GM eyes labor cost cuts, improved earnings

DETROIT (Reuters) - General Motors Corp (GM.N) said on Thursday it sees significantly improved operating earnings and cash flow in the next two to three years, but expects high fuel prices and declining consumer confidence to be a drag on U.S. sales this year.

GM said in a presentation to Wall Street analysts that it plans to reduce its annual U.S. labor costs by about $5 billion by 2011, mainly through the labor agreement reached with the United Auto Workers union last year.

The new UAW contract allows the U.S. automaker to shift hourly retiree health-care liabilities to a union-run trust fund and hire new workers at lower pay.

GM said it expects to cut U.S. hourly and salaried pension and health-care spending to an average of $1 billion a year from 2010, down from $7 billion a year over the last 15 years.

GM also said it aims to reduce structural costs as a percentage of revenue beyond 2010, with a target of 23 percent by 2012. GM said structural costs are below 30 percent, compared with 34 percent in 2005.

GM has cut $9 billion in annual structural costs from 2005 through 2007.

Chief Executive Rick Wagoner said GM would face challenges in 2008, including weak U.S. auto industry sales, high fuel prices, high commodity and steel prices, and mounting regulatory requirements.

"This has been a turnaround so far without any tailwind from the industry," Wagoner told analysts in Dearborn, Michigan.

"In fact, the U.S. industry importantly is running at a million units lower than when we started the turnaround and frankly the outlook for '08 is uncertain and a lot of people view it negatively," Wagoner said.

GM Chief Financial Office Fritz Henderson said the automaker had adequate liquidity through 2008 to sustain operations, capital spending and employee buyouts even under a downside scenario on U.S. industry vehicle sales.

GM estimated its liquidity at the end of 2007 was more than $27 billion.

GM expects U.S. industry sales to come in slightly above 16 million this year, while it projects global industry volume to grow to a record 73 million vehicles, up 2 million from 2007.

MORE CAPACITY CUTS POSSIBLE

Despite this year's projected weakness, GM expects to increase revenue in all of its regions in 2008 and "sees the probability of a stronger U.S. industry in 2009 and beyond."

A return of U.S. auto sales to historical trends in 2010 to about the 17 million mark, for example, would be worth $1 billion to $1.5 billion in additional pretax income, GM said.

Wagoner told analysts that at current U.S. auto industry volumes, GM would need to cut capacity further at assembly plants and supporting powertrain and stamping facilities.

The U.S. auto industry has been running at about 1 million vehicles below what it was two years ago when GM set capacity plans, Wagoner said.

"At this point, I would say we were watching that closely and actions will be frankly dependent on the development of our views on U.S. industry trends and product mix trends, so stay tuned on that," Wagoner said.

The automaker also said it launched another buyout program in January. Workers who accept the offers would leave the company starting in March.

GM said it plans to launch a second phase of buyouts in February.

The buyouts are being offered to 46,000 employees, GM said.

GM has already idled a number of U.S. plants and under a 2006 deal with the UAW, more than 34,000 workers left GM after accepting buyout packages ranging from $35,000 to $140,000.

Separately, GM said it expects U.S. finance company GMAC, in which it holds a 49 percent stake, to be profitable in 2008, driven by reduced losses at its ResCap mortgage lending unit.

GMAC said in a regulatory filing with the U.S. Securities and Exchange Commission that it is "adequately capitalized," has liquidity that is at "relatively high historical levels," and needs no further capital injections for 2007.