Stellantis NV (STLA) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to today's Fiat 2009 Second Quarter and First Half-Year Results Conference Call.

For your information, today's conference is being recorded.

At this time, I'd like to hand the conference over to Mr.

Marco Auriemma, Chief of Fiat's Investor Relations.

Mr.

Auriemma, please go ahead, sir.

Thank you, Maryann.

Good afternoon to you all or good morning as the case may be, and welcome to Fiat's 2009 second quarter webcasting results conference call.

Mr.

Sergio Marchionne, our Chief Executive and Mr.

Maurizio Francescatti, the group Treasurer will host today's call as usual.

They will use the material you should have downloaded from our website at fiat.com.

And after introductory remarks, we'll be available to answer the questions you may have.

Before moving ahead, let me just remind you that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement, including presentation material.

So now, I'll turn the call over to Mr.

Sergio Marchionne.

Good afternoon to you all, and thanks for attending.

I've had a chance to review some of the initial remarks for the release of the earnings this morning.

And to be perfectly honest, I think we probably have missed the market about the significance of Q2 in terms of the automotive sector.

And more in particular, I think the performance of -- Fiat's performance in the quarter will be viewed in the context of our competitors, not only on the car side, but in terms of the truck and the construction and agricultural equipment business.

I think as you can see from the title of the presentation, I think that we are -- we have concluded the second quarter well above our own internal expectations, and this is due to a couple of reasons.

I think that first of all I think we've done an outstanding job of managing the operating leverage of the [past].

We've done a huge amount of work to ensure that we will not be creating and overstocking the distribution channels, both in the car and on the truck side.

We've been incredibly rigorous about maintaining manufacturing discipline in the system.

And this has worked its way out in terms of the substantial reduction in stocks for the group, which have been in excess of EUR1 billion for the quarter.

And I think it's an indication of the way in which we intend this business, certainly for the remainder of 2009 in anticipation of the recovery, which in whatever muted form will come will come in 2010.

The second issue which I think is significant in the quarter is that when you look at it for the composition of our P&L, we have also been incredibly aggressive in removing what we call discretionary expenses in terms of the performance of the business.

We're clocking in excess of 15% of reduction year over year in terms of SG&A.

Our internal expectation is that we'll finish well above that number by the end of the year.

But it is one of the reasons why from a trading profit standpoint we're able to produce margins of 2.4%, which are a significant number in a market which has really at least in a couple of areas been absolutely devastated by a lack of demand.

If I can just move to page two and start getting in particular with the performance of the group.

We've had roughly nearly 25% drop in top line quarter-over-quarter, Q2 '08 and Q2 '09.

And the impact, especially in an industry which is so capital intensive and where operating leverage is so crucial, the ability to produce earnings in an environment like this is significant.

And I think as some of you in assessing the performance of Fiat have underestimated the impact that this contraction in demand has on the manufacturing infrastructure of ourselves and of our competitors.

I haven't seen also numbers from the competition yet.

We've seen a couple of data points come out yesterday.

There are a couple of things I don't understand about Caterpillar numbers, especially on the engine side, but we need to spend more time understanding them.

I think that the size of the [right] numbers that are being posted indicate how difficult it is normally to try and balance these issues in a market which is -- has contracted at the speed that we've seen so far.

And the fact that we've been able to manage it and manage it well and produce earnings in this environment is going to push Fiat, I think, probably to be an outlier in terms of Q2 and hopefully for the whole of 2009.

The automotive side was down, as you can see from the slide, about 12%.

We had an 8% volume reduction at FGA.

But we have been pretty disciplined in terms of making sure that the manufacturing piece of this puzzle is only turned on to the extent that we can see demand.

We are looking -- and we've finished the quarter with probably one of the strongest order books that we've seen in the business in a long period of time.

It's certainly consistent with the size that we have seen of this order book at the end of Q1.

And so, we're expecting the rest at least of 2009 to continue along these lines and for the sector itself to perform well and probably be the biggest profit contributor to the Fiat Group's results for the year.

CNH is a result of a mixed bag of results and we'll speak about this as we go forward.

But the AG side has done relatively well.

There's been a real shrinkage of demand out of Eastern Europe and CIS countries, mainly driven by credit squeezes.

And, it's a market which has fundamentally not been there for us in Q2 and that justifies a large portion of the shortfall in the AG business results for the quarter.

But the more important piece of CNH is the fact that the Construction Equipment business has suffered a decline which is certainly unprecedented.

We're now seeing volumes -- and we'll talk about this when we get to the chart -- we're seeing volumes that we have never seen in the last ten years.

And so, this has made it necessary that we intervene structurally into the business.

We'll talk more about this as we go forward, but these are conditions that obviously need to be addressed and the group is doing so.

Iveco is probably the Cinderella story of this business.

It lost half of its volume, and it still was able to post a profit.

This is due to a combination of things; special equipment sales have done well.

Latin America continues to perform well.

But I think (inaudible) and his team have done a great job of managing the P&L of the sector and in a market which has been otherwise been devastated by an absolute lack of volume, not only in Europe, but probably across the world.

So the trading profit world of EUR310 million, although it's significantly lower than it was in 2008, to us represents a significant achievement in performance.

It is in our view probably the best we could've achieved by driving optimal manufacturing efficiency, a balancing of demand and supply, and taking all the unnecessary cost out of this business.

So I'm pleased that the sectors overall performed as well as they did.

The largest portion was 90% of the [schema] of the car side.

And this has been the sector that has been maligned in the past as being the illness of Fiat.

In a down market of this caliber, it's performed as well as anybody could've possibly expected.

We have invested in restructuring of this business.

Most of it has been absorbed by CNH in terms of headcount reductions, which are substantial.

We are slimming down the organizations, mainly to deal with the downturn on the construction equipment side.

But I think all the other sectors have taken and are taking provisions to try and reduce the overhead cost associated with running this business.

We expect that we'll spend about EUR300 million throughout 2009, and we've spent -- we're about halfway there at the end of Q2.

All of this and especially the restructuring charges has pushed us into a loss of EUR179 million.

We would've been very close to breakeven, about EUR25 million plus -- EUR25 million negative if you were to remove the restructuring charges from the P&L.

So, from -- given today's market conditions, I keep on saying this I think we're pleased that we could not have done better than we've done so far.

We have, as I mentioned earlier, applied some pretty stringent capital controls on the balance sheet.

Our CapEx is about EUR1.4 billion for the six months.

It's not substantially lower than it was a year ago, I think a couple 100 million lower than it was in 2008.

But the more important issue is that I think we've managed working capital levels well.

And we continued all the efforts to destock the distribution channels, both at dealer and at company inventory levels.

All of this has caused liquidity to increase to about EUR6.4 billion.

Our net debt level are now at about EUR5.7 billion.

And two other significant things have happened in the quarter.

We have finalized our deal with Chrysler; it's now more than a month old.

And so, we have -- and we'll talk about this more as we go forward and near the end.

But we have started the process of integration, as we have promised the US Treasury in terms of providing platforms and engine technology to Chrysler.

We're actively engaged in the restructuring of this business.

We do have a new management structure in place.

And we've applied the same operating model that we've used, both at FGA and the Fiat Group overall, in terms of managing this business going forward.

The board of Chrysler is meeting -- the new board of Chrysler is meeting next Monday, Tuesday, and Wednesday for the first time to try and address Chrysler's future.

And I think it would be premature for me to make comments that have not been discussed with the board until then.

I can only tell you that the level of engagement is relatively high.

I'm very, very confident that the measures we're putting in place will pull Chrysler out of the crisis that it found itself in.

The level and quality of the management team is outstanding.

And I think we'll begin to see the impact of the technology transfers in the latter part of 2010 as some of these platforms become operational in the US.

And I think that one of the things that we've totally underestimated and I think we knew internally, that is the reverse flow of technology and know-how and architecture back into the European side, which is certainly going to help us in terms of the development of platforms in the C and D segments, where historically Fiat has been weak.

In terms of guidance, we're confirming everything we said at Q1.

We're going to make over EUR1 billion in trading profit for the year.

We'll spend about EUR0.5 billion in unusual one-off charges, including restructuring of about EUR300 million.

And net, we'll end up with about EUR100 million worth of profit.

And net debt levels will be below EUR5 billion.

If we can move onto page three -- and I won't spend much time on this, I think most of these items are known.

All the sectors are down year-over-year.

I think the most significant drop has been in Iveco, which is down 43% year-over-year.

The one that's the least affected has been the car side, which is only down 11%.

And there's no doubt that the volumes of FGA have been helped by a set of eco-incentives that have been put in place in Italy, France, and Germany to encourage the substitution of older vehicles which did not meet adequate ecological standards.

I think the product offering that Fiat has today is ideally suited to deal with that market demand, and certainly was designed -- has been created in order to deal with what we have known now for awhile to be a primary objective of the European Union in the substantial reduction of CO2 emissions.

So, the portfolio of products that we have are ideally suited to meet that objective.

I think we will continue to see strength in these sectors going forward.

I think some of you have got concerns which I think we will probably take up as part of the question and answer process about what will the market look like without the incentive system being in place.

We have seen some estimates as to where volumes will be in western Europe for 2010.

I think we're going to have a very -- it's almost a philosophical discussion about what will happen in those circumstances.

The only thing I can tell you is that, if in fact the volumes do drop because of the removal of eco-incentives, we will continue to balance demand and supply as we have done across the other sectors.

And I would expect the Car business will continue to be in the black, but certainly not in the magnitude that we will see for the whole of 2009.

CNH, as I said, mixed bag of results -- we'll deal with this more later.

I think Iveco we're particularly proud of, especially given what's happened to the heavy end of equipment sales.

We saw Volvo's numbers yesterday, and I think we will see more numbers coming out from the European competitors in the next 30 days.

I think that market is so down year-over-year that the ability to try and manage the manufacturing side of this with the demand is appearing roughly two-thirds of the heavy end of the market, makes anybody's life fairly uncomfortable.

We've been able to manage profits in a quarter like this, which is incredibly encouraging for the remainder of the year.

Components -- I think that we were able to substantially reduce the losses given the lack of volume.

Marelli achieved a breakeven position both (inaudible) and Teksid.

But these are totally driven by a contraction of demand.

In the case of Teksid, which makes engine blocks, the loss -- the lack of profits was solely attributable to the lack of industrial engines.

The bottom fell out of the market in Q2.

And it's reflective all the way upstream into the truck and to the AG and to the Construction Equipment side.

So, it's a business that will not see a recovery until those businesses firm up.

If you go onto page number four, I think there's nothing unusual about this.

I mentioned earlier the EUR152 million of unusual items.

I think the mark-to-market equity swap gave a positive of EUR39 million for the quarter, which reflects the movement of the share price in Q2 of '09.

The cash flow on page number five is relatively straightforward.

You can see the release of EUR752 million from working capital, which is substantial, EUR1 billion for the semester.

We continue to invest and invest well, although on a more rigorous basis on capital, where we're EUR1.4 billion -- I think we did EUR1.6 billion last year.

The number is expected to be over EUR3 billion for the year, closer to EUR4 billion than to EUR3 billion.

I think we need to see.

I mean, these are the internal projections.

I think we'll spend substantially less than the number that we've got in our forecast.

And if that in fact happens, I think we will improve our net debt level position at the end of the year.

That's fundamentally it from page five.

You can just skip to -- skip the title page on six and move onto seven.

This is our view of what the car business is expected to do, both in Western Europe and Latin America.

We are expecting the market to be down for the full year roughly five percentage points in Western Europe, much more in Eastern Europe, but that doesn't impact on our results significantly.

Brazil is expected to be flat.

The more disturbing part of this chart is our estimate of the performance of the light commercial vehicle sector, which is the single largest contributor of profit to the Western European business.

It is a business which is down, as you can see, roughly 34% year-over-year.

It's early in the quarter, we expect some recovery in the second half of 2009 simply because we've experienced some loss of volumes already in 2008.

But, it is a number which is going to significantly impact on our trading profit performance.

And I think that we have it -- and I'm not sure we have it in the slide.

But if you look at our trading profit reconciliation, which I think is attached as an appendix to this presentation, it's reflected in the red bar that deals with product and mix.

And that mix in terms of mix is really the loss contribution from our commercial vehicle side.

Brazil continues to perform well.

We have seen decent performance also on the light commercial vehicle side out of Brazil.

We may see some positive numbers coming out of Brazil in the second half.

But I think our internal assessment is that if we were to match 2008 volumes, we will be fine.

The significance of all the work that we've done in terms of the repositioning of the brand and the realignment of our product portfolio to deal with what we perceive to be sort of the current dominant theme in the marketplace is seen on slide number eight, which deals with our market share, 34.5% market share in Italy, 9.2% in Western Europe.

These are significant numbers.

We haven't seen numbers like this since the early part of 2000.

I don't have the historical charts here, but certainly current management has never seen these numbers.

On the light commercial vehicle side, we are now together with Iveco the largest producer of light commercial vehicles in Europe.

Notwithstanding the fact that the Italian market share dropped to 40.1%, something that was totally driven by desire to maintain margins and to avoid a price war with the competitors, our European market share has grown to 14.4%.

And we've achieved significant growth in most of the jurisdictions, notwithstanding the decline in volumes, which have been substantial and pervasive throughout Europe.

As I mentioned earlier, this emphasis on tight inventory control you can see on page nine.

We're now sitting on 1.3 months worth of sales using the average of the latest three months as an indicator.

This is the lowest level that we've ever seen here inside Fiat Group.

It's a number that we continue to maintain as being a primary objective.

We've got a very lean distribution system in cars; some of it is driven by the fact that the order book is as strong as it is.

But I think that we find that -- with dealers having less than a month worth of inventory on hand, it is making the management of the margin process much easier to confront.

It's something that we're dealing with at Chrysler today.

I think it's a necessary discipline for American car producers, and I think a lot of it is ultimately going to benefit the organization in terms of margin retention.

Just to give you some numbers out of Chrysler, we started the year with about 650,000 vehicles in stock.

We closed the month of July with less than 200,000 vehicles on hand.

And so, as we restart the industrial machine in the US, we're going to keep this in mind and trying to ensure that we maintain the inventory levels at optimum points without trying to really stop the distribution channels and cause pricing distortions as we go forward.

Page number ten deals with the industry outlook and volumes on the AG side of CNH.

Tractors are down, although I think the numbers for full year of 2009, I think these are -- I think they're realistic.

They're probably on the pessimistic side of the spectrum.

We expect tractors to be down 10% to 15% year-over-year, and combines are expected to be down 25% to 30%.

But that is not a North American problem.

As I mentioned earlier, I think most of it is driven by the CIS, where I think volumes have dried up substantially.

We have performed well notwithstanding these market conditions that are less than buoyant.

I think that we have done well, certainly with the Case International Harvester brand across the world.

I think we're now spending a lot of time understanding the performance of the New Holland AG business across the world, especially in terms of its ability to compete in the US.

And, I think that we want to make some adjustment to the product portfolio of New Holland AG to ensure that we remain as competitive as we need to be, given where certainly the target market for New Holland AG is going, which is phenomenally different from Case IH business is directed.

We expect the market to continue to perform well.

I think the profitability of the sector is not in question.

I just think we need to wait until the recovery of the international market is in place so we resume the growth story, which has been at the heart of CNH now for the last 36 months.

If you move onto slide number 11, this is our horror slide.

This shows you on the light side markets were down 50%.

On the heavy side, they were 45% down.

And this is an illness which is spread across all geographies that we cover.

And it reflects and probably the lowest possible point of industry performance that we have ever seen and that we even remotely expected.

2008 wasn't a great year to begin with, but 2009 is proving to be an even more challenging year.

If you move onto slide number 12, I think you can see what our expectations are.

We'll see the market down 45% to 50%.

The chart goes back to 1999.

And I think we're going to close the year with levels that are below any one calendar year starting from 1999 until today.

So, this is one of the reasons that I think we've tackled the issue of the reorganization of commercial organization of construction equipment.

I think we've got every -- both New Holland and Case on the one hand, then I think that we're going to certainly simplify the way in which we're running this business on a global scale.

And hopefully, we'll be able to bring this business back to profitability sooner.

Slide number 13 deals with inventory trends by quarter.

As you can see, the Q2 buildup on the AG side is totally due to seasonal factors.

But I think that we continue to drive inventories down both at dealer and company level.

The problem continues to exist on the construction equipment side as we continue to unload the distribution channels from -- most of us went through, which is an overproduction cycle back in 2008.

And so, most of our construction equipment plants are down.

They will continue to be down until we see a recovery in the market.

Outlook in trucks, as you can see, substantially down, Western Europe down 30% to 40% for the year, Eastern Europe down more than 50%, Latin America to about minus 10% to minus 20%.

I think that this is a market which is obviously associated with economic cycle, until that picks up, we will not see a substantial increase in volumes.

Our people have looked at the order book going forward.

Although there is not a lot of strength in that order book, there appears to be some indications of steady volume increases over the remainder of 2009.

This is nothing to be excited about, but I think it does indicate that probably we have seen the lowest point in the cycle and that we will rebuild positions from here.

If you look at page 15, this is the inventory trend by quarter again these are on the truck side, both dealer and company inventories, and this destocking story continues to be the main driving theme of performance here.

We're not turning on the manufacturing assets until we can work our way out of these inventory positions.

Page 16 deals with our purchasing efforts.

One of the things we were able to do in 2008 -- if you remember the early part of 2008, the main concern was the escalation of raw material prices.

We are able to manage our way out of that issue by postponing as much as we could the price increases.

We suffered the impact of that in Q3, Q4 of 2008 and in part in the first quarter of 2009.

We're now bringing back our purchasing basket down to more realistic levels.

And I think our target of achieving roughly EUR0.5 billion in savings year-over-year is confirmed.

I think we've achieved part of it in the first half of this year.

It's less than half of the expected savings, but I think the remainder will come in the next semester.

Page 17, which deals with the way in which we're approaching this global downturn -- I mentioned the fact that we do have incredibly tight control on the production system to ensure that we meet market demand.

We're going to continue to use temporary layoffs to balance the two functions.

On the Italian plants, we have tabled the issue very clearly with both the unions and government authorities about the need to do this in order to ensure the health of the business going forward.

And, we have asked for continued access to the temporary layoff schemes once the traditional limits have been capped.

And I think that (inaudible) that has come back is positive.

And so, I think we'll be able to navigate our way through the rest of 2009 and beginning of 2010.

Overhead costs continue to be monitored like a hawk.

I think I mentioned the fact that we're well above the 15% reduction in SG&A Q2 '09 to Q2 '08.

Our expectation is that we'll maintain this rhythm for the end of the year and in all luck, we would exceed that level.

We are -- we continue to bring down the headcount.

We've now achieved -- I mean, as an example, we've achieved agreement with the unions for a permanent reduction of 350 people in the Madrid plant, but this type of activity is going on everywhere.

And the most significant contributor to this rationalization has been CNH, which has carried out this activity on a global scale.

We confirm the targeted savings on implementation of world class manufacturing.

This is something which we'll continue going forward.

Two of our plants now achieved -- at least on the cost side have achieved silver medal levels.

And I think we take this as an incredibly positive sign.

The initiative has been rolled out to Chrysler.

All the Chrysler plants have now embraced the same type of production philosophy.

And, I think that we'll be able to see the benefits of this early in Q4 of 2009 for the remainder of 2010 in the United States.

Couple of words on the restructuring of CNH -- as I said earlier, we do need to -- we have reorganized and consolidated the construction equipment side.

We're investing up to EUR250 million in order to improve the operational efficiency and adjust the cost base of this business.

And, we've announced the closure of one of the plants in Italy.

And we will continue to take production capacity out of the system until we find the right balance between market demand and our own production capacity.

Moving onto slide number 19.

As I said earlier, I think regardless of the early comments that have come out from the analyst community on Q2, these results are certainly in line and better than what we had as internal expectations.

But, we are beginning to see the benefits of all the restructuring and the cost containment measures that we put in place at the end of last year and in Q1 of 2009.

We do expect results to improve in the second half of 2009 as a result of a variety of factors, not all of which depend on the improvement in the demand function.

But, I think that we feel relatively comfortable that we've got a good handle on our cost structure and that we'll respond as we need to respond to whatever market challenges we'll be asked to face.

Based on what we know today, we will confirm and are confirming the guidance that we gave out at Q1, EUR1 billion in trading profit, net of EUR100 million, and debt levels of below EUR5 billion.

And I think that -- there is another chart on page 20 which deals with Fiat and Chrysler.

We did -- I mean, this is a summary of the transaction.

We're 20% shareholders of the new Chrysler Group.

You can see who the other shareholders are.

We are -- we have recorded the position in Chrysler at zero and therefore, we are not going to book any losses coming out of business if there are any losses going forward; and I think eventually there may be some, but we have a zero cost base in the asset.

The Fiat and GATS agreement has been finalized at the beginning of July.

We're going to be investing.

We've finally resolved our sort of strategic dilemma in China.

We found a reliable partner with whom to build a future on the car side in China.

We did sign the agreement in front of the President of the Republic.

So, I think that we do -- it's a reflection of the type of institutional support that this venture will receive.

And I'm incredibly pleased that at least that part of the quest has been put to bed.

We move onto page 21.

I call this, odds and sods but fundamentally have three issues and I'll raise them here, and we'll take questions on them.

I think probably that's the best way to deal with it.

I'll just give you some general comments.

The first one is that I think it's incredibly hard to try and estimate what the removal of the eco-incentive programs -- what the impact of that removal will be on demand.

I think I've seen some numbers that range anywhere from 11 million vehicles in 2010 to 12 million.

I think that we need to -- we will manage whatever happens as a consequence.

There's not a single doubt that if the eco-incentive system -- if the eco-incentives are removed from the European arena in 2010 that they will have a substantial impact on demand.

I think we've proven the fact that we can weather that storm.

We will adjust production to meet those market requirements.

I think that more troublesome is the consequence of this on the other car producers is, in fact, that kind of support mechanism which would be removed.

So, I think this is going to be driven by -- there's going to be a large element of this decision which is going to be politically driven.

My expectation is that these eco-incentive systems will continue in some form in 2010 until we see a restoration of demand at normalized levels.

A lot has been said about industry consolidation.

I think some people made remarks about the fact that what happens now, that Fiat is not participating in the Opal auction.

I think the answer to that question is we will continue to look for strategic options to strengthen the business that we have.

We will get to the number that I think is important, which has been roughly 1 million vehicles per architecture.

I think the Chrysler opportunity is significant for us because it gives us the space to build that volume on the C and D platforms that we have never had and to share that burden and that effort with Chrysler.

So, I feel relatively comfortable on the four main architecture, the A, B, C, and D platforms.

We will achieve the required numbers regardless of whether we get to the 5.5 million or 6 million overall number.

I think a lot of -- as part of the Chrysler discussion, a lot of this was underestimated.

I think it has opened up a completely different world to us, the ability to be an effective competitor in the mid and higher range of the product offering, and that we'll go a long way in strengthening our dominant position in the A and B segment.

The spin-off of the auto sector, in case anybody is wondering where that argument has gone, the argument has not disappeared.

I think the performance of the car side in Q2 of 2009 is the kind of indication of strength that we need to continue to demonstrate to justify a spin-off of the car side.

It is my view that that move is inevitable for Fiat and the timing of which is unclear.

It may take two years; it may take three years to get it down, but I think there will be a point in time in which Fiat Group automobiles will be of sufficient size and muscle to justify its own standalone existence.

That pretty well covers the presentation unless there's anything else I forgot.

Or, is that it?

I'm done.

Thank you.

Now we are ready to start the Q&A session.

Maryann, please receive the first question.

Thank you.

(Operator Instructions)

The first question comes from Martino De Ambroggi from Equita.

Please go ahead.

Good morning, everybody, and good afternoon.

On the last issue you mentioned, the spin-off of the Car business, let's say that Opal is definitely out.

What are you looking at potential partner - potential acquisitions as an alternative if any in the relatively short term?

And second part of the question is on the spin-off option.

Apart from finding a new organization opportunity, what are the other conditions to be materialized specifically the car spin-off?

You mentioned to be able to be self sustainable.

I don't know if there is other issue to be respective.

And I have a follow-up question later.

All right, let me deal with the first one.

I think that we need to remove the angst from this process over the fact that I'm on a hunting mission looking for partners.

It looks like I'm going through a dating service to find somebody.

I'm not looking for dates.

Right?

I mean, these are things that are reasoned with an industrial standpoint of advantages being achieved by both people coming to an agreement on sharing other platforms, volumes, markets, and so on.

We've done a lot of this work.

I think that the repositioning of Fiat in China, which was concluded this month is an indication of the type of moves that need to be made.

We've done a similar move in India with Tata.

Now the Chrysler position has been strengthened in the United States.

These are all things that are designed to strengthen Fiat and to allow for the sharing for the things that I've been talking about now for the last five years, which is the sharing of platforms of technologies in order to achieve a level of volumes per architecture, per investment of technology, which justifies making the investment and getting adequate returns on such an investment.

So, the only thing I ask you to do is to wait for Fiat to carry on its activities.

They will happen as they naturally happen; they cannot be forced.

I think we should stop being fixated with this Opal issue as being the lifesaver of FGA.

To be perfectly honest, Fiat made money in the second quarter of 2009.

And it will continue to make money for the remainder of the year.

We're not threatened by anything or anybody in the marketplace today.

I think that we're beginning to build an incredibly strong organization.

I think the alliance with Chrysler is going to go a long way in solving what I consider to be the structural deficiencies of the business because it will fully complement our product offering, both in the United States by the introduction of smaller segments in the US, and by the introduction in the C and D platforms in Europe, which will have an American origin.

So from my standpoint, I think we're doing well.

We have an enviable position in light commercial vehicles, both in Europe and in Latin America.

We have a very strong position in Latin America now with the additional -- three additional brands of the Chrysler going to be able to leverage the distribution channels even more effectively.

So, let us work on this option.

I made the comment after we abandoned the Opal initiative to the effect that we had a lot of work to do, and we continue to be committed to the revival of Chrysler going forward.

That remains our primary objective.

It was an investment that was made of resources, of technology, of reputation of this group, which we have absolutely no intention of gambling on.

I think we need to deliver on what we promised.

I think the whole organization is committed to get that done.

And I think at the end of that process, we will end up with achieving the right level of vehicles per architecture that we need.

So we don't need anything to add to the catalyst to try and get us there.

I think the Opal option would've accelerated some parts of this consolidation exercise, but for reasons which are outside of Fiat's control, other choices were made.

And I think that one of the things that distinguishes Fiat today in the marketplace is the seriousness with which it does what it does.

We do not make vague promises.

We do not commit to things that cannot be achieved.

The conditions that we were offered in that transaction with Opal were conditions that we did not think could lead to the right answer for Fiat and therefore, we've declined it.

We stand ready, as we did in the last few months, to resume that dialogue if it's along the conditions that we've offered.

But as long as other people have other preferences, which do not include the creation of a strong European player, then Fiat cannot play.

So, I don't judge the quality of decisions that are being made on this issue by other people.

I'm just saying they do not match with the ambitions and the inspirations (inaudible).

In terms of what the conditions are going forward for the spin-off of auto, they fundamentally have to do with the ability to stand alone on a financing basis and to effectively live through a cycle without having to rely on the assistance of anybody.

These are conditions that we've imposed on the business ourselves.

They're conditions which by the way with very few exceptions are being violated by most other automotive players who are relying on government support in contravention of some basic competition rules in Europe.

And we've seen the level of intervention that's gone on in the United States that reshape this industry.

We've seen direct support being given by some governments to automotive manufacturers in Europe.

The US was designed to deal with a structural issue and I think it did it well.

I think we'll see the benefit of this certainly starting with 2010 going forward.

The most significant problem is the fact that in Europe this issue is now being addressed.

Fiat has taken a very strong lead in this.

It is clearly announced that the [Maresa] plant will no longer make cars post 2011.

And I think we will continue to make adjustments in terms of our production capacity on a global scale to ensure that we're not the ones that are contributing to the overhang of supply.

But, as long as other players do not do the same thing, I think this industry is not going to do well.

We will be fine.

We will match whatever the market demand is by making whatever decision we need to make at production levels.

But the biggest problem to me is that there appears to be no will at European level to find a solution that will optimize this industry once and for all.

Okay.

Thank you.

Now two quantitative follow ups -- on CapEx, you mentioned a reduction for the full year -- 2008 year of the magnitude.

And on the temporary layoff program if you can quantify what you'd be saving attributable to the temporary layoff programs in the second quarter.

Thank you.

I'm not sure there is a savings.

It has a cost to us on the segments is roughly 20% of the cost of labor.

So to the extent that direct labor is idle, it has an additional cost to us which changes the manufacturing cost structure of the business.

So it's not a question of -- the alternative to temporary layoff is firing employees, which is something that we have tried to do -- we have tried to avoid in Europe on a pretty consistent basis.

We will continue to do so with the expectation that we will see a restoration of demand.

The exception to that story is the identification of the (inaudible) Maresa plant and the (inaudible) plant for the production of construction equipment, which has -- have been designated as plants that will no longer be in production in the future.

In terms of the CapEx reduction year-over-year, I think the number's going to be about 1 billion below 2008.

I think that we saw a huge ramp up in the last two quarters of 2008, most of which was driven by power train, which had to invest to the introduction of a new transmission here in Italy for the introduction of the two-cylinder engine in Poland.

Both of those programs are coming to an end in terms of the intensity of the program.

So, we're going to see healthier levels in Q2, Q3, and Q4.

But as the minimum, we'll see 1 billion reduction year-over-year in CapEx.

Okay.

Thank you.

Next question comes from Stuart Pearson from Credit Suisse.

Please go ahead.

Good afternoon.

I just have a couple of questions mainly relating to pricing.

I mean, you touched there on the overcapacity we have in Europe.

Also, we have significant discounts in place from the discounts as part of those scrappage schemes.

And there's also talk of a free trade agreement with Korea that could see import tariffs removed.

Just how much of a risk do you see to European pricing going forward?

And given Fiat's scale targets, is Fiat willing to lose market share to protect its pricing, particularly in Europe?

And I would just like to ask pretty much a similar question for the US, given GM and Chrysler coming out of Chapter 11.

Do we think we'll see a more rational pricing behavior than in the past in the US?

Or, could we see a fight for market share between the US and Asian makers?

And, what is Chrysler's pricing policy in that context, please?

Let's just agree that as a matter of principle, whether it be the US or Europe that rational pricing needs to come back to the marketplace.

I think that what we saw in the US in 2008 and certainly in 2007 was a desperate chase for volumes at the expense of margin.

And so, the level of discounting that went on in the American car market in the last 30 months is something which is unprecedented.

To the extent that both General Motors and Chrysler have taken significant production cutbacks by closing plants and restricting capacity in some of their facilities, this is only going to be a good signal for pricing going forward.

I think that we have seen now indications of the fact that even the Asian producers we are located in and the US's producers are looking at production cutbacks, including closure of some plants.

So nobody's immune from the substantial decrease in size that we have seen in the latter part of 2008 and the first half of 2009.

My expectation -- and let's deal with the American side.

And then we'll come back to Europe.

My expectation is that we will see discounting levels drop significantly over the next 12 months.

Fiat and Chrysler has already started a process of rationalizing and the rationalizing of discount structure and making it much more pointed and effective in terms of its efficiency.

I think there's going to be a relinquishment of these wholesale discounts that have been applied across all cars in order to try and move iron.

I think discounts will be a lot more targeted in terms of models in particular geographic areas.

I think we need to get a lot more sophisticated in what we're doing in the United States.

I think we're going to -- we have started that process now.

I think that GM is along the same lines, although it's not for me to speak on their behalf.

But certainly, my view based on what I've seen and heard is that you will see a restoration of much better margin performance in the US car business over the next 12 to 18 months.

The European side is a more difficult question.

If you're -- the question is to whether I will let go of market share to protect pricing.

The answer in absolute terms is absolutely yes.

Right?

Whatever implications that has on the industrial footprint, I find it very doubtful that we will end up in a price war in Europe which is any more severe than we've seen so far.

I think the removal of the eco-incentives will be an equalizing effect on all carmakers.

And so pricing will move in accordance, and that will have an impact on demand.

If it does have an impact on demand, I think it's up to all of us to adjust production to meet that demand.

I don't think that that's going to be an issue.

I think that we have learned -- it's only the fact of market share and no profit is going to devastate this industry even further.

And given the condition that it's in, nobody's going to take that risk.

The -- part of your question that you've asked about Korea is a much more difficult question.

I can only speak on behalf of Fiat, although I've made my point very clear at [Asaya].

I think that the present proposal that's on the table in terms of the removal of the trade barriers between Korea and the EU are totally unsatisfactory.

And I think that we need to go back and look at this because I think it's a lopsided relief for tariffs for the benefit of the Korean carmakers.

I don't think that Europe is getting adequate compensation for that removal.

And I think that if we don't modify it -- as I understand it now, the decision has been postponed until September.

I think we're going to continue to work with (inaudible) to try to find a better way to deal with this issue than the current proposal.

I'm totally dissatisfied.

I think that we're making a big mistake, and I think we need to intervene now to fix it.

Okay.

Very clear.

Thank you.

Next question comes from Thierry Huon from Exane.

Please go ahead.

Yes, good afternoon.

It's Thierry Huon speaking from Exane.

Still a question on the pricing -- given the size that today the access price of a new car is well below what it used to be given the incentives provided by the different government, what do you believe will happen when these scrapping measures will be terminated?

Do you think that it will be possible to raise again the price of the car and to come back to the pricing where we used to be?

Or, do you believe that you will have to take out fast things from the car to make them more affordable?

No, I think that the offering of low-cost models or models that offer little content to justify an entry price, I think this strategy's already common parlance in the business anyway.

I think we're all doing this.

Then when you look at the effective number of these cars that are being sold in the marketplace, they represent a very small portion of the total portfolio.

So, I think everybody will use whatever marketing strategies are required in order to attract the consumer and to assure we will then sell a higher value-added car.

The problem -- the first part of the question which really deals with the fundamental issue as to whether the industry will adjust pricing to compensate for the loss of incentives, the answer is absolutely yes.

To the extent that those incentives were to be removed, we're going to move in the same direction.

And the real question is who's going to win at the end of the day in terms of maintaining the discipline between manufacturing and demand.

Right?

And what I just told you is that Fiat will continue to be as rigorous as it has been.

And by the way, we've demonstrated this not just on the car side.

We've demonstrated in trucks.

We've done this in construction equipment.

We've done it in AG.

We will apply the same discipline to a potential shrinkage of demand on the car side following the removal of eco-incentives as we have done across the other sectors.

Even in that environment, which as drastic as it may sound, I still expect SGA to be positive.

I've got two other questions if I may.

One is about the scale effect you are looking for, for C and D platforms.

Given the fact that the there is a car that Chrysler is supposed to produce at some point in time by your technology, should be produced in the US, do you expect to have the full benefit of this scale effect?

Or, it would be not enough to be competitive on this segment?

Look, the C and D segment of the United States account for more than half the market.

Even if I was to take a negative view as to where market demand will be in US in a steady-state environment, that number is going to be more than 5.5 million vehicles a year.

At current rate, Chrysler runs between 10% and 12% market share of the US market.

And that will give you more than 600,000 or 700,000 vehicles on a share platform.

The other thing I have to add is European volumes then I can to the 1 million.

I mean, I don't think it's that difficult to try and get there.

The important thing is that I need one main base on which to drive the technology, and I think we found that with Chrysler.

We have the platform; that platform has been handed over in the last seven days over to Chrysler.

It's going to become their platform.

They're going to federalize the platform for US purpose.

And then we'll continue to work with our people to make sure that we come up with a joint development of that architecture going forward, including an absolute sharing of power train, both on the American and European side.

So, my biggest concern about the missing part of our portfolio has been put to bed.

And so, you will see a completely different product portfolio in the next 18 to 30 months coming out of this house.

Just allow us to work through Chrysler to try and get that done.

Chrysler will reap the benefits of this technology, which is already on hand and I think we should move -- we'll move a lot faster.

So I'm quite -- to be perfectly honest, I'm quite content with what I have.

And that's why I tried to take out this [hunch] that's sitting in the marketplace about the fact that I need a partner.

I think I found the big partner in the United States and somebody that I can build a future with.

Okay.

Very last questions -- do you have postponed any product launch in the car business?

And if yes, could identify which one have been postponed?

Well, I mean, it's clear that the replacement of the Alpha 147 was postponed because of market conditions.

And so, that probably is going to come to the market in the early part of 2010.

You'll be able to see it at the Geneva Auto Show.

And that's certainly in anticipation of a gradual recovery of that segment in the European marketplace.

So -- and we have done so.

I mean, all the work that was done on the engineering and development side has continued, but we have refused to tool some of these models in anticipation of a better indication of where the market will be.

And I think we're relatively clear now that regardless of -- if there is a removal of the eco-incentives, I think it's going to re-equalize the distribution of the volumes being sold across all the platforms.

And, I think that one of the advantages that Fiat will have is an absolute new platform in the C segment with a new car in the marketplace in 2010.

But, we'll continue to monitor these.

And we have done the same thing in Brazil.

I think probably in the Brazilian case, we probably pushed a bit hard in terms of postponing the introduction of one of the models, but we're rectifying that now because certainly the indication out of Latin America is that 2010 will be a decent year.

Okay.

Thank you very much.

That's clear.

Next question comes from Philippe Houchois from UBS.

Please go ahead.

Yes, good afternoon.

I have two questions, please.

The first one is, if you look at Chrysler, you've taken control of the business.

The US government is a very minority shareholder.

And on the other side of the street pretty much, the US government is a controlling shareholder of GM.

Can you explain that to me?

And do you think that in any way it's an indication of commitment of the US government to the success of Chrysler versus GM?

In other words, does -- the credit level playing field for you against GM as both companies coming out of Chapter 11?

And the other question I have is, if you look at Europe, how much do you think is your success in the European market in gaining share, which is the fact that you have better financing costs (inaudible)?

Is that a competitive advantage that helps some of your market share gain or not?

Yes, the second question is always -- I mean, I don't know what to tell you about the second question.

The unofficial story is that most of the financing arms of the other carmakers is -- have received direct or indirect support from government institutions to make sure that they continue to finance the car pools.

If anybody has paid market rates, then the financing has been Fiat -- the fees.

So, we're not the ones that are benefiting anything or benefiting at all from subsidies.

All the other carmakers have had support one way or another to ensure that the financing arms continue to be able to finance.

We are the only one that have relied on an arms-length relationship with the Credit Agricole.

We paid the pricing in accordance with that market, with the market conditions.

And as a matter of fact, we're probably disadvantaged against the other competitors since we've had do this at market rate.

Having said this, I don't think it has had one iota of an impact in terms of our ability to get market share because all the other competitors had equal access if not more to credit markets.

The other question you've asked me is an interesting question.

I would not read too much into the fact that the shareholding position of the US Treasury is much larger in GM than it is in Chrysler.

Just you need to remember that Chrysler today has effectively only two types of debt obligations.

It has very large debt obligations to the United States Treasury, and it has a large debt obligation to VEBA, which is the remainder of the retirement benefit trust that was set up two or three years ago to try and deal with the UAW exposure.

And so the exposure that the US -- the United States Treasury is to both organizations.

It's much heavier on the debt side vis-a-vis Chrysler, much less than equity, but it's the other way around on the GM side.

And so, I do not expect there will be -- that their behavior will prejudice, will favor one organization versus the other.

Certainly, in terms of my dealings with the United States Treasury, there's been an absolute level playing field.

I think they've been incredibly helpful in ensuring, for example, the GMAC [act] at arms length in connection with both Chrysler and GM.

So, I see absolutely no indication of preferential treatment, and nor do I think it's going to be a defining factor for Chrysler going forward.

We're thankful to the United States Treasury for having done everything they've done.

I think it is in their interest, and I think it's their commitment that we share to make Chrysler into a successful organization going forward.

I don't think it differs from their commitment to GM.

Okay.

Thank you.

Next question comes from Ranjit Unnithan from JPMorgan.

Hello.

Thanks for taking my question.

I have two questions.

One is on Chrysler.

Can you give us any idea when Chrysler will be profitable?

I know there's a tremendous amount of restructuring taking place in terms of lowering the breakeven SAR level.

So one, the question is when do you think you could be profitable?

And second, leading to Chrysler again is what is the kind of operating margin potential you see at Chrysler once the SAR comes back to sort of 13 million or 14 million units?

And the second question I guess is on your guidance for the year.

Now second quarter seasonally tends to be one of the strongest for you in the auto as well as on CNH.

How do things improve sequentially?

Clearly, you expect it to.

But can you explain to us how you expect operating profit to improve sequentially so you make your guidance?

Thank you.

I think just to deal with the last question, this is purely historical.

We're going to have a strong Q4, which is the way in which we've historically run this business.

And you're going to see a weaker Q3, which is due to the summer hole.

It's that simple.

And you add up the numbers between now, the ones that we reported for the end of June, subtract it from the 1 billion-plus that we've targeted for the year, assume a much heavier concentration in Q4, and come up with a residual for Q3.

But other than that guidance, I'm not going to give you.

In terms of the other issue that you raised, one, I have no doubts that Chrysler will be profitable.

I think you need to give us enough time to discuss this issue with the Chrysler board before I discuss it publicly with Fiat analysts and shareholders.

I think it would be improper for me to give you any information.

We only have a 20% interest.

And as I've indicated in my remarks about Chrysler, this position has not been recorded; it's a zero book value, and we will not be booking the losses of Chrysler going forward to the extent that they exist.

I think we will be booking profits whenever we book them, but I think that we need to allow the system to go on and start producing some results.

But one of the challenges that we've got with Chrysler -- and I'll go this far -- but I think that we do Chrysler -- notwithstanding that fact that it is a private company and that the United States Treasury is the biggest lender.

And we have a number, a lot of significant shareholders.

It does need to behave like a public company because it does need to go public at some point in time.

And we will get there the day that we start achieving what I consider to be decent results for this business.

I think that we're going to see some healthy margins at the 13 million and 14 million size level.

By that time, which will not happen in 2010.

We will see the introduction of all the new platforms and the new product range into the three brands in United States.

You'll be able to see a completely different Chrysler group operating in the US and internationally.

I think the biggest challenge for us is to leverage what they have in the United States and make Chrysler Group a truly international player.

And, I think we can help them with that.

I think we know well the distribution in Europe and Latin America and effectively handling their products in a much more effective network that we've been able to build on the FGA side.

On the other side, we've get excess in an after market; it's something we've always wanted.

And, I think the discussion of exchanging these capabilities across the two organizations is going to benefit both of us.

But I think it's too early to talk about profit margins for Chrysler.

I think that they need to be internally discussed with the board.

And, I think we'll come back to you and give you whatever -- I think we agree after the public statement out of Chrysler on this matter.

Okay.

Thank you.

The last question comes from Adam Jonas from Morgan Stanley.

Hi.

It's Adam Jonas.

Good afternoon.

Just another question about--I know you don't like -- you're not looking for dates, so I'll talk about your Chrysler wife again, if you don't mind.

How much time are you spending in Detroit -- in Detroit-Auburn Hills area?

I'm sure it's pretty streaky.

And I understand you've spent quite a lot of time upfront.

But how much more time would you see yourself spending going forward?

And, what are some of the biggest surprises that you've seen since you've been there?

That's my first questions on Chrysler.

And then about the Brazilian market, can you remind us what your working capital cycle is like there?

Do you have -- do you run the negative days cash conversion cycle, i.e.

are your payable days significantly longer in Brazil relative to your receivable days like they are in Europe?

And then a final question if I may on payables again for the group -- you accurately pointed out that the inventory reduction that contributed entirely to the working capital benefit that you had in the quarter.

But I was a little surprised to see your payables continue to fall.

Looking back at your financial history, big movements in revenues are usually positively correlated sequential with the movement in payables.

Yet in this quarter, your revenues -- you sold EUR2 billion more worth of stuff, but yet your payables fell by EUR0.5 billion.

Why did they wishbone in the other direction, and when do we start to see that positive correlation return?

Thanks.

The answer to your question -- to begin with, the decline in production has not been consistent across all the sectors, so you're going to get some type of wishbone effect because of the mix issues.

But in general terms, the reduction of inventories and the shutting down of the production system is going to yield a reduction in payables levels.

It's bound to happen.

We're not running the plant, and we have not run it for awhile.

So, I'm not sure that I understand why you would've expected the payables number to go up in the quarter because the reaction on the production side were worse in Q2 than we would've been otherwise.

I figured your production -- pardon me, I figured your production would've been up pretty dramatically from a --

The production was only up on the car side, and it was in particular areas and not across the manufacturing footprint.

Okay.

I mean, inventory levels have really come down.

I'll give you an idea.

The number of cars -- I went back to Q2 of 2008.

And the -- I'm just going to give you -- between dealer, inventory, and company inventory just on the car side, we're down 33% year-over-year, Q2 '08 to Q2 '09.

So there's been a huge amount of destocking, which will continue for the remainder of 2009 and which has given rise to the capital release of about EUR1.3 billion purely on inventories.

And I don't think you're going to see a restoration of working capital levels until we turn the industrial machine back on.

And that's something that is a consequence of the way in which we run this business.

Right?

You have -- the trade payables terms in Europe are substantially different than they are in Latin America.

Latin America has got a 30-day cycle on trade payables, which is substantially different than it is over here.

And that justifies part of your concern because the industrial machine has shut down in Europe, and it's continuing to run relatively well in Latin America.

Yes, it makes sense.

Did you ask anything else?

Or was that it?

Yes, I just asked about Chrysler about the time you're spending there and surprises.

Yes, I tried to avoid the answer.

Yes.

But it's obviously having a devastating impact on my working hours.

But I'm spending half of -- less than half of my time at Chrysler.

What the equivalent of that is in dog years, I don't know, but it's less than a half year.

But, it is a full-time engagement.

So whether I'm here or there, I think that the business continues to run.

I think we put together a strong management team at Chrysler which is tackling a number of issues.

And I think it'll be fine.

I mean, obviously we've had to make some adjustments to the management structure here in Europe to try and get that done, but I think it's working well so far.

Okay.

I wish you luck with the jet lag.

Thank you.

That will conclude the question and answer session.

I would now like to hand the call back over to Mr.

Marco Auriemma for any additional closing remarks.

Thank you, Maryann.

We would like to thank everyone for attending the call with us.

If you have any further questions, please do not hesitate to give us a call.

Have a good evening.

Bye.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.