Stellantis NV (STLA) 2004 Q3 法說會逐字稿

Welcome to the Fiat 2004 Third Quarter results Conference Call.

Gentleman, please go ahead.

Ladies and gentlemen, welcome to the Fiat Third Quarter results Conference Call.

The Board of Directors of Fiat SPA has met today and approved results for the third quarter.

The full report will be available on our web site.

We understand today's been a very busy, reporting date for most of you.

So we are very appreciative of your attention today for us.

Sergio Marchionne, our CEO and Luigi Gubitosi will review results.

And we'll have a Q&A session afterwards to answer your questions.

Before we begin, let me just make the customary safe harbor remarks.

We might be making some forward-looking statements during this call, and these are covered by our safe harbor provisions filed with the SEC on August 20th (ph).

I will start right away by passing on the microphone to Mr. Marchionne.

Thanks very much.

I am going to be rather brief on my comments, so Mr. Gubitosi will be handling the detailed commentary on the operating results.

I'd just like to deal with the first slide, and obviously I'll take questions at the end of the presentation, of any nature.

We're relatively pleased with the third quarter this year, especially in terms of revenues.

We were up almost 10% at group level across the group.

And more importantly, the three large businesses inside Fiat posted quarter over quarter revenue increases of over 10%.

Significantly, we were able to cut our operating losses by two-thirds, at least the ones on a continuing operations basis.

We are still posting negative operating numbers.

As expected, we do confirm, and you'll see this at the bottom of the slide, we are confirming our breakeven target for the year.

The mix of that breakeven may shift depending on how events develop between now and the end of the year.

We are relatively confident that we will be able to maintain our breakeven operating target for the year.

It has been seventh consecutive quarter of improvements.

This has been -- there has been a visible uptick in performance across all the businesses.

Auto remains a concern and I think that when Luigi speaks about the Auto business, he'll give you more detail of about what's happened.

It's been a mixed bag of an outstanding performance out of our foreign operations and rather sluggish results of our Western European activities.

Significantly, we've launched a couple of new models.

The Musa on the Lancia side and the Fiat Panda 4X4.

All of those launches have gone well and we expect them to continue to perform well for the remainder of the year in 2005.

On the Iveco side, we have a new Trakker and the new Stralis large trucks were introduced in Q3.

These are all part of a continuing attempt across all the business to improve the quality of the product portfolio.

And soon you will see in the remainder of this year and for 2005 and 2006, a pick up in the level of activity of product introductions.

We are -- we continue to work diligently on trying to revive the organizational structure of the, house especially the Auto side, especially the Auto side, which is (technical difficulty) right, which has been really the main target of our intervention.

We do not believe that we have completed that task.

We've announced today that we will not -- that Mr. Kalbfell out of BMW has now agreed to join us as of January the 1st.

The announcement has been made public today.

And we continue to work on improving the quality of that bench.

There's going to be some activity on the -- at the same level on the other sectors.

Although given the level of performance that we've seen in Q3 and what we expect from them in Q4 and certainly going forward, they're not the main area of intervention at group level.

The Auto side continues to have a requirement to fine-tune the organization.

When you look at the roster of the announcements that have been made, the appointment of Wester on the engineering side, the appointment of Kalbfell for the Alfa brand, which has been made today.

We are raising, by substantial amounts, the quality of the people that are working on the leadership side of the house.

I'll pass on the comments to Luigi, who'll take you -- I just managed to spill a whole pile of coffee on the slide.

So I hope you can read them.

But I'll just pass it on to him, and he can -- we'll all see what he does after the coffee stain.

Thanks, Sergio, I'll try not to drown in coffee.

Let's start from Slide two.

As -- was remarked, revenues are up across the board.

Most important, the trend of improving sales at Fiat Auto that started last year is continuing.

And, both CNH and Iveco are giving us satisfaction by improving revenues about 15% in cost and currency terms.

On slide three, you will note that in what is traditionally the weakest quarter of the year, the operating loss has been sharply reduced.

Now moving little on the performance starting with Fiat Auto.

And as you'll notice in slide four, revenues are up 11%.

Volumes are up in all divisions but Alfa Romeo, whose key model is being just renewed.

The competitive environment is definitely improved in Brazil, when the price war that was going on last year has basically ended, and the market is rising.

While in Europe, the competitive environment remains pretty tough.

As has been noted, the organizational factor which we described to you in the log (ph) is now in place.

On slide five, you can notice how the new models are doing just fine.

Particularly exciting has been the performance of the Fiat Panda, whose version 4X4 has just been launched.

In slide six, we are giving a breakdown to what has been the main reason for the change in performance and reaction (ph) on the loss.

Brazil, as I said was an important contributor in the quarter as the negative pricing environment has been fully reversed.

While pricing of new models is good, older models are facing more pressure.

Finally higher R&D reflects investment in new products.

And as you know, we have a busy launch schedule for next year.

On slide seven, I will point out to you that inventory levels are lower on growing sales.

Wholesale is consistently tracking retail at a slightly lower level.

Moving down to CNH on slide eight.

Some of you might already notice as on Tuesday the company showed good results on continued strength in the Americas and then a very good construction equipment performance.

The manufacturing rationalization program has been completed at the East Moline factory.

A large factory in the United States of America is being closed in August.

CNH has rejuvenated its product line.

You will see on slide nine, two other products, which explain in part, the performance as well new models, the industry condition remains pretty good.

Obviously, in this environment, pricing has been very good and CNH has been able to pass on a large portion of the increased cost of steel.

The positive volume variance reflects mostly construction equipment as well as the performance, as I said before, in North and South America.

Iveco had an excellent performance, and continues to record good order intake.

The western European vehicle market remains good with -- was up 11.9% in the quarter.

Iveco engines are also done a very good performance recording almost a 10% rise in sales.

Working capital finally, has been tightly controlled notwithstanding the sharp increase in sales.

Again, on slide 12, you will notice as also vehicles launched in the quarter various new models, which particularly in the heavy segment have recorded very successful penetration.

The Stralis is confirming to be a success.

And the new version has been widely accepted on the market.

Also in the Iveco case, pricing has been very good.

And the sharp increase in volume has allowed the company to record good productivity gains.

As I said before, both medium and heavy in the engines businesses have been the most contributors to the improved performance.

On slide 14, you will notice the strengthening performance of our components business.

The positive trend recorded in the last few quarters by components, in particular by Magneti Marelli's continuing.

Both Magneti Marelli and Teksid are up in volume.

And Comau is down only because of the transfer to Fiat Auto of the service unit business.

It would be otherwise out for the quarter.

Slide 15 compares our results from continuing operation with the previous years.

As you will notice, the trend of quarterly result improvement is continuing in Q3 where the year on year gain was significantly higher than in Q2.

On slide 16, we take you from the operating results, to the net consolidated results.

Financial charges slightly declined.

And as you will notice the results before extraordinaries, has significantly improved in the quarter and the nine months.

The comparison with the previous year obviously is impacted by the large capital gain on the sale of FiatAvio in the Q3 of last year.

Slide 17, addresses cash flow, where net financial position is at 5.5 billion or, about 1.2 billion higher than at the end of June.

Of this 1.2, the major portion or actually 700 million, reflects a lower amount of trade receivables sold.

The balance of the 500 is mostly in line with the seasonal trend in higher sales.

On slide 18 our traditional presentations saw a much better result excluding change in working capital for both quarter and nine months.

Working capital is perhaps in line with last year despite higher sales.

With regards to change in net financial position, I will remind you that in the third quarter of last year, we had a large capital increase of 1.8 billion and we recorded the sale of FiatAvio.

Going back on working capital, slide 19, portrays this year net working capital evolution against last year.

As you can see we show a very similar seasonal pattern, which we expect to grow again in Q4 this year, which will show a market improvement over Q3.

Slide 20 shows a breakdown of industrial versus financial services companies.

As you would expect the increase in debt is due to -- being the increase in debt mostly due to working capital, is thus attributable to the industrial companies.

On slide 21, give you the usual figures on financial structure.

I would point out that, the increase in short-term debt is due to the mandatory loan coming due in next September.

On slide 22, we show you the maturity schedule.

Over the next 12 months, cash maturity at about 6.2 billion.

As you may recall, the figures from the last quarter, I'd like to point out that the bank rollover season has been fully successful.

And needless to say neither (indiscernible) alone nor the mandatory convertible constitute a liquidity issue.

Finally, just like to remark the liquidities remain conservatively invested as you see here on slide 23.

Let me sort of try and wrap up the presentation for a moment and then we will take questions.

I think that when you stand back from the quarter, a couple of issues that I'd sort of would like to highlight.

The first one is that with the exception of Auto we have been able to register some significant improvement in sort of both top line performance, and operating margin improvement.

These are significant permanent changes in the way in which these businesses are being run.

And so I think it's a very healthy indication of the fact that roughly 60% of this house does not have and is not experiencing similar problems to the one that Auto has historically been running into.

So I feel quite comfortable that we've -- that contrary to what we saw in Q3 of last year where we were still clocking losses in some of these big businesses.

That we have been able to turn the corner on performance, and then I think that we have a very clear understanding on how to manage these business in the marketplace and what kind of positioning we expect them to achieve by the year 2007.

I think that, the work required to try and reposition, especially businesses such as the CNH, which do have to right at least structurally to perform at the same level as its best competitors.

That argument, that discussion has been had, and I think we are now beginning to work our way through the organizational structure to try and position these businesses properly.

The second issue is the one on Auto.

And it's, it's a discussion that really ties back to comments that I made back in July when we met at Belocco (ph).

It is, it is of very little use now to try and belabor so that the critical assessment that we made of that business going back two or three months ago.

I think that, the thing I can confirm clearly is, that the changes required to correct those anomalies and that misalignment of performance are in place.

I think that the recent hires that we've made, are an indication of the type of commitment that the house is making to turning this business around.

Having said all this, the marketplace itself is rather ungrateful.

I think there is, the marketplace remains and is expected to increase in competitive intensity. and I think that we need to be, I think cautious in the way in which we sort of try and forecast performance for the business going forward.

I can tell you that in the medium to long term, the changes that we are making will pay off.

The question of quarter over quarter performance in this business, remains an issue that we need to deal with aggressively.

I think we do need to give some time to this team that has been put in place to try and operate its magic on the business.

And we're by far not in a position today to try and assess the speed with which that will happen.

Having said all this, I think we remain relatively confident on '04.

I think we will achieve breakeven operating performance, and I reserve to make any judgments on '05.

I think that we were relatively clear in Belocco about the type of operating performance improvement that we expected out of the group over the period.

And I will have nothing else to say unless there are specific questions.

Other than that I think we'll take questions.

I have not much else to add.

[OPERATOR INSRUCTIONS].

We'll take our first question from Massimo Vecchio from Intermonte.

Please go ahead.

Good afternoon to everybody.

I have two questions.

The first one is on the distribution network for Fiat Auto.

Can you say what you are trying to do to improve this network role outside Italy?

My question comes from the fact that I'm looking at your slide, on slide 6 and I see that the investment in the quarter looks to me extremely low, just increased by € 8 million.

So I was wondering what your action was on that side.

And the other question is on CapEx.

As you know from your cash flow that group CapEx is going down from € 551 million to 362.

Can you, can you also explain why?

Thank you very much.

The answer to your first question is that, is that we clearly identified this issue as being a rather severe weakness of other Fiat Auto business.

Having said this, when we began to work at the end of July in terms of putting the people in place, we did appoint somebody by the name of (inaudible) into that position.

He started on October 1st, I think, I am sorry it may have been September 1st.

And we recently appointed Mr. Dumpra Mundo (ph) to take a leading role in dealing with the Italian network.

The time spend, that is spent -- that has transpired between the appointment and the end of the third quarter is not sufficient to try and justify anything.

I mean the 8 million increase is only a continuation of what was in place, even before we identified the need.

I think you need to take a look at this in terms of the quarters going forward.

So I -- there are a number of initiatives that are underway now to try and develop an economic model that allows, the dealers to make money and I think that is the combination of a variety of things which deal with product supply, the way in which the product itself is being positioned, what the house will do in terms of support, because of the marketing of the brands.

All these issues are on the table and I think that you need to give this team enough time to try and bring out some visible results in terms of the changes that we're making to the way in which the network is working.

I can tell you that my brief limited experience with the foreign network, with the network outside of Italy has not been great.

I think that we've got even a more dire need of intervening into that environment aggressively to try and rectify some anomalies that have existed in terms of the network, in fact.

I like to comeback at the end of Q4 and deal with that issue in a realistic way.

Because that would have given us certainly enough time to a point out some of these (indiscernible) that have been made.

On the other issue of the CapEx I think you got -- I'll get Luigi to give you his comments.

Whatever number Luigi gives you, I can tell you that there has been a heightened insistence on rigor in terms of capital commitment in the house.

And that is probably, it's going to bring about a natural slowdown the way in which capital is being requested out of Fiat.

That's healthy.

In fact, people are stepping back before committing capital in an environment which has been incredibly capital prone and not conscious of the consequences of that commitment, it's a good sign.

Having said all this, I think that a number to the end of the nine months is not indicative of the run rate for the year.

I think we will probably around 2.2 billion to 2.4 billion for the year.

And that's probably the number that you should pencil in for 2004.

Does that answer your questions?

Yes, thanks, thanks very much.

Moving to Citigroup, we will take our next question from John Lawson.

Thank you very much.

Good afternoon.

A couple of things.

Firstly, I wondered whether you could just offer us a little more detail on the 200 million of restructuring expense in the third quarter, what it paid for?

And on Fiat Auto I guess that's, we're looking to try to understand what happened in the pricing environment for you, you give us a volume price impact.

You sold 40000 more vehicles and it gave you 73 million positive.

I guess that our assumption is that you were facing negative pricing in Fiat Auto as a whole.

And I wondered whether it was possible for you to give us a little more color on just how positive Brazil was in the quarter please.

Hi, John, Luigi Gubitosi speaking.

First of all, on your question about the extraordinary charges in the quarter?

Yes.

It's mostly restructuring charges for Fiat Auto.

About -- it's the vast majority includes a number of also legal settlements or provision for potential settlements in Brazil, about certain legal issues for about 25 million.

There has been some write off for 10 million to 20 million.

And for about 30 million it's the Magneti Marelli component has been shutting down a plant.

The actions in Fiat Auto were job losses or some other writedowns?

There have been some provisions for write downs, as well as certain reimbursement to the powertrain for restructuring.

So they have done as well as for layoffs.

So about 30 million is layoff and restructuring charges of people leaving the company.

Understood.

Did that answer your question?

–That's perfect, thank you, yes.

Moving to --

-- Yes, I am sorry there was a second question about, that John was making about the pricing environment for Fiat Auto.

As we said before, the pricing on the -- as you might have noticed on the slide 6, pricing has been overall good.

This is partially due to Brazil where the margin for cars dramatically improved.

As I said before there was a very negative environment last year, which is now fully reversed.

Secondarily in Europe, we have still pretty good pricing on the new products and particularly the Panda is doing extremely well in this respect considering the environment.

However, as you know we, as we're rejuvenating part of our product lines, we are seeing a significant component, of the older model are facing some more pressure as competition are fighting negatively.

About two-thirds of this improvement is coming out of South America.

Is that okay?

Yes, that's fine.

Thank you very much.

Thank you, John.

Moving to our next question.

We will take our next question from Mr. De Ambroggi from Euromobiliare.

Please go ahead sir.

Mr. Gubitosi, you mentioned working capital reduction in Q4 as an expectation.

Could you give us a target for net debt including more specific indication of working capital?

We know that in the past, you said that working capital would have been entirely or almost entirely offset considering the absorption it had so far.

And my second question is on Fiat Auto.

If you could give us some more details on what you are expecting for Q4 and particularly how much of the Melfi strike effect was already recovered in Q3?

And my last question is on R&D cost for Fiat Auto on a consolidated basis, if it is possible to have an indication?

Thank you.

Let me answer your question, your first question about cash flow, and obviously the main driver of cash flow is working capital.

This year, as you have seen capital needs have been the combination of, the seasonality in two items specific to 2004.

Sharp increase in sales, and some specifics of CNH, i.e. the closure of the East Moline which led to anticipate (ph) production, as well as the increase in North American sales, which requires more for our plan.

(indiscernible) say that, a cut for target which is assuming a stable sale of trade receivables, remain what we have told you before.

In the first nine months working capital, if you exclude the same level of receivables, so you are actually 1.6 million (ph) higher Now if you look at what happened last year Q4, was as it typically is a cash generative quarter, however we had higher stock at the end of the quarter.

So all in all, we do think that will generate significant amount of cash in the fourth quarter, and that we should be able to maintain, and as I said assuming the cost on level trade receivables, we should be able to come pretty close to our target.

Cost on level, considering the 5.9?

Sorry?

Cost on level of trade receivable is 5.9?

No, cost on level, I mean as compared year on year.

At the end of last year it was about 6.7.

Yes.

Okay.

Then you were asking about R&D for Fiat Auto for the group as a whole?

Yes.

And the expenses in R&D for the group is expected to be about – 1. -- for 2004 it should be about 1.8 billion, 1.9 billion, of which roughly 1 billion should be Fiat Auto.

That would be an increase of about 100 million from the previous year.

Okay.

Does that answer your question?

You had an additional question--

The trend should continue going forward.

The trend meaning the improvement --

(multiple speakers) Fiat Auto.

EUR100 million of additional R&D costs are going forward.

I think we expect to maintain this level of R&D going forward, I mean an increased level as compared to the past, yes.

Okay.

And the question on Q4 results for Fiat Auto and Melfi strike effect.

I think we basically say that we'll have, we'll have quarter over quarter improvement for the group.

I don't think we have set specific targets for Q4 for any of the businesses.

Yes, I mean, I think that we are going to see and we are expecting to see a quarter over corresponding quarter improvement in performance.

The issue that you raised about Melfi, by Q3 the issue had been absorbed and moved on.

So I, that's why it's not even a reconciling item in terms of Q3 to Q3 performance.

But these are difficult trading conditions in Auto.

I think that, to go back to what Luigi was saying, two-thirds of the improvement in operating performance came out of our South American operation.

The Western European market continues to be tough notwithstanding the fact, that we have been successful with new product launches.

The problem is that, the drag along here of the older models and the pricing impact of competitive maneuvers on that portfolio has been significant.

So we have been, we have seen margins erosion on the older models.

And until that portfolio gets rejuvenated, I think we are going to struggle with the maintenance of -- at least of historical margins and of the older stable.

I think that Q4, '04 compared to Q4 '03 is going to show some improvement.

It's difficult to tell you how much that improvement will be.

Okay, thank you.

Moving to Dexia Securities, we will take our next question from George Dang (ph).

Please go ahead.

Yes, good afternoon.

I have two questions.

First of all, on the raw material.

Wanted to know whether you could elaborate on the impact and the exposure both at group level for the current year and next and maybe specifically on Fiat Auto.

And the second on the warranty cost, you've mentioned earlier on that the warranty costs were down some 25% in '03 and that you expected, I think a double digit reduction in '04.

So I was wondering what is the actual achievement year-to-date and what you expect going forward?

Thank you.

I'm sorry the line was somewhat disturbed.

But if I understood correctly, you wanted to know what the impact of raw materials and then you were talking about warranty cost.

Warranty cost for Fiat Auto.

Yes.

With regards to the warranty cost, I think we have increased provision as we have recalculated the cost of the two-year on the car.

As you might be aware, roughly two years ago we changed that warranty from one year to two years and we made some estimates.

We revised the provision at include -- and we have beefed up the funds to cover such costs.

Then I think with regards to raw materials, we have been so far able to cover most of the cost as we tend to do on multiyear contracts.

We have basically hedged our cost for 2004 and we are working to do that on 2005.

Did I answer your question?

Could you be maybe more explicit, in terms of steel versus the other raw materials.

If I understand correctly, you are hedged probably up until end of this year.

And I guess we could assume that starting next year you would have to...

...

No, what we basically do, we have multiyear contracts which tend to be staggered.

I mean they don't expire all at once.

About 20% to 25% expires each year, as I recall correctly, maturity profile.

So in this respect, we tend to roll over our contracts.

And I think the effect is a low double-digit (indiscernible) out.

All right, and maybe just a rough idea all sectors combined what would be in million Euros the estimated cost for the current year?

I think the CNH cost was about $130 million, which was mostly passed on to the consumers, and the rate was definitely lower than that.

And then the final question -- maybe a final question, if I may, on the new accounting standards of IFRS, which were hardly mentioned, I guess you guys. have a lot of other things you care about but is there any indication you could give in the terms of the potential impact both P&L and balance sheet starting in 2005?

Yes, and I think we will be obviously more precise as we close the account at year-end.

But we expect implementation of IAS to have a positive impact of our income statement, mainly due to the discontinuation of goodwill amortization.

In addition at least in the early stage, you might find that depreciation of capitalized development costs should be lower than development -- that the addition to the -- to the equity base.

We don't expect material impact on the group equity base from the adoption of IAS, as the impact of capitalized development costs should be nicely offset by recognition of the full pension liability.

And it is likely that some of the receivables we sell will be, may need to be incorporated in the net debt numbers as -- this is still subject to interpretation.

However, in this case most of it would go on the financial services company.

Am I right in thinking that it's mainly the non-recourse receivables that will be added back to the balance sheet?

Yes, however on the securitization, I think we still looking for interpretation about the retained interest whether that requires to be reconsolidated.

But as I said, it's very likely on the one with recourse.

And we are investigating on the others.

Okay, thanks very much.

You're welcome.

Moving to Banca IMI, we have a question from Sabine Blumel.

Hi, good afternoon.

I'd just like to have a little follow-up question on steel.

I mean could you be a little bit specific?

I mean, as I understand, for CNH, you don't have multiyear contracts, whereas in Europe for Fiat Auto and partly for Iveco you have.

And so I mean, if you're not making in that order -- if you are, any double-digit additional cost, which you, I assume, can't pass on at Fiat Auto has quite an impact.

So could you please tell us a little bit more of what's going to happen or what impact you expect in 2005-2006?

Let's talk about 2005.

I think that's probably the most realistic timeframe for us, to try and assess the impact of raw material price escalations.

I think we -- our experience, both on the CNH side, and on the Iveco side has been that we have been able to pass on the raw material price increases, on to the customer base.

I think it's reflected over the severity of the problem in the industry, and the fact that all participants, have seen the need to adjust selling prices in order to maintain some level of margin performance.

This is also true structurally of the components business, where although with the delay, we have been able to sort of, pass on most of the hikes that have been experienced.

The other side, let me try and qualify this sort of low-digit issue.

I do not think that 2005 performance for Auto is going to have an unreconciled number a raw material price increase, which has not somehow been adjusted within the cost structure of Auto.

And, to be honest, I think I am unwilling to sit here and put up as a potential defense against non-performance the fact that we've had the raw material escalation issue to deal with that we have not been able to deal with.

So, as real as this issue may be in terms of it being in the low single digits, I am not sure that it is a relevant issue to try and assess performance going forward for Auto.

Are you okay with that answer or, you want more?

Hello?

Moving to our next question, we go to Alan Jones (ph) of Morgan Stanley.

Hi, good evening gentlemen.

I have two quick questions.

The first, is on Eastern Europe.

We have seen a trend now of sales falling particularly in markets like Poland in the large part because of the influx of used cars from Western Europe and the availability of these cars now in Eastern countries.

Obviously you have exposure there.

I was wondering if you can elaborate on what you're seeing either as an impact on pricing or volume or residual values, just your overall financial health of your Eastern European business, which had been picking up until recently.

Now the next question on, on regard to the net debt and the divestiture proceeds.

Now the biggest divestiture I guess in the quarter was Midas, which gave you about just under €50 million.

What was the impact on the net financial position?

Was there anything else on the divestiture front that impacted net financial position in the quarter?

And I know you said that there were little bits and pieces that might go on in subsequent quarters.

Can you give a bit of outlook of what we could maybe expect in the fourth quarter?

Thanks.

Okay, with regards to the sales, and basically the only sale very significant was Midas in the quarter.

So as we have discussed before, we don't typically like to comment about potential divestiture until they are done, so don't expect anything.

And the impact was about €56 million of Midas.

With regards to Poland, there has been a decline in sales, following from a sharp increase.

Our relative performance has been okay, also because as you know, Poland is for us it is important export base as all the Panda and the small diesel engines are produced.

So the company there is doing quite well.

But I would say, while obviously very impacted by lower volumes -- and I am not sure that's only attributable to import of used cars.

I think it's somewhat correcting a trend of sharp increases in sales in the first part of the year.

But I would say that among our problems, Poland is definitely not high on the list.

Okay, very good, thanks.

Thank you, Adam.

We will take our next question from Goldman Sachs.

Please go ahead Mr. Warburton.

Hi, good evening.

Just two quick questions.

Operating questions on Fiat Auto please.

The appointment of Mr. Kalbfell as head of Alfa Romeo, is that just a sales and marketing job, because our understanding was that Alfa Romeo is a separate business entity, had been disassembled and put back with Fiat Auto.

Could you just clarify exactly what his role is and whether there is going to be a change in structure between Alfa and Fiat brand?

And then secondly, a number of people in the industry are saying that the Punto and the Alfa 157 have been delayed.

Could you just clarify does Punto launch in the first half next year and will 157 be on sale during calendar year 2005?

Thank you.

Can you repeat your first question.

I was absolutely befuddled by your suggestion that Mr. Kalbfell do something other than run Alfa.

Can you explain to me exactly what you wanted to say?

Yes, sure.

Our understanding was that Fiat had separated Alfa and the Fiat brand for a period of time, and then put them back together operationally so they are one unit again.

Is Mr. Kalbfell in a sales and marketing role at Alfa?

Or is Alfa as a business going to be separated from the Fiat brand again?

Okay, maybe I think it will be useful, I made reference to some comments that I made in July about this side (ph).

What happened as a result -- the Alfa brand has always been part of Fiat Auto.

After July 26, we had separate business units that ran Fiat Lancia as a group and another group that ran the Alfa brand.

Both functions were fully independent functions.

They had manufacturing, sales and marketing, product development and I guess some guys of engineering and R&D associated with it.

The organizational change that we made in -- that we announced on July 26th, and that was put in place on September 1st, effectively created the position of brand so the Alfa Romeo brand now sits and it does not have reporting to it the manufacturing or the engineering side all of which are viewed as being central functions serving all four brands.

So, Mr. Kalbfell in his new function is totally responsible for the development of Alfa Romeo as a business and he is going to rely on the manufacturing services of central functions which are run out of Fiat Auto.

Does that help you?

Yes, that's clear.

And on the model launch?

I think that we are going to be within the ballpark of the date that you mentioned.

I think that one of the things that has happened here as a result of the new organization being put in place.

Certainly I don't see any substantial shift in the dates of the launch for the Punto, which I think was forecast for the second half of 2005.

And that has not changed.

What we have done on products that are in the pipeline is that I think that we are taking a very, very hard look today, as to whether we can accelerate platform convergence.

And therefore, we may push product launches by two to three months in order to accomplish that convergence.

I think it's too early to tell that the work that we are doing now has not yet been finalized.

But I do think that we need to look at this as being a primary objective to try and bring down product costs, going forward.

And so, I much prefer to wait three months, and achieve a much longer term impact on the operating performance in the business, than trying to get a quick buck by introducing the product range earlier.

So we'll have a much better view on this, I think at the end of Q4, because that work is ongoing now.

Did that help you or ...?

Yes, perfect.

Thanks.

Thanks.

We will take our next question from Xavier Gunner of UBS.

Please go ahead.

Yes, hi there.

Just a couple of questions go back to the debt and the working capital issues.

Now we know that working capital rose in the first half.

And one of the reasons given for that was Melfi amongst the other reasons.

And I guess, I was a little bit surprised to see working capital rise again off of what was sort of an inflated base, if you like, in the third quarter.

Was I wrong to be surprised or, was in fact the working capital rise in second quarter not really related to Melfi, and therefore not exceptional?

Second question I've got is, are you still comfortable with your EBIT (inaudible) a small loss target for '05 at Fiat Auto.

And then finally, I'm just (inaudible) working capital -- what is -- is the working capital going to be neutral in '05 or, do you expect another drain on the cash flow in '05 there?

Excuse me, could you say it again, your last question about '05?

What were you saying?

Yes.

I just want to establish how much drain there is on your cash flow in '05 from changes in working capital.

Okay.

With regards to working capital, first of all I am not sure that there has been anything exceptional in the way working capital has moved in the sense that you have to realize that the composition on our increase in sales is a lot dependent -- has not been caused by an increasing sale of CNH and Iveco.

In particular, the CNH has been mostly in, in North America when as I said before their significant floor plan.

But if you go back to the slides where we show that seasonality patterns, as you can see this has been not particularly unusual.

And this is why I tell you that we expect again that we will have a decrease of working capital in Q4.

Now in order to be precise to the last Euro or dollar if you like, I would have to know exactly the composition of sales at the end in the geographical mix which may vary from time to time.

Plus as as I say, I still believe that the ballpark figure is accurate.

With regards to '05 and as I said before, assuming an unchanged level of receivables our target should still be confirmed.

And with regards to the -- with regards to the 2005.

Again this would depend from increase of sales, because working capital obviously is in fact, somewhat dependent on volumes.

If we assume that your numbers are right, then what sales need to be to get to your EBIT for loss for Auto and net breakeven.

You obviously have an assumption about sales and I'm trying to establish if you see a cash flow drain there as well.

I, the line was pretty disturbed, but I heard clearly cash drain.

I think you're saying are we going to absorb from working capital?

Right.

If that was your question, I think at this stage I am not prepared to give you yet, working capital target for '05, but I think we will try, and I think we can succeed in reducing working capital to be less than proportional increase, than what we have been bringing on sales so that the working capital proportion to increase of sales will be lower.

That's what we are trying to achieve.

With regards to 2005, as we said before, we have not changed our objectives for the next year.

Obviously the market, the market is tough, and we said we have difficulties on the market environment.

It's an important year for us as we're introducing important new models.

And so, as we meet after the closing of the year we will assess 2005, and give you further guidance.

Sergio, do you want to add some comments.

I think, we have now begun the budget process inside the house, and I think that we're spending a considerable amount of time understanding the cost structure of Auto.

It is certainly in view of the losses that have been clocked at least for the first nine months of this year.

The issue of about getting to a small operating loss in 2005 remains our biggest challenge going forward.

I think that there are visible levers that we can get to, in terms of the cost structure of the house, to make a significant dent to the operating loss that has been experienced thus far.

I think we know where they sit now.

I think we have a much better consciousness of the pool of costs that has given rise to this issue.

And I also think, to be honest, that they really have little to do with the manufacturing cost environment within which Fiat Auto is running.

I think that there are peripheral costs, which are relatively large associated with the running of this business, which need to be looked at and examined in terms of their rally (ph) contribution.

I prefer to wait until we close the year, after we have seen what happens in Q4, to give you a much stronger and stricter guidance on '05.

But I know of nothing today that will suggest that we should revise the indications that we gave you in July in Belocco, but we will come back to this issue in greater detail when we announce the Q4 results.

That's great.

Thank you very much.

We will take our next question from Serge Escudè from Unicredit Banca Mobiliare.

Serge Escudè: Afternoon, my question is on Iveco, what kind of gross are you expecting for next year?

And what kind of competitive environment you are expecting especially?

The second question is on Ferrari and Maserati, you never set some targets in terms of return ops on sales or what kind of action you are taking to improve profitability?

And my last question is on Brazil, what is the scenario you are expecting in terms of pricing for '05 or, if you think that the trend of the last three months is going to be confirmed?

I think your first question -- again the line was a bit disturbed, I think your first question was on Iveco?

Serge Escudè: Yes.

And can you just elaborate on your question what you would like to know about Iveco?

Serge Escudè: The growth you are expecting for next year --.

Gross meaning?

Serge Escudè: Meaning ...

Growth?

I'm sorry, I'm sorry.

I understood gross.

The -- and I think you also asked about the competitive environment?

Serge Escudè: Exactly.

I think as I said before, the competitive environment, I'd say the industry scenario at the moment is pretty good, in the sense that -- and we can see that also in the results of some of our competitors.

The industry has a reasonable pricing behavior.

And there has been good demand.

Iveco, then, specifically and I think that was particularly evident in the quarter, I think at the international new products which once again has been pretty successful.

The Stralis I think has met our expectation and in fact is probably exceeding them.

So that is among the good surprises we get from time to time.

I think we were pleasantly surprised our performance in the (indiscernible).

Now, we hope that that will continue.

And at this stage as you might have noticed in the slides, we still are seeing orders coming at a good rate of increase over last year.

It's -- as we discussed before (inaudible) process.

So we still see Iveco -- I think I can tell you, at this stage, that we see Iveco improving next year over this year, but I wouldn't put a number yet on it.

As I said we are in a budget process.

Serge Escudè: Okay.

Then I think you were asking about Ferrari?

Serge Escudè: Exactly.

Then, I think we should distinguish three areas within Ferrari.

The Ferrari division, itself, I think continues to have excellent performance.

The Ferrari 430, without wanting to sound arrogant, is as good a car as has ever been made and is a fantastic car, which has almost two years backlog at this point.

Maserati has had very good success with the Quattroporte.

I think what we have to do obviously was wait for the increasing volumes to bring back Maserati's profitability as well as to make action of trying to reduce our costs in that area in particular components.

And thirdly, I think there is the Formula 1 side, where as you know, there's been long-standing discussion about the split of the revenues coming out of there.

I think the revenues that Ferrari's getting are not commiserated to the what it brings to the table.

But we will see in that respect.

And your third question was about -- and there again, we did not hear well what -- which company we are talking about?

Serge Escudè: It was Brazil and your ...

Sorry, about Brazil.

Serge Escudè: Brazil and the scenario you are expecting in term of pricing and if you expect the scenario of favorable pricing will continue.

Well, on the -- in Brazil, as you know, there's a market where you have three large players.

At this stage, all three I think are in a good position there.

We're definitely making money there.

I expect also -- I think -- in fact, I'm positive also, the two are recording good results.

There is nothing to make me think that the pricing scenario should change.

I don't think any -- at this stage, I don't see anything that should bring us back to last year.

So we expect that the market will continue to have a favorable pricing environment.

Obviously it went up dramatically -- I don't think it can sustain this pace forever.

But the prospective are still favorable.

That answer your question, Serge?

Serge Escudè: Yes.

May I ask another question, if I may.

How many you want.

Serge Escudè: The dismissal of the banking Logan (ph), what we can expect in a reasonable time to be solved?

And if you can give us some more indication on the ...

Sergio, I wish you a nice evening.

I'm joking.

But, as I said, we'd never comment on rumors.

Serge Escudè: Okay.

And my last question is on the small series on the 500 that should be launched next year that I read, as a kind of small series for city car.

Can we take that project as to be done in next year?

The answer is no.

It won't be done in 2005 and I won't tell you whether it will or will not be done, because the decision has not been made.

The issue -- let me go back to the issue about Ferrari and Maserati, because I think that's an important issue.

You made the comment that we do not have operating margin targets for these businesses and effectively, because of the glory and fanfare associated with running Ferrari that we're not focusing on the operational reality.

I don't think that's quite true.

I think that Ferrari in and by itself is a standalone business.

Has done a huge amount of work over the last few years, apart from winning the Grand Prixs, which I think everybody appreciates.

But I -- as Luigi said, if you were to order an F430 now, you'd have to wait until 2006 to get delivery.

And so the fact that the product line and the engineering work that's gone on inside Ferrari is yielding that kind of demand curve for it's product is very encouraging.

The Maserati story is a separate story.

It's a business that was given to Ferrari to be run.

It is a business which structurally is dissimilar from Ferrari because of the numbers of cars that are required to be sold in order to make them economically viable.

So that issue is being looked at quite intensively inside the group, to find out how we can effectively expand the reach of Maserati, and how we can bring down the cost of production, in such a way as to make these products successful.

I know that the Maserati Quattroporte, which is -- also has a very long demand curve associated with it.

Having said all this, it's still an unprofitable model because of volumes.

So I think we need to spend a lot of time over the next few months, trying to come up with a strategy that will deal with that issue.

But we will have much clearer views by the end of Q4 on that matter.

Serge Escudè: Okay.

Thank you very much.

We will take our next question from Thierry Huon of Exane BNP Paribas.

Hi, it's Thierry Huon from Exane BNP Paribas.

I've got a quick question about the main levers you may have next year to improve the operating profitability of Fiat Auto.

These are wonderful questions.

I mean ...

Thank you.

...

If -- no they really are.

And I thank you for having raised them.

The answer to that question -- I mean this is an issue that has been dealt with by five CEOs before me, and it's an issue that I continue to grapple with.

And for me to give you a to-do list, the short list of how to fix an auto business is not going to really be helpful.

The issue as I raised in Belocco is pervasive.

It is not a single item within the auto business that's causing me concern because I'm -- to be honest, as of the end of July, I have not found a lot that I would have considered to be world class in terms of organization and in terms of business behavior.

A lot of that has changed and is changing as we speak.

And I think that there's not a single item within that structure, that I would not touch in terms of being able -- in terms of bringing down the operating losses of the house.

What I can tell you -- I can tell you that it does not sit within the manufacturing plant layout of Fiat Auto.

We cannot keep on focusing on the existence of as many plants as we have inside Fiat as being the cause to the lack of success of the automotive business.

Even if I were to shut down a plant today, the impact on the house, in terms of operating efficiency would not be sufficient A, to justify the cost and the pain associated with the shut-down.

And it would not make it a significant, visible dent in the operating loss of the house.

The problem is elsewhere.

It has to do with the way in which it runs the business on the distribution side, the way in which we tackle our present and foreign operations, the way in which we have misaligned and really not nurtured the network side on the Italian side, while we have allowed other companies to come in and get share.

The issue is pervasive.

And that is why the team that has been put in place is as numerous as it is.

Because the tasks had to be broken down and single focused, in terms of getting the house to pay attention to these issues.

So, all the people that you see under organizational structure, 28 or 29 people around the table, are determined to change the way in which this business is being run.

So there's not a single thing that I would keep.

Not one.

So the answer to your question is pick a lever and we'll have one.

Okay.

Thank you for the answer.

But the question remains, I would say.

Because all this things are -- should have a long-term impact but as you said that for next year you expect to have a lower losses and even low operating losses.

What will these main drivers to reach this target?

It is certainly not going to be volume.

Because I think if we're banking the House on the recovery of revenues, it's not going to happen.

I think we are expecting to grow our top line.

There's nothing exceptional in that growth ambition.

So it must come out of the cost side.

But if you're asking me whether it's coming out of the manufacturing cost side, the answer is no.

The P&L is a complex instrument.

If you look at it in terms of it's parts, if you look at how much money we're spending in advertising across the group and where we're spending that money in terms of effectiveness.

If you spend -- if you look at how -- if you look in detail at how well our foreign operations are doing, in terms of distribution and the ability to try and maintain whatever market share we have in these jurisdictions, one has to question the wisdom of the economic call in making those capital commitments.

And those issues are on the table now.

So let us work through the issues.

We will give you a detailed layout of these actions when we talk to you about '04 at the end of the year.

OK.

Thank you.

We will take our next question from Ludovic Fava from CDC-Ixis Capital Market.

Yes, good evening.

Could you hear me?

Yes we can.

OK.

Thanks.

My question is a follow-up question on John Lawson's and Thierry Huon's one.

I remain surprised by the poor operating leverage at Fiat Auto.

You've booked € 444 million of additional revenues in Q3, in particular thanks to volumes.

But that played only to € 61 million of additional operating income.

Which means a meager 14 margin of profitability.

What can explain this low-level of operating leverage?

And what will change in 2005, since the best part of the year you will not have any major new products?

The real issue is that the margin improvement is also a result of mix.

And as I mentioned earlier, the older models have been impacted by margin erosion.

So what you see is the net effect of the two.

And I think that you got to be really careful, about suggesting that we are -- our ability to exercise operating leverage on the business is as limited as the slide shows.

There is a legacy issue, in terms of the portfolio models going forward, and it's going to impact on this issue until we work our way out of it.

That's why I go back to the issue about the fact that in terms of absolute gross margin performance of the portfolio, I don't think we're going to see a significant improvement in that percentage.

OK.

We're going to take one more question.

And then we'll close the session.

Thank you.

We will take our final question from Philippe Houchois of JP Morgan.

Yes, good evening.

Couple of questions.

Mr. Marchionne, if I follow through your last comments, does it mean that basing the new Punto and the cross-sell platform is not going to deliver the cost savings that might be expected from volumes?

I think the new Punto is an issue of time.

If you look at the product launch and the impact on the profitability in '05, I would -- I think one has to be cautious about including a large amount of the impact in '05 results.

I think it will have a significant impact going forward.

But we're talking about '05 here.

Yes.

OK and the -- speaking of models, the -- could you give us a number?

What is the Punto sales performance YTD and in Q3 specifically?

What kind of decline are we looking at? 15/20/25%?

I have no clue.

I'll pass it on to Mr. Gubitosi to comment.

Philippe, can you repeat your questions?

Yes, can you tell me what in terms of -- there's an echo in here.

Hold on a second.

Is it better here?

(Inaudible).

Yes.

Philippe, the line is very bad.

Yes, I tried --.

OK.

(Inaudible).

Let me ask the question direct.

Yes.

What is the YTD performance of Punto in terms of volume and what is it in Q3, compared to YTD?

And just wondering on the Alfa 147, which was just redesigned based on the dealer initial order intake, do you think Alfa is going to -- the 147 is going to keep its volume or, is it going to regain volume compared to the first half this year?

And then also --

-- Two hundred...

... are you going to start producing the 156 this year or is it -- does it start only next year?

Punto, 250,000 units sold in nine months of this year, 20,000 down on last year.

Only 20,000 down?

Yes, OK.

The 147 you asked?

Yes.

Just quickly repeat the question.

There's a lot of noise in my room ...

Yes.

... and bad reception ...

I have a lot of echo in mine.

... and bad line on yours.

The 147 ...

Yes?

(Inaudible).

Yes?

Based on initial ordering intake et cetera, do you think the volume will go up or, will you just maintain the volume?

I think volumes are -- will go up.

I think to be blunt, I'm not sure that we've handled the (inaudible) properly.

So I think -- and I think we're being very careful now on how we handle this -- how we handle the launch.

But our indications are that we'll have significant volumes on the car going forward.

It should clock about 80,000 units a year.

OK.

And ...

And the third question was 156 and whether it will be launched in '04 or '05.

Not '04.

There will be no build up.

There will be no assembly of 156 in '04?

It is '05.

OK.

All right.

Thank you very much.

Thank you very much for the participation in this call.

And we'll see you soon next time.

Ladies and gentlemen, that will conclude today's Fiat 2004 Third Quarter Results Conference Call.

Thank you for your participation.