Stellantis NV (STLA) 2005 Q2 法說會逐字稿

Mr. Ledda? Please go ahead.

Yes. Welcome everybody to Fiat’s Second Quarter 2005 conference call and web cast. All materials that will be presented today have been posted on the web site to use for your reference.

Today’s host will be Mr. Sergio Marchionne, Chief Executive Officer of Fiat and Mr. Luigi Gubitosi, our CFO. Forward-looking statements will be made during this call and if you have any questions please refer to the Safe Harbor provisions on our 20-F filed with the Security Exchange Commission in the United States.

I would now like to pass the line to Mr. Sergio Marchionne for his opening remarks.

Thanks very much and welcome to the Q2 conference call. I’m trying to repeat what I said before we were cut off.

I think we are relatively pleased with the performance of the group of second quarter of 2005. I think we achieved significant milestones in the reshaping of this group by bringing down the operating losses of Fiat Auto to what we considered to be a respectable level in the process of restructuring. We are able to do this notwithstanding a market which, I think, as we will discuss in a few minutes has been highly competitive and where we have effectively given up intentionally our market share in order to preserve the quality and integrity of the distribution system.

Overall, the group was able to achieve sales growth by 12.1 billion for the quarter which is in line with what we did in ’04. Importantly, I think is the fact that trading profit doubled to 350 million from 179 million in the prior year and as I mentioned earlier, I think that the other losses were significantly reduced from 248 million in 2004 to 88 million in 2005. There were unusuals, which include the final installment of the GM settlement. We were able to achieve a net income of 270 million, which obviously is tremendously higher than it was in 2004, where we had a relatively large loss.

Notwithstanding the sort of improvements in operating performance, we were also able to bring down net debts by roughly a third and to 9.2 billion. We are sitting on about 7.2 billion in cash at the end of Q2.

And the next couple of items, which will probably be the only time I will make reference to them, but I think they are relatively important—one has to do with the fact that if we give effect on a pro forma basis for the conversion of a mandatory convertible that we have been in and if you will see for a moment that we had already exercised the [indiscernible] on the Edison transaction.

Our debt to equity ratio will be roughly 0.44:1 and more importantly, I think that even if you exclude the unusual items, including the GM settlement and the sale of real estate, that you would have a positive net income of 35 million. And the reason why it is important is because if you were to transpose this operating performance with Q4 of ’05, I think it clearly indicates that the group is fundamentally, at least as a whole, out of the woods, although obviously the other issues remain at the forefront of our attention and need a tremendous amount of work to be completed.

We also confirmed that the 2005 objectives are going to be achieved for the group as a whole and certainly by sector in each and every one of businesses that we have.

We are going to move on to page 2, and I don’t want to spend a lot of time on this, I think the numbers have been around for a while. I think what is important to realize is that all of the businesses have had an improvement over ’04 with the exception of our components business and we will say something to this in a few minutes. But that market continues to be highly competitive and trading conditions are relatively tough.

I think that there are a number of initiatives that our people have started certainly in the second quarter of ’05, which give us a high degree of comfortable achievement objectives for the rest of the year.

For the first time I think we have shown the power train numbers outside of Fiat Auto. These numbers at least in terms of a restatement of ’04, were handled as equity pick up. We now have sales of 483 million for the quarter of a power train. These are purely passenger vehicle engines which relate to the Fiat/GM power train in which were carved out from the joint venture in May of this year. These represent two months worth of sales in which we earned roughly 15 million, in trading profits. Obviously, there is no reference in 2004 because of the difference in accounting treatment.

Revenues on the car side were up year over year and the main drive of this was a significant portion of this increase in revenue was due to our performance in Brazil and Poland and a better mix for our businesses. All of this was netted against 100 million of buy backs, which as you well know, under current rules are not to be recognized as sales.

We will move on to page 3. This is a confirmation and I think these numbers have been made public month by month. But they do indicate and confirm the fact that in the Q2 of ’05 we have, and I say this very, very intentionally, suffered a market share erosion because of our very clear commercial focus on the quality of sales and the fact that we are favoring retail sales as opposed to other means of distribution in which margins could not be achieved and which effectively have [indiscernible] on our hold and I think if you control the value chain including used car sales. The exception to all of this obviously, is Brazil, where we have achieved a market share of 25.2 percent as opposed to 24.4 in the prior year. In the midst of all of this, our commercial vehicles have done quite well in Q2 of ’05, not only in Europe but also in Brazil.

We will move on to slide 4, which deals with the issue of sales. As you can see, we were able, to just in terms of unit sales, we were able to maintain a healthy position in non-commercial vehicles. The Fiat brand has no longer suffered not in terms of percentages, but in terms of number of units. The biggest drop in revenues. The reason why this happened was because as I mentioned earlier, we out favored different distribution channels and also because of the fact that the Punto, which is the mainstay of our portfolio in terms of volumes, is in the process of being phased out. We will spend some more time talking about how we intend to deal with the phase out of this model for the introduction of the new Punto later on in the presentation. The Panda, which is roughly a large volume car, is holding up well in Western Europe. The Elantra has had a tremendous quarter with volumes up year over year and having a very, very strong performance in the countries where it is present.

Though we have continue to pay a huge amount of attention to the balancing of production with demand, we have continued to use the temporary lay off method in terms of balancing production as you will see in a few minutes. It has had a significant impact on profitability because of the under absorption of fixed costs associated with these facilities. But our whole objective was to make sure that both dealer levels, stock levels of dealers and with ourselves we are at a healthy level in which to try to build a launch of the cars coming forward. We are comfortable that the aging of our inventory is quite normal and that the used car part, which is a significant portion of the value chain in production here is now under control and that effectively the emphasis on full retail sales in the product line is helping tremendously in terms of maintaining prices in the used car market.

Move on to page 6. We will deal with restructuring efforts in the process of reshaping of this business plan. We are nearly complete and the reason why we are not complete is because there are some exits that are in the process of now in terms of some of the leadership of this business but we were pretty well done in terms of the costs recap. We have a line production with demand; we continue to rely on temporary plant shut downs in order to achieve the levels of inventories and utilization of the assets. We have, as we publicly announced in April, carried out some lay offs of white-collar workers. We will continue to do this until necessary and there is no better answer to that question other than the fact that we will continue to use this methodology until we can achieve the right level of sizing for these operations. I still believe that the current structure is excessive given our demands and we will continue to work on this issue until we bring it to a satisfactory conclusion.

We have completed the product planning cycle for the car business. We will be discussing this openly on August 3rd with the unions and the government in Rome. I think that the architecture and components conversions are and continue to be the key element] for the development of this house. We do need to bring about significant reduction in both the development costs and the costs of the vehicle to be manufactured and that can only be accomplished by reassuring that we can both move in both platforms and components.

The key objectives for the remainder of the year, and they will continue to be the main themes of development going forward, is the quality of the distribution network, including our own view which needs a significant amount of work in the quality of the commercial organization in which we are active on the marketplace. Having spent now, at least since February, a significant amount of time understanding the quality of the leadership and the general results side of these businesses, I feel relatively comfortable that the research and engineering and quality on the manufacturing sides of this business are in good shape.

What is crucial for us and what we are lacking in is an upgrading of our commercial skills and a recognition of the fact that perennial continuing problem are the lack of quality and distribution through our dealers. It is a problem that needs to be addressed head on, so there are only two issues on my agenda, on my own personal agenda going forward, and that is the right sizing and putting right both of these items.

If you move on to slide 7 these are profit reconciliation's from Q2 ’04 to Q2 ’05. As you can see, we have had a significant improvement in mix, a big portion of these numbers are coming out of our Brazil operation. Volumes are obviously down and they are down notwithstanding an impact of roughly 11 million on the Brazilian side. Improvement in pricing, and the key issue for us, is our absorption number, which is about 78 million. This is effectively the result of the fact that we have had to lay off, on a temporary basis, a number of people and therefore we have been forced to idle plants for a period of ninety days. This number is calculated to give us an idea of some utilization of these plants running about two hundred and thirty days of production days a year with whatever shifts are relevant by client. We will be discussing this issue with the unions as we go forward and on August 3rd, but because of some of the technical requirements that have been imposed in terms of solvent emissions on the painting lines in Europe, there is going to be a natural constriction of this production capacity going forward. So effective January 1st, ’07, the actual production capacity of these units is going to be naturally constrained. I think if you were look at those numbers in view of what that production capacity will be as of that date, the number will be significantly lower.

Having said this, it is just going to push, I think in the overall scheme of things, it is going to push the fixed cost elements of these operations back up into a smaller base of units and therefore on the forecast basis it will push up numbers and it will put margin pressure back on the organization. I think the important thing is that we clearly recognize what the impact of this underutilization of the assets is. We are conforming our commitments enough to shut down a plant in Italy. It is doubtful we are going to have a rationalization of the plant infrastructure today and the plant layouts would make a significant dent in that number in the immediate term. I think there are a number of these location issues associated with that rationalization and it is an issue, which remains at least to us, unconvincing in terms of the proxy nature of the problem. I think we need to work harder on the quality of the commercial organization and effectively try and move volume up to the point where that number becomes a number that can effectively be tolerated going forward.

We have delivered, I think, on our commitment to slash costs out of this organization. The purchasing numbers have gone down by 50, which at least based on numbers that I have seen from our competitors, it appears to be the exception to the rule. I mean our purchasing guys have done a great job on working with the purchases part. I mean that the fact that we have been able to cull leverage and the fact that our purchasing capabilities across all business in this last year, has had a large role to play in this reduction.

We continue to work on the efficiency side inside the plants. And you can see that numbers is really about a $47 million savings over a third of the quarter. And yesterday's numbers continue to drop to remember and we continue to take off loan value and costs out of this organization until we can balance it effectively.

If you were to just stand back and look at this chart and look at it terms of what it could look like in the event, which we are convinced of, that both the Punto and the 159 are going to have a moderate amount of success in the market place. It is clear to see that the end year absorption number would be effectively eliminated or reduced substantially. And it is the basis on which we can confirm our commitment to the trading profit number of roughly 300 million for 2005.

If we can move on to slide number 8 and look at the first half of '05. The forecast that we made on our targets for the year in terms of reduction of the loss of [822 to 317]. You can see we have made significant pluses in each one of the categories. And we have actually managed the hit some of the targets pretty carefully especially on the SG&A in the network side and in the first of June.

We continue to adjust these numbers in response to our success in the market place. Obviously our assumptions on volume drops for the year are the kind in which we cast our targets of 320 million for the year but based on the fact that we will suffer a lower volume loss than we have experienced. And that obviously has forced us to go back and look at other pockets of saving. Make sure that we can deliver the target that we promised.

On page 9 you can see the new Punto. Obviously this is at the heart of the profit generation of the car business. It represents roughly 25 percent of our turnover. The car is scheduled to be announced on September 5th and 6th , in turn it will be commercially available as of the 10th and we have pushed the turn and launch into the market place. I have had to buy it about 5 and half weeks, it was originally scheduled in mid October. And so we feel relatively comfortable that we will be able to penetrate the market with roughly 80,000 vehicles by December 2005.

The current Punto is going to be continued until at least the end of 2006. The number of versions available of the old Punto will be stripped down to a minimum because these two cars are structurally different. This is a much larger car in terms of size and content. It is much closer to a C-Fragment than a B. And therefore, we believe that we will run parallel production commercial maintenance of both of these products in the market place at the same time.

On the CNH the side of page 10 having overall, and some of you may have heard the conference call of that out CNH people have had in the U.S. yesterday, I think we will are relatively satisfied with the results of CNH. The figure continues be the unresolved issue on CNH is the fact that our competitors have been able to lower the substantially different rate than we have. This is especially true in terms of agriculture equipment. We have just come back, the early part of this week, from a rather intense discussion with our management team in the U.S. about how to address this issue. They are about to bring about changes in the leadership ranks of the organization to insure that we do address this problem effectively.

We are quite satisfied with the construction equipment. The element of specialty products [franchization] of the brands in Europe, which is now confirmed too, but I think that there is a huge amount of work that needs to be done here to try to achieve margin performance of our past competitors.

If you look at page 11, which is the trading profit there, on of the things that does concern us that of all the sectors it is the one that had the most significant negative purchasing events year over year. As related to steel, may be some pressurized issue in terms of C&H. But it is the only area that I think we are falling short of our exceptions to bring down our acquisition costs on raw materials. It is now an issue that we have decided to tackle, we are bringing to there the resources of the rest of the field organizations to understand and use the purchasing levels of the rest of Fiat to try to bring those issues down. The positive thing out of all of this is that what notwithstanding increases - the purchasing increases we have had a good degree of success in being able to pass through the raw material price increases on to the market.

We can ask for satisfactory solutions, simply because of the fact that, I think it will be possible in the view of circumstances to try to deal with them more aggressively. But I think that notwithstanding all of this, we were able to improve profits year over year. Fiat had a one-time item of $84 million which is, buried in the other column which relates to an adjustment made in our healthcare costs in the U.S. as a result of a resolution of labor union agreements in the U.S. This is a non-recurring item. It is a permanent reduction in our on going cost but it is a one time high incident fee too and therefore achievement of a 10 percent margin in the quarter it is somewhat skewed by the introduction of this item.

In view of this I think the tasks going forward is significantly higher. I think we need do a lot more going forward. The Latin American market, as you may have read in the release, is not—is a in the market which is contracted in 2005, purely because of demand in the marketplace. We did forecast, and I think did deal adequately with the forecast drop in demand. But last year in 2004 it was a significant profit contributor to the performance of the CNH and we will probably see something, which is not visible this year. So there is a lot of work to be done and we have started and I feel relatively comfortable with the targets that we have set for ourselves in 2005 will be achieved.

If you look on page 12 it is a somewhat better picture. I think we have held up in the market relatively well. We have been able to grow revenues on the back of a growing stock market, especially in the last five, we are light in the medium side of growing our strength.

All the things that we have promised in terms of product development are on tract. The '04, '05 product is on tract. We are beginning to install [indiscernible] in the second half of 2005. We were also able to reach a significant agreement with Barclays in terms of our financial services side. [Indiscernible] going to provide it's usual amount of dexterity in terms of visibility to review the financial arm for commercial operations. And we do expect the business itself will benefit from the association with Barclays.

On page 13, which is conservation of profits. We have done relatively well, we have been able to take a relatively year over year pricing in Q2 of '05. We have spent more on the SG&A side, which is probably an exception to the rule for this group and most of this has be driven by special projects that relate to sales and marketing. We are re-visiting all these programs now as a result of good execution and of these cost pools. We have agreed to take a harder look at all the indirect costs associated with running [Avaycore] by the end of Q4 we have a better view on how the streamline operation, and essentially bring about a higher level of profitability in the sector.

Moving on to page 14. On the components side, this is the one that has been hit hardest by a highly competitive environment, we have to face a fairly weak overall automotive market. Pricing continues to be difficult. On the Croma side, they have had a relatively rough second quarter where they have actually got a trading loss for the period; we understand clearly what the origins of the loss are there are corrective actions in place. We believe that over Q3 and Q4 we will recover not only the loss that we experienced in Q2, but also be able to improve on ‘04 performance for the whole year. [Tech systems] continues to be—seems to perform well. The fact that the magnesium side of business is suffering from a lack of volume and therefore negatively impacting our profitability. Look at page 15, which deals with the conservations of trading profit to net, the unusual items are $356 million. There is roughly 400 million coming in from the GM settlement, $120 million coming in from some real estate disposals. And then we spent some number of—a total roughly at about 190 million dealing with the reorganization of dealer and supply channels and the reorganization cost associated with the businesses. A big portion of this number relates to the solution of the IBM joint venture that we have. This was done after an extensive renegotiation with IBM. And it was redone in order for restructure of the organization, the information technology organization that that we sort of agreed to in the early part of 2000 and 2001. The structure that we agreed at the time has proven to be unchanged-compared to in this market place, we really limited the number of technology solutions that were available to this group and I think that we were quite glad that we were able to find a solution with IBM where we were convenient to be a short supplier to us but under a commercial and pricing system which is structurally different from the one we have today. We expect to see significant savings arising out of this reorganization, probably at the end of 2006, 2007 as we begin to unwind from the arrangements that have been put in place and as we re-gain control of some of those strategic choices in IT investment that are available to the group. Luigi will speak about the financial charges going forward. The tax side, a big portion of that number relates to the taxes on the GM gains, all of which is before tax. Roughly 48 million of the tax provision is current taxes of everything else. It is a paper charge. Another fact that Luigi will deal with is the cash flow statement of page sixteen and then we will deal with the debt in the currency side, and then I will come back and close it up.

Thank you, Sergio, now when you move down to slide 16. As you can see net industrial debt was down almost 900 million in the quarter. And this is due to a combination of factors, positive net income for that year, as well as positive change in funds. It is largely due to changes in deferred tax account. Deferred tax assets related to GM settlement. The change in receivables is mainly due to the sale of vendors not related to the [indiscernible] phase. We had received at the time a vendor note that was prepaid by the buyer in June with a small capital gain. And about 200 million was seen just because of the sale of real estate. All told, the working capital was not GM change for the quarter. And just so we believe we are on track to reach a 2 billion year improvement in cash flow that we targeted for the year. If we move down to slide 18, and looking at debt, net debt breakdown as you can see, gross consolidated, that was down by €0.7 billion in the quarter. And this reflects the reduction of the financial services company, which were down 1.4 billion. The main driver of all our best and creating movement in the quarter was obviously a very good market transaction which was obviously a very impacting transaction. So there is action in financial services components that reflects that the deconsolidation of the irregular financial activities which is partly effected by the depreciation dollar denominated CNH that when translated into euros. At this time, [indiscernible] the CNH is largely dominates and the composition of our financial services activity and the further translation of euros have an effect of about 700 million and €700 million euros. There were also more receivables transferred through financial services as a new security position transaction, particularly CNH and [indiscernible] were implemented. On the industrial side, it really increased by €1.7 billion, it also reflects the very good market of action. If you move on to slide 19, and we look at the composition of that and we quickly go through banker [indiscernible], which was unchanged for the quarter. As you might recall from our previous quarters we do consolidation bank [indiscernible] budgets] but it is totally outside this corporate barrier essentially manage activities and securities [indiscernible] most likely [indiscernible]. We are seeing the currency effect while non cash maturities were removed with the real estate transaction which will close at the end of June.

Finally in the cash maturities Banco Unicredito is unchanged while the capital market is reduced by the retainment offer in the nominated bond, which was repaid at the end of June.

If you turn over to slide 26, you can see we have 7.3 billion of liquidity of which 6.2 was made available to 200 million were it booked and $900 million was specifically targeted to retainment of security divisions transaction. So this is [indiscernible] some of that has been visualized as we speak as we are about on the 3.7 billion of capital markets with the maturity over the next 12 months, about 1.3 roughly will be repaid within the summer, in fact the single largest transaction will be repaid on August 1st and then we have about $700 million in December and the rest will be –the 1.7 remaining will be made 2006. Then after that, as you can see, we are fairly light maturities.

The roll over season, as they usually call it, is when we are also [indiscernible] so [indiscernible] is fairly stable as compared to the previous quarters and as we will speak later will impact—we will receive the new approved bank support by closing the cap line of about a billion Euro.

Finally the favorable receivables increases as compared to the previous quarters. You may recall the numbers of the first quarter of 1.5 billion and the main reason being once again the [Banco Unicredito] transaction as we use to reconsolidate the debt some of the dealer receivables that we are to send to the market while now this is sold and all risks and rewards are taken by the market as mentioned.

Page 19, possibly the most important slide of all, it shows the strong leverage on the financial side at least. You see, Sergio would probably consider [indiscernible] and correctly so but the financial side, the leveraging is indeed a very important phenomenon as we discussed at the beginning of the year and we have seen it coming through so that is quite encouraging and satisfying. At the end of June our net industrial debt of group [indiscernible] was about 1& 1/2 times and performing again for the internal GM impact, it was probably a lot [indiscernible] pro forma would be the actual. We go down to 0.44.

I was forgetting to mention the line I mentioned before. We did renew the one billion committed to pickup line and the reflect this to have 16 of the most significant international and Italian banks and once again we rate their rates as conversional non typical convertible will occur in H2 and so will occur the sooner we don't have GM. We believe that in second half will have positive [inaudible] cash flow and then maintain therefore a very healthy cash position and variables of capital structure.

Now allow me to move on a more personal note. As you may know I am going to pursue other adventures after the end of this call. So, before passing on the microphone to Sergio one more time I would like to have to tell you I have enjoyed this call as well as the relationship that developed sometimes in [inaudible] circumstances with many of you and I hope the remaining [inaudible] with many of you might [inaudible]. So Sergio it is all yours.

Thank you very much Luigi. I think probably we should acknowledge the contribution that Luigi has made here. I have only known him for 13 months but I can tell you I have appreciated his professionalism. I don't want to make this sound like a ghost of someone who is leaving the organization but I think he has contributed a lot over the last 20 years and we do wish him the best of luck now that he is going to have to deal with something slightly less tangible than the manufacture of vehicles.

If we can just move on to slide 23 which deals with the 2005 outlook. It is clear that we are reconfirming all the targets that we set for ourselves at the beginning of this year especially the issue on operating margin targets on the auto and on the other businesses.

I think in 2005, I am going to go back to that comment I made in the opening slide about the fact of the pro forma conversion of the [inaudible] and the exercise of [inaudible] and even though these are unusual items that Q2 was going to add and produce structurally a positive net income of 35 million. This is a significant issue because it does indicate that even at this level we should be under reorganization at a group level we are no longer staring at wet numbers. We saw --our view has created Q2 has been a turning point. There is a huge amount of work that remains to be done and we are, as I stated in the press release, cautiously optimistic of our future. It is clear that the auto business is by far not out of the woods. We are learning a lot as we go through this process of reshaping. I think that we have some significant product launches coming, which need to be handled with care and attention and discipline.

As I mentioned in connection with Balaco and the CNH business we allotted with change and the rejuvenation of the management practices associated with these business. Now that all, what I call the structural financial issues that impacted the group starting in June of last year have been resolved positively, I think the full attention of this management team now is on the industrial side of the business and I think that the commitment from our side is to ensure, as we announced in July of last year in our first meeting in Balaco, that we bring these businesses to their full potential by 2007. And I think that the quarter, this quarter is an indication of the fact that we are having some success in this venture and that we can address the remainder of the objectives with a clearer conscious now that the financial issues are behind us.

On the basis of this I close my comments and pass it back to Mr. Ledda. We can start the Q&A session now.

Thank you very much sir, ladies and gentleman the question and answer session will be conducted very shortly. [OPERATOR INSTRUCTIONS]. We will take our first question from Sergei Escude from UMB, please go ahead.

Good afternoon. My first question is about Fiat Auto. Can you give us some idea of the guarantee cost on Fiat Auto in the first half of 2005 and what it was in the first half of 2004. My second question is what kind of action are you doing to reduce costs of purchasing and especially when your volumes are lower or stable, what kind of actions immediately are done. My last question is about the network restructuring. At what point are you, with your network restructuring, since on slide 3 we see that the markets--your market share is falling and you explained why. We want to understand on a scale of 1 to 10 where are you with your network restructuring and what kind of strategy are you adopting with the long term to Punta on the network in Europe. Thank you.

When you asked the question, the first part of your question, had to do with some costs in each one of '05, which I do not understand. What costs are you referring to?

To the guarantee costs on the car you are selling. On the 2 year guarantee or 1 year guarantee you are giving on the car that you sell to your consumer.

Is it warranty costs?

Exactly.

We normally don't disclose that information for a variety of reasons. I can tell you 2 things. One, that the issue—whenever we look at this issue continuously, we obviously relate the cost of sales to the time at which we did make the accruals at the right time. We have been monitoring the development of these costs for the last couple of years and I can tell you that one of the things that we need to continuously do is keep on adjusting the rate of accrual to ensure that we reflect the past. I am less concerned I think about the models that are being launched because we are roughly comfortable with the level of quality associated with this production is substantially higher than anything else that Fiat has ever produced. So the Croma, the Stilo and then the Punto coming out in September of this year are going to match quality levels, which are probably with our best European competitors but I prefer not to deal with the number because it is an issue that I think it is company specific and I prefer not to give out that relative competitor information.

On the second issue about network structure being on a scale of 1-10 it depends on how I feel in the morning but if you were to ask me today it would probably be a two. I think there is a huge amount that needs to be done. I think we have devoted financial resources to this process in terms of insuring compliance with corporate identity programs and a variety of other issues. What we have not started to do is to deal with the quality of the people on the ground, including our own promotional people who are servicing the network structure. Our main target today is to deal with the Italian side, it is the market, which obviously is the largest market for us and the one that we need to develop relatively quickly. We have a group of about 40 people who have now taken on, which have been assembled probably since the last time we spoke at the end of Q1, whose sole purpose is to work on developers of the network side of the business. We are revisiting, very aggressively, the quality of the commercial people inside the dealership to ensure that we give proper work presentation. It is the single largest task that we have. I don't want anybody to underestimate the size of this task. I think it was a lot easier from where I sit today to try to deal effectively with the industrial setup supporting Fiat Auto both in terms of plant [firing] and the plant quality than it was to deal with the issue of distribution. So we are taking this issue pretty seriously. I think we have devoted the right level of human resources to such a task but we have a long way to go and the only thing I hope is at least on the accounting side by December we will have seen a significant impact of these efforts and the quality of the network and the ability to effectively replace the Punto in the market place.

The last question about your actions on costs.

Well I saw the numbers coming in on PSA and the fact that they registered some negative impact on the cost of raw materials, which now they have been able to pass on. The only explanation I have and I obviously don't know their circumstances as well as I know ours. I am relatively comfortable now that we de-linked ourselves from the GM relationship that we have acquired a substantial amount of freedom and the way in which we deal with the supplier base. I think we have used our freedom intelligently in terms of dealing with our suppliers but I think a lot of things that we have also learned to do is to aggregate down and to cross some of the factors in some of the commodities I have to say have been substantial because of our ability to wield much larger volumes across the table. There is one answer that says that perhaps were inefficient in the past. I am not sure that is true. It is very difficult for me to judge. I cannot revisit history. I just know that the purchasing efforts that we have got on the table now are reflective.

I have met with a number of our suppliers over the last 60 days. I think we found them to be very receptive in terms of our requests on pricing and service levels, and I expect that we will be able to live with the full commitment that we have made at the beginning of the year, the beginning of the year and the whole ’05 target. To be perfectly honest, I am somewhat baffled by a couple things. One is our competitors issue with this, which has been an obstacle to our, and suddenly by our own experience with CNH, which obviously has gone against the trend. So, I think that we can probably resolve the CNH issue satisfactorily; I cannot add any more light to the other side.

We take our next question from Phillip Houchois from J.P. Morgan. Please go ahead.

My question is that you raised some of the issues surrounding CNH, and we need some more restructuring on ag side. To what extent is the minority listing of CNH an impediment to restructuring or going to the next step on CNH, and on your priority list which I am sure is very long. What else taking off the listing of CNH sound? Is it high or low, or what is your view on this?

I think that the minority of the CNH are going to benefit as we are as being the most significant shareholder of CNH on anything that we do operational in the business. I do not think they are an impediment, I don't think they are going to benefit from the process. I think they really should, from my standpoint, is I think you need to understand why there is such and exceptionally large margin gap between ourselves and our competition, and that is an issue for which I think we have provided a very weak answer in the past and an issues which is not been addressed effectively by the management team.

I think we need to engage the competition head-on on this issue. I think we need to get our accounts to square up with theirs. When you look at gross profit margins across the sectors, across the product pools of CNH, we are substantially lower with the exception of a couple. We are substantially lower than the competition and that is something that I find unacceptable.

So, the restructuring that I made reference to, none is clearly applied to plant installation, and it has to do with the way in which we run the business from. So, the work that we are now doing with the [indiscernible] is to reassure that we have got the right organization in place to try and tackle this particular objective.

The discussion started on the weekend, we are going to continue them this weekend. I think we need to find -- and I think we have got some pretty good ideas on what we are to do with the management side of this, but Mr. Barinkowski who is the CEO of that house is fully in line with the objective and we expect to be able to achieve [indiscernible], hopefully, within Q3. The other question that you asked had to do with --

It was just a follow up. My question still is that you think that you can -- not having 100 percent of the ownership, does it not constrain your ability to restructure? Restructuring of the new power train unit for example. Is that an issue?

No. I think that historically CNH is the engine driver of the industrial side of this business has always been at the Echo] so the re-aggregation of our power train activities is effectively—it minimally had to do with Echo car train position which has been steadily a supplier to CNH.

There is a joint venture that exists between CNH and Echo with production engines which are high quarter year-end turn. I think it is clear that the essential know how is always back on this side of the fence and not the other. So, whatever initiatives have been put in place in order to rationalize the industrial landscape of industrial engine production are going to have a minimal impact on CNH, they are going to be done on [indiscernible] and I think they are going to commercially benefit that business. I do not see the minority investor as being an impediment.

Thank you, we will take our next question from Massimo Vecchio from Intermonte. Please go ahead.

I have two questions on the Auto and one on the debt side if I may. On the Auto, the restructuring of the dealer network, you say you are just beginning. Is it because you expect to start it aggressively boom in improvement in volumes and this will make easier for you the kind of restructuring? The question may lead right and understanding what is the timing of this restructuring?

Second question on the Auto subject. You look to be on the right track for your 2005 operating profit target. Looking a little ahead in 2006 and looking at your target of profit margin and cash neutral, if you have to pick just one of those, if it would be -- improvement will be more driven by top line growth, or further gross capping?

Some more questions on the debt side. In the €9.2 billion left industrial debt for the group, how much of that relates to CNH? It is $160 million equipment on CNH or is it CNH debt on the Fiat accounting, which should be more closely to $20 to 30 million? Thank you very much.

I am going to just deal with the issue on the network. I think the issue is facing a network are two fold. The first one is that until the early part of this year where we made a rather strong network unbundling the brand and effectively aligned them to develop a commercial conscience and a commercial presence in the market place, which is a distinct one from the other. One of the problems within the dealer network is the fact that we had a commingling at the dealer level with a variety of identity of brands, which made us ineffective in the market place against the competition.

We need to find a way in which we reflect the commercial unbundling at group level into an effective running of the Fiat network which we reflects the brand value that our people are focusing on, in which are reflecting the models that are being launched.

So that is a big task because in some cases we do have dealership that represents multiple brands and some that represents a few single brand dealerships for example within our Italian network and I think that is an issue that we need to wrestle to the ground. It just does not go--a very heavy interaction with the dealer to ensure that we segregate the identities of these parts of the businesses to ensure that we mean to take over the brand values.

The second part of it has to deal with the fact that the service levels associated with our dealer network are unsatisfactory and certainly below our competitor's standards.

That is an issue that has been a perennial complaint within Fiat now for a number of years. I think 1) We need to be able to quantify the level of detachment from the product competitive standard and the effectively address ways in which think clearly. This is the main task of the 40 people I made the reference to. It is the issue of determining what level of service that everyone's organizations are at and effectively bring about kind of action dealer by dealer to try to close the gap between us and the competition.

This is difficult. It is difficult because it is an issue that we cannot resolve internally. It needs to be addressed with a third-party, which although, strategically linked to us is separate from us. That is why I think we need to handle this with care, but I think we need to handle it with rigor and with determination.

I am not hoping, nor am I relying on the volume aspirations, or ask the Fiat client to try and deal with service deficiencies, I won't. And so, we need to test the core issue, the underlying problem of the services discussed and deal with it effectively. I think that we need to deal with this quickly; we need to do it certainly within--the large extent within the second semester of this year.

In terms of the ’05 targets, I can tell you right now that of all the numbers that I favor out of our targets, it is the cash flow mortality of the sector. We need to be able to make the assertion in '06 that this business is no longer bleeding cash at a group level. The faster we do this, I think the more sure we will be about the future of this business going forward. I think it that it is strange that it continues to rely on the group resources on a cash basis to try to finance the operation, it under minds the strategic flexibilities and its ability to try and deal with some sources that may become available to us going forward.

On the issue of cost cutting is an issue that is going to remain a perennial theme of this organization regardless of whether its Auto or any other sector. I think that the obligation on all of us is to try to look at cost structure at all times to be sure they will not embedding in our way of life and an acknowledgment in the tolerance of added non value function. I think we are beginning--the dialog has started with our operators on this. I think we are beginning to achieve a level of congruence with the other sector heads and that we need to get this done and I think this is a process that just started. I think we have aggressively hit it on the Auto side in the last few months. I think we need to deal with this a lot more aggressive elsewhere.

I think your other question, if I understood correctly, about how much will CNH net industrial debt? Under IAS? If that was the question, then the number is $700 million approximately. And please do not ask me of other sectors as we don't usually disclose the other sectors specific financials with CNH being an exception as it is [indiscernible].

We will take our next question from Martino DeAmbroggi from Euromobiliare. Please go ahead.

A couple of details on the Fiat Auto performance. Just for Brazilian activities, which was the contribution in Q2 and what do you expect for a full year contribution? Also on Fiat Auto in Minota, if I remember well, last year there was negative assets from the Melfi strike in the region of €50 to 60 million, I would like to check if it is correct, and also on Fiat Auto, what was the total amount of savings for the temporary re-up program in Q2? I do not know if you gave this figure, probably I lost it, and I also ask the question on net debt. Thank you.

Profit contribution on trading profit levels in Brazil will be up to €200 million for the whole of ’05. That was roughly 40 or 50 million in 2004, so there is €150 million swing year-over-year.

In terms of the savings on head counts, [indiscernible] is not the issue. If you are asking if we are going to track if we are going to do it again, the answer is no. But I think the number we are going to find is about 50 million for Q2. I think it was roughly 50 million, which, in the scheme of things, I really have to be very careful about extrapolating the values at 60 million within full year of 2004. You will notice that although we suffered in the Melfi strike in Q2 ’05, we have made absolutely no reference to that number. To being with, I think it is a lame excuse. But secondly, I think that because of the non unionization issues plants, this is a self-corrective problem in a period of 12 months.

So, although the Melfi strike has negatively impacted in Q2 ’04, over the cycle—over the 12 month cycle it would have probably gone out to zero because of the fact that we had all of our plants on these lines. It may have been a disruption in terms of the commercial impact on the distribution side, but in terms of the actual industrial layout by December ’04 that issue went away.

As far as Q2 ’04 it may have had an impact of roughly 60 million on stock that we could not push out the door. We have not given out a number on the impact of the restructuring on the head count in Q2. I can tell you that on an annualized basis it is probably worth less in the third than a quarter would have yielded. Because of the timing of which was done, the workers were let go at the beginning of May, the management ranks were sorted out by the end of May and we are now cleaning up the remainder of ranks. So, there has not been a significant portion of the SG&A reduction in Q2. Mostly it will be seen, hopefully, in Q3 and Q4.

Okay and then the question on targets on net debts. I wanted to check with you, if you could give us guidance for, or arrange for a free cash flow in the second half of this year. On net debt as you prefer?

It is not given a specific target, but we are getting what the target was for the year, and you can easily do the math. I think it will be positive and for end of the year target, and just considering where we are now, other than your numbers, there is a good chance we definitely feel we should reach our target and I think there is a fair chance that we might do somewhat better than that.

But as we have not done yet specific numbers probably all we can give you a target for the rest of the year. We do believe that, as usual, and this year we are even more convinced of that because new models roll out that we believe that is why we do so much socially in the third quarter, then fourth quarter will be very strong.

But I would rather not give you specific numbers, because we have not had agreed internally what numbers to give out.

I will have a conversation with Luigi over more questions and we may be able to give it to you by the end of the conference call.

Thank you. We will take our next question from Fredrik Westin from West LB. Please go ahead.

One question again on Brazil. You quantified the impact from the first quarter at 41 million positive contribution trading profit. Could you also give us this figure from the second quarter?

45 million

Once again please?

45 million in Q2.

45, thank you. My second question is on the Punto and how that ties in into your general volume planning. You're saying that your target is 360,000 units and that to me seems conservative. But it will definitely give you some good utilization of the Melfi plant. But then the question remains, what your plan is with Meliflori for instance. My question is, if you have a target number for '05 of about 1.65 to 1.7 million units, but what unit sales level do you target to be profitable on a sustainable level with your current plant setup as you are excluding closures?

Sorry, that is just a loaded question. Estimated volumes for the Punto for the fiscal years structural capacity is to hit 400,000 with marginal investment because of some fine-tuning the plan to the market.

The issue with Meliflori is an issue we prefer not to discuss today as we are in discussions with local authorities about a potential transaction involving some of the assets relating to Meliflori and therefore the potential installation of some production facilities, within in the plant, and I prefer not to discuss it until those issues are resolved and are not as of today.

It is clear in our heads because of the fact that we have carried out from the business settlement costs, that we were successful in other industries including the maintenance of white collars and the insistence of maintaining managerial lines at a certain level. But even at a level of 16 50 and 17 we should be able to achieve breaking new positions for the business. It does not solve the structural issue of Auto. It is not the way to live. I think we need to move volumes up from current expectations and I think with the product launches that we have in store will deal with that issue moving forward. I also do not think that we have unrealistic expectations about where we can get to, if we look at the volumes we will be discussing with unions and with the government on Wednesday of next week. our aspirations are somewhat modest, they do entail market share gains over the next few year, which I think is totally manageable.

In terms of your initial comment about the fact that we are being overly cautious on volumes.

I think that is one of the problems that we have and I have been able to experience in this house since I have been here. So this the reason why we have gotten ourselves in this condition because we have made overly optimistic assumptions about market ventures and with some of our models. And I think we have a list of a slew of examples within this organization that indicate that we have been able to forecast very, very poorly on the size of the volume and the Stilo and Idea are two perfect examples of why I think we have missed it by a mile. I much prefer to be cautious and right on volume assumptions and investments then to be grossly wrong. I think that we have a history of success in getting it wrong and I just want to get it right for once. If we do hit 400,000 I would be happy. I think we do have - especially because of the ongoing discussion in Meliflori, I do believe we have the capacity for increase volumes as needed, and as required by the market.

Thank you. We will take our next question is from Adam Jonas, Morgan Stanley. Please go ahead.

I just have two questions. The first is a follow-up on the Punto. The 360,000 full year target, assuming that is a full year '06 target, and you are going to be making the old Punto along side it, can you give us an idea of your targeted volume for the old Punto at the same time? Because my sense is, part of why the 360,000 for the new one seems so much conservative for some of us, is that you will be doing, - selling the old one along side it. And within that question if you could try to give us a sense of a relative, price gap of the stripped down or entry level old Punto versions, just to get a sense for what the consumer would be confronted with at a Fiat dealer if the old one would be so tempting.

And my second question is, as you look at potential partners for the auto business, maybe foreign partners, just having discussions, as automakers generally do, can you basically give an update today. How do you position Fiat when you are having a discussion with a foreign partner? What in your mind are the best thing, that Fiat has to offer potential, say Chinese or Indian partner? Without naming geographic regions. Thank you very much.

I make no comments on your choice of potential. Let me deal with this backwards. To be perfectly honest I think it would be an unfortunate choice of potential partners for the group. Whether they would be Chinese or Indian. I think that one of the things that - I think we have made 2 comments publicly. One is the type of wide ranging collaboration agreement that we have had between ourselves and General Motors are not repeatable in nature. I do not think that this market context is going to allow us to get that done.

Secondly, and by the way I also think they are inefficient because one the problems with the GM relationship is that it was a postponed sales. And those transactions do not work well unless you execute them as soon as you enter into discussions. I think that the type of collaborations we have referred post conclusion of the GM affair are very focused, very targeted collaborations that deal with platform and single model development. The conversations that we are having with potential partners has to do with the ability to share resources for financial and industrial resources in terms of the development of new models going forward. And I think that we have got in the market place a significant list of instances where that has been achieved successfully and I make reference to the activity that [indiscernible] has seen carried out over the past 4 or 5 years, which I think is at the heart of our success of the USA. I think we need to be able to unashamedly follow their example and get them done.

In terms of the volumes on the old Punto, we are trying - the volumes for the old Punto going forward and the forecast number for 2006 is roughly 50,000. And there is a gap of roughly €2,000 euros per car between the stripped down version of the old Punto and the new one. But you need to understand these are significantly different cars. I think that they will become visible from the pictures that we released today. But I think it will be clearly visible when you see the cars in the showrooms in September of this year.

Okay, very clear, thank you.

Thank you. We will take our next question Paul Griffith, Blue Mountain Capital.

Three questions, if I could. First you said something briefly but can you walk us through your plan to pay down the $3.7 billion of capital markets due over the next 12 months. How much cash? How much in new bonds and timing?

Secondly, you have done joint venture finance deals for Fitis [ph] and for Avecho[ph] now, should we expect a similar deal for CNH?

And then thirdly, is it fair to say that the next volume model after the Punto, that is the new Punto is going to be the first model that really has 100 percent of new management stamp on it and can you talk about what is the next major event after the Punto?

Okay, first let us go through the $3.7 and obviously we will reduce the available cash if need be. I think that your question basically is are we going to go back to the capital market and the answer is yes. If the circumstances in the market is good then as you can see we, the significant [indiscernible] will have been boasted by the Barclay deal and we released, as I said before about, about the bulk of the maturity of the Fiat over the summer and we are paying it now. If the market circumstances would be good, I can see Fiat going on the market sometime in the near future. I do not think it would be necessarily wise to discuss now timing and so on, but if the question is are we going to go back to the market-- the answer is yes.

In regards to the joint venture and the material difference between the Barclays deal and the joint venture for Fitis and the major difference is that Barclays is an integrated joint venture, by integrated I mean it includes the dealer and operating leases. The Fitis retail only includes retail and the second major difference is that we are full partners so effectively, none of the floor feels like –let's say in charge while markets obviously being the 5 owner has a much more immediate interest in the success of the venture. And therefore, the venture enjoys a much lower cost up front, so potentially one could then ee the other deals and foresee that the deal that we have done now, that is not necessarily strict feasibility to detract for the deficit as we have a potential goal for 2008.

The CNH capital works fairly well and Fitis itself on the ABS market in this case quite well. So I do not necessarily see where we have to do another joint venture at the moment.

To answer your third question, assuming I have answered the first two - what is the next big model, is that what you asked?

Is it fair to say that the Punto wasn't really [multiple speakers] -

We are working up to the 159 that is coming in the fall of this year it is going to be followed by the Abbrero which is the Spyder station wagon of the 159 is going to been seen and launched. It is going to be seen in Frankfurt and launched in the end of Q4. In terms of volume, a rather large volume of the Ducato is being launched in 2006. The replacement of the Stilo, we are going into production in Q4 and will fixes to be available in the end of '06 and/or beginning of '07.

We will give you a snapshot picture of what is going on and we will discuss what the start launch is. This information will be available after our meeting with the unions on the 3rd in Rome.

Okay, thanks, and good luck to you Luigi.

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

I have two questions. One is related to your estimate about the Auto parts being out of the woods. What would be the real milestone for you that Fiat Auto would be really out of the woods? And the second question is about configurations scheme, how long could you use it according to the Italian rules? Thank you and all the best for Luigi.

I thank you on behalf of Luigi. Let me try and deal with the first issue. The first one, we got a couple—internally we have got a couple of simple objective that we are targeting. The first one is to see a problem number turning profit level and the second one is to see a positive number of operational cash flow from the businesses. Based on what I have seen, these two things are unlikely to happen within the same quarter. I think we will know that we have hit land the day that we can see both of these numbers being in the black. And I think that there is a high level of urgency with our recognition for the need for urgency and for part of the management team to achieve both of those targets. It does change drastically the configuration of the car business and it obviously has a huge impact on the quality of the industrial assets sitting inside the Fiat group as a whole once we have been able to bring the level of stability to the car business. And I think that stability to us is to achievement of both of those objective.

The second question was our ability to use the discussing of the temporary layoff. As I understand the rules, you can do this 13 weeks on and 13 weeks off over a period of 2 years. For a total of 52 weeks. - Hold on, the layoff can happen over 52 weeks over a period of two years. After this you need extraordinary measures to bring about the reduction on a permanent basis. But we have not hit that level yet, and I think we are going to work within the structure and try to deal with this issue of our labor force. It has been a painful exercise on our side, but it has been absolutely necessary.

The only basis on which we can guarantee survival of the car business, I think that this is an issue that is clearly understood, certainly internally within Fiat, and probably outside.

If I may, could you just repeat the first objective for which you consider the [might], because I did not get that?

Positive operation of cash flow and positive operating profit.

Okay, thank you very much.

The faster it does it the better it is. And so I can tell you right now that the internal exercise, I would not call it that, but the internal exercise with the outside guys is to choose the quarter when that happens. So you are more than welcome to take a number if you would like.

We will take our next question from Sabine Bluemel, Banca IMI. Please go ahead.

I would like to come back to Brazil if I may. It says on the 10th of May you want us to extrapolate the first quarter results. Then your guidance for the third quarter 2005 was 100 to 120 million. But as I have noticed today, your guidance is 200 million for the full year. So am I right to conclude that the Brazilian operation is going better than expected. So what, since you have maintained your target, what is developing worth?

And referring to your decision to delay the introduction—to anticipate the launch of the Punto. On the other hand, the 159 launch will be delayed because of quality problems. Is there a danger that you anticipate the launch and increase costs cuts to achieve a 2005 targets, but at the expense of medium turn recovery through the 2006 and 2007 performance?

Well let me deal with the second issue because I think that is a fair question. I can honestly tell you that when we have looked at actioned each one of the costs, we have actually paused. The only question that we focused on was whether we were negatively impacting on the operational capability of the house to the point to where we would be unable to achieve '06 and '07 targets.

I can honestly say that I do not think there has been a single issue which we have actioned, which was even remotely associated with the possibility of impacting on our ability to execute. And the initial target on reduction of both costs and head counts were much higher than the ones we have announced and implemented. And the reason why they were cut back is because the difference between the initial target and the one that we have in front of us now would have caused a permanent reduction in our ability to execute. I think that we cut back our expectations and so I feel relatively comfortable that what we are sitting on now is certainly adequate to deal with requirements going forward and will still be overly adequate, and there may still be excess cost within the structure that we need to address. So I am not worried.

The fact that the 159 launch was postponed is because of quality issues. Obviously a very negative impact on the number of cars we will be able to sell in '04 – in '05. I think the issue is that we have been able to advance the Punto by 5 and half weeks and so we have worked around the issue by compensating for that delay, by working on other pieces of the portfolio in terms of cars to make sure that we can compensate.

The issue about Brazil and the fact that it is over shooting our own internal expectations and the question you had asked me about what was going worse. What is going worse, as you can see the chart that deals with our targets for the year for '05 in H1 performance? There is obviously the fact that our volume expectations had not been met and that we actually suffered a greater degree of market loss than we expect it and the reason for this is because the market has been structurally weaker than we thought it would be in the first half of '05.

The thoughts on all of this, although Brazil is doing better, when you look at the reconciliation of the numbers in that chart you will see we have been able to compensate for this miss on volume expectations by adjusting our running costs elsewhere.

And so bottom line answer to all of this is that nothing else is going worse than expected. And therefore there is an implicit drive on our side to try and do better than the target that we set for ourselves in '04 and '05. I cannot tell you by how much, but it should be better.

Just if I may, a quick follow-up question for clarification. This new subsidiary, this new union, Powertrain you have actually introduced in the second quarter. As I understand it only includes for the moment from operations from the joint venture with Powertrain joint venture with General Motors. It does not yet include any of the operations from events or moneys that you are trying to relocate in that division?

That is correct and in the corresponding period in the prior year those earnings will be accounted for on and equity method basis. It will be sitting on a different line on the P&L. So we have only reflected two months worth of performance. I think that you can say we will probably try to segregate Powertrain activities as a sector by Q4 and if we do not make it for Q4, then it will certainly be for Q1 '05. But I need you to be very careful when we carry out the segregation to maintain the integrity of the system. We are clients that have accomplished this a virtual basis by effectively aligning management responsibility for these businesses, regardless of ownership. And I think that Fiat is experiencing some issues that you get when you try and deal with virtual organizations. So I think we are okay on the leadership side and I think that we can access the assets, I think the reporting side is having a problem to catch up with leadership, which is not unusual.

Okay, thank you very much for that clarification.

Ricardo Ricciardelli, Banco Profi. Please go ahead.

I had one very simple question. Which one investor I talked to insisted very much. Can confirm your expectations for profit at group level in 2005 for the Fiat Group?

Yes I can.

Thanks a lot.

Our next question is from John McMullin [ph] from [indiscernible]. Please go ahead.

Maybe a somewhat provocative question that is somewhat inline with a question that has been ask before. On your full year target in especially the mix price far and away from services given, said already that you had 171 million volume pricing positive effect us in the first half on a sort of very old product line now and given that you have pulled forward in the launch of the Punto shouldn't that helps. Thank you.

Which slide are you talking about?

Slide 8 where you have the mixed price impact on the property of Fiat Auto that says 325 million positive. Given that you already had 120 million positive product impacts on the first half on a product offer that is obviously that is optimal given now that you have the Punto early launch for the second half? Shouldn't that be positive?

Well let me tell you, even if I followed your argument, let me point out in the area that we messed up big time. If you look under the absorption bar it shows 126 million for the first 6 months and when you figure 170 million for the year. So we are well behind the eight ball. You may be right on the other side. But the question is this, how quickly do we make up the difference? You need to understand that in order for that number to end up effectively doing the 46 million for the second half of 2005. We are going to have to be running the plant roughly 94 or 93 percent capacity before we hit the target. And that is a big bloody number. You may be right on the other side that I think we are going to fall short with the absorption number. The question is 'where to do I get to' in terms of a full year. And that is why I think we are cautiously optimistic. I think it is a fair chance that we would be able to do somewhat better than the target that we set.

Second question. Kind of a detail, a bit of a painful question, but when I look at the registration sheet that you send out on a monthly basis I get year-to-date registrations passenger cars for light commercial make up, of roughly 950,000. In Q1, you had roughly 450,000 of registrations. That put, the difference would be roughly 490,000, nearly 500,000 registrations on Q2. On the slide you are only showing 450,000 registrations. So if you could maybe explain the difference in the same context. If you have 450,000 registrations and you sell only 433,000 cars should not your inventory go down by roughly 20,000 cars? Or is there something that I do not understand there? Thank you.

I think that we will get Mr. Ledda to answer this because he was the one who sent out the sheet.

I did talk about this already. Certain registration numbers we do not include joint ventures, or assets through the company or our own conservation. So those are not included. Turkey, China and some more pieces around.

On the second question the difference is made of certain active inventory, which do not correspond with data, for example company cars. There is a running number of pre-registration, whatever, like in the Fiat. So that does not show up in the confirmation in invoices and inventory. And the personnel factors which is sometimes the registration does not correspond to the employee or a certain number because they go for a different period. Contribution between movements moving forward, possession and registration.

I think that Mr. Ledda just volunteered to provide you with a very detailed reconciliation of those numbers. I am just as confused as you are. We will get back to you by tomorrow.

We will take a final and follow up question from Sergei Escude, UBM.

I have a fourth question on the slide 8. Under absorption target for 2005 of 117 million. How much of this amount do you think that you will retain in 2006?

That is a good question, but I do not think we are in a position to answer that today, to be honest. And the reason I am avoiding that question is because I think it impacts our discussion on the third. And I prefer to hold back on the issue until we get there.

What would you need to answer the question?

What?

You say you are not able to answer, what would you need to answer that question, which does not fit.

No, I just do not have a view as to what 2006 absorption will look like. You know to answer that question I will have to answer the question about which models and what kinds are running perfectly and it is a discussion we would need to have on August, 3 when we meet with the union and the government. And I prefer to wait until our meeting at that time rather than try and tell you what kind of utilization of plant levels we are expecting for '06. It does affect in our labor position and what we will implement.

Thank you very much.

Before we complete I would like to give an answer to Martino DeAmbroggi about net debt. In looking at slide 21 we see starting at December 31st with 9.4., then we would add to that [indiscernible] 6.4 and therefore with out pro forma we are over the target. If we say that we are going to have a positive operating cash flow, by how much are we going to exceed the target? I guess that is what implicitly you are doing. Basically I think that as of today we have seen that we can do better than the 4.4 and if somebody come to me and says that we aren't doing it, and I have to give a range, I think it would be 4 to 4.4 saw we can do better than what we have done originally. And it so, 5 months is a long time in this industry and whoever thinks that is conservative should come and manage it. So again the target remains to be, and it is likely we can do better than this. And thank you for your patience. And now to turn it back over to Mr. Marchionne.

I think that is going to end our presentation today. Thank you very much ladies and gentlemen for participating in our call.

That will complete today’s call, thank you for your participation. Have a good day. You may disconnect now.