Stellantis NV (STLA) 2017 Q3 法說會逐字稿

Good afternoon or good morning, ladies and gentlemen, and welcome to today's Fiat Chrysler Automobiles 2017 Third Quarter Result's 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 Joe Veltri, Head of FCA Global Investor Relations.

Mr. Veltri, please go ahead, sir.

Thank you, Sergei, and welcome to everyone who is joining us.

You will find today's presentation material along with the related earnings release that we posted earlier today under the Investors section of our group website.

Our call today will be hosted by our CEO, Sergio Marchionne, and Mr. Richard Palmer, our Group Chief Financial Officer.

After their presentation, we will be holding the customary question-and-answer session with both of those gentlemen.

Before I begin, I wanted to point out that any forward-looking statement that we might make on today's call are subject to the risks and uncertainties that are mentioned in the Safe Harbor statement that can be found on Page 2 of today's presentation, and the call will always be governed by that language.

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

Thank you, Joe.

Good morning, good afternoon to everybody on the call today.

So starting on Page 3, I'll go through the highlights of Q3 for FCA.

Our financial performance was in line with our internal expectations and with our guidance.

Adjusted margins were up 110 basis points to 6.7%.

All our segments made positive year-over-year contributions to adjusted EBIT, with margins in NAFTA reaching 8.0%, in Maserati 13.8% and Components at 5.3%.

Our adjusted net profit was up 25% to EUR 922 million and our net profit up 50% to EUR 910 million.

Cash flow from industrial operating activities in the quarter was good at EUR 1.2 billion.

And as a result of the performance year-to-date, we confirm our 2017 full year guidance as previously communicated.

Moving on to Page 4, we talk a little bit about our new MoU partnership with BMW, Intel and Mobileye.

This is another key step as we embrace partnerships as the optimal way to develop technology solutions for the changing offerings in our industry, in this case specifically to develop a state-of-the-art autonomous driving platform.

The platform will be scalable for Level 3 to Level 4 and 5 automated driving and can be used by multiple OEMs, while maintaining brand identity.

Moving on to Page 5, we wanted to give you a little bit of an update on the progress of our NAFTA capacity realignment plan, which is obviously a very important part of our business plan going forward.

The activities are all on schedule.

And just going quickly through this chart in chronological order: the Jeep Cherokee is now in production in Belvidere having been moved from Toledo North and we will be launching a renewed version of that vehicle in Q1 of next year.

The all-new Wrangler is on schedule to start production in Toledo North this quarter and will be revealed in December, and the current Wrangler will end production in the first half of '18 as the new vehicle ramps up and to avoid losing any production in the transition process.

After the current Wrangler stops, the production -- the plant, Toledo South, will be retooled to then build the all-new Jeep pickup launching in 2019.

And at Sterling Heights, the production of the all-new light duty pickup truck will start in the first quarter of next year and the current pickup, Warren Truck, will continue in production to avoid any production losses in that ramp-up period.

Moving on to Page 6, I'll go back to the Q3 financial performance.

Our combined shipments were flat at 1.1 million units, with consolidated shipments down 15,000 units due to some reductions in NAFTA, mainly in the fleet area; partly offset by LATAM, which was up 29,000 units.

Our net revenues as a result were basically flat at EUR 26.4 billion and impacted also by negative FX translation, mainly for the dollar weakening in the quarter.

At constant exchange, our revenues would have been up 2%.

Adjusted EBIT margin was 6.7%, up from 5.6% last year and our overall adjusted EBIT was up 17%.

The margins were a record for the quarter and they were a record also net of the insurance settlement that we closed in the quarter regarding the Tianjin port explosion in 2015, of which EUR 87 million was taken as adjusted EBIT and so forth the adjusted margin would have been 6.4%, still a record for the quarter.

In terms of net profit, we had a good performance, being up 25% at adjusted net.

And our financial charges were down nearly 40% year-over-year due to reduced gross debt and reduced average interest rate as we continue to optimize our balance sheet.

And taxes were up EUR 200 million as the adjusted tax rate was up from 24% to 36% for the quarter due to some timing of U.S. credits and adjustments as well as higher U.S. EBT.

Our year-to-date adjusted rate is 34%, in line with prior year and our full year forecast.

Moving to Page 7, here we show the details of the improvement in adjusted EBIT of EUR 258 million by segment.

All segments contributed positively, as I said.

NAFTA margins were up 40 basis points, offsetting the impact of reduced volumes mainly in U.S. fleet.

LATAM improved from a small loss last year to a 2.6% adjusted EBIT margin, with volumes up in Brazil and in Argentina.

The improvement in APAC was substantially due to the insurance claim, as I mentioned before.

EMEA, Maserati and Components all improved their margin performance year-over-year.

And below by operational driver, you can see that positive mix continues to be the key driver for our improving margins, in particular in NAFTA, but also in LATAM and EMEA.

And our net price year-over-year was slightly negative, but mainly driven by the pound impacting EMEA and some incentive spend in EMEA and other major markets.

Moving on to Page 8, we show the change in our net industrial debt for the quarter, which increased by EUR 180 million.

Excluding the impact of FX on the U.S. dollar weakening, the net industrial debt would have been substantially flat.

The EUR 1.2 billion improvement in operating cash flow compared to prior year was driven by a number of factors: improved EBITDA of EUR 160 million; improved finance charges, down nearly EUR 200 million; and reduced cash taxes, down EUR 130 million; and also lower pension contributions with no repeat of the EUR 300 million pension contribution we made last year in the U.S.

So all of those factors helped us to maintain our net industrial debt of EUR 4.4 billion in the quarter, notwithstanding the seasonality of negative working capital, principally in the European region.

Moving to Page 9, we talk about NAFTA segment.

The U.S. SAAR for the quarter was 17.4 million units.

The retail SAAR was 14.9, slightly down from 15.3.

The Canadian SAAR was up to 2 million from 1.9 last year.

Our U.S. sales were down 10% and retail was down 4%.

So most of the reduction was driven by fleet, as I mentioned before.

Fleet mix of U.S. sales was down to 15% versus 21% last year and the 20,000 unit reduction in retail sales was driven by -- principally by discontinued Dart and 200 and Cherokee, as we continue to transition into Belvidere, slightly offset by improved performance for Ram and from Alfa.

The fleet reduction of 39 was mainly driven by discontinued older Compass and Patriot and constrained Journey as we ramp-up the Compass in Toledo.

If we look below at the margins, as we mentioned, margins were up 40 basis points to 8% in the quarter, positively impacted by market mix and nameplate mix, principally the improvement in retail competitive fleet and the improvement in Ram and Alfa.

Net price was basically flat in the quarter as we transition also to model year '18s from '17s.

We had some increased warranty charge in the quarter for some old model years on powertrain, which we have had a higher spend on than our forecast rates and so we've adjusted that.

We had also some costs as we continue to spend money on the realignment of our industrial capacity, slightly offset by purchasing efficiencies in the quarter.

SG&A was flat.

And that gets us to the 8.0% margin performance.

Moving to Asia-Pacific on Page 11, the industry in China was up 8%, Australia was flat and India was up 13%, driven by launches in the SUV segments in India, which included our locally produced Jeep Compass.

FCA combined sales were up 8% to [66,000] units, of which jeep sales were up 18% to 58,000 units.

Our regional market share was flat for the quarter.

Inventories were up from 97 to 108 days, driven by the launch of the all-new Jeep Compass and the Alfa Romeo Giulia and Stelvio ramp ups.

Consolidated shipment and revenues were basically flat and revenues were also impacted by exchange.

If we look at our adjusted EBIT walk, you can see that the volumes were up slightly on a consolidated level and positive mix was driven mainly by Alfa and the non-repeat of the sell-out of damaged Tianjin units last year.

If we look across, we had some unfavorable FX in the industrial costs.

And on the other column, you see the impact of the Tianjin insurance claim.

So overall, we would have had margins up slightly year-over-year notwithstanding the impact of the exchange.

Going to Page 12, we see EMEA performance.

Sales were up 5% and our share in passenger car was up 10 basis points.

LCV, the industry was up 5% and our share was down 10 basis points to 10.9% due to a non-repeat of a fleet deal last year in Italy.

Our passenger car sales as a whole were up 4%, continuing to be driven by the Tipo family and also by the all-new Alfa Romeo Stelvio.

And our LCV sales were up 9%, mainly due to Ducato.

Shipments were down 10,000 units, mainly due to lower volumes in the U.K. as we manage profitability in that market following the depreciation in the British pound.

And net revenues were basically flat at EUR 5 billion.

Adjusted EBIT moved from 2.1% to 2.6% and continues to be driven by positive mix.

We had, as I mentioned, some higher incentive spend and also the impact of the British pound was about EUR 40 million in the quarter.

And then we had positive impact from cost management both in the industrial area and in G&A cost, getting us to the 2.6% margin for the quarter.

Maserati, on Page 13, had another strong quarter, with margins up to 13.8% from 11.8% last year.

Volumes were down due to normal market seasonality, as we already talked about on the prior call.

And we expect Q4 volumes to be strong as seasonality particularly in NAFTA impacts the market.

Our performance in general was up because of Levante, slightly offset by Quattroporte.

And revenues were impacted by unfavorable FX, but we offset this with better option content and also industrial cost actions in the factory environment.

Overall, a strong performance from Maserati.

I think -- I have just been told I missed LATAM on Page 10.

I apologize.

So I'll go back to Page 10.

Latin America, we're starting to see some positive trend in Brazil in a market which was up 15% year-over-year and also continues to be up in the first half of October.

So it doesn't appear to be solely an impact of the end of our energy efficiency measurement period that ended in September.

And also Argentina was up 19% in the quarter.

Our market share was slightly down in Brazil due to strong competitive actions on price from some of our competitors in the A and B segments and we're managing our margins accordingly.

And our Argentina share was up to 12% from 11.2% last time.

Inventories were fine at 37 days.

Shipments were up 26%.

And our revenues were up strong at 44% at constant exchange, also helped by positive mix of the vehicles coming out of Pernambuco.

So as you can see in our EBIT walk underneath, to get us from the 1.1% negative margin last time to the 2.8% positive margin in the quarter, strong performance from volumes and mix as we shipped the new Compass and the Argo and the Mobi.

Positive impacts of pricing in Argentina and lower tax impacts in Brazil following the closure of the [fisco-fin] issue, as we talked about on the last call, slightly offset by inflation and depreciation, amortization for the new vehicle launches.

Moving to Page 14 on Components.

We had flat revenues impacted by unfavorable FX to some extent.

But notwithstanding that, we had a strong performance on margins with an improvement from 4.7% to 5.3% last -- this time.

And in particular Marelli was strong on the industrial efficiencies.

Marelli also acquired a stake in LeddarTech for joint development of lidar technologies for autonomous driving.

Page 15, the industry outlook for the rest of the year.

We're basically remaining unchanged in our outlook with the exception of a small change on Latin America.

Following the continued strong performance in Argentina, we moved our full year estimate from 3.8 million units to 3.9.

The U.S. industry remains stable with SAAR year-to-date at 17.4 and so we're holding our full year estimate.

And then moving to the last page of the presentation, Page 16.

As I mentioned before, we're confirming our overall full year guidance despite some impacts of negative exchange as the dollar weakened against the euro, which impacted us for about EUR 200 million in the quarter at an EBIT level and for about EUR 200 million for the quarter in the net industrial debt as well.

But confirming all targets.

As such, I'll hold it -- I'll -- thank you and turn you back to Joe.

Thank you, Richard.

Sergei, I think we are ready now to start the question-and-answer session.

Please open up the lines.

(Operator Instructions) The first question comes from the line of George Galliers of Evercore.

The first question was just around 2018 target.

So, Mr. Marchionne, at the start of the year you said you were confident that you could get there and I think gave a probability of more than 50%.

Has that probability changed and what in your view are the biggest risks to getting there right now?

I think the number is substantially higher than the 50% that I gave you at the beginning of the year.

I think the biggest risk that I see is the execution of what Richard referred to in terms of the -- of getting the industrialization plan up and fully functional.

We got 3 product launches coming in the next 90 days.

And if I add up the sum of all those products in a fully annualized basis, you're talking about over 1 million cars that are being launched between now and January of 2018.

I think flawless execution of that plan will pretty well guarantee that we will deliver '18.

And so -- and we're quite confident now and we've reviewed the numbers for '18.

We think we will -- the target is well within sort of the achievable range, including the cash generation associated with the volumes.

I'm encouraged by what I see.

I think that we are in good shape.

So I'm -- certainly I can tell you that if we launch properly in Q1 of 2018, by the second quarter of next year barring any sort of instability events in the system we should be able to confirm -- pretty well guarantee delivery of '18.

So let's see.

And then one of the targets also that has been mentioned in the past was potentially doing EUR 1 billion of EBIT of Maserati.

Clearly, if I look at results over the last 12 months, there has been huge improvement, I think a 13% average margin and around EUR 550 million of EBIT.

What are the next steps to get that closer to the EUR 1 billion target?

It needs another car.

And that's something that we've -- we just finished our executive meeting today.

I think we're well on our way to getting that done.

It needs a smaller SUV than it has today.

And I think we already invested in the architecture through the Alfa Romeo venture.

So that's probably coming by 2020 and I think we'll be in good shape to hit the EUR 1 billion then.

Our next question comes from the line of Brian Johnson of Barclays.

Three questions, if I'm not overstaying the welcome.

First is on the changeover plan on 5. I like the clarity around how the plants are being reshuffled around.

When you have the overlapping production, is that just to offset the lost production from the Ram time or, as I think you've commented in the past, are you using that extra production of the old vehicles to address markets you haven't addressed before?

And if so, how far into '18 on both the Ram and separately on the Wrangler side could the old factories continue production?

Just the -- then let me deal with the Wrangler issue, which is somewhat easier.

I think you will not make a lot of sense to have both the old Wrangler and the new Wrangler in market concurrently.

I think we need to make sure there's absolutely no lapse in market coverage not just in the U.S., but also globally.

The new plant in Toledo has substantial capacity, in excess for what we currently produce in Toledo.

We're going to be hitting well over 300,000 annual production of the new Wrangler for global distribution and it's something that we have to neglect because of scarcity of product and we're now positioned to try and take it internationally in a more significant fashion.

The more interesting question that you asked, Brian, is about the Ram, because the Ram has always been -- the Ram realignment was always designed to allow for parallel production both in Sterling Heights and in Warren.

And effectively when we get the new truck up and running at full scale in Sterling, we will bring down capacity to 1 full shift and then we'll continue indefinitely as long as we see market needs not being satisfied by the overall production capacity.

So I think it's going to be an interesting exercise in 2018 as we run it out.

My expectation is that we'll run the old installation at least for the whole of '18.

Both supplier and capacity -- production capacity are confirmed, so it's up to us to decide how long we run it.

I'm confident that we will need all the Warren for 2018, if not longer.

Which gets to the second question, and so your confidence around 2018.

There are some very aggressive goals for things like Jeep in China.

When you express confidence in it, are you expressing confidence in each of the subcomponents or are you just saying that -- and let me just hypothesize -- perhaps a strong NAFTA could offset slowness in other markets?

It was always part of the pitch that we made back in 2014.

The plan was the aggregation of a variety of objectives which add margins of errors associated with that.

And as is true in all things, we can never -- I think it would have been miraculous if we had hit all the component elements of the plan in their nature and in their size exactly as we have planned.

Richard and I were talking about this yesterday.

We did not forecast in 2014 the industrial realignment of NAFTA.

And effectively if you -- I'm going by memory now, but I think that when you look at the way in which we've exited car and we have reinforced our position in pickups and SUVs, that realignment was not in its entirety reflected in the '14 to '18 plan.

The fact that we moved midstream in that direction was designed to guarantee the delivery of the overall plan.

So the answer to your question in short fashion: I am confirming the total numbers for the group and including the fact that we will be debt free and sitting on nearly EUR 5 billion worth of cash.

I'm looking at Richard.

Richard is attempting to correct my exuberance from time to time.

But I think it's between EUR 4 billion and EUR 5 billion.

Isn't the --

Yes, indeed.

Yes, it is.

Yes, EUR 4 billion to EUR 5 billion, that we're going to make about EUR 5 billion net.

Then I think those numbers are deliverable now especially because of what I just finished telling you on the industrial realignment.

I think that gives me all the comfort that I need.

It moves the number substantially over 50%.

And final question should be quick.

The FCA, BMW, Intel, et cetera, partnership, are you contributing capital and expense for that?

Are you more of a customer for that?

No, no.

I mean we are contributing and it's built into our -- we are contributing both capital, resources.

We are a full participant in the venture.

So it's going to cost us some money.

It's built into our R&D plan.

But it's the safest bet -- the safest way for us to enter that market.

We're doing it with a reputable organization and there are reputable suppliers at the table too.

So I think we've put that issue to bed.

Then there was a big issue -- I just -- I've read a couple of the comments that people continue to make, which I think probably reflects a very poor understanding of the state of the industry.

But we are not laggards here.

We've just chosen our spots very carefully before we started playing, because I think that you can destroy a lot of value by chasing your tail in autonomous driving.

We want to ensure that we do it with the right people.

Martino De Ambroggi, Equita.

The first question is on Alpha Romeo.

First, if you confirm the breakeven in Q4 this year?

And secondly --

Let me deal with that question.

We did not breakeven in Q3 and I don't know whether we will break in Q4.

I think -- to be honest, I think our U.S. penetration given our distribution has been slower than we expected.

We understand the commitment that we have made and want to try and close that gap as quickly as we can.

I cannot confirm for you that we will breakeven in Q4.

Okay.

Any problem in China specifically for Alpha Romeo?

No.

I mean we just started distribution.

Just -- everybody has slowed down here.

The second question is on net working capital.

In Q4 last year, you had EUR 2 billion reversal for seasonal reasons.

I assume a similar trend for the current year.

I think it will be enough -- between earnings generation and net working capital movements, it will be enough to deliver a number which is below EUR 2.5 billion that --

Okay.

Specifically on net working capital in your net debt bridge accumulated 2017-'18, you had a EUR 3 billion contribution from net working capital.

If I assume EUR 2 billion reversal, I don't know if it's true, but a similar figure in Q4, I have a positive contribution of 0.6, 0.7.

So the EUR 3 billion is in any case a part of the plan as confirmed as a EUR 3 billion contribution in 2 years?

I'm looking at Richard really, but he is --

Martino, we're going to give you -- we'll give you a better look at 2018 and the components of cash flow when we give you the guidance for '18.

But I think we do expect working capital to turn positive in Q4 as it seasonally does mainly due to the EMEA seasonality, also the NAFTA seasonality because of a lack of a changeover.

So it will be positive.

But I'll give you a better look at 2018 working capital in January.

And the last question, maybe it's a tricky question.

I understand if you're not willing to discuss it.

But you mentioned many times GM, the -- your most preferred partner for merger sooner or later.

But if I ask you what could be number 2, number 3, because in the past few months we saw several names?

I don't know if you're willing to discuss it.

No, I'm just monogamous.

We'll leave it at that.

The next question comes from John Murphy of Bank of America.

If we look at Page 5 just to kind of follow-up on what Brian was asking, as we look at this, there's a lot of cost that's going on here that's outside of sort of your normal changeovers, really sort of your industrial realignment cost.

I'm just curious, as we think about it -- I mean I think on Page 9 you guys highlight EUR 87 million of industrial sort of cost that maybe -- that deal with these changeovers.

Now, how should we think about these costs on an annual basis?

And once you get to some kind of steady state after you go through this realignment in 2019, 2020, how much of this cost do you think could fade away or essentially just go away?

Well, it's -- I mean there are always like cash costs related to the changeover.

There's also lower D&A because we have less production of vehicles.

So I think as we go into '18, we'll see a reduction in the cash cost side; we'll see higher D&A as we launch the new vehicles, John.

I mean obviously we have a net positive impact in 2018 as a result of not having this type of activity ongoing as we have had in the '17.

I'm not sure that we answered your question.

I think that the answer is: the bulk of those things will go away in a steady state.

This has been a -- it has been an incredibly -- I think you are right, I think it has been an unusual year because of all the changes over.

The simple idea of just -- and it looks anonymous when you look to the chart and it was one of the things that I mentioned to the guys this morning.

The simple fact that we moved the Cherokee into Toledo out of Belvidere and ran it for less than a year on the old model and re-launching again in Q1 of 2018 tells you how much the economic benefit was of accelerating the shift of the Wrangler into that location in order to allow this thing to happen.

We ran the numbers on the switch over a gazillion times to make sure it looked anonymous and it looked strange on paper and instinctively it's something that we should avoid it.

But the economic benefit of us accelerating a launch in the Wrangler at the end of this year and having it in market in January '18 was sufficiently large by a multiple: so when you compare to the industrial cost associated with an early move of the Cherokee and then less than a year later into invention and style to re-launch a car in Q1 of 2018, so it tells you how momentous -- all this thing does -- to be perfectly honest, if you ask me for a number that will go away, one thing so I can tell you, I think we'll tell you at the end of the quarter -- at the end of Q4 that by then I think the buck will have stopped and we will know it, I think we'll tell you what the one-off cost has been in '17 and where we expect it to be in '18.

I mean would a guess in EUR 0.5 billion to EUR 1 billion range would be too aggressive?

Yes, I think it's too aggressive.

If you include lost margin, the answer is absolutely yes.

But if we're talking about raw industrial cost that hit our P&L, I think EUR 0.5 billion maybe at the outer edge of the possible.

Let's me -- let's look at it.

We'll give you a number at the end of the fourth quarter.

Okay.

And then just sticking on that Page 5. I mean an optimist on the Wrangler could argue that your -- I think you're mentioning 300,000 units in Toledo North.

Is that Toledo North and Toledo South?

But even with that -- I mean if the Wrangler is a smash hit here -- I mean changing over Toledo South to the Jeep pickup -- I mean I've got to imagine you got some room to potentially produce some Wranglers there if need be.

What would be the max capacity on the Wrangler if it smash -- you go -- if you went Toledo North to Toledo South [hub]?

It's well over 400,000, John.

And you are right.

I think the truck and the Wrangler are interchangeable.

Got it.

Okay.

And then just a last question on the tech portfolio.

I mean it sounds like you're really alluding to the fact that you think some people might be throwing money out the door on early development of --

John, just remove doubts.

I'm not alluding it.

I'm saying it.

Okay, so you're absolutely saying it.

So as you look at this consortium that you're running with BMW and some of the suppliers and this LeddarTech acquisition that you've made in Magneti Marelli, I mean as you look at this -- I mean how much lower of a cost do you think you can produce an autonomous vehicle versus the other players in the market by maybe being a fast follower or a fast advancer and doing this more cost efficiently?

Is it half the cost or -- I mean just trying to understand what you're thinking there?

My thinking is the actual ability to deliver a product that's commercially viable and technically defensible in the marketplace.

The biggest danger is not necessarily in the fact that we can guarantee it.

But there are a lot of people out there who are experimenting with architecture, solutions, technical arrangements that otherwise are designed to deliver a Level 3-plus, 4 or 5, whatever you may call, type of outcome.

Some of these and a lot of these wound up being for naught.

Most of these businesses, especially the start-up, will just disappear and vanish.

You know this.

We've all lived through the tech curves.

The problem with these things is that if you chase all or you chase a large number of them, you're going to get lost.

And we are probably the wrong people to try and make the ultimate selection of these things.

So the important thing is for us to find a reputable technical house.

And I can tell you honestly, I can find a few that are better than BMW with whom to share this journey.

Because it is complex.

I think it requires a huge amount of discipline.

And I think the combination with -- the combination of us and BMW and Mobileye and Intel and the group of partners that are being formed here, I think we got half-assed chance of delivering a technically correct solution at a commercially defensible price.

That's all I need.

And I don't want to start chasing rainbows here, because if you chase rainbows you're going to fall off the cliff.

And I have seen enough writings now.

I've seen enough sort of acquisitions of people being behind in this rat race.

Reality is that this is going to require a lot of discipline and a lot of technical knowhow, which will take time and will take dedication and perfect execution to get to an answer.

Don't believe the fluff.

Let's just stick to the knitting and deliver an outcome.

There's no shortcut to this.

The next question comes from Rod Lache of Deutsche Bank.

I had a couple of questions, just wanted to start maybe first with developments in Washington.

There's obviously a lot of talk about tax reform.

If tax rates fall to 20% and we see these proposed changes to CapEx deductibility and interest, what would be the impact on FCA from a cash flow perspective, if anything?

It would be obviously -- in the U.S. we're paying taxes at a full rate basically going into next year and we've used up most of our credits, all our loses.

So going from 34% to 20% is a pure saving for on a cash level on our U.S. profitability.

You disclosed what the U.S. pre-tax is for the U.S. entity?

No, we have not.

Okay.

And, Rod, I'm going to do it on the air here with Richard.

I'm looking at -- I don't know, but it has got to be 1 billion.

It sounds like it's a big number if this actually happens?

And on the flip side --

There you are.

I just gave you guidance.

It's about 1 billion.

Okay.

There's obviously a lot of unknowns with respect to NAFTA.

If there is some impact on the Mexico production of trucks, would you be able to mitigate that by shifting the heavy duties or some of the production to Sterling Heights or Warren?

Yes.

And effectively in the industrial plan -- I'm going to play smartass now, Ron.

So ignore it.

When we did the industrial realignment, it was designed to allow for the buffer in the event that that happened.

Okay, that makes sense.

And just lastly, can you just clarify for us what's happening with the localization of Jeep in China and is that basically the key driver of getting to that 10% margin in APAC?

Yes.

And I think we need to work really hard, because I think the products have been launched and I think we now have got India up and running too on the right-hand drive Compass.

I think we need to start devoting a lot of serious group resources to make sure the Jeep lives and does well.

It's -- this is -- then I talked to Mike Manley about this.

I think we really need to deploy sort of Jeep resources now on a global scale to make sure that we get all the traction we need.

Because I mean these are different markets and they will react to the brand in a different way.

But I think we need to keep on pushing.

I think this has turned out to be -- and I think we've seen it out of Europe now as to what the potential successes of Jeep -- I mean we've seen what it did in Brazil.

We need to keep on pushing and making -- to make sure that it does become as global and as profitable as we think we can be.

I've used the number before, but I think when you look at the UV market on a global scale, if Jeep aimed to own 1 in 5 of that market, I think we'll be well set for the rest of our lives.

We're talking about over 5 million cars a year.

I think we're building capacity to get that done.

We have distributed manufacturing knowhow globally now.

We just have to execute on the plan and get it done.

So presumably the business is not yet meeting your expectations.

Could you just clarify what you mean when --

It is not because -- I mean as you well know, the attractiveness of UVs has become sort of a global sport now.

So we've seen a lot of UVs come into the Chinese market from local brands, reputable brands.

I think it's going to take us longer to try and get Jeep established as sort of the owner of that segment outside of traditional channels.

We need to invest in this, because we haven't done it.

We used to import vehicles, Wranglers and Grand Cherokees, before we started local production.

And it was a different world.

It allowed us to make decent margins by just importing vehicles into the jurisdictions.

Being local now has changed the dynamics of that process.

So I'm going to be down there tonight and we'll start building some really core skills on the ground to get that done.

The next question comes from Thomas Besson of Kepler Cheuvreux.

I have 3 questions throughout this -- I'd like to start with an update on your thinking about Magneti Marelli.

We've seen results of the -- the business improved substantially, the Components business overall.

Can you update us on the timeline of any potential spinoff, if it's still the main thinking?

It's an '18 event.

I think we've had our preliminary discussions with the board.

I think we have sort of broad agreement on options and process going forward.

We'll revisit this during the first half of 2018 with better details and better delineation of alternatives.

And I think that probably by the time we get together for this business update, this plan that we've sort of -- that we've threatened to show you some time in the first half of 2018, we'll probably give you the rest of the story on Marelli.

But I think the initial reaction from the board has been positive.

So let's work on this and we'll see what happens.

So just to make it clear: the thinking is to separate Magneti Marelli from the other 2 Components businesses or it's to group the Components business and spinoff the Components business?

No, I think the whole idea is -- I don't think we need Marelli in our fold and I think it belongs -- the company or its value belongs to the shareholders.

That simple.

Second question please.

The interest charge came down a lot faster than I was expecting and that I think you were guiding for earlier.

I mean how much lower could it still go?

I mean should we assume that the Q3 rate is a normal run rate at the current liquidity level and net debt or can it still go further down?

So for the year I think our average interest rate is about 3.75% a quarter and I think that's what we expect to be at around for the full year.

And then obviously we have a Swiss bond that we will repay in the second half of this year.

We have another EUR 1.25 billion next year.

So we're going to continue to reduce our gross debt load as we work on the other side, improving our profitability.

So I think we're going to continue to see an improvement in the second half of next year when we reduce the gross debt again.

Last one, have you fixed a date for a new event, a Capital Market Day or --

No.

No?

Perfect.

Thank you very much.

No.

So keep your calendar open first half of 2018, Thomas.

I'm still waiting.

Stephen Reitman of Societe Generale.

Some questions about Alfa Romeo and Maserati if I can.

You mentioned that you are not sure yet about the breakeven of Alfa Romeo if it's going to be a 2017 event.

Could you give some idea about where your thinking is on the volumes that Alfa Romeo will achieve this year, sort of run rate you expect for the fourth quarter?

Also, if you could make some comments as well about some of the press reports about some short time working in Italy surrounding Alfa Romeo and also I believe also in Maserati.

It has been linked to some issues in China.

But also -- can you comment also -- you mentioned about the reception of the Stelvio and Giulia in the United States.

How far is it off -- how far off is it to your expectations?

Well, let me deal with the expectation gap here.

The product did not hit the U.S. here in a realistic way until the first part of October.

So we're just technically late in having physical product on the ground.

We've got a dealer network which is 90% set compared to our objectives, but the problem is the product is showing up too late in the year for us to try and have a meaningful sort of market coverage.

We had a very interesting discussion at council today on this issue.

We'll have to go back and revisit it throughout the quarter.

So I cannot tell you based on what I know today as to what the -- within any sort of -- within the realm of reasonable misses as to what the overall numbers will be for Alfa.

I'm looking at Rich.

I mean it…

I think we're looking at -- year-to-date we're at about 60,000 shipped between the 2 vehicles, between Giulia and Stelvio.

And so I would expect us to ship run -- rate probably 20,000-plus Q4, but it really depends on how quickly we get --

Distribution of the Stelvio in the U.S. And that's the real issue.

I mean the cars have just hit and some of them are on the way to get to port.

So it's difficult.

I mean I think we'll give you a much better read at the end of Q4.

So I mean there's no alarm here in terms of getting this done.

There's just a mismatch of ambition and the actual physical product on the ground.

The reports that have come out of Europe on short work weeks in Europe in connection with both Alfa and Maserati, more in particular to Maserati, this is absolutely normal.

We do adjust volumes especially given the penetration in China.

There are no structural issues in China on Maserati.

But we made 1 mistake when we ran the industrial machine out of Maserati in the past, flat out in excess of demand and it took us over a year to clean that up and we're not going to let that happen, which is the reason why you see these adjustments.

And I think we'll get used to them.

It will continue to happen.

The next question comes from Richard Hilgert of Morningstar.

Can you hear me okay?

Yes, we can, Richard.

On the cost side, there has been some discussion on the call about the capital expenditure, the research and development cost going forward and how these things are going to tailor off once everything gets set with North American realignment and bringing new products out.

On the other side, there is the partnership with the BMW Autonomy Group and I would expect that there would be some kind of increase on the R&D side because of that, also maybe possibly on the capital development side.

As those 2 things intersect, how does that settle out in terms of the net effect?

Well, Rich, I think -- we've been investing heavily in all of the new product introductions we've been discussing recently and in the last few years as we repositioned Jeep, Ram, et cetera, and Maserati and Alfa.

So I think I don't expect us to have any increase in our overall CapEx plus R&D spend as we get through 2018 and then go forward, because we're basically going to reallocate spending that was destined in the past to put us back into a competitive position on a number of our key products and brands and we're going to have more of it allocated to the types of technology challenges that you mentioned.

But I don't see why we would need to increase the overall spend.

Well, Richard, I can confirm it for you.

I think it's well -- it's built in well within the parameters of what we would normally expect as capital.

This is not an addition.

And I've read reports, by the way, where people think that we're going to start incurring this tremendous cost above and beyond normal.

There has been -- there's a tradition -- there is a shift going on in the profile of research and development and capital that is being allocated to the business.

And this is normal.

I mean it is technology driven.

It will happen.

It's not going to cause this enormous bubble in R&D, especially if you are careful about the partners that you picked to work with.

And I think we have.

Going back to Alfa Romeo, Maserati again, you commented earlier about the production adjustment that were going on for both of them and you've talked a little bit about the market in China.

I was wondering is the market in China actually meeting your demand target and the adjustments that have been made were part of the plan over there in that market and you're still expecting more penetration, and if so, is that maybe a matter of gaining more dealership, more distribution points in China for both of those brands?

Certainly, in the case of Alfa Romeo, it's a question of getting distribution, because we have very little on the ground.

So I think there's a huge amount of work that needs to go on to get coverage, geographical coverage in China.

And that's started; it's underway.

And I think it's going to require -- certainly, it's a multiyear project as it is here in the United States because this thing has started from nothing.

We have had sort of the ability to work ahead of the curve in the U.S. China is behind in that development, but I think it will quickly catch up.

There is not -- the question that you've asked about whether demand is matching our expectations in China.

The answer is fundamentally yes.

We need to be very, very careful in this distribution exercise that we don't end up by the -- creating either perceived or actual oversupply in market that will depress pricing.

That is something that we cannot afford to do.

And so the tweaking of the machine that we're not carrying out is to prevent the clogging of distribution.

We've done this before.

I mentioned this -- I think we've done this in 2000 -- I'm going back by memory, but I think it was 2014 that it happened and it took us over a year to blow that out of the system.

We can't let that happen.

So you will continue to see these adjustments being made until we match demand with capacity of the system.

And the thing that's not going to suffer out of all of this is price.

One of your German competitors had talked previously about increasing their number of dealerships over in China, and as they did, one of the things that we saw in addition to the volume growth in the region was that it was also a delayed effect where more volume would come on 18 to 24 months after these dealership had been opened.

So there was a bit of a lag effect.

Have you been opening more dealerships already?

Can you give us any kind of…

I don't have the exact number, Richard, but the answer is that you will see the delayed effect.

It will take time.

It's not an instantaneous turn on.

It hasn't happened in the U.S. and it won't happen in China.

The next question comes from Philippe Houchois of Jefferies.

Three quick ones I hope.

The first one is, I can't remember the last time I saw -- whatever -- sequentially net debt go down in third quarter, which is nice.

Having said that, there was the same or worse working capital I thought I was looking for, which is good news because it means potentially more contribution from earnings.

But I'm trying to understand is there any currency benefit in your net debt in Q3 that helped the deleveraging, is my first question?

No.

In Q3, no.

Actually, there's a little bit of a negative because with the weakening of the dollar we have a net cash position in dollar.

So you -- that's a good number then.

Great.

Second one is, GM showed us some interesting numbers today, revenue in U.S. down 20%, earnings holding up quite nicely.

I don't want to put you on the spot, but do you think structurally FCA or the old Chrysler could do that kind of decline in revenue on short notice and still post some nice numbers at the profit level?

I'm not sure that I like the part of the question as "such short notice." I sincerely hope that I don't have to repeat the short notice that GM just went through.

GM had a lot of warning on it.

Fair enough.

I agree.

But anyway, we try to avoid this by realigning the footprint.

But the answer is absolutely yes.

Because the market doesn't help you.

Yes.

Okay.

The answer is absolutely yes.

So you stand by what we've heard from you, from Dario, from Marchionne previously that the industry is finally better, that your cost structure has improved and therefore you are more resilient than you ever were in the past?

True.

And I think -- by the way, I think if we're right, the proof of the pudding will be Q2 of '18 for FCA.

And I think you have a decent read of margin potential.

And last question is: as you know, I've been a big fan of reducing cost of carry, reducing gross debt, et cetera.

You're doing it.

Very nice.

What I find interesting is right now -- no, for years now after the recession we've seen carmakers keep massive gross cash position in balance sheets.

All of a sudden, Daimler seems to be reducing gross liquidity, GM is returning cash at amazing rates right now and you are talking about reducing growth debt.

Is the industry getting a bit too comfortable that the cycle is gone and therefore we don't have to have gross cash on the balance sheets or do you stand by a lone view that you should have probably gross liquidity about 20% of revenue?

That view ain't changing.

I'm going to tell you something, Philippe, the scars that the last crisis caused I still have and I remember when people from your profession all of a sudden forgot who we were.

I mean the financial sector went absolutely dry overnight.

So I think it's going to be a long time coming before people relax the assumption on gross cash.

So we should still expect you to have a similar gross cash on your balance sheet even though your cost of carry will come down and therefore, hopefully, interest expense will continue to come down as well?

Yes.

It just means that we're going to make more money selling cars.

So that's all.

The next question come from Lello Della Ragione of Intermonte.

Actually, just 1 left on Maserati.

I was checking in past conference call, you once mentioned volume target for Maserati, was something -- I think it was 70,000 cars.

I was wondering if that -- when you were thinking to that figure, you were actually thinking to another model such as before.

And the fact that you are looking for smaller than the actual Levante, this came only to [operation] or -- I mean in terms of -- mostly flat from -- with -- and goes to an engine with Alfa.

I can tell you right now that the underpinnings of the Maserati to come is shared with Alfa.

It doesn't say anything about the powertrain, but the underpinnings are shared.

So that's -- and by the way, the number that I read out was between 70,000 and 80,000 in the past and then I connect it to about EUR 1 billion in EBIT.

So that's roughly the connection.

And we should be able to get there with a second car -- with a fourth car I guess.

Okay?

Okay.

So that relates to the -- to your EUR 1 billion EBITDA generation that you mentioned.

So 2020, correct?

Yes.

We will now take our final question from Jose Asumendi of JP Morgan.

CapEx please, guys, for the fourth quarter, are you expecting it to be down and how much please?

And also for 2018 we should be thinking about CapEx down year-on-year as well.

Is that correct?

CapEx for the year we're looking at a number of around EUR 8.5 billion.

So…

Very nice.

And 2018?

And 2018 we'll give you an update in January, frankly.

It will not be materially off that number.

With that, I think we are going to end today's call.

I want to thank everyone again for joining us and please have a pleasant day.

Thank you.

That will conclude today's conference call.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.