Stellantis NV (STLA) 2006 Q1 法說會逐字稿

Please stand by we are about to begin. Good day ladies and gentlemen and welcome to the Fiat Group 2006 first quarter results conference call. At this time all participants have been placed in a listen only mode. Later we’ll conduct a question and answer session, which we’ll provide instructions for at that time. As a reminder, today’s call is being recorded and may not be reproduced without written permission from Fiat.

I’d now like to hand the call over to the Head of the Investor Relations, Mr. Marcello Ledda. Please go ahead sir.

Yes, thank you very much. Good morning to you all. This is Marcello Ledda, Head of Investor Relations at Fiat. Welcome to our first quarter 2006 conference call. Mr. Sergio Marchionne and Maurizio Francescatti will review the quarterly result that were just released today.

You should have received our press release, while the presentation was posted on our website.

After the presentation as usual we’ll be able -- we’ll try to answer all of your questions. Exceptionally today our call takes place in the morning because, as you know, we are holding our Annual General Meeting of Shareholders starting at 1.00 p.m. So, I will have to try to keep this -- today’s call disciplined. And we’re going to end it within one hour and 15 minutes or so. Therefore, in the interests of all participants, please I would ask you to limit your questions to one question and follow-up.

Before passing on the microphone to Mr. Marchionne just let me take care of a couple of housekeeping calls. One is the usual Safe Harbor statement. For any forward-looking statements you may refer to the Safe Harbor statement filed with the SEC on our 20 F.

And second of all, and more specifically, we have released a press release today announcing the issue of a bond. Legal restrictions prevent us from discussing any details on this issue. So, please, don’t ask any questions on the subject, because we won’t be able to answer them.

Let me now just pass on the microphone to Mr. Marchionne to get started.

Thanks very much.

I think that Q1 ’06 has been from our standpoint an outstanding quarter. I think not only in terms of the trading profit results for the Group, but more importantly in terms of the revenue growth that the Group has been able to experience. We’ve had -- we’ve experienced growth across all the sectors, most notably the performance in Auto which has been 23% up on the prior year.

And obviously, that kind of volume increase worked its way down to the trading profit line, which is substantially higher than it was in Q1 ’05 and also in terms of Q4 ’05, which was the first time that we posted a trading profit in a number of years.

Group trading profit came in at €323m, which is €276m more than last year. The single largest contributor to that swing has been the Auto side, which has been up €186m over the prior year.

We have now -- as we threatened to do last year, we have now shown the Fiat Powertrain Technology sector in its totality. It’s the first year that we’ve done so and it includes all the activities of the previous Iveco industrial and marine engines, plus the passenger car engine and transmission production that was previously run together with General Motors until May of 2005.

Net income of €151m, which is €363m higher than last year if you exclude all the one-offs, which are fundamentally made up of the GM -- part of the GM settlement, net of some restructuring cost that we incurred in Q1 ’05.

As significant as the trading performance improvement year over year, we’re extremely pleased about the fact that the Group was able to generate industrial cash flow of roughly €300m. And net industrial debt is now down below the €3b mark at €2.9b. And what is crucial under analysis is that it really does break a tradition inside Fiat where effectively the first quarter of every year has been a large cash consumer. I think last year we were up -- we consumed roughly a billion -- €1.6b in cash consumption. This year we actually were able to produce roughly €300m against the ending balance of 2005.

A great degree of liquidity, €8.8b at the end of March, which is up €1.8b over the end of the year.

And we are confirming all 2006 and 2007 targets. In connection that we are rising guidance on the Auto side to €200m in terms of trading profit for the year.

We move on to slide three. This shows the composition of the build-up of our revenue and trading profit line in the first top two slides. The real key issues in terms of the trading profit change by sector, which is the bottom right hand slide. The big swing is -- has come out of Auto with a quarter over quarter improvement of €250m. But we have been able to get an improvement quarter over quarter across all sectors.

I think it’s important, CNH and Iveco, which are the other big businesses inside this group, have had decent results for the quarter. The Components business has also had some really great results. And I think that our forecast for the remainder of the year remains quite positive across all of our businesses.

Moving on to slide number four, which deals with the car side. And we have had a good quarter in terms of market share positioning. In Italy we’ve averaged about 30.7%, depends on rounding whether it’s 30.7% or 30.8%.

We closed the month of April. The numbers were released last night. And we closed the month at 31%. And -- which is a significant improvement over what we have been able to achieve historically over the last four years. I think the last time we achieved a 31% market share was in April 2002. So, it’s a very encouraging sign. We were able to do this in a down market, which is partially explainable as a result of holidays here in Italy and the impact of the elections. But I think that we were able to hold our position and grow.

We are having good success in terms of positioning the new models. And outside of Italy we have moved the target for Western European market share in the EU 15 up to 8% from a target of 7.2% which is what we said at the beginning of the year.

As you can see in terms of the comments, the success in terms of the introduction of the Alfa 159 Sportwagon, it will be supported by the introduction of the Brera and the Spider as we go forward. The numbers for Alfa Romeo, which were an area of concern historically in terms of brand positioning, are beginning to show the results of the work that’s gone on here in terms of distribution. And we do expect the market share data, both in Italy and across Europe, in Alfa to increase month over month.

The Fiat Sedici SUV that was launched in the -- in Q1 is having great success. We have 16,000 units on order at the end of April. There’s a seven to eight month waiting list now to try and get one of these vehicles. And we are limited in terms of the ability to supply. The car is manufactured by Suzuki on our behalf and so we have limited access to productive capacity. We’re negotiating with them now in terms of getting additional vehicles in order to fulfill dealer demand.

And as we have stated publicly, we continue to work on ensuring that we can offer the optimal mix of distribution to ensure that we can achieve the highest possible margin retention on sales.

If we move on to slide number five, which indicates production or sales by both jurisdiction and brand with the exception of Lancia, which has had a decrease against Q1 of ’05, mainly due to the withdrawal of the roll out of the Libra in the market place we’ve been up across all brands. And as you can see on the right hand side, we’ve been able to grow volumes across all regions.

Brazil’s had a very good -- has had a very good quarter again, which -- 2005 was a significant year for Brazil. The trend has continued throughout ’05 and it continues in ’06. And we see nothing in terms of market indication to suggest that that activity will slow down in the remainder of this year.

We continue to maintain market leadership in that area. And as I mentioned earlier, I think that the important thing is that the four European markets that we have targeted in terms of penetration with the Fiat Auto brands are beginning to show the desired level of response. The U.K., Germany, France and Spain are beginning to show some decent numbers in terms of market share. We have a long way to go, I think. But I think that the first signs are quite positive.

If we can move on to slide number six. As you would expect, production was up significantly in Q1 ’06. Having said this, I think the level of dealer inventories is below two months doing about 1.9 or 1.8 months in terms of dealer inventories, which is historically a low level. The number in terms of Company inventories is as expected -- and we’re just trying to fill the pipeline and find here with a pretty intense demand especially in the B segment, which as a result of the introduction of the Grande Punto. So, I -- there’s nothing really of concern in terms of both production and inventory levels. I think we are well within our expected ranges.

And if you go on to slide six, which shows the composition of the shift from the loss of €129m in Q1 ’05 with a profit of €57m in Q1 ’06, I won’t spend much time on the green bars. They obviously reflect the impact of the volume growth and the ability to try and improve pricing across the product range. What is significant, obviously, is the fact that we spent almost €50m more in terms of product launches, in terms of advertising and marketing expenses.

This was absolutely required in order to support and maintain the products in the products in the market place. With the introduction of the 159 Sportwagon and the continuing support for both the Grande Punto and the Croma, which we’re slowly beginning to roll out and it’s achieving the right level of penetration across Europe.

And so margins now are 1%. That is the basis on which we have now targeted a €200m trading profit for the year. We’re not going to move that guidance until we see Q2 and Q3 coming forward. Obviously Q2 is expected to be a strong quarter, as it has been historically. And so, we’ll re-look at these numbers at the end of the second quarter and try to provide a better view as to where ’06 will end up.

Next slide on page eight, there’s not much to say about Auto Ferrari and Maserati. I think they’re performing well. Maserati has had a -- Ferrari showed a profit in Q1 ’06. It is a seasonally low quarter as you can see from the ’05 performance.

More significantly, I think Maserati is achieving the right level of penetration with the Quattroporte. We’re phasing out both [Espalier] and the Coupe. And these products will be replaced with a new coupe, which will come in the market of July of 2007. So, I think that we’re managing our cost structure.

And Maserati will continue to work on the integration of the brands with Alfa. We have a number of projects around the table which are designed to effectively try and bring some level of convergence in terms of platforms between Alfa and Maserati, but none of which will be visible in the next 18 months. I think these are longer term objectives. But I think that in -- that structurally, strategically I think these two brands will move -- will begin to move in unison.

We have announced when I was in New York about four or five weeks ago that we will bring the Alfa Romeo brand back in the U.S. It will be done in connection with the next facelift of one of the cars that we have within the fold. It will not obviously involve the 147. But it will entail both the Brera and the 159 at the earliest possible time.

Slide nine, which deals with CNH. I know there was a conference call yesterday by our colleagues on the CNH side. A relatively decent quarter, last year we benefited from a one-off impact as a result of the renegotiation of our contracts with the UAW in the U.S. That’s obviously not present in our starting base with €100m in Q1 ’05, which we’ve been able to improve to €137m.

The business continues to enjoy pricing power, which is certainly unique in terms of our sectors. And we have now begun to implement the findings for the analysis that was carried out in Q4 ’05 and Q1 ’06 in terms of closing the margin gap between us and our competitors. And the first thing that we have done is that we’ve unbundled the brands, as you can see on page 10.

We now have some very clear delineation of the brand DNA associated with the four brands that we manage. We are now beginning to associate and clean up the product portfolio associated with each one of them. I think that we are developing the right structure in terms of the commercial organization associated with these brands. And I think we’ll begin to see the results of this reorganization, at least the beginning of these results, in the second half of 2006.

It’s going to take us a bit longer to try and bring about a complete rationalization of the product range, especially in terms of the efforts that are being carried out to de-content product. There may have been a respect in terms of the brand DNA. This is something that we need to continue to work through as these products come up for renewal. And one of the things that is helping us is the fact that a Tier III introduction and the requirements for Tier III engines is effectively giving us an opportunity to work on the product, and bring about the right level of cost reduction in positioning of the product in the market place.

As you can see from the bottom of the slide, we’re fully aware of the fact that we’re suffering a 5 to 8% cost of goods sold differential against our benchmark competitors. We need to close that gap. The real issue is how quickly we can get it done.

And moving on to Iveco, a good quarter, and we’re saying the fact that our market share has shrunk by 0.6%, all this is understandable in terms of the reintroduction of the Daily in Q2 ’06. But we were able to go -- to gain share both in medium and heavy, which have been, at least profit standpoint, our weakest contributor to the performance of Iveco.

Strong, strong quarter and the remainder of the year appears to continue along these trends. Order intake is up 19% in Q1 ’06. The backlog was quite strong at 34,000 units or roughly 30%. So, not really -- there’s nothing that worries us in terms of the rest of the year in ’06. I think we’re going to have to watch what the impact is of the new engine introductions in Q2 and Q3 of this year to find out what impact it may have in terms of demand going forward especially in ’07.

The Powertrain Technologies, page 12, is the, I think, first [proper] presentation of the business. It’s a €5.5b business, 18,000 employees and most of the business today is captive in the sense that it produces passengers and -- engine and transmissions for passenger cars on the Fiat Auto side and industrial engines for both CNH and Iveco. 20% of this business is pointed to the outside market. A large customer obviously is General Motors as a result of the unbundling of the joint venture with GM in May of last year.

Moving on to slide 13, the rest of the Components business have had a really good quarter. We’re pleased, especially with the performance of Marelli and Teksid, which were able to secure good volume growth and good margins. Obviously some of the growth of the Marelli side is associated with our increased level of activity in Auto. But I think we do see a very strong order book developing, even with third parties. And that’s very encouraging, at least in terms of our forecast for ’06.

Page 14, reconciliation of trading profit down to net income, and the only item we need to talk about is the difference in interest costs for financial charges of €64m. Really, the rate can be fully explained by the repayment of the ItalenergiaBis loan and in connection with the elimination of the [Congress] [inaudible], which was extinguished in September of 2005.

And the rest of the numbers I think are self explanatory. The net income is actually up €363m if you remove all the one-off elements impacting on Q1 ’05 performance.

I’m going to pass it on to Mr. Francescatti and I’ll drink a coffee while he does it. And he’s going to explain to you the cash flow statement and our liquidity profile.

In terms of our cash flow statement, that’s slide 15. You can see that during the quarter, as mentioned before, we have been generating €293m. So, the net industrial debt was brought down from €300 -- €3,219m to €2,926m.

As you can see the main driver, it was in the comparison with past year’s, is in the working capital behavior. Last year in the whole quarter there was an absorption of €600m roughly. And that included the cash in of €1b from General Motors. So, overall the financial net in this element is around €1.9b. And more than €1b comes from the working capital behavior.

The sustained level of sales mainly at Fiat Auto has actually driven this part. That has avoided the absorption from working capital, which was usually in past years during the first quarter, because of the lower level of sales in comparison with the last quarter of each year. And, therefore, this has allowed us basically not only to -- not having absorption but to generate -- to improve the position at net industrial debt level.

Page 16, you can see the usual split between industrial and financial, and gross and net debt. The gross debt has set at €26.9b, but increased in comparison to December because of the bond issuance out of the Fiat Finance and Trading, CNH, during the first quarter. And the cash is now at €8.8b. And the net industrial debt has gone down from €3.2b as at the end of December ’05 to €2.9b.

If we go to page 17, you have the split of the gross debt of €26.9b, where you can see that the major change is in the capital market level, because of the bond issuance we have mentioned earlier on. I wouldn’t spend further time on this. You should already be relatively familiar with it.

Slide 18, you have the maturity schedule, the cash maturities of the -- in the upper part of the previous slide. So, the maturities in the next 12 months are €5.9b. This amount compares to €8.8b in cash, which includes €1.1b of cash in the ABS vehicles and €0.3b in our banking activities. So, we have a comfortable cash position I would say.

If we can just move on to slide 19, which I think is my final slide.

We’re just confirming 2006/2007 trading profit numbers. Auto obviously is -- now take roughly 1% of sales of €200m. We’re maintaining guidance across all the other sectors. And as I said earlier, I think that to the extent that there are any revisions of these numbers upwards, we’ll have to wait for the conclusion of Q2 and Q3.

We’ll hopefully -- based on Q1 performance and our ability to achieve the type of volume gains that we’ve achieved year over year, I think we’re looking at the remainder of the year with some level of optimism.

I think we need to continue to work quite diligently on ensuring that this is profitable growth and that we continue to work away at the margin gap differences between ourselves and our best of class competitors across the sectors. It is an area which is certainly in front line in terms of the initiatives that this Group is undertaking. And I think we’re hopeful that certainly within ’06 and ’07 we’ll try and bring this organization to the level that we’ve talked about since 2004. So, it’s been a good quarter and the rest of the year looks good.

I really have nothing else to say other than try and answer questions as they come up.

Yes, we’re ready for questions.

Thank you very much sir. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We’ll pause for just a moment to allow everyone to signal for questions.

Ladies and gentlemen, the first question will be coming from Martino De Ambroggi of Euromobiliare SIM. Sorry for the pronunciation. Please go ahead.

Two questions, one on industrial net debt. So, on a full year basis I’d like to understand which is your net debt target and your assumptions on working capital, sales of receivables and CapEx.

And I can imagine -- just a follow-up on net debt, I can imagine that working capital terms in first quarter didn’t change. So, we don’t have to take into account any change in the payment and these terms.

And the second question is on Fiat Auto performance. Trying to understand, which was the Brazilian contribution in Q1, and your estimate on a full year basis, considering the first month of this year? Thank you.

Well, in terms of net industrial debt we have already indicated as a target that we expect to generate in the full year. As we said, it’s still early to give a more precise guidance. We want to see how -- what the behavior’s going to be and the second and eventually the third quarter.

In terms of working capital, you’re right in saying this quarter has not been generative in that respect. And if they remain at this level of activity, that should actually help the behavior in the future. We don’t expect any particular swing unless there is a huge difference in sales. But the third quarter’s going to be -- it’s going to have an absorption, because of the August performance in productions and sales.

And in terms of sales or receivables, actually there’s no structural change in the situation I would say.

In terms of CapEx, we expect to have in the full year an amount that’s probably a little over €3b. We are already €2.8b and I think that -- and there hasn’t been any structural change in terms of CapEx. I’ve indicated around €2.8b [and on top] no structural change in terms of [payment].

Thank you. And if I may, considering first quarter cash generation and your guidance on a full year basis of cash generation, we can assume that starting from April also the next three quarters will, overall, will generate further cash?

The third quarter is going to probably have an absorption because of the August, as we’ve said.

Yes.

That we hope to generate.

That’s overall the three quarters together?

Yes.

Just to add -- if I can add some color to this issue of cash generation. I think that one of the targets that we have set for ourselves, at least on a trading basis -- on a trading cash flow basis, pre-interest, pre-tax, that we want to be cash positive. And also, that was achieved in Q1 of this year. And it’s something that we do expect to continue to hold for the remainder of ’06.

In terms of the contribution of Brazil, we expect anywhere between €220 to €240m in terms of year over year contribution. The quarter impact of this against 2005 was -- on a like for like basis it was €16m.

Thank you.

Up to Q1 ’06.

Yes, thank you.

Thank you Mr. De Ambroggi. Our next question will be from Mr. Adam Jonas of Morgan Stanley. Please go ahead sir.

Good morning, just a follow-up to the last question on Brazil. So, to get these numbers right, you say there was a €16m like for like improvement, the delta year on year for Brazil in Q1, but yet the full year contribution in total of €220 to €240m?

Yes.

Okay. So, then in terms of backing out the contribution in the quarter, I know that can be tricky doing that quarterly. But can you confirm that Fiat Auto is profitable when you back out Brazil? And if you back out other profitable emerging markets, such as Turkey?

And if it’s not profitable, what needs to happen from here? Is it just further increase of utilization or adoption of governance costs? Just generally, what -- if you’re not profitable ex-Brazil, ex-Turkey in Q1 with your production of 21%, what else do you need to see to achieve that level?

Turkey is not in these numbers, because we equity account for our position in Turkey. So, that’s not going to cloud the issue.

The answer to your question is that it was nearly profitable in Q1 ’06. And to the extent that we continue -- as you saw from the profit reconciliation slide of Q1 ’05 to ’06, there was a very large investment against ’05 in terms of advertising and marketing costs for the product launch. It was roughly €50m. That is not something that we expect to continue to have to fund quarter over quarter. And just in terms of 2005 to 2006 comparatives.

So, we do expect that this business at the end of this year will come out of ’06, at least at the European level, on the positive basis both in terms of trading profit and in terms of cash generation.

So, you expect the €50m marketing cost to be fully compensated when you see it from a full year perspective, is that what you meant?

No, I think that the number in terms of the size will shrink over time. And I think that hopefully by the end of ’06 you will not see it as a reconciling item against ’06 --

Great.

Against ’05 performance.

I don’t think that we can make up the increased spending difference ’05 to ’06 in the remainder of the quarters. I think that was required in order to support the product launches that we’ve had. But the difference overall is going to diminish against ’06 -- against ’05.

And we’re fully aware, I think, of what you suggested as being the issue in terms of the European operations. We do in the objective -- and that’s effectively reflected in the ’07 targets. But we do intend to bring the European arena to a healthy positive level in the absence of Brazil. The margins are 2 to 4% that we set for ’07, are hopefully going to reflect our ability to get that done. Minimum performance in ’07 is going to deliver a minimum of €450m in operating profit. And to the extent that we’ve assumed in those numbers a flat performance of Brazil, all of it is coming on the European side.

Very clear, thank you.

Thank you Mr. Jonas. We’ll now go to Mr. John Lawson of Citigroup. Please go ahead.

Thanks very much. I wondered if you could just give us a comment please on the performance of the old Punto in the first quarter, both from a sales and a profit perspective.

And because this is also the first time we’ve seen the Powertrain division, I suppose we’ll all expect it to be driven largely by volumes in other parts of the business. But are there any strong external sales or profit dynamic that we should take into account as well please?

Let me deal with the Powertrain side and I’ll come back to the question about the old Punto.

I can tell you that the pricing on the Punto and margin contribution is in line with what was accomplished certainly in ’05 and ’04, and we have not degraded the product performance of the model. It has certainly been realigned in terms of content to present to the market place as an entry level vehicle in the B segment. But it is performing well. We do expect to sell about 60,000 vehicles in the year. Volumes for the first quarter of this year were roughly 33,000. So, the expectations are to hit 60,000 by the end of the year.

Understood.

In terms of your question about third party sales of our FPT, as I mention in my comments, and certainly I think it’s reflected in the comments on the slide on FPT, the first point.

The sector was put together to really combine the technology know how on engines and transmissions in one place across industrial and commercial engines. This is something which is certainly true and valid vis a vis diesel technology.

And the bigger -- the big unexploited area for us is the ability to try and position FPT on the industrial and marine side of the market. We have not actively, I think, pursued customers in the past in this area. As a matter of fact, we have reviewed the beginning of operations of FPT in China yesterday to try and target a market presence and distribution capabilities which can be associated with the distribution capabilities of CNH and Iveco in the country.

We have similar opportunities across the rest of the world. I think that one of the things that we have not done in the past is associate the distribution capabilities of a couple of good business, we [take on] CNH with the capability of distributing engines.

We have -- this has required time just in terms of setting up the commercial organization to satisfy those objectives. I think we have the beginning of a commercial organization today. And I do expect that over the next three years that roughly one third of the turnover of FPT will be third parties from the 20% that is today.

So, it is a significant shift, but it is one that’s going to require both investment of human resources and dedication in terms of a particular size of the organization, which has not been present inside Fiat ever. So, it’s being built as we speak. But I think the market is there to get it done.

Thank you.

Thanks very much Mr. Lawson.

By the way, sorry, before I forget, I wasn’t trying to ignore the passenger car side of this.

I think that we continue to make efforts to try and sell both diesel engines and diesel technology to the outside world. I think that over the next 12 months it will be come clear as to what we see as the next phase of development of our multi joint technology, of our common rail know how and the impact the common -- the multi-air and common rail will have on the development of our engine know how.

One of the things that we are trying to organize now is a -- probably a two-day session with the analyst community to try and deal with what I consider to be a comprehensive disclosure, what’s sitting inside these factors, which may not have been visible in the past. And the things that I’ve attempted to describe this morning I think will become clearer hopefully at the end of Q2 when we do hold this two-day session with the markets.

But I’ll leave it to Mr. Ledda to organize this later on. But it is important I think that we start communicating the technical depth on which our commercial future is based. And I -- certainly having read the analysts’ assessment of what’s sitting inside Fiat, there is an area which is poorly understood and it’s probably our fault.

Our next question will be coming Mr. Paolo Mosole of Intermonte. Please go ahead.

Good morning and first of all, congratulations on another good set of results in Q1. I have three questions and the first one relates to the Auto division.

In the last conference call you were quite cautious on the profitability of this division, because of the new Ducato launch costs. I want to know how much that -- was the weight of that in Q1.

And second on this division is the trend of average price per car sold, because I’ve seen that there is a slight decrease in Q1 versus Q4. And I want -- I was wondering whether there is a currency effect, or there is a change a mix, or there are discounts?

And the third one is on the capacity for the Grande Punto and Sedici, I want to know whether you have the constraints or you’re thinking to increase capacity in case the pace of sales is so good.

And then I have one other -- another question later.

Okay, I missed the second question. Can you -- [inaudible]. What was -- your second question was?

The second question is on the average price per car sold in the first quarter, because I have seen there is -- there should be a slight decline versus the average of the fourth quarter. So, I wanted to know, what’s the reason?

Okay. I -- we’ll come back to you on that question in a moment. We just -- I need the numbers. But if I can just deal with the issue of how much we spent on advertising and marketing in Q1 of ’06. It’s roughly €230m, which is about €50m more than we spent the year before. Or may be if you look at slide seven --

Yes.

That’s -- it tells you what the increase quarter over quarter was.

In terms of the capacity issues on the Grande Punto, the second line, which was announced in Q4 of last year in terms of the production of the Grande Punto, will become operational in Mira Fiori on May 22.

Combined productive capacity on a two-shift basis of the Mira Fiori together with the full line utilization in [Amalfi] is roughly between 400,000 and 410,000 vehicles. So, it’s certainly adequate capacity to try and deal with the market demand which we set at 360,000. And we have done better in Q1 of ’06 in terms of Grande Punto sales. We’ve done over 100,000 vehicles.

The issue that we need to face and be absolutely realistic about is that the competition is launching cars in the B segment in the remainder of the year. And so we need to deal with the introduction of those products and its impact on volumes on the Grande Punto side, we have to work our way through.

In terms of the average, I want to get Mr. Ledda to answer the question on the average car sales.

I don't think there's any specific issue with the unit prices. Probably we need to analyze probably the weight of Brazil maybe in the mix of the product, that can have a slight impact on the per-unit value.

Okay. Then I have just one question on the indication for the full year Auto margin and because you speak to the guidance of 0.51% margin. But considering that the first quarter had higher than usual level of marketing costs, and the margin was already at 1%, isn't it too cautious to stick to the 1% limit?

Well I think that -- just to answer the question on the average. We're checking the number now but the only reason why the number is down is because of the impact of Brazil in the mix. And it's purely a mathematical issue, it doesn't imply a degradation of pricing of the European cars.

In terms margin guidance, I think we have raised guidance to €200m to reflect what we achieved in Q1. As I mentioned in my earlier remarks, I think that we'll have to revisit guidance as we complete Q2 and Q3. I think the Q1 has been a good start, I think we need to continue on the strength of more than 90 days to try and confirm a significant and permanent shift in trading performance.

I just -- you know we're historically cautious here. We have been able to deliver on all the targets that we've set in '04 sequentially since we arrived here in June of '04. And I think that we going to maintain a healthy level of prudence in terms of providing guidance to the markets until we can prove that effectively all the things that have been talked about and that we've promised are effectively being actioned.

I do agree with you that when you look to the numbers purely on the basis of Q1 there maybe some upside for optimism. But I think what we do -- we'll need to see additional confirmation on the strand as we work through the rest of the year.

Okay, thank you.

Thank you Mr. Mosole. We now go to Mr. Max Warbuton of UBS. Please go ahead.

Yes, good morning. Max Warbuton of UBS. Just three quick questions on Auto, sorry to keep coming back to Auto, but I guess it's the main focus of today for the market. Just first question, you talk about the one-off special advertising expenses. Is that the only start-up cost, if we were to think about start-up costs related to the Punto launch, were there not special exceptional industrial costs as well as advertising spend in Q1? Could you just discuss that element?

And then the second question, obviously in this profit walk-through that there's probably been some change in the Government’s contribution to the wage bill. Could you talk about the year on year change in the Cassa Integrazione contribution in the Auto business in Italy.

And then the final third question. Some of your competitors are showing a big increase in production in Q1, highlighted a big increase in provisioning for warranty spend. And obviously Fiat as a Group, you've got 101 businesses in there but you actually have a negative move in provisions in Q1 in your cash flow statement. Could you just confirm that provisioning in the Auto business was up in Q1 itself?

Let me deal -- the answer to your last question is that I think you need to understand Fiat outside of the rest of the car manufacturers because of its track record.

I can tell you that in terms of absolute numbers the provisioning has gone up simply because of the volume that we pushed through the system. More significantly to us, both on the car side in terms of the CNH exposure, there has been a huge push much more on the car side than on CNH’s, [as of] Q1 '06 in terms of improving the quality of the parts that are being marketed.

So we monitor, we are taking a very cautious approach in terms of the provisioning until we prove in reality that the warranty costs associated with these launches is effectively of a sufficiently high caliber to warrant a lower provision. But we are beginning to see the benefits of the work that has been done inside the organization starting the beginning of '05. And I think that we're working our way through those issues.

I don't think that we have taken any aggressive view vis-à-vis warranty costs, which are out of line out either with historical trends or with what I consider to be a realistic recognition of the impact of the quality initiatives inside Auto. Nor do I think that they justify any part of profit reconciliation in terms of what we show on slide seven.

The question that you asked about there being additional launch costs, the answers yes. And we have not identified them because I don't think, to be perfectly honest that we -- given the slate of things that are coming out, that we need to identify them. I think that we've got a number of initiatives that are coming forward in 2006, including the launch of the Ducato in May of this year, the restyling of Lancia which will be shown in Paris in September.

And so these, what I consider to be these initial start-up costs are there, they existed in some form for Q1 '05 as a result of the introduction of the [inaudible]. I would not focus on them as being a significant item on the reconciliation of profit of Q1 '05 to '06.

What is clearly different is the commitment that we've made to the advertising and the marketing spend of the brands. That number’s so large that it needs to be identified. I mean €220m -- €230m, which is the Q1 number, is significantly higher than it was in '05.

I'm not sure that I understood the question about Cassa Integrazione. We made use of Cassa Integrazione.

Do you want me just to reiterate it? I would assume that you bring people back into the plant as production rises, and therefore the wage bill transfers to Fiat that was picked up by the Government. So was there a year on year decline in the Government’s contribution to the wage bill, and a year on year increase in Fiat’s contribution to it?

I don't have the data to answer your question in details. Mr. Ledda will come back to you on this issue. But I don't -- I would not consider it to be a significant item in terms of what's shown on slide seven. If you're trying to understand the profit shift Q1 '05 to '06, it's not going to be a significant number. But Mr. Ledda will call you back on this issue with the right numbers.

Right, thank you.

Thank you very much sir. The next question will be from Sabine Blumel of the Banca IMI. Please go ahead madam.

Hello, good afternoon. I'd just like to ask a follow-up question on Brazil. You [inaudible] reiterated the full year 2006 guidance of a contribution to trading profit at Fiat Auto in the order of €240m -- €220 to €240m. If we take into consideration the appreciation of the real, and also the volume increase, it's a considerable margin squeeze, so why is this the case? I assume you will probably be achieving operating -- trading margin in the order of 5%, so why is this coming down in 2006?

And could you actually give us a volume target for Alfa for 2006 in the medium term?

And thirdly what are the most important factors for you to increase your guidance for full year for Fiat Auto? Is it volume or is it pricing or mix? Thank you.

The answer to your Brazilian question. Our expectation, certainly in the numbers that I gave you -- that I've given you is that this year over year difference in the translation of the real to euros is going to last. But we will see convergence sometime during '06 so therefore the impact on a ForEx basis is going to be minimized. And therefore I don't see a contraction of structural performance in Brazil. It's based on our assessment of where exchange rates will be, if there are different obviously the number will shift accordingly.

In terms of this -- the volumes for Alfa. The number we've targeted, I think we've stated publicly, that we're targeting around 180,000 car volume for the brand in 2006. The target for the brand remains unchanged to achieve 300,000 over the medium to long term.

I think our problems about the introduction of Alfa back in the U.S. is certainly a significant component of that number shift. And we are in the process now revisiting the product portfolio in terms of development for Alfa going forward. And I prefer to say nothing until that analysis is complete.

Sabine, does that answer your question or you have one more?

I had one more. What are the main factors for you to actually increase the guidance for Fiat Auto to the upper end of your target range of €200m? Is it volume, is it pricing or is it mix or the combination of -- ?

No I think those -- we have no concern on pricing as we speak now. I think that we are -- we've been able to maintain positioning of the product and achieve the desired level of margin. I think it is a volume game. I think we need to see it play out during the remainder of the year.

We've got some products in our portfolio which are ultimately going to be okay, but I think they've shown certainly some slowness in terms of their ability to grip in the market. I think the Croma, which was, launched last year, as great a car as it is, has had its issues in terms of product penetration. And it's been supported by a significant marketing spend in Q1 '06. And we're beginning to see volume increases, certainly in Italy, in line with expectations.

But I think we need to see the full benefit of these initiatives in terms of the support of volume generation associated with these cars. It is not an issue, certainly has an impact the Grande Punto, the old Punto and the Panda, which are performing quite well. We are beginning to see the benefit of the introduction of the 159 Sportwagon, even on the sedan.

All these things are things that we're monitoring pretty carefully. And I think that the reluctance to try and move numbers at this stage is based purely on our ability to achieve volumes, mix as to what we've seen.

Okay, thank you.

Thanks.

Our next question will be from Mr. Serge Escude of UBM Investment Bank. Please go ahead.

Good morning and congratulations for the excellent results. My first question is about what is your target of cost cutting in 2006 for Fiat Auto? We see every quarter some cost cutting and it's -- we see that it is decreasing quarter by quarter. What is the annual target for that?

And [this fourth] question is about your restructuring of network in Europe, and especially like to have an update on the restructuring in U.K. Spain and Germany. Thank you.

Well, let me deal with the network issue first. I think we're in the middle of some negotiations now with the -- in the U.K., which I prefer not to discuss until they're resolved, in terms of realignment of the distribution network in the U.K., does look promising.

Certainly the introduction of the Punto has had a significant impact in terms of brand positioning. But this is something that we continue to work on pretty aggressively. It does remain, as you all well know, the single largest issue that we need to deal with.

On the positive side of these efforts, I think we have made significant gains in terms of just penetration in France. The City of London has been -- is receiving adequate coverage now as result of a couple of deals that we've signed, especially in the Alfa Romeo side. The Fiat launch positioning in Paris has been significantly increased, and we'll see the benefit of this over the next 12 months.

As I stated in -- on some occasions in the past I think that we're quite willing, given the length of time it does take to get these initiatives under way, to effectively fund the creation of a distribution backbone in Europe, but can eventually be passed off to entrepreneurs.

I can tell that we have looked at this issue with some level -- in some level of detail. When we looked at our main competitors, especially the French, they have had for rather a long period of time a rather strong policy in terms of Company owned dealers, which effectively dwarf by a significant multiple anything that Fiat has done historically in terms of European market coverage.

I think there's a lesson in this issue, I think we need to be cautious on the way in which we embrace it. I think we do need to be a lot more aggressive in terms of dealing with what has historically been called open points, by relying on the acquisition of third party dealers. I think we will fund the penetration of some of these markets on a strategic basis.

There's been a number of initiatives around the table. We will do them, and they're going to be targeted in terms of what we consider to be the highest possible return in the shortest possible time. Paris is an area that we've looked at, we've looked at Barcelona, Brussels and Monaco, Madrid. There's a number of cities that have been identified as being key points in terms of the distribution, which we continue and will continue to invest in. With the ultimate objective of exiting the dealer once it gets up and running and starts turning a profit.

In terms of the cost cutting I --

Yes, can I just ask what are the initiatives you have on the table, just very qualitative point of view. What kind of initiatives you think about for having the key points to enter the main dealers in Europe?

I'm sorry could you -- ?

You talked about initiatives with some dealers in some areas in Europe. Can you just illustrate what did that mean?

There are some -- without getting involved in the identity of these people, there are some large distribution networks that are available in Europe to try and place product. These are network organizations that we need to open a dialogue with. And we have done so especially in the U.K. where I think that we can access, and have a relatively decent access to a relatively wide network capability relatively quickly.

It's a costly process because of the size of the people on the other side but it does shrink the time for us to get to market. And I think that that's one of the issues that we're currently evaluating is to define the process going forward. I think we just -- we need to continue to work through details, and I prefer to announce nothing until we resolve the issues.

Okay.

The other question you asked in terms of the reduction of governance cost. To be perfectly honest I -- the system is on a self-regimented mode now so that whatever cost savings are being achieved are being purely achieved as a result of a discipline we have targeted. But we have not targeted anything in particular in terms of governance cost reduction, other than in Q1 '06 the ending trail of our restructuring efforts that were implemented in Q2 of '05. The relative impact on this is between probably €50 and €60m for the remainder of the year.

Okay, so we could have €400m full year.

At best.

Okay, thank you very much.

Thank you for your questions Mr. Escude. Our next question will be coming from Mr. Thierry Huon of Exane. Please go ahead.

Yes, good morning. A very quick one on the Iveco side. I must admit that I was a little bit disappointed by the result of Iveco. And I'm guess part of it came from the fact that for the first time you split the contribution between Powertrain unit and Iveco. Could we have the part of the Powertrain unit operating profit which is related to Iveco?

The answer to your question is no.

Why?

Because I think at the end of the day we're going to start tearing apart and dissecting the component [inaudible]. FPT was created for one particular reason, it was created bring about a level of synergies across the technology framework to support our presence in diesel engines. If we start dissecting what we're making in -- the next question’s going be how much we make in Marine Engines which I think is going to be [unanswerable].

No, if you want I quit there. I ask my main question in another way. What would have been the Iveco result if this split didn't take place?

I think the number was reported on that basis last year, was it not? What was the number for Iveco?

Last year it was €65m, if I remember correctly.

If you go to slide 11, opening position of €48m.

Okay.

The €5m difference is the scope section, isn't it? There's a gray bar on top of the opening position.

This is the contribution of the Power Unit.

Correct.

Okay. And the second question is about the new Daily which is -- which would be introduced in Q2. Do you expect it to be a sales booster for Iveco during the coming quarters?

The answer is yes. And just to go back to your opening remark about the fact that you were somewhat disappointed with Iveco. To be perfectly honest, as significant as the shift is in terms of performance Q1 '05 to Q1 '06, I think we all recognize that we have a long way to go. So I think it's a start in terms of the restoration of profitability levels for Iveco.

It does have a target of between 7 and 7.5% for the full year, so it will continue to improve performance Q2 to Q4. But I agree with you, I think that it potentially could have done better. But I think the Daily -- the restarting of the Daily has held back some of the potential turnover on the light end. We'll see that restored I think as the product gets launched in Q2.

So you remain confident with your guidance for the full year for Iveco?

Yes, as I said earlier, all sector guidance is confirmed.

Okay, thank you. Thank you Mr. Huon. We now go to Mr. [Enrico Licadelli] of [Banca Propilov]. Please go ahead.

[Ricardo Ricardelli] actually from [Mercato Filo] and of course congratulations for the results, you continue to deliver. Just one quick question on [DPS mid-end] distribution. Let's put it this way, will you see any dealer distribution in 2007, based healthy operating trends you are showing today. Even if there is still an issue about loss carried forward that could be partially offset by contribution from [premium] reserves?

I think that the issue -- our [compounded] dividend policy is on the table and there will be properly dealt with in '07.

Okay, thanks.

Our next question will be coming from Philippe Houchois of JP Morgan. Please go ahead.

Yes, good morning. I have a question on Powertrain. If I look at that business I think it's probably maybe the core of the Group going forward. In response to John Lawson's question you talked about the external growth opportunities that exist. What about the other way round? What is the decline potentially from your captive business?

To what extent does the different reporting also create more commercial flexibility for Iveco and CNH and Fiat Auto to make sure that what it purchases from that division is competitive? What is the potential fall-out in terms of revenue and profit? Or is there any such potential? If you can give us some internal views on this. How that might affect the profitability of that business going forward. Not just growing externally but also improving some of the relationships that they have with other Group companies.

It's an interesting question and may I -- I think one of the rules inside this house is that, obviously to the extent that we do have a captive that is in the business of producing engines, that our instinctive immediate reaction is to try and source engines and Powertrains from them.

I think that the more fundamental question is that, to the extent that Fiat Powertrain is successful in penetrating third party customers, it will provide the required benchmark to ensure that it is producing at the right level of cost. I think that there are a number of initiatives that have been put in place by current management to ensure that we can keep on bringing down the cost of execution in terms of engine production in 2006 and 2007.

I think we will continue to see a decrease in cost curve coming out of engines produced by FPT. There are a number of initiatives that have been put in place, especially in terms of the expansion of the largest portion of that portfolio which is 1.3-liter diesel which are going to provide a much larger productive base on which to spread fixed cost. But we do -- our expectation in the absence of raw material increases is that we will see -- we'll continue to see a good reduction in the underlying cost -- production cost of our engines.

I -- it is not realistic on our side to expect that both CNH -- any of our sectors, CNH, Iveco or Fiat Auto, will ultimately outsource a significant portion of the portfolio that’s currently being produced by FPT. Having said this, I think the pressure on that sector to try and keep pace with competitors’ product is going to become quite large. And we do and have entertained discussions with third party suppliers in terms of the replacement of some parts of the portfolio. Which may be more reflective of a lack of scale on the FPT side in producing those engines than their ability to manage the production process itself.

But overall I don't see the numbers going into the other sectors diminishing in any substantial way. And I think that we will look at the increase in third party sales as providing the safeguard to ensure that we are producing at the lowest possible cost.

Makes sense. If I could just ask [a more] detailed question on this. What kind of restructuring cash spend do you expect to incur in '06?

Somebody is getting a sheet of paper if you just hold on.

Total cash spend is €350m in terms of the cash on our restructuring, and another €120m to deal with other one-offs. I -- to be realistic I think the number will probably come in lower than this.

But €350m cash then. Okay.

Yes.

Thank you very much

Thank you sir. Ladies and gentlemen, we have time for one more question today. We'll take that question from Ms. [Laurie Wooden] of [Fortis]. Please go ahead.

Good morning. There's a substantial amount of cash on the balance sheet at this point. And if you consider what you might be raising, even though it is your near term maturities, there's still a fair amount of cash. Could you please discuss what you plan to do with the cash? That's my first question.

And the second question, you mentioned the possible roll-out of Alfa Romeo into the United States. Could you discuss the timeframe and any costs that you might have in mind associated with rolling that out?

No, I think that to answer your question about the Alfa Romeo launch, I think it's going to be a cautious targeted launch in the United States. We will rely on the distribution capabilities of Maserati to launch the product.

Okay.

A lot of work has already been done in terms of setting up the network in the U.S. to deal with this. And so we will piggyback the introduction of selected Alfa Romeo models in U.S. And it probably will not -- it's really beyond the targets period that I've given you in terms of 2006 and 2007.

Okay.

The biggest constraint that we find today is that the models that we have on hand need to be -- need to meet Federal regulations in the U.S. And the cost associated with getting current products in compliance with those regulations is excessive. So we'll have to wait for the first product that's coming out of Alfa, either as a result of restyling or a new model introduction, to try and get that done.

And in terms of the cash usage, I'll pass you on to Mr. Francescatti.

Well in terms of cash, first of all you’ve noticed that we said we have €1.4b of cash in the banking activities or in the [ABS] [inaudible]. Apart from that we have a bond maturing in May for €1.7b, we have another one in December for €500m. And we have some other smaller maturities during the year over all the capital markets, as you have seen our slide this [€3.1m] so we -- first of all we have to repay them [technical difficulty] further drive it down by reimbursing selectively the most expensive lines we have.

Having said this, I think what Mr. Francescatti wanted also to tell you that he hasn't told you is that we will work down the cash balances during the year and repay debt as required. I think that numbers like €8.8b is an inordinate amount of cash to keep on the balance sheet given our cash flow generation profile. So that number will diminish at December '06.

Okay. Thank you very much.

Thank you.

Thank you Ms. Wooden. That will conclude today's question and answer session. I will turn the call back to [you] for any additional closing remarks.

Yes, thank you very much to everyone for participating. I'm sure we will be talking to each other pretty soon, so this is it for now. Bye.

Ladies and gentlemen, that will conclude today's conference. We thank you very much for your participation. You may now disconnect.