Stellantis NV (STLA) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Fiat 2009 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 your host today, Mr.

Marco Auriemma, Head of Fiat's Investor Relations.

Mr.

Auriemma, please go ahead.

Thank you, Sarah.

Good afternoon to you all or good morning as the case may be and welcome to Fiat 2009 Third Quarter Results Webcast And Conference Call.

Mr.

Sergio Marchionne, the Chief Executive, and Mr.

Maurizio Francescatti, our Group Treasurer, will host today's call as usual.

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

And after introductory remarks, we will be available to answer all 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 the presentation materials.

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

Sergio Marchionne.

Good afternoon.

Thanks for attending.

I think that it's fair to say that the quarter has certainly been in line with our own internal expectations.

I'm pleased about the performance of all the sectors of Fiat Group.

I think that the fact that we've been able to post positive results for all the sectors is an indication again of the resilience of the sectors and the ability to manage what has been an unprecedented decline in volumes, which has continued in the third quarter of this year.

I think that as the title of the presentation suggests, I think that we're beginning to see the bottoming out of this volume decline.

And while I think it's relatively difficult to try and predict performance in 2010, I'll make some comments at the end of this about what are views are vis-a-vis next year and what we expect in terms of trading performance.

I think it's fair to say that the worst is past.

And this organization has realigned its cost structure to deal with this reality.

As you can see from slide two, just in terms of the highlights of the group, revenue was down some 16% year over year to about EUR12 billion.

The positive thing out of this performance is that the automotive sector and principally Fiat Group automobiles was sort of a steady component of performance.

I mean, volumes are up 4.3%.

And just in terms of revenue, top line was almost flat with 2008.

The other two capital goods businesses, CNH and Iveco, continue to suffer from a lack of volume, especially pronounced in the case of CNH in the construction equipment sector.

And Iveco continues to see a shortfall in volumes compared to 2008.

And it's a situation that we will continue to see for the remainder of the year.

And it's unclear as to when we will see substantial signs of recovery in 2010.

So our forecast for next year include a level of caution about where I think we can be overall.

But certainly, we do not see at least in the first quarter a substantial pickup in activity in trucks.

And I think we'll have to follow it as the year develops.

The more important thing is that trading profit for the house came in at EUR308 million, 2.6% operating margins in a very difficult environment.

And this is purely a result of the realignment of the cost structure of the various sectors to try and deal with this really less-than-brilliant economic environment.

Automobiles produced about two-thirds of the operating profit of the house.

And as we go through the profit reconciliation, you will see why.

Although volumes were up year over year, effectively, there was a shortfall in the trading profit for the sector.

It was fundamentally a mix issue as we moved away from the relatively strong reliance on light commercial vehicles to a much lighter mix in the A&B segment.

CNH came in at EUR66 million in a very, very difficult quarter as we continue to realign the cost structure of construction.

The ag business has shown some indication of weakness.

I still think that we're forecasting a strong fourth quarter on the ag side.

And we see a continuation of the weakness in the construction equipment continuing for the rest of the year and well into 2010.

Iveco again posted what by most industry standard one would view as being anomalous results.

They came in at EUR22 million worth of trading profit.

Most of our competitors reported today to show negative numbers on the truck side.

And this is purely a result of cost containment, the good performance in Latin America, and the fact that our special purpose vehicle business continues to perform well.

Net profit for the quarter was EUR25 million.

I think more significantly our debt number was nearly in line with Q2 of 2009.

This is very nontypical of Fiat, which has been substantially absorbing cash in the third quarter of the year.

We carry that free capital market transaction from the third quarter.

We're now sitting on about EUR8.4 billion worth of cash, which we consider given the circumstances and given where market conditions are a healthy level of cash to try and deal with the uncertainties associated with managing our way through -- out of this market.

We signed an important agreement with Kamaz in Russia a couple of weeks ago.

It's the first step in the establishment of a manufacturing presence in Russia, which is part of the continuing effort of CNH to globalize.

I think that given the tariffs that will be imposed on imports, it is absolutely crucial that we become local producers.

We found a very strong partner in Kamaz that will help us get that done.

More importantly, at the end, we are confirming the guidance that we have given to the market in terms of trading profit.

We will be in excess of EUR1 billion.

We're also confirming debt levels below EUR5 billion for December of 2009.

There's been a caveat that we've added, which is connected to the presentation we will make on November the 4th in Detroit about the five-year plan for Chrysler.

And I should mention right now that I'm not going to be able to answer any detail questions about Chrysler.

We're going to have to wait until we get together on November the 4th to try and take you through that.

But the simple fact -- one thing I can tell you is that the industrial alliance with Chrysler is going to yield a very clear delineation of responsibilities in terms of the development of architectures going forward.

And that delineation will force a rethinking of the volumes associated with existing architectures within Fiat Group automobiles and may require us to take a noncash write off for the remaining carrying value of these assets on our balance sheet.

We're going to go through that analysis after November the 4th and after the Chrysler plan gets made public.

But overall, a good quarter in a tough market.

And I think we're relatively comfortable that the achievement of the 2009 targets are within reach.

We can move on to slide number three, which talks about revenue and trading results by business.

As I mentioned earlier, two-thirds of our trading profit came out of the combined car side, including our luxury brands.

But notwithstanding all that, all the other sectors were positive contributors.

There's been a maniacal attention to costs across the group.

We have targeted a 15% reduction across the whole of Fiat on SG&A for the year compared to 2008.

We've exceeded that number year to date to the end of September.

And I think that we'll be able to maintain that rate of advance.

I think the real issue from our standpoint and something that we're looking at very carefully is how much of that cost reduction is going to remain as a permanent abatement in the running cost of this business.

There's a view out there, which has developed and which I happen to share, that as a result of this economic turmoil that the actual trading conditions of these businesses have been permanently altered.

And as a result, I think that we will have to keep on focusing on the cost structure as hard as we have in 2009.

I think wisdom will suggest that at least for 2010 they won't be as careful in the management of their cost structure as we've been so far, at least until we see a more substantial rebound in volumes across the world.

If we move onto slide number three, which talks to the reconciliation of trading profit to net result, we have nothing much to talk about.

We do have unusual items of EUR41 million.

That's for the additional charges that [Fannie] will be taking in the fourth quarter in terms of the realignment of the platform carrying costs on the balance sheet.

The financial charges do include a gain of EUR34 million on the mark to market of the equity swap on the stock options, which are now EUR87 million positive for the year.

And other than that, there's really nothing major.

The tax rate is aligned with our own expectations.

We continue to be unable to book debits in the jurisdictions where we actually have operating losses, including Italy, where as a result of the decline in the activity of some of the sectors we have not been able to book debit.

So the majority of that charge relates to cash taxes that are payable in Brazil because of the continuing strong performance of the business in that region.

And if you can move onto slide number five, I don't know whether -- no need to add anything in terms of the cash flow statement.

But I think it's been a good quarter.

I'm looking at Mauricio here to see if you want to add anything.

It has been a good quarter, especially as we talk about the third quarter, which season has always been a quarter of huge [outsource] and several hundred million.

And this has (inaudible) on this time, especially in terms of working capital consumption.

And this I think has been the driver of the performance.

I think the other thing that -- we continue to be cautious on capital commitment that's reflected in the reduction of CapEx.

The real challenge for us is to try and manage our expectations in 2010 on that number, given the fact that a number of sectors are expecting a substantial rebound in activity in 2011 and later.

I think we have to be careful.

One of our objectives obviously is to try and conserve as much cash as we can going forward.

But I think the pressures from the business will require that we increase the capital spend rate compared to 2009.

What that level will be is something that we can probably talk about when we're together -- when we get together in January for the full-year results.

The important thing is that the businesses have been able to bring inventories down.

I think we have destocked and continued to destock, destock the distribution channels across all the businesses.

And you'll see this when you look at the inventory numbers, especially on the car side, which have been kept pretty well at a minimum.

If you look onto slide number six, which deals with the debt maturity schedule, there's enough cash on hand now to extinguish all liabilities in 2010 with a part of 2011.

And I think we feel relatively comfortable to the extent that we continue to generate cash in the fourth quarter that we really have no maturity issues coming up that cannot be dealt with realistically.

I think that there was rumor in the earlier part of this year about the fact that Fiat was facing the need for a capital increase.

And I think -- certainly, I confirm the view that I expressed on the call in the second quarter that that is not the case, that most of these -- most of this financing is related to working capital positions.

And then as long as we continue to manage these positions aggressively, we'll be able to maintain and contain the level of indebtedness of the group.

If you just skip the title page on seven and move onto slide number eight, you can see clearly that the full-year expectations of Western Europe is still for the market to decline by roughly 5% in Western Europe, much more so in Western Europe than Eastern Europe.

Italy is expected to be slightly down on the prior year.

And Brazil continues to perform well, as we indicated in the second quarter.

The problematic area for us in terms of performance is the light commercial vehicle side, which has suffered a substantial decline against 2008 numbers.

And that level of decline is expected to continue in the fourth quarter of 2009.

Overall volumes are still healthy.

We're over EUR2 million in terms of expectations for the group for the whole year.

But the mix of that volume is phenomenally different than it was in 2008.

And when you move onto the inventory trend by quarter, you can see that our commitment to maintaining the new distribution channels strategy has been kept.

I think we are setting a pretty healthy level of inventory in both the dealers and company inventory.

This is probably one of the lowest levels that we've seen historically, both in absolute numbers and in terms of forward-month sales.

There's really not much to be said because in some cases we're actually -- we are unable to meet demand for some models, which have been equally incentivized above the level -- production levels.

But we're dealing with that demand.

I think that the market -- at least the portfolio of orders at the end of September continued to be strong.

And that's why I think we can look at the remainder of 2009 with a level of confidence.

The introduction of the Punto Evo, as you can see on page number ten, reflects the level of technical commitment that the house continues to make.

We'll have an opportunity to introduce both the MultiAir engine on the gas side and the introduction of the MultiJet II, which is the second phase of evolution of our diesel technology.

These are -- both of these are leading-edge technologies which have been introduced in the car.

There's been substantial work that has been done on the interior of this vehicle.

And we have been able to reposition this car now as really representing the best of the technology know how that this house has.

Sort of the specialized press has taken well to this model.

We received confirmation of the seal for the most stringent evaluators.

The German specialized press has liked this vehicle very much.

And I think that it just reconfirms our commitment to the B segment, which will now have the ability to offer three cars starting from the first edition of the Punto to the Grande Punto, which was launched in 2005, to this evolved vehicle.

And we have done this in order to maintain full coverage of the price positioning of the B-segment offering.

If you look at slide -- on page 11, which talks about CNH, we have seen a decline both in the tractors and the combine business in the quarter.

And we do expect a decline to characterize performance for the whole of 2009.

We have fared relatively well with the exception of a couple of spots, which I think were just seasonal misses on our part.

I think overall in the year, we'll be able to maintain and grow share in the relevant sector.

We've been able to grow overall market share in tractors in North America, which is a significant market for us.

The rest of the world numbers, where we do show a negative sign, really reflect our inability to penetrate the Russian CIS market in view of the restrictions that have been imposed on imported equipment, number one, and secondly the lack of financing that is available in that region.

And that is effectively what has characterized sort of the negative performance and certainly vis-a-vis 2008 has been a large contributor to the shortfall in earnings of CNH.

Having said this, we have realigned the production schedules to meet this demand.

The ag side does not have a large inventory issue to deal with.

And so I think we expect to close certainly the first quarter of 2009 with the ability to monetize a large portion of the working capital position that's been sitting on the ag side.

It's a totally different story when you move onto slide 12 dealing with construction equipment.

These are declines that we have not seen -- I don't think we have a historical series that shows numbers of this caliber.

We have not had three years in a row where volumes have effectively been down nearly 50% year over year, starting in 2008 where volumes started collapsing.

We're now -- I looked at numbers going back to the '90s.

And I don't ever recall numbers on a global scale being as low as they are.

The only bright spots in all this is Latin America, which continues to perform well.

And certainly in view of the recent selection of Rio as the host for the Olympics, we expect that that will continue to perform well between now and that time.

And obviously, Asia, which continues to perform well -- our ability to perform in Asia as a result of the market demand is limited because of connections that we have.

The strategic alignments that we have with our two excavator partners in the regions, we are sorting our way through those arrangements now so effectively we can become a full-fledged player in that market region over the next 12 to 24 months.

But it's not a pretty picture.

The effort to destock continues.

If you move onto page 13, you can see that we have done a relatively decent job on the ag side.

The construction equipment, both on the light and the heavy end, continues to require a lot of management.

Most of our production infrastructure has been shut down for the large portion of 2009, both in the United States and Europe, with the only clients that are really running relatively well being in Latin America.

I think the situation will continue in the fourth quarter of this year.

And we will not turn that back on until we have stabilized a healthy level of forward-month sales, which is very difficult to predict in today's market conditions.

The Iveco side is similar, as you can see.

We expect to see relatively large drops in industry.

This is for anything greater than 2.8 tons, 40% down for the full year in Western Europe, 55% in Eastern Europe, and a 20% decline in Latin America, which is a combination of factors.

But the important thing for us is the European exposure, which is really sort of the heart of Iveco's activities, is the one that has suffered a substantial drop in market demand.

We have decided not to enter into a price war with our competitors, have tried to maintain the positioning of our products, especially at the heavy end, which has given rise to some market share loss.

But all of this has been designed to ensure that we maintain the equity value of the brand and that we protect margins.

We continue to destock the channels.

And we will continue to do this until we see a significant pickup and recovery.

I don't want to make it sound as if it's -- the world is coming to an end.

We are beginning to see a sign, a more encouraging sign, from the sectors in terms of demand.

But it is nothing stellar.

And it is nothing certainly that you try and move our guidance on the sector for the remainder of this year and the early part of 2010.

If you move onto slide number 15, you can see the destocking effort has gone on, 41% in dealer inventory, roughly 37% on the company side.

The reason we don't see a phenomenal drop in forward-month supplies, purely a reflection of our assessment of where market demand will be.

So we continue to work our way out of this economic slowdown.

And we'll let you know when the market resumes.

But certainly, it's not going to be within 2009.

The group purchasing activities is on page 15.

We had targeted a 2% savings across the board.

We're confirming the number.

We're going to be slightly short to the EUR500 million mark for the year.

And it's been a significant contributor to the profit composition on a trading profit basis for the group.

And we expect to achieve a similar performance in 2010, notwithstanding the fact that we have seen a rise in some raw material prices of a substantial nature, certainly in the metal area.

If you move onto slide 17, which deals with costs and production levels, it is clear that we have had to intervene very heavily on the cost side.

We've been able, as I mentioned earlier to take out more than 50% of our SG&A cost 2009 versus 2008.

We continue to reduce headcount across the board in order to match our cost structure to market conditions.

The one bright star in all this is that our world-class manufacturing efforts continue strong.

We're going to be able to achieve a 7% reduction in transformation costs in the plants that could be impacted by the effort.

If they're not running, we are obviously not able to try and extract those savings.

But the important thing is that the whole European system, not just Italy, has been able to deal with the temporary layoff issues because it's happened in Italy.

It's happened in France.

It's happened in Germany.

And as significantly, it's happened in Spain, especially in terms of the activities and the [truck] activities of Iveco.

If you move onto slide 18, which talks about the restructuring effort to CNH, these have as a primary objective the realignment of the cost structure of construction.

We've done a lot of work in terms of unification with brand structures within the group.

But overall, we're looking at only 11% to 12% reduction in headcount for the full year.

And most of this has been implemented within the first nine months of this year.

And the remainder will be taken out by the end of December of this year.

Slide 19 that deals with market developments and outlook -- I mean, we've just confirmed guidance that we gave you at the end of Q2.

The only exception -- we've reserved the right to go back in and look at the current value of the architectures and platforms that are left on Fiat Group Automobile's balance sheet.

We will make the required adjustments in the fourth quarter.

These are noncash adjustments.

But they will reflect the full industrial and strategic alignment of the architectural and platform developments of the two companies between Fiat and Chrysler going forward.

We will know more obviously after the presentation on November the 4th.

Slide 20 deals with the best-in-class sustainability.

We were -- we became members of the Dow Jones Sustainability Index.

As you can see from the indices, we were one of the top performers.

There was only one company that scored one point higher than we did on an overall basis.

But this is something that obviously we've intentionally done.

It doesn't even include all the efforts that we have done in terms of reducing CO2 emissions as a group.

But certainly there's an indication of the way in which we're managing the group on a global basis.

And it will continue to be a significant area of emphasis going forward.

I mentioned that I would give you some indication about 2010 performance.

And I guess early in the game, I gave you some broad lines as to where we see the business going.

We're expecting anywhere between 2% to 3% top line growth in 2010 compared to 2009.

Trading profit for the group is going to be roughly about roughly EUR1.5 billion.

This assumes that there will be some continuation of the incentive schemes in the Italian market.

In the absence of a removal of that scheme, we will see roughly a 300 million reduction in trading profit for the car side.

And there will be a connected decline in trading profit of our power train division in the components business, which is roughly EUR75 million.

So if there's not a renewal of the incentive scheme in Italy, we're looking at a number in excess of EUR1.1 billion for the year.

And we'll give you better details on our forecast for 2010 when we get together for our annual call in January of 2010.

That pretty well concludes the presentation.

I think that we should be able to take questions now.

Thank you, Mr.

Marchionne.

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

Sarah, please retrieve the first question.

Certainly.

Thank you, sir.

(Operator Instructions).

We'll now move to our first question from Max Warburton from Bernstein.

Please go ahead.

Yes, good afternoon, everybody.

Two questions, please.

The first one's on Brazil.

There's a very honest statement in the full release that talks about pricing pressure in Brazil.

Could you just expand on that a little bit because I guess a lot of us have remarked before on the extraordinary strong pricing situation in Brazil and wonder about how long that lasts.

Is this just something temporary?

Or do you think we're beginning to see something a little bit more structural.

And that's my first question.

And then the second one -- just on cash generation, you give some guidance for the end of this year.

CNH gives some separate guidance.

Is it correct that basically CNH delivers all of the balance sheet improvement for the rest of this year and that the other businesses are going to be roughly flat?

And just sort of looking into 2010, in the past, we've been amazed by the cash generation of Fiat.

Anything we need to take into account on working capital opportunities next year?

Or is it relatively straightforward to understand next year?

Thanks.

I don't want to alarm anybody on the Brazilian situation.

I think that there as a high degree of clarity in the press release about the pricing pressures that were encountered.

We consider these to be temporary issues.

I think if you look at the market share data coming out of Brazil, I think we intentionally stayed away from any attempt at fighting for share and thereby giving additional cause for other competitors to try and deal with pricing.

Based on our indications today, I don't think that we're going to see a repeat of the situation in the fourth quarter.

And certainly, it's not going to characterize performance in 2010.

In terms of the cash generation capabilities, the only number that we made public is the fact that we're going to be below EUR5 billion at the end of this year.

And that includes all the cash generation capabilities of CNH going forward.

So I'll leave it to you to determine whether effectively the other business may contribute to a further reduction.

But I think that CNH has got a very clear task at dropping inventory levels by the end of this year.

It needs to monetize the build of all the ag equipment that it has done -- that has been done in terms of the order writing season.

And all these transactions need to close by the end of this year.

So it's a significant task that they need to bring about, in addition to which they need to continue to destock the network of the construction equipment, which has been built up over the last 18 months.

So it's a tall order.

We've incorporated certainly that projection in our group forecast (inaudible) additional opportunities for that number to come in and for further reductions to happen and take the number right below EUR5 billion.

It's very difficult to make that call today.

I think we need to watch and follow and sort of continue to manage the CNH situation very carefully going forward.

Great.

Great.

And just to follow up on 2010, I think you just said that you're expecting top line of 2% to 3% for the group if I have that correctly.

Yes.

I mean, with that sort of modest growth, working capital would be what, sort of roughly neutral next year?

Or will I be surprised again?

Well, let's go on the assumption that I think wisdom will suggest to you that you would assume that it's neutral.

And then we'll see.

All right, thanks very much.

Thank you.

We'll now move to our next question from Stephen Reitman of MainFirst.

Please go ahead.

Yes, good morning.

You gave some information about the Punto Evo.

I'm just wondering what you think (inaudible) to do to the Punto range going into 2010.

And what does your research show about the level of awareness of the imported new engines in terms of [their] decision?

Thank you.

I'm sorry.

I missed -- you must speak louder.

I missed the first part of your comments.

On the Punto Evo in terms of this impact or how much of an impact you expect it to have as potentially the new model in terms of buyers' perceptions and what is the degree of awareness you have seen in terms of the new engines' [design]?

I think our own internal forecast to be honest is that, notwithstanding the technological advances that we've made with this vehicle, that we would be able to maintain the same market share in the B segment that we've been able to maintain in Europe.

I think it's a safe assumption.

The maintenance of the three products, especially in the Italian market across the price range is designed to maintain that position.

We are not forecasting substantial increase in market share.

The only thing I can tell you is that to the extent that the car has been reviewed as favorably as it has, it's bound to have a positive impact on volumes.

But they're certainly not -- they were never built into the case of the investment, nor are they built into our forecast for 2010.

Thank you.

Thank you.

We'll now move to our next question from Ranjit Unnithan from JPMorgan.

Please go ahead.

Thank you.

Could you answer your forecasts of Brazil?

I guess the tax scheme has come off at the beginning of this month.

And I'm just wondering how you look at that market I guess through the end of this year and into 2010.

And on Italy, you mentioned your sensitivity to the Italian market.

Just how do you sort of describe that in volume terms, like in terms of percentage increases?

Are you expecting the Italian market to be flat in that assumption that incentive schemes continue?

Just to answer your question about Brazil, I think the tax maneuvers that you're making reference to are not going to be an impact on volumes in Q4.

I don't think they're going to be substantial or substantive enough to try and move that demand.

And in 2010, we expect a continuation of performance similar to 2009.

In terms of the Italian market question, we'll finish off the year roughly 2,050,000 vehicles for the year.

If you were to remove the incentive on blocks starting January 1st of next year, we're going to lose roughly 350,000 vehicles.

And the volumes that we're looking (inaudible).

The impact of that loss on us is going to be roughly 160,000 vehicles for the year.

And we'll have to adjust production levels according.

I mean, one of the things that we need to be very careful about -- you talked about the incentive scheme -- contrary to other European jurisdictions, this incentive scheme is effectively being financed by Fiat and by anybody else who benefits from the scheme.

Under the current tax rules, all the incentives that are being offered by the government in connection with the scheme are effectively being advanced by Fiat for the customer.

So on a cash basis, Fiat is actually producing these vehicles at a cash loss.

This tax credits -- this recoverable tax is going to be applied against future tax payments, which are non-VAT related.

But they apply to future tax payments into the treasury.

And so based on our calculation, we have over EUR400 million in receivables from the government at the end of September of this year.

That number will be in excess, so EUR0.5 billion at the end of '09.

And that's negatively impacting our debt position.

If we had been able to monetize that recovery as we have done in France and in Germany, then our net debt levels would've been EUR400 million lower.

And we would've been at EUR5.3 billion.

So it's a nonrecurring bulge in indebtedness.

It will take us -- based on our best expectations as to what is payable to the treasury, under other captions, it will take us anywhere between two to three years to work off that credit.

Obviously, if the incentives are continued in 2010, that number will continue to increase.

And it will take us -- and we will add on an additional tail to the repayment timeframe under which we're going to recover the full cost.

But I think it's important you understand that the financing actor in this incentive scheme is the carmaker.

And so Fiat is carrying the burden of that incentive.

And it will carry it until the incentives expire.

There's more cash coming across from the Italian Treasury over to Fiat to try and make us whole.

And so that's why our own internal view on this is that obviously it's going to have a negative impact on our trading profit for the car side.

Even with the removal of the incentive, SGA will post positive earnings in 2010.

It will have whatever impact it has on employment levels, both in Italy and potentially in Poland as a result of the decrease in demand for A-segment cars.

But there's no doubt that the drop involves some 2,050,000 to 1,700,000 is going to negatively impact Fiat more than any other producer.

But I think we're ready to deal with the situation if it happens.

And I think life goes on.

It's not our business to try and dictate industrial policy.

This is a decision that must be made by the Italian government knowing what it knows about its own finances.

I think we will respond accordingly based on what they do.

Okay.

Thank you.

Thank you.

We'll now move to our next question from Martino de Ambroggi from Equita.

Please go ahead.

Yes, sorry to go back to the guidance.

Just to be sure correct understanding, (inaudible) between 1.5 and 1 plus is just Italian fiscal incentives, nothing else?

No, I don't know, EUR1.5 billion or EUR1 billion trading profit?

Yes.

No, no.

That number -- the incentive scheme never game into the trading profit calculation.

This is purely a balance sheet item.

I sell a car for 100.

There's $20, EUR20 that are recoverable from the government.

I carry the $20 on my balance sheet as a receivable and which I can only offset against future payment that I make to the Italian Treasury.

So I will keep on carrying that receivable forward until I have no more payments to make to the Italian side.

But it's not a trading profit item.

The difference between the EUR1 billion and the EUR1.5 billion that I made reference to is purely due to the impact of the full reorganization of the business that has gone on, the fact that we will extend the operating losses of CNH construction equipment business because of all the organization that's gone on, and the fact that we have for the full year a much better grip and control on our cost structure.

So it's based on the restoration of some levels on the truck side, nothing phenomenal.

But I think that the EUR1.5 billion is based on a realistic assumption about where volumes will be next year.

But it's certainly not based on an astounding recovery of trading conditions across the sectors.

It's certainly the continuation of all the work that we've done that we started at the end of 2008 and really fully implemented in the latter part of this year, third and fourth quarters.

So it's purely the benefit of the management of operational leverage on the house.

Okay.

If we lose the incentive, we will lose roughly EUR375 million of the EUR1.5 billion.

So it'll be about EUR1.100 billion in 2010.

Perfecto.

Perfecto.

Thank you.

My second question is on Brazil -- I'm sorry -- is on Brazil because in the press release you mentioned the price pressures.

So I can't imagine that if you gave a guidance of next year's CNH for this year that maybe the price pressure will inevitably have a negative impact.

No, I actually think that the performance of the business will be in line with 2010.

And I think you probably -- I think you're putting way too much emphasis on this pricing pressure in Brazil.

I think it's an issue.

But I don't think it's -- it is being managed.

I think that it's a healthy competitive environment in Brazil.

I think you need to allow our Fiat operations to continue to perform as well as they have.

But I'm not throwing up any red flags on this issue, nor am I changing the forecast on Brazilian performance in 2010.

Okay.

Perfect.

Very clear.

Thank you.

Thank you.

We'll now move to our next question from John Buckland of MF Global.

Please go ahead.

Thank you.

Just going back to that working capital question, I mean, if you take what CNH did in the third quarter and can deduct that from the figures you report in the cash flow statement, it does look as though the cash flow was down a couple of EUR200 million or EUR300 million.

So I just wondered whether you really are happy with the performance of the other businesses in terms of reducing working capital compared to the peak performance that's coming from CNH.

And I don't know.

Going back to Max's question, I mean, it does appear as though the big part of the cash flow benefit that you're going to get this year is also coming from that working capital that CNH is going to deliver.

They're saying going to reduce working capital by $1 billion this year.

That's the first question.

The other questions relate to what's going to happen to the markets in 2010.

You talk about the impact of Italy.

Obviously, you've got a big market share.

And that's important market.

But you've also had a very strong gain in market share in all markets in Europe, especially where there are incentives.

And these incentives also potentially going to come to an end.

They've already come to an end in Germany.

What does that mean for Fiat's sales?

And then on Brazil again, you seem to be quite optimistic that the tax and changes in tax breaks that have been in place in Brazil aren't going to affect sales in Brazil.

I wonder if you could just talk about why you're so positive on Brazil.

Thank you.

I think we're going to chase our tail on this working capital issue until we're blue in the face, right?

I mean, CNH obviously has made a very clear commitment to deliver $1 billion in working capital reductions, which is absolutely true, right?

That's the share commitment.

It's built into our forecast.

The only thing that we said is that we expect that our debt levels will be below EUR5 billion at the end of this year.

I didn't tell you it was going to be EUR5 billion.

I didn't tell you it was going to be EUR4.95 billion.

I just told you it was going to be below EUR5 billion.

You and I are going to argue about how much below EUR5 billion we're going to be at the end of this year.

And if we're going to have that argument, we might as well have something else.

Well, no, I don't want to argue about the level.

I'm just arguing whether you think that the other businesses are delivering their share of improvement, given that a lot of it seems to be coming from CNH at the moment.

Well, I can only tell you this that if you look at the inventory positions of the other businesses, I don't think we could drive -- and to be perfectly honest, if I tried, I don't think it could drive a lower level of inventories on the car side.

We're not talking about an incredibly thin distribution to the channel, to the channels.

We are at capacity limits on some models.

And I don't think we have, as you're seeing from the numbers that we've given you -- we do not have an inventory issue in terms of the car side, certainly not in Europe, and certainly not in Latin America.

The area where you may have some comments is on the performance of Iveco.

And Iveco is working its way out of this -- working its way through this restocking exercise.

Most of the plants are effectively not producing.

And I think that there is a level of pessimism that's built into how much cash they'll be able to generate by the end of the quarter.

But they all need to be taken in the context of the commitment that we've made and the guidance that we've provided that that will be below EUR5 billion.

The other thing you need to understand is that out of that EUR5 billion, EUR0.5 billion relates to unrecovered incentive money.

In the scheme of things, we will have been sitting on about EUR4.5 billion at the end of this year, which is a significant number.

And that's a number that was unknown to us at the time that we gave guidance.

I mean, there's a natural ballooning of the debt position, which is due to this unrecovered incentive scheme out of Italy, which is at the time that I gave guidance in the early part of this year was not known to us.

So take that into account.

Okay.

On the price, on the VAT issues, we feel relatively comfortable that that is not going to be an issue in Brazil going forward.

I'll leave it at this.

The other question -- the market share gains you've had in these other markets, where incentives have been strong.

Yes, there's not a single doubt that the German market in the absence of incentives as we have seen now, but the actual raw number of demand is actually dropping pretty rapidly.

And I think that there's a view out there that there's 1 million cars that will somehow not be placed in the marketplace in 2010 under that market.

I think that the real issue for us is whether the other countries will continue some type of lower incentive schemes to incentivize consumer purchases.

Our best indications today is that France and the UK will continue the schemes in 2010 at a lower rate and then will phase them out during the year.

And that's built into our projections for next year.

So I don't think that these things are going to continue forever.

But I think that we're now reaching levels which go beyond sort of the natural replacement rate of vehicles going forward.

A market like 1,700,000 vehicles in Italy as a worst-case scenario is a number that we have not seen historically here.

I mean, I'd have to go back and check.

But I don't remember a number ever being that low.

And I think there's a point in time in which you're just going to go -- you're going to go below the natural replacement rate of vehicles.

So I don't think that the market share gains that we've made outside of Europe are going to be totally disappearing, especially in those two major countries where I think that the incentive schemes will be continued.

And that's our view today.

We'll have a much better view on this at the time when we get together in January.

But certainly, our indications today is that the other major markets will continue, Germany excepted, that they will continue to provide stimulus for the purchasing function.

It is actually -- I mean, if you want my honest opinion as to whether Germany can actually withdraw -- completely withdraw the incentive scheme.

There may be a modified version that will be introduced.

But the government has not spoken on this issue.

So we have built a dramatic reduction in volumes in Germany in 2010.

That's built into our forecast.

Okay.

Thank you.

Thank you.

We'll now move to our next question from Thierry Huon of Exane BNP Paribas.

Please go ahead.

Yes, good afternoon.

This is Thierry Huon speaking from BNP.

So I've got three questions, if I may.

The first one is still about Brazil.

When we are speaking with different OEMs, all of them are speaking about their big ambitions in this market, which seems to be one of the few buy-ins and where it's still possible to make some profit.

So don't you feel that we'll put some pressure on the pricing and that in 2010 it would be much more difficult to make the same amount of profit as the one you are currently making in this market?

The second question is about the UK market forecast.

You gain significant market share and volumes in this market.

But here, there is a big issue in terms of currency.

Could you share with us how you deal with this currency issue?

And the last question's about your product [rollout] for 2010.

I'm not sure that I have a good view of what you will put in terms of new products.

And I think this will be even more important in 2010 than ever.

So could you give us some clues on that, please?

The last question was about what new products we're introducing?

Yes.

Well, I mean, to be clear, product introductions out of Fiat, which are purely Fiat-derived products, is that we're going to be introducing the successor to the 147.

And you'll be seeing this in Geneva next year.

I don't think there's anything else that we're -- somebody just reminded me of the fact that we're launching the new 00 in the light commercial vehicle sector in the latter part of 2010.

So there's no big news.

And this is totally reflective of the fact that we made a decision to postpone a lot of these launches because of the weakness in the markets and the fact that these launches would've been fundamentally ineffective.

Somebody just handed me a time series data of volumes in the Italian market.

We have to go back to 1996 to find a number that resembles 1.7 million.

1996, we sold 1,723,000 cars in Italy.

But we had been above the 2 million mark since 1997 until 2009.

But it will certainly be a phenomenal drop in volumes, which is going to be pretty disastrous when you look at the impact not just on us but on every other car producer.

I mean, we have (inaudible) share in the country.

But one out of three cars is ours.

Two out of three belongs to somebody else.

And the impact is going to be significant.

In terms of your -- and by the way, the answer to your new products issue, I prefer to answer all these after we have the meeting on November the 4th because obviously one of the things that will happen as a result of the presentation is that you will see there will be a cross pollination of architectures and products across the brand.

2010 for the UK, the currency side of the UK by the way -- not just now -- but it has been historically a huge problem for all of us.

It's a sector which is -- it's the only country I think historically which has been really fundamentally ungrateful to all car producers.

Having said this, there's still -- on a [very full] cost basis, they're still profitable.

And I believe that we will continue to produce them as long as that condition is met.

But I can tell you even at times when sterling was stronger than it is today, the pricing -- and it's never been phenomenal.

I think a lot of the car producers been able to move our prices as a reflection of the weakness of the currency today to try and recover.

Certainly, we will not solve them if we're reaching those levels.

On the Brazilian side, I think that there's -- I agree with you.

I think everybody talks about Brazil like everybody talked about China and the fact that it was going to be the exploding market.

I think that we have an incredibly strong brand and incredibly strong distribution.

In Latin America, there's no doubt that we're going to suffer additional competitive pressure as other people come into the area.

Our expectations are that in 2010 we'll still be able to maintain volumes and margins.

And certainly, based on our run rate that we've seen for the end of September, what we're expecting in the fourth quarter, we may see some loss of some marginal loss on market share due to this.

But I don't think we're going to enter into a price war, which will depress margins.

Okay.

Maybe a very last question if I can about [MCV].

You mentioned the importance of this business for the (inaudible) profitability.

Do you think that there is a chance to see some recovery in 2010?

Well, I just looked at the numbers when I came into the room.

Our volumes for 2009 are going to be roughly half what they were in 2008.

And so I'm -- the answer is yes.

We're now really dealing at historically low levels on sales.

But the problem with our commercial vehicles is that they're very much [a pass] to the economic cycle.

Unless we do see a general movement in GDP across the European area, you will not see a significant move in those numbers.

And it's a bloody shame for Fiat because that has been the single largest contributor of profits in terms of brands to the Fiat Group automobile sector.

So I -- we suffered.

And when you look at the charts that are included in the appendix and you look at the trading profit loss, you see that the price mix chart, which is negative --

Yes.

-- is purely an indication of the shift away from light commercial vehicles to the A&B segment.

And so anything that gets recovered off those volumes is going to significantly improve the trading profit performance of cars.

Okay.

That's clear.

Thank you very much.

See you in Detroit.

Yes.

Thank you.

We now move to our next question from Jose Asumendi from RBS.

Please go ahead.

Hi.

Jose Asumendi, RBS.

A couple of questions, please.

On the truck side, you provided some comments.

Could you maybe just (inaudible) on which regions or countries you still have some inventories?

And what would be your assumptions for the Eastern European truck market in 2010?

And the second question on car production rates for the fourth quarter -- I guess it would be reasonable to assume that you're going to have higher production rates versus Q2 '09.

Could you comment on that?

And how should we think about December production rates?

Are they going to be sustainable?

Are they going to be considered different to the October or November levels?

Let me try and deal with your last question first.

I think that in the absence of some very clear indication from government authorities as to what will happen in the incentive schemes in 2010, any answer that I give you is going to be wrong.

If the incentive schemes are dropped at the end of 2009, you're going to see a phenomenal ramp up in demand in the last quarter of 2009.

And you will see these plants running flat out and certainly in excess of any capacity that we currently have forecast in the plan.

If the incentives get rolled over on a reduced basis in 2010, you're going to see some increase in demand.

And you will see a higher level activity in Q4 compared to Q2.

If the incentives are maintained at the same level, I think that the market will stay where it is.

And you're not going to see a substantial shift.

And so you will not see a phenomenal increase in production rates in the fourth quarter.

But all of it depends on what happens to the incentive schemes across Europe and more importantly for us what happens to the incentive schemes in Italy.

And we'll run the production machine accordingly.

We are running the machine today on the assumption that the incentive scheme will be shut and that it will not be renewed in 2010.

So the purchasing organization and our production schedule is designed to run it on that basis.

And until we get a better indication from government authorities, we will not change it.

If you're asking the question about trucks in Eastern Europe or you're interested in a personal purchase, just call me offline.

I'll get you a great deal on a truck.

But we do have an issue in Eastern Europe with the inventory levels.

We have been slowly working our way out of that position.

And this is a destocking exercise that will continue to take the rest of 2009 and the early part of 2010 going forward because we're assuming that market to be absolutely flat year over year.

Okay.

That's great.

Thanks a lot.

Thank you.

We'll now move to our final question from Adam Jonas of Morgan Stanley.

Please go ahead.

Thanks.

It's Adam Jonas, Morgan Stanley.

Good evening.

Couple questions.

First, a follow up to your Italian incentive kind of game theory that you were discussing -- so you're going on the assumption then that the incentives are going to now be pulled at the end of the year.

So does that mean that you are planning to ramp up production massively in the fourth quarter?

(inaudible) first question.

Second, you also alluded to Iveco and how you're trying to maintain price discipline to protect the equity to brand in this market.

But of course, that statement implies that the pricing pressure -- that there is a pricing pressure in the market.

And your competitor aren't being as disciplined as you because hence your market share loss.

So is that a correct assessment then that your competitors are getting quite aggressive on pricing?

Any way you can quantify that?

The answer to your second question is yes.

There is pricing pressure in the marketplace.

But we're not playing.

And can you quantify?

Is it normal level of gaming the system?

Or is it kind of these like 5% type declines or significantly more?

No, I don't think the normal -- I don't think they're part of a normal trading mechanism.

I think that you're seeing in some cases a very unreasonable positioning of these products.

They're not disastrous.

But I don't think they reflect normal trading conditions.

Got it.

And by the way, I don't think that we're going to see -- I mean, you're seeing the results of some of our competitors that reported third quarter.

I mean, truck makers are in deep doo-doo.

I mean, I think fundamentally the earnings performance of these businesses is not stellar.

I think there is phenomenal margin pressure, which is being caused by the inability of the systems to run the investor machines.

And so when you're trying to deal with an overhang of inventory, you will do stupid things.

And that's why I think we have been very, very careful in the way in which we deal with the Eastern European inventory, which is being digested.

I think we need to be very careful that we don't do anything which permanently damages all the work that's gone on here in the last five years to try and reestablish brand equity.

But I'm not sure that everybody else either has the same objectives that we do or is as disciplined as we are.

In terms of your question about higher production, the answer is absolutely yes.

I mean, we are -- we're going to get an indication sooner or later as to whether the government will sit on incentives for 2010.

But this machine is -- we're responding to demand.

And that demand is -- I mean, we have a pulse on the market which is quite good actually.

And so to the extent that we see any turn at all in demand caused by the potential disappearance of incentives, the machine will be able to get on stream relatively quickly.

And so we have reserved our rights to try and produce the hell out of the system in 2009.

Thanks.

And final question -- hopefully, it's a lighthearted one -- but reading those headlines about the legal action apparently brought on by Great Wall about this kind of side situation, I went on the internet.

I'm looking at the picture in front of me right now, the Great Wall Parry and the Sea of Panda.

And I'm like, they're suing you?

Shouldn't you be suing them?

I mean, what am I missing here?

And is this just a nothing?

You're not missing anything.

We have sued them.

Okay.

And we were first to sue them.

I think this is a response to our --

It's a retaliatory tactic basically.

It's a retaliatory tactic.

And I don't want to prejudge the case.

But I think history will prove the case out.

I mean, we've been making the Panda for a lot longer than China has, although the animal goes back to a long time in China before we started making cars.

Yes, they may have the panda.

But Fiat has a better lawyer.

There you are.

That's a good answer.

Okay.

Thanks a lot.

Thank you.

Okay.

I think that the operator is missing.

We would like -- I think that the Q&A session has ended.

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

If you have any questions, please don't 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.