Stellantis NV (STLA) 2017 Q2 法說會逐字稿

Good afternoon, or good morning, ladies and gentlemen.

And welcome to today's Fiat Chrysler Automobiles 2017 Second Quarter and First Half-Year Results webcast and conference call.

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

At this time, I would like to turn the conference over to Mr. Joe Veltri, Head of FCA Global Investor Relations.

Mr. Veltri, please go ahead, sir.

Thank you, [Kloto], and welcome to everyone who's joining us.

Our call today will be hosted by the group's Chief Executive Officers Sergio Marchionne and Richard Palmer, our Chief Financial Officer.

The presentation material for today, along with the related press release, have been posted under the Investor section of our group website.

After the presentation, we will hold our customary question-and-answer session.

Before we begin, I would just like to point out that any forward-looking statements that might be made during today's call are subject to the risks and uncertainty

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Of today's presentation, and that the call will be governed by this language.

With that, I'm going to turn the call over to Richard.

Thank you, Joe.

Good afternoon, good morning to everybody.

I will start on page three with the highlights of the quarter.

We had record Q1 results, and we've posted now another set of very strong numbers for Q2, with record adjusted EBIT at EUR1.9 billion, and margins up 90 basis points to 6.7%., and adjusted net profit of EUR1.1 billion, up over 50% year-over-year.

All our operating segments showed margin improvements year-over-year.

And in particular, NAFTA posted an 8.4% margin, which is a record for that region.

And Maserati drove, again, double-digit margins for the fourth quarter [of] 14.2%, doubling them compared to last year.

Our cash generation from operations drove a reduction on net industrial debt of EUR0.9 billion to EUR4.2 billion, and we continue to slim down our balance sheet in the quarter, with gross debt reduced through the paydown of EUR1.4 billion of debt [as of] cash on hand.

And so, overall, I think it was a strong quarter.

With the progress we've made in the first half of the year, we are confirming our full year guidance.

We move to Page 4, we see some continued news on the product front.

In Latin America, we are launching now the all-new hatchback, the Argo, which was unveiled in May in Brazil.

It's built at our Betim plant and replaces the Punto and Bravo models.

And it's also powered by a new small gas engine called the Firefly.

In Maserati, we revealed the restyled GT and GC products, which also include a new infotainment system, which is something that customers have been asking for.

And these two vehicles will be available from Q3.

And in Asia-Pacific, we showed a concept [DHUV] SUV for Jeep, a three-row vehicle which is conceived as being designed specifically for the Chinese market.

Moving to Page 5, we have the summary of the financial performance.

Combined shipments were down slightly to 1.225 million units, with NAFTA down 90,000 units, offset by increases in LATAM, APAC, EMEA, and Maserati.

Consolidated shipments were down 37,000 units, showing the improvement in our joint venture operations, particularly in China.

Net revenues were flat at EUR27.9 billion, down 2% at constant exchange, in line with the shipments number.

And our adjusted EBIT was up 15% at EUR1.9 billion, with a record margin, as I mentioned before, at 6.7%.

And both year-over-year and quarter-over-quarter margin improvements in all segments.

Adjusted net profit was EUR1.1 billion, up 52%, driven by the strong operating performance, and also by reduced financial charges.

Our net profit was EUR1.15 billion compared to EUR321 million in Q2 of last year due to lower net special items, which I'll talk about in a second.

Our net industrial debt was reduced by EUR900 million due to strong cash flows from operations net of CapEx investments.

And our available liquidity was at EUR20 billion net of the planned gross debt repayments of EUR1.4 billion that I mentioned earlier.

Couple of words about a couple of items we posted in the quarter regarding Latin America.

Following recent court decisions in Brazil, we reversed the liability for indirect taxes for EUR895 million.

We also took the corresponding decrease in our deferred tax assets for EUR281 million related to the same transaction.

And this was posted as an unusual item which is excluded from our adjusted net profit.

And in addition, due to the continued political uncertainty in Brazil and a slower pace of economic recovery we're anticipating, as a result of this, we wrote off EUR450 million of deferred tax assets related to Brazil.

And also, this item was excluded from adjusted net profit.

Moving on to Page 6, we show the composition of the improvement in our adjusted EBIT, which was up 15%, or EUR239 million.

NAFTA margins were a record 8.4%, as strong mix and industrial cost performance offset reduced volumes due to the transition to our new Compass and the move of the Cherokee vehicle from Toledo North to Belvidere.

NAFTA represented 72% of our group adjusted EBIT, down from 84% last time, as all the other segments improved their overall performance.

Latin America improved with volumes from new Compass and improvements in Argentina.

EMEA margins were up 80 basis points to 3.3%.

And Maserati margins more than doubled to 14.3%.

On the bottom of this chart by operational driver, you can see that positive mix continues to drive a lot of our margin improvements across the regions and accounted for about EUR400 million, with positive impacts in NAFTA, Maserati, EMEA, and LATAM.

Net price impacted by NAFTA year-over-year, although positive compared to Q1 sequentially [and by] EMEA, both regions included negative impacts due to exchange for the Canadian dollar and the British pound, respectively.

Our industrial costs showed significant efficiencies in NAFTA and EMEA, with reduced warranty costs and purchasing savings.

Moving to Page 7, you see our net industrial debt performance, which was reduced in the quarter by EUR900 million thanks to improved EBITDA and positive working capital.

Finance charges and taxes were flat year-over-year due to timing of tax payments in the U.S. offsetting reduced interest charges.

Compared to prior year, cash flow was EUR1 billion lower due principally to lower working capital impacts due to lower shipments in NAFTA, which was driven by the move of the Cherokee from TNAP to Belvidere, with a reduction of over 30,000 units in the quarter.

This was the main reason for working capital being less positive than last year by EUR800 million.

Also in terms of changes in provisions, feeder stocks in the U.S. were reduced by 70,000 units, which accounts for the negative impact on changing provisions of around EUR350 million compared to prior year.

These negative impacts on working capital will largely reverse in Q3, as Q3 NAFTA shipments increase with the ramp-up of the new Compass continuing and the Cherokee ramping up in Belvidere as the transfer from Toledo North is completed.

So the working capital negative seasonal impact in Q3, which you are used to seeing as a result principally of EMEA, will be significantly lower at the group level because of a positive impact in NAFTA.

Just to make sure this is clear, in summary, in 2016, we had both Toluca and SHAP plants down in Q1, and coming back up in Q2 due to product changes and to management of supply-demand for the 200 in SHAP, whereas this year we had reduced production in Belvidere and Toluca in Q2, and those two plants will be back up to full production in Q3.

So this has changed our working capital profile, and, as a result, we would expect Q3 cash flow performance to be significantly better than last year, which was a negative EUR1 billion.

If we move on to Page 8, we see the performance in NAFTA.

Q2 SAAR for U.S. was down from Q1 to 17 million, but the retail SAAR was flat at 13.8 million units.

And Canadian SAAR was constant at 2.1 million units.

U.S. sales for FCA were down [30,000] units, driven by 20,000 reduction in fleet sales, which were reduced from 24% to 21% of our total U.S. sales.

The main nameplates driving the reduction were the discontinued Dart and 200, and the transition from the old Compass Patriot to the new Compass.

The Jeep brand continues to reduce fleet sales in the U.S. to focus on improving [residual] values and margins, and particularly for the Cherokee and for the new Compass.

U.S. dealer inventories were down from 75 days to 71 days, and our shipments were down 90,000 units, as I mentioned earlier, which is 14%, primarily due to the transition to the all-new Compass and the move of the Cherokee.

Net revenues were down 10% at constant exchange, with the lower shipments partially offset by favorable vehicle mix.

So if we look at the walk-across on EBIT, underneath you can see the improvement in margins from 7.9% to 8.4%, a large improvement in mix offsetting the impact of 90,000 of reduced volumes.

Year-over-year, our pricing was slightly negative by EUR84 million, which is substantially 50% due to Canadian dollar weakness, and the rest due to incentives in U.S. retail.

So as you can see underneath, on a sequential basis, our pricing was positive EUR73 million compared to Q1.

Industrial costs were positive EUR207 million, driven by strong purchasing savings, warranty reductions, some supply recoveries offsetting product cost increases and launch costs.

And we also have highlighted in the others that last year we had a one-off residual value adjustment, unusually high in Q2 of last year, due to some changes in methodologies related to ALG that improved our residuals.

And we wanted to identify that, given that it was an unusual item in the prior period.

If we move on to Page 9, looking at Latin America, the Argentina market continues to be strong, was up 24% year-over-year.

The Brazilian market was also up year-over-year, but was boosted by energy efficiency requirements that need to be met by the end of September of this year, and are likely creating some demand pull ahead.

Our sales were up 15,000 units, driven by new Compass, up 12,000 units, and the Toro pickup, up 5,000 units.

Our market share in the Latin America region was 12.6%, slightly up versus prior year.

Inventories were down to 33 days, and reflect continued disciplined approach to supply and demand.

Our shipments, as I mentioned, were up 18%, and revenues were up 24% at constant exchange, reflecting positive mix of Compass and Toro.

And if we look at the EBIT walk underneath, you can see that we went from a break-even number last year to EUR60 million this time around, with a large contribution of positive mix due to the new vehicles I mentioned earlier.

Price was substantially flat, our product cost impacted by about 5% year-over-year inflation, but overall mix driving a significant improvement versus the prior year -- prior quarter.

Moving to Page 10, Asia-Pacific, the industry was up 5%, with China up 4% as it normalized following the negative number in Q1, driven by the demand pull-forward at the end of 2016 due to tax changes on the vehicles under 1.6 litre.

Combined sales for the group were up 30%, with joint venture sales up 75%, and Jeep sales were 62,000 units, up from 40,000 last year.

Our inventory days came down as our sales rate improved.

And also, we have lower imported vehicle stocks.

Our shipments were up 44% overall on a combined basis, driven by the joint venture, and also by the start of the launch of the Alfa Romeo Giulia and Stelvio.

If we look at the walk-across underneath in terms of margins, you can see a positive vehicle mix, offset by some negative exchange for renminbi and also of the dollar year-over-year, and some launch costs for the Alfa Romeo vehicles as we launch both Giulia and Stelvio, offset by improved China joint venture results.

In EMEA, on Page 11, passenger car industry was up 1%, with strong growth in Italy, up 6%, and Spain also up 6%, while France and Germany were flat, and the U.K. was down 5%.

The LCV industry was up 5%, with all major markets up except for the U.K. Our sales were up 6% in the quarter, and our share, both in passenger car and LCV, was up 20 basis points.

Higher sales were driven by the Fiat Tipo family and the new Alfa Romeos, and we saw passenger car share up 40 basis points, driven by increases in Germany, France and Spain.

Inventories were up slightly to 62 days to support the new model launches.

Our shipments were up 7% year-over-year, driven by the vehicles I mentioned earlier.

And if we look at the walk-across underneath for our adjusted EBIT, you'll see that margins improved from 2.5% to 3.3%, driven by positive mix, volume, and industrial cost efficiencies offsetting some negative exchange on the British Pound and higher incentives in some of our [e-markets].

Maserati, on Page 12, had another strong quarter.

Sales were up over 50%, shipments up 90%.

Total net revenues were up 85%, and we had a fourfold increase in our adjusted EBIT to EUR152 million with the 14.2% margin I mentioned earlier.

Most of the increase in both sales and shipment is driven by the all-new Levante, which is more than offsetting some level of decline in our other vehicles as we move towards new model years in both the Ghibli and the Quattroporte.

Volumes and margins improved versus Q1 also due to market seasonality.

We expect Q3 will be more moderate as we go through the summer production shutdown, and then Q4 will show positive seasonality, particularly due to the NAFTA market.

Moving to Page 13, the components businesses continue to see sequential improvements in both margins and revenues, driven by Marelli and by Comau.

Both Marelli and Comau continue to show large portions of their business non-captive, with Marelli at 65% and Comau at 72%.

Moving to the industry outlook on Page 14, we don't have any significant changes to our outlook.

We show a modest reduction in U.S. SAAR to 17.2 million for the year from our previous 17.5 to reflect second quarter SAAR, which was at that level.

We increased slightly the Canadian SAAR to 2 million for the year.

Moving to our guidance on Page 15, as I said earlier, we're confirming our full year guidance following a strong first half performance.

We are basically halfway to our targets on adjusted EBIT, and more than halfway on adjusted net income.

The second half will benefit from higher volumes of Giulia and Stelvio, and Cherokee and new Compass, as those vehicles ramp up in Q3, as I mentioned earlier.

And we expect, therefore, a stronger cash performance seasonally than we have had in Q3 in the past.

So with that, I will hand over to Joe Veltri.

Thank you very much.

Thank you, Richard.

With that, I'm going to turn the call back over to Kloto, and we'll start our question-and-answer session.

Kloto, go ahead, please.

(Operator Instructions).

George Galliers, Evercore ISI.

Three questions from me, if possible.

The first one is very short time in nature.

Can you just remind us where we are in terms of the rollout of the new Compass and its overall availability in the U.S. market?

Well, we've been -- we started production in Q2, and basically we're ramping up production, and we should be running in a pretty full level at Q3.

Yes.

It will be available in dealers by the end of Q3.

And then, the second one was looking at 2018 and your targets there.

Given the kind of recent move in the euro against the U.S. dollar, can you give any indication of what your euro-U.

S. dollar assumption was when you gave those 2018 targets?

It was not materially different from where we are today, probably slightly lower, but I don't think it's material enough.

If it stays at these levels, it's not material enough to change, [for example].

And then, the third question I had was just when we look at the improvement you're seeing at Maserati, as I think about the end of next year, I guess Maserati and Alfa Romeo combined could look like a 250,000 unit per annum company with around EUR12 billion of revenue, EUR1 billion of EBIT, and margin in excess of 8%.

That sounds like a pretty healthy and respectable standalone OEM, and one which could attract a good multiple, given the growth profile it will have seen.

Are there any platform or powertrain constraints which could make a separation of those two as a unit unviable?

I'm going to answer your question by answering the last portion of what you said, which is that there are no restrictions.

There are no structural, industrial, or engineering restrictions to the separation of Alfa and Maserati.

That means nothing.

That (inaudible) acknowledgement of the fact that as it can be done or would be done.

So there's a statement which I think is still in the press release, about the fact that we have, in the analyst deck, about the fact that we're holding an Investor's Day in the first half of 2018.

And I realize that there's been a relatively large amount of excitement out there caused by initiatives, both this autonomous driving front on electrification, and this whole notion of separation of businesses.

And I think that, given the fact that we're bringing to conclusion a five-year plan, and so far, to the best of my knowledge, we're on track to achieve objectives and all (inaudible), including [net debt], by the end of next year.

We thought that it was proper that we sort of update the market again on what we consider to be the next five years of FCA, 2018 to 2022, and we intend doing that within the first semester of 2018, notwithstanding the fact that I will not be here when that cycle continues.

The reason why we're doing this is because although we are now -- we started doing this at the end of 2016.

We're doing it today.

We're doing it next year.

We're not committing capital that will not see any economic result until well after the completion of the '18 plan.

And I think it seems sort of improper that we keep on committing capital and reveal these numbers on a quarterly basis without giving an indication of what it is that we're working on.

I'll give you a couple of broad sort of indications of where we are today in terms of the delineation of the post-'18 FCA.

The first one -- and I've mentioned this in passing in other occasions, about the fact that there's nothing that will prevent an OEM from engaging in the type of development work that Tesla has done so far.

As you well know, we have been reluctant to embrace that avenue until we saw clearer a path forward.

I think we're now in a position to acknowledge that at least one of our brands, and in particular Maserati, will, when it completes the development of its next two models, effectively switch all of its portfolio to electrification.

And as these products come up for renewal post-2019, it will start launching vehicles which are all electric and which will embody -- I think will be considered to be state-of-the-art technology.

It's an integral part of the development of the group, and I think it's an integral part of a broader strategy on electrification which will see more than half of its fleet, by the time we hit the conclusion of the plan in 2022, that you will see more than half of its fleet incorporating electronification.

Some of that money has been spent already.

Some of it will be spent within 2017 and '18, and some of it will be spent as we launch products in the '19 to '22 time frame.

I think it is important that we reserve judgment on what you suggested as being a possible avenue until we hear that story in the first half of next year.

The only thing I can tell you for sure is that, when we look at the portfolio of activities that FCA carries out, there are things which are associated with automotive but are fundamentally non-OEM activities.

And when we have looked at the development of the sector over the last two or three years, we have come to the conclusion is the differences in valuation between what we currently achieve as an OEM and some of the activities that carry out, including Marelli, no longer justify aggregation.

And I think that when we speak to you next year in the first half, after having discussed this with the Board at some length, it is my view that we will show you a much clearer portfolio of OEM activities by the end of 2018.

And I think that forms an integral part of the plan going out to 2022.

But other than that, I will not speak about anything else, and I really will not discuss anything else in terms of disaggregation of activities within the group.

There are some things which have been inside the group for a number of years and which we have worked on now in terms of profitability over the last two or three in a very intensive way, and which in all likelihood [required will] see the light of day on their own merits and away from something which appears to be not as loved by the markets as traditional OEMs.

So we need to reserve all this until the first half of 2018.

Adam Jonas, Morgan Stanley.

So can you provide any update on the Chrysler Pacifica-Waymo partnership in terms of anything like numbers of cars, milestones, miles traveled, new cities, anything at all?

No, because I think a lot of it depends on their development path, and we are just resuming discussions with them.

Obviously, we've provided them with a number of vehicle.

I think they're interested in getting some more, and we are working on that deal.

But we have not seen the next phase of -- at least Waymo has not announced its next phase, and I think we need to wait until they move first.

But I think the collaboration continues quite strong.

I'm encouraged by what I see, but I think this is an incredibly fluid world, as you well know.

I think that a number of people are [making advances], and I think we need to be ready to collaborate with as many people as we can find.

But Sergio, those 100 cars, the 100 Pacificas, or I guess ramping to 600 (inaudible) if I'm wrong.

Presumably, those cars have over-the-air update firmware capability.

Am I mistaken?

I think they do.

And if I'm wrong, we will rectify, but I think they do.

We'd love to confirm that.

Just one last one on Jeep.

Can you bridge -- I'm using round numbers here deliberately, but you're going to do around 1.5 million units this year.

You're targeting over two million next year.

Can you refresh us on where you see the bridge of that roughly 500,000-unit gap in volume from one year to the next, either geographically or by model line?

There are two fundamental reasons for the bridge to 2018 and two million, and it's fundamentally the rollout of the Compass on a global scale.

We have now launched the Compass [out of] India.

I think we're shipping -- we started shipping today.

We're going full blast with the Compass in the U.S. now out of Toluca.

China is ramping up.

And the second non-inconsequential piece of this is the fact that the Cherokee is going to have a facelift, or substantial intervention, at the beginning of 2018 in an environment which has the higher capacity than they used to have up in Toledo.

In addition to this, obviously we're launching the Wrangler.

The Wrangler is coming onstream in November of this year.

This is a big piece of the portfolio.

When you add up all the shift between 2016 and 2018, those three products are -- by themselves account for nearly 100% of the shift in volumes.

I reckon those Wrangler margins could give some of the Ferrari a run for the money, but different discussion.

Different discussion.

John Murphy, Bank of America Merrill Lynch.

I just wanted to follow up actually on the product launches being the Wrangler and Ram, which are really on the near-term horizon here in North America.

It does sound like the Wrangler, as you said, in Toledo North is coming online in November.

I'm just curious.

As we think about that product in its early years of being launched in this generation, will it be as profitable as the outgoing product?

Because the outgoing product's been around for a while, so I've got to imagine it's extremely profitable.

But the expectation is yes.

And then, also on the Ram, what is the timing of the launch of the Ram next year?

Because that's obviously a big-ticket item, as well.

Detroit Auto Show 2018.

And NSOP?

It's just about then, for Q1 of '18.

And then, if we look at Page 10, it looks in China your mix was positive EUR39 million, which is great.

But I'm just curious.

As we look at Jeep, and correct me if I'm wrong, I think you talked about shipping or delivering 62,000 Jeeps, up from 40,000 last year, so that's 22,000 positive on Jeep.

I would imagine the mix from that kind of surge in Jeep volume would give you a much better mix in volume benefit.

Is there something else going on there in China?

Well, frankly, John, a lot of the Jeep volume you're talking about is in the JV.

And so, really, you're seeing that improvement come through the JV results, not through the consolidated volumes.

And obviously, given we're in launch phase, some of that improvement in mix is being offset by the commercial costs as we launch the products.

So you'll start to see more of that coming through the JV results as we ramp up production locally.

And are most of those Renegades at this point, so we're looking 5,000 to 10,000 variable margins as opposed to the big ones we'd expect over time?

The Renegades and Compasses.

Okay, so the lower end.

And then, just as we think about the U.S. market potentially weakening, but obviously it's already started to deteriorate, I'm just curious.

As you think about the levers that you can pull to respond to potentially more market pressures from the top down on volume internally, but also, very specifically, you've cited some cost saves from purchasing, which is, obviously, I think working with your suppliers, and potentially even with your dealers.

As you look at your business partners, if the market deteriorates, what kind of work and actions, and potential price-downs, can you affect there with those partners?

Well, look, you said, "If the market deteriorates." The market will come down from this peak, so there's not a single [doubt there].

And we've seen indications of the market softening in the first half of 2017, and I think you will see softer market conditions.

You've seen and you've heard from the other two competitors in Detroit about the fact that that is going on now.

You've seen how they reacted.

The fundamental difference between us and most of the other people is that we have now built inventory into the pipeline.

We've been incredibly disciplined, and it's something that we continue to do in managing our position with the U.S. dealers.

We have no intention of building excessive inventory that will ultimately translate into pricing pressures.

We have shown, I think, a willingness to take down capacity if the market is not there, and I think we will continue to do so.

I actually think that, because of all the investments that we've made in rejuvenating both the pickup and the SUV segments in which we compete, that we are in the enviable position now of presenting some relatively new products in the next six to nine months that will allow FCA to stay in the forefront of consumers' minds.

I do not think -- and that's why I think we're confirming guidance for 2017, and we're confirming down guidance for '18.

We have never built a plan on the assumption that 2016 volumes will continue ad infinitum.

We'd always built in a level of conservatism in those expectations.

And I think that, as long as we don't see really bizarre aberrations in volumes drops of three or four million SAARs a year that appear in the next 18 months, I think that we will be fine.

But I think that we will do all the things that we are -- I know we're not the only ones doing this.

I mean, we show discipline in the manufacturing side.

I think we'll show discipline on the cost side, and we'll try and ride it out.

But if anybody believe that we can live in a 17.5 million, 18 million SAARs world forever, I think they were smoking illegal material.

I mean, everybody knew that this market was going to come down.

And so we have made the right strategic choices in terms of exiting the passenger car market, but we're now left with the majority of our productive assets being concentrated on pickups and SUVs.

And I think that's where the market is, and I think that will play to our strength.

I think we'll just ride it out.

But I think we're today probably in the most enviable position of all U.S. automakers.

It took us a while to get here, but I think we're -- it's nice for us to reap the benefits of that effort.

And then lastly, Sergio, we're all going to hate to see you go.

But based on what you're saying, you have less than a year left at the company.

Obviously there's a lot of speculation about who your successor might be, but is there any line of sight of who you're going to be passing the baton off to some time in '18?

Well, as I understand it, we're going to pass off in the early part of '19, so the time line doesn't change much.

It's a year and a half.

I won't be here for the '19 calendar year.

But, obviously, this issue about succession has been a big issue inside our house, because we knew that it was coming.

I mean, it was inevitable.

So we've been working on sort of feeding the succession pool for quite a number of quarters, if not years.

And we have, I think, developed a suitable, stable people who are both willing, and I don't understand why, but who I think are both willing, and in some cases capable, of carrying off on where I leave off.

So I am not worried about succession.

I think it's going to be good.

I've worked with these turkeys now for -- these friends now for a long, long period of time, a lot of them.

And if you look at the stability of our management team, certainly since 2004, we've had very few corrections.

And if I go back to the 2009 Chrysler contingent, I think we've lost none.

And so I am confident that we'll find the guy.

Obviously we know who these people are.

I think it would be very, very bad practice to start speculating openly about who these people are.

We have made the right investments in them to try and give them the right exposure and give them the right sort of spectrum of responsibilities to ensure that they can do this, going forward.

There's one caveat.

I think there's -- because of my background and the way in which I got here, I think the management structure that I've used to try and manage this business is very, very peculiar in a lot of ways to me and the way I run businesses.

It may be that that structure needs to be tweaked to allow the successor to function well, and it's certainly within his or her realm or responsibilities.

But the fact that we're having an Investors Day before I step down is an indication of the level of cohesion that exists in management group, because that view that will be pitched [I] maintain will be the collective view of this management team, which has been responsible for everything they've been able to accomplish since '04.

So we're in good shape.

We're in a good place.

Philippe Houchois, Jeffries.

Two questions.

First one, I just wanted to check that I understood correctly what Richard said earlier, because you're going to resume production in a more normal way in the third quarter, we should expect an element of counter-seasonality in working capital and a better inflow.

Is that the right way to understand what you said, or did I miss...

Yes.

And as usual, Richard is being cautious, because he is not [taking into determination] as to whether the inflow out of North America will be bigger than the outflow out of the seasonal shutdown in Europe.

But he did say that it's going to be better than Q3 of 2016.

Another question maybe for you, Mr. Marchionne, is there's a lot of talk, excitement around spinning off, et cetera, and you've contributed to that over the years, certainly.

My question is...

By the way, Philippe, I've only contributed by doing it.

Yes, absolutely, but it's become more credible because you've done it.

In other words, you can talk about it endlessly and almost like it never happened, in some cases.

But my point is, in any kind of spin-off, there's a good side and there's a, let's say, a lesser good side that's left behind.

And what I hear some of the speculation on the street on what could happen, the wonderful things happen at FCA in the future, to what extent do you take into account the viability of what's left behind?

Because you do have an unusual collection of brands that are more or less successful, and so we can speculate about what you can do.

At the same time, you've got to make sure that there's a viability in what's left behind.

No, I wholeheartedly agree, and that's why I've been incredibly reluctant.

Other than acknowledging the possibility of doing things, I've never made a commitment to doing any of the spin-offs that have been referred to, because we do need to worry about the stump that's left behind.

I mean, there is a piece of business that needs to be looked after which is relatively large.

And if we start picking away all the things that appear to be interesting to people, then I think we're going to end up with a sub-optimal business that cannot run.

So let's wait until the first half of 2018.

I think, by the way, just to close your argument on spin-offs, I don't think that that story, at least vis-a-vis FCA, is over, because as I said in my remarks about the Investors Day pitch in 2018, one of the things that we need to come to grips with is whether all the activities that are currently within the FCA world are required to run a proper OEM.

And if the answer is not, then I think we have an obligation to purify that portfolio.

And if they're viable enough and large enough and sufficiently capable of carrying on their activities, is to give them a space in the sun on their own merit.

Because from a valuation standpoint, I can tell you honestly, I've been in this business long enough, I have never seen an industry which is as little-loved as being an OEM today.

For a period of time, I thought that banking had reached the bottom, but I think we have now surpassed them in terms of dislike.

And so, I sit back and I think we -- it doesn't matter how hard we work.

I mean, I've seen numbers come out of our competitors over the last three or four days.

And to be perfectly honest, I think -- I keep on scratching my head about sort of the valuation metrics that we're using to try and peg a value for this sector.

This has got nothing to do with FCA.

It's got to do with a very broad discussion.

And so, in order to be fair to our shareholders, we need to make sure that we deliver as much value out of this venture as we can, and one of which -- one of the options is to assure that we can purify the OEM.

And if we have to live in this OEM world and its valuation, let's make sure that we live purely in that sector, and we don't leave other sectors involved in this which deserve better treatment than we're getting out of FCA.

So let's work through this.

We've got less than 12 months to get this done.

When we get together in the first half of 2018, hopefully our thoughts will be clearer, and we'll be able to point out additional ways in which we can release values to our shareholders.

If I can squeeze one last different question, but if I look at the past few days, or weeks and months, but we've seen quite an acceleration, I would say, in the profitability of small premium car makers.

I mean, clearly, Ferrari is one.

We had Porsche [print] 20% margin today.

Aston-Martin is about to be profitable, and Maserati at 16%.

Is this the new normal, or is this kind of a last fireworks before things normalize?

I'm going to give you an answer.

I'm not sure that it's an answer to the full question that you asked, and maybe we'll have to address that question when we get together in the first half of '18.

Let me carve out Ferrari from all this, because -- and I had this view right throughout my tenure at FCA.

I've confirmed it now.

But Ferrari lives and breathes in a different type of atmosphere.

And so for it -- and with all due to respect to the other alleged contenders to that market, there's nobody else who lives and breathes the same air.

We're dealing with a completely different concept, level of exclusivity, which is unparalleled, an intimacy with the customer base which is also unmatched, and it's a way of life, which I think takes you -- I mean, we're celebrating 70 years for Ferrari this year.

It would take you 70 years to try and emulate it.

So let's take Ferrari out of this thing and talk about everybody else, and if we want to, including Maserati.

It is possible, in my view.

When I look at it structurally, a company like Maserati can survive on its own, and it can.

It's doubtful, in my mind, that it will make a lot of sense, given the challenges that we're all going to experience collectively, both in terms of autonomous driving and electrification.

That expenditure can be carried out by a standalone entity like Maserati and do it successfully and be relevant in the marketplace.

There's too much stuff going on.

Had things not moved on technologically as fast as they have in the last five or six years, I would have probably had a more benign view.

I think today, based on what I know, I will be reluctant to engage in that discussion.

I may be wrong, and I think we need to have that full discussion at management level and with the Board.

But it is unlikely, it seems to me, at least in the next little while, that you'll see this type of disaggregation of activities away from OEMs.

By the way, if you look at companies like Aston-Martin, for which I have a huge amount of respect, the real question about Aston is not about its timing and its positioning as an auto maker.

It is what is the technical offering that Aston-Martin has, going forward.

Can it do it on its own?

Does it need a partner to get it done?

These are questions that are relevant.

And I've had this conversation with Andrea Bonomi over at Aston Martin.

I think we recognize the magnitude of the task.

Ferrari, on the other hand, is a self-sufficient, probably in my view one of the most technologically advanced manufacturers of car in the world.

It has knowledge which is old, it's deep, and wide.

And that knowledge is something that you don't acquire overnight, and I think it gives it the legitimacy to make the statements that it makes today.

I'm not sure that that's common to everybody else.

And I think we should wait until the first half of '18.

I may be dead wrong, Philippe, right?

And we may come back and surprise you.

I just don't know.

Right now, my gut says now.

Richard Hilgert, Morningstar.

Richard, in your final comments there, you were talking about the third quarter cash flow being stronger than seasonally is typical.

Fourth quarter is also usually a strong quarter seasonally because of working capital.

Are you expecting those same kind of dynamics to play out for the fourth quarter this year?

Yes, Richard.

And then, the revenue that we've had so far this year, we're up about EUR1 billion in the first quarter.

We're up maybe about EUR100 million, or a little less, in the second quarter.

But at [EUR15] billion on the low end, we're EUR4 billion ahead in 2017.

And I think, Sergio, you talked a little bit about some of the volume increases that we'll be seeing coming from Compass, Grand Cherokee, Wrangler, to get you to the 2018 revenue target.

But what about 2017, to get to that 115 low end, 120 high end?

What are some of the drivers that we can expect to see in the second half that's going to get us over that hump?

Well, the things we mentioned, so the Compass ramping up from Toluca, and also the Compass in India, the Cherokee ramping up in Belvidere, and the Alfas, the Giulia and the Stelvio, continuing to launch worldwide.

So those are the three main reasons why second half revenues will be higher than first half.

So it sounds like it's -- and it's going to be more weighted towards the fourth quarter than it is the third quarter in terms of how much we actually see incremental revenues coming onstream?

I think Q3 will also be strong because of Compass and Cherokee in NAFTA.

So we're not waiting for Q4 for (inaudible).

Yes, Rich.

I think we're expecting to see two decent quarters between Q3 and Q4 simply because of the way in which things have stacked up on the production side.

And then, is it just those three, the globalization particularly of Compass, but stronger volumes of Grand Cherokee, stronger volumes of Wrangler globally, that take us to that 136 in revenue for 2018, or are there some other products in there -- oh, the Stelvio from Alfa Romeo -- are there some other products in there that are getting us to that big ramp of an additional EUR16 billion from 2017 to 2018?

Well, we also have -- as we've talked about before, Richard, in the realignment of our manufacturing capacity in the U.S., we have more capacity for the new Wrangler.

We have more capacity for the new truck in the plants we're going to.

So I think those will be significant contributor, and we also have more capacity for the new Cherokee in Belvidere, which has [an MCA] launching in 2018.

Brian Johnson, Barclays.

I have a question probably more for Sergio, but maybe Richard, as well, similar to one I actually asked another auto maker and didn't get an answer, which is can you take your roughly EUR8.8 billion of CapEx and give us a sense of how you think about the return on the incremental investment in those buckets?

What are the major buckets?

What are the high return investments?

What are the must-do invest -- with lower returns?

And then in kind of connection with looking ahead to the '18 session, how do you see that evolving?

Let me give you sort of a broad answer to the question.

I'm going to give it to you in declining degrees of pain, right?

So the most painful thing that we commit money to is anything which is -- what I broadly call compliance-related, and which has to do with the development of powertrain and the mix of combustion and electrification.

And the reason why I find it painful is because, one, the costs are relatively high, and so the question of aggregation, of spreading them across a variety of platforms and nameplates becomes crucial, but it is painful.

And we don't know -- we still haven't experienced for long enough the ability to recover those costs in the marketplace, right?

This is all technology that's coming onstream, and we don't know.

The second thing which is perhaps even more painful is when you compare our regional commitments and the ability to make money, is when you start looking at margin generation in a place like EMEA, for example, which has gone a long, long way in the last four or five years in terms of restoring it.

It is very difficult for us to justify some of the bucks that are being committed to those jurisdictions in the absence of a globalization strategy, such as Jeep or Alfa or Maserati that allow us to effectively leverage that industrial footprint for a much greater use.

The one that I find least painful is any dollar at all that we place in the development of Ram and Jeep on a global scale.

Those are the things that I find certainly in terms of returns on investment, are the ones that have historically proven to be the most rewarding.

And also on a forward basis, they show a great degree of -- regardless of the size of the [commitment] that we're making.

Even in uncertain U.S. market conditions show us significant returns on capital.

So that's, broadly speaking, where we are.

We spend a lot of time, and I can tell you, the majority of our time, a group Executive Council is really committed to the understanding of the deployment of capital, of the reconciliation of the size of those commitments in view of brand strength, in terms of globalization opportunities.

And they do take -- we just finished a two-day session on the weekend dealing with a bunch -- I'm not sure that we spent a lot, but certainly we rejected more than we approved.

But there is a huge amount of consciousness at group level about the fact that this is really a matter of life and death for us, that if we get that wrong, then we will not be able to survive in the long-term.

So there's value.

But I tried to give you some -- I don't know whether Richard has got a different pecking order.

Yes, Alfa, Maserati for sure, in the long-term helped by Maserati.

When you see margins like the 14.2% of the Maserati, you understand that a machine running at cycle can give you those returns.

And if it does, then by definition it will do well.

The other ones -- the Jeep story is not necessarily a premier story.

It has to do with globalization and reach and the strength of the brand.

So I guess two follow-on questions, because what you've described I might call conglomerate, multi-industry capital management circa 1980s, take money -- don't give money to dog businesses -- no offense to our canine friends -- and put money in strong, well-positioned business, et cetera.

So I guess two questions kind of for this environment.

One, any further progress in terms of whether it's not necessarily consolidating at a big level, but consolidating with other OEMs certain high-cost functions, like powertrain?

And then, second, where do the more speculative investments in next-gen mobility?

We've certainly seen competitors over the quarters put money into various autonomous efforts in mobility, and ride-sharing efforts fit into that capital allocation discussion.

I'm going to give you an answer to the last one.

I am incredibly reluctant to engage in what you just described as speculative investments.

I think it's incredibly dangerous.

I mean, we have spent enough time in Silicon Valley.

We've met enough people now to realize that there is a phenomenal amount of activity down there.

There are a number of people who are willing to fund the capital requirements of a number of startups.

And to be perfectly honest, as bright and as conscientious as some of our people are, we are at a loss at trying to determine who is going to win that game.

And so, we remain very vigilant.

We remain committed to working with established suppliers who have now entered the space.

And you will hopefully hear, between now and certainly the time that we launch the plan, our involvement in these activities, which we have been very quiet about.

As long as I'm here, I don't think you're going to see us making a speculative investment down in Silicon Valley.

I think it's crazy, because I just don't know what the returns are, or the time frame for getting that done.

But having said this, I think we will be there.

The brother question that you've asked, which has to do with consolidation, or at least the sharing of knowledge, that is a very thorny issue.

If you've seen the last allegations that have been made against German OEMs -- and I was amused.

There was an article that showed up in Breaking Views that almost appeared to support the collusion argument on an intellectual basis because it brings down the cost of execution, by the way, before anybody was interested in economic theory.

That is true of all cartels.

There is a question as to whether they reap abnormal benefits for the benefit of the participants, or whether they spread the benefits of that cartel for the users of the products that they manufacture.

But on the assumption in an economic argument that says -- in an economic world that says these things are done for efficiency reasons, then by all means I think we should do a number of things together with a bunch of other people to try and get it done.

And I've even seen Volkswagen's declarations this morning, trying to defend their position and involvement by saying that information sharing is healthy.

It is.

I agree.

The question is at what point in time do they become destructive forces in an economic market, right?

And those are the things that I'm much more reluctant to engage.

I know one way in which we can get to that solution, and I pitched that story back in '15.

And by the way, when we pitched the capital (inaudible) story, none of that discussion, the question of aggregation, precluded the ultimate disintegration of the OEM world in very powerful, high margin businesses that could have survived on their own, and then a much more difficult OEM world where you have to [fight] on the sharing of resources in a much cleaner way.

It makes as much sense, by the way, to run particular premium OEMs on an aggregated basis as it does for the mass market.

Those arguments don't distinguish one from the other.

And so, my real problem in answering your question is, given the legal and political environment that we're now living through, the likelihood of us finding a group of other OEMs that will be able to aggregate into this cost-sharing agreement is relatively small.

And the best conduit to that ideal world is still the supplier base.

It is easier for us to get the supplier -- we can get them to act as the conduit and to have direct relationships with other OEMs to try and bring down the cost of execution.

Is there a way to push more of the powertrain investment out to the supplier base, or create new powertrain companies that work across OEMs?

Yes, and that is exactly one of the reasons why, if you go back to what I said originally about the '18 plan, the '18 to '22, when I look at my structure underneath this, and I say what doesn't belong here, what doesn't belong to FCA, anything which has got value beyond the OEM, so all of our components business, everybody who supplies to that base, needs to stay away from me because I'm almost radioactive.

So they have a much better chance of being able to act as the conduit to higher margins and better capital utilization than I can.

But it's an interesting discussion.

And I think we'll be able to flesh it out in a more intelligent way in the first half of 2018.

Michael Tyndall, Citigroup.

Mr. Marchionne, on the first quarter call, you mentioned about the whole diesel issue.

And if I quote you, you said you "Invite the national bodies to let this thing go." It doesn't feel like that's happening.

Then again, we're only seeing it from the outside.

What is happening on your side of things in terms of the relationship with the authorities in terms of diesel emissions under the old standards?

Are we getting to a point where we can draw a line under this, or is there still, as the media would have it, this appetite for a pound of flesh out of the auto makers?

I don't know how to answer your question, because this desire to get a pound of flesh out of OEMs sounds like a victim story.

I'm not sure that I play victim well.

But let me -- a lot of things have happened since Q1 of this year, and so I think that you have seen a build-up of additional anxiety around diesel, especially out of Europe, which I think is making the future of diesel, at least in Europe, much more suspect than I would have told you in April of 2017.

I think we need to see how this thing shakes out with the German authorities in terms of what comes out of this investigation that's going on.

I think we need to see more out of this collective effort that Daimler and the rest of the German OEMs are making to try and preserve the validity of diesel as a technology solution to the automotive industry.

I don't know enough.

My gut tells me that whatever happens out of all this, that we're going to see diesel come out of this in a much weaker state than it was on the way in.

Having said this, this is a technology argument.

The relationship with the authorities, I've always had the view, and I continue to repeat this, that given what has happened here, that the only thing that could have rationally happened out of Europe is for the European governments to really come to an understanding of the facts as they had happened, effectively agree a way forward, try and correct as much of what's correctable, given the alleged deviations, and then move it in, because all of this has been incredibly -- from a reputational standpoint has been a disaster for most OEMs, including ourselves in some cases.

And it's made our life a lot more uncertain, because as long as you keep on maintaining the sort of emission standards that we've got in place for 2020 and post-2020, diesel played an integral part of the solution.

To the extent that it's in doubt now, there are no easy paths to try and get there.

So we need to find a solution.

I think I've read a lot of the studies that have speculated about the quantum of the cost that is going to be associated with compliance, which is immense.

And this is unhealthy for us, because I think it provides a high level of insecurity in terms of technology development within the OEMs, and I think that needs to be put to bed.

So I re-invite the European Commission, to the extent that I have any right or basis to do so, but I think it would be very helpful if the European Commission and the member-states effectively came out with a final solution that is (inaudible) the issue to bed.

This sort of bleeding -- death by a thousand cuts is not a good thing, and we're killing it a piece at a time, and I think we need to stop.

The U.S. experience is somewhat different, right?

To be perfectly honest, I was hopeful that today I would be able at least to show that we have made some progress towards resolving the sort of EPA carb issue that we have on the three litre diesel.

I think we've gone a long way since we spoke the last time.

I continue to be confident that we will find a proper resolution with the authorities, and that will -- and I'm a lot more hopeful that the U.S., having established a solution to this then putting it behind us, that we'll be able to look at this in a much more constructive way.

It's also the nature in which I think Americans deal with issue.

I'm relatively comfortable that we can get the U.S. position rectified in relatively short order.

I wish I was that hopeful about the European side.

It isn't.

And it's not just an FCA issue.

I think it's something that's impacting everybody.

And I would actually invite the political order in Switzerland to -- sort of in Europe to come to grips with this.

It's not under control.

Patrick Hummel, UBS.

Sergio, one question for you related to the diesel issue in Europe.

We've seen those voluntary software upgrades of your German competitors that were announced over the last few days.

Are you planning to do anything similar?

Is there a feasible software solution that you could, relatively easily and at low cost, implement into the cars that are already on the road?

Or are you waiting, as you just indicated, for final word from the European Commission on the entire matter before you would do any action?

Patrick, I think that the answer is that we did a voluntary update of the software in the first part of 2016.

It was done on a voluntary basis without being required by anybody to do it.

I think it's an indication of the type of attitude that we have towards this process.

We are looking at this, if we can do it, and provide an improvement in air quality, both on CO2 and NOx, purely as a result of calibration, and we'll do this.

The important thing is that, within the scheme of things that existed at the time in which we launched these vehicles, we weren't compliant.

If there's a way to improve that position, we will more than gladly do it.

So we're working at this.

We have not been asked to join this sort of German group of people who are trying to better the world, but I think we'll do it on our own merits.

My second question is relating to the Alfa Stelvio and the new Jeep Compass in terms of the order situation in the markets where it's already on sale, and also the pricing and profitability level.

You rightly emphasize, Richard, that this is a rapidly growing segment, but it's also very competitive one.

And I would just be curious in terms of your expectations on pricing and margins, whether what you see so far is meeting your expectations, or maybe even exceeding it.

I think we're positioning Alfa against the premium brands, and I think that's the type of pricing that we expect to obtain.

So far, we've been successful.

Obviously, the launch of the Stelvio is in progress now.

It's early days.

But I think the reception of both the brand and the vehicle would indicate that we should be able to execute at those levels.

On the Jeep side, Compass reception has been extremely strong in Brazil.

We're leading the SUV segments down there with Renegade and Compass.

The reception in the U.S. we expect to be similarly strong.

I think for a number of years, we've had Patriot and Compass in those segments with vehicles that were a little out of date in terms of technical content, and we've upgraded significantly with the new Compass.

And so I think it will help both [for] us to be more competitive in our segment, and also to manage the price steps more logically between Renegade to Compass to Cherokee.

So I think we transact at very good price levels in the U.S. with the Jeep brand.

I don't see any reason why Compass would be different.

Obviously Compass in Europe is in the [harbor] segment in terms of the European market, so we've seen very strong performance in the Renegade in Europe, but the Compass segment is much larger.

And again, I think we'll be competing on the premium end with that vehicle, near premium, let's say.

It's a brand which clearly has something to say beyond the sort of mass market crossover vehicles that abound in that market.

And then, obviously, we've thought about China.

We're launching a localized production of both Renegade, and now the Compass.

The reception's been very strong.

Obviously it's a very competitive market also.

The Jeep brand I think means something different to the Chinese than to the Americans or the Brazilians, and we're working very hard to ensure that we position the brand properly, both sort of from a marketing, from an emotional point of view in terms of the content and the reasons for purchase beyond just the pricing.

But I think we've seen great traction everywhere we've launched Jeep so far, and that's why we've been confident with the globalization strategy.

And we'll continue to update you as we go through this process, but, so far, we don't have anything bad to say.

I'm just going to leave you with one thought.

The internal discussion that we're having with our people in Jeep is that, to the extent that the UV market is at all relevant to the other model space, and as we have seen it is, if there is one brand out there that has the right to claim the ability to have one out of five, 20% of that market belong to it, it's Jeep.

And I think that everything that we've been doing, including the work that we've been doing on the Wagoneer and the Grand Wagoneer, and the development of the Renegade, the Compass, the Cherokees, the new Grand Cherokee that's coming out, all this work, including the possibility having five- and seven-seaters, all these things are designed to provide a complete coverage to the biggest growth segment in the automotive space that we have seen in the last 20 years.

So our prognostication is that this market has, out of the global market, is going to be roughly between 33 million and 35 million cars globally.

If we're right in the estimation of Jeep need to own 20% of that market, we're talking about over seven million vehicles.

You know what?

If that's the ambition, this industry and this business especially has got a long, long way to go before it's saturated.

So I think we need to continue to be consistent with that objective.

I think that's really -- it's a very long-term view.

I think it will take a number of years to get there, but I think the road is relatively clear for the brand.

Lastly, simply there's no question this EUR2.5 billion that are targeted for year-end, that's under the assumption that you don't do any asset sales between now and year-end, correct?

Correct.

Max Warburton, Sanford Bernstein.

I'd like to come back to the subject of succession that was mentioned earlier and just ask a couple of questions on that.

Sergio, could you clarify a bit more about what this capital markets event in the first half of 2018 will involve?

Is it just going to be about technology and where you're investing, or are you actually going to start talking about a longer-term financial plan?

I may have misunderstood you, but I think you referenced 2022 at some point during those comments.

That's right.

It's an '18 to '22 plan.

So you're going to set new financial targets, but not have unveiled your successor?

So basically, whoever takes over from you is going to have to run with your plan?

No.

I think that we've been very clear, Max, that my successor is coming from inside the house.

Okay, so they're involved in setting this.

Oh, hell yes.

In the same vein, so the second part of this, can you clarify what degree of involvement you're going to have after stepping down?

Are you going to be elevated to some sort of Executive Chairman?

Zero.

Zero.

But you'll still be on the board of [Exel]?

Probably, yes, but that means nothing.

I think in terms of the running of FCA, once I've finished my mandate as CEO, I'm done.

For the benefit of everyone on this call, because I think this is probably one of the big issues for the stock, we can talk about the numbers and we can talk about 2018, but the issue for the stock is the multiple more than the earnings.

And the multiple, in my view, and I think a lot of people's view, would be helped greatly if you were to continue to have some involvement with the company, even from a distance.

My biggest involvement is in having provided the opportunity to a bunch of my colleagues here to develop into great leaders.

And I have zero doubt in my mind that the person that will succeed me will be as capable, if not more capable, than I am.

And I don't say this because I'm trying to avoid sort of retaining responsibility for what's happened here, but I actually do believe that these people are great people.

And by the way, the training school has been pretty ugly.

I mean, they've been with me for a long period of time.

They've lived through hell, and I think that we have seen a lot of ugly stuff together.

I think they've learned in the process.

And it's not because I'm trying to condition their thinking, but I think a lot of the stuff that we've seen them do is a reflection of the way in which they've grown.

And to be honest, I think I would be much more of an impediment if I were around, an impediment to their development.

I don't believe in this sort of recycled CEOs that continue to act as Chairman.

I've done it in my previous life, but it was done under a different set of circumstances.

This one here, given the challenges that it has between 2018 and '22, I think needs a new person, and it doesn't need to be influenced by me.

My influence will be visible on the '18 to '22 plan to the extent that it will have (inaudible).

Once I do that, I think the rest of it, including execution and details, will be left to the successor.

And it's the right thing.

Stephen Reitman, Societe Generale.

Looking at Alfa Romeo and Maserati, first of all, could you give some idea about the production cadence you're seeing in Alfa Romeo, roughly what the volumes were like in the first half, or the second quarter, and also where we are in terms of Levante, as you mentioned that you're launching it in all markets?

Where are we now in terms of utilization and capacity?

In terms of Alfa Romeo, we shipped just over 12,000 units in the first quarter worldwide, and 22,000 in the second.

And obviously we're still in the process of launching Stelvio.

So large part of those units were Giorgio production.

Giulia.

I'll give you my read of these numbers.

I think Stelvio just started launching.

We started showing it to the markets here in the U.S. We're beginning to get some units on the ground now.

Reception is quite good, as well as one could expect.

They're probably in line with the reception that Giulia received when it was launched.

It is -- because of the fact that the ambitions and the commitments that were made to the architectures were totally different than they were for Maserati, we're not seeing the same type of economic benefit from the launch of these two vehicles than we did from the launch of the Quattroporte and the Ghibli.

These are much larger investments that were much wider in scope in terms of technology in the engines that were launched and associated with these products.

So I think it's going to take the remainder of the product lineup fill-out, which will take until '19 or '20 initially to try and get the full benefit of Alfa onto the table.

It will include one EUV, one larger UV on top of the Stelvio, which ultimately will share something with the U families, EU families of that size.

So there's more work to be done, but the reaction has been superb, and the brand is performing incredibly well across the markets.

I mean, the recognition and familiarity is quite high.

So I understand there was a figure mentioned around the first quarter of about 170,000 units of Alfa Romeo targeted for this year with a run rate of close to 200,000 units by the end of the year, which brings close to profitability, or brings to break-even.

Are we on track on that?

Yes, for the whole Alfa range.

That includes Mito, Giulietta, Giulia, and Stelvio, and a few 4Cs, which you will lose on the (inaudible).

So the 12,000 and the 22,000 units in Q1 and Q2 relate to the Stelvio and the Giulia?

Yes.

Rod Lache, Deutsche Bank.

So I guess just to touch on something you discussed earlier, you're acknowledging that there's been a shift in the market vis-a-vis electrification, and you're acknowledging the compliance-related spending is painful.

Could you talk a little bit about how we should be thinking about the magnitude of what that means for R&D and capital and other costs, obviously not for this year but as you look beyond?

And I guess what I'm getting at is, relative to the amount of capital that you're committing today, how does that look?

Because you're reiterating your EBIT targets.

We're trying to calibrate what that means for the company's cash generation.

And as you were talking, I felt like I was on a stand there, Rod, (inaudible) the fact that I'm -- it's like a Spanish inquisition.

I'm repenting all my -- and I've acknowledged the fact that, yes, electrification is here.

Yes, I've acknowledged it.

I've just joined the rest of the crew.

By the way, I've always -- my aversion to electrification was based on pure cost issues.

I think what has really made the issue absolutely mandatory now is the fate of diesel and the fact that it's actually the intrusion of -- especially in Europe, of some type of electrification on gas engines is inevitable.

So, strangely enough, the issue with electrification is not the capital that's required to get into production.

It is actually the impact on the variable cost of this technology as we launch it across the ranges.

That's the thing that worries me most.

It's not the capital hump.

I think we can get over that one to the extent that we standardize.

It's actually more standardizable than most, because we understand battery packs and engines and motors and some of the other paraphernalia associated with electrification.

We understand it much more than we do per the complexity of new combustion engines and the level of commitment that we have made historically to these.

The variable cost piece is going to be the killer.

If the cost of the stuff doesn't come down quickly, then I think marginal returns on every investment that we made is going to be under fire, under pressure.

And so we are seeing a variety of prognostications over battery cost in terms of kilowatt, of cost per kilowatt hour is.

We're encouraged by the direction that they're taking.

I still think that there's going to be a huge increase in prices in '21, '22 if effective electrification becomes as widespread as people expect.

There has to be a shift in pricing.

And that, by the way, based on everything that I know in terms of economics, will cause a shrinkage of demand.

And the problem that you run into is, and we are seeing this in Europe now, is we've introduced everything from Euro 0 to Euro 6, is that people keep on driving older cars, and it doesn't address the issue of emission.

So if we don't do something to allow this technology to become accessible, you will not see a rejuvenation of the car part.

So I take it you're not ...

(inaudible) good question.

Yes, that makes sense.

It's more what the industry's being forced to do versus what the consumer would prefer to do economically.

So I take it that you're not -- some of the plans of your peers on electrification involve pretty broad commitments to infrastructure, charging to make these products more appealing, and also internal capital commitments for batteries and so forth.

I take it that that's not the path that you're thinking about.

No.

And by the way, to be perfectly honest, I think now we're exaggerating at the other end, right?

The minute that I start becoming a battery manufacturer, given the level of knowledge and depth of that knowledge that sits with other people in the industry, what right do I have to enter that space?

None.

Just lastly, based on what you're seeing on diesel, does that have any implications for the Jeep international expansion plan?

No, none at all, because I think we will accommodate this sort of combination, electrification and gas.

As there are no further questions, I would now like to turn the call back to our speakers for any additional remarks.

Thank you, Klota.

I think that will conclude today's call.

I'd like to, again, thank everybody for joining us, and have a pleasant day.

Ladies and gentlemen, this concludes the Fiat Chrysler Automobile's 2017 Second Quarter and First Half-Year Results webcast and conference call.

Thank you all for your participation today.

You may now disconnect.