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Executives

Joe Veltri - Head of IR

Sergio Marchionne - CEO

Richard Palmer - CFO

Analysts

George Galliers - ISI

Fraser Hill - Bank of America

Martino De Ambroggi - Equita

Alessandro Foletti - Bank am Bellevue

Philip Watkins - Citi

Teo Lasarte - Bank of America Merrill Lynch

Kristina Church - Barclays

Philippe Houchois - UBS

Rabih Freiha - Exane

Stephen Reitman - Societe Generale

Jose Asumendi - JPMorgan

Richard Hilgert - Morningstar

Charles Winston - Redburn

Fiat S.p.A. ADR (FIATY) Q2 2014 Earnings Conference Call July 30, 2014 8:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to today’s Fiat Group 2014 Second Quarter Results Conference Call. For your information, today’s conference is being recorded. At this time, I would like to turn the call over to Joe Veltri, Head of Fiat Group Investor Relations. Mr. Veltri, please go ahead sir.

Joe Veltri

Thank you, Darren and good afternoon everyone. The earnings release that we issued earlier today together with the presentation material from this call, are available now on our Investor Relations website. As customary, today’s call will be hosted by the Group’s Chief Executive, Sergio Marchionne; and by Richard Palmer, the Group’s Chief Financial Officer. After introductory remarks, we will be available to take your questions.

Before we begin, let me remind you that forward-looking statements we might make today during the call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included on page two of today’s presentation. And as always, the call will be governed by this language. With that, I would like to turn the call over to Mr. Sergio Marchionne.

Sergio Marchionne

Thanks, Joe. I am going to keep my comments to just a couple of points. The first one is, overall the quarter notwithstanding so the mix results we have from the region was satisfactory, made about a 1 billion in EBIT. It does leave the Group with a minimum of 2 billion EBIT GAAP to complete by the end of the year. In order to maintain guidance, we have jacked up volumes for the year. We see numbers coming in at 4.7 million for 2014 and we feel relatively comfortable that the guidance that we laid out at the beginning of the year is going to be met. Richard will take you through the various regional pieces of the puzzle but two things are important from my standpoint.

One, I am encouraged by the progress that has been made in EMEA. In terms of closing the gap we are seeing similar results coming in from some of our competitors, so the European situation although not fantastic and certainly not in terms of forecast improving tremendously is stabilizing and I think that’s an encouraging sign. APAC continues to perform well, I think the issues about the investment locally and the introduction of Jeep on a ground scale and that jurisdiction is progressing well. Those are the positive arguments about all this.

Notwithstanding the lower numerical results coming out of Latin America, we have had a chance to compare our numbers to our competitors. We have done tremendously, better than anybody else in the region. The region as you all know and most of us have written about this, in your remarks is not having what I consider to be a glorious year. We found poor performance in the first half of this year but just to reinforce the notion that we have presented to you on numerous occasions, we do have an operational event in the Latin America and I think it’s evident now from the results that have been posted, we are still positive not tremendously in large numbers but at a sufficient distance from our competitors, suggest that we do maintain the same type of operating margin distance to the other two big guys in Brazil and so I am encouraged by that.

I am also encouraged by the fact that I think that we are going to see a more stable market in the second half of this year and obviously the fact that we do have this large plant coming on-stream in first quarter of 2015. So, that and notwithstanding less than exciting market conditions continues to perform well.

The disappointing story is from a margin standpoint has been NAFTA, Richard will take you through the issues that have impacted performance and NAFTA but it is something that obviously we intent to remediate. We continue to sell more certainly the last indications that I have of our performance in July are encouraging. I think we are going to continue the streak. I don’t want to jinx the results before we release them on Friday.

But all indications today suggest that we continue to perform well in the marketplace. I think we need to become a lot more disciplined on the pricing side of this and I don’t think we seized every opportunity that’s available. I don’t think that we are suffering from pricing pressures on a competitive basis. I don’t think we have been proactive enough in terms of pushing the portfolio in the market.

Couple of things about the quarter, today was the last official Board Meeting of the Fiat SpA Board in anticipation of a Shareholders Meeting which will be held on Friday. F4s have been filed, they became effective on July 10th.

One of the things that appears to be attracting interest in the market is the sole issue of the [indiscernible] rights or the withdrawal rights associated with the dissenting shareholders we do not agree with the merger. To be absolutely clear, there is a condition that’s associated with this merger and that is then in total between dissenting creditors and dissenting shareholders. The sum of €500 million cannot be exceeded at which point the merger is ineffective. There appears to be some misunderstanding in the marketplace about the fact that that is a waivable condition on the part of either Fiat or Fiat Chrysler Automobiles. The answer is not and so if that number were to be crossed for whatever reason I think the merger will be ineffective and we will not be in a position to complete the transaction.

And so I have zero intention of taking this issue back into the Board for a consideration. We would have to start the process all over again which we will on the review in due time if in fact that condition were not to be met. I fail to see why that would happen but in the event of people were trying to play arbitrage games in terms of potential benefits from the exercise of that right I would just -- I am doing this to give you a fair warning about what the implications would be.

I think we’re dead serious on getting this done. I am confident and hopeful that we will not exceed the 500 number but if the 500 million number is exceeded the merger is ineffective.

The other important thing is that obviously we’re confirming guidance. These are not inconsequential numbers, we made about 1.6 billion in the first six months of this year we need to go a long distance in the next six. We’re confident we can make the numbers and on that basis I’ll pass it on to Richard who'll will give you more color.

Richard Palmer

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

I am now going to review with you the Q2’14 results starting from slide three. Group worldwide shipments in the second quarter were up 2% year-over-year to 1.2 million units. And this takes first half shipments to 2.3 million units, up 5% compared to last year. Group revenues were 23.3 billion, up 5% over last year and up 10% at constant exchange and first half revenues amounted to €45 billion. EBIT was 961 million for the quarter, down 10% or 5% at constant exchange, resulting in first half EBIT ex-unusuals reaching €1.6 billion. The unusuals were principally related to the Q1 unusual items we looked out in last quarter.

Net industrial debt was reduced to 9.7 billion from 10 billion at the end of March. And total available liquidity for the group at the end of the quarter was €21.8 billion, up €1 billion from the March level.

As mentioned in April the Group expanded the joint venture partnership with GAC for the localized production of three new Jeep vehicles for the Chinese market, which will expand upon the portfolio Jeep SUVs currently available to Chinese customers as imports. Production is expected to begin by late 2015. The Group success for the access to the Capital Markets on July the 15th to complete the refinancing of 2014 maturities with the issuance of an joint venture partnership with 850 million bond with 4.75% coupon and maturity in July 2022.

Regarding upcoming events as you are aware an extraordinary general meeting with shareholders was called for August 1st to approve the cross-border merger of Fiat and to its wholly owned subsidiary incorporated in the Netherland’s Fiat Investments N. V.

2014 full year guidance is confirmed as already mentioned with worldwide shipments of 4.7 million units up from 4.5 million to 4.6 previously; revenues greater than or equal to €93 billion; EBIT ex-unusuals in the range of €3.6 billion to €4 billion; net profit ex-unusuals in the range of €0.6 billion to €0.8 billion and net industrial debt between €9.8 billion and €10.3 billion.

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

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

Revenues for the components group were flat compared to prior year. First half revenues reached 45 billion, up 13% at constant exchange. EBIT for the Group was €961 million in the quarter a decline of 5% at constant exchange. I’ll talk you through some more details by region in the following pages.

Net profit was €197 million, down from €435 million in Q2 ’13. The reduction reflects the lower EBIT and also a higher tax charge as was forecast in our full year guidance due to the U.S. based earnings now being taxable on a book basis at full tax rate of around 35% following the booking of the deferred tax assets regarding U.S. book tax differences at the end of 2013. Net industrial debt at June 30 was €9.7 billion, a decrease of 300 million from the end of Q1 2014. Thanks to 0.6 billion of positive cash flow from operations offset by a 0.3 negative effect of non-cash items, principally related to changes in cash flow hedge items.

As mentioned, liquidity remained strong at 21.8 billion including 3 billion of undrawn committed credit lines.

Turning to page five, you can see the different contributions from the various areas of the business, starting with revenues. The NAFTA region continues to grow and remains the main source of revenues for the Group representing 53% of total revenues and 62% of total EBIT.

The second biggest contributor to EBIT was luxury brands with revenues growing 59% year-over-year, the EBIT increased to represent 17% of Group EBIT from the 10% contribution a year ago.

LatAm EBIT has stabilized with a significant reduction compared to last year but at a similar level the last two quarters as the market scenario continues to uncertain and reduction in top line volumes drives lower EBIT. With EMEA reaching nearly breakeven this quarter and improvement of 63 million year-over-year we’re nearly in the position having all segments with positive EBIT for the quarter.

On slide six we focus on some of the key performance metrics for the group, net financial charges in the quarter were €506 million which included interest accrued on employee benefit provisions of nearly 90 million. Financial charges were 11 million lower than Q2’13 or 32 million lower if we exclude the positive impact of the Fiat stock option rate equity swaps in the prior year.

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

Income tax charge amounted to 258 million for the quarter compared with a 121 million last year. The increase of €137 million as mentioned was principally due the increase in deferred tax charges.

EBITDA was down 81 million in the quarter to 2.15 billion excluding exchange impact of 100 million EBITDA was basically flat quarter-over-quarter.

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

Slide seven shows the components of the change in net industrial debt during the quarter which is reduced to 9.7 billion in line with the balance at year end 2013 adjusted for the purchase of the minority equity stake in Chrysler in January.

Positive cash flow from operations was 2.4 billion which was 0.6 billion higher than the 1.8 billion of capital expenditures during the quarter. The positive contribution from change in funds in other is driven by increased accruals for incentives and warranties enough to APAC our luxury vehicle driven by volume growth together with increase in accrual rates for NAFTA incentives as well as the impact of seasonal sales of GDP and buyback units to free customers in NAFTA and EMEA.

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

The negative investment scope column is a non-cash effect driven by changes in the cash flow hedge reserves due principally to the Canadian, Australian and U.S. dollar exchange rates strengthening compared to the end of Q1. FX translation was also negative for €70 million.

Moving to page nine we look at the performance by region for the mass market brands. Starting with NAFTA the industry remains strong supporting a robust level of sales for the group. Revenues were up 7% year-over-year due to higher shipments and 11% in U.S. dollar terms. EBIT for NAFTA was down 18% compared to Q2‘13 or 15% at constant exchange rates. I will provide a detailed EBIT walk on the next page.

Q2 shipments were up 10% versus Q2 ‘13 with a 13% increase in U.S. while shipments were flat in Canada. Group vehicle sales in the region were up 11% to 647,000 vehicles outperforming both the U.S. and the Canadian industry growth. The Jeep brand and Fiat brands is all reported solid year-over-year sales increases. Sales for the Chrysler brand came in lower partly reflecting the change over to the all-new 2015 Chrysler 200 which launched in May.

Sales for the Dodge brand was slightly lower reflecting the discontinuation of the Dodge Avenger in line with brand strategy. U.S. dealer inventory with a 72 days' supply in line with the March end level.

Page 10 details the EBIT for NAFTA compared to Q2 ‘13. EBIT for NAFTA was 598 million in Q2 130 million down from Q2 ‘13. The 2013 EBIT included net positive unusual items of 66 million driven by the gain on the pension curtailment amendments in U.S. and Canadian salaried pension schemes partially offset by Jeep voluntary recall campaign. Excluding the negative impact from the non-repeat of the unusual items our negative exchange translation for 30 million EBIT was down 42 million or 6%.

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

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

Page 11 shows the industry was up 7% in the U.S. versus prior year with cars up 4% and trucks up 10%. In light of the growing industry the group outperformed the market with a 13% growth in sales which resulted in overall market share increasing by 70 basis points versus prior year to 12.1%.

The group maintained its streak of consecutive months of year-over-year sales gains with the Jeep brand continuing strong performance achieving record sales levels for the month of June. In Canada, the industry was up 4% in Q2 due to the growth in the truck segments. Group sales outpaced the industry, posting a sales increase of 6% with Canada also continuing its string of consecutive months of year-over-year sales increases. For the first half of 2014, the Group was the overall market leader with market share increasing by 20 basis points compared to prior year to a total of 15.3%.

Moving onto Slide 12, the LATAM auto industry was down 16%, reflecting more difficult trading conditions in the main markets and the tough comparison with a record Q2, 2013. Group revenues declined 23% year-over-year or 13% at constant exchange which resulted in a reduction in EBIT of €162 million or 65% at constant exchange. Group shipments in the region totaled 203,000 units in the quarter, down 21% versus Q2, ‘13. Brazil declined by 21% versus Q2, ‘13 which was benefited from lower IPI tax rates. Shipments in Argentina were down 13%, reflecting a decline in the overall market. This was partially offset by an improvement in market share in that country.

Turning to page 13, the decline in EBIT for the region reflects the reduction in shipments of 55,000 units due to weaker trading conditions with Brazil down 46,000 units and Argentina down 4,000 units, partially offset by some better mix. Net pricing improved thanks to pricing actions in Brazil and Argentina which nearly offset increased industrial cost resulting from higher input cost inflation, FX on imported material and some cost for the Pernambuco startup. Moving to Slide 14, Q2 market demand in Brazil declined 12% compared to the record sale in Q2, ‘13. Although the Group’s market share declined in Q2, we did retain our leadership position in the Brazilian market which share for the quarter 20.9%, a 180 basis points lead over the nearest competitor.

The Group’s share for the combined A/B segments was 23.4%, down from 27% a year ago due primarily to the discontinuation of the Uno Mille, while share for the new Strada was up 350 basis points and its segment closing Q2 of 56.5%. Volumes for the refreshed Fiorino were up 33% with segment share of 78%. In Argentina, Group sales outperformed the market, resulting in a share gain of approximately 300 basis points to 15.8%. Share of combined A/B segment was 21.3% with a strong performance from the new Palio. Moving now to Asia Pacific on Slide 15, the region experienced strong overall demand in the quarter, up 9%, driven by growth in China, India and South America, partially offset by slight declines in Japan and Australia.

Group revenues were up 34% or 41% at constant exchange, driven by a 42% growth in shipments. The main nameplates driving growth were Fiat Viaggio, Jeep Compass and Jeep Grand Cherokee. EBIT increased by 20% versus Q2, ‘13 to €106 million. Retail sales including JVs were up 50% to 69,000 units with a Jeep brand up 57% compared to Q2, ‘13 due to Grand Cherokee and to the newly launched Cherokee. Volumes for the brand were up 69%, for the Fiat brand were up 69%, driven by Viaggio and Ottimo models.

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

Page 16 shows the details for the EBIT growth in Asia Pacific compared to Q1 to Q2, 2013 there was a positive impact for high volumes of 16,000 units and better mix. However pricing was negatively impacted by foreign exchange for vehicle exports to China and Australia. Industrial cost increased versus last year due to higher R&D spending while the increase in SG&A expenses were incurred to support volume expansion and new product launches in the region.

Turning to page 17, Group sales were 50% higher in Q2 versus the same period last year. Sales in China including JVs were up 63% versus the 13% growth in the industry primarily due to the Fiat Viaggio and Fiat Ottimo and the new Jeep Cherokee. In Australia, sales rose by 55% with market share growing by 140 basis points and in June, Jeep began selling the new Jeep Cherokee. Group sales for the quarter were up and also outperformed the market in both India and in South Korea. In Japan, Group sales were down 10% as the market experienced sales pull ahead for the increase of a consumption tax starting in April 2014.

Moving to Slide 18, for the EMEA region the industry for EU28+EFTA into its fourth consecutive quarter of growth with demand up 4%, 3.4 million vehicles. The positive trend continued in Spain and the UK with the moderate growth in France. Demand remains stable in both Germany of Italy. In the rest of Europe, there was an overall increase in industry of 5%. Group revenues were down 3% due to a lower yield car volumes and component volumes. Overall shipments was stable at 286,000 units with passenger cars down 2% fully attributable to the Italian market. LCV shipments were up 9% in line with the industry. Company indeed [continue] to remain stable at two months of supply.

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

Pricing was negative due to continued competition in passenger car segments which was slightly offset by pricing for LCVs. Industrial costs improved as a result of continued efficiencies and purchasing savings. SG&A was higher compared to Q2 2013 due to increases in advertising spend to support Jeep brand growth in the region including the launch of the new Cherokee.

Turning to page 20, here we showed details for the commercial performance of the region. Overall, the market was up 4% to 3.5 million units. This was driven by Spain, UK, and France, with Italy and Germany flat. Group sales were up 1% over last year to 213,000 units. Market share in Europe came in at 6.1% for the quarter, which represented a 20 basis point decline compared to Q2 ’13 but up 10 basis points from the first quarter. The Group experienced share gains compared to a year ago in Germany, the UK and Spain, while Italy was down 120 basis points mainly due to an 8% market decline in the B segment. Fiat 500 and 500L were confirmed as the leaders in their respective segments with combined sales of 81,000 units in the quarter.

Moving to slide 21 which deals with the LCV segment in Europe. The industry was up 9% to 453,000 units confirming the first quarter trend. The higher LCV market was driven by growth in Europe -- of growth in each of Europe’s five major markets. Group sales were up 5% to 59,000 units with share gains in Italy and in Germany while share declined in other major markets due to fleet seasonality. Ducato maintained market leadership position in this segment with the launch of the new model by achieving its best ever share of 25.7% in the quarter.

On the following slide 22, we review the performance of the luxury brands. Ferrari revenues were 729 million in the quarter, an increase of 16% from prior year. Consistent with the announcement that production will be capped to preserve the brand’s exclusivity shipments were 1.9,000 units or three cars slightly down versus prior year. Shipment of 12-cylinder models were up with positive contributions from both the F12 and the FF. Shipments of 8-cylinder models were slightly down with performance improving over the first quarter following the launch of the California T.

EBIT rose 99% to €105 million compared to Q1 last year, thanks to better sales mix. Revenues from Maserati total €738 million, an increase of 162% over prior year. Shipments for the quarter were approximately 9,500 units compared with approximately 2,300 in the prior year.

EBIT was at €61 million compared to €9 million a year ago on the back of this strong volume growth. The components business is shown on slide 23 posted combined revenues of 2.1 billion for the quarter with EBIT flat compared to last year at €60 million. Revenues from Magneti Marelli were even with last year, performance was positive in NAFTA, China and Europe but down in Brazil partly due to the weakening of the real.

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

Taxed revenues were down 3% year-over-year on a constant scope of operations with the [CAPA] and business posting a 2% decrease primarily due to lower volumes in Brazil. The aluminum business posted a 19% year-over-year increase. EBIT was minus 1 for the quarter compared with a positive 1 in Q2 ’13. Camaro reported second quarter revenues of 336 million down 6% over the prior year. Order backlog is up 12% from year end 2013 and second quarter EBIT was €11 million slightly up compared with the prior year.

Turning to page 25, to review some of the key business issues by region starting with NAFTA we recently launched the all new Chrysler 200, production began in Q2 as it’s turning high assembly part and the vehicle was available at dealers for sale starting at the end of May. This is the third vehicle derived from the Group’s compact U.S. wide architecture and contains many benchmark features for its segment. In Q3 production of the redesigned and reengineered Dodge Challenger SRT will start at the Brampton assembly plant in Canada. This will be the fastest muscle car ever and will feature the first application of all new Supercharged 6.2 liter HEMI with 707 horsepower.

On page 26 in LatAm we recently began selling the upgraded version of the Fiat Linea, produced at our Betim plant. The upgrade included significant product interventions including an all new interior. This car will allow the Fiat brand to better compete in the critical sedan segment of the market.

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

Moving to slide 27, growth in APAC was mostly driven by Jeep up 57% and accounting for 51% of the total sales increase in the region. Fiat was up 69% driven by Viaggio the Group’s bestselling nameplate in the region. Dodge was up 29% mainly driven by the Journey in China.

On the right side you can see some recent models that launch in the Beijing Auto Show in April such as the Fiat Ottimo Sport and Freemont Black-Top Edition as well four Chinese-inspired Concepts Vehicles for Jeep.

Jeep in Europe on the next page is growing and in June reaches best sales month ever in the region driven by the Grand Cherokee and the all-new Cherokee. In particular Grand Cherokee sales grew by 78% in Q2 ‘14 as it was ranked 5th in its segment. The all-new Cherokee was launched in March and already reached the segment share of just under 3% in June selling 5,000 units in the quarter.

The Jeep brand will expand its line up in the region with the all-new Jeep Renegade which will be launched in the third quarter of this year. This all new vehicle will be Jeep’s first B segment SUV and our segment leading features such as best-in-class off-road capability, segment exclusive 9-speed automatic transmissions and advanced safety and technology features.

Moving to slide 29, to review our expectations for full year market demand in each region. For NAFTA we have revised our estimates up for the U.S. industry and now expect it to grow 16.5 million units in the year in line with the first half. In Canada the market is projected to be substantially in line with the record levels reached in 2013.

The outlook for LatAm has been adjusted downward from 5.8 million units to 5.6 million to reflect market uncertainties. The Brazilian market is expected to be down 2% for the full year was a positive 3% in the second half of the year. And Argentina is expected to decline full year by 25%.

In APAC the industry demand is still projected up around 6% with improvement driven by China, India and South Korea. The overall industry (need) [ph] 28+EFTA countries, is now projected slightly higher with a 5% growth of year-over-year.

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

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

Slide 30 provides the detailed outlook of our shipments by region for the year. On the right hand side you can see we’ve increased our 2014 estimated shipment volumes to approximately 4.7 million units up from the previous estimate in the range of 4.5 to 4.6.

Moving to page 31 as stated we are confirming our full year guidance for 2014, we expect revenues to be greater than or equal to €93 billion with EBIT in the range €3.6 billion to €4 billion. Group net profit remains forecasted in the range of €0.6 billion to €0.8 billion. We expect to end the year with net industrial debt in the range of €9.8 billion to €10.3 billion compared with the 9.7 billion at the end of 2013 adjusted for the VEBA minority equity transaction.

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

Joe Veltri

Thank you Richard. Now we’re going to turn the call back over to Darin who will begin the Q&A session. Darin?

Question-and-Answer Session

Operator

Ladies and gentlemen, today’s question-and-answer session will be conducted electronically. We will now take our first question from George Galliers from ISI. Please go ahead. Your line is open.

George Galliers - ISI

Good day. Two questions from me, firstly with respect to your joint ventures in China and other regions, can you confirm that all the joint ventures are included in the results from investment line and that were part of the EBIT and the EBIT guidance but were not included in the previous trading profit guidance. And are there any joint ventures which for any reason are not included in EBIT or not be included going forward.

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

Sergio Marchionne

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

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

The question that you asked us whether I agree with the intervention of the NDRC on pricing, it is what it is. I think that there has been a heightened level of concern on the Chinese side about the way in which foreign car makers were approaching the Chinese market and I think I understand their positioning and I think we’re collaborating with them. I don’t expect it to be to have drastic or dramatic draconian results and impact on our results. On the first issue I think that the answer is yes to all the questions you have asked and I wouldn’t get -- to be perfectly honest, I won't get overly excited about the inclusion of joint venture earnings out of China, I mean we are still in startup phase in China, so I am not sure it’s a positive today.

George Galliers - ISI

Great, I mean just on that second item, what you are basically saying is I guess the trading profit guidance and the EBIT guidance are the same but within the EBIT you have I guess somewhere between €100 million and €150 million of incremental income from the other investment line?

Sergio Marchionne

Yes, the number is 50 million to 100 million to begin with and it’s not APAC related. It’s all coming out of EMEA. Since you are being granular about this, one of the reasons why we closed the gap in terms of EBIT performance Q1 to Q2 out of EMEA.

Operator

Thank you. We will take our next question from Fraser Hill from Bank of America. Please go ahead. Your line is open.

Fraser Hill - Bank of America

I was interested in your comments about meeting some improved profitability in North America, I want to just may be looking back at your bridge. Which areas of the cost side of the equation do you think you are going to have some flexibility on to perhaps improve your profitability there?

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

Sergio Marchionne

There are a couple of things that I think have negatively impacted our results. The first one is that there has been a significant rise in the portion of our vehicles at the upper end which are being leased. And we make more money out of our retail sales than we do out of our leasing transaction and we are not the only ones in this business that suffer from that problem. So, we have had a significant increase in leasing that’s negatively impacted our margins.

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

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

The other thing that Richard mentioned is that we are still dragging a number of products from the old portfolio of the compass, the patriot, the products that existed when we took over in 2009. We are still selling more or less the same Grand Caravan in town and in countries minivans in the marketplace. We had the last bout of Avengers in the marketplace before the 200 was launched. It’s a combination of things and when you look at the pricing structure of those vehicles and a margin generation in order to keep these products alive we have had to resort to what I consider to be anomalous pricing actions which are now reflective of the current portfolio of the house.

We won’t have a new minivan until 2016. We understand that the structure of efficiencies of the vehicle at least against its competitor class Honda and Toyota and that has cost us money. So, at the end of the day as much as I believe in the product, I think we do need to wait until 2016 until proper pricing condition and margin generation can be gotten from that class. I don’t know where you, you want to add anything Richard?

Richard Palmer

May be Fraser, just to be clear, maybe there is a better way to represent this but in the industrial cost column when we launch new product that has a higher cost content because of enhancements in the product outfitting the industrial cost. And in the net price, you see two effects, one is the fact that we have been pricing positively for the new products in the market but on the other side we are spending more on incentives because of the items that Mr. Marchionne mentioned. So, higher leasing, higher incentive spend on the legacy products as we need to renew those going forward. So, that’s eating into the positive pricing that we are getting on the new products. So the 42 million should be a lot higher but the incentives are basically eating into the pricing.

Fraser Hill - Bank of America

Two more questions, I guess a bit of housekeeping on the tax, Richard, you explained why the tax rate was so much higher in the quarter. How should we think about that over the next, for the rest of this year and over the medium term? Is that going to be a consistent factor for your tax rate over the coming quarters?

Richard Palmer

Well In terms of the book tax rate, it’s going to continue to be a persistent factor because of the fact that we don’t book deferred tax assets in the Italian jurisdiction as we generate losses here. In terms of cash taxes, obviously our cash tax rate is significantly lower than the book tax rate you are seeing which is impacted by the deferreds, right about low 30% in terms of cash taxes and that’s the same number that we gave you, when we did the plan presentation and that’s what we expect to have going forward.

Sergio Marchionne

And just let me add one operational overview on to the incredible technical discussion of the blended tax rate. The underlying problem from disposition and we’re not the only ones in this box is that are unless those EMEA earnings turn positive, the drag on the combined tax rate is going to become evident. This number that we’ve booked for Q2 in absolute terms if I look at them in terms of percentage is by all international standards obscene. I mean we booked a number like 57%, at 57% tax rate part of that is attributable to the fact that this country, we're talking about Italy now has this employment tax which is not profit related and therefore it's a levy -- it’s fundamentally a general levy and which is included in income taxes almost incorrectly.

But the other part of it is that there is an underlying loss which goes back to the earlier question about the fact that there is an operating loss out of EMEA which needs to be cured. All the work that we're doing including the introduction of the new Jeep which is going -- which is coming out of Melfi this year the introduction of the 500X and the reorientation of all the other industrial plants in this country to produce cars with both Maserati and Alfa is designed to cure that problem. If we are successful and I think we will be in that repositioning, then the tax rate as we go forward and as profits get generated is going to drop like a bomb. And you will see the rate going well below the traditional OACD rates because all those profits will effectively benefit from non-book tax losses which are sitting in our books.

So, long term it’s going to look a lot better as we transition from current state to the future state it’s going to be painfully ugly and there is nothing I can do about it, zero. I mean I think the booking of the losses which was mandatory in the U.S. because of the fact that we proved the fact that we could generate profits. The booking of those debits have really created this problem and we need to work our way through it. The only good thing about all this is effectively a book tax it’s a reversal of the previous debit and has no cash impact on the house split. From a reporting earnings standpoint it looks likely.

Fraser Hill - Bank of America

Okay, thanks. My final question was on EMEA and just your comments about the losses needing to be cured you’ve clearly made some good progress yourself but the market is not giving you much help either. And do you think that you can actually get to a position of acceptable margins through your own measures with the sort of segment market that we got in Europe or do you think that you’re going to need to see more alliances across the industry maybe from yourself. There has been some I guess stories across Bloomberg suggesting a tie-up with Peugeot I am sure you can’t comment specifically but are you looking at strategic alliances to give you even greater scope in Europe is that funding sensibly?

Sergio Marchionne

That’s a multiple question. So let me try the third part. The first part of it is that I do not think that the mass market in Europe has presently configured. Even on a recovery basis if I assume that we’re going to make up some of the distance between '07 levels and today and we’re still nearly €3 million shy of that number. Even if we were to make a significant recovery of that loss volume across Europe it’s never going to be rewarding enough to generate profits that will justify the capital structure in the jurisdiction ever.

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

The larger question about whether we’re talking to people about alliances, the answer is yes and I repeat what I said that we are open to discussions with everybody especially if the objective is to improve the cost positioning and market presence of our brand. There is not -- it's nothing new we have shown in the past our willingness to engage in discussions. I make no comment -- as we have made no comment on international with the rumors on PSA and there are a number of rumors that have been floating around but I mean we have VW coming in and PSA talking to us and a variety of other sources. I think there is nothing to talk about here. I think we’ve dismissed all those rumors as being rumors. When we have something to announce we’ll make it clear.

Operator

Thank you. We will now take our next question from Martino De Ambroggi from Equita. Please go ahead your line is open.

Martino De Ambroggi - Equita

Two quantitative questions and one is on the EMEA. You improved in the first half by 100 million your performance and I was wondering if we should expect a similar improvement in the second half taking into account the launch of new models or the marketing costs will offset this potential improvement?

Richard Palmer

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

Sergio Marchionne

Yes, we should do better H2 to H1.

Martino De Ambroggi - Equita

Yes, okay. And the second relates to LatAm because I notice that very positive pricing effect in excess of a 130 million in the second quarter and is it more repeatable sustainable going forward helping to maintain a certain profitability in LatAm region?

Sergio Marchionne

The answer is yes I'll repeat what I said in opening remarks. I still think that we have a significant competitive edge given our operating structure in Latin America and it's something that's visible in margin generation and in a market which is fundamentally depressive. if you look at the volumes in Q2 of 2014 and you compare them to last year we're down by some I mean it looks like 20% doesn’t it? Was it 18-20? And so the ability to withstand that kind of margin grind and still produce earnings in an environment like this with the startup cost of a brand you plant up in Pernambuco is a significant accomplishment. as I mentioned earlier I don't want to talk about competitor's results but I think everybody -- there are a number of people who are not having a good time in Latin America right now and I think the deteriorating situation in Argentina is not helping matters either because one of the outlets for Brazilian production was effectively Argentina and their market appears to be inaccessible or fundamentally shut down for foreign exchange restrictions coming out of Argentina.

So I think we are in a decent position I think that the way in which we are realigning the portfolio in LatAm the work that is been done to make sure that we properly equipped up our Argentinean plant at Cordoba to try and deal with a currency flows is ultimately going to deliver there were a set of numbers which combine with the -- will hopefully will turn out to be exceptional performance that a new investment Pernambuco will slowly restore this business up to double digit performance as quickly as we can. So I’m as confident as I’ve always been about Latin America being able to navigate to these issues. And I know there are a number of things we will talk about the World Cup and the elections. There is going to be a number of things that are going to be a disturbance for the underlying operating performance but I think we’re in good shape given everything else what’s going on.

Martino De Ambroggi - Equita

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

Sergio Marchionne

Profitability is improving. One of the reason why we don’t provide you the bridge because it has to do with the portfolio mix between the Ghibli and the Quattroporte and margin generation out of the Ghibli is significant -- it is quite important and therefore until we start launching the next vehicle out from the class which is Levante and hopefully will come on stream in Q1 of ‘16 or at the end of ‘15. I think you are going to see this type of results coming through, we’re going to make between 37,000 and 38,000 cars this year.

The number will hopefully be in excess of 40,000 in 2015, but the order book continues to be strong. But the Ghibli was priced at a point that we decided on the pricing to make it competitive against the relevant class. It has got a very large exposure to the U.S. The U.S. is incredibly comparative on pricing but more importantly the euro, dollar exchange rate is making these -- and I keep on hammering on this issue, the euro is grossly overvalued and for a variety of reasons I think we’re beginning to see a lessening of the strength of the euro as we move forward but until we start seeing more decent numbers out of euro it is going to be negatively impact on everybody.

But in the case of Maserati it’s purely mix.

Martino De Ambroggi - Equita

Okay.

Sergio Marchionne

And the increasing proportion of Ghibli as a percentage of total.

Martino De Ambroggi - Equita

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

Sergio Marchionne

I don’t know about that. I think we need to work to 2059. I’m slightly more optimistic than that. We’ll give you a better guidance at the end of the year.

Operator

Thank you. We will now take our next question from Alessandro Foletti from Bank am Bellevue. Please go ahead. Your line is open.

Alessandro Foletti - Bank am Bellevue

Yes, good morning, good afternoon. I have two questions if possible, one on the overall, you’re guiding for the 2014 for higher number of volumes, the shipments and yet maintaining more or less the guidance in euro terms, is this because you see pricing deteriorating or is more of a conservative outlook?

Sergio Marchionne

No its simply based on the fact that I only made a 1.6 billion in six months and I need to make 2 billion in the next six.

Alessandro Foletti - Bank am Bellevue

Which means?

Sergio Marchionne

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

Alessandro Foletti - Bank am Bellevue

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

Sergio Marchionne

I actually think -- I am looking at a couple of colleagues in the room here who're looking at me sideways. I don't think there is anybody inside the group that thinks will be conservative on confirming guidance. I think everybody is committed, everybody is optimistic and everybody is pushing in the same direction but these numbers are not conservative. It’s a huge number. We had a number of things to do but let’s take the guidance 3, 6 to 4 is a good number. Let’s live with that and hopefully we will surprise you on the positive side but let’s not get overly enthusiastic here.

Alessandro Foletti - Bank am Bellevue

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

Sergio Marchionne

I will leave the accounting question to my friend Mr. Palmer but timing of all this, meeting is Friday, we will the deposit the minutes to the Shareholders Meeting on the 4th and the 5th. There is a 60 day running period thereafter we should be in U.S. by the middle of October. And the rest of it I will leave to Richard.

Richard Palmer

So, we will continue to report IFRS in 2015 in my opinion. We are looking at the utility of transferring obviously the U.S. listed company to U.S. GAAP but that won’t happen until late ‘15, early ‘16 based on the fact that there is a lot of work to do within the group to put together the processes to report U.S. GAAP as a full consolidating group. Obviously Chrysler does that today, Fiat doesn’t and we need to be able to report both IFRS and U.S. GAAP in the new configuration. So, it’s going to take a little bit of time.

Alessandro Foletti - Bank am Bellevue

And change to U.S. dollar is going to overcome or stay to euros?

Richard Palmer

That will probably come together with the U.S. GAAP change based on the listing in the U.S. but that will happen late ‘15, early ‘16 in my opinion.

Operator

Thank you. We will now take our next question from Philip Watkins from Citi. Please go ahead. Your line is open.

Philip Watkins - Citi

I just had two. In terms of debt, I was just wondering if you could update us on your latest thinking about how that declined, whether a couple of months ago we, the market at least, have thought that maybe something like a mandatory convertible bond could be on the agenda. Is that the case actually and, if so, when? And secondly just on Brazil, I understand what you're saying about competitive situation, but in terms of the market being more stable in the second half, could you perhaps elaborate on why you think that would be the case? Thanks.

Sergio Marchionne

Richard, will give you a crack [indiscernible] but if I can just deal with the issue of the mandatory convertible and issues relating to equity. I mentioned during the Analyst Meeting on the 6th that the whole question about capital structure was being looked at by management obviously was being discussed actively with the Board. It is an issue that we need to address on completion of this merger. I think there is going to be a dialogue with the Board about what I think the available alternatives are for us going forward. I don’t want to take anything off the table but I don’t want to put anything on the table. I think there is a fundamental question that says that if we execute well and we execute our plan then I think somebody should just buckle up and ride the wave that’s one extreme view of believing in the fact that the plan is going to get executed.

And if you look at the numbers and you look at the fact that by 2018, the plan calls for a debt free organization, [indiscernible] equity through a mandatory convertible with almost be a crime. On the other side I understand the issue about safety and the comfort that you get from some type of equity raise. We need to have a dialogue with the Board. I think it’s on for the second half of this year. We will keep you updated but today I have no plans for the issuance of anything and I think that we continue to rely on the debt markets to support the positioning of FCA. I think we have found excess debts adequate for our needs. So, I will leave it at that.

Richard Palmer

I think it sounds like the Brazilian market, last year’s first half was relatively strong. It weakened in the second half. We are not expecting miracles in the second half of this year. We are expecting Q3 to be relatively flat and then to start to see some level of improvement in the back end of the year after the elections and certain level of confidence comes back into the market. We don’t fundamentally think that Brazil has an issue from a macro point of view. There is a lot of demand in the market. There is a lot of demographic reasons why this market should continue to grow and like I said we are not really projecting anything huge to happen in the second half of the year. The second half of last year was pretty poor. We are looking at a flat Q3 and some potential improvement in Q4.

Operator

Thank you. We will now take our next question Teo Lasarte from Bank of America Merrill Lynch. Please go ahead. Your line is open.

Teo Lasarte - Bank of America Merrill Lynch

In the past you have highlighted an increase in CapEx going forward on your plans. I mean looking at your CapEx for H1, it was below that of last year, I mean going forward can we expect year-on-year increase in CapEx or is that something more for 2015 or later?

Richard Palmer

I think we have initially said it will be around 8 billion for the year, last year was 7.5 billion I think will be around the 8 million, we may be slightly shorter. it truly depends on some of the timing of the CapEx, it’s not related to the programs they were on time. And so I think slight increase year-over-year but maybe not as significant as we had originally targeted than we reached. The lower part of the CapEx was actually on the NAFTA side. And we expect a second half to be higher given some of the programs we have coming through to replace the legacy vehicles that we discussed earlier which are suffering from an incentive point of view and we need to replace. So second half will be consistent with a $7.5 billion to $8 billion spend for the full year.

Operator

Thank you. We will now take our next question from Kristina Church from Barclays. Please go ahead your line is open.

Kristina Church - Barclays

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

Sergio Marchionne

I am bit perplexed by the question I thought I got -- I thought -- no I understand it fully I think I understand the English content of what you said. I am a bit stretched to follow the conglomerate argument because I thought I cleaned that up with the demerger of CNH Industrial. And I thought we had taken all the non-car related activities into a separate company but on the assumption that I was successfully conveying their message to the market I am not sure that our loading brands is a way of removing some of the conglomerate nature of our business. We are a multi-brand environment have been and will continue to be a multi-brand environment going forward. If my discussions about Ferrari and the uniqueness of the brand perplexed some people in the audience May the 6th it was done in order to help you trying to get an understanding of valuation and the inherent value of investing in Fiat. But I wasn’t suggesting that I was carrying a hidden conglomerate discount in my shorts. So I am…

Kristina Church - Barclays

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

Sergio Marchionne

Yes, what I mean the question is there for any brand that we own, is Jeep more monetizeable to somebody else and how much is it worth. This is -- we have been very, very clear about the commitment to develop Alfa within the fold of Fiat Chrysler. I am as confident now as I was on May 6 of our ability to generate significant profits from our involvement on the premium side. I think you cannot disconnect that commitment to the premium brand building from the incredibly positive repercussions on the financial performance of EMEA as an operating region. The absorption of cost out of the industrial structure and the potential utilization of this incredible reservoir or loss carry forwards that my predecessors and I have been able to accumulate over the years. So I think that from a structural standpoint we would be looking like a million bucks if we were able to effectively develop Alfa on our own. And I also think that it would be that development would be far in excess of any transaction that you could possible concoct in terms of the sale of the brand itself. It’s outside our DNA, we’re not in the business of brand trading. And so we are committed to Alfa, we’re committed to the premiums brands and life goes on. I mean let us work, we’re car makers, that’s what we do for living.

Kristina Church - Barclays

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

Sergio Marchionne

I think that there is limited -- there is room I think it’s limited room in terms of bringing down the actual cost of borrowing as long as the size of the gross borrowings remains at the size as it is. We are keeping and Richard talked about this, we are keeping what I consider to be an inordinate amount of cash on hand. The number which is, if you include uncommitted lines is an excess of 20 billion, and that is not normal. I don’t think we need that kind of reservoir to run a €93 billion business. So by the time we finish renegotiating the packages and getting through all the call options that we have on this debt back mix in 2015 and ’16, how we refinance this will undoubtedly yield from savings. I don't have a doubt. Is it going to drastically change the interest line, the answer is not unless the absolute level of gross borrowings goes down. And that’s an issue that needs to be addressed and its somehow connected to the first question that was asked about capital structure and comfort that we have, is it worthwhile to pay that price today by keeping all those liquidity on hand and thus avoid any concerns of our capital calls or is it worth raising some capital on bringing down the absolute level of borrowing.

So that analysis is ongoing. I think we’ll come up with the view I think we’ll discuss it with our Board and I think hopefully by the end of the year we’ll express the firm view.

I repeat what I said on May 6th. I can live easily with this environment it doesn’t bother me. And I understand that it has a cost. I understand and as we go forward and generate cash through this process we may be able and I think the real lumpy year for us is really the conclusion of this year and next year, ‘16 start changing color. And so we’re less than 18 months away from the potential signs of a structural reduction into debt levels of this house and when you’re that close to a rebound you’re going to have to ask yourself the question, is it worth the hassle for 18 months to get this done.

I’m going well beyond the scope of your question, this is something we think about all the time, so leave it with us, we’ll come back to you by year end.

Operator

Thank you. We’ll take our next question from Philippe Houchois from UBS. Please go ahead. Your line is open.

Philippe Houchois - UBS

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

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

Sergio Marchionne

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

Yes, I mean we keep -- look the other problem that you need to understand is that we keep our portion to limits of our production capacity most of our Jeep plants and out Ram plants are running flat out, and we keep on stretching our suppliers into providing us with the components, that in addition to the cost associated with getting them to do it has got quality issues associated with making sure that this increase demand continues to meet our quality requirements. So there have been issues in the quarter and there have been issues in the first quarter and there continue to be issues until this situation goes into a steady state and we’re not there.

Philippe Houchois - UBS

So but those are industrial friction costs and not some problems with a particular product to recall, or something like this that you’re kind of preempting before the regulator comes after you?

Sergio Marchionne

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

And you're going to see an increased level of regulatory interface with the car makers and the consequence of that interface is going to be an increase in recall activity across the fleets, and some of them are going to overshoot the mark by definition. And I think we need to live through that process of adjustments so I expect over the next two or three or four quarters we’re going to see increased charges coming through, which I don’t think are going to be devastating but I think they are going to work their way through the industrial cost machine and they’re going to lead us to a point where I think we will reestablish equilibrium. I’m equally convinced that, as these costs become structural to the industry there is going to be a pricing action across the piece and we’re going to restore margins. This thing is going to right push back into the marketplace it cannot be held.

Philippe Houchois - UBS

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

Sergio Marchionne

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

Philippe Houchois - UBS

Well you don’t need those, okay.

Sergio Marchionne

Timing is everything as they say.

Philippe Houchois - UBS

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

Sergio Marchionne

It does not.

Philippe Houchois - UBS

It does not, okay, that’s fine. Great, now if Richard can tell me about currency that would be great.

Richard Palmer

Hi, Philippe. So basically, the 5% difference because of exchanges driven both the revenues and EBIT basically by U.S. dollar predominantly but also slightly by Brazilian real.

Philippe Houchois - UBS

Does it mean that when you give us this 5% reported revenue growth, organic was something like 10%, is that the right number?

Richard Palmer

Yes.

Philippe Houchois - UBS

Okay and then in terms of your earnings of, your EBIT of [961 or 161] for the quarter, how much of the currency headwind did you have aggregate in that number?

Richard Palmer

60 million for translation.

Sergio Marchionne

I am not talking to you, 60 million to you, you just brushed off.

Philippe Houchois - UBS

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

Richard Palmer

This is a translation of the result.

Philippe Houchois - UBS

Right, okay. So, what’s the transaction then as well?

Richard Palmer

Well the transaction is like I said for example we have negative impact in pricing in Asia Pacific because of the Chinese and Australian dollar. Those are the -- that’s the main factor and we had a negative impact in pricing in Canadian revenues.

Sergio Marchionne

The biggest issue that we have is the Canadian-U.S. dollar problem because of the way in which product flows as north and south of the border. We have a large production base in Canada. We sell most of that output in to states and most of the Canadian stuff was produced in the U.S., so the question of flows is important and when you got these kind of gyrations in Canadian dollar, U.S. dollar rates. It does impact and it wasn’t negative for the quarter for us. It was a large portion of the number that Richard talked about.

Philippe Houchois - UBS

That makes sense, 60 million will be a nice add-on to your EBIT, I agree.

Sergio Marchionne

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

Operator

Thank you. We will now take our next question from Rabih Freiha from Exane. Please go ahead. Your line is open.

Rabih Freiha - Exane

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

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

Richard Palmer

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

So, I think question is, that yes, in terms of the guidance that we talked about one factor is volume. We expect the U.S. business to continue to grow and generate more volume in the second half, that's why you see 2.5 million units for the full year for NAFTA coming of 1.2 in the first half. We also, as we discussed sometime in the beginning here, we need to work on the incentive structure for some of the legacy vehicles and also the leasing percentages.

I think there’s some opportunity to improve our margins in the second half of the year as we look at the commercial policy on those items. In addition to the fact that as we transition to the model year ‘15 in August, September. So, I think one of the big drivers for the improvement in the second half of the year has to be NAFTA and those are the key things that we need to go after.

Operator

Thank you. We will now take our next question from Stephen Reitman from Societe Generale. Please go ahead. Your line is open.

Stephen Reitman - Societe Generale

This also partly relates to capitalization as well, and in particular looking at the US, or the NAFTA results, rather. I know we will get the Chrysler US GAAP results next month, but might we expect that the margin that Chrysler reports under US GAAP certainly looks better than the general trend we're seeing in these NAFTA IFRS results, given the fact that, obviously, the capitalization plays quite an important role in the NAFTA -- in the difference in the results between the Chrysler, the US GAAP results and the NAFTA IFRS results. If you could just generally also talk about what has been the pricing trends on the newer products you've been launching, like Cherokee and what general early indications you're seeing on the Chrysler 200.

Richard Palmer

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

In terms of pricing on the new products, as I said before we have been fairly successful I think in pricing the new products significantly higher than the predecessor products in the market. Obviously a good piece of that is a function of the improved product offering and the content that we put into the vehicle. And so therefore there is cost associated with that but, I think that so far we’ve been pretty successful in adequately positioning these products within the marketplace to sustain or improve margin performance. Obviously depending on the level of the brand awareness that each vehicle has, I think Jeep the Cherokee is doing very well and we priced it right in the higher goods segment, so it’s performing well, the 200 is too early to really talk about in any detail.

Sergio Marchionne

No the 200 is doing well I mean I think we’ve blown through records on the Canadian introduction the U.S. is coming along well. It’s only been in the marketplace for less that 60 days I mean give it a chance to grow.

Operator

Thank you. Our final question comes from Jose Asumendi from JPMorgan. Please go ahead your line is open.

Jose Asumendi - JPMorgan

Thanks very much, two items the first one on capacity utilization of the plants in Europe. You used to provide this data and you could give any comments where we stand in Q2 has there been any progress been done over the last quarters as compared against end of ’13?

Sergio Marchionne

No, the answer to that question is obviously there has not been significant progress as the products get launched and we’ll see this now with the launch of the Renegade. You will see utilization rates going up and you’re going to see a gradual improvement in that portfolio going forward. The reason why we don’t release the numbers is because there has not been a significant change in EMEA positioning now for quite a while. And so it would have been what I consider to be a redundant and somewhat unnecessary disclosure. But we’ll start providing it again as these plants come up.

Jose Asumendi - JPMorgan

Sorry to go back again on this industrial cost in the US; Richard, can you give us some color there on the split between R&D, D&A, and purchasing savings? Then, I'm sitting here looking at your CapEx R&D spending, peaking at 16. So I'm just thinking it looks it like an obvious burden over the next quarters and in 2015. Is there a chance that these purchasing savings is going to offset some of the burden, or is the geographical mix going to change so you will see a lower burden in the US? Any comment on that, please. Thank you.

Richard Palmer

In terms of R&D spend it’s relatively flat, there is a level of amortization that’s coming through every quarter year-over-year which is higher as we amortize the newly launched vehicles and that’s the function of the transition to IFRS the Chrysler activity. So there is about 60 million of extra R&D in the industrial cost and R&D you look at. And then there is about $300 million of extra content cost in the line partially offset by the purchasing savings. That was a 300 million is those number that then on the price side we have priced for.

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

Operator

Thank you. We will now take our next question from Richard Hilgert from Morningstar. Please go ahead your line is open.

Richard Hilgert - Morningstar

My question also was a follow-up on the industrial costs. In prior quarters, we've had over 600 million in industrial costs third quarter, fourth last year. This year, we've got 400 million and 300 million first and second quarter coming out of NAFTA. In those quarters, we had the launch of the Grand Cherokee and the launch of the Chrysler 200, both of which replaced previously high-volume models. These are high-volume models themselves. It looks like then, in the second half of this year, the decks are clear. We don't have the degree of high-volume launches that we had in the previous 12 months. Is that a fair characterization? And can we expect the run rate in the margin in NAFTA to go back to what we saw prior to these very large, high-volume launches taking effect?

Sergio Marchionne

Richard just to clarify the record, it wasn’t the Grand Cherokee it was the Cherokee that we launched. By the way and then I’ll pass it on to Richard. He'll give you more but I am incredibly gratified by your characterization of our performance with the Jeep Liberty and the old Chrysler 200 as being high volume products. It certainly would redefine what a high volume product is. To be perfectly honest, they never have been. I think we were able to resurrect the Chrysler 200 back in 2011 and the Liberty unfortunately suffered from what I consider to be a structural overweight condition which means that product is uncompetitive.

So they were never really high volume. Our expectation is that with both the 200 and the Cherokee now we’re now going to remedy this. But just to allow Richard to give you a proper answer to the question, we don’t have on the table any significant product launches in the second half of this year of the magnitude of the caliber and the implications that the Cherokee and 200 have had. Richard.

Richard Hilgert - Morningstar

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

Sergio Marchionne

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

Richard Palmer

I think between the two of you, you’ve clarified the situation, I don’t think there I can usefully add.

Richard Hilgert - Morningstar

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

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

Sergio Marchionne

Richard let me give you the color that you need. We’re confirming 1 million, 5000 Cherokees was for the quarter not for the month I wish it would have been, but there is going to be a substantial cost reduction as a result of the authorization of the Cherokee in China, because of the import duties associated with the way which these cars are coming into the country now. But production will start in Q4 of ‘15 in China.

Operator

Thank you. Our final question comes from Charles Winston from Redburn. Please go ahead, your line is open.

Charles Winston - Redburn

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

And just same region, can you just help me think about how you're going to start -- how the impact of the Pernambuco opening will impact in terms of numbers? In other words, have you been capitalizing costs that you stopped capitalizing as that plant opens? Given how difficult the market is in that region, could we potentially see a delay of the opening of that? And just perhaps, it's a very big plant in that region, how it might impact in terms of the reported numbers in the cost base. Thank you.

Sergio Marchionne

The answer is that we’re not -- all the costs that are being capitalized are related to the building of the plant. So once we build the plant the cost will stop [indiscernible] clearing them.

On the P&L I have no indication to suggest that the plant is not going to open on time, we reviewed this about a week ago and I think we are on track to open as expected. The expectation is that for the whole of 2015, there is going to have a significant positive impact on reported earnings and the specialty margins because of the difference in margin generation on products producing Pernambuco compared to the ones that we’re producing in between.

So I think that’s going to be an interesting 2015 as we ramp up this plant I think our expectation is obviously overtime and hopefully by the end of ‘15 the beginning of ‘16 we are going to start restoring margins in Brazil to the double digit mark that we had in the past.

So let us work through all this my indication today is that we're on track. And in terms of the real/dollar discussion of ForEx as to whether we expect these inflation cost to decrease. The country is unfortunately they still has an inflation problem and they need to be able to do this effectively. I’m not sure that the current round of adjustments in ForEx is going to change that dynamic very much. I think there is a bigger issue in Brazil [indiscernible] how to manage their position.

And obviously it depends on how the political situation resolves itself in the elections in October, so let’s just wait until then. But overall the dynamics of jurisdiction are still healthy.

Operator

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

Joe Veltri

Thanks Darin. We like to thank everybody for joining the call today. And as always my team and I look forward following up with you on any further questions that you have from today. Please note that the release of the Group results for the third quarter of this year is currently scheduled for October 30th. Thank you and have a pleasant day.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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Source: Fiat's (FIATY) CEO Sergio Marchionne on Q2 2014 Results - Earnings Call Transcript

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