Stellantis NV (STLA) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Fiat Group 2014 second quarter results conference call. For your information, today's conference is being recorded.

At this time, I would like to turn the call over to Joe Veltri, Head of Fiat Group Investor Relations. Mr. Veltri, please go ahead, sir.

Thank you, Darren, and good afternoon everyone. The earnings release that we issued earlier today, together with the presentation material from this call, are available now on our investor relations website.

As customary, today's call will be hosted by the Group's Chief Executive, Sergio Marchionne, and by Richard Palmer, the Group's Chief Financial Officer. After introductory remarks, we will be available to take your questions.

Before we begin, let me remind you that forward-looking statements we might make today during the call are subject to the risks and uncertainties mentioned in the safe harbor statement included on page 2 of today's presentation. And as always, the call will be governed by this language.

With that, I would like to turn the call over to Mr. Sergio Marchionne.

Thanks, Joe. I'm going to keep my comments to just a couple of points.

The first one is, overall, the quarter, notwithstanding the mixed results we got from the regions, was satisfactory; we made about EUR1 billion in EBIT. It does leave the Group with a minimum of EUR2 billion EBIT gap to complete by the end of the year.

In order to maintain guidance we have jacked up volumes for the year. We see numbers coming in at 4.7 million for 2014. And we feel relatively comfortable that the guidance that we laid out at the beginning of the year is going to be met.

Richard will take you through the various regional pieces of the puzzle, but the two things that are important from our standpoint.

One, I'm encouraged by the progress that has been made in EMEA, in terms of closing the gap. We have seen similar results coming in from some of our competitors, so the European situation, although not fantastic, and certainly not in terms of forecast improving tremendously, is stabilizing and I think that's an encouraging sign.

APAC continues to perform well; I think the issue is about the investment locally. And the introduction of Jeep on a grand scale in that jurisdiction is progressing well. Those are the positive arguments about all this.

Notwithstanding the lower numerical results coming out of Latin America, we've had a chance to compare our numbers to our competitors. We have done tremendously better than anybody else in the region. The region, as you well know, and most of you have written about this in your remarks, is not having what are considered to be a glorious year.

We've had poor performance in the first half of this year, but just to reinforce the notion that we have presented to you, on numerous occasions, we do have an operational advantage in Latin America.

And I think it's evident now from the results that have been posted that we're still positive, not tremendously large numbers, but at a sufficient distance from our competitors to suggest that we do maintain the same type of operating margin distance to the other two big guys in Brazil.

And so I'm encouraged by that. I'm also encouraged by the fact that I think that we're going to see a more stable market in the second half o this year, and obviously the fact that we do have this large client coming on stream in the first quarter of 2015. So LatAm notwithstanding, less than exciting market conditions, continues to perform well.

The disappointing story is, from a margin standpoint, has been NAFTA. Richard will take you through the issues that have impacted performance and NAFTA, but it is something that obviously we intend to remedy. We continue to sell more; certainly the last indications that I have of our performance in July are encouraging. I think we're going to continue to streak.

I don't want to jinx the results before we release them on Friday, but all indications suggest that we continue to perform well in the marketplace. I think we need to become a lot more disciplined on the pricing side of this, and I don't think we've seized every opportunity that's available.

I don't think that we're suffering from pricing pressures on a competitive basis. I don't think we have been proactive enough in terms of pushing the portfolio in the market.

Couple of things about the quarter. Today was the last official Board meeting of the Fiat S.p.A Board, in anticipation of a shareholders' meeting which will be held on Friday.

F4s have been filed; they became effective on July 10. One of the things that appears to be attracting interest in the market is the sole issue of the [retraso] rights, or the withdrawal rights, associated with dissenting shareholders who do not agree with the merger.

To be absolutely clear, there is a condition that's associated with this merger, and that is, in total, between dissenting creditors and dissenting shareholders the sum of EUR500 million cannot be exceeded, at which point, the merger is ineffective.

There appears to be some misunderstanding in the marketplace about the fact that it is a waivable condition on the part of either Fiat or Fiat Chrysler Automobiles. The answer is not, and so if that number were to be crossed, for whatever reason, I think the merger will be ineffective and we will not be in a position to complete the transaction.

And so I have zero intention of taking this issue back into the Board for a reconsideration. We would have to start a process all over again, which we will undoubtedly do in due time if, in fact, that condition were not to be met.

I fail to see why that would happen, but in the event that people were trying to play arbitrage games in terms of potential benefits from the exercise of their right, I'm doing this to give you fair warning about what the implications would be. I think we're dead serious on getting this done. I'm confident and hopeful that we will not exceed the EUR500 million number, but if the EUR500 million number is exceeded, the merger is ineffective.

The other important thing is that, obviously, we're confirming guidance. These are not inconsequential numbers. We made about EUR1.6 billion in the first six months of this year. We need to go a long distance in the next six months. We're confident we can make the numbers and, on that basis, I'll pass it on to Richard. He'll give you more color.

Thank you, Mr. Marchionne, and good afternoon or good morning to everybody. Before we begin, I'd like to remind you that, beginning this quarter and consistent with our May 6 business plan presentation, the Group will no longer report trading profit as a supplementary performance assessment measure. We're focusing on EBIT, going forward.

Now going to review with you the Q2 2014 results, starting from slide 3.

Group worldwide shipments in the second quarter were up 2% year over year to 1.2 million units. And this takes first half shipments to 2.3 million units, up 5% compared to last year.

Group revenues were EUR23.3 billion, up 5% over last year and up 10% at constant exchange, and first half revenues amounted to EUR45 billion. EBIT was EUR961 million for the quarter, down 10% or 5% at constant exchange, resulting in first half EBIT, ex unusuals, reaching EUR1.6 billion. The unusuals were principally related to the Q1 unusual items we looked at last quarter.

Net industrial debt was reduced to EUR9.7 billion from EUR10 billion at the end of March. And total available liquidity for the Group at the end of the quarter was EUR21.8 billion, up EUR1 billion from the March level.

As mentioned, in April, the Group expanded the joint venture partnership with GAC for the localized production of three new Jeep vehicles for the Chinese market, which will expand upon the portfolio Jeep SUVs currently available to Chinese customers as imports. Production is expected to begin by late 2015.

The Group successfully accessed the capital markets on July 15 to complete the refinancing of 2014 maturities with the issuance of an EUR850 million bond with 4.75% coupon and maturity in July 2022.

Regarding upcoming events; as you are aware, an extraordinary general meeting with shareholders is called for August 1 to approve the cost for the merger of Fiat into its wholly owned subsidiary incorporated in the Netherlands, Fiat Investments N.V.

2014 full-year guidance is confirmed, as already mentioned, with worldwide shipments of 4.7 million units, up from 4.5 million to 4.6 million previously; revenues greater than, or equal to, EUR93 billion; EBIT, ex unusual, in the range of EUR3.6 billion to EUR4 billion; net profit, ex unusual, in the range of EUR0.6 billion to EUR0.8 billion; and net industrial debt between EUR9.8 billion and EUR10.3 billion.

Moving on to slide 4, beginning with shipments.

NAFTA and APAC reported shipments up 10% and 42%, respectively. These gains are partially offset by a 21% reduction in LatAm where shipments were down compared to a record second quarter in 2013. EMEA shipments remained flat year over year.

Group revenues were up 5%, or 10% at constant exchange, attributable to the higher volumes in NAFTA and APAC, as well as an increase for luxury brands on the back of a fourfold increase in volumes for Maserati, which shipped nearly 10,000 units in the quarter.

Revenues for the components group were flat compared to prior year. First half revenues reached EUR45 billion, up 13% at constant exchange.

EBIT for the Group was EUR961 million in the quarter, a decline of 5% at constant exchange. I'll talk you through some more details by region in the following pages.

Net profit was EUR197 million, down from EUR435 million in Q2 2013. The reduction reflects the lower EBIT and also a higher tax charge, as was forecast in our full-year guidance, due to the US-based earnings now being taxable on a book basis at full tax rate of around 35%, following the booking of the deferred tax assets regarding US book tax differences at the end of 2013.

Net industrial debt at June 30 was EUR9.7 billion, a decrease of EUR300 million from the end of Q1 2014, thanks to EUR0.6 billion of positive cash flow from operations offset by a EUR0.3 billion negative effect of non-cash items, principally related to changes in cash flow hedge items.

As mentioned, liquidity remained strong at EUR21.8 billion, including EUR3 billion of undrawn committed credit lines.

Turning to page 5, you can see the different contributions from the various areas of the business.

Starting with revenues, the NAFTA region continues to grow and remains the main source of revenues for the Group, representing 53% of total revenues and 62% of total EBIT.

The second biggest contributor to EBIT was luxury brands, with revenues growing 59% year over year. The EBIT increased to represent 17% of Group EBIT from a 10% contribution a year ago. LatAm EBIT has stabilized with a significant reduction compared to last year, but at a similar level to the last two quarters as the market scenario continues to be uncertain and reduction in top-line volumes drives lower EBIT.

With EMEA reaching nearly break-even this quarter, an improvement of EUR63 million year over year, we are nearly in the position of having all segments with positive EBIT for the quarter.

On slide 6, we focus on some of the key performance metrics for the Group.

Net financial charges in the quarter were EUR506 million, which included interest accrued on employee benefit provisions of nearly EUR90 million. Financial charges were EUR11 million lower than Q2 2013, or EUR32 million lower if we exclude the positive impact of the Fiat stock option-related equity swaps in the prior year.

The decrease in interest costs was mainly related to the benefit of the early repayment of the VEBA note and the repricing of the Chrysler credit facilities, which more than compensated for higher costs of the increased average net debt in the quarter compared to last year.

Income tax charge amounted to EUR258 million for the quarter, compared with EUR121 million last year. The increase of EUR137 million, as mentioned, was principally due to an increase in deferred tax charges.

EBITDA was down EUR81 million in the quarter to EUR2.15 billion. Excluding exchange impact of EUR100 million, EBITDA was basically flat quarter over quarter.

Just one more point on the book tax rate. The book tax rate of 57% for the quarter is impacted by the fact that we do not book any deferred tax assets on Italian losses in addition to the impact of IRAP on the total tax rate.

Slide 7 shows the components of the change in net industrial debt during the quarter, which was reduced to EUR9.7 billion in line with the balance at yearend 2013, adjusted for the purchase of the minority equity stake in Chrysler in January. Positive cash flow from operations was EUR2.4 billion, which was EUR0.6 billion higher than the EUR1.8 billion of capital expenditures during the quarter.

The positive contributions from change in funds and other is driven by increased accruals for incentives and warranties in NAFTA, APAC and luxury vehicles driven by volume growth, together with an increase in accrual rates for NAFTA incentives as well as the impact of seasonal sales of GDP and buyback units to fleet customers in NAFTA and EMEA.

Working capital also contributed positively, due to seasonal production profile in EMEA compared to Q1, and for NAFTA, driven by the start of production of the new 200 in SHAP during the quarter, as well as volume growth in Maserati.

The negative investment scope column is a non-cash effect driven by changes in the cash flow hedge reserves, due principally to the Canadian, Australian and US dollar exchange rate strengthening compared to the end of Q1. FX translation was also negative for EUR70 million.

Moving to page 9, we look at the performance by region, for the mass market brands.

Starting with NAFTA, the industry remains strong, supporting a robust level of sales for the Group. Revenues were up 7% year over year, due to higher shipments, and 11% in US dollar terms.

EBIT for NAFTA was down 18%, compared to Q2 2013, or 15% at constant exchange rates. I will provide a detailed EBIT walk on the next page.

Q2 shipments were up 10% versus Q2 2013 with a 13% increase in the US whilst shipments were flat in Canada.

Group vehicle sales in the region were up 11% to 647,000 vehicles, outperforming both the US and the Canadian industry growth. The Jeep brand and Fiat brands all reported solid year-over-year sales increases.

Sales for the Chrysler brand came in lower, partly reflecting the changeover to the all-new 2015 Chrysler 200, which launched in May. Sales for the Dodge brand were slightly lower, reflecting the discontinuation of the Dodge Avenger in line with brand strategy.

US dealer inventory was at 72 days' supply in line with the March end level.

Page 10 details the EBIT walk for NAFTA compared to Q2 2013.

EBIT for NAFTA was EUR598 million in Q2, EUR130 million down from Q2 2013. The 2013 EBIT included net positive unusual items of EUR66 million driven by the gain on the pension curtailment amendments in US and Canadian salaried pension schemes, partially offset by a Jeep voluntary recall campaign.

Excluding the negative impact from the non-repeat of the unusual items, and negative exchange translation for EUR30 million, EBIT was down EUR42 million, or 6%.

EBIT was positively impacted by higher shipments of 55,000 units, as well as better mix, due to most of the volume growth being in the US retail market, driven principally by the new Jeep Cherokee. However, positive pricing actions to recover vehicle content enhancements, included here in industrial costs, were substantially offset by increased incentive spending on legacy products and the negative impact of FX related to the Canadian dollar revenues.

Industrial costs reflect higher level of R&D and depreciation and amortization. SG&A growth was related to higher advertising to support the new model launches of the Jeep Cherokee and the Chrysler 200.

Page 11 shows the industry was up 7% in the US versus prior year, with cars up 4% and trucks up 10%.

In light of the growing industry, the Group outperformed the market with a 13% growth in sales which resulted in overall market share increasing by 70 basis points versus prior year to 12.1%.

The Group maintained its streak of consecutive months of year-over-year sales gains with the Jeep brand continuing its strong performance, achieving record sales levels for the month June.

In Canada, the industry was 4% in Q2, due to the growth in the truck segments. Group sales outpaced the industry, posting a sales increase of 6%, with Canada also continuing its string of consecutive months of year-over-year sales increases.

For the first half of 2014, the Group was the overall market leader with market share increasing by 20 basis points, compared to prior year, to a total of 15.3%.

Moving on to slide 12, the LatAm [motor] industry was down 16%, reflecting more difficult trading conditions in the main markets and the tough comparison with the record Q2 2013. Group revenue declined 23% year over year, or 13% at constant exchange, which resulted in a reduction in EBIT of EUR162 million or 65% at constant exchange.

Group shipments in the region totaled 203,000 units in the quarter, down 21% versus Q2 2013. Brazil declined by 21% versus Q2 2013, which had benefited from lower IPI tax rates. Shipments in Argentina were down 13%, reflecting a decline in the overall market. This was partially offset by an improvement in market share in that country.

Turning to page 13, the decline in EBIT for the region reflects the reduction in shipments of 55,000 units, due to weaker trading conditions, with Brazil down 46,000 units and Argentina down 4,000 units, partially offset by some better mix.

Net pricing improved, thanks to pricing actions in Brazil and Argentina which nearly offset increased industrial costs resulting from higher input cost inflation, FX on imported materials, and some costs for the Pernambuco startup.

Moving to slide 14, Q2 market demand in Brazil declined 12% compared to the record set in Q2 2013.

Although the Group's market share declined in Q2, we did retain our leadership position in the Brazilian market with share for the quarter at 20.9%, a 180 basis points lead over the nearest competitor.

The Group's share for the combined A/B segments was at 23.4%, down from 27% a year ago, due primarily to the discontinuation of the Uno Mille, while share for the new Strada was up 350 basis points in its segment, closing Q2 at 56.5%.

Volumes for the refreshed Fiorino were up 33% with segment share at 78%.

In Argentina, Group sales outperformed the market resulting in a share gain of approximately 300 basis points to 15.8%. Share of combined A/B segment was at 21.3% with a strong performance from the new Palio.

Moving now to Asia Pacific on slide 15, the region experienced strong overall demand in the quarter, up 9%, driven by growth in China, India and South Korea, partially offset by slight declines in Japan and Australia.

Group revenues were up 34%, or 41% at constant exchange, driven by a 42% growth in shipments. The main nameplates driving growth were Fiat Viaggio, Jeep Compass and Jeep Grand Cherokee. EBIT increased by 20% versus Q2 2013 to EUR106 million.

Retail sales, including JVs, were up 50% to 69,000 units with the Jeep brand up 57% compared to Q2 2013, due to Grand Cherokee and to the newly launched Cherokee. Volumes for the Fiat brand were up 69%, driven by Viaggio and Ottimo models.

In Q2, Jeep further expanded its product lineup in China with the launch of the Cherokee Trailhawk model and diesel versions of the Grand Cherokee and the Wrangler. As noted earlier, during the quarter an agreement was signed with GAC to locally produce three new Jeep models beginning in late 2015.

Page 16 shows the details for the EBIT growth in Asia Pacific.

Compared [to Q1] to Q2 2013 there was a positive impact for high volumes of 16,000 units and better mix. However, pricing was negatively impacted by foreign exchange for vehicle exports to China and Australia.

Industrial costs increased, versus last year, due to higher R&D spending, while the increase in SG&A expenses were incurred to support volume expansion and new product launches in the region.

Turning to page 17, Group sales were 50% higher in Q2 in APAC versus the same period last year.

Sales in China, including JVs were up 63% versus the 13% growth in the industry, primarily due to the Fiat Viaggio and the Fiat Ottimo and the new Jeep Cherokee.

In Australia, sales rose by 55%, with market share growing by 140 basis points, and in June Jeep began selling the new Jeep Cherokee. Group sales for the quarter were up and also outperformed the market in both India and in South Korea.

In Japan Group sales were down 10% as the market experienced sales pull-aheads before the increase of a consumption tax starting in April 2014.

Moving to slide 18, for the EMEA region, the industry for EU28+EFTA registered its fourth consecutive quarter of growth with demand up 4%, 3.5 million vehicles. The positive trend continued in Spain and the UK, with moderate growth in France. Demand remained stable in both Germany and Italy. In the rest of Europe, there was an overall increase in industry of 5%.

Group revenues were down 3%, due to a lower used car volumes and component volumes. Overall shipments were stable at 286,000 units with passenger cars down 2%, fully attributable to the Italian market. LCV shipments were up 9% in line with the industry.

Company and dealer inventories remained stable at two months of supply.

The walk on page 19 details the improvement in EBIT for EMEA driven by better mix, thanks to higher Jeep sales, continuing growth of the Fiat 500 family and stronger LCV performance driven by Ducato.

Pricing was negative, due to continued competition in passenger car segments which was slightly offset by pricing for LCVs.

Industrial costs improved as a result in continued efficiencies and purchasing savings. SG&A was higher compared to Q2 2013, due to increases in advertising spend to support Jeep brand growth in the region, including the launch of the new Cherokee.

Turning to page 20, here we show details for the commercial performance of the region.

Overall, the market was up 4% to 3.5 million units. This was driven by Spain, UK and France with Italy and Germany flat.

Group sales were up 1% over last year to 213,000 units. Market share in Europe came in at 6.1% for the quarter, which represented a 20 basis point decline compared to Q2 2013, but up 10 basis points from the first quarter.

The Group experienced share gains, compared to a year ago, in Germany, the UK and Spain, while Italy was down 120 basis points, mainly due to an 8% market decline in the B segment.

Fiat 500 and 500L were confirmed as leaders in their respective segments with combined sales of 81,000 units in the quarter.

Moving to slide 21, which deals with the LCV segment in Europe.

The industry was up 9% to 453,000 units confirming the first quarter trend. The higher LCV market was driven by growth in each of Europe's five major markets.

Group sales were up 5%, to 59,000 units, with share gains in Italy and in Germany, while share declined in other major markets, due to fleet seasonality.

Ducato maintained market leadership position in its segment with the launch of the new model, by achieving its best-ever share of 25.7% in the quarter.

On the following side, 22, we review the performance of the luxury brands.

Ferrari revenues were EUR729 million in the quarter, an increase of 16% from prior year. Consistent with the announcement that production will be capped to preserve the brand's exclusivity, shipments were at 1,900 units for street cars, slightly down versus prior year.

Shipment of 12-cylinder models were up, with positive contributions from both the F12 and the FF. Shipments of 8-cylinder models were slightly down, with performance improving over the first quarter following the launch of the California T.

EBIT rose 9%, to EUR105 million, compared to Q2 last year, thanks to better sales mix.

Revenues for Maserati totaled EUR738 million, an increase of 162% over prior year. Shipments for the quarter were approximately 9,500 units, compared with approximately 2,300 units in the prior year.

EBIT was at EUR61 million, compared to EUR9 million a year ago, on the back of this strong volume growth.

The components business, as shown on side 23, posted combined revenues of EUR2.1 billion for the quarter, with EBIT flat compared to last year at EUR60 million. Revenues for Magneti Marelli were even with last year.

Performance was positive in NAFTA, China and Europe, but down in Brazil, partly due to the weakening of the real.

Lighting business was up 11%, electronics systems up 13%, driven primarily by sales of telematics and navigation systems to non-captive customers, while powertrain units were down 14%, mainly due to Brazil.

Teksid revenues were down 3% year over year, on a constant scope of operations, with the cast iron business posting a 2% decrease, primarily due to lower volumes in Brazil. The aluminum business posted a 19% year-over-year increase.

EBIT was minus 1% for the quarter, compared with a positive 1% in Q2 2013.

Comau reported second-quarter revenues of EUR336 million, down 6% over the prior year. Order backlog is up 12% from yearend 2013, and second quarter EBIT was EUR11 million, slightly up compared with the prior year.

Turning to page 25, to review some of the key business issues by region, starting with NAFTA.

We recently launched the all-new Chrysler 200. Production began in Q2 at the Sterling Heights assembly plant, and the vehicle was available at dealers for sale starting at the end of May. This is the third vehicle derived from the Group's compact US-wide architecture, and contains many benchmark features for its segment.

In Q3, production of the redesigned and reengineered Dodge Challenger SRT will start at the Brampton assembly plant in Canada. This will be the fastest muscle car ever, and will feature the first application of our all-new, supercharged, 6.2 liter HEMI, with 707 horsepower.

On page 26, in LatAm we recently began selling the upgraded version of the Fiat Linea, produced at our Betim plant.

The upgrade included significant product interventions, including an all-new interior. This car will allow the Fiat brand to better compete in the critical C-sedan segment of the market.

In April, we also introduced the Way version of Fiat Palio in Brazil, which is an all-new, off-road-like model. This car expands the success of Palio family of models, and will help Fiat maintain its leadership in the A and B segments.

Moving to slide 27, growth in APAC was mostly driven by Jeep, up 57%, and accounting for 51% of the total sales increase in the region.

Fiat was up 69%, driven by Viaggio, the Group's best-selling nameplate in the region. Dodge was up 29%, mainly driven by the Journey in China.

On the right side, you can see some recent models launched on the Beijing Auto Show in April, such as the Fiat Ottimo Sport and Freemont Black-Top Edition, as well as four Chinese-inspired concept vehicles for Jeep.

Jeep in Europe, on the next page, is growing, and in June reached its best sales month ever in the region, driven by the Grand Cherokee and the all-new Cherokee. In particular, Grand Cherokee sales grew by 78% in Q2, 2014, and it was ranked fifth in its segment.

The all-new Cherokee was launched in March, and already reached a segment share of just under 3% in June, selling 5,000 units in the quarter.

The Jeep brand will expand its lineup in the region with all-new Jeep Renegade, which will be launched in the third quarter of this year. This all-new vehicle will be Jeep's first B segment SUV, and has segment-leading features such as best-in-class off-road capability; segment-exclusive nine-speed automatic transmissions; and advanced safety and technology features.

Moving to slide 29, to review our expectations for full-year market demand in each region.

For NAFTA, we've revised our estimates up for the US industry, and now expect it to grow to 16.5 million units in the year, in line with the first half.

In Canada, the market is projected to be substantially in line with the record levels reached in 2013.

The outlook for LatAm has recently been adjusted downward, from 5.8 million units to 5.6 million, to reflect market uncertainties.

The Brazilian market is expected to be down 2% for the full year, with a positive 3% in the second half of the year. And Argentina's expected to decline full year by 25%.

In APAC, the industry demand is still projected up around 6%, with improvement driven by China, India and South Korea.

The overall industry in EU28+EFTA countries is now projected slightly higher, with a 5% growth year over year.

Revised outlook is driven by better expectations for Spain and the UK, while for Italy, Germany and France the outlook is unchanged.

LCVs in Europe are now projected to 1.7 million versus 1.6 million previously, with Italy expected to post a 14% increase year over year.

Slide 30 provides a detailed outlook of our shipments by region for the year.

On the right-hand side you can see we've increased our 2014 estimated shipment volumes to approximately 4.7 million units, up from the previous estimate in the range of 4.5 million units to 4.6 million.

Moving to page 31, as stated, we are confirming our full-year guidance for 2014.

We expect revenues to be greater than, or equal to, EUR93 billion, with EBIT in the range EUR3.6 billion to EUR4 billion. Group net profit remains forecasted in the range of EUR0.6 billion to EUR0.8 billion.

We expect to end the year with net industrial debt in the range of EUR9.8 billion to EUR10.3 billion, compared with the EUR9.7 billion at the end of 2013, adjusted for the VEBA minority equity transaction.

And with that I will pass the call back to Joe.

Thank you, Richard. Now we're going to turn the call back over to Darren, and we will begin the Q&A session. Darren?

(Operator Instructions). [George Galliers, ISI].

Two questions from me. Firstly, with respect to your joint ventures in China and other regions, can you confirm that all the joint ventures are included in the results-from-investment line, and, therefore, are part of the EBIT and the EBIT guidance, so were not included in the previous trading profit guidance?

And are there any joint ventures which, for any reason, are not included in the EBIT, or will not be included, going forward?

And secondly, I'm sure you've seen the headlines with respect to the NDRC placing pressure on JLR, Mercedes and Audi to align their China prices with those in other parts of the world. What are your thoughts with respect to government intervention on pricing? And with respect to Ferrari and Maserati, have you had any discussions regarding pricing with the authorities? Thank you.

Let me deal with the second part of your question on the NDRC matter. Discussions are ongoing with the NDRC; I think we are collaborating, as the other carmakers have in China. There have been no discussion with them in connection with Ferrari and Maserati, simply because of the uniqueness and limited number of cars that are being sold in the jurisdiction.

We have had discussions with them about Jeep, and the pricing of Jeep in the jurisdiction. I think we do not have a resolution of those discussions to be presented today. It's my expectation there will be, certainly from an overall standpoint, from a Group standpoint, whatever implications may come out of those discussions will not be material to earnings.

The question that you asked as to whether I agree with the intervention of the NDRC on pricing, it is what it is. I think that there's been a heightened level of concern on the Chinese side about the way in which foreign carmakers were approaching the Chinese market. And I think I understand their positioning. I think we're collaborating with them. I don't expect it to have drastic or dramatic, draconian impact on our results.

And the first issue, I think that the answer is yes to all the questions that you've asked, and to be perfectly honest, I wouldn't get overly excited about the inclusion of joint venture earnings out of China. We're still at startup phase in China, so I'm not sure it's a positive today.

Okay, great. Just on that second item, what you're basically saying is, I guess, the trading profit guidance and the EBIT guidance are the same, but within the EBIT you have somewhere between EUR100 million and EUR150 million in incremental income from the other investments line.

Yes, the number is EUR50 million to EUR100 million to begin with, and it's not APAC related. It's not coming out of EMEA.

Great, that's clear. Thank you very much.

[Which by the way] -- since you being granular about this, that's one of the reasons why we closed the gap in terms of EBIT performance Q1 to Q2 out of EMEA.

Makes sense. Thank you.

Fraser Hill, Bank of America.

I was interested in your comments about needing to improve profitability in North America. I wonder, maybe just looking back to your bridge, which areas of the costs side of the equation do you think you're going to have some flexibility on to perhaps improve your profitability there?

It looks like your pricing was actually slightly positive, so am I right to be thinking that it's the cost opportunity, or do you think that you can be doing even more than you've already done on pricing on North America?

There are a couple of things that I think have negatively impacted our results. The first one is that there has been a significant rise in the portion of our vehicles [of Fiat] brand which are being leased.

And the leasing -- we make more money out of a retail sale than we do out of a leasing transaction. And we're not the only ones in this business that suffer from that problem. We have had a significant increase in leasing that's negatively impacted our margins.

The more fundamental issue -- and that's something that we need to watch. We need to watch it very, very carefully because, obviously, if that's true, then I think it needs to be built into the cost structure of the vehicle and it needs to be reflected in pricing.

The more important thing is that I think we have gone through a period of significant product enrichment across the portfolio. I don't think we have been as disciplined as we should be on passing on those enrichment costs over to the customer base. I don't think we've met resistance on pricing in the market; I [don't] think there are issues on a [competitive] basis that will suggest we can't recover. I think it is truly a matter of discipline on our side in trying to get that done.

The other thing that Richard mentioned is that we're still dragging a number of products from the old portfolio; the Compass, the Patriot are products that existed when we took over in 2009. We're still selling more or less the Grand Caravan in Town & Country as minivans on the marketplace. We've had the last bout of Avengers in the marketplace before the 200 was launched.

It's a combination of things. And when you look at the pricing structure of those vehicles and the margin generation, in order to keep these products alive, we have had to resort to what I consider to be anomalous pricing actions which are not reflective of the current portfolio of the house.

We won't have a new minivan until 2016; we understand the structural deficiencies of the vehicle, at least against its competitor class, Hyundai and Toyota, and that has cost us money. So at the end of the day, as much as I believe in the product I think we do need to wait until 2016 until proper pricing condition and margin generation can be gotten from that class.

I don't know whether you want to add anything, Richard?

Maybe, Fraser, just to be clear there; maybe there's a better way to represent this. In the industrial costs column, when we launch a new product that has a higher cost content because of enhancements in the product, that's hitting the industrial cost.

And then in the net price you see two effects: one is the fact that we have been pricing positively for the new products in the market, but on the other side, we are spending more on incentives because of the items that Mr. Marchionne mentioned. So higher leasing, higher incentive spend on the legacy products as we need to renew those going forward, so that's eating into the positive pricing that we're getting on the new products.

The EUR42 million should be a lot higher, but the incentives are basically eating into the pricing.

Okay, thanks. That's useful. I just have two more questions. The next one was a bit of housekeeping, but on the tax, Richard, you explained why the tax rate was so much higher in the quarter. How should we think about that over the next -- for the rest of this year and over the medium term? Is that going to be a persistent factor for your tax rate over the coming quarters?

In terms of the book tax rate, it's going to continue to be a persistent factor, because of the fact that we don't book deferred tax assets in the Italian jurisdiction as we generate losses here. In terms of cash taxes, obviously our cash tax rate is significantly lower than the book tax rate you're seeing, which is impacted by the deferred. We're at about the low 30%s in terms of cash taxes.

And that's the same number that we gave you when we did the plan presentation and that's what we expect to have, going forward.

Now, let me add one operational overview on to that incredibly technical discussion on the blended tax rates. The underlying problem from this position, and we're not the only ones in this box, is that unless those EMEA earnings turn positive the drag on the combined tax rate is going to become evident.

This number that we've booked for Q2, in absolute terms, if I look at them in terms of percentage, is by all international standards obscene. We booked a number like 57%, a 57% tax rate, and part of that is attributable to the fact that this country -- I'm talking about Italy now -- has this employment tax which is not profit-related and, therefore, it's fundamentally a general levy which is included in income taxes, almost incorrectly.

But the other part of it is that there is an underlying loss which goes back to the earlier question about the fact that there's an operating loss out of EMEA which needs to be cured. All the work that we're doing, including the introduction of the new Jeep, which is coming out of Melfi this year, the introduction of the 500X and the reorientation of all the other industrial plants in this country to produce cars for both Maserati and Alfa, is designed to cure that problem.

If we are successful, and I think we will be in that repositioning, then the tax rate as we go forward and as profits get generated, is going to drop like a bomb. And you'll see the rate going well below the traditional OECD rates, because all those profits will effectively benefit from non-book tax losses which are sitting in our book.

So long term it's going to look a lot better. As we transition from current state to the future state it's going to be painfully ugly, and there's nothing I can do about it. Zero. I think that this booking of the losses, which was mandatory in the US because of the fact that we proved the fact that we could generate profits, the booking of those debits have really created this problem and we need to work our way through it.

The only good thing about all this is it's effectively a book tax; it's a reversal of a previous debit and has no cash impact on the house. But from an order earnings standpoint, it looks ugly.

Okay, thanks. My final question was on EMEA and just your comments about the losses needing to be cured and you've clearly made some good progress yourself, but the market's not giving you much help either. Do you think that you can actually get to a position of acceptable margins through your own measures with the stagnant market that we've got in Europe, or do you think that you're going to need to see more alliances across the industry, maybe from yourself?

There's been some stories across Bloomberg suggesting a tie-up with Peugeot. I'm sure you can't comment specifically, but are you looking at strategic alliances to give you even greater scale in Europe? Is that front and center for you?

Fraser, that's a multiple question, so I've been trying to tear it apart. The first part of it is that I do not think that the mass market in Europe, as presently configured, even on a recovery basis, if I assume that we're going to make up some of the distance between 2007 levels and today, we are still nearly EUR3 million shy of that number.

Even if we were to make a significant recovery of that lost volume across Europe, it's never going to be rewarding enough to generate profits that would justify the capital structure in the jurisdiction, ever.

2% to 3% margins running in this business are fundamentally unsatisfactory and they don't provide an adequate return on capital. So to me, there's a more fundamental question associated with this, which is the reason when you look at the May 6 plan that we presented, is that we have really tried to move away from the sand box in which this Company has historically played in, because I am convinced that continued presence and the continuing intensity of competition in the mass market is going to yield some return, but not enough, and certainly not as good as we could possible obtain from repositioning the industrial assets towards another end.

The larger question about whether we're talking to people about alliances, the answer is yes. And I repeat what I said that we are open to discussions with everybody, especially if the objective is to improve the cost positioning on market presence of our brands.

It's nothing new; we have shown in the past our willingness to engage in discussions. I make no comment, as we have made no comment in connection with the rumors on PSA, and there are a number of rumors that have been floating around, I mean VW coming in and PSA talking to us and a variety of other sources. I think there's nothing to talk about here; I think we've dismissed all those rumors as being rumors. When we have something to announce we'll make it clear.

Many thanks. Thank you.

Martino De Ambroggi, Equita.

Two quantitative questions. One is on the EMEA; you improved in the first half by EUR100 million your performance, and I was wondering if we should expect a similar improvement in the second half, taking into account the launch of new models. Or the marketing costs will offset this potential improvement?

I think it's reasonable to look at the second half in regards to the first half as being slightly worse, potentially, because of the seasonality of the third quarter. But I don't think it's going to be significant. So I would expect EMEA to continue on this type of run rate that it's been at in the first half of the year.

Yes, we should do better H2 to H1. [If that's possible].

Okay. And the second relates to LatAm, because I noticed a very positive pricing effect in excess of EUR130 million in the second quarter. And is it repeatable, sustainable going forward, helping to maintain a certain profitability in LatAm region?

The answer is yes; I repeat what I said in my opening remarks. I still think that we have a significant competitive edge, given our operating structure in Latin America. And it's something that's visible in margin generation and in a market which is fundamentally depressed.

If you look at the volumes in Q2 2014, you compare them to last year, we're down by some -- it looks like 20%, doesn't it? Is it 18%, 20%. And so the ability to withstand that kind of margin grind and still produce earnings in an environment like this, with the startup costs of a brand new plant up in Pernambuco, is a significant accomplishment.

As I mentioned earlier, I don't want to talk about competitors' results, but I think everybody -- there are a number of people who are not having a good time in Latin America right now. And I think that the deteriorating situation in Argentina is not helping matters either, because one of the outlets for Brazilian production was effectively Argentina. And that market appears to be inaccessible or fundamentally shut down for foreign exchange restrictions coming out of Argentina.

So I think we are in a decent position. I think that the way in which we are realigning the portfolio in LatAm, the work that is being done to make sure that we properly equipped up our Argentinean plant at Cordoba, to try and deal with currency flows, is ultimately going to deliver a set of numbers which, combined with the [revenue] will, hopefully, turn out to be exceptional performance out of the new investment in Pernambuco will slowly restore this business up to double-digit performance as quickly as we can. So I'm as confident, as I've always been, about Latin America and being able to navigate through these issues.

And I know there are number of things people are talking about, the World Cup and the elections, there's going to be a number of things that are going to be a disturbance to the underlying operating performance. But I think we're in good shape, given everything else that's going on.

Yes, thank you. If I may, one more question on Maserati? Since there is not any EBIT bridge disclosure, if you could help us to have a better understanding on the profitability trend and specifically --?

Profitability is improving. One of the reasons why we don't provide you the bridge is because it has to do with the portfolio mix between the Ghibli and the Quattroporte. Margin generation out of the Ghibli is significantly lower than it is on the Quattroporte and, therefore, until we start launching the next vehicle up from the class, which is the Levante and, hopefully, it will come on stream in Q1 of 2016 or the end of 2015.

I think you're going to see this type of result coming through; we're going to make between 37,000 and 38,000 cars this year. The number will, hopefully, be in excess of 40,000 in 20105, but the order book continues to be strong. The Ghibli was priced at a point that we decided on the price to make it competitive against the relevant class.

It has got a very large exposure to the US. The US is incredibly competitive on pricing, but more importantly, the euro/dollar exchange rate is making these -- and I keep on hammering on this issue, the euro is grossly overvalued and, for a variety of reasons, I think we're beginning to see a lessening of the strength of the euro as we move forward. But until we start seeing more decent numbers out of the euro I think it's going to negatively impact on everybody.

But in the case of Maserati it's purely mix. And the increasing proportion of Ghibli is a percentage of total.

Okay. So to have a steady double-digit return on sales, we need to wait for the new SUV?

I don't know about that. I think we need to work to 2015. I'm slightly more optimistic than that. We'll give you better guidance at the end of the year.

Thank you very much.

Alessandro Foletti, Bank am Bellevue.

I have two questions, if possible? One, overall, you are guiding for the 2014 for higher number of volumes, shipments, yet maintaining more or less the guidance in euro terms. Is this because you see pricing deteriorating, or is more for conservative outlook?

No, it's simply based on the fact that I only made a EUR1.6 billion in six months and I need to make EUR2 billion in the next six months.

Which means?

Which means that I had a -- okay, let me turn this into vernacular language. We had a crappy first quarter, a half decent second, and we need to have outstanding quarters in the third and in the fourth.

Right, okay. So I interpret this as you being conservative?

I actually think -- I'm looking at a couple of colleagues in the room here, who are looking at me sideways. I don't think there's anybody inside the Group that thinks we're being conservative on confirming guidance. I think everybody is committed, everybody is optimistic, and I think everybody's pushing in the same direction. But these numbers are not conservative; it's a huge number.

Okay.

We have a number of things to do but let's stick to guidance; EUR3.6 billion to EUR4 billion is a good number. Let's live with that and, hopefully, we'll surprise you on the positive side, but let's not get overly enthusiastic here.

Okay, thank you. Second question on the merger plan, assuming it is accepted by the general assembly, can you give a bit of a feeling on the timing and also may be changing of accounting coming up?

I'll leave the accounting question to my friend, Mr. Palmer, but timing of all this, meeting is Friday, we'll deposit the minutes of the shareholders' meeting either on the 4th or on the 5th. There's a 60 day running period thereafter. We should be in the US by the middle of October.

All right.

And the rest of it I'll leave to Richard.

We will continue [to report on] IFRS in 2015, in my opinion. We're looking at the utility of transferring, obviously as a US listed Company, to US GAAP, but that won't happen until late 2015, early 2016 based on the fact that there's a lot of work to do within the Group to put together the processes to report US GAAP as a fully consolidated Group. Obviously, Chrysler does that today, Fiat doesn't, and we need to be able to report both IFRS and US GAAP in the new configuration, so it's going to take a little bit of time.

And change to US dollar, is it going to overcome or stay to euros?

That would probably come together with the US GAAP change based on the listing in the US, but that will happen late 2015, 2016, in my opinion.

Thanks.

Philip Watkins, Citi.

I just had two. In terms of debt, I was just wondering if you could update us on your latest thinking about how that declined, whether a couple of months ago we, the market at least, have thought that maybe something like a mandatory convertible bond could be on the agenda. Is that the case actually and, if so, when?

And secondly just on Brazil, I understand what you're saying about the competitive situation, but in terms of the market being more stable in the second half, could you perhaps elaborate on why you think that would be the case? Thanks.

Richard will give you a crack at the LatAm question, but if I can just deal with the issue of the mandatory convertible issues relating to equity. I mentioned during the analysts' meeting on the 6th that the whole question about capital structure was being looked at by management obviously, was being discussed actively with the Board.

It is an issue that we need to address. On completion of this merger, I think there's going to be a dialog with the Board about what I think the available alternatives are for FCA, going forward. I don't want to take anything off the table but I don't want to put anything on the table.

There's a fundamental question that says that, if we execute well and we execute our plan, then I think somebody should just buckle up and ride the wave. That's one extreme view of believing in the fact that the plan is going to get executed. And if you look at the numbers and you look at the fact that, by 2018, the plan calls for a debt-free organization, raising equity or quasi-equity through a mandatory convertible would almost be a crime.

On the other side, I understand the issue about safety and the comfort that you get from some type of equity raised. We need to have that dialog with the Board; I think it's on for the second half of this year. We'll keep you updated. But today I have no plans for the issuance of anything, and I think that we continue to rely on the debt markets to support the positioning of FCA. I think we have found accessed depths adequate for our needs.

Thank you.

We'll leave it at that.

I think in terms of the Brazilian market, last year's first half was relatively strong. It weakened in the second half. We're not expecting miracles in the second half of this year. We're expecting Q3 to be relatively flat and then to start to see some level of improvement in the back end of the year after the elections and a certain level of confidence comes back into the market.

We don't, fundamentally, think that Brazil has an issue from a macro point of view. There's a lot of demand in the market. There's a lot of demographic reasons why this market should continue to grow. And like I said, we're not really projecting anything huge to happen in the second half of the year. The second half of last year was pretty poor. We're looking at a flat Q3 and some potential improvement in Q4.

Thank you.

Teo Lasarte, BofA, Merrill Lynch.

In the past you've highlighted an increase in CapEx, going forward, under your plan. Looking at your CapEx for H1, it was below that of last year. Going forward, can we expect a year-on-year increase in CapEx, or is that something more for 2015 or later?

I think we initially said we'll be around $8 billion for the year. Last year was $7.5 billion. I think we'll be around the $8 billion; we may be slightly shorter. It really depends on some of the timing of the CapEx. It's not related to the programs; they're all on time. So I think a slight increase year over year, but maybe not as significant as we had originally targeted, envisaged.

The lower part of the CapEx was actually on the NAFTA side and we expect the second half to be higher, given some of the programs we have coming through to replace the legacy vehicles that we discussed earlier, which are suffering from an incentive point of view and need to replace. The second half will be consistent with the $7.5 billion to $8 billion spend for the full year.

Understood. Thank you.

Kristina Church, Barclays.

It was a little bit more of a longer-term strategic question. I know you've talked about alliances and that you think nothing is off the table. I was just wondering what you thought, in an ideal situation, would be the structure of the Group in 18 months' time, say. Would you ideally be looking at a similar structure in terms of a conglomerate nature, or are you actively looking for ways to tie up or otherwise to look at maybe offloading some of the current brands that you have? Thank you.

I'm a bit perplexed by the question. I understand it fully; I think I understand the English content of what you said. I'm a bit stretched to follow the conglomerate argument, because I thought I cleaned that up with the demerger of CNH Industrial, and I thought we had taken all the non-car-related activities into a separate company. But on the assumption that I was successful in convey that message to the market, I am not sure that unloading brands is a way of removing the conglomerate nature of our business. We are a multi-brand environment; have been and will continue to be a multi-brand environment, going forward.

If my discussions about Ferrari and the uniqueness of the brand perplexed some people in the audience on May 6, it was done in order to help you try and get an understanding of valuation and the inherent value in investing in Fiat. But I wasn't suggesting that I was carrying a hidden conglomerate discount in my shorts, so I --

I guess my question was more whether you thought you could get more value for a brand like Alfa by keeping it within the Group, or whether there could be potential to raise the value? I guess that's the same way of asking it.

Yes, well, the question is, for any brand that we own, is Jeep more monetizable to somebody else, and how much is it worth on a trade. We have been very, very clear about the commitment to develop Alfa within the fold of Fiat Chrysler.

I am as confident now as I was on May 6 about our ability to generate significant profits from our involvement in on the premium side. I think you cannot disconnect the commitment to the premium brand building from the incredibly positive repercussions on the financial performance of EMEA, as an operating region, the absorption of costs of the industrial structure, and the potential utilization of this incredible reservoir of loss carried forwards that my predecessors and I have been able to accumulate over the years.

So I think that, from a structural standpoint, we would be looking like a million bucks if we were able to effectively develop Alfa on our own. And I also think that that development would be far in excess of any transaction that you could possibly concoct in terms of the sale of the brand itself.

It's outside our DNA. We're not in the business of brand trading, and so we are committed to Alfa; we're committed to the premium brands [in life were gone]. Let us work; we're carmakers, that's what we do for a living.

And if I could ask a follow-on question, sorry, another question following on from Philip's comment on the structure equity? In terms of debt renegotiation, do you think there's a significant amount you can do to reduce your current interest costs? How near term do you think that could be done as a more favorable step than looking down the route of a convertible?

I think there is room, I think it's limited room, in terms of bringing down the actual cost -- the cost of borrowing, as long as the size of the gross borrowings remains at a size that it is.

We are keeping - and Richard talked about this -- we are keeping what I consider to be an inordinate amount of cash on hand. The number which, if you include uncommitted lines, is in excess of EUR20 billion. And that is not normal; I don't think we need that kind of reservoir to run a EUR93 billion business.

So by the time we finish renegotiating the packages and getting through all the call options that we have on this debt back [next] in 2015 and 2016, how we refinance this will undoubtedly yield some savings. I don't have a doubt.

Is it going to drastically change the interest line? The answer is, not unless the absolute level of gross borrowings goes down. That's an issue that needs to be addressed, and it's somehow connected to the first question that was asked about capital structure and comfort that we have. Is it worthwhile to pay that price today by keeping all this liquidity on hand, and thus avoid any concerns about capital calls? Or is it worth raising some capital and bringing down the absolute level of borrowing?

So that analysis is ongoing. I think we'll come up with a view; I think we'll discuss it with our Board. And I think, hopefully by the end of the year, we'll express a firm view.

I repeat what I said on May 6: I can live easily with this environment. It doesn't bother me, right. And I understand that it has a cost; I understand it. And as we go forward to generate cash through this process, we may be able -- and I think the real lumpy year for us is really the conclusion of this year and next year. 2016 starts changing color.

So we're less than 18 months away from the potential signs of a structural reduction on the debt levels of this house. When you're that close to a rebound, you're going to have to ask yourself the question, is it worth the hassle for 18 months to get this done.

I'm going well beyond the scope of your question, but this is something we think about all the time. So leave it with us; we'll come back to you by the yearend.

Thank you.

[Philippe Houchois, UBS].

My question was on -- your top line, about 5%, is still pretty good, considering the currency headwind that you have across the industry. What was the negative impact of ForEx on top line, and possibly on EBIT, if you could give the number on an aggregate level for the Group?

The other question I had is on the industrial costs that we keep seeing on the [NAFTA] or Chrysler, again, EUR300 million in the second quarter. Was there anything that was related to some kind of quality issues, recalls, etc., things that we keep seeing across the industry? Or was it just industrial ramp up costs of new products, etc.?

Look, just to answer that question, the rest of it is all Richard, before I forget to give you the answer, Philippe. There's no doubt that the industrial machine, as it launches products, is not firing on all cylinders. There are still issues that we're working our way through, and we're not in an ideal state. Do I think it would have made a huge difference if we had executed flawlessly? Yes.

The other problem that you need to understand is that we keep on pushing the limits of our production capacity. Most of our Jeep plants and our [RAM] plants at running flat out, and we keep on stretching our suppliers into providing us with the components. That, in addition to the costs associated with getting them to do it, has got quality issues associated with making sure that this increased demand continues to meet our quality requirements.

So there have been issues in the quarter, and there have been issues in the first quarter, and there continue to be issues until this situation goes into steady state, and we're not there.

But those are industrial [frictional] costs; they're not some problem with a particular product or recall, or something like this, that you're preempting before the regulator comes after you?

No. Just let me deal with this issue of regulation, and so on. I've been public on the call the last time we were on, and I was also in May, when we got together. I think that you're going to see -- and we are not the only ones, there are other companies that have gone through this in the United States.

You're going to see an increased level of regulatory interface with the carmakers. And the consequence of that interface is going to be an increase in recall activity across the fleets, and some of them are going to overshoot the mark by definition.

And I think we need to live through the process of adjustment. So I expect, over the next two or three or four quarters, we're going to see increased charges coming through, which I don't think are going to be devastating, but I think they are going to work their way through the industrial cost machine. And they're going to lead us to a point where I think we will reestablish equilibrium.

I'm equally convinced that, as these costs become structural to the industry, there's going to be a pricing action across the piece, and we're going to restore margins. This thing is going to get pushed back into the marketplace; it cannot be held.

Okay. Maybe before you pass on to Richard, you told us back in May that there were about EUR500 million to EUR600 million or $500 million to $600 million, I can't remember, of things to dispose of. Are you still on track to do that before the end of the year? I think the treasury shares and CNH, or CNH Industrial, etc.

The answer is, we are always on track to dispose of things that we don't need.

You don't need those, yes. Okay. (multiple speakers).

But timing is everything, as they say.

Right. But your guidance doesn't include -- your net debt guidance for the yearend does not include disposals, are we clear on this?

It does not.

It does not. Yes, okay. That's fine. Great. Now, if Richard can tell me about currency, that would be great.

Hi, Philippe. So basically, the 5% difference because of exchange is driven, both for revenues and EBIT, basically, by US dollar, predominantly, but also slightly be Brazilian real. (multiple speakers).

Yes. But does it mean that when you give us a 5% reported revenue growth, organic was something like 10% you said. Is that the right number?

Yes.

Okay. Then in terms of your earnings, your EBIT of EUR961 million, or [EUR951 million] for the quarter, how much of a currency headwind did you have aggregated in that number?

EUR60 million.

Only EUR60 million, okay.

[The] translation.

Philippe, I'm not talking to you. EUR60 million to you, you just brushed up. We will (multiple speakers)

No, (laughter) it's because we see triple-digit numbers from your peers, which are smaller. So in terms of the transaction risk, you are in much better transaction position.

Wait just a second. This is the translation of the result.

Right, okay. What's the transaction then as well?

Well, the transaction is, like I said, for example we have a negative impact in pricing in Asia Pacific because of the Chinese and Australian dollar. That's the main fact. Then we had a negative impact in pricing in Canadian revenues.

The biggest issue that we have is the Canadian/US dollar problem because of the way in which product flows north and south of the border. We have a large production base in Canada. We sell most of that output into the United States and most of the Canadian stuff is produced in the US. So the question of flows is important. When you've got these kind of gyrations in Canadian dollar/US dollar rates, it does impact and it was negative for the quarter for us. It was a large portion of the number that Richard talked about.

Yes, okay. That makes sense. EUR60 million would be a nice add-on to your EBIT, I agree.

It would have been very, very nice. I could have used all the digits.

Okay. Thank you very much.

Rabih Freiha, Exane.

Just two questions on my side. Could you tell us a bit more, maybe, about the R&D capitalization rate in the quarter? Would it be fair to assume that you're progressively going to lower this capitalization rate to converge accounts IFRS to US GAAP?

The second question would be on the guidance; obviously, Q3 is seasonally less favorable. Could you tell us what's driving your optimism on H2? Is it mainly pricing in North America, is it industrial costs, the biggest drivers you see in H2 to get you to your guidance? Thank you.

Our capitalization rate is about 60% of spending is capitalized, and that rate is projected to be relatively stable. Clearly, it's not a gradual change as we go to US GAAP. If and when we go to US GAAP, we will have to, basically, restate the numbers and no longer capitalize any R&D. So that would be a net change in the accounting policy.

Okay, very clear. Thanks. (multiple speakers)

Second question is, in terms of the guidance, like we talked about, one factor is volume. We expect the US business to continue grow and generate more volume in the second half. That's why you see 2.5 million units for the full year for NAFTA, coming off 1.2 million units in the first half.

We also, as we discussed at some length at the beginning here, we need to work on the incentive structure for some of the legacy vehicles and also the leasing percentages. I think there's some opportunity to improve our margins in the second half of the year, as we look at the commercial policy on those items, in addition to the fact that, as we transition to the model year 2015 in August/September. So I think one of the big drivers for the improvement in the second half of the year has to be NAFTA. And those are the key things that we need to go after.

Okay. Thanks.

Stephen Reitman, Societe Generale.

This also partly relates to capitalization as well, and in particular looking at the US, or the NAFTA results, rather. I know we all get the Chrysler US GAAP results next month, but might we expect that the margin that Chrysler reports under the US GAAP certainly looks better than the general trend we're seeing in these NAFTA IFRS results, given the fact that, obviously, capitalization plays quite an important role in the NAFTA -- in the difference in the results between the Chrysler US GAAP results and the NAFTA IFRS results.

If you could just [generally] also talk about what has been the pricing trends on the newer products you've been launching, like Cherokee and what general early indications you're seeing on the Chrysler 200. Thank you.

Stephen, I don't honestly want to go and start to talk about Chrysler results before we go public with them officially, so if you could be patient. In 10 days' time, we will issue those and then I'll talk to you about the differences. I don't want to preempt the issuance.

In terms of pricing on the new products, as I said before, we've been fairly successful, I think, in pricing the new products significantly higher than the predecessor products in the market. Obviously, a good piece of that is a function of the improved product offering and the content that we put into the vehicle and so, therefore, there is cost associated with that.

I think so far we've been pretty successful in adequately positioning these products within the marketplace to sustain or improve our margin performance. They're obviously dependent on the level of brand awareness that each vehicle has. I think Jeep, the Cherokee is doing very well and we've priced it right in the [higher vis] segment, so performing well. The 200 is too early to really talk about in any detail.

No, the 200 is doing well. I think we've blown through records on the Canadian introduction; the US is coming along well. It's been only in the marketplace for less than 60 days; give it a chance to [grip].

Thank you.

Jose Asumendi, JPMorgan.

Two items; the first one on capacity utilization of the plants in Europe. You used to provide this data; if you could give any comments where we stand in Q2. Has there been any progress been done over the last quarters, just compare against end of 2013?

The answer to that question is obviously there's not been significant progress. As the products get launched, and we'll see this now with the launch of the Renegade, you'll see utilization rates going up and you're going to see a gradual improvement in that portfolio, going forward.

The reason why we don't release the numbers is because there has not been a significant change in [EMEA] positioning now for a quite a while. So it would have been what I consider to be a redundant and somewhat unnecessary disclosure. But we'll start providing it again as these plants come up.

Sorry to go back again on this industrial cost in the US; Richard, can you give us some color there on the split between R&D, D&A, and purchasing savings?

Then, I'm sitting here looking at your CapEx R&D spending, peaking at [EUR16 billion]. So I'm just thinking it looks like an obvious burden over the next quarters and in 2015. Is there a chance that these purchasing savings is going to offset some of the burden, or is the geographical mix going to change so you will see a lower burden in the US? Any comment on that, please. Thank you.

In terms of our R&D spend, it's relatively flat. There is a level of amortization that's coming through every quarter year over year, which is higher as we amortize the newly launched vehicles, and that's the function of the transition to IFRS for the Chrysler activities. So there's about EUR60 million of extra R&D in the industrial cost line you looked at. Then there is about $300 million of extra content cost in that line, partially offset by the purchasing savings. So the [$300 million] is the number that then, on the price side, we have priced for.

As I was trying to explain, and I apologize if I wasn't clear, we have priced for that. But on the other side, we are seeing negative impacts on our net price position on the legacy vehicles, and because of Canadian exchange, which is basically offsetting the positive price from the new vehicles.

Okay. Thank you.

Richard Hilgert, Morningstar.

My question also was a follow-up on the industrial costs. In prior quarters, we've had over EUR600 million in industrial costs third quarter/fourth last year. This year, we've got EUR400 million and EUR300 million first and second quarter coming out of NAFTA.

In those quarters, we had the launch of the Grand Cherokee and the launch of the Chrysler 200, both of which replaced previously high-volume models. These are high-volume models themselves. It looks like then, in the second half of this year, the decks are clear. We don't have the degree of high-volume launches that we had in the previous 12 months.

Is that a fair characterization? And can we expect the run rate in the margin in NAFTA to go back to what we saw prior to these very large, high-volume launches taking effect?

Richard, just to clarify the record. It wasn't the Grand Cherokee, it was the Cherokee that we launched.

I'm sorry, yes.

By the way, I'll now pass it on to Richard [for that], but I'm incredibly gratified by your characterization of our performance with the Jeep Liberty and the old Chrysler 200 as being high-volume products. It certainly would redefine what a high-volume product is. To be perfectly honest, they never have been.

I think we were able to resurrect the Chrysler 200 back in 2011. And the Liberty, unfortunately, suffered from what I consider to be a structural overweight condition, which means the product is uncompetitive. So they were never really high volume. Our expectation is that both the 200 and the Cherokee now are going to remedy this.

But just to allow Richard to give you a proper answer to the question, we don't have, on the table, any significant product launches in the second half of this year of the magnitude, of the caliber, in the implications that the Cherokee and the 200 have had, Richard.

Yes, let's call them mass market brands. They were intended for the mass market and you're right, they weren't exactly high volume.

Yes. They were [born] that way. I think we certainly didn't meet target on them. But these two cars are intended to be mass market cars, and I think we're walking into H2 with a better state of mind. That doesn't say that it's going to be a walk in the park, but we are walking in with a better state of mind, Richard.

I think between the two of you, you've clarified the situation, so I don't think there's anything I can usefully add.

Okay, great. One final question; the launch of the Cherokee in China, having the 5,000 units just in the one month sounds like it was a very good start for the product. A couple of things surrounding that product. First of all, those are all imports. If I'm not mistaken, you haven't started production of the Cherokee with GAC yet. When does that happen?

And then also, you've got import tariffs that you've got to deal with on that, along with this goal of reaching 1 million units for Jeep, this large goal for the year. How would you characterize that? Does that volume that you've already started to get in China, does that put you on path to that? Or was that above or below your expectations, if you could add some color there, please?

Richard, let me give you the color that you need. We're confirming the 1 million. 5,000 Cherokees was for the quarter, not for the month; I wish it had been. But there's going to be a substantial cost reduction as a result of localization of the Cherokee in China because of the import duties associated with the way in which these cars are coming into the country now. But production will start in Q4 2015 in China.

All right. Very good, thank you.

Charles Winston, Redburn.

I just want to go back to Latin America, if I could do; two quick questions on that. Given that a chunk of the industrial cost inflation, if I understood the presentation, was FX related, and with certainly the BRL relative to the euro coming back your way, would it be fair to say that that industrial cost inflation should start easing as we go through the year, which should help in terms of your LatAm profitability?

And then same region, can you just help me think about how you're going to start -- how the impact of the Pernambuco opening will impact in terms of numbers? In other words, have you been capitalizing costs that you stopped capitalizing as that plant opens?

Given how difficult the market is in that region, could we potentially see a delay of the opening of that? And just perhaps, it's a very big plant in that region, how it might impact in terms of the reported numbers in the cost base. Thank you.

The answer is that all the costs that are being capitalized are related to the building of the plant. So once we've built the plant, the costs will stop as far as we'll be carrying them on the P&L. I have no indication to suggest that the plant is not going to open on time. We reviewed this about a week ago and I think we are on track to open as expected.

The expectation is that, for the whole of 2015, this is going to have a significant positive impact on reported earnings and especially margins because of the difference in margin generation on products produced in Pernambuco compared to the ones we're producing in Betim. So I think that's going to be an interesting 2015 as we ramp up the plant.

I think our expectations obviously over time and, hopefully, by the end of 2015/the beginning of 2016, we're going to start restoring margins in Brazil to the double-digit mark that we had in the past. So let us work through all this. My indication today is that we're on track.

And in terms of the real/dollar discussion of ForEx, as to whether we expect these inflation costs to decrease, the country, unfortunately, still has an inflation problem. It needs to deal with this effectively. I'm not sure that the current round of adjustments in ForEx is going to change that dynamic very much.

I think there's a bigger issue in Brazil, in terms of how they manage their position. And obviously, a lot of this depends on how the political situation resolves itself in the elections in October, so let's just wait until then. But overall, the dynamics of the jurisdiction are still healthy.

Okay, clear. Thank you.

Thank you. That will conclude the question and answer session. I would now like to turn the call back over to Joe Veltri for any additional or closing remarks.

Thanks, Darren. We'd like to thank everybody for joining the call today. And as always, my team and I look forward to following up with you on any further questions that you have from today.

Please note that the release of the Group results for the third quarter of this year is currently scheduled for October 30. Thank you and have a pleasant day.

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