Filed by General Motors Corporation
Subject Company - General Motors Corporation
and Hughes Electronics Corporation
and EchoStar Communications Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Commission File No.: 333-84472
Set forth below is a transcript of a live conference call that is now being
rebroadcast on General Motors' website.
In connection with the proposed transactions, General Motors Corporation ("GM"),
HEC Holdings, Inc. ("Hughes Holdings") and EchoStar Communications Corporation
("EchoStar") have filed amended preliminary materials with the Securities and
Exchange Commission ("SEC"), including a Registration Statement of Hughes
Holdings on Form S-4 that contains a consent solicitation statement/information
statement/prospectus. These materials are not yet final and will be further
amended. Holders of GM $1-2/3 and GM Class H common stock are urged to read the
definitive versions of these materials, as well as any other relevant documents
filed or that will be filed with the SEC, as they become available, because
these documents contain or will contain important information. The preliminary
materials, the definitive versions of these materials and other relevant
materials (when they become available), and any other documents filed by GM,
Hughes Electronics Corporation ("Hughes"), Hughes Holdings or EchoStar with the
SEC may be obtained for free at the SEC's website, www.sec.gov, and GM
stockholders will receive information at an appropriate time on how to obtain
transaction-related documents for free from GM.
GM and its directors and executive officers, Hughes and certain of its officers,
and EchoStar and certain of its executive officers may be deemed to be
participants in GM's solicitation of consents from the holders of GM $1-2/3
common stock and GM Class H common stock in connection with the proposed
transactions. Information regarding the participants and their interests in the
solicitation was filed pursuant to Rule 425 with the SEC by EchoStar on November
1, 2001 and by each of GM and Hughes on November 16, 2001. Investors may obtain
additional information regarding the interests of the participants by reading
the amended preliminary consent solicitation statement/information
statement/prospectus filed with the SEC and the definitive consent solicitation
statement/information statement/prospectus when it becomes available.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction. No offering of securities shall be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of 1933,
as amended.
Materials included in this document contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of GM,
EchoStar, Hughes, or a combined EchoStar and Hughes, to differ materially, many
of which are beyond the control of EchoStar, Hughes, Hughes Holdings or GM
include, but are not limited to, the following: (1) the businesses of EchoStar
and Hughes may not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected benefits and
synergies from the combination may not be realized within the expected time
frame or at all; (3) revenues following the transaction may be lower than
expected; (4) operating costs, customer loss and business disruption including,
without limitation, difficulties in maintaining relationships with employees,
customers, clients or suppliers, may be greater than expected following the
transaction; (5) generating the incremental growth in the subscriber base of the
combined company may be more costly or difficult than expected; (6) the
regulatory approvals required for the transaction may not be obtained on the
terms expected or on the anticipated schedule; (7) the effects of legislative
and regulatory changes; (8) an inability to obtain certain retransmission
consents; (9) an inability to retain necessary authorizations from the FCC; (10)
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; (11) the introduction of new
technologies and competitors into the subscription television business; (12)
changes in labor, programming, equipment and capital costs; (13) future
acquisitions, strategic partnership and divestitures; (14) general business and
economic conditions; and (15) other risks described from time to time in
periodic reports filed by EchoStar, Hughes or GM with the Securities and
Exchange Commission. You are urged to consider statements that include the words
"may," "will," "would," "could," "should," "believes," "estimates," "projects,"
"potential," "expects," "plans," "anticipates," "intends," "continues,"
"forecast," "designed," "goal," or the negative of those words or other
comparable words to be uncertain and forward-looking. This cautionary statement
applies to all forward-looking statements included in this document.
* * *
GENERAL MOTORS CORPORATION
MODERATOR: RANDY ERICK
OCTOBER 15, 2002
8:30 AM CT
Operator: Welcome to the General Motors Corporation Third Quarter
2002 Earnings Release Conference Call.
During the presentation all participants will be in a
listen-only mode. Afterwards we will conduct the
question-and-answer session. At that time if you have a
question, please press the 1 followed by the 4 on your
telephone.
As a reminder this conference is being recorded Tuesday,
October 15th, 2002.
I would now like to turn the conference call over to
(Randy Erick), General Director of Investor Relations.
Please go ahead, sir.
(Randy Erick): Thank you. Good morning. And thanks for joining us
as we review our third quarter results that we sent you
earlier this morning.
First I'd like to direct your attention to the Safe Harbor
language on the first page of the chart set. Like always
the content of our call will be governed by
that language. We're broadcasting the call live via the
Internet, and the financial press is participating as
well.
This morning John Devine, our CFO and Vice Chairman will
cover Q3 Earnings Review and provide an update and outlook
for Q4 as well as the calendar year. As we've mentioned
that after the presentation, like always, 30 minutes will
be set aside for Q&A from security analyst followed by 30
minute Q&A with the financial press.
I would also like to mention we have several other
executives here to assist in answering your questions
including Eric Feldstein, Vice President, Finance and
Treasure, Paul Schmidt, Corporate Controller, Bill Muir,
Executive Vice President and CFO of GMAC, Pete Bible,
Chief Accounting Officer, Ray Young, CFO of GM North
America, and (Paul Baloo), Executive Director of Global
Market and Industry Analysis. Now I'd like to turn the
call over to John Devine.
John Devine: Good morning everyone. Thanks for joining us. We
have a lot to talk about today. And so I'll go through
reasonably quickly and then we'll turn it over to you for
questions.
If you turn to Page 2 of the deck -- I'll cover third
quarter highlights first -- I characterize the quarter as
another good one, overall. Good operational results in
terms of the quarter. We continue to have some issues, and
I realize you have some questions in areas like pension so
we've taken some time in the presentation. We'll take some
time in the call to make sure you know what we know in
terms of the outlook for that, and that is added to the
length of the presentation a bit.
Overall third quarter highlights are good. Financial
performance, $1.24 earnings per share; that's without
Hughes, and that's without special items that I'll cover
in a moment. The $1.24 compares with $1.09 on first call,
including Hughes, the first call number was about 99
cents; and including Hughes, our results are about $1.20.
So a little better -- volume was better. And we'll cover
some other items as well. So overall, a good quarter.
We have taken a charge for the write-down of Fiat Auto,
which I'll explain in more detail in a moment. And we've
taken some write-down employee cost-related to changes in
our production footprint, which I'll also cover in a
moment.
Our revenue: A good quarter -- $41.4 billion, overall.
That's up 2-1/2% year-over-year. An adjusted net income of
$696 million; a nice improvement again of the third
quarter of last year.
Very good progress continues on automotive cash flow third
quarter despite typically being the worst of the year.
We're actually able to improve our net liquidity. So we're
pleased with that.
Market share: Good results. Global market share of 15.2%
up 4/10 of a point. North America market share: Up 4/10 of
a point. Truck sales: Up very significantly was leading
the way in North America. Our retail share: Up 9/10 of a
point. So a good quarter.
On Page 3 you can see the adjustments we've broken. The
left hand of the column, the page breaks up Q3 of 2001. Q3
of 2002 is on the right. I'll cover the 2002 numbers.
GMX used $791 million reported losses; that's $1.41. We
have a production footprint, which I'll explain in a
moment, of a charge of 116. Fiat investment write-down of
$1.371 billion; I'll explain that as well in a moment. So
the GMX Hughes number on an adjusted basis is $1.24. The
Hughes result, which was out yesterday was a reported loss
of $13 million or a penny a share. There's some special
items that are favorable by 68, so $81 million and 4
cents; that's $1.20 I mentioned before. 29% tax rate
continues in the third quarter. It's a little lumpy by
region, as you'll notice in the background. But 29% is the
overall rate.
If you turn to the next page -- the detail of the third
quarter adjustments. The larger one, the largest one in
fact is Fiat -- the write-down. We talked about this in
our second quarter call. We talked about the fact that
we're going to study looking at the value for the
investment we made a couple of years ago.
In 2000 we purchased 20% of Fiat Auto Holdings for $2.4
billion. Based on the market value -- looking at the Fiat
Auto equity value, which is not broken out within Fiat
S.p.A. and debentures -- looking at that a couple of
different ways, we estimate today that the market value
would be about $220 million.
I would stress this as an outside-look-inside. We don't
have access to any inside information here. And we're
looking at it based on reported data. It's our best
guesses for evaluation. I would stress again that this is
not a -- contrary to what you see in the press -- this is
not a negotiated approach. We're not trying to make a
point with this. This is our best shot of what we think
the value is today. $220 million would be our stake. That
would imply an overall value about $1.1 billion for the
company, for Fiat Auto that is. Again Fiat Auto as most of
you know, is not broken out within Fiat S.p.A.
We also have a charge on the production footprint in North
America -- 116 after tax. Primarily this is the transfer
of the medium duty commercial truck production from
Wisconsin to Flint, Michigan. And then there are several
Hughes items in (unintelligible) yesterday results in a
$68 million after tax gain that was primarily the
multimedia company -- Thompson shares -- that were sold in
the last month or so.
Turn in to Page 5; this breaks our third quarter adjusted
results out by segment. Our focus on the middle column --
2002 -- you can see the automotive result was $345
million, 133 improvement from last year. North America:
Another good quarter at 510, building on the success they
were having last year and had so far this year. Europe:
Better; $180 million loss versus 287 last year, but still
a way to go before we get profitable, but some
improvement. We'll talk about Europe in a moment.
LAAM was a disappointment. Given the economic conditions,
we have a loss of $61 million -- worse than last year.
Asia Pacific: $76 million profit; a bit of improvement
from last year. GMAC: Another good quarter at 476. So it's
a total of 696 and Hughes as an 81 negative for a $615
million profit. $230 million total improvement from last
year.
Just putting it back by segment, Page 6 relates out North
America: $510 million. You can see the pre-tax at 734. Net
margin of 1.9%; we're pleased with this despite very heavy
(unintelligible) spending in the market. A lot of
competitive pressure. We've been able to improve our share
as well as improve our net margins. So we're pleased with
that.
Production volume is up 69,000 units. You can see the
market share up 28% for the U.S, 27.6% for total North
America. I'll show you that in a moment as well.
We're also pleased with the ending inventory level at
904,000 units, down 125 from last year. That obviously
gives us some flexibility going forward.
In terms of the profit drivers, obviously volume and mix
have been favorable. Pricing was a significant negative.
I'll come back to that in a moment. But good news on cost,
both material cost as well as structural cost.
Revenue per unit decreased $600 a unit. Just to give you a
little more flavor for that. There's always a lot of noise
in these numbers as you can imagine. The two major
drivers, though, in the revenue per unit are mixed and
negative pricing. At this point in time for the third
quarter mix improvements more than upset the negative
pricing. So it's a good news on that standpoint.
There was a negative impact on revenue because of the
(unintelligible) within (daily rental) and you got a
further effect on the predicament to dilution on the
non-volume sensitive of our after market sales or SPO
sales at several hundred dollars. There are some other
miscellaneous factors in there as well. The net is down
600. But the two major drivers again are mixed and
negative pricing, and mix slightly offset the negative
pricing. So overall that's a good story.
I would also point out that the Q3 2000 revenue per unit
improved from the second quarter levels by about $900 a
unit. Net price was unfavorable in the quarter by 2.2%.
Reflects very tough market conditions in the quarter. Year
to date, that net price is negative by 1.8%.
Turning to page on Market Share; I think the market share
improvement is a good story. As I mentioned, it's in the
U.S, it's in the Canadian market and in Mexico. So we're
pleased it's across the board. It's also the story about
the quality of the market share.
Our retail share was up. Retail as percent of total,
reached 81%. It does not mean we're walking away from a
fleet business. We are not - but the fleet business has
been - at least (daily rental) has been softer. We backed
away from that a little bit. But we're certainly pleased
with our retail share. You can say the (daily rental), as
a percent of total, is down at 13.4%. That will gradually
improve as that market improves, but it's certainly down
for the quarter.
Truck retail market share is very strong at 30.6%. And
truck, as a percent of total, was 56%. Cars are not as
strong as we like to see them obviously. But overall the
market reaction to the products we have and the incentive
program has been very favorable.
Europe: I characterize Europe as (saying) there's been
progress. We're pleased with the reduction in the loss --
$180 million loss versus 287 last year. We're not pleased
that we're still in a loss position. Wholesale volume is
down driven by a weaker industry and a change over to the
new Vectra. Production, though, was up 35,000 units as you
can see mainly due to last year's stock reduction as GMA
worked to reduce their inventories last year.
Our pricing pressures remain in this market. There's no
secret about that. But our cost performance has been very
strong. I'd say that overall we `re certainly on track on
our cost plan. We know we have more to do on the revenue
side here. And that's exactly what we're focusing on.
Market share, as you can see on the chart, was down 4/10
of a point. We're still weak in Germany. UK was a good
story; record improved market share there as well. So more
to do on the revenue side but good progress on the cost
side, overall. And despite I had to point out that the
launch of the new Saab
was a drag in the third quarter. Despite that, Europe was
able to reduce their loss from last year, and are making
progress.
Turning page to Page 9 -- Latin America, African, and the
Mid-East: Net loss is $61 million. This is really about
Brazil. Argentina has been a problem for some time. Brazil
continues to be both an economic issue and for us, a
profit problem. We're making good progress in market
share, really across the board in Latin America -- very
pleased with that. You can see the improvement on our
market share. We're not pleased with the loss of $61
million. The economy of course, and the political
uncertainty, in particular in Brazil, has been an issue.
We don't expect that to change overnight. We're working
very hard to make sure that we can make money in this
market at a reduced industry. And that's our focus right
now.
Turning to Page 10 on Asia-Pacific: Good result -- $76
million, very nice margin. In the pre-tax income, you can
see I point out on the tax rate that there's a lumpy tax
rate here. We had a deferred tax write-off in prior years
that creates the high tax rate this year. I'd say that's
an anomaly this year. But good results from a pre-tax
basis in Australia still, very strong market there. In the
case of the equity earnings that has really been led by
Shanghai, are very nice result there. Very strong industry
in China. Thailand has come back (a lot) but we're still
losing money there. Pretty good market in Australia. And
overall a very good market, very hot market in Asia
Pacific. We're pleased with our results. We're pleased
with the improvement on market share here as well.
Turning to Page 11 -- GMAC: Another strong quarter for
GMAC. I think the diversified portfolio has been a big
help. You can see that financing operations are (above the
first) versus last year. In the case of the core finance
operations, there has been some higher credit provisions.
I'd point out that
that's about the severity or a loss per unit. The
delinquency rate, which I'll show you in a moment, are
holding up quite well. (unintelligible) offset by the
higher retail asset levels, so overall about a push.
Insurance is down by $29 million reflecting a write-down
of some investment securities because of the equity
markets which some think is prudent. Mortgage operation
has bounced back significantly both on higher volumes and
higher servicing fees. So overall GMAC has been able to
improve their results by $39 million.
Furthermore on GMAC on Page 12, you've got a lot of
questions about what's going on, what delinquency and
re-possessions on the delays that I'll state. You can see
about 30 plus delinquency and re-possessions. You can see
the track over the last couple of years in particular
folder 3 at 2.1% of 30 days --pretty important indicator
for us. And it has been holding the line up a touch from
Q2, but very much in line with last year and in line with
the first quarter. We don't see anything unnatural buy
back re-possessions. So holding up reasonably well, as
well.
The other area that we get a lot questions about are our
gains -- book gains per unit -- given what's going on
Hughes car prices on our Smart Lease Program. Of course
the Smart Lease Program runs off on a regular basis. So we
have a chance to reset the mark on this.
And frankly we're saying here this is holding up better
than expected. Our goal at the beginning of the year was
to breakeven given what we knew about the market. Calendar
year to-date book gains are about $310 per unit -- not
shown on the chart -- versus 360 per unit for the same
period in 2002. So that's holding up reasonably well.
Obviously there's pressure on the used
car market. But in terms of our Smart Lease or leasing
program, that's holding up well.
The other area in GMAC I wanted to talk about a bit was
really the balance sheet updates -- what's going on there?
I know there have been a lot of questions from a variety
of sources in terms of balance sheet growth at GMAC and
what it means for us.
And, yes, there has been rapid asset growth in recent
years. You can see back in `98, total assets, auto assets
as well as everything else was $138 billion. At the end of
the third quarter it's $237 billion. So there has been
substantial asset growth during this period of time.
But you can see we've been improving our equity base as
well. So when you look at it from a debt to equity ratio
or funding to equity ratio bases, look at it anyway you
want, and frankly we've been able to improve our leverage
ratios during this period of time.
We've done that by retaining our earnings during this
period. We've also put - GM has infused about $.1.09
billion of capital. This has been a work in progress over
the last several years. The net result is that we don't
expect to have any call for GM Capital on the next year
certainly or the year after that. We think the GMAC
balance sheet is strong. We think the leverage ratios are
quite good. And as I pointed out, we've been working on
those for the last couple of years.
Turning to Page 14, again, I'll focus here on total GM net
liquidity. This is without GMAC and without Hughes. We've
been making the point for some time that improving our
capital position, improving our liquidity is an important
effort. We're making progress. Thanks to very good
operating
cash flow this year. You can see the numbers of December
31st of last year -- $1 billion net liquidity. We had cash
of 11/5 and debt of 10/5.
If you look at the total Q1 to Q3 cash flow -- and I'll
come back to Q3 in a moment -- it was a net positive of
$6.3 billion. We've put $3.2 billion in those pension
(unintelligible) program earlier this year, dividends
to-date of $800 million, so a net liquidity of $3.3
billion. And we winded up at the end of this quarter with
$18.2 billion of cash and debt of 14.9. So overall this
has been a very good story for us.
Talking about the third quarter a little bit, we generated
$600 million of cash during Q3. Small reduction in debt,
so net liquidity improved by about $700 million. As I
mentioned, I think most of you know the third quarter is
typically a weakest quarter. Because the production change
over is (insolent); this in fact we think we have very
good results. We're pleased with it, and the cash flow
continues to be a very good story for us during the year.
One last point on this page; we continue to get questions
about the dividend -- what's going on there? -- and the
short answer is nothing. This is obviously something the
Board looks at on a quarterly basis. As we've talked with
most of you in the past, we tried to set a dividend rate
several years ago that we could sustain during good years
and bad years; and that's what we've done. So stability
and the dividend are important to us and we know it's
important to our investor group.
So keeping this dividend, we know is a very important
piece. And as what we can see today, that's exactly what
we plan to do.
Turning to Page 15, I want to talk about a goal that we
set for ourselves early this year of generating about $10
billion of capital improvement -- effectively
new capital to the company this year. We had a number of
various to do it. The good news is the $10 billion is
achieved through the end of September. This is with all
the Hughes transactions -- which I'll speak about in a
moment -- and without the GMAC dividend.
We still expect the GMAC dividend at the end of this year.
We'll obviously take a hard look at that at the end of the
year based on the size of their asset base and the
requirements. But we still expect that at the end of the
year. You can see what has been driving the $10 billion
automotive cash flow with $6.3 billion, as I just showed
you, has been the key driver. Dividends, as I mentioned,
$800 million.
The retail debt offering and importantly the convertible
bond offering that we did at the first part of this year
has given us a lot of help this year. So we're pleased
with the $10 billion. We're not suggesting we're going to
stop here. We are not. But we're pleased to see this has
progressed so far this year.
This might be a good time to speak about the Hughes
transaction. I think most of you have been reading the
papers as to what happened. On October 10, the SEC
declined to approve the transfer of license from Hughes to
the merged companies. The SEC provided 30 days for Hughes
and EchoStar to file amended applications to reduce or
eliminate their concerns.
The bottom line for us is we're obviously very
disappointed in the actions about the SEC. We're
continuing to work with the regulators to resolve their
concerns. The important piece for us is we believe the
merits of the merger are still very strong. They're in the
public interest and we certainly believe they're in the
shareholders' interest. We think this has been the best
deal for shareholders. We're doing everything we can to
get this done. And we'll continue to push on that very
hard.
If the merger is ultimately not approved though, we
believe we have alternatives. Today it's premature to
discuss them. But I want to make sure that people realize
that there is a very important store value on the Hughes
business. We're pleased with the progress they've made. I
won't go through that a great deal; they were out
yesterday. But DIRECTV in particular has been a
significant improvement in the overall business. They're
focused. They're doing the right things. And the store
value for General Motors, we think, is still very
substantial here.
Page 16 -- U.S Pension Plan Update: This has been a
difficult story given where the market has been. If you
stand back and look at where we were at the middle of the
year, we were down about 3% at mid-year. And that what we
said at a time is we had some hope that if the market
bounced back, we could get to close to a breakeven for the
year. And that was not a great outcome but certainly not
bad.
As the market has continued to be very negative, the third
quarter was very negative -- a minus seven. We're now
looking at year-to-date about a minus ten on the overall
portfolio. Better than the DOW, better than the S&P, down
29% for the same period. It doesn't make you feel a lot
better. But it's still down 10%.
At the same time we also are looking at a lower inflation
rate. And as corporate bond yields have come down, we're
looking at the discount rate coming down as well. At the
end of last year, it was 7.25. If we measure it today, it
would be about 6.75. So another 50 basis points in the
discount rate, which also affects the level of
underfunding.
So the impact of both the poor asset returns this year,
declining discount rates are going to have an impact on
our funded status at the end of this year. It's certainly
going to be worse than we expected at the middle of the
year. It will change with minimum cash requirements, we
see for pensions over the next several years.
We're looking at on the basis of the variable rate premium
avoidance -- what it takes to avoid the premium. Although
our worst case even if a premium cut in, that would be in
the order of about $200 million a year. So it's not the
end of the day. But we want to work very hard to avoid the
premiums. And we refer to that as a minimum cash
requirement.
And then importantly, it's going to be a larger drag. And
we expect that earlier on our 2003 pension expense. I want
to take you through each of these issues.
Page 17. Look at the funded status on a projected yearend
basis. Obviously we have another quarter to go here. There
are a lot of things that can happen in this on both the
discount rate and the asset returns. So we're not trying
to predict the market. We're just saying that if we took
the numbers as they existed today, what would they look at
by the end of the year? And obviously it didn't look very
good.
If you look at a 6.75 discount rate and a minus 10% asset
return, which is where we were at the end of the third
quarter, our underfunded position would be $23 billion.
That compares with $9 billion underfunded at the end of
last year. So obviously this is a deterioration versus
that. And this is worse than we expected at the beginning
and certainly at the middle of the year.
On Page 18 -- and this is an important point -- we do have
flexibility when we put some cash into the pension fund.
And this will help us a great deal although the amount
we're going to have to put in is certainly higher than
we'd like or what we'd expected at the beginning of the
middle of the year.
Just to explain the schedule: On the left hand side you
can see several asset returns scenario for `02, `03, and
forward years. We're not trying to predict these. We're
just trying to show you a range of outcomes. When we look
at it at the end of this year, we'll take another look at
these. But if we had a minus ten this year, followed by
ten going forward, you can see the present value of those
contributions over the next several years 2003, 2007. To
avoid the PBGC Premiums would be about $14 billion.
Just to explain that more, this does not mean that's what
it takes to fully fund the pension. That's what it takes
to avoid the PBGC Premiums -- $14 billion present value.
If you dropped down to a minus ten followed by nines going
forward on asset returns, that's about $16 billion; and
minus ten, eight going forward, it's about $17 billion. I
would point out that these deductions are tax deductible.
So if you look at the middle number of $16 billion,
effectively that's about a $10 billion after tax cash
impact. Still sizeable but I think its dimension is a
little better.
We do have flexibility. In this -- for the BRP requirement
-- there's no contributions required prior to 2004. So we
do have some flexibility. And when we put the money into
pensions, but clearly we're going to have to put more of
our operational cash flow, which has been good, into the
pensions than we'd like or we had planned earlier.
Turning to Page 19, looking at 2003 Pension Expense. And
this is still highly variable obviously; a lot of things
can impact this. And again we're taking a
market as it existed at the end of the third quarter. But
we're saying based on what we have today, that our 2003
pension expense after tax could be about $1 billion --
about 1.80 EPS. So it's a sizeable hit.
That billion dollars of course is about $1.6 billion
pre-tax. It could get larger obviously based on the return
of the fourth quarter, and also could grow to the extent
that the long-term asset return - the assumption is
reduced. We will look at that at the end of the year. It
could get smaller to the extent that we increased our
contributions. The numbers that I gave you on the prior
page and here assume no incremental contributions beyond
the $2.2 billion we contributed earlier this year.
The best and the strongest option we have is the operating
cash flow from the automotive operation that provides the
option to (wrestle) the underfunded pensions, partially
offset the forecast increase in pension expense. We want
to make sure that we're a player on this despite continued
excellent cost performance expected next year.
It's unlikely that North America will offset the increase
in our 2003 pension expense and other areas of structural
cost. North America is now working on their plan -- their
business plan -- and their budget for next year. They're
going to be very aggressive on cost reductions. But the
size of this pension will really require us to have an
increase in structural cost next year for North America.
The final number obviously we'll cover with you on
January.
Just to come back to 2002 on Page 20, we still expect the
fourth quarter to be reasonably strong, softer than the
nine months to-date. We'd expect some softening, and we
will see it, we believe. We're looking at a 16.5 industry
in the U.S for the fourth quarter, 17.0 for the calendar
year.
Our production estimates -- our latest estimates -- are
$1.4 million for the fourth quarter. In North America: 2.1
overall. The North America production estimate is about an
8% increase from the fourth quarter of last year. That
would result in total North America production of about
5.6 million units -- a very good year.
And again I think given our view of the market, given the
inventory position we are in right now, we think this is a
very reasonable plan. We're taking our earnings guidance
up a bit for the year and for the quarter. Excluding
Hughes, we're going up to $1.50, and we're taking up the
full year from 6.50 to 6.75. If you include Hughes in
that, then that will be $1.40 and 6.35. But our confidence
for the year remains very strong. And that's reflected in
these earnings numbers.
On Page 21, I won't cover, just gives an update on our
report card for the priorities we set out this year. Good
progress. No real change from the last time we spoke. This
continues to be a very good year from an operational
standpoint. Obviously the pension drag is one we have to
take seriously; and we do. We're working hard to offset
that. We believe it is manageable, but it's going to take
some number of years and some amount of cash to feed it
over the years to reduce that drag. Let me stop there, and
we'll turn it over to questions.
Operator: Ladies and gentlemen, if you would like to register a
question, please press the 1 followed by the 4 on your
telephone. You will hear a three-tone prompt to
acknowledge your request. If your question has been
answered and you would like to withdraw your registration,
please press the 1 followed by the 3. If you are using a
speakerphone please lift your handset before entering your
request.
One moment please for the first question.
Our first question comes from the line of David Bradley
with JP Morgan. Please go ahead.
David Bradley: Hi! Good morning and congratulations!
John Devine: Hi, David. How are you?
David Bradley: A question for Bill Muir. Just looking at the
quarterly trend and residual values -- 4.26 Q1, 4.10 in
Q2, $136 in Q3 -- are we getting toward a - can we
extrapolate that it would be breakeven in Q4 and
potentially looking at loss later on or are we going to
reverse that trend or how's that going?
Bill Muir: Well as you, I think, probably know is there's
pretty much a seasonal pattern to what takes place in
terms of Hughes car values. And the fourth quarter is
always the weak quarter for us. Last year, for example, we
actually had a book loss of $24 a unit in the fourth
quarter. So as a year as a whole, we were like $285 a unit
last year. That actually was with a negative in the fourth
quarter.
Now this year we're expecting it to be a little bit worse.
So I'd say for our financial forecasting, we're assuming
that there is a book loss in the fourth quarter. Having
said that, it hasn't happened yet. So far on October,
we're about like $100 a unit. But there's still plenty of
time for it to dip down. And even assuming that, even kind
of in our - not worst case, but kind of conservative
outlook, we're still expecting the whole calendar year
book gain to be somewhere between $175 a unit, $200 a
unit.
John Devine: David, the other thing I'd point out is of course
we reset the values as the leases roll up which helps us a
great deal. And most importantly, we've emphasized leasing
over the last couple of years. So our leasing run rate
today is single digits. We've done that very
intentionally. Probably it ramps up a little bit frankly
because some parts of the market really require it. But
our leasing exposure is relatively light today.
David Bradley: Okay. If you had to - if it looks like you're going to run
negative for a while, would you take a one-time reserve or
would you simple run a negative number?
Bill Muir: Well it's kind of hypothetical. We don't expect that we're
going to run negative for a while. With 175 to $200 a
unit, that's a pretty substantial cushion for the calendar
year. And it clearly points out that there's no need that
our accounting policy is appropriate and there's no need
for us to take any kind of....
John Devine: We've been very transparent on this, David. So I think if
we ran close to it, we'd be very open with you. But that's
an issue we haven't confronted yet.
Bill Muir: Yes.
David Bradley: Thank you.
Operator: Our next question comes from Michael Wood with Salomon
Smith Barney. Please go ahead.
Michael Wood: One quick one and then a couple of questions on Europe.
The three special items on the pre-tax basis, were they
all in cost of goods sold?
John Devine: Yes.
Michael Wood: Okay. Overseas, can you comment at all about performance
with Saab?
John Devine: Yes, Saab is in a difficult year. It has been an important
year for Saab because they're starting up the 9/3
production. If you look at the Saab production footprint,
that is obviously the bulk of their business and the bulk
of their production. So it has been a big deal. And we're
having a few difficulties; although we love the product. I
think the product reaction -- all of us who have driven
the car think it's going to be very, very successful.
But they're trying to eat a lot this year as they launch
that product and get it started. And of course then they
have the run down of the old car or so we have more to do
on the profit side I'd have to say on Saab. I'd make that
clear. We want to make bigger improvements than we have.
But we're delighted about the product. We think the
product is going to be very successful. Although the
impact of that is going to be felt more of next year than
it had this year.
Michael Wood: Is Saab fully integrated with GME?
John Devine: It is not. It has been more stand-alone, frankly. And
obviously that's something we're looking at the reduced
cost on a continued basis. We thought it was important as
they launched the 93, to do it pretty much as we've done
historically. But going forward, we also think and believe
it's important to bring it closer into GME.
Michael Wood: Okay. And that would improve its profitability?
John Devine: We think so; we think there's a big opportunity for cost
reduction in Saab, as well as in the rest of Europe.
Michael Wood: Okay. As it relates to Fiat, is the Journal article
correct that the original deal was Fiat contained some
change in structural ownership in some clause, to that
effect?
John Devine: I'm not sure I know what that is, Michael. Is that the
story today in the Journal?
Michael Wood: Yes, and it alluded too, that there was a - the original
deal with Fiat contained some sort of a clause -- if there
was a change in ownership, you could get out of the put
with Fiat.
John Devine: There were clauses on there.
Man: If there was a change in control on Fiat S.p.A,
(unintelligible).
John Devine: If there's a change in control on Fiat S.p.A....
Man: Then the put is automatic...
John Devine: ...then the put is automatically eliminated.
Michael Wood: Okay. Would - if the government of Italy assumed the debt
or the bonds that are outstanding with Fiat, would that -
John Devine: I don't want to speculate on that.
Michael Wood: Okay.
John Devine: You're getting into a lot of...
Michael Wood: Yeah.
John Devine: ...details. This is frankly -
Michael Wood: No problem. Thank you very much.
John Devine: Okay.
Operator: Our next question comes from Steven Girsky with Morgan
Stanley. Please go ahead.
Steven Girsky: Good morning, everybody!
John Devine: Hey, Steve!
Steven Girsky: A couple of quick questions; when you went through your
pension assumptions, John, you assumed no change in
benefits as a result of next year's negotiations?
John Devine: We assumed the repeat of the prior contract.
Steven Girsky: That there would be an increase next - in the fall, or
whatever?
John Devine: Yeah. Basically, repeated the prior contract, although
that's again, not at all negotiated with the UAW.
Steven Girsky: Okay. And can you tell us how you're doing on the
healthcare front? You had a 6% target this year?
John Devine: Yeah. That's our OPEB trend rate; pretty much on target. I
mean that's very tough to keep cost down on healthcare
these days. So, our team has been working very, very hard
to do it. We think it will ratchet up about a point next
year, we're looking at probably a 7-handle, versus a
6-handle for next year, given some of the HMO and drug
cost that are coming through. But they're pushing very
hard. We still expect to contain it through the 6, 7 range
for next year. So a 7 is probably more realistic than 6,
but it's still a drag, but I think our guys have done a
nice job managing it.
Steven Girsky: And -- I have just a question on the - and you guys may
have to get back to me. Give us this worldwide payroll
numbers, and then we look at the employment, it seems like
the employment keeps going down and the payrolls keep
going up. Is there something - is there some disconnect on
the employment, does that include the people on lay-off
too, or no?
John Devine: You know what? I don't know. We'd have to check -- I don't
think so. I don't think there's anything in there. I think
the thing on people cost, when you look at the dollar
cost, is that people cost do go up every year.
So, you know, typically, you'll look at a single-digit
increase for everybody on the rolls across - around the
world. So, with constant headcount, your payroll cost will
go up. So that might have been what you saw, but I --
we'll have to get back and check and see.
Steven Girsky: Bill, was there any gain on sale accounting in your
quarter?
Bill Muir: There was about 37 million in the quarter compared
to none last year. But if you look at the calendar
year-to-date, it's exactly even this year as last - we're
basically - right on page this year with last year -- $81
million calendar year-to-date this year; $81 million
calendar year-to-date last year.
John Devine: As Bill does securitization, that could be lumpy by
quarter, Steve as you know.
Steven Girsky: Thanks. But that's an after tax number, right?
Bill Muir: Yup.
Steven Girsky: Thank you.
Operator: Our next question comes from Gary Lapidus from Goldman
Sachs. Please go ahead.
Gary Lapidus: Good morning, guys!
John Devine: Hey, Gary.
Gary Lapidus: Bill, since you're so involved in this, I'm going to keep
that trend going.
Man: Got to go. Go for him.
Gary Lapidus: The mortgage had a particularly good
quarter. Maybe if you could kind of shed a little light on
what's going on there, was this mostly related to a big
increase in mortgage servicing rights? But, you know, I
would think it was pre-payment's up and you know, (re-Fi)
application's up. What would you expect to happen there,
you know, or maybe, are you over-hedged there, so
that you're getting actually a benefit from the rates
versus the pre-payment speeds and all that?
Bill Muir: Well, just let me touch briefly on MSRs just to kind of
put it in perspective. We started the year with about 4.5
billion in MSRs. We ended the third quarter with two 2.8
billion in MSRs. So, obviously, you know, we have in line
with the accelerated pre-payment experience in the
industry. We have been taking the value of those MSRs down
very aggressively. In the third quarter in particular, we
took them down by about 1.5 billion. We started the
quarter with 4.4 billion; we ended the quarter with 2.8
billion.
So you know -- now we obviously haven't recorded a $2
billion losses the beginning of the year or a $1.5 billion
loss in the third quarter. So clearly, we've had a very
effective hedging program that has been in place, and I
wouldn't say we're over-hedged. I would say if you look at
the economic offset, it's almost an exact match. I mean we
are just like dead nuts right on top in terms of tracking,
you know, what the impairment and the write-down in the
MSR is to what the economic results of our hedges.
Gary Lapidus: Is there a point at which, if mortgage rates were to
continue to go down, that the hedging - you sort of run
out of steam on your ability to hedge out the impact of
the write-down to the MSRs?
Bill Muir: I mean, theoretically, I guess anything's possible. But,
you know, it's a very dynamic hedging program. It's
something that doesn't just sit there with -
Gary Lapidus: But is the market unable to sort of hedge everybody that
would need to, if mortgage rates keep going down?
Bill Muir: Gosh, I don't know, Gary. I mean, that's -
Gary Lapidus: Okay.
Bill Muir: There has been a lot written about, you know, how (Fannie
May) can do it. You know, we're certainly a bit player, as
compared to (Fannie May).
Gary Lapidus: Yeah, okay.
Bill Muir: But I think the bottom line is if you look at, like the
calendar year and the quarter for the mortgage group,
MSRs have been, you know, certainly in the quarter, a
neutral element compared to last year. It's positive,
okay? Because last year, we didn't quite hedge it as
effectively but we did this year in the third quarter.
So, year-over-year, if you kind of look at the breakdown
between, you know, our companies, we were up about $75
million year-over-year, and 40 million of that improvement
year-over-year is in the residential servicing businesses.
And it's just coming from better hedge effectiveness this
year compared to last year, combined with the benefits
from having a very strong flow of new mortgage
originations at very wide spreads.
Gary Lapidus: John, when you said prevailing, there was a page you
mentioned prevailing rates, were you saying that you
were calculating the pension expense assuming you went to
- and some of the other things, assuming you went to the
675?
John Devine: Yes. We assumed if we took our market-to-market today --
again, we're not going to do that; we're going to look at
it at the end of the year.
Gary Lapidus: Yeah.
John Devine: On the discount rate, our best guess today would be about
675 versus a discount rate we had in place at the end of
last year of 725.
Gary Lapidus: Okay. And then so, presumably, you would do a similar
reduction in the discount rate on healthcare?
John Devine: Yes.
Gary Lapidus: Okay. And how - approximately, what would that add to
another - well, I guess if you wrapped it all up, if you
lowered the discount rate 50 points in your inflation as
you see it -- a new contract, et cetera, pension expense
(up) roughly -- how much would you expect that to be up
year-over-year?
John Devine: Well, the only number we'd put out so far -- we'll
give you more in January when we see because there's a lot
of pluses and minuses -- is that billion dollars for
pension expense for `03 over `02. That's a billion
after-tax.
It gets fairly complicated going into all the pieces. That
billion dollars does not include healthcare, does not
include a change in asset returns, and does not include
any additional funding we've put in to either (V-Biz) or
into (health).
Gary Lapidus: Would you expect healthcare to be up, what, a couple of
hundred million?
John Devine: I'd expect at (unintelligible) OPEB trend rate is more
like 7, so we'll get an aging factor of another couple of
points on top of that. So, we'll get another 7, 8, 9%
increase.
Gary Lapidus: On your book expense?
John Devine: On our expense year-to-year.
Gary Lapidus: Yeah. Okay, thank you.
Operator: All right. Our next conference question comes from Scott
Hill with Sanford Bernstein. Please go ahead.
Scott Hill: Good morning, John!
John Devine: Hey, Scott!
Scott Hill: John, I know it's not in your forecast, but the market's
obviously discounting a more difficult automotive demand
environment (unintelligible) you guys are forecasting for
next year. If you just look from a theoretical standpoint,
North American production in the low 15 million-unit
range, could you just talk broadly about how you think
that would play out on your net liquidity position? Do you
think you're actually in a good position to weather that
storm given the obvious, you know, holes in the balance
sheet, (unintelligible)?
John Devine: It can never be strong, as you'd like. And obviously, as
we do our plan, we always include a downturn segment into
it. Low 15's, we think, would be well off the chart of
what a downturn would look like. You know, we think it
would be more of a high 15's than low 15's. But obviously,
we do a lot of planning on the base plan, but also what it
would have looked on a larger downturn basis. And we do
get surprises in this business that we have to be ready
for.
Never as strong as you'd like to, but we've been focusing
on liquidity for the last couple of years, as you know.
Pensions are a drag, but we do have the capability of
doing that over time if we have to.
We obviously are going to work very hard to protect our
automotive spending. We think that's a very important part
of our competitive position. To protect our core
businesses is very important. We think we can do that,
certainly and reasonably good times and in downturn. So
the work we've done to-date would certainly suggest that
we will do more work for `03. Obviously, in this market
there is a great deal of uncertainty, but by and large, we
think we can get through.
Scott Hill: John, midway through the year and even earlier, you were
suggesting that your commitment was to offset the negative
impact from pension and healthcare. Obviously it's - the
hole is a lot bigger then anybody expected. But can we
look at, you know, your overall negative number that
you're forecasting here, or at least not forecasting,
carrying forward from the third quarter levels and suggest
that, you know, that's what it's likely to be, and you're
saying you're not going to be able to cover it all. But
thinking that there's actually some capability to cover
some of that through structural or material cost
reduction.
John Devine: Yeah, obviously.
Scott Hill: At least along the lines of what you previously talked
about?
John Devine: The North American team is working on their `03 plan right
now, so they're working very hard. We're going to be -
continue to be aggressive on cost. But what we didn't want
to do, because of the size of the pension requirement for
expense, is just assume that we could offset it entirely,
as we did this year.
You might recall, this year we had about 1.4 billion
per-tax increase in healthcare and in pensions. And we
offset it, and we're right on the mark to meet our
structural cost requirements despite that increase this
year.
So we managed to offset them this year. We're going to
fight like crazy to offset them next year. But we thought
it was important to flag: it's a big number. And there's a
lot of pressures on us since we aren't sure we can offset
it next year, and that's the reason we laid it out that
way.
Scott Hill: Okay. Do you have any net price guidance for the fourth
quarter, as well as what you're looking at in terms of
next year?
John Devine: The year-to-date number: North America -- 1.8% negative; a
little higher than we'd like, obviously -- 2.2 for the
third quarter. We aren't going to give you a number for
the fourth quarter for next year, and the reason we don't
want to do it -- we obviously have it -- is more for
competitive reasons than anything else. I think suffice it
to say that that's - the run rate is probably a reasonable
indicator of future expectations. But this is a
competitive market. We have been very aggressive; we think
it has been a good play for General Motors. We aim to keep
that up, but we don't want to telegraph everything that
we're going to do.
Scott Hill: Thank you.
Operator: Our next question comes from the line of Ronald Tadross
with Bank of America Securities. Please go ahead.
Ronald Tadross: Hey there, John!
John Devine: Hey, Ron!
Ronald Tadross: The net cost reductions -- 3.5% -- that's still yellow,
could you just give us a rough idea of what you're getting
there?
John Devine: Yeah, actually, pretty much as we talked the last time,
Ron. Good progress in material cost in both North America
and Europe. You know, the number we set this year in both
markets was net of design changes. So it's not just the
negotiated savings. We're looking at this as a single
number this year and going forward.
So it has been a tough struggle. That was a big record
level. We've never achieved those levels of net savings
either in North America or in Europe. And the guys are
pushing very hard in getting the maximum we can achieve
this year, but we also expect to go back at it next year.
I'd emphasize that while we continue to put pressure on
negotiated savings with our suppliers, we're putting a lot
of pressure on ourselves to take cost out in areas where,
frankly, the consumer won't see it, where there is a not
as safe or quality impact, but to be smart about how we
design; and we think there is more to be done there.
Ronald Tadross: So is it closer to 3.5% or closer to 2%? I mean, we - I
know it's a really tough target.
John Devine: For North America, it's closer to 3.5.
Ronald Tadross: Closer to 3?
John Devine: Yeah, 3.5.
Ronald Tadross: Okay. And then, on the outlook for the year at 17's are -
I guess that presumes that the fourth quarter runs in the
16.5 to 17-range. Could you just give us a rough idea of
what you're seeing in October?
John Devine: Let me ask all (Paul Schmidt) to comment; he's watching us
hour by hour, as you can expect.
Paul Schmidt: Okay. Thanks, John.
As we've been looking at it, Ron, and as we've discussed
throughout the month, we expect October to be a bit softer
than the first nine months. I don't think that that's a
surprise, but pretty much in line with our expectations
somewhere around 16 million units on an annualized basis
for October, and still sticking to our low to mid-16 range
in the fourth quarter, which would bring in right about 17
million units for the year.
Ronald Tadross: Okay.
Paul Schmidt: So a little soft. As early in October, we've seen some
improvement as the months has progressed, and we're going
to stick to our current guidance.
Ronald Tadross: Okay. All right, thanks a lot.
Paul Schmidt: You're welcome.
Operator: Our next question comes from Michael Bruynesteyn, with
Prudential Security. Please go ahead.
Michael Bruynesteyn: A couple of questions; first of all on the cap ex, it
looks very low in the quarter. Is this rate sustainable,
what does that mean for this year and next year?
John Devine: We're still on that 7-1 number we laid out before,
Michael, so that's still our best forecast. We ran pretty
well in the third quarter. North America did a very good
job of really getting the product out the door with the
minimum cap ex. So we'll get - it's always lumpy by
quarter, so I suggest you don't want to just look at it by
quarter. So we think the 7-1 forecast is still our best
shot. We'd probably will (beat it), I have to say, but
that's our view today.
Michael Bruynesteyn: Okay. And then, correct me if I'm wrong, but are you
guiding down for the fourth quarter?
John Devine: Not to our knowledge. We took it up to ($1.50) without
Hughes; that's higher than we had before -- 6.75 - we were
at 6.50 before -- this is all without Hughes -- so up 25
cents. About 15 cents of that is in the third quarter,
about 10 cents in the fourth.
Michael Bruynesteyn: And, I guess in the context, this is sort of stepping
back but looking at what you're hearing with the
- what you're showing about with the pension, et cetera,
is this $10 of EPS by mid-decade still achievable?
John Devine: We haven't backed off it. We obviously have a deeper
pension requirement to fill, but we're still pushing
harder to get to the $10. We'll give you an update on
that, probably early next year or middle of the year.
Michael Bruynesteyn: (Unintelligible).
John Devine: Next question?
Operator: And our next question comes from the line of John Casesa
with Merrill Lynch. Please go ahead.
John Casesa: John, given Paul's comments on October sales, are you -
when you talked about inventory flexibility, do you mean
flexibility to increase the schedule?
John Devine: No, no. We're not talking about increasing; in fact, we
probably can't. But our inventories, we believe, are
pretty low on a -- most certainly in some parts of the
line. So if the sales were a bit softer, we think we'd
have some ability to observe it. No, we're not talking
about a significant increase in production.
John Casesa: Okay. Then just secondly on - at Shanghai, it seems to be
making a lot of money for you guys. I mean what's the
outlook for that business, you know, on a quarterly basis
or over time or however you want to characterize it?
John Devine: Yeah, I can't give you a number. We're still going through
it. But I'll tell you, we've been pleasantly surprised
this year by the growth in the industry and by the
opportunities in China, and frankly, by our continued
ability to make money despite the fact that, I think, as
you know, the prices have come down. Prices have come
down, and that has been one of the reasons the industry
has gone up, but we've been pleasantly surprised. I think
one of the issues we have to confront in China is how do
we keep pace with the growth.
John Casesa: And given what the prices are and given what you're
earning, I mean is that business earning satisfactory
margins, low margins, high margins?
John Devine: I'd describe them as good. It could always get better.
John Casesa: Okay. Thank you.
Operator: Our next question comes from the line of Wendy Needham
with CS First Boston. Please go ahead.
Wendy Needham: Hello, good morning!
John Devine: Hi, Wendy!
Wendy Needham: (Paul), a quick one. All of your numbers included medium
and heavy -
Paul Schmidt: Yes, they did, Wendy.
Wendy Needham: So the 16 that you're seeing - 16, as you're seeing for
October, could be in the 15's in a light basis?
Paul Schmidt: Yeah, on the light vehicle bases; and given how strong
things were in the third quarter, that's pretty consistent
with our expectations.
Wendy Needham: Okay. And then, John, maybe you want to address this. Over
in Paris at the analyst meeting, Peugeot was talking very
bluntly about targeting Germany and Italy, having been
successful almost everywhere else in Europe.
Particularly -
John Devine: Who thought they already have?
Wendy Needham: Yeah, well, he said they still were ready to go for it. So
can you maybe update us on your diesel, is that what's
doing it or is it just the Peugeot designs are more
interesting?
John Devine: I bet they've done a very nice job -- their designs, their
diesel lineup has helped; you know, we looked at this a
couple of weeks ago. We assume that - this is not being
defensive, but frankly, if our diesel share was fully up
to what we think some of the major competition is, we
think that's probably worth about a point a share for us.
We've been improving. What you're going to see over the
next year, a year and a half in GME are four new diesel
engines coming out.
So we have a lot of new product coming out through a
couple of our different sources that we think are going to
be very competitive. But certainly the diesel lineup that
Peugeot has, has been a strong point for them. But I think
it's more than that. I think it's good design. They've
been aggressive in the marketplace. It's a good role model
for the rest of us on what you can do in that market.
Wendy Needham: And then, obviously, there are small - more, well, they're
targeted at the small end, which would have some pretty
serious implications for Fiat, which is already falling.
Is there anything you can do to help Fiat or do you just
have to sort of stand by until the put is exercised?
John Devine: Well, we're on the outside; so obviously, we're not in the
inside. And they're running the business. I think they
realized what they have to do. They're being aggressive
about it, but it's going to take product, it's going to
take restructuring menu ...(unintelligible) they're
working on it, but we're on the outside, no question.
Wendy Needham: Okay. And now your other favorite subject, Isuzu. I guess
some of the new people in Japan are calling for a poorly
operating business is to - just to shut down completely,
and I thought Isuzu might be on that list, but you need
the diesel engines from Isuzu.
John Devine: Well, that's the reason we announced the deal in August.
And what we did was we want to be helpful to Isuzu, but we
also want to protect our interest.
So we're doing basically increasing our ownership beyond
50% in the diesel programs, both for one here and the one
in Europe.
So that's the deal we're negotiating with the banks and
with Isuzu today. We think it's good for Isuzu, good for
the banks, and importantly, good for us. But that's the
reason we're doing it.
Wendy Needham: But could the government commit and override you
or is it your plan - that your plan is strong enough to
keep the government away from shutting it down?
John Devine: Well, we're still negotiating, but we think that it would
be a mistake if that happened. And obviously, we were
gaining a lot, but we're still confident we can protect
our diesel supply.
Wendy Needham: Okay, thank you.
Operator: Our next question comes from the line of Rod Lache with
Deutsche Bank. Please go ahead.
Rod Lache: Good morning, everybody!
John Devine: Hey, Rod!
Rod Lache: I've got a couple of questions. First of all, can you
comment on the GMAX financing needs in `03, and to what
extent are you planning to tap the ABS
market next year; and also related to that, are you
treating the gain on sales on ABS Securities any
differently when there's 0% loans?
John Devine: Let me ask Bill to comment on that.
Bill Muir: Okay. Well, our funding requirements are, you know, very
much in line with what we've kind of had them pegged at
during the course of the year. I mean we're well ahead of
schedule in terms of what we have to complete for the
year.
And this year, we've made kind of a modest shift towards
an increased amount of asset-backed funding. You know,
it's probably about 1/3 more than what we did last year --
not quite, but that's kind of the combination of the cost
effectiveness rather than the highly liquid nature of that
market.
For next year, we would expect our funding requirements,
you know - and so this year, we're going to be somewhere
in about, you know, a $30 billion funding year overall for
our US book, which is the main book.
And next year, we expect this is going to be about the
same. And we're going to approach the market in pretty
much the same way. We might, again, just modestly increase
the proportion of ABS, but our overall funding approach is
one of diversification. We don't believe in just relying
on one market for our funding and, you know, we kind of
take a little bit longer-term view towards that.
Rod Lache: Okay. And the gain on sale accounting is similar?
Bill Muir: Yes. I mean there's really no difference. I mean, if....
(Paul Schmidt): Zero does an impact.
Bill Muir: So zero does an impact. And I mean, essentially, when you
do a securitization of a 0% deal, you basically just
discount those receivables in the marketplace. So, in
other words, the, you know, since there's no interest
component, the asset-backed security holders basically
look at the principal payment stream and then discount it
at a prevailing market range.
Man: For return.
Bill Muir: You know, and that's how you sell the receivables. So it
really doesn't screw up or in any way change the nature of
how you're doing asset-backed (unintelligible).
John Devine: The nice thing about the Zero business, Rod, as I think we
know is the credit quality of that business has been quite
good. So...
Rod Lache: Yeah.
Man: That's was incredible.
John Devine: It's not cheap, I'd have to say, but the credit quality
has been a big plus.
Rod Lache: Yeah. Also - okay, if you can comment a little bit on
Hughes. We would imagine that the Hughes deal doesn't go
through and Hughes gets the 3.2 billion between the break
of (unintelligible) in the sale of PanAmSat. Would it be
fair to assume that GM has the ability to repatriate that
cash to the (parent) in some way. And also, do you still
have quite a bit of flexibility with respect to
contributing Hughes' shares to the pension fund?
John Devine: The break up for the -- just to be clear for everybody --
is $600 million and there's a requirement to collect or
start to buy PanAmSat at a predetermined price of 2.7
billion, so that's a 33, or so we talked about. We think
that's a very clear contract. We obviously spent a lot of
time negotiating that a year ago. That goes to Hughes just
to point that out. We did that to make sure that we
protect Hughes in their liquidity requirement.
I can't tell you much more about options other than we
have them. We will explore them if the deal breaks up. But
right now, our focus is on getting this deal done. I'd
rather not go too far down that road until we know more.
Rod Lache: Okay, one last question. Can you comment on the fixed
costs in North America versus last year? I think last year
in the third quarter, you commented they were about 9.6
billion. Was it basically flat?
John Devine: Ray Young, let me ask you.
Ray Young: Yeah. Actually, we actually had a really good performance
in the third quarter of this year. We're actually, for our
fixed costs, down this year compared to last year in North
America, which is a tremendous performance, given the fact
that we've got increased volumes, as well as additional
pension and healthcare expense. I think we're very pleased
with what's happening right now in North America.
John Devine: North America has done a very nice job on their structural
cost. More to be done, but (eventually), they've done a
very job.
Rod Lache: Is it down meaningfully?
John Devine: We can't give every number, Rod.
Rod Lache: Okay. Well, it's worth a shot. Thanks, guys.
Operator: Ladies and gentlemen from the press and media, at this
time, if you would like to ask a question, please press
the 1 followed by the 4 on your telephone.
Our next question comes from the line of Darren Kimball
with Lehman Brothers. Please go ahead.
Darren Kimball: Hi, good morning!
John Devine: Hi, Darren!
Darren Kimball: You laid out some assumptions on the pension expense side,
and while I know you're not ready to tell us what you're
going to use as an expected return on assets, you did map
out sort of a range of 10 down to 8 when you were talking
about the PBGC minimums. So, I was just wondering if you
could confirm what the sensitivity is -- we calculate it
at about 75 cents per point -- in terms of where you go on
the expected return from the current 10%.
John Devine: I can't tell you unless Eric has something.
Eric Feldstein: Well, a 1% move in the expected long-term return on assets
would impact '03 pre-tax expense by roughly $700 million.
Darren Kimball: Okay. So that's more like 85 cents?
Man: Yes.
Eric Feldstein: I think you're close.
John Devine: It's pretty close on that.
Darren Kimball: Okay. And on the OPEB side, are you including the expected
increase in OPEB expense in that (unintelligible).
John Devine: No, that's -
Darren Kimball: It sounds like you're just talking about pension. Can you
speak to that expected variance, possibly?
John Devine: Just what I said before, is we have a - the OPEB trend
rate this year was in the order of 6, it looks to be
coming in about that number. We're going to be a little
higher next year; it looks to be more like 7. You got an
aging impact and things like that on top of that, but the
base OPEB trend rate is in that order.
Darren Kimball: Okay. That's all I have, thanks.
Operator: Our next question comes from the line of Saul Rubin with
UBS Warburg. Please go ahead.
John Devine: Hi, Saul.
Saul Rubin: Hi there. Good morning.
Man: Good morning.
Saul Rubin: Just a few quick ones on pension and then a question on
cash flow. When you give these present value numbers, what
is the discount rate you're using to calculate them?
Bill Muir: We're discounting it at roughly the rate - you know, we're
discounting it somewhere between 8 and 10%.
Saul Rubin: Okay. So, in real money terms, we're actually talking
somewhere over $20 billion, is that fair to say?
Bill Muir: I can look at the numbers, but I - if you're talking about
in nominal value terms.
Saul Rubin: Nominal terms, yeah.
Bill Muir: I supposed the present value is obviously higher, yes.
Saul Rubin: Okay. So it's around 9% you're using. Is that fair to use?
Bill Muir: I'll double-check it, but I think that's about right.
Saul Rubin: Okay. And then just to clarify. When you say that despite
your excellent cost performance it's unlikely you'll
offset the pension expense, are you referring to the
billion dollars?
Bill Muir: Yeah, the new money. Not this year, we have offset it.
Saul Rubin: Right. But it's just a billion; it doesn't assume any
lowering of (unintelligible) asset assumptions.
John Devine: Yeah, the billion dollars before any change in asset, it's
also before we add any additional funding. Both could
change the number.
Saul Rubin: Okay.
John Devine: We'll give you an update on that number when we see in
January.
Saul Rubin: Okay, fine. And then cash flow -- you're doing rather well
on cash flow for the course of this year -- $6 to $7
billion in operations. I'm presuming - I assume it would
be higher for the full year. Less than half of that is
going to come from earnings. So can just talk a little bit
about where that is coming from, and how sustainable that
might be?
John Devine: Yeah, there' a number of factors and certainly working
capital has been a very important piece. And I think one
of the things we tried to do right through each of the
operational organizations is focus on, obviously,
profitability and net income and contribution margin, but
also on cash flow. And I think we're not going through all
of the bits and pieces -- that's having an impact. I mean
people responding, cap ex has been good, as we talked
about so far, managed working capital has been attractive.
So there's a number of pieces to it; obviously, volume
improvement here helps cash flow. It does generate
positive cash flow. That helps.
Now, the other piece I should mention to you in the third
quarter just for say, you know, all the pieces we had tax
refund in the third quarter, as well. It's - this is prior
year taxes resolving those prior year taxes that was about
$1 billion in the third quarter -- that's in the number.
There are a lot of bits and parts on that, good and bad.
But overall, it's been a very productive year. Cash flow
was worked very well. And part of our mission is to keep
it up.
Saul Rubin: Fourth quarter can we expect another billion or two?
John Devine: I don't want to give you a projection, Saul.
Saul Rubin: Okay.
John Devine: I think suffice it to say that it's right at the top of
our priority list.
Saul Rubin: Okay.
John Devine: Once it's there, we'll get it.
Saul Rubin: Is it fair to say a fair amount of that came one way or
another through working capital?
John Devine: Certainly it was a big driver in addition to
profitability.
Saul Rubin: And what was the basis on that - of that other than higher
volumes?
John Devine: As I've mentioned before, really, a lot of efforts right
to the organization to focus on improving cash flow.
Inventory beyond volume right to the organization as an
example.
Saul Rubin: And that includes pressure on some price I presumed -- it
includes changing the payment terms from some of those?
John Devine: (Unintelligible) this year. That's not - we - the payment
terms have been in placed for the last couple of years.
Man: It's all three on here. I think it's fair to say we have
had a tremendous focus on inventory management within
organization both in finish - work in process inventory as
well as finished goods inventory. And I think we're really
seeing the benefits flow through this particular calendar
year.
Saul Rubin: Okay. Good. Thanks. And a final quick one.
John Devine: (David), I think I should I mention, Saul, while you're on
the tax issue and mentioned the refund. We're not paying -
for the book tax we talked about 29%. But given our
position, we're not paying much real cash tax. So that's
helped as well. We expect that to continue for some time,
by the way.
Saul Rubin: Okay. Okay, fine. Okay, thank you.
Operator: Our next question comes from the line of (Mickey Maynard)
with -
John Devine: Before we get on to that, I just want to mention one other
thing. When we're going through earnings I've neglected to
mention that we're going to have an impact for Daewoo in
the fourth quarter. Just to make sure that everybody
understands that; it's about 15 cents negative.
We're getting Daewoo started up, as most of you know.
We're just about to get the key. So that - the impact in
the fourth quarter is 15 cents; that is in the numbers
that I gave you before. So the full year 6.75 and the
fourth quarter number of $1.50 include the Daewoo number.
We'll talk about the impact next year in January.
Sorry (Mickey), go ahead.
Operator: All right. We are now taking questions from the press and
media with (Mickey Maynard) from New York Times. Please go
ahead.
(Mickey Maynard): Good morning! I want to back to David Bradley's original
question on leasing and make sure that I understood the
answer correctly. You were saying that you are now in
single-digit run rate on leasing. In other words, fewer
than 10% of the (unintelligible) are being leased, is that
right?
John Devine: Yes; it's about 12 to 13 of retail. The single-digits are
percent of total.
(Mickey Maynard): Okay. Could you tell me what it was at its peak?
John Devine: I would have to get back and check. It was above 20.
(Mickey Maynard): Yeah. And I'm just wondering, is the reason primarily zero
percent financing or is it residual combination of both?
John Devine: No, it's been a strategic issue on our part (Mickey), to
back off leasing or we could. I mean there are certain
parts of the market that really demanded luxury cars. Some
parts of the country geographically that have a higher
propensity for leasing. So we have to be competitive.
But strategically, we try to back off. There're maybe
opportunities for us to increase it going forward so we're
not going to stay forever. But that's been the strategy
the last couple of years. We think it's been working for
us.
(Mickey Maynard): Okay. But would you - if you were to get to make an
estimate right now, would you say we'll see less leasing
going forward rather than more?
John Devine: For us, I think, you'd have to wait and see.
(Mickey Maynard): Okay. And second question and then I'll let you go; while
this is a healthy quarter, I think you would say -- John,
as you know in `98, I think, Ford earned about $1 billion
in the third quarter. For you to get to the $10 a share by
mid-decade, where you have to be in the third quarter? Do
you have to be earning Fords of about $2 a share to pull
it all together for the year?
John Devine: Well, we're going to make 6.50 this year. We talked about
the pension drag next year, which would be an issue for
us. So we have to do better in every quarter. And I
wouldn't look at it just quarter-by-quarter, specific, but
we have to do better.
(Mickey Maynard): Right.
John Devine: You know that.
(Mickey Maynard): But if you look at something like this, this is not where
you have to be, correct?
John Devine: No, absolutely not. We know that we have to do better on
North America. We certainly have to do better outside of
North America or really across the board. So -- listen, no
one at GM thinks this is good enough by any stretch.
(Mickey Maynard): Okay. Great. Thanks very much.
Operator: Our next question comes from the line of Joe Miller with
Bloomberg. Please go ahead.
John Devine: Are you there, Joe?
Joe Miller: Hello?
John Devine: Hey, Joe. Are you there?
Joe Miller: Yeah. Can you here me now?
John Devine: Yeah. Go ahead.
Joe Miller: Sorry about that. First the Daewoo charge in the fourth
quarter, that's 15 cents after tax?
John Devine: After tax; it's not a charge. It would be just our share
of what we think their loss will be. Early days you have
to (unintelligible) we're just walking in the door now.
But that's our guess for the fourth quarter.
Joe Miller: Okay. Do you have a larger figure on that or a, you know,
none -- a net figure on that?
John Devine: You mean in that income number?
Joe Miller: Yeah.
John Devine: It would be $80 million to $90 million after tax.
Joe Miller: All right. Now on the pension expense for 2003, would the
estimated 1.6 billion before tax increase? What does that
(give you) total?
John Devine: A billion six pre-tax is about 1.0 billion after tax.
Joe Miller: Right. But that's an increase, right?
John Devine: Yeah. The impact -- the pre-tax charge this year is about
$1 billion, about 600 after tax. So it's 1.6 billion on
the base of 1 billion, 1 billion on the base of 600.
Joe Miller: Okay. I understand.
John Devine: That's still -- again, that's the number we see today. It
would be the end of the year before we calculate our --
the real pension numbers.
Joe Miller: And that's included in that 14 billion -- the 17 billion
contribution range you guys gave for the next couple of
years?
John Devine: Yes.
Joe Miller: Can you give me that 14 billion to 17 billion after tax?
John Devine: Just take roughly 60% of it. So 16 would be roughly 10.
Joe Miller: And that would be through 2006, that range?
John Devine: Yeah. That's the present value through to 2007 -- '03 to
'07.
Joe Miller: Got it. Thank you very much.
John Devine: Okay.
Operator: Our next question comes from the line of Greg White with
the Wall Street Journal. Please go ahead.
Greg White: Oh, hi. Good morning.
John Devine: Hi, Greg.
Greg White: A few questions; one, while we're on the pension expense
issue, I just want to make sure I understand those. It,
sort of, puts brackets around what the possible number is.
The 1 billion after tax or 1.6 billion pre-tax increase
(unintelligible) for next year, that's only based on
current -- on the asset returns and the changing the
discount rate.
John Devine: Exactly.
Greg White: And that your expectation is also that you will change
your expected asset return.
John Devine: We'll look at it at the end of the year. And so -- we'll
take a look at that. We'll also look at any additional
cash contributions; we'll take a look at that. We'll
update on where the fourth quarter was from an asset
return standpoint as well. So there's a number of variable
that will be in the final number.
Greg White: Okay. Because based on what Eric said, the rule of thumb
on what change in the asset return assumption does, the
1.6 billion pre-tax increase could get to about 3 billion
if you took it down to 8% and everything else stayed
equal, is that correct?
John Devine: It could grow, there's no question. And when it grows it
means we're going to be forced to put more cash against
it.
Greg White: So -- but you haven't decided yet whether you put more
money in the fourth quarter?
John Devine: We haven't decided if or when.
Greg White: Okay. And then second question about pricing, did -- are
you seeing there are, kind of, effectiveness of incentives
declining? It looks like now that as net price accelerates
in the market despite slow in sales that, you know, sort
of - is there are period point of diminishing returns?
John Devine: Oh, hard to predict. Let me ask Paul to give to you a view
on that.
Paul Schmidt: I would say a couple of things, number one: Sales are
really moderating down; I wouldn't describe them as
softening. We have seen a bit of easing. Secondly: It is
legitimate to point out that we are seeing some
diminishing returns with regards to the effectiveness of
some of the marketing programs and incentives. But it's
pretty gradual in nature. There's not a significant fall
off in the effectiveness.
Greg White: Now -- but given that you're all ready -- you're at now
negative 2% net pricing and to drive a 16 million market,
does the pressure between the pension and then the
pressure on cost reductions they get bring you to a point
where you simply can't sustain driving marketing cost even
higher?
Paul Schmidt: Well I think the first point is, that it's a 17
million-market maybe 16 in October. But just like we
couldn't overreact to 18 million in August, we have to put
it in the context of 17 million first and foremost.
Secondly, the aggressiveness in the downward pressure on
price being the important element for us is to keep our
cost and continue to constrain cost and increase
productivity. So, it is a bit of a relative game on that
phase. But I would point those two elements, (though).
John Devine: I think it's safe to say, Greg, that, obviously the fund
our pensions over time, we have some time to fund them. So
there is some flexibility there. But I think it's safe to
say that we need our automotive operations in North
America but around the world to be healthy and profitable
and generate cash flows -- there's no question about that.
Greg White: Thank you.
Operator: Our next question comes from the line of (Mike Ellis) with
Reuter. Please go ahead.
(Mike Ellis): Hi, John!
John Devine: Hi, (Mike)!
(Mike Ellis): Hi! I wanted to ask you -- as you're pretty aware in lieu
of discussing some bail out plans for Fiat and including
perhaps the government or banks taking a minority stake in
Fiat or Fiat Auto. How would that impact the put?
John Devine: Yeah. Well, I tell you, I can't keep up with all the
speculations. There's a lot of speculations in the Italian
press and some of it filters out here. I don't want to add
to that speculation today. We did what we did on the
write-down. We've gone through that piece of it. If
there's any change to General Motors on the Fiat
relationship, if and when that happens, we'll, obviously,
tell you right away. But I don't want to get into the
speculation.
(Mike Ellis): Okay. Can you repeat the condition again with the put
(unintelligible)?
John Devine: Well the put in existing plan is the early '04. So that's
when it's can first be exercised.
(Mike Ellis): Right.
John Devine: Close to '09, five years.
(Mike Ellis): Right. But you were saying earlier that it was a change of
control of Fiat S.p.A.?
John Devine: S.p.A., that's what I said -- yes.
(Mike Ellis): Right. What about Fiat Auto, is that part of the -
John Devine: Well Fiat Auto is not a standalone organization. There's
subsidiary area at Fiat S.p.A. wholly owned.
(Mike Ellis): Yeah. All right. Fine. Thanks.
Operator: Our next question comes from the line of (Tyrell Jones)
with the Los Angeles Times. Please go ahead.
(Tyrell Jones): I wanted to just ask; John, I believe you said that on
North America your net margins was 1.9%, which was an
increase.
John Devine: Right.
(Tyrell Jones): What was that up from?
John Devine: One point seven points last year, third quarter, (Tyrell).
(Tyrell Jones): And how was that trend in the past five years, the summary
of it? Does it continuing to -- is it hovering or is it -
John Devine: Oh, it's been up and down. We'd, obviously, like to see
something like five. I mean that's a post-dated goal.
We've been pretty public about that. Not an easy thing to
do in this market.
So, frankly, we're pleased we can improve it in a tough
competitive market at the same time we can improve our
market share. We're not satisfied with it don't get me
wrong. There's a lot more work to be done. But I think
it's reasonable progress to be able to improve both market
share and margins.
(Tyrell Jones): When was the last time it was 5%?
John Devine: That's at the back of research. It's been awhile.
(Tyrell Jones): (Unintelligible). You're right. Well, okay. You also said,
John, that something for you that have improved by $900,
I'm sorry I didn't catch what that was. Do you recall?
This was early on in your presentation.
John Devine: Let me see if I can find that. Oh, I was talking about
revenue per unit, second quarter to third quarter.
(Tyrell Jones): Was up by $900?
John Devine: Yeah.
(Tyrell Jones): Okay. Then, Q2 to Q3 that was -
John Devine: Q2 to Q3 was up 900. We were down 600 from the third
quarter of last to third quarter of this year for a number
of items. But the primary items were basically mix
offsetting net price.
(Tyrell Jones): Okay.
John Devine: We're doing a little better than that price.
(Tyrell Jones): You also mentioned that trucks were 50% - 56% of your
total mix in this past quarter, is that right?
John Devine: Right.
(Tyrell Jones): Is that the highest it has ever been?
John Devine: We have to get back and check that.
Paul Schmidt: I think last fourth quarter was probably higher.
John Devine: Yeah. Maybe the last quarter when truck availability was
better.
Paul Schmidt: Fourth quarter a year ago.
John Devine: But it's been pretty (hot).
(Tyrell Jones): Do I hear Paul saying Q4 of last year was probably the
highest (that's been)?
John Devine: Yeah. We will -- we can research it for you if you want.
(Tyrell Jones): Uh-Huh.
Paul Schmidt: We'll check it to be sure. But I believe last fourth
quarter 58 or 59% truck because of the fall off in (daily
rental).
John Devine: I'd emphasized our goal here is not to be a truck company.
We're obviously improving our car share. And our car sales
are very important objective. And we aim to make strides
on that over the coming years.
(Tyrell Jones): Where would you see the right kind of balance for where
you want to be in that mix?
John Devine: I think it's going to be reflective of where the market
is, so we need to compete in the market. But obviously we
don't want to focus -- we're very pleased with our trucks
and our line-up and our competitive position. We want to
improve it. But frankly, we also know we have to improve
our car line-up and our car position.
(Tyrell Jones): One last question, a little more broad and perhaps
philosophical but in the recent weeks we've been seeing
more downgrades from Wall Street not just the car industry
but across the board, but in particular in the car
industry where you didn't see a lot of that before either
downgrading to neutral or even to buy in some cases. And I
just wonder what you attribute that - do you attribute
that to the new atmosphere on Wall Street that is forcing
analyst to divorce themselves from whatever their
companies may be doing on the investment banking side and
really say what they think, or is there really a general
downslide in the auto industry that warrants these
changes?
John Devine: Well I think you have to ask the analyst on the auto side.
But I'll tell you my view is they've always said what they
thought. So I don't think there's any
change in that. They've always been tough on us. I think
direct in (unintelligible). So I don't see any view that
that's changed.
I think the two issues that would have been raised --
which are fair issues to put in a table -- is the concern
about the consumer going away. Can we sustain the kind of
volumes that we're looking at in the auto industry? And
the straight answer for us: "While we see some softening
and some moderation, we think the industry involves North
America and Europe can maintain their reasonable level."
The second concern is on balance sheet: It's pension, it's
health care, a variety of issues on those areas. I think
we've been very direct on our plans to address those
issues. But those are the issues for the most part that
have been raised.
(Tyrell Jones): All right. Thank you.
John Devine: Okay.
Operator: Our next question comes from the line of James Mackintosh
with the Financial Times. Please go ahead.
James Mackintosh: Hi, John! James Mackintosh.
John Devine: Hi, James! How are you?
James Mackintosh: Pretty well. How about you?
John Devine: Good. Thanks.
James Mackintosh: Couple of questions. First thing I wanted to ask about
GME. Looks pretty clear that you're going to miss the
target by some distance as having -
John Devine: Yeah. We've been saying that.
James Mackintosh: Yeah. Absolutely. And what I was wondering about was
whether it is possible to hit the breakeven target next
year because that's looking also pretty challenging.
John Devine: Well, stay tuned. We'll be talking about our targets for
next year. We're not backing up our tough targets. It
obviously makes it a little harder. But the issue for us
in Europe, I think, is the market has been softer this
year. We're pleased with our progress in reducing
capacity, reducing our cost structure. Our team has done a
very good job.
We know we have some more work to do on the revenue side
and we think the real answer for that is product. It's
more than just product but it certainly going to be of an
important piece. If you look at the product shell, you
look at the subsequent shells and what we have planning to
roll out, I think you'll get some improvement and some
view of what we think GME can do.
We're very pleased with the future products. We think
they're going to put us in good position. That's (yes);
it's a tough market. And I think before we brag about
breaking-even we're going to have to get along the boards.
So, we know we have a lot more work to do here.
James Mackintosh: It sounds like you're retreating from the target.
John Devine: I'm not.
James Mackintosh: Okay. The other thing was, you know, they're like coming
back to it but just on Fiat, have you actually been --
have an initial approach from Fiat about the possibility
of the (unintelligible).
John Devine: Listen, as I've mentioned I can't keep up with all the
speculations. It's about ten a day. So as we've said about
two months ago, we don't want to get into the speculation.
I don't want to add to it. If and when there's anything to
talk about, we'll talk to you right away.
James Mackintosh: Okay.
Operator: Our next question comes from the line of (Catherine Polly)
with Euromoney Magazine. Please go ahead.
(Catherine Polly): Good morning! I think this is probably a question mostly
for Paul. I mean you have touched on the funding issue
already but given the spread (quality) that you're
experiencing in the (unintelligible) market at the moment,
I just want to know if that's going to change your funding
strategy or timetable at all for this market going
forward?
Paul Schmidt: No. Obviously it's a -- it's been a difficult market over
the last couple of months. But -- both at the GMAC level
and at the corporate level, strategy has been in place for
some time. And we think we'll continue with it. So we
don't see a change in our strategy. It's the market that
you have to pay attention to (though) everyday -- and we
do.
(Catherine Polly): Thank you.
Operator: Our next question comes from the line of (Joseph Sletny)
with the Oakland Press. Please go ahead.
(Joseph Sletny): Good morning, John!
John Devine: Hey, (Jo)! How are you?
(Joseph Sletny): Good. On the structural cost side, you mentioned that you
will not be able to bring down cost in the North America
by cutting, is that how the way I understand it? How are
you going to?
John Devine: Well, we said it's unlikely. We haven't concluded this
yet. We're still going through the `03 plan. But given the
size of the pension increase, that's going to be a very
difficult thing to offset for next year. We did it this
year. And we're making good progress on our cost this
year. But the size of the increase next year, that's going
to be very difficult to offset.
(Joseph Sletny): So where's the money going to come from then? I mean it
has to come from someplace.
John Devine: Well, no the impact won't be on -- it has an impact on
cash but the impact would be more on our profitability. In
case of funding the pensions, I mean that's going to have
generated by our operating cash flow but there's a lot of
flexibility on when we'd put the money into the pensions.
(Joseph Sletny): I know there was a flurry of excitement a couple of weeks
ago when you suggested you aren't going to cut heads
anymore. Is that still the plan or are you going to begin
-- you have to go back -
John Devine: Yeah. I think - I'm not sure exactly what we said at
that point in time. But obviously we're looking for
continued efficiency across the board. So we
don't have any major programs to announce but we continue
to look at efficiencies and ride the (attrition) curve
then.
(Joseph Sletny): You will be looking to reduce payroll rather than increase
it or?
John Devine: I think the cost pressures -- the reality of the cost
pressures is we have look at every avenue of cost. We want
to do it on the manner that keeps people focused,
recognizing the contributions of people. But we have to do
it on a careful way -- and we have been. But we have to
continue to look at our cost structure.
(Joseph Sletny): Any other areas (unintelligible).
John Devine: We don't have any major programs that we're about to
announce.
(Joseph Sletny): Okay. Are there any areas where you want them to focus?
John Devine: I think everybody understands what they have to
focus on. It's been pretty clear over the last couple of
years. (unintelligible) has made it clear to everybody in
the organization: Continue to improve our market share,
improve our net income, reduce our structural cost, be
more effective and competitive in the market place. You
know, I think it's pretty clear what we have to do.
(Joseph Sletny): But the net result is that you're going to expect North
America to be less profitable next year than it was this
year?
John Devine: I think all else being equal, and say unless there's a big
improvement in volume, that will happen.
(Joseph Sletny): Thank you.
Operator: Our next question comes from the line of Jocelyn Parker
with Dow Jones. Please go ahead.
Jocelyn Parker: Hi! I was just...
John Devine: Hi, Jocelyn!
Jocelyn Parker: I just wanted to just double check. The net price is down;
it's negative 1.8 through the first nine months of the
year?
John Devine: That's right.
Jocelyn Parker: Okay. And it's negative 2.2% for...
John Devine: For the quarter.
Jocelyn Parker: For the quarter?
John Devine: Right.
Jocelyn Parker: Okay. And I just want to piggyback on Joe's comment on --
for the pension expense, you expect to be less profitable
in North America next year because of pension cost?
John Devine: It's because of the drag of pension cost, all other issues
being equal. We'll lay that number. You won't have go to
guess what that number looks like. In early January we'll
lay our targets out for `03.
Jocelyn Parker: Okay. Thank you.
John Devine: Okay.
Operator: At this time I'd like to turn the conference call back
over to (Randy Erick). Please go ahead, sir.
(Randy Erick): Okay. Thank you very much everyone. And we'll look forward
to talking to you next quarter.
John Devine: Thanks everyone. Talk to you soon.
Operator: Ladies and gentlemen, that does conclude your conference
call for today. We thank you for your participation and
ask that you please disconnect your line.
END
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