Stellantis NV (STLA) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Fiat Chrysler Automobiles 2016 third-quarter results webcast and 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 FCA Global Investor Relations. Mr. Veltri, please go ahead, sir.

Thank you, Elaine, and thank you to everyone for joining us today. The earnings release that we issued earlier today, along with the presentation material that we will use for this webcast and conference call, are available in the investors section of the FCA website.

Today's call will be hosted by the Group's Chief Executive, Sergio Marchionne, and Richard Palmer, the Group's Chief Financial Officer. After their introductory remarks, they will both be available to answer your questions.

Before we begin, I would like to note that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement 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 Richard Palmer.

Thanks, Joe,. Hello, everybody. We will start on page 4.

Our Q3 financials results were strong. We had our best Q3 ever for adjusted EBIT and our best adjusted net profit ever. Our adjusted EBIT margins were up at 5.6%, up 130 basis points over last year. All of our segments contributed positively to the improvement in the result in the result year over year, excluding LATAM, which continues to suffer the market situation in Brazil. But that area will still around breakeven. Maserati had a very strong quarter on the heels of the launch of the Maserati Levante, and showed double-digit margins for the quarter.

On the balance sheet side, our net industrial debt increased by EUR1 billion, as was expected, with our normal Q3 seasonality in both NAFTA and EMEA as we have the model year changeover in NAFTA and the summer shut down in EMEA. So, those two regions had a negative impact on our working capital. We expected it to be around EUR1 billion and that is what it came out at. We are still confirming our net industrial debt guidance for the year on the back of the Q3 number.

Other items in the quarter, the all new Jeep Compass was launched in Brazil. It is the third vehicle in the Pernambuco plant there. And that vehicle will then subsequently also be launched shortly in both China and Mexico production plants.

We signed the new labor agreement with Unifor in Canada, which was ratified on October 16. So, we now have a four-year agreement with Unifor to work through with them.

Lastly, but importantly, we have increased our full-year guidance for the year on the back of the strong results for the quarter and year to date. We are confirming our net revenue guidance at over EUR112 billion. We are increasing our adjusted EBIT guidance to more than EUR5.8 billion from the more than EUR5.5 million previously. And we are increasing our adjusted net profit guidance to more than EUR2.3 billion from more than EUR2 billion prior. And, as I said before, we're confirming our net industrial debt guidance at less than EUR5 billion, notwithstanding, as we discussed in the last quarter, the significant negative impact year to date of the real strengthening on our debt position of about EUR800 million year to date.

Moving on to page 5, talk about some of the product news in the quarter. As I mentioned earlier the Maserati Levante is being launched. It is the first SUV that the Maserati brand has offered. We have been launching it in Europe and in NAFTA, and also started in Asia-Pacific.

We have over 18,000 orders worldwide year to date. And, really, this vehicle and its initial reception in the market is reaffirming our commitment to the strategy to build our premium presence in the marketplace, and confirms our intentions regarding the business plan for the Maserati brand. In the quarter we shipped 5,000 Levantes. And the sales rate as of September was about 2,000 in the month of September, so picking up very well, starting the launch now.

We also launched the 124 Spider Abarth version. I think the 124 Spider and the Abarth version are important for the Fiat brand image. They are doing good work in the marketplace showing new product under the Fiat brand. This car is available in Europe and in North America and has been very well received in the marketplace. We shipped about 4,000 in the third quarter.

Then, lastly but not least, importantly, we have launched a new engine family for small gas engines called the Firefly. The first installation starting production is in Latin America. The first vehicle is a refreshed model year 2017 Fiat Uno.

This engine is modular in design. The initial versions are 1.0-liter three-cylinder and a 1.3-liter four-cylinder. And future versions will also incorporate direct injection and turbocharging as this gets rolled out across our small- and medium-sized vehicles.

Moving on to page 6, we will get into a bit more detail on the numbers. Our shipments worldwide on a combined basis, including JVs, were in line with prior year, notwithstanding, as we have been talking about regularly, that we have taken out production of the Dart and the 200 in North America. And including the switch of volume from imported units into China to our joint venture, which was up 30,000 units in the quarter.

In terms of consolidated shipments, therefore, we were down by about 4%, driven by the 200 Dart impact in NAFTA, which was slightly offset by Jeep and Ram improvements, and driven by Latin America due to the market, with an offset in EMEA of 18%, driven by new products, in particular the Tipo family launch.

In terms of revenues, we were flat year over year. There was no significant exchange impact in there. And basically the reduction in our consolidated shipments was offset by the increased revenues in Maserati and positive mix, particularly in NAFTA but also in EMEA. That revenue performance produced the adjusted EBIT at EUR1.5 billion, up 38%, with margins of 5.6%, as I mentioned earlier. So, year to date we are at EUR4.8 billion with a 5.5% margin, up from 4.0% last year, year to date.

That drove adjusted net profit in the quarter at EUR740 million and year to date just shy of EUR2 billion. The adjusted net profit also included, beyond the improvement in the operating results of EBIT, also reduced financial charges and some positive impacts on the tax rate because of some higher tax rate credit utilizations in Q3, which helped us to get to the EUR740 million in the quarter.

The net profit was EUR606 million compared to a loss in the prior year. As you'll remember, last year we had an unusual item for adjustment to our results for recall costs and also for Tianjin port issue in Asia-Pacific. This year, we have taken a charge for a litigation we have in progress with a component supplier and that is contributing to basically the primary driver of the net charge of EUR149 million unusuals in this quarter.

Our net industrial debt, as I mentioned, went from EUR5.5 billion at the end of June to EUR6.5 billion at the end of September due to seasonality and working capital, as we will see later on. And our available liquidity, for the same reason, we came down from EUR24.7 billion to EUR23.2 billion, but still very strong available liquidity. And, as we go forward, we will continue to pay down some of the maturities that are coming due in Q4.

Moving to page 7, we can see the adjusted EBIT walk by segment. As I mentioned before, ex LATAM, everybody else contributing positively to the improved adjusted EBIT performance. And NAFTA margins were up to 7.6% from 6.7% last year, in line with our 7.5% year-to-date number. LATAM was down due to the continued market contraction.

EMEA was up to 2.1% from 0.4% last year, continuing the positive trends we have had thus far. Asia-Pacific was up mainly due to improved profitability in the joint venture, as we go through the launch process of the Jeep vehicles we have been launching there. And Maserati, as I mentioned, showing the positive impacts of the start of the Levante volumes, up to 11.8% margins in the quarter.

Moving to page 8, you can see the same improvement in adjusted EBIT looked at by operational driver. You can see that basically all of the areas of the business are contributing positively. In particular, I think we are seeing positive impacts on industrial costs as we work on that part of the business. The volume and mix is positive driven by Ram, Jeep, and Fiat Toro and Tipo. On net price, we're still working hard to improve our price positions and, in particular, offset some exchange impacts in Canada and Australia. So, overall positive performance getting us to the EUR1.5 billion adjusted EBIT.

Page 9 shows our net industrial debt walk. As I said, it increased by EUR1 billion, the balance. The seasonal working capital absorption was EUR1.2 billion, due to model year changeover and summer shutdown in NAFTA and in EMEA. Basically that meant that we were down 40,000 and 70,000 units, respectively, which we expect to recover in Q4.

The working capital impact is very similar to the prior-year impact, and in line with our expectations. EBITDA generation was nearly EUR3 billion, with margins of 11.2% on EBITDA, up [180] basis points year over year. CapEx spend was EUR2 billion, which is consistent with the low end of our guidance at EUR8.5 billion to EUR9 billion for the full year.

We can now move on to the operating segments. If we look at NAFTA, the US market was 4.5 million vehicles in the quarter, with SAAR at just shy of 18 million units, and the Canadian SAAR at 1.9 million. So, industry sales were down 1% and 2% in Canada. Our group sales are down 2% in the region.

US sales were up 1% to 570,000 vehicles, with share up 30 basis points as Jeep and Ram sales offset the impact of the Dart and the 200 reduction. Our US data supply was slightly down at the end of Q2 2016 to 72 days. Our US fleet mix was higher than last year, mainly due to timing of deliveries that were a little late in 2015. So, this is more of a normal cadence seasonally.

Canada sales were down 18%. I think we're seeing some impact of some of the price increases that we have been taking over the last 18 months to protect our margins in Canada from the FX impact of the weakening Canadian dollar.

Shipments overall for NAFTA were down 58,000 units, of which 44,000 were Jeep, driven by the Dart and the 200. So, our net revenues were basically flat, with those reductions in volume offset by mix and some pricing.

So, if we look at the adjusted EBIT walk, you can see the negative volume impact of the Chrysler 200 and Dodge Dart, offset by some favorable vehicle mix. The industrial costs improved due to purchasing efficiencies and some lower warranty costs, partly offset by some product costs for the new Pacifica. And overall getting us to the 7.6% margins for the quarter.

Moving to Latin America on page 11, there is nothing particularly new here. The market continues to be tough in Brazil, down 8% for the quarter as LATAM, and 17% in Brazil, with some offset in Argentina, which was up 12%. We continue to be the market leader in Brazil for the quarter, with share of 18.6%.

The Jeep Renegade and the all new Fiat Toro pickup continued their strong performance and lead their segments with share of nearly 25% and 75%, respectively. Our net revenues were down 7% with some of the volume impact offset with positive mix from the Toro, in particular.

So, if we look at the EBIT performance, we lost EUR16 million in the quarter. We were down principally because we are struggling to offset the impact of input cost inflation and some exchange differences in the pricing area. September was a particularly difficult month and that is the reason why you can see the inventory days up to 48 from 39. We're seeing some improvement in sales in the month of October. Obviously we're watching this very closely and continue to take out costs, as you can see by the SG&A line continuing to contribute positively.

We do have a new vehicle in Q4, the Jeep Compass. Production was started in September and will start to contribute in terms of shipments and sales in Q4, so that should help us to continue to improve and get back to a breakeven result whilst the market is remaining tough through the end of the year.

Moving on to page 12, Asia-Pacific, the industry is strong, up 18%. Our combined sales, including the JV, were up 27%, with China up 52%. Australia down 50% as we continue to price and try to cover the Australian dollar weakness and maintain profitability. The Jeep brand was 81% of our regional sales in Asia-Pacific and was up strongly year over year driven by the localized Cherokee and Renegade.

So, if you look at the EBIT walk across, we lost EUR83 million last year, this year we made EUR21 million. The biggest driver of this is the joint venture result, which is within the other line, and also the SG&A coming down as that marketing activity is principally performed within the joint venture. So, the joint venture numbers are starting to show positive trend. And as we go into launching the third Jeep with the Compass at the beginning of next year we expect to continue to see incremental improvements.

Last year, as you remember, we had the Tianjin issue and the port explosion. We are getting through the process of setting down all of the vehicles that were involved and damaged in that issue. And we did take some incentives on closing out both all the imported vehicles -- those have now transitioned over to localized production -- and the Tianjin vehicles. We are down to less than 2,000 units at this stage, so that issue should be rectified going forward.

Moving on to EMEA on page 13, sales were up in a positive industry, with the market up 5%, with growth in all of the major markets. Our sales were up 11% in passenger car and so share was up 40 basis points. In light commercial vehicles the industry was up 14% and we were up 17%.

Overall you can see that our EBIT improved from EUR20 million to EUR104 million on the back of stronger volumes with the Fiat Tipo family and also the LTV performance being improved. Industrial costs were slightly higher due to R&D and manufacturing on those new vehicle launches, and also SG&A from marketing expenses related to those launches. But overall 2.1% margins as we continue to launch a number of vehicles was a good performance for the quarter.

Moving to Maserati on page 14, as we mentioned in the last call, we are starting to see now in Q3 the impact of Levante. Shipments, as I said, were 5,000 units in the quarter, taking us to 10,600 units for Maserati in the quarter. As a result, our revenues were up nearly 70%, and our adjusted EBIT was up to EUR103 million, with margins at 11.8%. We still have a very strong order backlog for Levante so we expect to continue to see the positive trend going forward into Q4. The Ghibli shipments were slightly down as we transition to the model year 2017. But, overall, all three of the Maserati vehicles are well-positioned going into Q4.

On page 15 the components businesses, revenues were in line with prior year, showing some improved mix of Magneti Marelli. Our EBIT increased due mainly to growth in automotive lighting in Magneti Marelli and non-captive revenues were nearly 70%, in line with prior year.

And then moving to page 16, showing our industry outlook for the remainder of the year. In terms of NAFTA, we are not changing our industry outlook. We see the US industry as stable at around 18 million units, as borne out by the third-quarter numbers.

The story, really, is LATAM where we obviously continue to see softness in the Brazilian market. We were at 3.6 million to 4.1 million prior. Now we have reduced our range basically to around 3.6 million for this year. We are seeing some level of improvement in October in the sales trend, but obviously this is something to watch very closely going forward.

Asia-Pacific, no change in our guidance. We expect to be at the high end of the range there.

And in EMEA we have increased our guidance by 0.5 million units. And we still expect to be on the high end of this range, as well, as the momentum in the European markets continues positively.

Moving to page 17, as I mentioned earlier, we have improved our guidance for the year, both on adjusted EBIT and adjusted net profit. We are holding revenues and net industrial debt. And with that, I will hand the call back to Joe. Thank you.

Thank you, Richard. Elaine, I'm going to turn the call over to you now, as I think we're ready to start the question-and-answer session.

(Operator Instructions)

John Murphy, Bank of America.

Good morning, guys. Just a first question on net debt. Obviously, at least to us the year-end target looks a little bit optimistic. I am just curious if you were considering or contemplating any asset sales in that number.

And also, Richard, you highlighted the EUR800 million headwind you're seeing from the real, so I was just curious if maybe EUR5.8 billion is an adjusted number for that ForEx hit. I'm just trying to understand the relatively optimistic number for year end.

This is Sergio. The number does not force any asset disposal. It is fundamentally due to performance of working capital reversals in Q4. If you look at our seasonality you will see the number is realistic given our history. We should be well below finance.

Okay. Then just a second question, you highlighted net pricing as a positive in North America. Obviously there are some conflicting views on this. The data is collaborating what you are talking about, but we're also hearing about gross pressure at the dealer level.

So, dealers appear to be taking some of the first wave of hits on pricing. I am just curious what you are hearing from your dealers, and if you think this positive net pricing environment can really be maintained for the foreseeable future.

I am not sure how to understand the term gross that you used.

The new vehicle gross profit per dealer is coming under pressure.

I thought you talked about just their experience being gross. (laughter) It may very well be. I am being facetious.

I think that there is no doubt that the market has probably increased in competitiveness at retail level. I think it is also a function of the way in which we have been driving performance out of our dealers. We are very much interested in growing volumes and growing share.

But I have not heard, and I have met with the dealers about two weeks ago, I met with counsel, I have not heard any alarming signs of a disintegration of the profit structure at the dealer level. I think it is reflective of normal healthy trading conditions. I would not read too much into this. As Richard said, we maintain our forecast of 18 for the year for the US. And I don't think anything is going to disturb the margin performance of our dealers between now and December.

The more problematic area for us, as Richard mentioned, is Canada, because I think that with the devaluation of the Canadian dollar, a lot of the US-based products have become naturally expensive. I think every attempt that we have made at maintaining margins in the region has come at a cost in terms of share. And you've seen volumes drop in Q3.

We were market leader at least up to the first half of this year, a position that we have now ceded to another Detroit competitor. We will not chase volumes just for the sake of getting numbers into the fold here. So, we have protected margins in Canada and I think we need to see how the year ends up.

We have also been capacity constrained on tracks, which has limited our ability to properly service the Canadian market. But it's something hopefully will be rectified in Q4 of this year.

Okay. And that leads me to the last question. The drag on the 200 and Dart, I think on slide 10, you're looking at EUR204 million on mix and volume there. And that sounded like at least all of that, if not more, was from the 200 and Dart winding down. As we look at Belvedere changing over to the Cherokee, could we see that completely reverse, and then some, by the third quarter of next year? How fast do you think this reversal and changeover will occur and you'll get the benefit from the Cherokee as opposed to those two fading vehicles, if you will?

By Q3 of next year, certainly Cherokee has gone in and I think we will be in the process of industrializing Sterling Heights to try and get the Ram up. You may not see the full margin impact of this. I think the completion of this transformation of the industrial footprint in the US will require the startup of both the Wagner and Toledo, the startup of the Ram 1500 of the new one, and the reintroduction of the Cherokee and Belvedere. That will not be completed until Q1 of 2018, so I think the full benefit will be visible then. It's my sincere expectation that we will be able to achieve double-digit margins at NAFTA once we get the number.

I can see from the sun in my eyes that Richard is having an apoplectic reaction to my assertions, but I think the transformation should allow us the set of the yield, best-in-class margins at NAFTA, and that remains a key objective.

Okay, that is actually very helpful. Thank you very much.

Patrick Hummel from UBS.

Good afternoon, gentlemen. Two questions, please. The first one, can you give us an update on where we are in terms of potential disposal of your supplier businesses? There was obviously, some news from Samsung that negotiations are being delayed due to their Galaxy Note 7 issue. And then there was some additional news on [kumaon], some interest from Shanghai Electric. I was just wondering if you can comment on where we are with those two assets or, in general, whether we should expect the closure of a deal in the fourth quarter for any of those businesses.

My second question is regarding the capacity utilization in pickup trucks. Obviously, you are still running at full capacity. We heard, on the other hand, from Ford that they are idling some plants also for the F-150 production. I was just wondering if you can give us your latest views on how your utilization is going to look like in the fourth quarter and how you would explain the differences between the three Detroit players in terms of utilization and production in the fourth quarter. Thank you.

Just to put your mind at rest, I am not going to comment on the plant utilization out of our Detroit three. If you have any questions about what the impact of that is I suggest you go back and read the capital junkie presentation that was made in May of last year.

I got to give you my views about what the utilization of our asset is in NAFTA, both the Mexican plant in Saltillo and the plant in Warren that we have in Detroit. Both of them are running flat out. I have no indications that will suggest we are going to take production down in Q4.

I think all work continues on making sure that we introduce the new 1500 properly in the early part of 2018. But certainly our forecast is not to reduce capacity utilization. So, you can use whatever definition of capacity you like, but we are over 100% of that number.

In terms of your opening remarks about asset disposal, just to be clear, I have never, to the best of my knowledge, indicated either one of the assets that you made reference to were for sale. I have never made reference to a particular deal with Samsung, nor would I be courageous enough to suggest that Samsung is having issues with batteries that connects to the 7 series. I think those are internal issues at Samsung and I am sure they will resolve them.

From our standpoint I can only tell you that, as it is true for most businesses, there are a continuous numbers of approaches that are made into the house from a variety of sources that are potential interest in other sales or combinations of some of our assets. Those discussions do continue from time to time. Based on what I know today, there is nearly 100% certainty that no deal will happen in Q4 of this year.

Okay. Very clear. Thank you very much.

Monica Bosio from Banca IMI.

Good afternoon, everyone. Thanks for taking my questions. Maybe I am wrong but I believe that, aside from 2016, the market is focusing on what could happen in 2017. We know that the NAFTA market is top-ish -- is at the top. If I have understood well the pricing is still quite disciplined. I am just trying to figure out and try to model the room for further improvement in the NAFTA in margins, not on the long term, but in 2017.

I would also like to ask your feelings on Europe, what kind of growth are you expecting for the automotive market in Europe in 2017? I have spoken with some players and they are telling me 2% or 3%. Is it right?

To the extent that it is a forecast for next year, by definition, wrong. But I think our estimate will not be consistent, and is significantly different from the 2% to 3% that you referred from our competitors. I think there is broad agreement that the market will be marginally up on 2016. I think if you use 3% as a guide it will not be off.

In terms of your 2017 numbers, my suggestion, and I think Richard would concur, is that we would wait until the January call when we give you the full rendition of 2016, for us to give you a more intelligent view on how 2017 is shaping up. I do not see any drastic or draconian movements other than range shifting of the top end of the NAFTA market.

I have always had the view that this market is capable of ranging between 16.5 million and 18 million SAARs. I think we need to wait for the conclusion of 2016 to make a more intelligent assessment as to where the market will be next year. But we do not expect it to be off so materially that it would change our views about portfolio shift or our market share ambitions for next year.

Thus margins in NAFTA will continue to go higher in 2017 thanks to the mix.

We have made it an absolute case here inside this house to make sure that we effectively shore up the margin shortfall in NAFTA that we have had against our competitors. It continues to be the single largest shortcoming that this Group has against a competitor class and it needs to be cured. And I think 2018 is a good year to get it done.

Okay. Thank you very much.

Adam Jonas, Morgan Stanley He has stepped away. Martino De Ambroggi, Equita.

Thank you. Good morning, good afternoon, everybody. One more question on net debt, because the second time you are improving the operating guidance, confirming net debt guidance. I understand it is just below EUR5 billion, so it is not a precise indication. And I know you are able to reverse the net working capital in Q4. But the improving EBIT, confirming net debt is mainly due to non-recurring [kishouts] that you had during the year due to the ForEx translation effect, or what else?

The main reason, Martino, as you mentioned, is the Brazilian real, because our competitor on initial guidance, that translation impact, as I mentioned before, is that EUR800 million. So, as we have improved our operating performance, we're offsetting that impact and maintaining the cash flow guidance.

Okay. So, the non-recurring kishouts and costs you are recording during the year or last year had no impact significantly?

No, they have no significant impact that they're basically related to liabilities that have a pretty long tail on them. So, we do not expect any significant, or we aren't recognizing any significant impacts on our guidance for the year.

Okay. And, on NAFTA region, on the EBIT bridge, industrial costs during the last quarter were the most important driver for Q3 performance. I understand efficiencies and the lower warranties, but could you collaborate on 2018 in order to better understand to what extent this can be considered recurring and maybe to see maybe not the same amount but a similar impact going forward?

We are clearly, as we have been talking about, working very diligently on the cost equation. Our purchasing savings year to date in NAFTA touching 3% of our buy, which is a must better performance than we have had historically. I think as we continue to focus on product costs we will continue to see a positive impact also through 2017.

On the warranty side, we have had a number of issues on some product launches in the past, as you are aware, that have cost us a lot of money in terms of warranty spending. I think we're starting to see more stability in our vehicle park vis-a-vis warranty. So, that is another area of focus, which can help to improve our margins going forward, as well.

Okay. And then, lastly, I did not see any update on [Alfa Romero].

It is going well. There is nothing nefarious about this. We are in the process now of rolling out the Giulia on a global basis. It's not in the US yet. It will come to the US in Q4 of this year.

As you know or you may know, the car's received a number of awards. It's been recognized as one of the best technical launches that this Group has ever carried out in its history. I think it will get traction in the market as it starts getting distribution. It will be in China hopefully in Q1 of next year, Q1 or Q2. So, it is an ongoing story.

We have a big launch coming up in Q4 of this year with the first UV off the same architecture being launched. Hopefully we will see it in Los Angeles. And then will be available for rollout in Q1 of next year.

So, the plans are going as expected. I am incredibly pleased. I will tell you honestly, apart from the fact, that I think the cars that we have launched are, bar none, probably the best vehicles we have built in a long time.

But I am encouraged by the versatility of the architecture that was planned at the time in which the Giulia was launched. I think it has proved out to be all and more than we expected. And I think its utilization across a wide range of applications within the Group is probably the most beneficial thing we have done from a technical development here in a long time.

I think it's ramifications are yet to be seen. But I think we know have the basis on which we can build a phenomenal rear-wheel-, all-wheel-drive environment, which may spill over in some forms even as far as Jeep. So, I am delighted.

But, other than that I have really nothing to add. Let's watch and let's see what happens at the end of the year.

Okay. Thank you.

Alberto Villa, Intermonte.

Good morning, good afternoon. Some questions from my side, as well. The first one is on that expiring in the fourth quarter of this year. Are you planning to issue new data or you are considering to lower the overall gross debt and that would probably reflect in lower --?

We have already repaid the Euro bond on October 17 out of cash. We have another Swiss franc bond of about CHF400 million that we would also pay with cash. And then we have the MCS coupon that we will pay with cash, too, in Q4. So, about EUR1.6 billion of reduction of gross debt from cash in Q4.

Okay. Thanks. Second question is on the passenger car agreement you were planning to have in the US market. Is there any update on that? And did you change any plans considering maybe a different view on the market development going forward for passenger cars in North America or it's still in the agenda?

It is still on the agenda. I have nothing to announce because we have not finalized anything. The only reason why we have looked at the passenger car market with some degree of skepticism is because of the pricing power associated with that position. And I think when we find a cost-effective solution to our objectives, then I think we will execute it. And I think our distribution network is quite capable of turning that into a successful venture.

This is a market which has now -- and I would have to go back and look at the quarterly performance -- but I think it has been coming down now in terms of relevance in the US market for a number of sequential quarters. And I think we need to recognize that this is not a fashion shift from passenger calls into utility vehicles and pickup trucks. I think there is a structural change.

I think we have adapted our industrial footprint to reflect what we consider to be a permanent change. And I think we need to rely on economies of scale and capital deployed invested by others to give us the desired objective. But it is a matter of time. We will find somebody.

Okay. But put it another way, if you do not reach an agreement, is that changing your targets in any fashion materially?

To be perfectly honest, in the scheme of things, given our objective of making EUR9 billion by 2018, I think it will be a rounding error if we found it. That's not really the big issue.

I think the important thing for us was to preserve the uniqueness of the real drive offering that we have across fundamentally, four brands, which are Alfa, Maserati, Dodge and potentially Jeep. I think that solution has been nailed down internally by focusing on the [georgia] architecture which underpins the development of Alfa. As long as that has been secured then I think it continues to deliver as we expected. I think our search for a front-wheel passenger car solution to deal with very much of an American problem has limited impact on our ambition.

Okay. Just another very trivial final one, on the cover of your presentation there is a car that I can't recall. It's the second on the left from the top line. Which model is it?

It is a Toro from [Michigan].

Okay. Thank you very much.

Rod Lache from Deutsche Bank.

Hi, everybody. A couple of questions. First, I was hoping you could talk a little bit about your strategy for NAFTA trucks. And, more specifically, JD Power reported that incentives on Ram rose to around 16% of average transaction prices in September and October, which obviously is up quite a bit from the 12%-ish that we saw in this time frame last year.

So, it would seem on the surface that achieving this capacity utilization requires quite a bit more pricing. If you can comment on whether that is correct. And related to that, can you remind us --

Rod, if I can just give you an answer on the incentives. I think you are follower of this market and you know that our main competitors in this area have put on a variety of initiatives to try incentivize dealers to sell trucks. We have been absent from those strategies. And we were absent until the last 60 days -- 90 if you include October as a full month.

But certainly in the last three months we have been active and have, in part, replicated some of the strategies that our competitors have used to focus on particular section of the inventory on hand at dealers to try and motivate the network to try and deal with trucks. We have taken a very hard look at the level of penetration in some of the key truck areas in the US, and we have been deficient. And I think a lot of this has been because of the fact that we have not emulated people who have had a longer history and better success than we have had in this sector.

I think we have tried to emulate them. I think in some cases we may have been insufficiently accurate in terms of the target area that we were going after, which may have caused some distortions.

We spent a lot of time with the management team yesterday before focusing on the quarter end, to try and understand exactly how to pitch the position for the next 90 days. We feel relatively comfortable that the system, broadly speaking, that we have put in place is something that ought to be preserved. I think we need to sharpen the focus of the intervention.

I think the numbers that you have mentioned in terms of the 16% thing is reflective of -- and I can't comment on the JD Power number in and by itself, I just don't know -- but it is reflective of the impact on a particular piece of inventory on the ground and not necessarily the whole fleet. And I think we need to be very careful about reading too much into those numbers because they do not impact 100% of the population of trucks that will be disposed of. But they are used as instigators of increased activity in truck.

We have seen no negative impact as a result of all of this in our overall performance. The forecast that we have in place for the remainder of the year does rely on the continuation of a focused structure that was started about 90 days ago.

Okay. That is helpful. I was hoping that you can also remind us the magnitude of what you are looking to achieve at Sterling Heights in Toledo. It looks like, at least while they are making passenger calls, Sterling was a 30,000-unit plant, and Toledo North might have been capable of about 200,000. So, when you flip over from car to truck do you have roughly the same magnitude of capacity available?

The answer is yes on trucks. It is different on Toledo. Toledo will potentially go as high as 280,000 of normal capacity.

Okay. That is very helpful. And just lastly, any comments or color on the financial impact of the Unifor agreement?

The only thing I can tell you is that obviously on the economics we were followers because we were bound by the GM deal. I think that when you look at the impact on overall cost as a result of the deal, you can combine it with the devaluation of the Canadian dollar, both Canadian plants in Canada remain competitive.

I think I feel relatively satisfied that we have reached a satisfactory objective and it buys us peace on the farm for the next four years, which are pretty important years, as you well know. I think the cost impact is manageable and certainly falls within our plan expectations for FCA.

Great. Thank you.

Stephen Reitman from Societe Generale.

Good afternoon. Two questions, please. On fleet, we saw the average fleet in Q3 at 21% was less than the nine-month rate, which I think is running about 24%. What is actually happening within the fleet mix? I think you said at the Q2 stage that dealer rental was down from 85% to 75% of the mix. As you run down and stop production of the Dart and the Chrysler 200, can we expect that proportion to fall further in the coming quarters?

And second, a question about Alfa Romeo. Just, again, if you could talk a little bit about the ramp-up. From what I can see it still seems to be running at relatively low levels from [your timing] plants. And I can understand that you have not done the US launch yet. But it seems to me that, it looks to me that the production of the Levante is actually higher on a monthly basis at the moment.

Of course, the volume aspirations on that Giulia are significantly greater than they are on the Levante. So, when can we expect to see Giulia production getting to a cruising rate consistent with your targets for Alfa Romeo's volumes? Thank you.

The cruising rate for the sedan, without the station wagon, is probably between 75,000 and 100,000 a year. I can tell you right now that Levante as an ambition, even at full capacity utilization, is over 40% of that number. I wish you were right that I was producing Levantes at a faster clip. But I make better money on the Levante than I do on the Giulia.

But I think Giulia is going through a different process. You understand that Maserati has an established distribution network we have built up between 2010 and now. And that is the reason why both the Quattroporte and the Ghibli have been historically successful. I think it is walking into established hands in terms of distribution. Richard made reference to the fact that we've 18,000 orders in-house.

We've probably got as many for the Giulia. I just don't know enough today, given the fact that most of the attention is focused on the US and the introduction of the vehicle for the US market, which remains its key main market for distribution. So, I think the best thing we can do is give you a better update when we get together for Q4.

The answer to your fleet question, I do not have an answer to your question, but maybe Richard does.

We have gone down from 80% to about 75% on rent-a-car, so slightly down. I think, obviously bringing the mix of commercial and government up as a total compared to our fleet volume is a target we have talked about, and we are focused on. The two key items there for us to continue are to, basically we have completed our van lineup, so the van gives us a complete product lineup for commercial customers.

And going into 2018, as you just mentioned, having more pickup capacity will allow us also to satisfy fleet the customers' demand on pickup, which we struggle to do today because we favor retail in the US, and also Canadian volume which have higher margins. So, I think as we realign our capacity we're going to be able to continue to work on improving the fleet mix.

Do you have any estimate -- you mentioned earlier about the differentials about trying to close the gap between your US operations and those of Ford and General Motors. What do you think? Do you have any guess of what the margin impact is of the reliance on daily rental versus your peers, and closing that?

No. It is very much dependent on individual customers and individual mix in the sales mix. I don't really want to give you a number, because I think it would be a little bit too much of an estimate, frankly. Clearly, our ability to sell more truck and more van to commercial customers would be a positive impact on profitability compared to our current mix.

Thank you.

I'm going to hazardous a guess and Richard is going to cringe when I tell you this. But based on what I see -- and I'm going to get crucified by our commercial people, so I warn you before -- but I think there's probably, the difference could be as high as 80% more margin out of a commercial fleet account than it would be out of rental car. And it is purely volume based. It is simply the size of the purchasing power that the rental car companies have on OEMs.

By the way, before we ignore the relevance to us, they were a crucial element, and continue to be a crucial element of our operations and we are thankful for them sticking around and sticking with as far back as 2009 and 2010. We did not necessarily look like the best possible OEM in town, but they were loyal and supportive of the transition that we were making, so we owe them a lot.

But they are very tough on margins. And I think any time that we can supplement their volume with commercial fleet volume we do phenomenally better. Nobody is suggesting that we should replace them, but I think we should certainly reduce their reliance on the overall portfolio by focusing more on the commercial accounts.

Thanks.

Philippe Houchois from Jefferies.

Good morning. Thank you. Two questions for me, please. The first one is we have waited for a long time at FCA for the growth cash position to come down and the cost of carry to come down as a result. I think we're looking at about EUR18 billion, EUR20 billion a while back, and we're now EUR23 billion, EUR24 billion.

We're going to use EUR1.5 billion in the fourth quarter. You'll be happy. We're going to use EUR1.5 billion to pay debt. Let him pay it off. As soon as it comes due, somebody cut a check and send them merrily on their way.

But you refinance it again. What should we be looking at in our model for the end of 2017?

I don't think we have issued anything in a while. I'm looking at Richard. Have you been out on the street raising bonds without telling me? We haven't raised any money in the last 12 months, to the best of my knowledge.

Your getting me into trouble.

I notice a slice point of contention between you two, so that is why I am asking. The more question is more general, if you can give us a view on the industry in general. At what point do you think this industry is going to start to write down its investment in combustion engines as a result of loss of value added as we downsize engines and the growing electrification of powertrain?

That is, by the way, a phenomenally difficult question to answer for two reasons. One, I think that the transition from the current state to a future state is not going to -- and I am talking about the next decade, famous last words, the ability to call transition in the next decade -- we're going to go through a phase where I think combustion will not lose its relevant in its entirety, but where I think electrification will combine with combustion to provide solutions to the OEMs.

I do not think that combustion engines will lose their appeal. They will lose their relevance, but they will not lose their usefulness in terms of the portfolio.

I think whoever thinks that electrification will actually replace the bulk of the automotive market, I think is probably being overly optimistic. It will take time to transition and the transition will include combustion.

I think that given one way, the write-down will happen naturally a result of normal write-down processes. Now these assets have got long lives on our books, and I think they will just come off with natural depreciation.

At the same time, if you look at it differently, in terms of value added, if you shrink the size of your engine and you end up buying more and more to value add some suppliers to meet CO2 and other emission regulation, your value add goes to zero. And that normally, if you do a method impairment, that should lead you to write down your asset base. Am I wrong in thinking that way?

You are probably not, but I think you are doing two things. One, you are overestimating the speed of change, and, secondly, you are overestimating the size of the asset build that is happening here. We are not talking about numbers that are that large.

The problem that you raise, by the way, is truly significant from a strategic standpoint, because what is buried in your question, I hope, is the fact that the real assets of an OEM, it is the definition of what we do for a living, is on the table. Because, if you are right -- and I think that you are in the mid to long term -- then I think we need to be able to redefine our core skills to reflect a much higher level of disintermediation and production than we have had so far. Because the only thing that is really left in our hands and that we have managed in a very proprietary way is combustion.

So, the issue is a much deeper question. And it only reinforces the debate that I started, that has probably been going on even before I started, on utilization of capital in an industry, which is going through a phenomenal set of transformations. I think we need to think about that long and hard as we work through the next phase of development for the business, because the relevance of brands is on the table.

It is undisputed in my mind for brands like Ram, Jeep, the premium brands. It is a much more difficult analysis to carry out on the long term for what we call more generic brands, which I think are prone to being commoditized. And I think that is a much bigger question that we need to deal with.

I do not have an answer at the end of this quarter for you on this question. I just try to focus on making as much money as I could to make sure that we execute on our plan. But your question is well taken and maybe we can have a discussion over a beer on that issue any time you like.

Thank you.

Charles Winston from Redburn Partners.

Hi. Good afternoon. Charles from Redburn here. Just two left for me. We talk quite a bit about pricing in the NAFTA region and in the US, and obviously it is quite clear that small EUR40 million entry into your walk is a net figure. Could you perhaps break that down a little bit and talk about what the underlying pricing impact would have been, perhaps, in the US only? In other words, to try to strip out that adverse impact of that in any way possible.

And the second question is just in the LATAM region, industrial costs, big step up again as we have started seeing the currency move. If the BRL remains at these levels, are you going to be able to get back into profit in that region? In other words, are the new models at Pernambuco going to be enough to offset what still looks to be, at least at current exchange rates, quite a vicious FX impact on the input costs?

Thank you.

On the pricing question, the US number I estimate would be about EUR100 million positive, and then we're offsetting a piece of that with the impact of the Canadian dollar negativity on the other side. The US is, in part, subsidizing the impact of exchange on the Canadian dollar and on the Mexican peso.

Both markets are trying to offset that impact with their own actions, as we discussed. Canada has been very active in that regard in the last 18 months. But it is a big devaluation so that is eating into some of the positivity that we have on the US side.

Your second question on Brazil, we are building a product portfolio for Jeep in Brazil localized there to be able to be competitive, notwithstanding the impacts of exchange. And clearly, in normal market circumstances, I think we would be making strong margins, as we have in the past, out of the installation that we have put into Pernambuco.

The real impact of the real, obviously, is, as the volumes in Brazil go down, our ability to export into the rest of Latin America is tougher than obviously it would have been. So, that is clearly a negative impact in the scheme of things on our profitability in Latin America given that we would have volume in Latin America outside of Brazil.

But, I think, to answer your question, we can't make more at these levels of exchange. Our focus is clearly to launch the third Jeep in Pernambuco and continue to run that installation to basically help us to return to breakeven and positive in the beginning of next year. That is a feasible target.

Obviously, for us to start to make the sorts of margins we have historically made in Latin American, we need to see some improvement in the Brazilian market conditions, which we have seen fast turnarounds in Brazil in the past of double-digit CAGRs off lows. So, I think we are optimistic that we can see a recovery in the Brazilian market in the beginning of 2017.

Just to shed some light on this, I've been listening to Richard explain this, you need to understand, in the absence of a startup in Pernambuco, our South American operations would have been lost. But I think the more worrisome part about being in a loss is that we would have deprived, and consistent with what most other people are doing, we would have deprived South America of any new product launches during the time of the crisis.

And I think the Pernambuco solution allowed us to do two things. One is to modernize the architecture. Secondly, to introduce Jeep to the market.

I think, as we have seen in Argentina, which has recovered at an incredible rate from several years of crisis, certainly based on my last interface with the authorities in Brazil, which was no older than a month ago. My indication is that I think we've hit rock bottom once the presidential has been resolved. And I think that there appears to be a consensus, at least the political level, about moving the agenda forward. And I would not be surprised if we saw the beginnings of a slight recovery in Q4 this year. Hopefully, a better performance in 2017.

Having said this, I think we as a group are better off having done what we have done because of the benefit on the rest of the region as a result of the startup of the plant.

Great. Thank you.

Richard Hilgert from Morningstar.

Thanks for taking my questions this morning. And good morning to everyone and good afternoon. Just to follow on a little bit on the electrification question posed earlier, my question was more centered around, given the Company's current spending situation and capital investments that it's intending, and given the industry's seeming to now be accelerating more towards that electrification, I wonder if there has been any plans or thoughts put into changing over to an additional electrified powertrain approach.

I understand that a hybrid is one way to go, but it seems like with Daimler making a commitment to battery capacity now, just announced this week, and Volkswagen's announcement earlier about its commitment into battery electrification, things are accelerating on the full electrification side.

I am not sure that it is fully accelerating on the full electrification. It certainly is accelerating on the electrification side. And I think that, based on our assessment, we certainly have the resources and have worked now on projects that will make these a reality, certainly within the same timeframe that both of our German competitors have announced.

The great thing -- the bad thing and the great thing about electrification is that most of it will rely on components being provided by suppliers to the industry and not by us. The single largest drawback to electrification to us as OEMs is that we are no longer in control of the component side. All batteries will be made by others.

So, it is really a question of capacity and access to that capacity. Everything else, including the technology associated with providing electrical powertrain, is within our reach, and certainly supplemental by the relevant tier 1 suppliers.

So, I am not concerned about that becoming a disadvantage to FCA. I think we're going to have a long debate about the rate of change associated with what is happening here. I think we need to be very careful about not being overly optimistic about the rate of change. Having said this, I think we need to be prepared.

The reality is, we have the first, the only, minivan in the marketplace that is fully hybrid. I think we need to be careful about believing that line. The real substance of this market, at least for this year and next year is going to be driven by something else. And resources are being devoted to the development of alternative powertrains at a rate which is comparable to some of the other OEMs.

Okay. Very good. My second question has to deal with the quality of the product coming out. It seems like the last three years there have been some personnel changes. Recognizing the Consumer Reports, what they call a quality issue might not necessarily be from an engineering perspective a quality issue, but just curious what is the managerial approach to now locking in a better way of improving what is coming out in the product portfolio?

You talked a little bit about the launch of the Giulia and how well that has been. Is there some implementation of an approach that this will transfer from the Giulia to other model launches going forward?

Without getting involved into our intimate entrails in the way in which we run the business, I can only tell you that the selection of the leader that we've put in place now was carefully thought through. I think he has been well trained in running both purchasing on a global scale and North American manufacturing over the last seven years. So he understands the problem from both the implementation side in terms of manufacturing, and the acquisition side in terms of supplier choices for the Group.

The more important thing to me is that I think we have now externalized the benchmark evaluation process to other people. I think this was very much of an inside exercise. It was always done using internal parameters. I think we have learned the hard way that external valuations are perhaps more relevant to the way in which we look at quality from an internal standpoint.

That has been put in place. They governed the launch of the Alpha Giulia. But, more importantly, it governed the launch of the minivan. I think they were very instrumental, these third-party agencies were very instrumental in bringing about suggestions and changes to the way even in which the product was configured initially to make sure that we met customer expectations. I do expect that benefit will work its way through the rankings.

I think we have had to learn the hard way that perhaps having engineers, although not necessarily associated with either design and manufacturing, assess the quality of the work of other engineers may not have been necessarily the best way out. We've learned the hard way. We have moved away from this, and I think we are in a much better place now than we have been in a long time.

Okay. Thanks again.

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.

Thank you, Elaine. Once again, everyone, thank you for joining us today, and have a pleasant rest of your day.