerable amount of time and but we felt that it was important that we update investors and update our disclosures, based upon what we know today. Page 20, our outlook for '07 in the second quarter, we do anticipate lower North America production, offset in part by higher production in AP and LAAM.
We do expect to see continued year-to-year savings related to attrition, in the hourly retiree healthcare deal. We will continue to ramp up our launch products.
At this point, all the pickup body styles are launched, HD pickups are being launched and Buick Enclave crossover is being launched. So, we are launching some very important products.
We do expect continued strength and high-growth emerging markets, concerns that we've identified here today, certainly regarding volatile fuel prices is probably foremost in our minds and we can talk about that when we have some questions. From a calendar year perspective, we still expect to have improved automotive earnings for the calendar year.
We expect improved negative operating cash flow. And we do expect capital spending to ramp up growth into the first quarter and land somewhere in the range of $8.5 billion to $9 billion for the year.
So, summarize the quarter, strong revenue growth outside of North America. Automotive operations improved $0.3 billion, from the first quarter of '06 on adjusted basis, largely on the strength of the emerging markets.
But we also had little ups in $0.2 billion improvement in North America and substantially lower volume. So, we think there were some positive sign even within the North America results.
The weakness at GMAC was due to continued challenges in the mortgage business. So, other parts of GMAC's businesses are performing well.
Positive adjusted operating cash flow in the quarter was encouraging, although part of that was clearly driven by a lower level of CapEx, which we would expect to ramp up overtime. Our liquidity position remains quite robust at the end of the quarter and as we look into the second quarter, we will continue to focus on trying to bring Delphi resolution.
With that, we'll prepare to take questions. Thank you.
Operator
Thank you. Ladies and gentlemen, we will now proceed with the analyst's question of the question-and-answer session.
(Operator Instruction). Our first question comes from the line of Himanshu Patel from JP Morgan.
Please proceed with your question.
Himanshu Patel - JP Morgan
Hi. Good morning, guys.
Fritz Henderson
Hi, Himanshu. How are you?
Himanshu Patel - JP Morgan
Good. On slide 8, on the North American walk, can we get a little bit more granularity Fritz on the contribution margin?
I know there's a lot of moving parts there but any sense for how much steel was a head win in the quarter? And what happened to pricing?
Was that a positive I presume, given the big negative on steel?
Fritz Henderson
When we met with you in January, we laid out what we saw the impact might be of steel and raw materials for the calendar year. And pretty much we are seeing that roll through.
So, raw materials remained a challenge for us. I would say pricing was net small favorable, very small tough.
So, when we look at it, net pricing was small favorable, material cost was frankly negative, given the pressures we saw in raw materials and commodity. And it came out to above $0.1 billion negative.
So that was pretty much it.
Himanshu Patel - JP Morgan
Okay. And then on the Delphi issue, you mentioned your contingent exposure is still in the $6 billion to $7.5 billion range.
This is just, I guess, an accounting question. In the last quarter, didn't you say that $4.5 billion was transferred into OPEB?
I don't have the accounting works on that, but does the contingent exposure go down because of that, because now it's in the OPEB category now?
Fritz Henderson
Yeah. If you look at geography and the balance sheet, you would have moved a part of that $6 billion into OPEB.
But for a purpose of understanding what's the total cost of the deal would be, we keep focusing back on that $6 billion. But if you look at our balance sheet, we have reclassified a part of that $6 billion into OPEB.
Himanshu Patel - JP Morgan
Right, okay. And then one last question, Fritz.
On the slide, just trying to reconcile a little bit between slide 7 and 8. Revenue per unit saw a very nice $1,000 increase; mix was $400 million increase on your walk on slide 8.
I am just trying to do the math there. I mean it sounded like it should have been may be a more powerful increase on the walk for mix.
Any color on the discrepancy there?
Fritz Henderson
I would say, if you look at our newer vehicles and our launched vehicles. We're getting excellent pricing.
But they are more contended then too. So, it wouldn't just be a pure calculation.
We just take your high revenue per vehicle because many of our new vehicles are well contended and more contended than their predecessors. And so therefore that does provide a bit of I won't call it a drag because actually it was the practice strategy, but it does diminish what you might normally see in terms of the favorable mix uptick.
Himanshu Patel - JP Morgan
Got it. Great.
Thank you.
Fritz Henderson
Thank you.
Operator
Thank you. Our next question comes from the line of Jonathan Steinmetz from Morgan Stanley.
Please proceed with your question.
Jonathan Steinmetz - Morgan Stanley
Yeah, thanks. Good morning.
Fritz Henderson
Hi, Jonathan.
Jonathan Steinmetz - Morgan Stanley
Hi. Actually, I want to keep going on this mix topic if we can.
You have added three things option mix, model mix, fleet retail in this $400 million number. Were any of those disproportionally large drivers relative to others?
And also was there a lot going on in the non-new products what's called some of the mid-SUVs and mid-car and in terms of aging, and there was a big drag on this figure?
Fritz Henderson
I would say, it was in that order. I actually gave the order purposely, option and term mix was first.
Model mix is second. Retail versus fleet mix is third, in terms of relative importance.
I would say, mid-SUVs was the drag in terms of looking at the mix calculation. That would have pulled the number down.
Jonathan Steinmetz - Morgan Stanley
Okay.
Fritz Henderson
And frankly, some of them where we actually had some reasonable performances in smaller vehicle, which actually pull it down but net-net obviously mix is favorable.
Jonathan Steinmetz - Morgan Stanley
Okay. Your $600 million of cash restructuring in the quarter, is there a number that you can provide for the year?
And can you talk a little bit about what that $600 million was forward, that's still paying some folks to go and was that kind of thing related to last year's program or what was in there?
Fritz Henderson
It was exactly that. By and large, some final payments associated with last year's attrition program.
But I would also say, not just North America, also Europe had cash restructuring cost a little bit in AP and Australia. So, it wasn't just in North America.
Jonathan Steinmetz - Morgan Stanley
Okay. So, the numbers for the year though shouldn't be monsterably higher?
Fritz Henderson
I think North America numbers would by and large be, I won't say exhausted in the first quarter, but you'd see those go down. I would say Europe we do expect to continue to have restructuring cost through the year in Europe.
AP you shouldn’t see anything further at this point.
Jonathan Steinmetz - Morgan Stanley
Okay. And last question, related to the Chrysler transaction.
The servers need your authorization to purchase either Chrysler and/or Chrysler financial and have they asked for it?
Fritz Henderson
I think, I'm going to come back to what I've been saying on Chrysler, which is I am just not going to comment. I would say, if you would add certainly the agreements we had at the GMAC level, major transaction like that would require the shareholders to agree but beyond that I'm not going to get into what discussion has taken place.
Jonathan Steinmetz - Morgan Stanley
Okay, thank you.
Fritz Henderson
You're welcome.
Operator
Thank you. Our next question comes from the line of Rod Lache from Deutsche Bank, please proceed with your questions.
Rod Lache - Deutsche Bank
Good morning Fritz.
Fritz Henderson
Hi Rod.
Rod Lache - Deutsche Bank
Also then a stay on this slide 8. One of the things that stands out is this $1.3 billion of cost reduction and the fourth quarter it was $2 billion.
So, could you comment a little bit about what happened to the pace of savings and how this would kind of aggregate up to the $9 billion annualized?
Fritz Henderson
Yeah, I'd say a couple of things. First, last year we actually ended the year at 6.8 relative to 6.
We had a good start, we certainly see ourselves still to be on track to achieve the $9 billion of structural cost savings. I think the first quarter was generally in line with what our expectations were, I think I am quite confident that when we finish the year, we'll achieve our $9 billion goal.
Rod Lache - Deutsche Bank
Okay. Last quarter you had commented on 900 million of pension OPEB, 500 million of manufacturing attrition, 600 engineering, so you got 2 billion there and --
Fritz Henderson
Engineering was lower, if we look at this year, it's actually up. So I'd say manufacturing, when you look underneath manufacturing we do see continued progress there.
You do have some periods where you have economics in it, but when we look at it over the course of the year, again, we expect to be able to land the 9 billion level. I think part of what we saw in engineering, for example, in '06 we did not expect to repeat, in fact, its up in '07.
Rod Lache - Deutsche Bank
Okay. You have a slide that shows that your -- maybe it's in your Release that your hourly headcounts are some 15,000.
So is that the full attrition plan or there is still people on the payroll that aren’t yet at their retirement age, so there is some additional cost savings coming in?
Fritz Henderson
There are still some people in the lead program, the exact number for which I don’t recall offhand, but the vast majority of people have already left. So, the only people that are left would be in the lead program, and that was just one of the smaller parts of the program.
So, you know, by and large, what we identified that needs to be done has been done.
Rod Lache - Deutsche Bank
Okay. And there has been a lot of talk lately about fuel economy regulations.
There is obviously a lot of regulatory costs. Do you have a kind of a way to quantify or characterize the kind of the ongoing trajectory of these regulatory costs as you see them, how big a drag is that on your contribution margin now, and how is that going to look in the out years?
Fritz Henderson
I would say if you look at the impact in the first quarter of '07, I dare say I don’t necessarily know how to quantify it. The concerned day is more of a future, and what the impact might be, and we have to see what happens.
I think I would say, if I look at the impact of regulation, if it were broadly stated in our results, it clearly is a factor, if I think about the changes we made for pedestrial protection in Europe, crash standards in the US. These are particular filters in Europe, I mean, there is a whole host of both emissions, as well as, safety standards which is factored into the results.
But I wouldn’t say in the first quarter results, Rod, that there was anything of specific note. I think the issue is more of what’s the impact longer term.
Rod Lache - Deutsche Bank
One last one, if I could fit it in. Of course, you are in a good spot right now, and your product cycle, we've talked about that before.
You are seeing your average transaction prices up, you are acknowledging some concern about fuel prices going forward. You are not quite where you need to be, by your own acknowledgement, can you just talk about how that sort of plays into some of the big structural changes that you are looking at in the contract?
Does that, in your mind, increase the urgency?
Fritz Henderson
Say, it's easy to go into bargaining. We have had a high sense of urgency, we continue to have a high sense of urgency, and I guess that's how it's answered.
I certainly, when we look at the results of North America, it's good to see the improvement, but it's not good to be operating at a small loss, clearly, given where we are in our product cycle. So, some good things to look at, but frankly, our business is not generating the kind of returns that we expect, and clearly, we have to continue to make significant improvements and that has been foremost on our minds, we work on our agenda going into bargaining and still is.
Rod Lache - Deutsche Bank
Great. Thank you.
Fritz Henderson
Thank you.
Operator
Thank you. Our next question comes from the line of John Murphy from Merrill Lynch.
Please proceed with your question.
John Murphy - Merrill Lynch
Good morning, Fritz.
Fritz Henderson
Hi, John.
John Murphy - Merrill Lynch
I am just trying to gauge where you are in your restructuring efforts here, maybe just a little bit more specifically. I mean, you guys gave a number of cap used for North America of 88.9% in the first quarter.
That kind of indicates your capacity is of about 4.8 million, which seems like your generally on track, but there is still door available and were it to come out in 2008, which is another 500,000 units of capacity. I mean, it just seems like in 2008 there is a whole additional leg of cost savings that comes from that capacity reduction.
Am I viewing this wrong or is there more to come?
Fritz Henderson
There is more to come. I mean, we clearly have some more, you mentioned door that, clearly notable.
So, there is more to come as we wind that down for sure.
John Murphy - Merrill Lynch
So, if you are saving the $9 billion of run rate this year, you are saying there is additional in 2008 then?
Fritz Henderson
Yeah. I mean, we are definitely not stopping, as we look at our cost reduction requirements.
The $9 billion goal was set for us to achieve it, but we are not stopping.
John Murphy - Merrill Lynch
Okay. And then if we look at your residual performance, I mean in the GMAC's sides yesterday it was a pretty good side on the residuals and you are up 1.3% year-over-year, so pretty good sequential improvement there.
I mean, are the improvements in your residuals coming from just your pull back in fleet or is it the pricing discipline or mix? I was wondering if you could parse those factors out on the residual improvement and if you expect it to continue going forward?
Fritz Henderson
I think there is a short answer than I'm going to have Paul give you a little longer answer. But, my short answer is yes, yes and yes.
So, let me have Paul provide you a bit more analytical rigor behind that.
Paul Ballew
I would agree with the yes, yes and yes. And [imperious] it' a number thing, certainly to point back and rent, given the demand for product out there is been a plus for us, it's shown up in the financial dynamics of the rental business for us.
Secondly, we showed some discipline in terms of incentives in the marketplace, what we've done on the leasing, versus where we were few years back. And then I would say thirdly, the acceptance of the new products in the marketplace.
You are seeing substantial improvement for our existing brands and started to tap a little earlier than others. If you look at the jump in residual patterns, in many cases that's been class or at or near the top of the categories we are playing in.
So it's all of those things together, rental being a big driver, but not the only driver of what we are doing. And by the way the rental business for us again is shaping up to be improved business as we continue to execute this strategy and it's helping us on the front-end as well as on the back-end.
John Murphy - Merrill Lynch
And for instance on the CapEx number, you don't have the $9 billion. I mean that's increase from where we have been.
I mean, do you potentially see any additional increases as we go forward to automate production or just on the product side?
Fritz Henderson
I actually think that if you talked about January, we expect to be $8.5 billion to $9 billion for this year and next. We'll talk about this.
We tried to give you some picture each year, we do that January. But, that's what we expect to be certainly in '07 and '08.
John Murphy - Merrill Lynch
And just two housekeeping issues, the COLA give back or adjustment or give up by the actives. How much of that is offset to the VEBA contribution you made.
And secondly on the performance in the pension plan, what was it in the quarter?
Fritz Henderson
First, we don't offset our billion dollar contribution. Our billion dollar contribution is made and than there are COLA diversions on top of that.
So, it's not an offset.
John Murphy - Merrill Lynch
So, what's the COLA diversion sort of on annual basis?
Fritz Henderson
Off hand I don't know that, because the money just goes right from the COLA into the VEBA, So, I don't know that number actually.
John Murphy - Merrill Lynch
Okay. And what was the pension plan performance in the quarter?
Fritz Henderson
We are not going to talk about the actual return, but it was a good return. I mean the markets were actually somewhat volatile, but they ended up with reasonable return.
I will say the reallocation that we announced about a month and a half ago has been completed. But by and large, certainly the investment return in the first quarter, I would characterize it satisfactory.
John Murphy - Merrill Lynch
Thank you very much.
Fritz Henderson
You're welcome.
Operator
Thank you. Our next question comes from the line of Brian Johnson from Lehman Brothers.
Please proceed with your question.
Brian Johnson - Lehman Brothers
Good morning. On the Delphi settlement or outlines of this settlement, when we look at your hourly staffing now, you had in the prior disclosure, about 5,000 flow back offers that you'd put on the table for Delphi.
How many of those people have flown back, have come back to GM and how many are liabilities, if you will, with potential to come back into the headcount?
Fritz Henderson
Let me just clarify. First, I think we have about 4,000 people which have actually flown back already.
Brian Johnson - Lehman Brothers
Okay.
Fritz Henderson
We have provided offers to more people and some people haven't flowed back. I think other opportunities will arise for people to flow back between here and the end of the year.
So when they flow back, the obligation you have, there is a relocation amount of, I think it's about $25,000 per person that's associated with the relocation. But by and large, people are just moving from Delphi in to GM.
There is a relocation payment and there is no liability trigger per se. Clearly, if they come aboard, its part of an overall deal, we'll be dealing with their legacy obligations and healthcare for example.
That's part of the overall deal.
Brian Johnson - Lehman Brothers
So, what you would say the overhang is of potential flow back?
Fritz Henderson
I couldn't really have it at guess. It's not that big of a number, frankly.
And frankly, where we have flowed people back, we needed them.
Brian Johnson - Lehman Brothers
Okay.
Fritz Henderson
I wouldn't characterize this as an overhang really.
Brian Johnson - Lehman Brothers
And second question around Delphi would be increase from under $100 million to $200 million of ongoing expense. Is it fair to interpret that is about when you go through the number, workers of $3 an hour wage subsidy you might be putting on the table?
Fritz Henderson
No. I'm not sure that that's the way I'd interpret it actually.
The wage subsidy could take multiple forms though. I think that will be too simplistic.
I think, when the deal is done, we'll have a chance to actually talk about how that works. But unbalance, we certainly think that our range of cost will be in that range we are stating here today.
Brian Johnson - Lehman Brothers
And how does that fit in with your goal of $2 billion price down and what is the timeframe now, do you think, on that price down effect?
Fritz Henderson
Well, I would say, we have been trying to be careful and separate from the price downs. In another words, there were likely to be a wage subsidy cost, that's what we are disclosing here.
The $2 billion or so of premium prices that we pay, we would expect to lower that overtime. I was asked before, is this a one or two year?
No, it's not. It's something that happens probably over three or five years.
And part of that is, how do you price down the existing business and then part of it is, how does the new business get priced.
Brian Johnson - Lehman Brothers
Okay. Thanks.
Fritz Henderson
Welcome.
Operator
Thank you. Our next question comes from the line of Robert Barry from Goldman Sachs.
Please proceed with your question.
Robert Barry - Goldman Sachs
Hi, Fritz.
Fritz Henderson
Hi, Robert.
Robert Barry - Goldman Sachs
Actually a quick follow up on that $500 million for '07. What stage does that contemplate for Delphi being settled?
Fritz Henderson
We've been thinking it was going to be in the second half of '07. And I know that's a broad range, but that's the best I can say today.
Robert Barry - Goldman Sachs
Okay. I mean that's interesting.
I guess my next question is just on the context of the union talks this year. If Delphi could potentially drag on into the second half and you've got clearly a lot of complexity with what's going to on with Chrysler.
How do you see the talks playing out this year? Do you think there'll be a pattern?
Fritz Henderson
Couple of things. First, you should clarify one thing.
Part of that $500 million could actually be, workforce transformation cost between here and the end of the year. So, even if something comes together lately here, we could still end up paying it like in the third quarter or something like that.
So, it's important it depends on the deal coming together but its timing may not be as unusual as we should think. Hopefully, that clarifies a little bit because we have already paid some amount of workforce transformation costs associated with Delphi.
We do think there will be some additional costs that will be necessary in order to accomplish that in '07. The second part of your question having to do with labor negotiations, I think certainly as our objective, we would like to bring this to resolution I think all parties actually would prior to the commencement of any discussions regarding '07 bargaining.
I would say, in terms of the complication that a Chrysler matter would bring to it, really not for me to speculate at this point. There's a lot that's going on, let's put it that way.
Robert Barry - Goldman Sachs
And just to clarify a couple of things on the cost saves. I think you exited '06 at 6.8 billion run rate.
Where are you now versus that 6.8?
Fritz Henderson
I guess, what I would say is, we are on track to achieve the 9. It probably doesn't.
I think to try to figure out where we are in the bolometer at this point, I don’t actually know the number, I just know that we are on track to achieve our $9 billion goal.
Robert Barry - Goldman Sachs
Based on what you said earlier about some of the manufacturing costs going up is it may be kind of one to two steps forward and one back? May be you kind of receded a little bit.
Fritz Henderson
No I think our performance in the first quarter was pretty much inline with what we expected. And we did expect our engineering spend to actually ramp up and that's what happened but in terms of manufacturing and other structural cost, we are pretty much in line with what we expected.
Robert Barry - Goldman Sachs
And then, was there some of that in that corporate other line, I think if you remember on the last call you mentioned that some of the cost saves actually accrued there and not in North America?
Fritz Henderson
Yeah. Legacy, for example.
Our legacy cost on former Delphi employees, there is a benefit from healthcare deal, a large part of that is in North America. Some part of that is in Corporate Sector.
Robert Barry - Goldman Sachs
Any sense of how much this quarter, the Corporate Other was boosted by those cost saves?
Fritz Henderson
If we look at the improvement in corp other in the first quarter, $90 million improvement, you had legacy, I would say, we looked at the total savings on the healthcare deal. Yeah, actually the biggest part of it happens to be just that.
Took me a while to put my finger on it.
Robert Barry - Goldman Sachs
So about 90?
Fritz Henderson
Yeah. It would so.
Robert Barry - Goldman Sachs
And then just finally, you mentioned mix pressure in Europe, due to selling more small cars, I always thought that the European market is generally trending towards small cars. So, I was wondering, year-over-year, what the real delta was there?
Fritz Henderson
If you look at it, when I say small cars, Corsa is just doing extraordinarily well. We are selling it very, very well.
Astra is doing well, but we launched the car in 2004, and that there is flat volumes were a little down. So, in the first quarter, that's the kind of mix that I was looking at, basically more Corsa vis-à-vis and after disappear.
Robert Barry - Goldman Sachs
Okay. Thanks a lot but.
Fritz Henderson
You're welcome.
Operator
Thank you. Our next question comes from the line of Chris Seraso from Credit Suisse.
Please proceed with your questions.
Chris Seraso - Credit Suisse
Thanks, good morning.
Fritz Henderson
Hi, Chris.
Chris Seraso - Credit Suisse
Two things, I think we've seen slide 8, that's I'll pick on something else. Is there, this is probably particularly good question for you, is there any reason to expect that Latin America will be kind of less volatile than it has been in the past, so should we expect $200 million a quarter forever or is there going to be continued sort of volatility in that region?
Fritz Henderson
One thing I have learned about Latin America is that there is always volatility, always, but as I look at the, it’s actually a land its not just Latin America, its Africa and Middle East as well, I think about the commodity based economies, and certainly if we are concerned about higher fuel prices, there are certain countries where high fuel prices are a good thing. And I do think that strong markets like Venezuela and the Middle East, are going to stay strong.
I would say Brazil is more driven by economic fundamentals, there are host challenges in Brazil, but frankly the economic fundamentals for the country are very strong. Interest rates have been declining, and frankly, I think what's happening with Brazil is volumes in the industry are coming back to what we thought they might be as we were sitting in the mid 90s planning for what long-term volumes might be in Brazil.
Argentina's growth has been very, very strong and then I think a country like Colombia, just, very sound fiscal policies, very strong economic growth, some commodities, but mostly all about sound fundamentals and a very good auto market. So, as I look at the prognosis for the LAAM markets.
We are seeing some softness in South Africa, just a little bit and not bad. I think, by and large, I would characterize the environment as robust, the markets, in general, are very strong.
Chris Seraso - Credit Suisse
Okay. The comment about the first quarter in North America, you got kind of a boost from the restatement on the FAS-133.
Anything like that in Q2, can you give us a jumping off point for North America? What was the adjusted restated net income for North America in Q2 last year?
Fritz Henderson
It was positive in Q1 of '06 last year, it was slightly negative in Q1 of '07 this year. So the swing year- to-year was negative.
Actually, the restatement affects were really out, I think by quarter in our 10-K and we just refer you back to that; you can actually see what the impacts were by quarter.
Chris Seraso - Credit Suisse
At the regional level?
Fritz Henderson
No, we actually did it at the Corp level, but the way you should think about it is those two really are North America and Europe.
Chris Seraso - Credit Suisse
Okay. And then the last one, just as it relates to the income statement in the new presentation with GMAC, just want to make sure I understand, you mentioned the, you got separate lines showing income and expenses, and those net out to about a $100 million favorable, and then you show equity loss at GMAC of a $180 million.
And then a third number you have got in kind of the slight deck of a $115 million negative for GMAC, so is there something other than the GMAC numbers that are coming through here? What's kind of the right net number as it relates to --
Fritz Henderson
The leased asset curve up, you know, if you think about the, we took as part of the deal, $14 billion of assets back -- leased assets back. They were called the asset curve up, those -- if you look at the first quarter of '07 that, the income from that less the interest expense associated with that is what’s remaining, and then you have what our equity -- in this case the equity and net losses of GMAC.
That's what you've got. So, think about the fourth quarter P&L as being the run off of this lease portfolio, that's what's in your revenue and expense and then you've got our equity loss in GMAC as the separate line item.
Chris Seraso - Credit Suisse
Okay. And than is there something tied up on the tax line, because you show on the income statement an equity loss for GMAC of 180, but you reported 115 on the regional loss?
Fritz Henderson
Pre-tax number.
Chris Seraso - Credit Suisse
Okay.
Fritz Henderson
Yeah, 180 is pre-tax.
Chris Seraso - Credit Suisse
Okay. Great, thank you.
Fritz Henderson
You're welcome.
Operator
Thank you. Our next question comes from the line of Jon Rogers from Citigroup.
Please proceed with your question.
Jon Rogers - Citigroup
Yes, thank you. First, just a follow up on that question on the $4 billion in leasing that you took back.
Is it reasonable to assume that that number goes up as residuals improve?
Fritz Henderson
No. Actually, it was a $14 billion portfolio, $4 billion basically net assets and that is just going to roll off.
It will perform how it performs. If residuals improve, it improves.
But, we are not originating new assets against this. It's just going to be a function how the assets perform over time.
And it rolls off, I think by in large by early '09 it's exhausted.
Jon Rogers - Citigroup
Okay. And then just may be a longer-term product planning question.
There has been some talk in the press about rear-wheel drive cars. And can you just tell us where you stand with rear-wheel drive cars in North America?
And then potentially with the success of the [lamda] program, what you might do about the mid-size SUV program?
Fritz Henderson
I would say the success of our Acadia outlook and Enclave program. We are quite pleased with it.
Actually I call it from an interior perspective a large crossover actually. The vehicles performed well.
They got great acceptance by consumer, great ATPs, good turns, particularly the GMC product. So we're encouraged by that.
I would say in a higher fuel price environment those kind of vehicles are going to be even in more demand. So, I think we're pleased that we made that call.
And I would say in rear-wheel drive when you look at, and we have some rear-wheel drive programs that are in the pipeline. We're going to execute those.
But, I think we need to step back and think about fuel prices regulation as we develop our portfolio. We shouldn't just leave it static.
We obviously need to be, we need to consider the dynamics of the market as we think about future choices and that sitting here today given the uncertainties it's something we're looking at. But, I wouldn't say I have anything to really announce today.
I think it's just kind of natural that we should be looking at our portfolio of choices in a different regulatory [flush] fuel economy environment.
Jon Rogers - Citigroup
Great. Thank you very much.
Fritz Henderson
You're welcome.
Operator
Thank you. Our next question comes from the line of Ronald Tadross from Banc of America Securities.
Please proceed.
Ronald Tadross - Banc of America Securities
Hey good morning, Fritz.
Fritz Henderson
Hi, Ron.
Ronald Tadross - Banc of America Securities
I guess there is something in the payables, I noticed they are up about $3 billion sequentially if you look from 4Q to 1Q and typically they are flat, is there a reason for that?
Fritz Henderson
We built inventories actually from 4Q to 1Q as well. I mean net-net working capital was flat, it was neutral.
There wasn't anything unusual in payables to be honest. I think part of that was just -- payments actually tend to pretty important in terms of what your payables balances are at the end of any given quarter.
But, we have also built inventory in first quarter.
Ronald Tadross - Banc of America Securities
Yeah. But, I mean your inventories seasonally did what they usually do, it seem like, but the payables, I mean, they were up to like $30 billion, which seems like an all-time high.
There is no supplier-term changes or anything like that?
Fritz Henderson
No.
Ronald Tadross - Banc of America Securities
All right. You have mentioned that liquidities were relatively strong for liquidity.
Would you consider more capital raising and what would your bond covenants allow?
Fritz Henderson
Well, couple of things. First, we do look at continued measures to improve liquidity.
I have talked, for example, at the time of the calendar year about what we are looking with respect to Allison's. So, we do look at selectively targeted some additional liquidity raising measures.
So, we do continue to have an interest in improving our liquidity position. We think our position today is strong.
We certainly will selectively look at augmenting it. There are specific limitations on our various bond agreements, indentures, loan agreements, revolving credit agreements and what not.
We certainly believe we have adequate financial flexibility to be able to do capital raising on a targeted basis. But our larger focus at this point has been really around focusing on the Allison transaction.
And then we'll continue to monitor market developments and see if there are opportunities for us. I wouldn't say that the conditions that we have are so restrictive that would prevent us from taking advantage of good opportunities.
Ronald Tadross - Banc of America Securities
Could you do this in a more secure debt or would you need to be unsecured?
Fritz Henderson
We can actually do both. With some limitations, we can do both.
Ronald Tadross - Banc of America Securities
Okay. All right.
Thank you very much.
Fritz Henderson
You are welcome.
Operator
Thank you. Our next question comes from the line of Mark Warnsman from Prudential.
Please proceed.
Mark Warnsman - Prudential
Good morning.
Fritz Henderson
Good morning.
Mark Warnsman - Prudential
Yes. I wonder if you could provide us with an update on your plans to address your declaration of ineffective controls made as part of the 10-K.
And also share with us perhaps a target date for being able to tell us that you have effective controls back in place.
Fritz Henderson
A couple of things. First, in the 10-K, we outlined what the initial steps were of our action plan to address our internal control environment over financial reporting.
We are executing the plan you saw in there. Second, in terms of augmentation of resources, we are doing just that.
The remediations are, we are adding resources. We are actually making some changes in the organization of our financial reporting and control function led by my new controller Nick Cyprus.
So, bringing more people in. Second, we are making some reorganization.
So, for example, tax accounting has been changed in terms of how we handle tax accounting. I would say, the remediation of the specific material weaknesses of significant efficiencies will take place throughout '07.
These are not factors though, that are going to be remediated in one quarter. I guess the last point I would make is that we made $62 million on a net basis and $92 million on adjusted basis.
And so, frankly from a materiality perspective, we are at the nice edge. We are operating at/or close to breakeven.
So, our materiality thresholds remain very tight. And so, therefore, we need to be even more vigilant than frankly any company in my size.
Mark Warnsman - Prudential
Okay. Another question regarding the capital spending increase, realized that it is relatively small.
But is it being driven by incremental product or capacity actions? Is it missed on an existing product or capacity action program?
Or is it recalendarization?
Fritz Henderson
If you look at our level of cap spend, we have got a pretty aggressive product team, everybody says that. So, nobody is ever going to say anything, otherwise sitting in my spot.
But we certainly have a pretty aggressive product team. We are changing over a number of power trains.
For example, we have a significant rollout of six-speed automatics, which is a pretty significant chunk of capital. This is a business line period.
In terms of new capacity we are building, we do have some new capacity being built, India, Russia, New Mexico, we are building a new assembly plant. So, we do have some additional capacity, the capacity that built in China, is funded from our joint venture in China.
So, you would not see China cap spending in our capital spending numbers. But by and large I would say, if I would have look at where we are allocating capital, I would say its largely allocated in products.
And we do have three new plants being built. So, I don't want to overlook it those, but 8.5 to 9 billion, the lion share that is in new product.
And frankly, fair amount of new technologies. We've already launched, for example, some hybrid products in the market, we have a number coming here through the rest of '07.
We continue to be aggressive in terms of our investment in new technologies, particularly in the area of fuel economy and we'll continue to do so. But I wouldn't say there is a disproportionate amount of our capital being allocated for example, the capacity expansion that wouldn't be true.
Mark Warnsman - Prudential
I guess what I was drawing was the incremental guidance on capital spending and given the long lead times on capital spending and then the planning associated with it, was there something that's changed meaningfully?
Fritz Henderson
No.
Mark Warnsman - Prudential
Compared to your prior plan?
Fritz Henderson
No.
Mark Warnsman - Prudential
Okay. Thank you.
Fritz Henderson
Welcome.
Operator
Thank you. Ladies and gentlemen.
The following question will conclude the analyst portion. Following this question, we will proceed with the media portion of the question-and-answer session.
(Operator Instructions). And the last analyst question comes from the line of [Eric Feli] from JP Morgan.
Please proceed with your questions.
Eric Feli - JP Morgan
Good morning. Lot of my questions have been answered, but just getting back to working capital and I see the trend sequentially, I am just wondering, we saw the same sequential decline in production in the first quarter of '06 as we did in '07, why did we not see the working capital use that we saw last year?
Fritz Henderson
Last year when we implemented our new pricing strategy, we replaced all of our vehicles, over 90% of our vehicles, I think on January 13. And therefore we had a significant reduction in our incentive payables between December 31st, and March 31st, which didn't repeat this year.
So, that would be one thing I would point to. Second thing I would point to, I think Rod is right, we did at payables rise, nothing was unusual in their, but payables did rise in the second quarter, should be in the first quarter of '07.
So, I wouldn't say there was anything unusual in there, and really when we look at it neutral working capital. So, also important to realize that our production was down in North America, it was up in some other areas of the world so for example, if we looked at operating cash flow.
I mentioned we generated positive operating cash flow in all four automotive regions, but we had strong operating cash flow at both LAAM as well as AP and you could certainly read into that, you could have working capital changes not just in America, you could have it in the rest of the world.
Eric Feli - JP Morgan
Okay. And so, I guess been got more globally to have more working capital out?
Fritz Henderson
You could have a situation where, for example, LAAM, we've been running very tight on working capital, we've been draining it down mainly because sales has been so strong.
Eric Feli - JP Morgan
And then moving down to cash flow statement. Looking at the dividends, should we assume there is going to be no dividends from GMAC this year.
I thought you guys are going to give like a 40% dividends retention?
Fritz Henderson
The agreement calls for 40% of presentation-tax profitability. There was no pre-tax profitability obviously in the first quarter.
Eric Feli - JP Morgan
Okay. And then finally looking at raw materials, was a drag this quarter.
Looking forward is that going to get worst or better throughout the year?
Fritz Henderson
It could be in line before we talked about in January
Eric Feli - JP Morgan
Okay.
Fritz Henderson
We talked about in January as we thought of the drag for automotive, total automotive, in '07 will be about a $1.5 billion in '07 versus '06 calendar year. We are still being about a billion of that and non-ferrous being about $0.5 billion.
So, we expect that to continue through the year. I think that's our best estimate for what we think the impact is going to be in '07.
Eric Feli - JP Morgan
And what was that in the first quarter, I think I missed it?
Fritz Henderson
We didn't actually specifically talk about it, but I think we certainly were in line with what we saw. So, we didn't give a specific number.
I would say that we are on path for $1.5 billion, so you could make an estimate of what the impact was in the first quarter as you wouldn't be very far along.
Eric Feli - JP Morgan
Okay. Thanks a lot.
Fritz Henderson
You’re welcome.
Operator
Thank you. Our next question comes from the line of Jui Chakravorty from Reuters.
Please proceed with your question.
Jui Chakravorty - Reuters
Hi, there. Can you hear me?
Fritz Henderson
I can hear you Jui. How are you?
Jui Chakravorty - Reuters
Hi, good. How are you?
Fritz Henderson
Good.
Jui Chakravorty - Reuters
I know you don't want to comment on Chrysler, but I was wondering if you could talk just a bit about whether you think it would cause a conflict and further if would it had been the majority on your GMAC and sub owning Chrysler?
Fritz Henderson
Jui, I think you actually just -- last quarter Bernard asked me one question. It was on Chrysler, and I answered that I am not going to comment on Chrysler.
So, I feel bad I wasted your time, but I -- we are not going to comment on Chrysler just like, and I really don’t want to get into what the impact might be if service was going to do something or not.
Jui Chakravorty - Reuters
Okay. Thank you.
Fritz Henderson
You're welcome.
Operator
Thank you. (Operator Instructions).
Our next question comes from line of David Wells from BusinessWeek. Please proceed with your question.
David Wells - BusinessWeek
Can you guys hear me?
Fritz Henderson
Hey David, how are you doing?
David Wells - BusinessWeek
Pretty good, pretty good. Just a quick one on, actually, two quick ones.
Hope you kind of ready to do the same thing. GM Europe, you have got market share up, revenue is up, profits are down.
What's the driver behind that?
Fritz Henderson
I would say a couple of things, David. First, I talked about mix.
You do have some unfavorable mix and you’ve got more courses relative to lets say factors and the period. Second, you’ve got some country mix, then we’ve got revenue growing and volume growing at places like Russia.
Thirdly, we have some translation; actually, if you look at the revenue line actually because of the strength of the Euro, there is some element of that, if you just look at revenue. And then finally, that doesn’t affect the P&L; that just affects the revenue.
And then the last part I think is hedging. Last year again, in the first quarter of '06 was a repayment.
We had favorable hedging commodity gains. This year in the first quarter of '07 didn’t frankly had nothing with small losses, and that was a unfavorable swing year-to-year.
So, I would end up talking about from a profit perspective, largely mix and commodities.
David Wells - BusinessWeek
So basically, you are selling -- a lot of the revenue gains are coming in the Eastern market, where profits -- the vehicles aren’t as those expensive, profits aren’t as good?
Fritz Henderson
That’s right, I mean, it’s you are getting incremental volumes in some markets for margins, and so it doesn’t mean it’s bad, it just means on a relative basis margins are thinner.
David Wells - BusinessWeek
Okay. And in North America, we've got the full $9 billion in now.
You are hitting your results with profitability, I mean, like you say running roughly at breakeven, slight loss. I guess, probably a lot of people figured that obviously it will be little bit better now when the full effect of cost cutting hit the bottom-line.
What's going on here? Why aren't we seeing better results?
Fritz Henderson
First thing I'd say is the $9 billion was expected to be completed by the end of the year, we are on track. So, I wouldn't say it's all done yet, its not.
And frankly, longer-term, I think earlier in the call we talked about long-term we are actually trying to drive our structural cost percentage of revenue down to 25% of the company. So, we've still got more to go even beyond this year.
But that said, if you come back and if you look at the first quarter down a 192,000 units of volume. A part of that was, actually, a reasonable part of that was strategy.
But, I would also say you know the market its okay, about two million in the market is okay. It's not awful, but frankly not great either.
It's below trend in terms of retail. You've got some mix concerns.
First quarter mix was moving more towards cars than trucks. So, there were still more trucks than cars.
April actually kind of tipped over and become slightly more cars than trucks. But, I would say we had, I wouldn't say it's been a particularly strong market is I guess the way I would put it number one.
Number two, you've got some pretty steady and difficult commodity price increases we are trying to deal with in terms of material, non-ferrous. It's basically we talked about in the call.
There are some things in there and we are still not satisfied generating a break-even or small loss position for North America given where we are. You can't be satisfied, obviously, with it.
And it reinforces our need to decouple our efforts. But, to be honest, we are actually selling in to what I would characterize is not a highly favorable market.
I guess the last point is, over time we talked about getting the material costs back on more of a normal performance type threshold and there is two things that we need to do to get that done. One is, frankly, move through this period of volatility and, frankly, high prices on steel and non-ferrous and get something that's more normal, but at least attenuate the increases that we have seen.
Number two, we have got $2 billion on the table at Delphi, approximately, that over time we can go get out from a material cost perspective. And third and finally, as we drive our business globally, we do see the continued opportunities to reduce cost through the globalization of our supply base.
David Wells - BusinessWeek
Okay. And you guys haven't hit the 25% of revenue yet.
Where are you right now, roughly?
Fritz Henderson
We finished last year at right on 29. And so, we think of it as a move from 34, 35 to 29, and so we are what it would be a little bit more than half way there.
David Wells - BusinessWeek
Okay. And you are seeing some mix issues in North America as gas gets expensive, things [go towards cars].
And we are getting into the summer driving season. So, I think gas would be more expensive than it is right now, and it's about $3.
So, are we going to see more pressure on mix throughout the year?
Fritz Henderson
I think I'll just have Paul try to give you his perspective on that, David, if it's ok?
David Wells - BusinessWeek
Sure.
Paul Ballew
We mentioned we feel that Q2 could be a bit challenging. We'll have to see what happens with refineries and getting inventories of gas levels back up.
But, as we mentioned we at least expected this quarter to be a little choppy and a challenge. We looked through that last year as well.
As we get into Q3 and Q4, were cost play up and let's say we've see some coming back down in price points, and then we see view that [flares up] we do see mix return back to more normal levels, at least we have to date. On having said that, as Fritz alluded besides mix, we are looking at US industry that while close to our forecast is operating below trend.
And that remains our biggest challenge from an industry perspective, not so much for us, but certainly overall industry condition. So, I would say Q2 probably a challenge, Q3, Q4, we’re expecting when we return to a more normal level.
David Wells - BusinessWeek
Okay, alright. Thanks guys.
Fritz Henderson
Thanks, David.
Operator
Thank you. Our next question comes from the line John Stoll from Dow Jones.
Please proceed with your question.
John Stoll - Dow Jones
Thanks a lot. Could you address the Lordstown and Fairfax negation with UAW.
It appears as if those are just come to sort of the COAs have come to terms. How important is that you get those restarted before the national contract negotiation start, what is the issue at those two plants that sort of is standing in the way of sealing the COA?
Fritz Henderson
I'm not going to get into what the individual items are from the bargaining table or with the -- the bargainers do that, I would say Competitive Operating Agreements are crucially important for the success of our business, and those are obviously done plant-by-plant. So, from time-to-time, you know, tensions get high and the parties don’t necessarily agree, but I don't think it would be productive for me to talk about what's happening at the table.
We just need to stay focused on it because we know we need to have Competitive Operating Agreements in every single one of our plants in the US.
John Stoll - Dow Jones
Okay. Is there some kind of a accelerated strategy or threat, should we get this done at on a large scale, this year?
And just, against the backdrop of Ford did, sort of it subdues at least 38, 39 of the 40 somewhat plants they have. And we haven't heard the same sort of progress reports at GM in terms of COAs.
I know you've been doing them in (inaudible) Tennessee, but is there some kind of a plan here to get something going quickly, so you can wring out some of those costs?
Fritz Henderson
Working with the Indians, we've been working on it one by one. We have been making progress in both the vehicle some advances, as well as power train.
We've made, actually, a fair amount of progress in a number of power train plants, but this is one where that kind to get done quietly. They are done location-by-location.
I would say, is there a urgent concerted effort, yes. Why, because we absolutely needed to be competitive, and its part of the overall goals at every one of our plants as competitive that they possibly can be.
Beyond that, I wouldn’t say, I think it’s, in my mind, I look at this as part of the fabric and the organization. This is what we need to do to be competitive; we are going to keep the pressure on everyday.
John Stoll - Dow Jones
I apologize, sort of asking a question that was addressed back with the Delphi slides earlier. You are still anticipating the $2 billion in parts and cost savings down the road, is that right even though these revisions were definite?
Fritz Henderson
Yeah, there is still about a $2 billion premium we pay for parts that we purchase from Delphi. And we think overtime, we can significantly reduce that premium.
In others words, we can move to market prices over time. It's not a one or two year, I think I’ve talked about over 3 to 5 years.
And I think of it as the existing book of business, how does that move to a competitive price over time in the new business, and how does that get booked at market.
John Stoll - Dow Jones
So, 3 to 5 years after a settlement?
Fritz Henderson
Yeah, that's where, I would think about it. I wouldn't necessarily say that’s specific because frankly, we haven't negotiated it yet.
But I just caution people that it’s not something that happens in one or two years, it takes place over time.
John Stoll - Dow Jones
And this would be in addition to the structural cost savings?
Fritz Henderson
Correct, there is the material cost.
John Stoll - Dow Jones
And this is the raise you made in the entire $2 billion disadvantage or it’s a significant portion of that?
Fritz Henderson
When we get to that point, we'll be able to provide you more specifics, but I would say we'll be able to capture a large portion of it, but I would not think it’s fair to say we'll get all of it.
John Stoll - Dow Jones
Thank you.
Fritz Henderson
Welcome.
Operator
Thank you. Our next question comes from line of [Tom Crutcher] from Associated Press.
Please proceed with your question.
Tom Crutcher - Associated Press
Hi, Fritz. You had mentioned earlier that you had a reasonable performance from smaller vehicles, I think it was for North America, and that pulled down the benefit you receive from the mix and I guess at least one to believe that are you still losing money on some small cars and some of your smaller vehicles?
Fritz Henderson
Do you think this is profitable? I would necessarily point them being unprofitable.
I just think they have lower average transaction prices and therefore lower profit per vehicle per say, does it mean that, just means that the affect mix.
Tom Crutcher - Associated Press
Okay. Thank you.
Fritz Henderson
Welcome.
Operator
Thank you. Our next question comes from the line of Jeff Green from Bloomberg News.
Please proceed with your question.
Jeff Green - Bloomberg News
Hi, guys. Can you hear me, okay?
Fritz Henderson
Yes, Jeff, fine.
Jeff Green - Bloomberg News
I just want to follow-up on David's question. North America seems have disappointed a lot of the analysts so the shares took a hit today.
They didn't take a hit yesterday when GMAC reported that loss. So, people seem to be focusing on your automotive operations, not GMAC's disappointing numbers.
Should Analyst take what happened this quarter is sort of going forward expectations for where things are in North America this year and this is sort of what we should expect to that to put long break even then and if now what is the factor that will change to make it stronger to match what they were expecting? A lot of people thought would be a profit this quarter or on special items?
Fritz Henderson
Couple of things. First one, I am going to provide guidance on sectors, what we said as we do expect to improve the automotive profitability this year.
I'm not going to go beyond that for the year. I would say in North America, as I look at it, we lost $85 million on adjusted basis in the first quarter, basically operating the business at or around break even, certainly in the first quarter.
That's not our goal, obviously. I'd say there were some things in there as we looked at it that we think were positive and things to build on, but frankly not a number that we're satisfied with.
So beyond that, I'm not going to comment as to what the outlook might be. Again what I said before, we do expect overall automotive profitability on a global basis to improve year-over-year.
Jeff Green - Bloomberg News
Okay. Thanks.
Fritz Henderson
Thank you, Jeff.
Operator
Thank you ladies and gentlemen. That's all the time we have for questions toady.
I'll hand the conference back to you Mr. Arickx, please continue with your presentation or closing remarks.
Randy Arickx
Okay. Thank you operator, thank you everyone for your time today, I'll see you next quarter.
Operator
Thank you. Ladies and gentlemen that concludes our conference call for today.
We thank you for your participation and ask that you please disconnect your lines. Have a good day.
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