Stellantis NV (STLA) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Fiat 2008 Third Quarter Results Conference Call. For your information, today's conference is being recorded.

At this time, I'd like to turn the call over to Mr. Marco Auriemma, Head of Fiat's Investor Relations. Mr. Auriemma, please go ahead, sir.

Thank you, Maria. Good morning and good afternoon to you all and welcome to Fiat's Third Quarter 2008 Results Webcast and Conference Call. Mr. Sergio Marchionne, our Chief Executive, and Mr. Maurizio Francescatti, our Group Treasurer, will host today's call as usual.

They will use materials you should have downloaded from our website and after introductory remarks, we will be available to answers all the questions you may have.

Before moving ahead, let me just remind you that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor Statement, including the presentation materials. So, now I would turn the call over to Mr. Sergio Marchionne.

Thanks very much. Good morning and good afternoon, wherever you may be. We're going to take a rather unusual tack to this conference call today, because going through the third quarter, at least based on the comments that I've seen this morning, coming back from the analyst group. The actual results of the third quarter appear to be almost irrelevant and so I would like to devote as much time as I can to our forecast for the fourth quarter and how we see 2009.

There appears to be, for whatever reason, a sense of doom and gloom, which all of a sudden has developed about not only Fiat, but in general, about the automotive industry in its wider sense. And without getting involved in specifics, and probably we can dispel some of these issues as we go forward, but I think the level of pessimism has probably reached levels that really cannot be explained.

I mean, we have looked at a share price this morning, I remember speaking to you about 4.5 years ago, when the company was in dire straits, the share is worth, more or less, today what it was worth 4.5 years ago. And so I've [trailing] the finances, most of you have, I find it hard to believe that it has been such a fundamental shift in some view of the capital asset pricing value of the valuations opposite where they are. I leave it to you to decide whether in fact it's justifiable or not. From where we see them today, I think we've entered an area, which is pretty hard to fathom and I think it reflects certainly a view about 2009 and 2010, which is not shared by us and certainly not shared by the management team at Fiat.

One quick comment about Q3 of 2008. It was the highest third quarter result in the history of the group. It was the fifteenth consecutive quarter-over-quarter improvement in performance. And so we're entering what potentially may be a downcycle, with a relative strong performance of the first nine months of this year.

We're pleased with the way in which all of our businesses have performed in the third quarter. I think there are a couple of things that we could have done better, including a slowdown in our production rate, especially on the car side, to take out inventory. This is something, which is being rectified now, and will be in line by the end of December, which we can talk about more in a few moments.

But fundamentally, the performance of the group so far has been absolutely in line with our original expectations and absolutely in line with what we told you back in 2006 about what we would do to share.

And so the rest of my comments this morning this morning are intended to give you my view about how we see these markets developing. I've had a chance to read some of the views that you have expressed, including views that have been expressed by specialists on the CNH side, on the ag. and construction equipment business. And I think that we can all, if we sat and down and listed all the potential negative areas of development going forward, I think we can probably envision a world, which is much, much uglier than it is today.

I think the likelihood of those events happening simultaneously is undoubtedly remote. I think that we can think about them, but it is highly unlikely that all the things that I've read would in fact happen. At least simultaneously.

I can tell you that organizationally, this group has looked at its businesses in a very thorough way. I think we spent quite a bit of time adjusting our sites, given where we see the markets developing over the next 15 months. I think now the operational measures to try to deal with this, whatever shape it may take, are in place. And so, I walk into the fourth quarter with a high degree of confidence that we'll be able to execute on the 2008 objectives and that we will be able to contain whatever damage ensues from erratic market behavior in 2009.

I think that we understand the implications. I think that we have made all the right decisions, that we've got discretionary moves that we can implement as required in order to try to deal with a market decline, which is even in excess of what we forecast.

So, then that's the reason, as we get into the back end of the presentation, we have given you what we have gave you back in 2006 as a modeling or a simulation of what the certain volume declines will be in 2008. I've seen a report from one of you guys that suggested the situation might even be worse.

And I won't mention names on the call, but I think that if you're -- if the person who wrote it is absolutely serious about this, then I think that the issue is much, much bigger. Because a 20% decline in volumes across all of our business sectors, would it be on an absolute lock up of the industrial system in Europe and probably on a global scale, which is beyond what we have ever seen historically? And if that's the case, I think that we are probably the last guys to be -- to worry about the system itself would come to a collapse.

There's no doubt that we're looking at a demand curve, which is sloping downwards in some fashion. What is unclear is the slope of the line and the point of inflection at which that demand function will either flatten out or resume its progress.

Some of you have expressed some concern about the fact that we have the audacity to reconfirm our commitment to 2010, given what would happen in 2009. I think you need to understand that whatever measures we put in place are ad hoc operational responses to what we consider to be a temporary set of events.

There is nothing structural that we have seen in terms of the businesses that we run that would suggest that the actual market demand for what we make would, in normalized credit conditions, be impacted by anything other than the type of growth curve that we've expected and delivered certainly between 2006 and 2008.

So, I encourage you really to take a look at this with a high level of realism, this is not a reflection on the share price of Fiat. I think it's a suggestion of how you should be viewing this business. These are uncertain times. I think that we are suffering the consequences of incredibly ill-advised maneuvers from an industry that is sitting in front of us today. I mean, it's the industry that you represent today that's at the heart of this problem. So, I mean, we are in the unfortunate position to have to answer to you about something, which we did not fundamentally cause.

Having said all this, I think Fiat, as most other automotive houses, I think especially in Europe, I think our way to deal with these issues and I think we will adjust whatever we need to adjust industrially to deal with a potential downturn.

I -- it is of very little use, I think, to go through the numbers for the first quarter -- for the third quarter. I think that nothing that I say could improve it. There is an issue that you've raised in terms of liquidity, which I'll come back to in a moment. But if I can start with the -- I guess it's on slide nine, which deals with the group purchasing issues, which is something, which we spent quite a bit of time on in the last call.

We have seen a substantial reduction in commodity prices in the third quarter and we are continuing to see these prices drop. We have provided some information on the back about how we're handling these. Obviously the impact of raw material price hikes in 2008 are pretty well set and cast in stone and so we're digesting them through the industrial system.

They're reflected in our forecasts for the fourth quarter. We have not made commitments in 2009 that would not allow us to benefit from the commodity price decline, so we are entering 2009 with a clean sheet of paper, not being bound by any of the erratic movements that we have seen in 2008. And I think we'll be able to leverage the group purchasing power of Fiat across those commodities, totally reflecting what I think ultimate commodity prices will go up.

And I mean I'll come back and answer questions and issues, but as far as I'm concerned, the issue is closed. I mean, we've dealt with the up ticks, we have done and brought on all the price increases that were required to try and recover these price increases. Some of them may become systemic, this time we will be able to actually allow them to stick as a price going forward. This is especially true in CNH, where I think we're still looking at a buoyant demand for our products, or at least on the ag side for the remainder of 2008 and I think a good chunk of 2009.

In terms of the industrial flexibility piece in Europe, which will be required in the event that we were to experience severe downturns in demand, we have instituted a very thorough process of taking out production to match demand as required. As you can see, we have made substantial use of temporary work forces as we ramped up over the last 24 months. We have been able to take that work force out with no structural damage to the organization. As you can see from the slide on page 11, we've taken out 1,900 people between Q2 and Q3, whose temporary contract was not renewed and we continue to take up production of European system. The slide talks about what we are expect to do in Q4 of 2008, we're taking out about 1.6 weeks per month or 27% of the work force across all the Italian plants, across all sectors. And we have assessed the availability of the Casa Integratione of the normal shock absorbers that are associated with employment levels in Italy and they are sufficient to allow us to weather even a worse -- even the worse possible storm in 2009, without utilizing means, which are not currently available.

We have done then Spain, we have also implemented measures in Germany to try and deal with this issue. But I think we can deal structurally with the even worst case scenario, which is outlined at the end of the presentation.

We're going to finish off the year with about EUR63 billion in revenue. We are going to deliver the very -- at the low-end of the EUR3.4 billion to EUR3.6 billion in trading range, of trading profit. And our industrial debt, purely because of working capital reversal will end up between EUR1.5 billion and EUR2 billion. So, there won't be a cash recovery in the fourth quarter, which I seasonal and structural to the way in which we run the business, even in a downturn. And so we'll bring -- be able to bring that level down from the levels that we've displayed anyway.

The markets for the fourth quarter, generally speaking, are going to appear to be weak. We're going to see a strong ag market throughout the world, for a variety of reasons, most of which have to do with the fact, especially in North America, which has a relatively buoyant farming income year, I think people will be incentivized to continue to invest in equipment to try to bring down their taxes.

We have seen commodity prices in -- on the ag. side drop. I think that this industry is probably in the best possible shape going into 2009, then it's ever been historically. I think that directly brings levels in the farming sector in North America will be below double-digits, they are below 9%.

And so, they will be able to deal with whatever is required in 2009 and to the extent that we don't see the economics of Farm income restored to normal levels in 2009, they will take out production. I think that they will have exactly the type of impact on commodity prices that I expect. We will see a rise in those -- in their pricing structure, certainly in the medium term and certainly at the end of 2009. So, we're not worried about a conclusion of this year as we are not worried about 2009, at least for the first part of the year, based on the quality of the order board that we see.

It's a different story on the Car side. The Car side is going to continue to see a decline, a structural decline, in Europe with Italy leading the pack in terms of the percentage defined. We've indicated some numbers on the slide here. We expect Brazil to slow down in the fourth quarter. Its had an outstanding nine months, but that rate of increase will slow down in the fourth quarter. And on -- similarly in the truck side, which I think is going to post some weak volumes in the fourth quarter of this year.

So, overall, we know what's coming in Q4. I think we can reasonably peg the performance of our business over the next three months and the real issue is what do we see in 2009. And so getting to page 14, we -- there are too many variables at play here for us to be able to make an intelligent, reasoned, reliable call of what 2009 looks like.

The base case, which somebody asked, in -- well, what is our base case? Our base case is that we will deal with whatever is being thrown at us. We do expect volumes to decline in 2009 compared to 2008. It's going to be erratic and it's going to be geographically unpredictable. I don't -- I think that there are some economies around the world that will be hit in a different fashion. We have begun to see the impact of a potential credit squeeze on the Brazilian market as a result of a variety of factors, something that certainly would not have been expected 90 days ago. But we are seeing the credit market squeeze in Brazil happening. That will have an impact on demand going forward. There's a number of initiatives that the government is putting in place to ease the credit squeeze. How effective it will be is unclear to us.

And so we're prepared for an uncertain and an uneven 2009. As I mentioned earlier, organizationally and operationally, we have the plans in place to do so. We will continue to take production out of the system to match demand. We will continue to postpone CapEx in order to ensure that we have right levels of indebtedness. We're going to play this day-by -day as we see the market develop. We expect to get better clarity as we work our way through 2009.

This is Premier Global Services. We are currently experiencing an interruption in today's conference call. Please stand by presently, the conference will resume shortly.

Hello? Operator, am I back on?

Yes. Please go ahead, sir.

Thanks. I have no idea where I got cut off, by the way. I'm still alive and still kicking.

So, I will give you my views about 2009. I mentioned that I think we have the -- we're approaching 2009 in a very rigorous and disciplined way. We will continue to take production out of the system as required. We won't make decisions on CapEx. That will be postponed in the event that we see a prolonged duration of this decline in demand. The thing that is really important to understand is that whatever was embedded in the 2007 2010 plan is not impacted by what we're doing. Because these are short-term tactical measures that are being implemented to deal with a downturn in demand.

And that's why I think we feel rather comfortable, if we can come out of this crisis over a reasonable time that we'll be to embrace 2010 and effectively deliver on what we have promised back in November of 2006.

We have run, as I mentioned in my opening remarks, a simulation as to what the world will look like in the event of a worst case scenario. Which we do not think will happen, certainly not in the minus 20% range. But if all volumes across all the businesses were to hit those levels, reflecting all the impact on pricing, all the reactions that we will do on SG&A, the net result of all this will bring us to a trading profit, which will be between EUR1.5 billion and EUR2.3 billion. Net income would be about EUR400 million at the very low end and EUR1.2 billion on the upside. And the industrial net debt would go between EUR3 billion and EUR4 billion.

Somebody has asked the question, why the changes in income don't fall straight down to the net debt number? And that's simply because in the worst case scenario, we will do much more in terms of a response to the decline in terms of postponement of CapEx and other measures that we will -- would implement to improve liquidity.

It is a comfortable box to be in, because we will know, A, we know we will not bleed. Secondly, we know we can weather the storm. It's a statement that we made back in 2006 about a potential hit in 2008, we're reconfirming that statement today about 2009. I think we're in a much better position than we would have been had this happened last year. And so we're entering 2009 with a degree of serenity, knowing fully well what the implications of the downturn are.

I really have nothing else to add. I'm much more interested in listening to questions that you may have and trying to dispel some of the concerns that you've gathered over the last few days. So, I think that we're going to open up the call to questions. Operator, if you're on.

Thank you. (Operator Instructions). We'll now take our first question from Martino De Ambroggi from Euromobiliare. Please go ahead.

Yes. Good morning. Good afternoon, everybody. My first question is on -- actually is on net debt you were mentioning, you are ready to cut CapEx and so on. But just to add an idea, if in your guidance, in the worst case scenario, you are including the -- a dividend payment at least at last year? And what are the CapEx assumptions that you are planning in the two -- the worst and the best case in the minus 10, minus 20% market growth?

And my second question is on -- more general and strategic. So, what's your attitude in de consolidation process that we see someone is looking for in the car sector or in other sectors that you are present in right now?

Yes, if you adjust -- if you can go on mute, thanks. Operator, can you put this call on mute?

Thank you. Just to answer your first question on the dividends, they are dividends. There's a normal dividend payout assumed in the forecast that we've put together. The CapEx number that you see in the worst scenario will range between EUR4.5 billion and EUR5.2 billion in terms of CapEx. We have the capacity to slow it down further if we have to. But I think that's a number that was naturally built into the projections.

And a more fundamental question that you've asked in connection with our willingness to enter into what you consider, I think you called it a consolidation process, not just in auto, but elsewhere. I think the -- I think we can take a couple of issues right off the table. I think the CNH structure, I think that the Engine business and certainly components will not be businesses that would be -- they're irrelevant in terms of this discussion.

I think certainly on the vehicle side, there's been speculation about agglomeration. I think that will do nothing in terms of bringing about a more rational and poised response to a downturn. The bigger issue continues to be the car side and the way in which we would handle this.

It has been my experience that times like these, on a global scale, probably provide the right economic framework for those discussions to be had. And I say so not because I think that we're responding irrationally or emotionally to a downturn in demand. I've been incredibly public about this, about the fact that the car industry on a worldwide basis has been a destroyer of value historically now for a number of years.

This is a situation that cannot structurally continue. And I think it requires the wisdom of a number of CEOs to recognize the predicament that we're in and to try and find the permanent base solution to this industry going forward. And it's my sincere hope that the market -- that my colleagues, including Fiat, will be willing to entertain discussions that bring about some sense into this industry, to provide the right level of discipline and capital allocation that can deliver some real value back to the shareholders.

I sincerely hope it happens. I think that the biggest opportunity for that to happen is in the US and I think we're going to watch with interest what happens over the next few months.

As to whether Fiat is willing or not willing to play in that consolidation process, we will do whatever is required in order to ensure, one, the safety of our own business. And secondly, to ensure that we don't miss out on what I consider to be a potential industry reshaping exercise that will benefit Fiat in the medium to long term.

Okay.

All right? Does that answer your question?

Yes. Thank you.

Thank you very much.

Yes.

Yes? Go ahead. You had one more?

We'll now take our next question from Arndt Ellinghorst from Credit Suisse.

Yes. Thank you. It's Arndt Ellinghorst from Credit Suisse. I have two questions, please.

Firstly, could you explain a bit more your underlying assumptions for a worst case scenario regarding operational leverage in your company? You talk about revenues being down 10, 20% across the board next year and your EBIT to be in the range of EUR2.3 billion to EUR1.5 billion. So, why is the drop for the first 10%, let's say, towards the EUR2.3 billion from your original target of around EUR4.3 billion to EUR4.5 billion, quite significant. So, around EUR2 billion. And then its revenues are assumed to go down another 10%. You're just -- the EBIT would just come down an additional EUR800 million, whereas I would assume the first 10% are probably more easy to stomach versus the second 10%. That's my first question.

And the second question, if I may, I just want to ask you, Mr. Marchionne, when you are planning to see investors next? I'm hearing quite a lot of criticism and complaints from your shareholders and potential shareholders. That after you've been seeing investors on a regular basis, some years ago, you haven't been seeing investors, especially in London and New York for quite a long time. Do you have any plans to come over and see investors? Thanks a lot.

Well, let me deal with the second question. I don't know whether you're asking me on behalf of Credit Suisse to do a road show with you, but probably -- .

I'm actually not.

But we're -- we could probably talk about this offline, but it really does not reflect a reluctance on my part to see investors. I think we will put that on later.

We do this on a regular basis. We don't -- but it's certainly not something that we do quarterly. So, the fact that I've not been to the US for awhile, on this issue, is not a reflection our lack of interest. We will resume -- we will spend some time in the US and in the UK to try and explain this.

Your question about operational leverage is an interesting question. Because what is absolutely true, if you remember, back in 2006, I gave you the idiot proof way of determining operating leverage on the car side, which appeared to be not only simplistically obvious, but in our mind, it's true. I mean, I think that we know where break even is on the car side. It is linear, strangely enough, and the minute that we start hitting a couple of million, 840,000 vehicles a year, we start seeing the potential right across the sector.

It's a much more difficult question to answer in terms of the other businesses because the operating leverage in those businesses is not what you would have expected. It is not linear. It is -- and so the first 10% drop in those volumes would have really a fundamental negative impact on the profitability of those businesses because it would be substantial loss contribution against the relatively large fixed cost base. And this differs business-by-business. We feel relatively comfortable that the number that we gave you reflects the combined operating leverages of the sectors. But you should not take the Fiat auto case as an indication of the way the rest of the house runs.

Thank you very much.

We now take our next question from Massimo Vecchio from Mediobanca.

Hi. Good afternoon and good afternoon to everybody. I have two questions.

The first one is on the financing of your debt and related to the funding of the ADS, the capital markets. And also, I see you have sales and receivables for EUR6.3 billion. What's the actual situation on this? Are you able to issue new ADS? Are you able to still sell a receivable? And just as an update on the financing of your gross debt.

The second question is on the working capital. I've seen your slide. I have an additional question. Did you change the payment terms to your suppliers or customers? I've been hearing small component makers in different areas suffering payment terms from it. You're giving better payment terms to keep them alive? And also, on the dealer side, I heard the difficulties in financing working capital, and was wondering if you are also in a way supporting them? Thank you.

Let me deal with the -- start backwards. The -- we haven't done anything on the dealer side to try and help them on inventory financing. One of the things that we have done, obviously, to relieve pressure is to take out production from the system and effectively work out the stock levels across our organization and theirs.

But we are going to take a look at this in the fourth quarter of this year. We are going think -- we are thinking of ways in which we can extend the interest-free-period for these dealer, which is totally in line with what we think our competition would do.

In terms of this working capital addition, I think you're going to hear a variety of answers from our supplier base. I think they're all being, to the extent that there's been a volume drop and it's been impacted by a lack of activity from Fiat, I think that you're going to hear a variety of complaints about the way in which life looks.

And so some of the -- structurally, as a matter of policy, our payment terms have not changed and there may have been one or two interventions that were done in particular cases, but not significant to explain any deviation in the way in which working capital levels would work.

In terms of this -- the bigger issue of the financing capability, I'll deal with the ADS issue because I'm probably focused than Maurizio is today. And the only reason why I have this unfortunate experience is because of my infinite knowledge now of asset-backed securities, being on the Board of UBS.

This is a market, which is on the capital goods side, capital goods side of the ADS market, it suffered an absolutely indecent death because of the mortgage-backed security problem that arose here in the States between 2006 and 2000 -- I'm sorry, 2007 and 2008. It is a market, which would have -- otherwise is an incredibly efficient way of financing what I consider to be good businesses.

There have been sporadic access to that market over time. Pricing of that market is substantially -- have been prohibitive in some cases. Although I think some of our competitors continue to make access out of the pool.

I -- we have taken a much more structured approach to this lack of availability, which we consider to be temporary in the ADS market. We have got the room to finance some of these activities, we have found other arrangements on bilateral -- on a bilateral basis between CNH and other financial intermediaries that have provided funding for particular tracks of the portfolio.

We continue to work that position off and we're trying to find ways in which we can align this business with other providers of financing, which obviously are not as complete as the ABS market was, but we're trying to give proxies to bilaterals to deal with this.

I feel relatively comfortable that I think at the end, by the end of 2009, we will have found the right way to get this done.

The financing of farm equipment, which is really at the heart of the issue here, and which is at the heart of the demand curve in 2008 and prospectively in 2009, there are other agents in the marketplace, especially here in the US, whose sole job is to finance farmers. They are, because of their structure, they're in a much better position as CNH Capital is today, to try and provide that funding. We're trying to find ways in which we can piggyback on that structure and deliver equivalent results. But on the issue of sales of receivables, I don't -- there's no particular issue in terms of the way we do that.

No particular issue in terms of the (Inaudible - microphone inaccessible).

Have you seen any change in approach from the banking world towards your debt? On probably the rolling of your debt?

No, I think the -- I think we haven't seen one iota of a change. And, I mean, the world is not as bad as you think it is. I mean -- .

Thank you very much.

Where sound credit remains --.

We'll now take our next question from Max Warburton from Sanford Bernstein.

Yes. Good afternoon. It's Max Warburton.

I've got three questions, if that's okay. The first one is very simple, and I apologize if it's in the slide pack somewhere and I've missed it, but in the 2009 guidance, could you talk us through, if you're willing, some of the assumptions about each business? I mean, in this scenario, in this tough scenario, and also you made clear that you are factoring in some sort of Brazilian slowdown, is it possible auto is going to be near break even but CNH and Iveco are going to be the ones that continue to hold? Or is it Iveco that you're most worried about? Just some sort of feel by the key divisions? That's the first question.

And then the second one, on financing again, obviously when we as analysts look at the financial services exposure of these companies and this sector, you look like you've got lower exposure because a lot of the businesses were JVed. Have you had discussions with your JV partners, particularly on the auto side? And are you seeing any reluctance on their part to continue to finance Fiat automobiles in particular? That's the second question.

And then the third question, Mr. Marchionne, you talk about hoping to see sanity prevail and a solution to the industry and some rationality, etcetera, in the context of M&A. But when we looked specifically at what's within your control, e.g. at Fiat Auto, I mean, one could argue that the capacity the business is carrying in Italy is not what a rational business person, who could do whatever he wanted with a company like this, without political constraints, would carry. And could you just give us your thoughts on whether maybe now is the time to rethink the industrial footprint in Italy? Or whether the political constraints are just as fierce as ever?

And how -- I put this into context, it seems that Mr. [Garner Reno] went to the French government and asked to close two plants, or really slim down two plants a few weeks ago, and was essentially told, no. What's the discussion like for you in Italy please? Thanks.

Well, that's not a bad series of questions this morning. Why don't I start backwards and then we'll -- well, why don't we deal with the easy answer first, the question about the -- our partners' willingness and commitment to our joint ventures in terms of financing our sales. There's not been one iota of hesitation on the part of our joint venture partners, both on the -- across all our sectors and especially on the car side.

They continue to provide support for the activities. So, I don't -- we are not in the same box as others. Our partners do have a strong deposit base to support these activities and I do think that they would -- they are looking forward to a restoration of normal premium levels and they see this being a temporary phenomenon. And therefore, not a reason to wander away from a commitment they have made to us in terms of a joint venture. That's the first issue.

The second issue that you've raised, it was a discussion of the downturn and whether I can give you some color. I -- what we have factored in and one of the things that I cannot tell you, and I won't, is what is built in in terms of pricing assumptions in the various models. Because obviously to the extent that these potential volumes, the volume declines will happen, we will see pricing action on the part of ourselves and certainly we are not the ones to start it, but we would have to respond to competitors' pressure on pricing and therefore the result is a combination of not just the impact of the industrial backbone, but also a reduction in the top line as a result of pricing.

There are associated responses with those scenarios, which involve a severe take out of SG&A expenses, a substantial reduction everything, which looks even remotely discretionary. And the fundamental postponement of capital expenditures waiting for a restoration of normal trading levels. So, I cannot be more helpful than this, other than to tell you that I think that the process has been well reasoned. I think that we have looked at the implications of a downturn across all the potential levers of intervention that we have on the business and the combined number that we see reflects this.

As I mentioned earlier to a previous call, it is undoubtedly true that a linear function on the car side holds. So, we know where break even is and I think we have hit that number, which is that it would be a structural disaster if we hit a number like 8,040,000. But we begin to bleed at that level. So, we don't see that happening in 2009. I think it is even in the worst conjecture of potential events in 2009, is probably one of the most remote things that we see. That's not withstanding what we think is a reasonable decline in Western Europe and a slowdown in demand in Brazil.

It is more difficult, I think, to explain why the operating leverage curve is not a linear function anyway from CNH. It is not because of the size of the fixed costs (inaudible), right? I would just ask you to bear with me on that issue. I think we've looked at this. And I think it's reflective of our well reasoned approach.

The other question that you've asked, about the potential for Italian closures and the takeout of production capacity. I think the dialogue is not -- we have had no dialogue with the Italian government on this issue because I actually think that fundamentally that issue is not on the table. I think that we have sized these operations now to the point where I think we can sustain even low levels of activity in Europe, certainly not at the minus 20% levels that are provisioned as being the worst case scenario. But in normal trading conditions, the utilization of these plans, I think, is relatively safe.

We know, and I've said this publicly and I continue to reiterate it, and I'll speak for myself, but I would drag [Carlos Gone] into the process too, that if either one of us was to start off with a clean sheet of paper in Europe and say, Where are you going to put your production site? Then probably in all likelihood, none of us would create the existing infrastructure industrially to try and deal with this business.

So, we know we're starting off with a position, which is not ideal. I think certainly Fiat has made huge efforts in terms of optimizing the industrial backbone over the last 4.5 years. We will continue to do so. But I -- before we get involved in discussions about opening a dialogue on takeout of production in Italy, which by the way is not the most costly production site in Europe, Western Europe. And if it was to be put in the context of an industry-wide rationalization exercise, I am not sure that the Italian plants will be the first victims of such rationalization. I think there are much better candidates in that exercise to be offered in the Italian industrial footprint.

Could I ask just two really quick follow-up questions on this very subject?

If we look at the production base for Fiat Auto, would it be fair to say that if you closed, say, [Publicliano], the alpha plant, and put that production into Casino, if you were able to close the one in Sicily and put the production into [Milsey], it would give you a material reduction in overhead. Is that a fair question?

I'm going to give you an answer. I think, no, to the third question, but I can also give you an answer. My gut, and I make the comment subject to a right to revise it on the next call, but the potential benefit of those shut downs, and I remove for a moment the one-off costs associated with a closure, because if you include those, then the payback argument on that position becomes rather dubious. But my expectation is that those two plants that you talked about will probably give us a measure of a couple of hundred million in terms of trading profit.

Okay. And the second part of this, [Motosconi] was reported on the news wires, end of last week I think, saying that he believed the industry deserves State aid. I've not seen an official press release, but what is your understanding of what he means by that? I mean, we've had the request for aid for R&D to the EU, is it -- is that what Motosconi's talking about? Or he's talking about an Italian-type solution that will benefit Fiat?

No, I think he's talking -- I don't know. I have not spoken to Mr. Motosconi about his comments, I appreciate the interest that he's taken in the industry and the fact that he's providing support and qualified it in the way that he's doing.

I think that the real issue, and we need to understand it, and I reiterate it now for clarity, is -- and this came out of discussions that I had with my colleagues at [AFEA], The European (constructive) levels, where we have responded to the American government intervention in the current business by providing $25 billion worth of financing to the industry to try and deal with (inaudible).

It seems to me that the extent of the auto industry has, becomes more and more of a level playing field on a global scale. I think it is absolutely imperative that the European Union, in its totality, embraces this issue on an equal basis with the Americans and do not create the conditions for this industry to be globally uncompetitive.

And this is something, which I think is fundamental. I've -- it goes beyond the question of providing State aid, it has to do with the way in which Brussels is dealing with the CO2 legislation and it's probably one of the most precarious times in the history of European car activities. And I find it obscene, fundamentally, that the European Union, not only is it refusing to acknowledge the severity of the crisis that we're facing globally, but continues to burden this industry with costs, which are technically postponable and the benefits associated with such measures will be easily obtainable by alternative measures that will benefit the car side, such as removal from polluting vehicles from the roads.

And so the overall discussion is a much wider discussion, but I do not think that it impacts -- I don't think -- and I'm speaking on behalf on Mr. Motosconi, I'm the wrong guy to do so. But my understanding is that it was reflecting a view that he was trying to push through the European Union to try and get a unified position from the Commission.

So, illuminating as always. Thank you very much.

Thanks.

We'll now take our next question from Dens Shattner from Oppenheim Research.

Hello. Good afternoon, gentlemen.

I just want to come back to your scenario analysis and I just wanted to check whether in this 20, 20% decline in volumes, if there is any kind of pricing pressure and additional deterioration in the pricing assumptions?

Yes, there is.

And could you give an indication? Is it a 1 or 2% pricing decline here?

I would love to help you with your spreadsheet. But the problem that I have is if I tell you, I just told the competition, right?

Yes, okay. So, you have a reasonable pricing pressure in there, which goes in line with 10 or 20% volume decline, I assume?

We have modeled the price decline to reflect what we consider to be prevailing conditions in that environment.

Okay. Thank you very much.

You're very welcome.

We will now take our next question from John Buckland from MF Global. Please go ahead.

Thank you. Good afternoon.

I would like to come back to this idea, if normality is restored, then you can still make your 2010 objective. Because, first of all, is it really reasonable to expect normality to return that quickly, given that you've got a major recession, people unemployment rising, projects globally cancelled or postponed?

And if we aren't going to get this big trough in 2009, and normality is postponed a little bit, then clearly the volume of which the 2010 objective is based is going to be substantially lower. So, therefore, I just wondered if you could talk about that.

And then also, perhaps you could give us a bit more guidance on what your assumptions are for Brazil. I mean, are you actually thinking that Brazil will see the volatility in demand that we've seen in the past where from having -- we've had some big boom bust cycles in the past and is that a likely scenario again, going forward?

Okay. Let me deal with 2009, because I think you need to understand what I said about 2010. Then we can work our way back into 2000.

I can't express an opinion as to whether your description of gloom and doom is as accurate -- is more accurate than mine. I have no idea. I think your view is extreme, but the fact is it's going to impact a variety of activities across the world and it will be persistent and effective over a long period of time.

I think that what we have seen is the resilience of a lot of these economies to try and respond to this crisis in an effective way. What is unclear to us, obviously, is the fact that just -- the origin of this thing is financial. We aren't clear as to what the natural implications of this will be going forward. We have never seen this before.

But certainly history has taught me, in terms of running these businesses, that over a period of 12 months, these things all worked out. And so that's my view, but I -- it's like discussing religion. I -- we're not going to resolve it -- resolve this. We are both facing uncertainty in terms of assessing the future and I only give -- postulate my views about that could be. It's highly unlikely that this will continue much longer.

The 2010 numbers, and the affirmation of the fact that 2010 is achievable. I mean, let's probably let the cat out of the bag so we don't waste much time. If the financial industry had not dessiminated havoc, in terms of the global stability, Fiat Group would have made the 2010 numbers in 2009.

I think you need to understand this. Going the way in which the markets were scheduled to run, in a normalized trading environment, we would have hit the 2010 numbers a year earlier. And so the assertion about taking it up at the end of 2009 to get to 2010, it just screwed up our advancement plan.

We're going to be right back on the page the day in which we see our amount. And in that context, how Brazil responds is, in our view, is going to respond in a much more rational way to the decline because the political leadership and the way in which the social context of Brazil is being structured today is a lot more amenable to normalized trading levels. We do see a drop in volumes in 2009. We do expect the credit business to be down '09 versus '08. We do expect a slowdown in Trucks. We expect a slowdown in Construction Equipment, but I think it will follow along and effectively continue to perform as most of the other normalized economies will perform from this point on. So, that's -- if the erratic behavior to which you made reference to does happen again, it's going to impact on the wonderful break even curve that I've told you earlier, right?

I mean, both -- if we don't hit the 1,840,000 vehicles, we'll bleed.

So, what -- yes, so what you're saying is that when you talk about the objectives, you're -- if you like, if you can imagine a plane flying, if you like, you have -- you were climbing and you were climbing rapidly, such that you could reach this 2009 before -- a year early. But you've hit an air pocket and the whole thing has dropped. But you're -- when you get to the bottom level, when your -- normality resume, you start climbing at the same rate as you were. You're just going to be at a much lower level? That's -- is that one sort of way of looking at it?

Yes. I mean, the other way to think about this is I have to go on vacation for a year because you guys screwed up the market, so I can do nothing in 2008, I need to resume in 2010. I mean, this is a vernacular, pedestrian version of what I just said.

All right. Well, let's hope we do get to that normality sooner than later.

You and I both, especially for your sake, thanks. Next.

We'll now take our next question from Paolo Mosole from Intermonte. Please go ahead.

Good afternoon. I have three questions, if I can.

Coming back to the third quarter results, I would like to have more colors on the working capital trends by region and possibly by division, which are those that had the most significant loss in terms of working capital?

And as far as the guidance for the end of the year, what kind of assumption you make for working capital in Q4 and CapEx in Q4?

And the final question, on the, again, working capital in your worst case scenario, what kind of assumption you have on working capital in the case of a 10 or a 20% drop in volumes?

Can you repeat the last question? Sorry.

In your worst case scenario, what kind of working capital assumption do you have in case of a 10 or 20% drop in volumes?

Well, we're not -- let me answer -- try and answer the last question, because I'm not sure what you mean. We're not changing the working capital configuration of Fiat Group. It's going to continue on that base and therefore we expect to get a 20% volume drop. You're going to see a reversal of that relative portion of the drop that relates to auto, you're going to see a realignment down of both the vehicle and CNH, which have been in a positive position historically. But I think that we will see a restoration of levels.

I -- and so it's part of the simulation exercise. Nothing is changing structurally in the way we run the business.

In terms of the -- you want to get some additional color on the way in which the business is run. There have been two things that have impacted the third quarter. One is the fact that we have -- and I might say I think we have probably misjudged the extent of the decline and we've kept the production in place in the third quarter for a period longer than we should have done. And so we are, especially in two sectors. One of them is on the auto side and the second issue is on the construction equipment side of CNH, where we have effectively allowed a certain level of stock position to build.

We have taken out that capacity out of the first and the fourth quarter. So, we're going to work our way out of the stock position and working out of the inventory levels, certainly by the end of December in the case of auto and it make take probably 30 days longer in the case of construction equipment depending on the extent of decline in the market.

But so it's been a combination of these two. I mean, the thing I keep on repeating is that the auto side has negative working capital. And to the extent that you have production drops and reversals, it hits you on a cash basis. And that's why that process stops the minute that your normalize production levels. Once you start ramping it up again, you won't throw off cash in addition to earnings as a result of the reversal.

Does that help you?

Well, just to follow-up on the -- your assumption you make of the working capital. As I am -- if I understood it correctly, you assume a modest worsening of the working capital in those two scenarios. But I was wondering what are really trends in working capital, if you go back to a significant percentage of sales as a -- Fiat sold in the past?

No, because -- no. And that's why if you go back to what I've said earlier, it was sort of rigor and discipline with which we were approaching this. We won't take production out.

I mean, we've done it and we will continue to do so until we provide -- until we normalize production with demand. And we need to be clear about this. This is a cardinal rule inside this house. We will not run plans to produce unsold inventory. You can just get it out of your head. Is that helpful?

Yes.

But trust me, if there's anything you are not sure about 2009, that you can be sure about.

Well that's true, but there was capital also made by the payables, that dropped, I suppose, that significantly and that would have a quite negative impact. So, that's maybe more a matter of faith?

Well, no, look, the payables are the payables and they only relate to things that we buy to make (inaudible). If we don't make them, I don't pay anybody. To the extent that I don't buy them, I don't own them -- own anything, but I also don't have the inventory on conversion. I mean, it's a very simple thing, right?

At the end of the day, if the number is a negative number on sales, to the extent that the number goes down, it will reverse on the cash book. Once that decline stops, that bleeding stops structurally. It's within the system. It's predictable and quantifiable. So, to the extent that we hit rock bottom and we start rebuilding from then on, from the time that we hit rock bottom to the period of ramp up, we will throw off cash. It's structural. We're not going to change terms. We're going to continue running this business as we run it.

Okay. Just one final follow-up. In the worst case scenario, are you assuming that you could cut entirely the dividend next year?

No.

Okay. Thank you very much.

You're welcome.

We'll now take our next question from [Yulesay Masumante] from Royal Bank of Scotland.

Hi. Good afternoon. [Jose Masumante] from RBS. Two broad questions.

The first one, on cars, could you please remind us what is the program Casa Integratione. Have you started using this program in 2008 and could you just help us understand how the mechanics work and how could it -- if you -- sorry?

Go ahead.

Yes. How -- could you let us know how (inaudible) during the downturn in 2009?

And on the truck side, I was just wondering if you could give us some details of the increase in truck deliveries in South America? Which products are driving this increase in deliveries and what -- the -- how is the mix between light and heavy.

You may have to repeat the last question, I was getting details on your Casa Integratione. But could you repeat the last part?

I was just wondering, in the South American truck market, your deliveries are increasing very sharply. If you could give us, I guess, some color on which model is driving that and how is the mix between light and heavy in South America? If you expect this strength to continue through 2009?

Okay. Well, the answer is we had an outstanding year in 2009. We're going to see a slowdown in Brazil in the fourth quarter. We are going to see -- I mean, we probably our optimistic view is we're going to be seeing a relatively flat market in 2009 in Brazil. But the -- it is not on the light end, it is much more on the heavier end of the offering, in which we are gaining significant market share.

We have done some significant product launches in 2008 in Brazil. We have restored our position in the business, which has been directed for a number of times. And probably that's one of the best stories in terms of our Latin American activities.

In terms of this question that you've asked about Casa Integratione in the system, it's relatively simple. We -- you cannot put people in Casa Integratione or temporary layoffs for more than 13 weeks. And you can only use it for 52 weeks out of a two-year period.

Is that clear?

That's very clear. Thank you.

Well it's a very simple rule. And with that rule, we can get all the flexibility we need.

Okay. Thank you very much.

We'll now take our next question from Thierry Huon from Exane. Please go ahead.

Hello. Good morning. It's Thierry from Exane.

Two specific questions. One, could you give us any idea of the inventories level at the end of Q3 in the car divisions? And the second one is about the -- what happened in the power train unit? I mean, the profitability declined really severely. Does that mean that part of fixed costs of the cars on the truck are located in these divisions? And make the operating profit of truck and cars better than it would have been if this part of the business had been still in these divisions?

And last question is about the consolidation you mentioned. If Fiat is ready to have discussions or talks with any partners, do you believe that a prerequisite would be to move debt out of Fiat Group up to [Efill]?

I have no way of answering any questions in connection with Efill, so I take it right off the table. But I don't see the structural necessity to move anything, anywhere that was the objective.

I think it can be done within Fiat Group for a variety of reasons, whatever the ultimate architectural arrangement would be of the transaction. I think we have this information in the pack for inventory levels? No, we don't. But I think that we have had -- I cannot tell the total bill, but we've had an increase of roughly 11% in dealer inventories and about 5% on our all-stock levels between Q2 and Q3.

Okay.

And that's going to be worked off over Q4 because of the takeout of production that we've done.

What I mentioned earlier about not having reacted early enough is that we allowed that to happen at the end of Q3, but hindsight is 20/20.

Okay.

Now the other question that you asked me, I wasn't sure, but if I understand the stuff about trading profit on the engine side. The engine business provides a large chunk of its product back to the Fiat Group units. I mean, it is -- one of the reasons that we set it up was we've had to allow for all of the operational efficiency associated with running engines, which is fundamentally a different business than making cars elsewhere. Or anything else that we do, really.

The transfer price mechanism between FBT and the rest of the house varies from sector to sector. But they do wear the consequences of a severe downturn in volumes, which is what they're seeing. And so it's reflected in the pricing and not passed on to the fixed portion of the costs, which is unabsorbed as a result of lack of production. And therefore it has an impact on our volumes.

But it was designed that way to incite them to go out there and get third-party business to offset whatever declines the group would have. And I think we continue to work with management to get that equation right. I don't think we're going to change the transfer pricing mechanism. And I know Alfredo's listening to the call, but Christmas is going to come next year, not this year.

Okay. I understand. Thank you.

Thanks.

We'll now take our final question from Adam Jonas from Morgan Stanley.

Hi. It's Adam Jonas from Morgan Stanley. Just a --.

Hi Adam.

Hi. How are you?

Good.

Just a follow-up on Brazil. You mentioned that you expect a relatively flat market in 2009. Was that kind of in your base case or is that your worst case?

That's in my base case. The worst case is about 20% drop.

Okay. Following on the emerging markets theme, of all of the emerging markets that Fiat is exposed to, throughout your businesses, which is the one that concerns you most right now? I know things are moving quickly and you probably have to go back to like the Reuters screen to probably answer that question fully. But given what you know now, which is the one that is -- you're most concerned with? Not sort of the one that you're most sensitive to, because I think we know the answer to that one.

It's probably China.

And then what, if I can ask, after China? Given that you have --?

Probably Latin America.

Okay. And if I can ask the similar question for currencies. Again, knowing that currencies are trading like banking stocks recently, what's the currency you can single out, you're exposed to, that could have a big potential negative impact on your base or worst case next year?

Yes, let's agree that it's purely translation and so it's not a transaction that's exposed.

Yes.

The one that would cause us the most damage is a wild fluctuation in the US dollar. This -- if the US dollar and the Brazilian real still doesn't -- the two ones that fundamentally take the financial exposure of Fiat Group. So, if we see erratic behavior. I mean, the decline in the reals, which I -- nobody understands, that we've seen in the last little while, is going to negatively impact our reported earnings for Fiat Group Auto, it's that simple.

And on the US side, CNH, from the strengthening of the dollar versus the euro, will show a better profit.

If you look at the quarterly results, I think the number in US dollar terms for the quarter was twice what it was in Europe. I think that was the impact of foreign exchanges on the activity, correct?

The other question is, fundamentally, I don't understand the US dollar today. So, I agree with your assessment, there are probably cracks to behavioral banking stocks. But once we get some normality on those, we'll see the US dollar restored to normal trading levels. But I think it's significantly overvalued from where I see it today. But having said that, I think we'll manage whatever comes.

Okay. Now given the level of global content in Brazil, can you give us a sensitivity of real-euro moves and CN Auto operating profit or is it so localized, that's purely a translational impact at this point?

It is truly translational.

Okay. And then finally, exposures to any of the somewhat exotic Eastern European currencies that have been quite radical recently? Any exposure that we need to know about there?

No.

Any bullish production, but is that -- is it a wash given the content that you have versus the sales that you have in a market like Poland?

No. We're short. I mean, we've actually --.

Got it. So, you're benefiting from the body movement is what you're saying?

I'd say we are.

Significantly? Or --.

No, I mean, we are -- we're 400,000 cars in Poland, right? We only sell 400,000 vehicles on Poland. The net difference is what it is.

In the local content [embodies], now?

Totally. It's totally local. Including engine supply, which is most of what we supply.

All body. That's very helpful. Thanks and good luck next year.

Thank you. Operator, I think we're done. I see no names on the screen. There are no more willing victims to take me on this morning. So, I'm ready to let go.

That concludes the question and answer session. I would now like to turn the call back over to Marco Auriemma for any additional or closing remarks.

Thank you, Maria. And we would like to thank everybody for attending. If you have any additional questions, please do not hesitate to call us.

Have a good day. Bye.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.