Stellantis NV (STLA) 2001 Q1 法說會逐字稿

FIAT FIRST QUARTER RESULTS CONFERENCE CALL

Good afternoon ladies and gentlemen and welcome to the Fiat first quarter results conference call. Hosting today's call is Damien Clermont, Chief Financial Officer, and I would like to turn the call over Giovanni Maggiora, Head of Investor Relations to introduce the call. Please go ahead, Sir.

Thank-you. Thank-you Lorna. Welcome everybody. Hello, welcome to Fiat's first quarter conference call, which will be hosted by Damien Clermont, our Chief Financial Officer. As usual, the warning about the forward-looking statements we shall be making which are of course covered under the usual provisions indicated under our 20-F statements filed with the SEC in the US. You should be able to refer during the initial speech, the slides, which are available on the Internet and it should also be sent to you by E-mail a few minutes ago. So, I hope you've got them already. We shall of course have an initial speech, which we shall try to keep short and then have an extensive Q&A session. Hopefully, we should use one hour for this exercise, but let me introduce you to Damien, please.

Thank-you Giovanni and good afternoon to all of you on this call and of course, good morning to those who are listening from the States. You have had already a chance to examine our results in some detail over the past 24 hours. So, I will limit my comments to the key messages that we believe come from the quarter. We shall then move on to the Q&A session as already announced by Giovanni. In summary, our first quarter results were pretty much in line with our expectations and are fully consistent with the full-year outlook that we outlined months ago, during our Fiat day in Balocco. In the first quarter, revenues were broadly stable at 14.7 billion, a 3% up with pricing and mix compensating slightly lower unit sales. The groups operating profitability improved slightly to 125 million euro driven primarily by the improvement at CNH, which is now taking full benefit from synergy realization, $60 million in the quarter. Overall, synergy realization is on track at both CNH and Fiat Auto, supporting the bottom line of both sectors at an accelerating pace. Fiat Auto's operating income was slightly lower than a year before. Lower volumes in Western Europe and Poland drove the year-on-year change, but also the cost of reducing residual inventories not compliant with Euro 3 regulations.

We maintain confident about the company's ability to meet its full-year goals. Below the line, we have provided you with the first sign with the net income figures for the quarter to improve transparency and to enable you to focus ahead of time on non-operating items including taxation. Net attributable income in the quarter was 193 million euros sharply up from last year, primarily because of the changes in the composition of our Magneti. Our net financial position was stable at 6.5 billion with working capital levels under control. Talking about strategy progress, disposal generated cashing of around 600 million euro in the first quarter; more is expected during the rest of the year, starting with the closing of the agreement with Thyssen for Magneti Marelli suspension system division. Disposals are a key driver towards our goal of reducing debts to 3.5 billion euro by the yearend. Although recent strategic moves have been on one hand, the agreement with Renault for the acquisition of their 50% stake in Irisbus, which ensures the vehicle positions as a leading player in the best business in Europe. On the other hand, the global strategic alliance between CNH and Kobelco in construction equipment business. The goal here is to ensure a long-term stability and global pricing through CNH construction equipment business replacing the original alliance framework, which was typical of the industry over the past decade.

The product pipeline moves on towards important launches with the key model, such as Fiat Stilo less than 6 months away from launch. Iveco is going to benefit from the ramp up of the new medium tractor and CNH will start introducing replacements for divested products. Product momentum will form the base for the second leg of our twin action on earnings, sales growth and higher price realization on one side, cost reductions with synergies and restructuring on the other. As I said earlier, operating income was slightly higher than a year ago. As you see in slide 3, positive drivers were the performance of CNH that I will discuss later, plus the continuing improvement of FiatAvio and Toro Assicurazioni. Why is Toro's profitability better measured at pretax level, it is notable how the drive towards further operating efficiency has brought Toro's operating income at breakeven. This has Toro's offset reduced financial income as the overall rate environment declines. Iveco, Teksid, and Comau all generated operating income slightly lower than a year ago. The reduction of Teksid and Comau is to be linked to reduced activity levels in North America, in line with the slowdown of the auto industry in the country. Marelli was intact, primarily by change in the scope of consolidation as much as 10 million euro linked to the divestiture of the [________________] system business and the full consolidation of the lighting division.

As for Fiat Auto, let me walk you through some analysis in detail. I will then add a few comments about CNH and Iveco. Slide 4 highlights a number of drivers in the performance of Fiat Auto which was in line of our forecast of slow stocks through the year, one synergies and product momentum will push results higher in the second half. First - lower volumes had a 35 million negative impact on results. Lower shares in the 'C' segment in Italy; down approximately 3 points as Bravo/Brava phased out is one reason. Another is the decision to reduce low margin sales to car rental fleets, not yet recovered fully with higher sales to a more profitable profit fleets. The third can be found in Poland where demand and share were both lower than a year before. Brazil was, of course, a positive, but partly offset the other factors. Higher contents were less considered for 129 million in additional costs, half of which due to the switch to Euro 3 emission standards. Pricing and discount were again a plus in the quarter, thanks to a more favorable channel in Italy in particular.

This allowed Fiat Auto to recover content increases with the exception 40 million in extra discount necessary to shift approximately 60,000 units in dealer inventories, which were left from last years Euro 2 production. Product costs were a plus, by over a 100 million including 40 million in synergies as structured from the GM earnings. I will remind you that we have a 200 million target for synergy this year additional to the 20 million rate achieved last year. Finally, higher the pricing expenses that are 15 million impact as we continued to favor this marketing tool to discounting and other tactics. Forex was a 30 million negative for the quarter. The primary drivers of this impact were achieved on one side weaker sterling reduced UK margins and the other stronger Polish zloty, increased local production costs. Once again, Fiat Auto's performance was in line with expectations, and we are maintaining a full-year outlook at 150 to 200 million euro in operating profit for this sector. For CNH on slide 5, you are very familiar with the results published a copy of which I gave. Let me note again, how the sector has managed to take all of the benefits of synergies down to the operating profit line during the quarter with a 60 million improvement, this was a very good development, which boasts well for the rest of the years.

Remember that we expect CNH to hedge $300 million to its total synergy realization this year compared to last year, but we note that the development of sales volume at CNH is dealers accounting to region and businesses. In the first quarter, we started seeing a few positive signs in the North American market for that business, but a 15% to 20% drop in construction equipment in the same continent. On the contrary, Europe is weaker in that business and Brazil is still enjoying the mangroves. Moving to slide 6, as far as Iveco is concerned, we are confirming our projections for substantial stability of the sectors results this year despite pressure in the heavy segments in Europe. The first quarter is in line with this projection. Lower unit sales were due to a number of factors, some linked to the cycle, some temporary. Heavy trucks are reflecting slower sales across the whole market in Europe, particularly in Germany. We prefer not to accept margins on contractures fleets just to keep market share up. Medium trucks were held back in the first quarter by the ramp up of projections of the new Tector engines. Tector as you know is one of the driver of higher profitability in the rest of the year, Daily is a success, also we have seen some heavy marketing actions from competitors in a couple of operation in Italy, in particular with temporary share seepage in the quarter.

Most of the profitability lost to lower volumes has been recovered by a number of factors including reduced ramp up costs of our new facility in Brazil, and lower adjustments to buyback provisions compared to a year ago. All in all, we believe that Iveco's profitability position is worth protected. Iveco's long-term strategic weaknesses in terms of presence in the early market in the US are at this time a strength against the most exposed segment of the global truck market. Below the operating profit line as you can see on slide 7, we saw income from investments move down from last year because of lower gains on Toro's equity portfolio as equity markets were weak in the quarter. Financial charges, net on investment income were up on a year ago. Out of 100 million, 36 are due to lower investment income related to Toro's activity and 60 to higher interest charges. However, this 60 is due to a higher gross debt position as to higher average interest rates. In fact, interest rates from the euro were more than 1 point higher than a year ago. By the way, our moves to consolidate on lower maturities is continuing as you saw last week with our benchmarks will begin euro transaction and 5 and 10 years maturity, we had higher costs as we move along the yield curve, ensuring, however, a much more solid liquidity position.

I will note by the way that the 3 billion issue was a success and demonstrate that we had a significant FPL on the debt markets despite recent downgrades. Extraordinary items reflect 450 million in gains on the Denso and Ferroviaria disposals, partly offset by other items. Once again, our aggressive focusing actions have on one side increased in the short term of financial charges, but at the same time are generating gains to offset the charges to the benefit of the bottom line. Longer term, both financial charges and extraordinary items are going to be reduced as we stabilize the configuration of the group. All in all, pretax income was 316 million in the quarter against 390 million a year before. For the first time this year, we are providing you with guidance on net profit on a quarterly basis as you can see on slide 8. The slide gives me the opportunity to stress how tax planning is going to be an area of attention going forward to a much higher degree than in the past. We believe that we have opportunities for efficiencies in this area, which we had not targeted in the past. Aside from the constant impact of [IRAT] in Italy, our tax rate in the quarter is significantly lower this quarter than a year ago.

This is due to lower taxation of capital gains in Italy reduced from the 27% implied in the last year's numbers for the quarter to 15% this year. We believe that on the full-year basis, we can target a range of approximately 35% to 40% for our annual tax rate, excluding of course the [IRAT] impact. Net attributable profit was three times higher this year, primarily due to a different share of Magneti in our net results. The gains of the Denso disposal of Magneti Marelli were this year fully reflected in attributable results. While third parties had a 13% share on the last year's gains of the sales of Fiat significant by Magneti Marelli. Moving to our balance sheet on slide 9, the key indicators have not changed substantially during the quarter. Net invested capital, net debts, and our interest in shareholders equity were all stable. It is interesting perhaps to understand what has driven this [________________] evolution. Net invested capital is slightly higher at the end of the quarter compared to the beginning of the year, primarily because of exchange rate translation as you can see on slide 10. Excluding this affect and excluding the reductions due to changes in the scope of consolidation, working capital were reduced by 127 million euro and net fixed asset by 145 million, as we continue our actions to review the amount of capital utilized within our businesses.

Moving then to slide 11, our net financial position was stable over the quarter. Free cash flow was positive during the quarter; however, foreign exchange assets was an important in euro II and the dollar denominated debt was greater that euro with a negative impact of around 400 million compared to the situation of a year ago. Disposals, mainly those of Magneti Marelli, [_______________] and pistons and of the remaining 49% stake in which I remind you generated inflows for total of about 600 million, up at that would otherwise be a seasonal opportunity for a increase in the financial position. The disposal to [Tefen] of the suspension business is not included in this figure, and I will remind you that we expect all the disposals to follow in the rest of the year. To conclude, we look to the first quarter as a small step in the right direction consistent with our expectations. Assuming of course that the global macro scenario doesn't dramatically deteriorate in the next month. We are reconfirming our targets for this year. We are confident that the acceleration of synergies and product momentum will drive second half results higher towards the 1.1 billion target for operating profitability we outlined earlier this year. Once again, let me clearly state that we are not expecting improvements in the second quarter particular a checkout. Our net financial position is said to improve to 3.5 billion in debts, primarily driven by further disposals expected in the next 2 months, and all of this will be the base for our 2002 breakthrough in profitability. Cash flow from operation will wind as well, and will be the primary driver of further debt reduction in 2002. With this, I thank you for your attention so far, and we are ready to take your questions.

Thank-you Sir. Ladies and gentlemen to register for questions, please press '*' followed by the '1' on your telephone keypad. Star followed by '1' to register for question. We'll pause briefly to assemble our roster. Our first question comes from Mr. Xavier Gunner with UBS Warburg. Please go ahead, Sir.

Yeah, hi, its Xavier Gunner here from UBS Warburg. Mr. Clermont, I wonder if you can just help us with a couple of things, Fiat Auto predictably, I guess, firstly inventories, why were inventories at the end of the first quarter, I mean I remember that at the end of the first quarter of 2000, obviously it was high because of the ramp up of the Punto, where are we now, so where were we at the end of the first quarter, where are we now, and where do you anticipate you'd like to go? And then the second question is really on the timing of the Stilo, because I'm slightly confused because I was under the impression this was out, sort of end of third quarter, beginning of fourth, and if not so, then combining all the launch costs and so on and getting this thing out, I'm not quite sure when you are actually going to get an earnings stream from this vehicle or is it going to come through this year? Could you if just help us on those two things, that'll be great.

Okay, let me first of all answer on the stock level. At the end of March, we had approximately two months of inventory including those inventories we have at Fiat Auto and the dealers networks inventory that means approximately 410,000 to 420,000 cars in stocks. Let me just remind you that level of stock is very close to the level we had at the end of last year, where we had approximately 430,000 cars in stock. We had then as you can see slightly reduced that level of stock by approximately 10,000. So now, of course, we will have to manage our production level and stock level according to the demand. The standard level will [_______________] to which will be approximately 1.5 months in inventory is shared off the 2 months we have at the present time. Coming now to your other question, so the timing we forecast for the launching of the Stilo is the month of October. Talking about the cost of the launching, I think that the cost will not offset old margins in the course of the quarter,

and of course 2002 will have the complete level of margins, and we will not have any more, obviously cost of the launch, but in anyway in the fourth quarter we don't expect of course the cost of the launching to offset all the margins that we'll have, while we will generate all the stocks including the dealer network stocks for the new Stilo.

Just on that vein in that case, are we still seeing, I mean, the first quarter, I seem to remember you commenting on the erosion of margins because of the run outs of the Bravo and the Brava, is that therefore going to be stopped entirely, you're not going to be building any of those vehicles in the second and third quarters, is that the right thing to read?

I think that the margins are not coming only from the production or coming from the sales to the dealer network of Bravo/Brava, so we still expect to have margin coming from the Bravo in the second and third quarter, and then we will not have any longer this level of margin from the Bravo/Brava, we will have the new margin, higher margin from the Stilo in the fourth quarter.

Correct, it is sort of, can I just confirm, the operating margin was not that great for the whole business, are you implying therefore that the Bravo and the Brava was actually still profitable at the operating level in the first quarter, is that what we should deduce from that?

I'm not sure I fully understand, could you repeat your question, please?

I'm just trying to wonder whether the Bravo and the Brava was not profitable at the operating level in the first quarter, then it's unlikely to be in profit for the second and third quarter, therefore we're likely to see a further erosion on your figures, before the Stilo is actually launched..

No, I think we will get approximately the same level of margins for the Bravo/Brava in the next quarter versus the first quarter. The reason of that, is we have already presented, as you know, the new Stilo in Geneva, and we have done that because honestly speaking, as you know, we have now not high margin and high volume on Bravo/Brava. So, we don't expect, now that we have presented the new Stilo to the market, we do not expect a further deterioration in the volume of sales and level of margin of the Bravo/Brava. We have already recorded that decrease of volume and margins.

Thank-you very much.

Thank-you.

Thank-you Sir. Our next question comes from Mr. John Lawson with Salomon Smith Barney.

Thanks very much. I'm wondering whether we could first ask about the indebtedness level because I guess that a lot of us would be looking carefully at the second quarter number. Could you confirm that the deconsolidation of the power train activities is going to happen in the second quarter, could you possibly remind us or let us know what you think you'll get in from TKA during the second quarter, and is it a seasonal impact first quarter to second quarter in terms of debt levels, please?

Okay, good afternoon John, first of all, let me answer you that usually speaking, as you know, we have those seasonal increase in our working capital on the first quarter, and so usually we have an increase in our net financial position at the end of the first quarter versus last year. This year, we have offset the impacts of that increase by the level of the cash, meaning we receive those from Rolling Stocks payment and from the payment we received from Benz, mention the number is approximately 600 million, right.

Right.

Then I confirm you that we still can't, in agreement with GM to their consolidate the power train asset and activities at the end of June of this year. Third - we expect to be able to close the Thyssen deal by the end of the second quarter. The amount of this deal is, as you know, 450 million with potential upside of approximately 100 million, but we expect in terms of impact, immediate impact I would say on the net financial position to receive half of that 450 as Thyssen has asked to remain a shareholder of the new company at least for a while. Did I answer your question?

You did, but Sir, the seasonal outflow is roughly the same as the cash in from the disposals, is it right, I didn't completely follow your slide 11, I guess.

Yes, as you remember, we have maintained exactly at that same number which is 6.5, I am just trying to show position figures, so your interpretation is a right one. So the seasonal increase in the working capital has been opted by the cash in from disposals.

Could I just ask you to comment on the Latin American profit situation please Mr. Clermont, we've had some very strange things in some of the quarterly reports from the companies with the devaluation in Brazil, clearly you're intending still to be a big exporter from your reduced Argentinean operations. I wonder if you just give us a little bit flash on the profitability situation from Brazil and Latin America in general at the moment?

Okay, let's us talk then globally about Mercosur if you want, and I would say that, overall, for this quarter Mercosur area has generated positive operating income. I would say that Brazil is positive and Argentina is now, after the restructuring actions we have done last year, now Argentina is close to breakeven. So I would say that compared to one year ago, Fiat Auto industrial operation in Brazil are compensating slightly lower margins from financial services due to the higher levels in interest rates, and also the Argentinean losses, slight losses. So in total, all in all, I would say that Mercosur is for the quarter is better than a year ago. As far as Iveco is concerned, Iveco is reducing the packed ramp up losses on the new trends and CNH is taking advantage of very positive market trends. Now talking about the future is, it's well known that the present Argentinean economic situation is to some extent critical that could have some effect on the Brazilian situation even if we see all the economic fundamentals in Brazil rather favorable.

The fact that the interest rate in Brazil has increased is to some extent reducing our capacity to sell the car, which is usually financed having higher interest rate. For the time being, I would say that globally, Brazil's situation is quite good; Argentina has to be monitored. We all know the situation in that country. We are following the economic situation of the country we do believe that Carvalho plan is the right one, but we have to wait a little bit further.

But the Siena from the Argentina's target is at Brazil primarily is that correct?

We are producing only Siena in Argentina, and we are exporting it to Brazil, so the only production we are doing now in Argentina is the Siena.

Okay, thank-you.

Okay, thank-you John.

Thank-you Sir. Our next question comes from Mr. Gianluca Pediconi with CS First Boston. Mr. Pediconi could we have your question Sir?

Can you hear me?

Yes we can.

Okay, hi! Good afternoon.

Good afternoon.

Just a clarification, I am not sure that I properly understood when you stood that in Q2, you expect Fiat Auto to post a similar result than in Q1, and I was wondering, I should presume that we should expect probably better profitability, better contribution from Brazil, higher synergies from GM because there should be an acceleration, and also probably lower units to the stocking aspect, so I was wondering if I understood properly or is there something different?

I'm not sure that you are not trying to get another additional information versus what we have said Gianluca, to be honest, but what we said is we really expect the improvement in the profitability of Fiat Auto to be on the second part of the year rather on the first part, so I didn't mention any number for Q2.

Okay sorry. So now...

No, no, talking about the synergies as we have mentioned it, we have realized approximately 40 million in the first quarter of additional synergies for the GM alliance. We do expect approximately the [________________] number for the second quarter, but globally for the whole year, we are expecting 220 million that means that on these items as well we're expecting an acceleration of the synergy on the second part of the year.

Okay.

And then again, we will have still the impact as we mentioned earlier of the phase out of the Bravo/Brava versus last year on the second quarter, so we don't expect as we mentioned, new deterioration on the volume and margin, but we will still have low volume and low margins coming up from the Bravo/Brava products, and this will be the reality before until the launch of the new Stilo.

Thank-you very much, now it's clear. I just would like to have two more information, the first one is on the - could you please quantify the Euro 2 stock affecting in Q2, I mean.

You mean the number of number of cars.

Yeah.

While we have reduced our stock of Euro 2 by approximately 60,000 units during this quarter, at the end of the quarter by the 31st of March, we still had approximately 20,000 cars. We will go on selling these cars with discount or with rebates during Q2, so we expect to have no longer any Euro 2 product at the end of the second quarter.

Okay great, and the second question is related to your new 1.5 billion Euro cost cutting program, when will we see the first impact, in the second half of the year or in 2002?

Well, talking about this new program, we are talking about a full reengineering of core processes, so we will have some very, very, very large impact this year because we will have some quick wins from that, but this will be contraband by the cost of these reengineering programs. So to be honest to your question, I would say that the first tangible impact of that will start in 2002.

Thank-you very much.

Thank-you Gianluca.

Thank-you Sir. Our next question comes from Ms. Sabine Blumel of Banca IMI.

Hello and good afternoon, here's Sabine Blumel speaking. I'd just like to have a followup question on the cars which are only compliant Euro 2 and not Euro 3. So, basically you're just saying that you had at the beginning of the year 80,000 cars, which were not Euro 3 compliant. I am a little bit startled by that magnitude of figures. So, why didn't you switch your production to the Euro 3 equipment level earlier last year? Or did you try or did you plan to sell these cars last year? I mean, I don't really understand the mechanics behind that.

So, we have managed that phase as a normal, I would say hasn't phased out of normal products. I would say that 80,000 cars of Euro 2 is not a huge deal. I remember that at the end of the third quarter, we had that kind of question. At that time, and we mentioned that we didn't expect any major disruption in this area. So, I don't think that having additional discounts of that level for selling the Euro 2 products is a big deal, honestly speaking. I think that all companies around the world had known that problem. We have done that without any major disruption.

But it seems to be the one single reason for you to be loss making in the first quarter because when it adds back 40 million euros, I am in a profitable situation, although at a low one. I think it makes a difference.

It terribly makes a difference. I'm not arguing that we have the best-looking company or the best profitable company for the first quarter. I'm just saying that we have managed that. We had a problem of Euro 2 to Euro 3 without major direction. Then we have other issue to solve, as you know, and we have some action to control all that, but different items.

Could you actually give us also some indication to what extent are the extraordinary items in the first quarter actually included write-downs of Turkish assets. As the CNH results $20 million was quoted to differential of...

Yes, the global impact that we have for depreciating the two participations that Fiat Auto on the first hand and CNH on the second hand has in Turkey is approximately 35 to 40 million euros, the twin tool depreciation for both participation. Half of that is Fiat Auto and half of that is CNH. On the other side, good news coming from this Turkish currency devaluation is the reduction of the projection cost of the Doblo that will have in the coming months. As you know, we are producing Doblo exclusively in Turkey, and this depreciation of the local currency will mean for us a decrease of our local cost, but the local content for the Doblo is approximately 40%, so it's a high level of maturization.

But surely, what is your outlook of the development of the Turkish lira because if the currency is in freefall, you will have problems also in repatriating the profits, surely.

Yes, I remember that we are in joint venture with some partner there. We have not the majority of the share, so we'll have to dissolve that in accordance with the partner. So, we had not decided anything about that at that time.

Thanks.

Another question.

Thank-you Sir. Our next question comes from Mr. [_______________].

Good afternoon. I had just a quick question on Iveco. Sales were up 3% this quarter compared to last quarter, even if you said medium vehicle sales were held up by Tector, was any and even if heavy business unit, I guess, was performing not very well. So, does this mean that you expect sales to increase more than 2% in 2001, and can you also expand a little bit on heavy vehicle sales in the quarter. Were they up or below first quarter of 2000? Thank-you.

As a fact, as you have seen, we have more or less the same level of the operating earning for the first quarter versus last year. So this is coming from some reduction in our sales on the heavy and light, and some improvement on the major. Talking about global forecasts for 2001, we expect markets to be slightly reduced by 5% to 8% versus last year. Our expectation of the market, I'm talking about, showed the heavy trucks for the total year of 2000 would be approximately 225,000 units this year.

Thank-you.

Thank-you Sir. Our next question comes from Mr. Gregory Melich with Morgan Stanley.

Good afternoon. I had two questions. I want a quick one on the cash flow. Do I read this correctly that D&A was 767 million in the quarter?

Greg, excuse me, I'm not sure I heard, what cost what was 600 million?

Depreciation and amortization.

I've not got the number. Let's go on and then in the meantime we are preparing the answer.

Just so you're aware that's on page 8 of your release page 8 or 9 or in the discussion of cash flow. So that's where I saw that. And second...

Yes, I have the number in front of me. The total amortization is 767 million euro to be very precise for this quarter.

But do you think that that can keep running 200 million above capex or do you think that those two numbers will become closer.

I think that the number will be closer that the capex for the quarter, relatively at a low level, we're below 600 million, but I think that part of that would be recuperated during the future months. So, we are far below, I would say, in terms of investment capex for the first quarter versus depreciation. Our global objective is to have a very close number between depreciation and capex.

Okay.

Greg, sorry just to be more specific, remember that at this point a very important item in our depreciation and capex figures are the long-term rental activities. They by themselves are counted in the quarter for 188 million euros in the first quarter of this year. The amortization for those vehicles, since we started relatively producing recently is not quite fully up to speed at normal levels. So, we see there is a gap between capex and amortization for that activity, which frankly I would not consider in the same way as you look at, let me call it, industrial capex and industrial depreciation.

So that number is not in the numbers we just discussed.

No, it is.

What is, okay, okay.

Yes.

The second question I have was on Iveco.

Obviously, in that number also deprecation, Greg, we mentioned before, we have not included the goodwill depreciation of course.

No goodwill.

Right.

Okay.

It's on top on that.

Additional to the 767?

Yes, exactly right.

Turning to Iveco, a look into you breakdown of operating profit change; it was interesting that you said in the write-up that the pricing for Iveco is very competitive. So that means if you have positive pricing for all of Iveco, you must still be getting some very good positive pricing out of the light commercial vehicles. Could you help classify?

The answer Greg is we have than some counterbalance between the impact we have on the light side, and the impact we have on the heavy side. First of all, we have recognized some pressure on the heavy side part of the market. While we have been able to maintain very high price on the light segment, we have been obliged to recognize that decrease on the price of the heavy segment.

Could you quantify what the.... in the heavy or on the light or however you want to do it?

I have not the number right now, but if you call Giovanni, he will glad to give you the numbers.

Okay. Thank-you.

Greg, sorry just a little amendment if I may. I mean so many numbers is, the 767 figure that we gave you for amortization and depreciation includes goodwill negotiation.

Includes goodwill but not the operating leases?

No sorry, as far as the operating leases are concerned, let's recap, total capex 547 that includes 188 of operating leasings and long-term rental investment, new assets billed. Amortization of those assets is 92 million, so we're still half the rate of new investment, and that's a gap that is going to close.

Thanks.

Thank-you Sir. Our next question comes from Jean-Baptiste with HSBC.

Good afternoon.

Hi! John.

In the change of some operating profits, CNH is presented as having the biggest swing. What I'm not understanding is exactly how that has come about, because in the first quarter, last year, you presented the reconciliation between the published CNH profit of $44 million in creating a loss of 10, in the CNH results that 44 million becomes 53 operating profit, yet we are showing here a 55 million euro profit, and so it seems to me as though part of this improvement is a completely different treatment of the accounts that you've presented. This is all down to synergies. I wonder if you can just put me correct on that aspect?

First of all, as you know, CNH we decided starting it in the first quarter of this year, and maybe not everybody has noticed it because it's in the footnotes of the press releases of CNH. But starting this year, we have decided to [________________] this exercise by noting directly at the CNH level, let me say the equivalent results as published by Fiat CNH, therefore already, pre-announced so to speak, in dollar terms of course, the equivalent figure for operational profits as reported 2, 3 up and therefore consolidated by us to them. Okay, let me walk you for a second in the differences between their US GAAP numbers and the operating result as stated by us.

Can I just stop you for a minute? Why don't we start when you make your comparison Q1 as 44, Q1 last year is 44, shouldn't we start with that position if you're saying you're now using the CNH numbers?

No, I'm not saying that I'm using the CNH number. I said that starting with first quarter this year, CNH has probably, in order to help you, because we've had this surprise factor every time. We decided to abolish the surprise factor by asking CNH to assist you in doing the reconciliation to IAS by stating directly themselves what IAS number they have reported to us.

Okay.

There is, once again, as you know, many factors to be included between what the CNH discusses at industrial margin level and what we report at consolidated level for the reported growth. I can quickly run through the reconciliation for this quarter. If you want more comparisons or anything let me call you back later, together with our Treasurer who is here with us today, so that we can do it separately perhaps given that we're taken so much time perhaps on more important business questions so to speak. Ninety one dollars, millions, of course, is the CNH industrial operating margin as declared by CNH in this quarter. This margin, as they define it, operating margin as they define it, does not include a number of operating expenses that are considered being the definition of operating income by ourselves. Thirty-nine million is the figure, which includes the goodwill as declared by CNH under US GAAP, which was 21 million this quarter. Then, of course, that's industrial, you have to add back the financial services, their results in this quarter not too high still because of the issues of CNH capital, 5 million, and then you have to place out 7 million for inter-company eliminations, so that leaves you with $51 million in US GAAP operating income as stated by CNH. Then you have to adjust the 9 million for goodwill as we, under IAS amortized goodwill at a softer rate. And then, finally, the foreign exchange impacts which CNH includes in their operating margin, will classify together with financial expenses, that is 7 million positive, plus another 6 million positive in the dollar-to-euro adjustment. That should bring you back to 55 euros, but again, if you want to go in greater detail, I would appreciate if we can do this on a separate basis together with translator.

Well what I was confused about was last year you used 44, and this year you used 51...

...without choice I don't think.

All right. We'll go on. Can I ask another question?

Yes, you can.

In the extraordinary result of capital gains, there is an implied restructuring charge of 49 million I think. I wondered what that was for, I missed you telling us what it was for, and why it hasn't been included in the operating result, given that restructuring has been an ongoing aspect for a number of quarters?

I think that the number you're talking about is coming, the reason of that number is not restructuring charges, if I understand the question, but the impact of the 40 million euro of depreciation on the Turkish participation that we mentioned earlier on. These are not 100% cost of restructuring that the main number of that is the depreciation on the Turkish participation we have.

Okay. The translation of your release, you were supposed to stop there.

Exactly. Yeah, okay.

Okay.

But there're also restructuring costs as well. We have 4 million at CNH, including that number 8 million at Magneti Marelli, and 5 at Comau, and so on and so forth. But the main items are coming from the depreciation of the participation we have.

Fine. Okay. And just on the net debt what were the deconsolidation of the power trains? What would be the impact on net debt from that?

800 million euros.

800 million and...

At the end of June.

Okay, and just maybe another sort of strange question, but on Toro, there's a couple of issues there. One is the changes of insurance market and the fact that you people are no longer use third party insurance. Is that the reason why you got the improvement there because you are not writing as much third party insurance is?

So, what do you mean by third party insurance?

Well I understand that when you insure a car in Italy, you have two parts, you insure the value and liability if you like and the third party insurance liability, and because of some claim...

John, John, I get your point. The improvements in the total operating performance are driven by two factors. On one side, managing the risk factors, the cost that what we are facing in terms of range. Selection of the customer portfolio is a continuing action, and it continues to drive the results up. The second half of the improvement comes from, let me say, reengineering of those way of working especially as far as their relationships with the dealer networks in terms of cost of repairs on car insurance. These three things, I would say, are the real thing to look at when you're trying to figure out why Toro is managing and that's going on now for quite a few quarters already to improve the operating line. Of course and Toro must be judged at pretax level, but the improvement on the operating line is offsetting, what otherwise this pressure, but every insurance company in Italy has been facing it in the past few years not because of the declining, or general decline in rate scenario. They say it's a trend that's going on across Italy and let's say quite frankly, I don't whether there are other insurance companies in Italy have a positive operating margin in our definition today, but in any case that's a trend that's going on in the Italian market.

Well I was just, my understanding of insurance was that the fact that this third party insurance business has been turned positive because people are just not writing as much. Anyway, the other issue is with the new government and the pension reform, have you made any plans or what will be the plans for the treating of your severance indemnity which at the moment is if you like cheap finance but could turn into a real cash liability.

So we have, of course John, to expect the potential decision, if any, of the government on that. For the time being, we have not changed anything. The rules have not been changed, and we will see, of course in the future. I mean, this is an important way of financing for us and we'll see what'll be the next decision, we'll be training again all that but for the time being nothing has been changed of course. Okay, I think we have time for one more question from the audience.

Thank-you, Sir. That comes from Mr. Mike [________________]. Please go ahead Sir.

Hi, its Michael [________________]from Goldman Sachs. I'm wondering if we could come back to this issue of capex. Mr. Clermont you said that capex in Q1 ran a little bit below where you might expect for the full year. Could you just confirm that there has been no capex yet on the Stilo, that none of the investment is yet going to Casino and secondly..

Yeah, we have met a lot of capex on the Stilo. Now we are launching the new products in October, but fortunately we have done a lot of investment on the new model. Otherwise, we would have some problems around the model in next October. Of course, we have, on the Stilo, we do not expect any delays, so all the capex have already been done.

So have you put a parallel line at Casino. I mean how have you put the tuning in when the Bravo's during in production.

I think we need to come back to you on this one. I don't have anybody from production here, so I am asking if we can answer this separately I would appreciate.

Sure.

One thing regarding capex that's notable is the fact that Iveco has taken its last year of sustaining their capital expenditure as they're entering the final phase of the renovation of the engine ranges, as you know, the new light commercial vehicle engines will be introduced at the end of the year so this is really the final year with a big wave of capital expenditure that Iveco is sustaining in order to truly strengthen its engine range of both, for third party clients but most significant of course for its own use and for the strengthening of each truck range in the vehicle line.

Because of the capex, CNH is what you talked about having to replace some of the model lines that were divested, is that just a question for the R&D or would you actually have to build some form of new plants or tuning to build those products, and is that an affect we'll see this year in the second half?

Does that answer your question Mr. [_______________].

I guess the answer here is that capex and that R&D expenditure is already included in the targets that CNH has been giving over the past couple of months as far as cash flow for this year being neutral, so that's embedding those numbers. There is a bit of that of course, R&D and a little bit of capex right there, not a lot, in any case included in the CNH targets as far as cash flow is concerned for this year.

Right, thank-you.

Thank-you. Well I guess we have completed our conference call. If there is any followup questions out there, please feel free to call myself and [________________] and since he's here in our offices I'll try to signature for specific questions. Thank-you very much.