General Motors Corp. expects the sky-high costs related to leasing vehicles in the U.S., which on top of labor problems and restructuring actions in North America contributed to a second-quarter loss of $15.47 billion, to decline as the industry moves to the back half of the calendar year.

GM writes down $2.0 billion in its quarterly results to cover impairment charges and reserve adjustments related to a residual-support and risk-sharing agreement it shares with its captive financing arm, GM Acceptance Corp. GM owns 49% of GMAC, which on July 31 took an impairment charge of $716 million to cover plunging residual values within its lease portfolio.

Residual values fell sharply in the second quarter after consumers suddenly shifted towards fuel-efficient passenger cars in the face of high gas prices, leaving GM and GMAC to resell unpopular gas-guzzling pickups and SUVs coming off lease at substantially lower prices than originally expected.

Other auto makers also recently have reported major expenses because of their lease portfolios and last week Chrysler LLC said it would discontinue the practice at its captive finance unit, Chrysler Financial, as of today.

But unlike other items to repeatedly nick GM’s financial performance in recent quarters, such as payments to former in-house parts supplier Delphi Corp. and cash infusions to GMAC to help cover its losses from the mortgage-industry nosedive, the auto maker does not anticipate the leasing impairment to recur with the impact it had the latest reporting period.

GM President and COO Fritz Henderson admits investors may be asking themselves, “Where have I seen this before?” But he says GM has taken actions to mitigate the damage vehicles coming off lease might inflict in the future.

Henderson says GM’s effort to rely less on leasing as a sales incentive has pushed its present number of leases down to 10% of retail sales and the share of 2-year leases, which feel the greatest impact from declining residual values, down to 10% of its entire lease portfolio.

GM Second Quarter
Financial Results
2008 2007 % Chg.
Sales $38,156 $46,677 -18.3
Net Income ($15,471) $891 -1,836.4
E/S ($27.33) $1.56 -1,851.9
Unit Sales* 2,287 2,407 -5.0
Note: Dollar sales and net income stated in millions; unit sales in thousands. E/S is earnings per share. *Unit sales are worldwide wholesale deliveries.

“So supply and demand, I feel much better about it than I would have a year ago,” Henderson says during a quarterly earnings call today with journalists and Wall Street analysts. “The supply of product coming back at us is going to decline.”

Henderson also takes comfort knowing residual values adjust rapidly, unlike the slow burn in the mortgage crisis, because auctions on vehicles coming off lease occur weekly.

“Can you guarantee things? No, but I think this is one where if we’re wrong we’re going to find out pretty fast. It won’t be (a situation) of waiting two years to figure out,” he says.

Ray Young, GM’s chief financial officer, says used-car prices will determine whether the auto maker must make set aside additional money this year to cover its lease portfolio.

“If the used-car prices don’t deteriorate any further from the end of June, then we won’t expect any further adjustments,” he says. “In fact, if used-car prices increase from June levels, you may see some gains. Everything is a function of where we think used-car prices are going (and) we believe we’ve taken a conservative viewpoint at this time.”

Henderson also reiterates GM’s stance on the future of leasing after it issued a letter to dealers earlier this week saying it would continue the strategy in the U.S. with adjustments. GM suspended incentivized leasing in Canada on Monday (July 28). Leases comprise about 40% of GM’s sales in the country and incentives include pricey items such as reduced initial payments and lower interest rates.

“It’s our most expensive incentive program,” he says. “It always has been. You’re going to see significantly less leasing in trucks and SUVs (but) we will stay in the market (in the U.S.). We will very carefully and purposely use our resources to provide leasing only where it is to our maximum advantage to win at retail.”

Looking more broadly at GM’s results in the quarter, its loss of $15.47 billion, or $27.33 per share, compares with a profit of $891 million, or $1.56 per share in the same period last year. Adjusted for write-offs, such as the lease impairment and charges related to a 3-month strike at supplier American Axle Mfg. & Holdings Inc. and restructuring in North America, GM lost $6.34 billion, or $11.21 per share, in the quarter.

Revenue fell 18% to $38.15 billion from $46.67 billion in like-2007, due mostly to slumping sales in North America from high gas prices and continued turmoil in the housing market. Revenue per vehicle also fell sharply in the quarter – from $21,375 per unit a year ago to $17,940 – due mostly to a shift in sales mix from trucks to cars.

GM’s market share in North American fell 1.5 percentage points vs. year-ago to 20.2% and the auto maker has adjusted its industry sales forecast for the U.S. down to 14.3 million units, including medium- and heavy-duty trucks, from the mid- to-upper 14 million-unit range.

Revenue outside North America grew 9% to $20.84 billion from $19.13 billion, as countries such as China, Brazil, Russia and India continue to bolster GM’s performance overseas. International sales grew to a record 65% of GM’s quarterly total.

“Growth in emerging markets is having a positive impact on unit sales and revenue,” Young says.

GM also seeks to allay Wall Street’s concern over its liquidity position, saying it ended the quarter with $21 billion in cash and $5 billion of available credit. The auto maker announced earlier in the month action to raise an additional $15 million. GM says it must generate between $11 billion and $14 billion every month to fund its operations.