Stellantis NV (STLA) 2006 Q2 法說會逐字稿

Thank you for holding ladies and gentlemen. And welcome to the Fiat Q2 2006 conference call, taking place on Monday, July 24, 2006. [OPERATOR INSTRUCTIONS]. I will now hand the conference over to Mr. Marcello Ledda. Thank you sir, please go ahead.

Thank you. And good evening everyone. My name is Marcello Ledda I am Head of Investor Relations at Fiat. Welcome to our second quarter results conference call. Today’s host, as usual, will be our Chief Executive Mr. Sergio Marchionne, our Group Treasurer Mr. Maurizio Francescatti.

All material that will be used during this presentation has been posted on our website. And after the call, of course, as we said we are going to be able to answer most of your questions.

It has been a pretty long day, pretty long day for all of us. I will try to pass it on immediately to Mr. Marchionne, providing that any forward-looking statements are going to be covered by the Safe Harbor statement, which has been filed recently with the SEC in the United States. I will pass the microphone immediately to Mr. Marchionne.

Thanks very much. Q2 has been a really good quarter for Fiat Group. And we have been able to accomplish, I think, all the things that we set for ourselves as targets early in 2004. And certainly that we have been performing, as we worked our way over the last three years of restructuring.

The most significant part of all this is that we were able to grow the top-line significantly €13.6b. It’s roughly 14% -- almost 13% over the prior year. But -- and most of that growth has been driven by a nearly 21% increase out of Fiat Auto, which has obviously benefited from the new models that have been launched and from the strengthening of the distribution network in Europe.

We’ve broken the 1m mark in terms of units sold for the first semester of 2006. We have not achieved levels of this caliber since the first half of 2001. And it’s certainly -- on the indications that we have so far, we should be able to duplicate this in the second-half of this year. I think it does form a good basis for us to look towards 2007, and that margin targets that we set for ourselves of between 2 and 4%.

We’ve doubled trading profit to over €660m. We’ve got Group operating margins now, which appear to be a goal that belonged to an industrial company in the automotive sector 4.8% trading margins. We still have a long way to go, but I think it’s the first time that we’ve been able to look at Fiat Group in terms of its industrial trading performance, which is coming in line with certainly the bulk of our competitors.

We have been able to post a profit in Fiat Auto again for the third quarter, the third quarter running. We’ve gone from a loss of €88m the year before to an €88m positive this year.

Probably more impressive has been the turnaround of Iveco which has nearly doubled its trading profit to €163m and we will see it, when we talk about margins. It is now moving certainly in the mid, if not the upper end of its competitor class.

CNH has also had a good quarter. If you remove the one-off impact of Healthcare -- of the Healthcare benefit, which came about as a result of the renegotiations of our labor contracts in the U.S., there’s been a €59m improvement quarter-over-quarter.

Net income at €330m, it’s up €369m over the prior year. If you remember the second quarter of 2005 had the benefit of the second part of the GM settlement, which was recorded then, together with some other one-off items. But if you remove those from the P&L we actually have improved net income by nearly €370m. And consistent with what we’ve done in the first quarter, we’ve also generated cash. We’ve generated another €600m worth of cash. Our debt levels are now down to €2.3b. Debt to equity ratio now is at a very reasonable 0.24 to 1.

We continue to clean up our portfolio. We’ve announced previously that we would -- that we would conclude the sale of our private bank in Switzerland. That will be done in Q3 of this year.

And we’ve announced today the fact that we have withdrawn from the shareholding arrangement with Ashok Leyland in India. That’s really -- this is an investment that goes back some 20 years. And over the years it actually matured into a financial investment for Iveco. Our industrial presence and our industrial intervention was really not required. That’s allowed us to effectively reset the base for our presence in India and start looking at other alternatives as to how we can move into -- in that region in other parts of South East Asia.

If you move onto slide three, on the basis of what we’ve been able to accomplish on the first semester we are moving guidance. Trading profit is at the upper end now at €1,850m, net income of €800m. We are forecasting a net industrial cash flow for the year of about €1.2b. And debt levels will be at or below €2b by December 31, of this year.

On page four is a summary of the relationships that were announced that -- the alliances that were announced this morning. We announced one with Severstal-Auto for the production of the old version of the Ducato, the 244, that will start in 2007.

We’ve also announced the beginning of a set of moves, of Iveco in China which are designed to re-establish Iveco as a major truck player in that region. We’ve also -- are beginning to set up operations for the production of industrial engines in that country.

In the mid to long-term these activities are designed -- create a business which will equal the Iveco presence in Europe, so it’s a pretty ambitious program. These are the beginning steps in that repositioning of Iveco. And I think you will see as we move forward over the next few months, some additional moves which are designed to strengthen the product offering in the region, to effectively allow it to compete as effectively as it has done in Europe.

I know there’s been a lot of speculation about alliances and what type of alliances we will be announcing today. We work on these alliances on a continuous basis. Whatever was announced today was effectively coincidental in terms of the announcement of our results. There will be other announcements that the Group will make going forward as we conclude these deals.

And so I really would not hang very much on the fact that we’ve only announced three deals today. I think there will be additional alliances and we will disclose, at the appropriate time, as the final details of these dealings are concluded.

If we move on to slide number five, probably a relatively significant piece of our strategic realignment has been the establishment of both establishment of our joint venture with Credit Agricole. We have spent a number of months trying to position this business and effectively select the appropriate partner to drive this business forward.

We are doing this on the basis of a strengthened Car business, which is going to give a much greater degree of leverage, in terms of -- and volumes to the financial services joint venture. And we are delighted that we were able to choose Credit Agricole to help us in this process.

The terms of the deal have already been announced. All the numbers that I make reference to, in terms of targets for 2006, exclude the impact of any one-off gains, which relate to this transaction or any other one-off transaction that I refer to, including the sale of the private bank in Switzerland and of our interest in Ashok Leyland.

If we move on to slide number six, this is a decomposition of our revenue line. Obviously, the single largest element of the growth has been the €1b plus growth on the car side, although all the other businesses have contributed to the improvement year-over-year. We now have a Car business that effectively is running at about €13b a year. And that is a level in which the achievement of the 2007 targets, of between 2 and 4% becomes much more realistic and understandable.

If we move on to slide number seven, which deals with trade -- with the decomposition of profit, the reconciliation to Q1 of ’05 -- Q2 of ‘05. You can see the biggest portion of the swing, the €206m portion at the bottom right-hand side of the graph has come from the car side.

I made reference to the fact that last year the trading profit number included a one-off gain related to the Healthcare -- the renegotiation of the Healthcare benefits in the U.S. If you exclude that we’ve actually done almost €60m better than we did the prior year.

Trucks have been a significant contributor to the profit improvement, as have components. So I think we are relatively pleased that we were able to get all of our sectors to contribute to that trading profit performance.

Moving on to slide number nine, which deals with the car side. 22.2% increase in volumes in the first-half of this year. The Punto continues to sell strong. We confirm our commitment to sell a minimum of 360,000 cars in 2006. The old Punto, the predecessor to the Grande Punto continues to sell well. We will sell probably close to 90,000 vehicles in 2006.

The Fiat Sedici, which was launched in the first part of this year, continues to do well. We are now nearly sold out in terms of the annual allocation out of the Suzuki.

And a number of initiatives continue to strengthen the brand appeal of Fiat. It is -- it -- the benefit of the work that’s gone on in the last 25 months is beginning to be visible in terms of the volumes that we are achieving. Not only in terms of the Punto, but also in terms of the other offerings in the product range.

Alfa Romeo has not completed its product launch cycle. We've introduced the Spider in Q2 of ’06 and we are beginning to get traction across the 159, the Brera and the Spider, all of which now are new cars, which are less than 12 to 15 months old in the market place. So we are beginning to work on the network now to try and reposition this brand, which as we stated publicly, is intended to achieve a volume overall roughly of 300,000 vehicles.

Ypsilon and Musa on the Lancia side, continue to perform well. We have a facelift that’s coming into the marketplace in September of ’06. And so notwithstanding the launch of the restyled product, Ypsilon has done well in the first six months of this year.

We are finalizing the component elements of the product portfolio of Lancia. We saw the last pieces of it this morning. We feel relatively comfortable that by the time we finish with the realignment of this portfolio that we will have a viable brand that together what Alfa can offer, rather to the upper end of the automobile range, and which are distinctively Italian.

So, I think one of the things that we’ll talk about later is the fact that we are scheduling an Investor Day, which will be held after the Q3 results, probably in the early part of November at Balocco. And I think that we’ll lay out, certainly in greater detail, the scope and the depth of the work that’s gone on in the product portfolio across all brands.

Slide nine has got a number of details about what we’ve done with these vehicles. It’s just factual information. Product launches have gone well and we have come across no unforeseen slowdowns in the introduction of these vehicles. Although certainly the take up of the Punto, and the speed with which it’s occupied a space in the B segment is certainly unique across the product launches that we’ve had.

Slide number 10 tells you the volume break up by both region, and by brand of what was sold in Q2. Together with a 500 -- 515,800 vehicles that we sold in Q2 of ’06 together with roughly 480,000 that we sold in Q1 of this year allow us to reach the 1m mark.

We have got a 30.7% market share in Italy, which is significantly up from the 27% that we had the year prior. Just the Fiat brand alone has gone from 19.8% to 23.2%. We are now holding market share at 7.6% for the quarter. We’re just shy of the 8% mark for the half-year. But we confirm our objective of an 8% Western European target for the whole year.

Brazil continues to perform well. In the light commercial vehicles side they had a really good quarter notwithstanding the fact that we’re phasing out the old version of the Ducato and introducing the X250.

We’ve had a market share of nearly 50% in Q2 in Italy and Western Europe has been roughly at 12.6%. But we’re forecasting an increase – a significant increase in volumes for 2007, based on the initial reactions of the Ducato after launch.

Slide number 11, which deals with the trading profit reconciliation. As you can see we’ve improved across all the relevant elements of the trading profit reconciliation. Consistent with Q2 -- with Q1 of this year we continue to overspend compared to Q2 ’05 in terms of advertising and marketing expenses purely due to the fact that we continue to support the introduction of these new products. All of these are designed to effectively reposition the brands.

As you can see from the margin chart, we have now crossed into positive territory. Before anybody asks the question as to whether Western Europe was positive for the quarter, we were nearly positive in Q2 of ’06. And we could have been positive if we wanted to.

I think the decision that we made to continue to invest, in terms of advertising and marketing expense, were purely designed to ensure that we had a sufficient base to try and grow, support our volume aspirations. We’re talking about roughly 2m cars, mainly Brazilian portion.

But, I think, to the extent that we need EMEA to reinvest in the credibility and -- of the brands in the marketplace. We have done so and we need to continue doing this for the remainder of 2006. It’s really in anticipation of the significant launches that we’ve got with both the C segment car being launched in January of ’07, Cinquecento -- Cinquecento, which will be launched in September of the same year.

We can talk about raw material price increases now. At Group level, we were –- the total impact on raw materials was roughly, just checking, it’s roughly €110m, I think it is. And we expect the total raw material price increases for the year are going to be averaging around €280m. Most of this is coming from non-steel related raw material price hikes. Aluminum, copper, and other metals are the major contributors to the raw material price impact on margins. All of these raw material price increases have been contained either as a result of technical savings, or as a result of supplier negotiations.

Moving on to slide number 12, Ferrari again has had a good quarter. Margins are at 13.6%. They are still shy of the benchmark of Porsche. But just to remind everybody that Porsche does not have, nor does it support, a racing section. So, in terms of overall operating performance, we are quite pleased.

Maserati continues to dwindle or reduce its losses, and our expectation is that this business will be profitable and cash generative in 2007 on the basis of the introduction of the new transmission for the Maserati Quattroporte, and the new Coupe, which will come out in the summer of 2007.

Moving on to slide number 13 which is Agricultural and Construction Equipment. I think it’s fair to say that, we have had a very good reception to the un-bundling of the brand exercise which will carried out at least on paper, at the end of 2005 and is now being in action in the first semester.

We have effectively stopped market erosion across all brands in terms of our presence both in Agricultural and Construction Equipment. We are quite pleased with the performance of the construction equipment brands, both Case and New Holland. As I said, a really good quarter in the second quarter.

The Ag market continues to be at best -- at best flat. It has been down significantly in Latin America in Q2, which is a continuation of a process that was started at the beginning of 2005. But the Construction Equipment business, especially outside of North America, continues to be strong and we continue grab share.

And so, I think just -- if you flip over to the next page and look at what we’ve been able to accomplish in terms of margins, we’ve now got margins of 9.1% for the business. For the quarter certainly they are in excess of the target that we set for ’06 of between 7 and 7.5%. But more importantly, we are moving margins towards the ’07 target of roughly 10%.

As part of this exercise in Q2 of ‘06 we’ve also intentionally reduced production and effectively relieved some of the dealer inventories that were sitting out there. It is a process we continue -- that we expect to continue for the remainder of the year and therefore there may be some negative implication, in terms of absorptions -- of absorption at plant level. But we do confirm the target for the year of 7 to 7.5%. And certainly the overall objective of producing roughly €800m in trading profit.

Star performer for the quarter has been Trucks. We’ve had volumes at least for the half have been up 5%. But we have had -- we have been able to maintain share. We have been able to reposition the products, both at the medium and the heavy end. We’ve had a very successful introduction of the new Daily in the second quarter of this year. It’s a restyled product but it is certainly -- the orders that we’ve been able to pick up, so far, are indicative of very good market penetration.

If you look at page 16, the ability to pull 7.1% margins is certainly within the band of what we forecast to be able to achieve in 2007. And it’s certainly in line with our competitors, obviously with the exception of a couple who are star performers. But in terms, of what I call the larger market, these margins are quite good and certainly in line with our ‘07 objectives.

We continue to work away at the cost structure of this business, as you can see from the chart. We’ve been able to -- supported by a very strong market, we’ve been able to get good volumes and price concession out of the marketplace. And we continue to reduce cost throughout the organization. So it has been -- it has been a good quarter and it is expected to continue at this rate for the remainder of 2006.

On to page 17, these are our Powertrain numbers. We’ve -- are beginning to see the benefits of the realignment of this organization after the aggregation of our passenger and commercial vehicle engines, which were part of GM Powertrain joint venture, and of the industrial and marine engine section of Iveco.

This is now turning up -- the business itself is fleshing out as a full business. And it’s been able to maintain relatively decent trading profit numbers notwithstanding the fact that aluminum and oil have moved, and moved against them in a pretty significant way.

So margins are about 3.3%. We have a long way to go before we get to the 5 to 7% that we set for ’07. But I think a number of initiatives are under way, both, here as a purchasing and in terms of manufacturing efficiencies, to try and bring our cost of products sold down and effectively achieve the margins targets that we set.

Page 18 deals with the remainder of our Components business Marelli, Comau and Teksid. Marelli has had a really good quarter. Comau struggle somewhat on the back of weak demand from car -- from car makers and Teksid has had a decent quarter.

We expect that the weakness in Comau will be rectified by H206, and therefore the margin targets for ’06 are certainly achievable and within range. And we may even be able to get much, much closer to the ’07 target of roughly 5%.

Page 19, which deals with the reconciliation of trading profit down to net result. I already made reference to the fact that we had a one-off item impacting ’05 numbers, as an unusual item, most of which relates to the second portion of the GM settlement.

Financial charges are down significantly year-over-year, mainly as a result of the reduction in net debt which is attributable to both industrial cash flow generation and obviously the fact that the [Ingresando] and the [ItalenergiaBis] are no longer on our books.

Move on to slide number 20, which just deals with the cash flow statement. I am going to go over this on behalf of Mr. Francescatti, who has had a very, very long day, and very long weekend trying to finish the negotiation of Fidis. So I’ll do this on his behalf.

But we’ve had a -– it’s a good cash flow statement. I think it shows that the businesses are finally beginning to grip and we are beginning to get the right level of cash flow generation on this business. In an ideal world, new businesses, this collection of business should be generating in excess of €1b, €1.5b worth of cash flow a year. And I think that we are beginning to see the benefit, the cert -– the first indication of the capability of the sectors to do so.

Important -- it’s important to realize that the Car business, again, produced cash in Q2 ’06. So, the process of cash burn that was associated with the sector as early as 2004 has pretty well gone.

Debt maturity, on page 21, or at least a composition of our gross debt. We have reduced our cash holdings and we confirm the fact that we intend to dwindle those cash reserves down to a level of €5b by the end of the year. Most of this has been used to pay back debt, therefore, reduce the cost of arbitrage in terms of hanging out the cash [bills]. We feel relatively comfortable now that with the cash generation capabilities that we have within the house, that €5b cash is sufficient to try and deal the requirements.

Page 22 deals with debt maturity. It shows you that we have enough cash on hand to pay all maturities over the next 18 months, and so pretty safe and pretty healthy position to be in.

Page 23, it’s the objectives that we identified in 2004. Tick marks indicate the fact that we’ve achieved all the ’04, achieved all the ’05 and effectively we have improved in 2006 targets.

It may be that the inclusion of Q3, we may have to give it another upward revision based on performance in Q3. But we feel comfortable only to the extent of this revision so far. I understand that when you look at the half-year trading profit number of nearly €1b, that is the equivalent to what we were able to accomplish in the whole 12 months last year.

So the trend appears to be right. I think we’ll have to see Q3 come in before we do anything else to targets. On the basis of what we have today we are just confirming 2007 objectives.

Upcoming events, we have the conference call on October 26 for Q3. As I mentioned earlier we are planning a two-day Analyst and Investor meeting at Balocco post Q3 results, which will not conflict with the reporting season by competitors and so details of that -- of that event will be forthcoming. That’s all isn’t it?

Thank you all. We’re ready to take your questions now.

Thank you sir. [OPERATOR INSTRUCTIONS]. The first question comes from Mr. Thierry Huon. Please state your company name followed by your question.

Hello. Good evening it’s Thierry from Exane. I’ve got a question on the Punto targets. You confirmed that its 350,000 units despite the fact that you put in place a new line in Mirafiori. So I am just wondering if 350,000 units is not quite cautious given the success of the product?

And the other question is about Ashok Leyland. So you just announced that you’ve sold this participation. So could you elaborate a little bit more on what you intend to do in India, in the Truck business? And could we see any extension of your agreement with TATA on the truck side?

Let me deal with the Punto side. I think we made reference to the fact that, I think, we sold 313,000 units the first nine months [inaudible]. Sales have gone well. Introduction of the second line in Mirafiori was effectively designed to allow us to produce the old and the new Punto at our discretion. So one of the things that we struggled with is trying to deal with the demand side of the old Punto coming in as strong as it was. When we originally launched -- we originally launched the Punto September last year, our forecast is at maximum we would sell anywhere between 35,000 and 40,000 of the old Puntos. Our forecast now is that we will sell nearly 90,000. So we have just been able to compensate -- we’ve just been able to shift production from the new to the old in the Mirafiori plant.

Having said this, the system is capable, between the [Amalfi] plant and the Mirafiori plant to produce more vehicles than this and even accommodate the 90,000 -- the 90,000 old Punto objective. I think we just need to see what happens in the marketplace after our competitors have launched the relevant cars in the B segment. And so we are being cautious. I would just like to see the reaction of the Grande Punto after our competitors come in.

In terms of the -- of our position in India, the Ashok Leyland is a historic -- it’s a heritage issue, it goes back to more than 20 years. So the fact that we have monetized this investment now, and regained our strategic flexibility, in terms of developing the business, is as you suggested a good indication of the fact that, we will be -- we would be looking at TATA, find ways in which we can effectively strengthen both their business and slowly introduce the Iveco presence, in a way which meets their objectives and ours.

That discussion was already on the table on which we opened the table with TATA a few months ago. And I think we need to work our way through the process before we can make any announcements. But I think its way too premature today to try and decide how that will go, although directionally TATA is the right place.

If I may, I just have a [precision] about the raw material price impact. You mentioned €110m for the first-half, but I didn’t get the number for the full-year and if it was for the whole Group or only for the Auto Group?

No. It’s for the whole business. It’s €110m H1 and €280m for the full year.

Okay, for the whole Group?

It’s for the whole Group.

Okay, thanks.

If it was for the Car business we would be in trouble.

Yes. That’s why I wanted to have the [precision]. Thank you very much.

Thanks.

Thank you the next question comes from Mr. Serge Escude. Please go ahead with your question sir.

Yes, good afternoon. First of all, congratulations for your results. I have a first question on the CNH. The price of CNH is between $18 and $20 pre share. What do you intend to do with the shares - to release them, or if the market do not price this asset rightly? And what are the reasons you are attributing to that poor valuation of the market? Is that communication to the market not clear, or not debt -- there’s no debt analysis in this asset? This is the first question.

And the second question is about the update on the dealer network restructuring. You gave us some hints last time. Can you update us on the opening and closing of the dealer, in Europe especially? Thank you.

I am going to try and get you these details. I don’t know whether I have them here. But certainly in terms of -- if I don’t give them to you today, you are more than welcome to get them when we get together for Investor Day in Balocco. We will give you a full -- and the guy who was developing them -- the dealer network for the car side will be present and will explain it.

But let me deal with the CNH side for the moment. I -- we will come back to the dealer numbers. CNH, we are an industrial holder of the 90% plus position in CNH. And I am, therefore, the wrong guy to give you advice as to what the proper valuation of their position is. Because one I don’t intend to dilute down from the 90% and I’ve no intention of buying the remainder.

And so, to me, and I am not trying to be disrespectful, but I think that a relative pricing of CNH in today’s market price is not something I truly worry about.

Having said this, I am the Chairman of the Board of CNH, and I do spend a lot of time with the management team. And I know they spend a huge amount with the markets -- a huge amount of time with the markets, especially financial earnings release to try and educate the market as to one, what has happened and secondly, what the future potential is.

So I think there has been adequate disclosure of CNH information into the marketplace. I think that it’s been, certainly in line with what the competition does, and has done. And in terms of the potential impact of Fiat’s ownership on the minority shareholders, I would surmise, although I can’t quantify the impact, that probably the position of a 90% shareholder on the block, does have -- does have an impact on valuation. But I’d leave that for you to decide.

So you think that un-listing the share would be useful for the valuation?

Do I think that the un-listing or listing, sorry?

Yes that you will take off the shares from the Stock Exchange.

I have no intention of de-listing CNH today. And even if I had, as a wild thought, this would be the wrong forum to do it in. And certainly it would be -- it would not be wise. And so I -- based on what we know today, and given our financial structure, there is no need to take out the minority interest in CNH. Therefore, certainly in terms of our plan going forward, we will see CNH continuing to be a publicly listed company in the U.S.

So, I don’t -- do I think we need to -- the speculation of [of the listing] has been around for quite a while. I have nothing to say because it is not in our plans.

Okay.

The question that you asked earlier, about the number of dealers that we have acquired. We had an objective, for 2006 of 217 new mandates in Europe. By the end of June we have accomplished 139 of those new acquisitions and mandates.

Is this spread all over Europe or is --?

This is all over Europe, and the Italian portion is less than 50% of that number.

The new one, less than 50%.

Yes. And the major area of intervention, as we stated before, was France and Germany.

Great.

Okay.

Thank you very much.

Thank you.

Thanks.

Thank you. The next question comes from Mr. George Dieng. I am sorry the next question comes from Max Warbuton. Please go ahead with your question.

Yes good evening, it’s Max Warbuton at UBS. Two questions really. Turning to 2007, if we look at the targets for ’07 would it be right to say that the Company or the division that’s probably most at risk of missing in ’07 is CNH? Or if I could word the question slightly differently, how bad do Ag markets have to get for that 10% guidance to be at risk?

And then the second question just on Auto. The 2% margin target does look increasingly realistic. To get to 4% is that really just a story of top-line revenue growth? When we as analyst are looking at how does Fiat Auto get to 4% should we just be thinking in volume and operational gearing terms? Thanks.

The answer to your question is yes. I mean the issue about the last question that you asked it is a volume issue, because it is at that point in time that, we will be able to get the right level of utilization of our –- out of our plants. And I mean it’s that simple.

I am less worried fundamentally on internally generated volumes as being the basis on which to justify a platform investment because our search for partners and the development of these cars is it’s essentially going to equalize the lack of internal volume associated with the development.

But having said this, the margin story between 2 and 4% is a volume story. And I think we need to be absolutely consistent. What we started doing in 2005, we need to continue to invest in the network, and I think that -- I think it’s really a question of continuing to execute on the very few simple objectives that we set for ourselves for the cash side.

The CNH story is really the one that’s really most at risk. It’s a difficult question to answer because we know that in the structure there is a margin gap and a flat market between us and John Deere. And so if we were to cure that -- the structural shortfall in the margins we would do an excess of 10%, because our competitors are cycling in excess of 10% today. And certainly our product portfolio does not justify the margin loss, both the gross margin and trading profit margin, against our competitors.

The issue as to what level the volumes of Ag need to come down to offset the impact of the improvement in margin performance of the business is a question that I have not looked after to be honest. But I would expect that as long as this market stays at this level of activity in Ag, or is 5% down, then a 10% margin is not at risk. But it’s more of a gut thing than a calculated number. I don’t know whether it’s helpful.

Yes it is on CNH. Can I just clarify on Fiat Auto? If you look at the operational gearing that the business has displayed the last couple of quarters, to do a 4% margin it’s are going to need to find something like €4b or €5b extra of revenue year-on-year.

How should we think about that? Is that new models? Is it further growth in Punto in ’07? Is it emerging markets? What are your assumptions about where you find that kind of extra revenue from next year?

The number -- it’s interesting when you say its €4 to €5b because that represents roughly 20 to 25% increase in volume. So we’d have to take the business from 2m to 2.5m cars. And if I -- without being unrealistic about what is achievable, I think that we can get to 4% halfway between where we are today and the 2.5m.

One of the things that’s not visible from the trading profit reconciliation is the impact of the increased spend on both network development, and advertising and marketing, which I am not sure is an ongoing process. There is an over-proportional investment in this processes now simply because of the fact that we are trying to reposition the brands. I think maintenance, advertising and marketing is not necessarily at this level. And that’s why I am lot less careful -- I am a lot less concerned about hitting a number like 2.5m which is a big number in 2000 and -- in 2007 and 2008.

Having said this, when you look at the product line after sitting beside -- sitting with Fiat Auto today, we know we are going to achieve roughly a 20% increase in light commercial vehicle volumes ’06 to ’07. We know that we are launching a C segment car, which structurally will do at least three times as better as the current steel. And we know that we got the Fiat Cinquecento coming on stream. And although it will cannibalize some of the segment presence, it is surely that the overall impact of all these things should add anywhere between 125,000 and 150,000 cars to the load.

So assuming that Brazil maintains volumes in ’07, we have enough inherent organic growth within the organization to move to that number, certainly in ’07. And -- again, when we get together at Balocco we will show you what we plan to go in 2008 and 2009, because our ideas are relatively clear. But the 2.5m number is not an unachievable number in a mid-term value range.

Great. Very helpful. Thank you.

Thank you. That next question comes form Mr. Adam Jonas. Thank you sir, please go ahead with your question.

Hello. It’s Adam Jonas from Morgan Stanley. Good evening Mr. Marchionne, Marcello. A couple of questions. First on Brazil. Can you tell us how much the Brazilian operations added to the Fiat Auto profit in the second question, my first question?

And if you could also say how much it added, and that to remind us of how much it added in the first quarter as well. And the reason why I ask is because it appears as if your full-year, your revised Fiat Auto target of €250m is more or less the magnitude of what Brazil Auto did last year. But yet Brazil appears to be improving year-on-year or at least it has so far.

I just wanted to make sure that we are right in our assumption that with your revised targets, we are still -- with the increase in raw material cost, and the advertising expense we are still -- Fiat Auto ex-Brazil is still expected to loose money for the full year, is that assumption correct?

The extent of Fiat Auto was negative Q1 and Q2 in Europe. The -- I assume that it will go to flush in ‘06. But it will actually not -- that it will not make any money but it won’t loose any in terms of your analysis. And that’s what’s built into your 250 number. That will -- we will recover whatever portion of losses of Auto Europe that we had in the first semester of ’06. So it will be neutral.

Okay. But is there is a lot of [inaudible] [leases] outside of Brazil. Can you please specifically tell us what Brazil did in the quarter please?

We don’t -- we have never given out trading profit numbers of Brazil. What I can tell you is what the shift has been quarter-over-quarter.

Okay.

So that when you look at the trading profit reconciliation you can determine what portion of that was Brazil driven, and that number is about €15m for the quarter.

50?

15.

Okay, 15. Okay. My last question is on the page 20 of your release, the, on the cash flow statement the change in provisions. In the first quarter it appeared to be a negative €140, €141m of cash flow impact on the change of provisions which was around €118m swing year-on-year. I know there is a lot that can go into that number, and not all of it impacts the income statement, but can you tell us what, if any, of that change of provisions would have impacted the income statement? And if you could, tell us if there was any movement there that would have affected the delta, or the profit itself in the second quarter, of the Automotive business?

The number you are making -- what is the number you are referring to?

It’s the, on page 20. It would be the €159m negative change of provisions for the first-half of ’06. But if we back out the same number that you provided for the first quarter it was a negative €141m in the second quarter by itself.

I am going to get Mr. Francescatti is looking for the numbers. He will answer you.

Okay.

[Inaudible]. Do you want to go on and ask me any operational questions while we try and come up with the reconciliation?

No you can go on with the Q&A and if you’re able to give us an answer later that would be great.

No I will and then we’ll come back to you.

Thanks very much.

Thank you. The next question comes from Mr. Stephen Reitman. Please state your company name followed by your question.

Yes hello, this is Stephen Reitman from Merrill Lynch in London. I have a couple of questions on Fiat Auto. The first question is just some clarification that Delta you were talking from Brazil, the €15m in the second quarter, is this on a constant currency basis or does this take into account the rise in the value of the Brazilian real versus the euro in the quarter, which is about 12%?

And my second question is about the price realization per unit we’ve seen in Fiat Auto. If my math is correct, it appears that the revenue per unit was about €12,700 per vehicle, which was up about €50 per vehicle on the first quarter. Now we know the first quarter was somewhat brought down by the fact that this is the quarter where you have a large amount of vehicles going into the rental fleets and service vehicles don’t get booked at revenue at that stage. But I would have thought there might have been a bigger pick up in the revenue per vehicle considering the very strong improvement in the mix that you were talking about on the per unit basis, not only increase in Grand Punto sales but also the mix that customers are ordering.

And finally, just a third question if possible also, again, referring -- going back to the Brazil situation. Could you also then -- also tell us a little bit more if the expectation is still for Brazil to be flat or broadly is similar to the 2005 result, still your forecast for this year? Thank you.

Just in terms of the difference on Brazil year-over-year, it is actually difference foreign currency included. And so that’s the actual number that you would tear out for profit reconciliation that you see on the page of the presentation.

I haven’t looked at a price realization per unit. Just looking at this now. Okay, Mr. Ledda has just showed me the calculation that we do where we actually take out buy backs. But the average price has gone from €10,400 to €11,000 from Q2 ’05 to Q2 ’06. So my suggestion is that you probably give Marcello a call and he’ll take you through the calculations. But we have seen an improvement in pricing which is between 5.5 and 6%.

In terms of your question about Brazil, whatever gains we’ve achieved year-over-year will be held. Our forecast for the year is that it will be flat ’05 ’06 in H2, that’s what’s in the 250 number.

Right.

Somebody -- Mr. Francescatti is going to try and give you an answer on the working -- change in provisions.

Yes, the change in provision of 1.9 is due for around [100m] to the contribution to the pension funds made by CNH and the rest is mainly due to expenses for the restructuring accrued during 2005.

And the pension funding has effectively been absorbed into pension expense anyway so it is truly a funding issue only as is -- the only one that may be relevant is the payment on the restructuring charges which were accrued in ’05.

I think I’m done operator. Can I take the next question?

Thank you sir. The next question comes from Mr. Philippe Houchois. Please go ahead with your question sir.

Yes good afternoon, Philippe Houchois from JP Morgan. First of all congratulations on good numbers and very encouraging trends. A couple of questions I had. One was to just clarify, for the sake of clarity, on the 2 to 4% operating margin guidance for 2007 in Auto, are we talking about Fiat Auto as know it, we’ve known it for many years or the new re-defined Auto division? If you can just clarify that for the sake of --

It’s only Fiat Auto.

Only Fiat Auto, okay, so we’re clear on this. And the more general question is I saw your tax rate. If I did my sums right it’s about 39% in Q2. I know the quarterly tax rate is pretty meaningless but can you help us understand, going forward, what kind of tax we should be looking at on the P&L? And also how we should look at cash tax and whether we get to a point soon where your cash earnings exceed your P&L earnings, just because you work through your tax credits. If you can help us get a general view on where we’re going forward, both in P&L and in terms of cash tax that would be helpful?

To give you an answer on the cash earnings section I think we’re already there in terms of the cash earnings being in excess of paper earnings, because there’s a portion of our tax charge which is deferred taxes. In the case of 2006, for the first half, we’re talking about a deferred tax charge of €45m on the 2006 actual. Let me give you a breakdown of the number. We’ve got IRAP, which is this Italian tax which is based -- I think it’s payable on employment levels or something isn’t it, which is about €78m. We’ve got a current charge of about €170m and a deferred tax number roughly €45. So on a cash basis we’re still -- our actual cash tax half year is about €240m out of €290m.

This -- with the absence of the distorting impact of IRAP on the tax charge, the normalized rate for this should average between 33 and 35%. To the extent that we can generate profits outside of Italy, right, this is going to happen and is going to try and rebalance the rate. We’ve spent quite a bit of time because of this proposed legislative changes to taxation and to loss carry forwards in Italy. We’ve taken a very hard look at the composition of our deferred tax debit, which is about €1.7b at the end of 2006 -- the end of 2005.

The potential debit that could be hung on the balance sheet is in excess of €5b. So, obviously, we’re going to work our way through the 1.7 paper debit before we can get that remainder. At this rate of recovery, I think it’s probably going to be until -- it won’t be until 2008 that you are going to see the benefit of the filtering through of some of these un-booked losses. Having said this I think the benefit of the bleed through of the referred tax debit is going to become a lot visible a lot earlier, which means that the cash earnings, as such, are going to be significantly higher than the paper earnings. Does that answer your question?

Very clearly. Thank you very much.

Thank you. The next question comes from Mr. Martin De Ambroggi. Please go ahead with your question sir.

Yes good evening/good morning to everybody. First question is on -- it’s a quantitative question. What’s your volume assumption under your Fiat Auto €250m target for the current year?

And the second question is strategic. Concerning speculation on spin off on -- or other kind of the consolidating -- the Car business, can we say that one way or another the consolidation of the Car business can be totally ruled out? I don’t know when we will see the improving margin at Fiat Auto, probably make us more comfortable on this option.

Volume expectations ’06 supported at €250m is about 2m cars, give or take 10,000, but I think it’s in that neighborhood. And it does include the increased spend on advertising and marketing which we’ll carry out for H2 ’06.

In terms of the de-consolidation on the car side it has always been our objective since we started this re-shaping exercise of Fiat 2004, to allow these businesses to get to the point where the margin targets that we identify for 2007 will be supportive of stand alone cash generative and operating earnings generative businesses.

So the question that you’re asking is as to whether things are ruled in or ruled out is -- to be honest I’m not sure I can answer the question because the only thing that’s truly relevant here is that if we complete the process of re-shaping of Fiat by 2007, and if we achieve the margin targets that we set for ourselves, it is technically possible to look to de-consolidation of Auto. Having said this, there is neither commitment nor confirmation on the part of Fiat management to do so.

Okay thank you.

Thank you. The next question comes from Mr. Ricardo Richardelli. Please go ahead with your question sir.

Good afternoon to everybody. Thanks for the presentation. Three quick questions. On Fiat Auto division, [inaudible] final breakeven, do you think this could be the trigger to actually have the long awaited upgrade of that fair debt rating from the rating agencies and if it will be more consistent with your risk profile today?

Secondly, on net debt guidance of around €2b, just one [inaudible], this is not including the 550 net cash in you can actually -- potentially register by year end from Fidis, is it correct?

And one follow up on Fidis transaction overall. In my number you should post around €380m potentially eligible for dividend distribution. Is this a number around -- or close to what you actually will realize on Fidis? Thanks.

I’m sorry, could you tell me what the second question was? The €380m represents --

The net -- in my number, this should be the net capital gain on -- or the gross, sorry, the gross capital gain on the Fidis transaction overall. As you were actually selling at around 1.63 your carrying value for the retail, wholesale and renting division.

Okay. The first question about the rating agencies. We continue to work with the rating agencies as we have done here for a number of years and, certainly, intensely since 2004 in terms of explaining to them how we would achieve the targets that we have set two years ago. I think as we go through the cycle and we keep on, both delivering on the targets that we set and effectively confirming the achievement of the objectives going forward, it is becoming much more plausible and, in my view, realistic to the rating agencies to take a more benign view of the rating of Fiat.

Having said this, we are going to spend some time with them. We will see them relatively quickly post-closure of Q2 in terms of explaining to the rating agencies as to what we see as achievable in ’06 and what the impact is going to be on that levels and coverage. I am hopeful that what we will have been able to accomplish so far is of sufficient strength that it will cause them to re-consider their assessment of Fiat. But I have no guarantee that they will. I think they have been appreciative of everything that has gone on so far. I just cannot tell you how quickly we’ll be able to turn them around.

Certainly, at the rate at which we are generating cash in this organization today, it is quite possible that the debt levels that we’re looking at, at the end of 2007, are going to be, certainly in the historical context of Fiat, millions.

And so it does structurally change the look of this Group and I think that we need to work with the rating agencies to convince them one, that it’s doable and secondly, that we’re well on our way to getting it done.

The second question about the net debt position, it does not include any of the exceptional one off items. I think you are wrong with the size of the capital gain which is going to be in excess of €400m but, more importantly, it does not include the potential cash out on the re-acquisition of the minority interest of Ferrari. One of those things that we stated publicly is that we do want to re-acquire this asset that we consider to be strategic to Fiat going forward.

And I think that the sum of all the things that we’ve carried on, including the divestitures of the private bank and other assets that have either been monetized or capable of being monetized over the next six months will ensure that the re-acquisition of the Ferrari minority stake is cash neutral. Having said this, and taking all that into account, we do confirm net debt levels [are 2b lower].

So, translate this into plain English. If you were to get -- when the Fidis transaction closes, when the Banca Unione di Credito transaction closes, when we monetize the actual claiming positions, when we close the other open items in terms of potential real estate development disposals, we will have enough cash to buy back all of the minority interest position in Ferrari with no burdening of leverage. Thanks.

Thanks.

Thank you. The next question comes from Mr. Paolo Mosole. Please go ahead with your question sir.

Good evening everybody, I have three questions. The first one is related to the problems at one of your suppliers, which is C F Gomma. I would like to have an update and to know to understand whether this is causing you more extra costs and could it be one of the reasons of your cautiousness?

And the second question regards the new target for 2006 vehicles of 2m, which implies roughly plus 10% volumes increase versus second half 2005. The fact that you are giving a lower second half trading profit for Fiat Auto is only related to the issues at raw material costs or to the fact that you are selling lower value cars, or to what reason is that related to?

And the last question, if you can give -- you would see your market share stable at this level or growing even more for the rest of the year and both for 2007? Thank you.

Let me deal with this C F Gomma issue which is -- which has been a bit in the press and it’s been certainly impacting on our operations. As a result of this event our loss, it’s certainly at car level. It also has impacted on vehicle but not to the same extent. We have probably lost about 10,000 cars worth of production, so the extent that we could probably make up the difference going forward is -- will impact on absorption at plant level of Q3 ’06 and it is not the reason why we are being more cautious on H206.

We don’t plan on selling more lower value cars during the period. I think that one of the things that we have learned in managing this business is to be very, very careful both in terms of establishing targets and in delivering them. We’ve had a good first half. I would like to see Q3 before we do anything else in terms of trading profit objectives for the year. The competition is not easing. I think that the Punto is going to encounter friction in the marketplace as the competitors come in.

We continue to work very hard and I think feel relatively comfortable that the targets that we set of 360,000 on that car are going to be achievable. Having said this, we need to set the stage and there’s going to be money spent in H2 ’06 for the introduction of the C segment car, of the Bravo in January ’07, and a number of other initiatives which are going to require funding. So the answer to your question as to why we’re being, well, pessimistic, I call it realistic about H206, is because we just don’t have enough facts here to try and move guidance higher than I would say.

In terms of the 2007 targets in terms of market share and objectives, I think there’s no doubt that we can grow from the current position of 30.7% market share, especially on the back of the introduction of the C segment car in the Cinquecento. How big the number will be, I prefer not to talk about it until we meet at the end of Q3, but it will be in excess of the 30.7% number that we’ve achieved. 8% in Europe is considered to be the minimum level within which we tend to operate and, therefore, in all likelihood ’07 and ’08 targets for Western European penetration will be increased. But all of that will be announced [inaudible].

Thank you.

I think I’ve answered all your questions.

Yes, thank you.

Thanks.

Thank you. The next question comes from Mr. Stefan Burgstaller. Please go ahead with your question sir.

Hello, good evening, Stefan Burgstaller from Goldman Sachs. A few questions here. Could you just talk a bit about quality, what’s the progress, what are the indicators you’re looking at, and when is the improvement in quality having an impact on the P&L? Is it already having an impact on your P&L in terms of lower provisioning?

And my second question is, you mentioned in your comments that this Group had generated free cash of €1 to €1.5b a year. What sort of margins do you have in mind when you think about these numbers in terms of the main divisions? Is this the ’07 target here you're talking about or are these ’07 targets more peak levels and, in terms of the first cycle, you will be looking at something lower? Could you maybe just have a quick discussion on that? Great.

Well I, -- that’s the obvious issue about free cash flow generation, it’s only the generation of €1 to €1.5b is built into our margin targets for ’07 which are 5 or 6% I think is Group level. So at that level I think that we will be able to accomplish a cash generation of roughly €1.5b which is the basis on which, going back to the question about the rating, we expressed the view that ’07 gearing would be at least negligible in the scheme of things.

And so I don’t think that these are peak earnings, nor do I think that they’re trough earnings and, therefore, the question as to where cash generation will be on a down cycle if all the sectors went down, a much more difficult question. And I don’t have an answer for you, nor do I think it is likely that you’re going to have a simultaneous concurrent downturn on all sector activity. I think it’s a pretty far fetched assumption.

In terms of the quality side, we continue to invest in quality. We have not made any radical draconian adjustment to the provisioning process in quality because of the fact that we need to see these cars in the marketplace with actual empirical experience of claims against warranty.

I can only tell you that we have significantly increased the number of people there are involved in quality and I -- if you -- I don’t have the exact number with me today as to how many people we have unleashed on the organization, both within the manufacturing sites and with our suppliers, to ensure that we bring the quality levels of these cars at least equal to European levels -- our internal assessment equal to European levels.

Our internal assessment suggests that all product launches that we’ve had since -- in 2005 and 2006 have been done with quality levels which are at or above peer standards. This is going to be visible, ultimately, in terms of what the new car buyer survey data will show and that, by definition, on a 12 month delay. So we’re not going to be able to see and assess the quality of all this work until 2007.

So we can only tell in terms of what we’ve been experiencing on warranty claims on products that were launched in the last 18 months and the number has improved significantly over what they were in 2004.

Thank you.

Operator, we’re going to take one more question.

Thank you sir. The last question comes from Sabine Blumel. Please go ahead with your question.

Hello, good afternoon or good evening basically. Very quickly, could you actually clarify the situation with the old Punto? As I understand it you target for this year 90,000 units. My question is are you going to cease production by year end as announced early on or are you continuing to produce it next year?

Second, your staff capacity, production capacity for the Grand Punto is larger than 400,000, so it excludes the 90,000 you have allocated for the Punto. And when do you actually expect Alfa Romeo to break even? And the 159 -- the volume target for the 159 of 80,000 units, I assume it’s only for 2005 and not when the whole model is available for the full year?

I think that we have already mentioned, just to deal with the Alfa Romeo issue, I think that we have already mentioned our expectations in terms of volumes on the 159 to roughly 80,000 vehicles for Western Europe, including the station wagon this year. So the number -- there’s no doubt that the initial volume expectations that were associated with the car at the time of launch have been decreased and we have lengthened -- we’ve effectively lengthened the time that it will take to reach peak volumes of about 110,000 to 120,000 cars for the 159. That’s the first issue.

The second one, which deals with the old Punto, the old Punto is scheduled to run for at least the first half of ’07 in our plans, so it will not be withdrawn from the marketplace. The issue that you’ve raised about the combined capacity of the old and the new is undoubtedly correct. We can produce roughly -- in total we can produce in excess of 420,000 vehicles between the Amalfi and the Mirafiori plant because of the fact that the old Punto and the new Punto lines are interconnected. You would have to add additional shifts to try and achieve the 420,000 vehicle number plus continue to produce, at some level, the old Punto. I don’t know whether that answers your question or not about --

About the Punto yes. Would you make any comment on profitability or lack of profitability at Alfa Romeo and what is your medium to long term strategy on it, or when do you --

We have stated publicly that I think that we need to get Alfa Romeo to cycle roughly 300,000 cars. It is not making money. It didn’t make money in ’05. It is not making money in ’06 and it will, in all likelihood, based on current expectations, will not be making money in ’07 as a brand on a fully allocated basis across the Fiat Auto sector.

It is highly likely that the Alfa Romeo brand will be at least breaking even in ’08 and, certainly, on the back of volumes post-introduction of the brand in the U.S. in 2009 and the volumes associated with that introduction, that it will start making money. But everybody recognizes I think today, that the Alfa Romeo brand, as appealing as the brand is, is going to require a lot of effort to ensure that it does achieve margin targets.

I’ve just been given a piece of information from the Newswire telling me that I suggested in post ’07 that we will carve out the car business. For the record - one, I never said it and secondly, we will never ever hear a commitment of post the achievement of a target. We will automatically trigger a re-shaping of the portfolio. The only thing I did say is that all these businesses, Auto included, once the 2007 targets have been achieved, are all capable of being won on a stand alone basis because they’re profit and cash generative on their own terms. That’s all I said. So let’s limit it to that objective and nothing else.

Sorry, I wasn’t trying to dig you out of the -- not give you an answer, but I want to correct the record before this thing got misinterpreted.

Well, thank you very much for your participation to the call. Of course, we are going to be available to answer all your questions back in our offices so I’ll assume we will be talking to all of you pretty soon. Thank you very much. Good night.

Thank you ladies and gentlemen. This concludes the Fiat Q2 2006 conference call. Thank you for participating. You may now disconnect.