Marco Auriemma – IR
Sergio Marchionne – CEO and CEO, FIAT Automobiles
Camillo Rossotto – Group Treasurer
Monica Bosio – Banca IMI
Martino De Ambroggi – Equita
Thierry Huon – Exane BNP Paribas
Brian Johnson – Barclays Capital
Ranjit Unnithan – JPMorgan
Stuart Pearson – Morgan Stanley
Max Warburton – Sanford C. Bernstein
FIAT SpA, (OTCPK:FIATY) Q4 2010 Earnings Call January 27, 2011 10:00 AM ET
Good afternoon, ladies and gentlemen and welcome to today’s FIAT Group 2010 Fourth Quarter and Full Year Results Conference Call. For your information, today’s conference is being recorded.
At this time I would like to turn the call over to Marco Auriemma, Head of FIAT Investor Relations. Mr. Auriemma, please go ahead sir.
Thank you, Bettina. Good afternoon to you or good morning as the case may be and welcome to FIAT Group 2010 fourth quarter and full year results webcast and conference call, the last quarterly analyst call for the group. The Chief Executive, Sergio Marchionne together with Antonio Pica Piccon and Camillo Rossotto, the newly appointed treasurers respectively for FIAT and FIAT Industrial will host today’s call. They will use the material you should have downloaded from our website, fiatspa.com and fiatindustrial.com. Also with us is Manfred Markevitch, the head of the investor relations for both FIAT Industrial and CNH. After the introductory remarks we would be available to answer all the questions you may have.
Before moving ahead, let me just remind you that any forward-looking statements we might making during today’s call are subject to the risk and uncertainties mentioned in the Safe Harbor statement included in the presentation material.
So now I will turn the call over to Sergio Marchionne.
Thank you for the introduction. As you all know today is the last conference call for the automotive conglomerate that we all knew as FIAT Spa. I think that I am looking forward to a slightly lighter load as we move into 2011. I think that the CEOs of the industrial group will be able to address most of your concerns going forward although I think my presence will still be somehow felt through the process. The important thing is to try and get an understanding of what was accomplished in 2010 and really get a firm understanding of how we are starting our new lives as FIAT and FIAT Industrial.
I am going to ignore making any comments about the title page. I will leave it to you to use your literary interest to find out why we chose the title that we did. And I am also going to skip the first two slides of our presentation which are pure propaganda that relate to the event on January 3 when we started trading in the two securities of FIAT.
Page four deals in a very clear way with what I think we were able to accomplish in 2010 for FIAT not only much common about the revenue side. We are going to deal with these as we go through the sectors but the important thing is from a trading standpoint we committed about EUR2.2 billion, roughly 600 million in net income for the year and probably the most relevant part of this analysis is the fact that we were able to generate a substantial amount of liquidity in the last 12 months. We are now sitting in a net debt position which is substantially below what we indicated as guidance as little as 3 months ago. We are sitting now at 2.5 billion worth of net debt; 2.4 billion of which 0.5 billion is sitting with FIAT with the car side and 1.9 starting with – is the starting position of FIAT Industrial.
Net cash is about EUR16 billion, most of that cash over 12 billion is now sitting with FIAT. There is a comment that somewhere in the slides going forward saying that there was an amount of intercompany debt that existed as of January 1, 2011 which has now been extinguished because the – a number of lines has been drawn down to repay the indebtness as a result of that repayment. The actual cash balance of FIAT is about a billion higher as we have performed the transactions of the end of 2010.
So overall a good year I think. I think we are satisfied with the trading performance of the business with all the businesses and I think we are looking forward to an improvement in 2011 performance to the two organizations.
Slide five, the first part deals clearly with what I just talked about the financing of FIAT Industrial. These lines have been drawn. I think that as we mentioned to you as early as April of last year we have intentions of going back into the capital market to provide proper financing of FIAT Industrial as we go forward it is going to be at 2011 and then hopefully within the first half of this year.
Given the performance the board has recommended the dividend is going to cost of about 152 million across the three classes of shares and the other significant event which is one of three events that the other two of which hopefully will materialize in 2011, which is about the ownership of FIAT into Chrysler from 20 to 25%.
Slide six, standard reconciliation of operating profit down to net income. Obviously the financial charges are relatively high. This is the price that we are paying for the high levels of liquidity that we have maintained in 2010. The financial charges are also net of a one-time gain of EUR111 million which relates to the mark to market of the equity swaps that are associated with stock options plans of FIAT. Both options will continue to stay on FIAT SpA’s books on (inaudible) exercised or otherwise dealt where they will continue to impact the performance of FIAT SpA’s results.
Group cash flow, page seven: This is the based on what we are able to reduce our debt position substantial cash generation. I think the working capital management has been quite good especially in the fourth quarter of 2010 and we continued to apply a pretty rigorous CapEx discipline to the business. This is on a combined basis. You will see these numbers substantially move in 2011 as we resume what I consider to be at least in part a catch-up strategy in terms of CapEx especially as it relates to car.
We will deal with this as we give you 2011 guidance but overall a healthy cash generation. It has allowed effectively FIAT SpA to start to fly almost with a net debt-free basis, which I think is significant given all the challenges that I think we need to face in 2011 and 2012.
Slide number 8, just two basic points. We have rolled out this world class manufacturing nearly sometime in 2005; it was rolled out across the group. In the span of the last five years we have been able to accumulate roughly 1.1 billion worth of savings. In terms transformation cost we have applied the same philosophy to Chrysler, which has now begun the same path that we started sometime five years ago on FIAT. We are quite pleased with what has happened here on the manufacturing side and it is something which is going to continue to remain part of the manufacturing fabric of FIAT going forward.
Group purchasing has done well. We have put over almost 400 million in savings year-over-year. Fourth quarter has rolled down as a result of raw material price hikes that we have begun to see across some commodities. We are still confident that we can deliver the savings that we outlined to you on April 21 as part of the Investor’s Presentation for 2011
In slide 9, getting to page number 10, the current FIAT, the FIAT that we understand today the re-trading had good top line growth mainly as a result of performance other than the western European automotive sector which is it continues to have performed poorly.
The luxury brands have done well both Ferrari and Maserati on the back of the economic recovery but I think that is a good year for both in terms of revenue and in terms of trading profit and components and production systems are following. I think the global recovery in automotive demand and therefore the numbers have significantly improved year-over-year.
Slide number 11, you can see what the impact has been of the decline in market demand in 2010. Europe has been down almost 5%. Italy has been severely hit as a result of the non-renewal of Eco-incentives, down almost 10% year-over-year. Brazil on the other hand has gone exactly the opposite direction, (inaudible) tremendously grow up nearly 7% over 2009 and light commercial vehicle business is recovering from incredibly low levels that we saw in 2009 up across Europe, up also in Italy but not by as much and certainly very strong performance of the Brazilian market.
We expect most of these markets to recover in 2011 with the exception of Italy and I guess a continued negative view of where European demand is going to be this year. We are not encouraged by the signs that we see in terms of European economic activity and therefore we have taken I think a very prudent approach for estimating demands for the current year. We do expect Brazil to continue grow, I think that we see numbers being anywhere between 2 to 5% higher in 2011 and certainly it is one of the biggest on which we forecast profits for FIAT in 2011. We do expect our strong economic performance that we have had last year in 2010 to continue unabated in 2011.
Slide 12 deals with where we have had gains and losses. It is clear that the incentive system that were put together by European governments namely in Italy and Germany that the non-renewal of these eco-incentives plays significant impact on the demand for FIAT products in those markets. The fact that the demand for CNG and LPG powered vehicles was a size that was in 2010 played obviously in FIAT’s favor because it is the leader in these segments and the non-renewal of the incentives caused a substantial drop in demand which we saw beginning in Q2 of 2011.
Good recovery of Alfa Romeo has re launched the Guiletta. In the end of the first half of last year, we are seeing a significant inroads being made in terms of the positioning of that car and certainly it is a good basis on which to try and develop Alfa as we strengthen the relationship on a manufacturing development basis with Chrysler.
The second half of the slide deals with residual values, significant improvement that we have made year-over-year and I think it is a reflection on the commitment to qualities and the discipline that we have had in distribution on the European side.
Slide number 13 of the two Cinderella stories. These are really the strong points of FGA. They have been historically and they continue to be the main profit generators for FIAT Group Automobiles. The light commercial vehicles side, which we continue to manage well, roughly 13% market share. In Europe, and if we take the Iveco side of light commercial vehicle business we are still the main force in light commercial vehicles in Europe, strong performance also in Brazil not only on the light commercial vehicle side as we saw from the previous slides but also in terms of car, we are now running our plant in (inaudible) at capacity.
We are running an additional 100,000 cars from the facility that we have in Argentina in Cordova. We recently announced as you can see from the bottom pictures between Christmas and New Year the establishment of a new manufacturing location in Pernambuco in the northeast of Brazil. I was there with President Lula for the inauguration of the construction investment in excess of 3 billion and it is part of a much wider commitment at FIAT across all of its businesses FIAT and FIAT Industrial has made the Latin America for the period of 2011 to 2014.
Initial production at that plant is going to be roughly 200,000. It is expandable for over 400,000. We are now finalizing all the necessary arrangements to determine exactly the type of cars brands that need to be localized near Pernambuco to support the introduction of these vehicles which will be hopefully visible in the marketplace in 2013.
Slide 14 deals this ongoing saga of underutilization of the European plant infrastructure and the fact that that has at the heart of the lack of profitability of our Italian operations. We showed this slide before. We have updated it to reflect actual data for 2010 in terms of utilization of the passenger car plants. You can see a very clear difference and probably one that has gone which has made the difference here more visible in 2010 between the technical utilization rate of our Italian plants compared to what we have been are able to do in the rest of Europe is a situation which cannot continue.
I think we have made two significant inroads in 2010 by signing two labor agreements – one in connection with the Pomigliano plant, the other one which relates to the recently agreed deal with the labor unions in Mirafiori here in Torino. The agreement that we signed with Pomigliano will allow startup production for the Panda in 2011. That should produce about 250,000 cars that will give significantly change the utilization rate of our Italian assets and the other one is Mirafiori, which the labor deal passed with the vote of 54% but it will allow us to – it will allow both Chrysler and FIAT to jointly commit and produce a Jeep SUV and an Alfa Romeo SUV in the C-segment.
We have also announced that this is more than two years we announced that by the end of this year production will cease at our Termini Imerese plant in Sicily and this is thoroughly consistent with the industrial plan that we laid out for our Italian manufacturing infrastructure.
Slide 15, which deals with the luxury brands, Ferrari had a phenomenal year again and margined nearly 16% over 300 million in trading profit continues the height of success in its international expansion. It is now focused on China as being the next significant area for growth. We sold over 300 units in 2010, more than double what it was in 2009 and we continue to develop the distribution network in China to deal with what we consider to be a significant demand for developing in that area of the world.
Maserati continues to do well on slide 16, made 24 million more than twice what it made in 2009, continues to perform well in terms of demand, sold 25% more cars than was sold a year before with the U.S remaining its strongest market. There is a lot of work that continues within Maserati do develop the success of the Maserati Quattroporte and hopefully we will be in a position to present this some time by the end of 2012, the early part of 2013, but I think we remain focused on next year as being the critical year for Maserati as it renews the architecture.
Not much to be said about FIAT Powertrain other than it had a significant recovery and performance up to 140 million in trading profit for the year. It continues to maintain its leadership in terms of CO2 emissions. It is the lowest emitter of any other European mass manufacturer. We see the number of awards both in connection with the TwinAir, the two cylinder engine that was recently launched by FIAT and then the recognition of the value of MultiAir as a technology to be applied across all of FIAT engine families.
Slide 18 was just the top part of the slide. It is just a confirmation of what was laid out to you – to the investors on April 21. I heard that there are some rumblings over the fact that we have lowered guidance for 2011 is just nonsense. We have just repeated the information that was given to you on April 21st with the confirmations of our belief in the doability of the industrial plans as far out as 2014. It is obviously our view that we are going to be at the top 10 of the trading profit forecast. The number is not expected to be lower than it was this year. We are seeing significant recovery in the components business going forward and certainly the luxury brands will continue to do well. Brazil is expected to continue its profit performance in 2011 at levels at least equal to what we were able to accomplish in 2010.
What is significant is the amount of capital that will be used by FIAT in 2011. This relates to the number of initiatives that we have put in place including the industrialization of the Panda as I outlined earlier in connection with Pormigliano and the beginning of the expenditures of the SUV that will be built here in Mirafiori.
Calendar for FIAT, this is pretty well standard stuff. We will have the first quarter result from April 28 in our shareholder’s meeting, which will be held on March 30. I think we have managed to run the calendar as so that FIAT Industrial reports one day later and then FIAT. Am I right? Well I think that unless we are going to try and organize our chaotic life with advance warning.
Slide 21 looks like getting into the industrial business. Outstanding performance that is CNH, I think the fourth quarter has been really the icing on the cake. We have done really, really well from a variety of reasons. I think we have had great market fraction both in the AG and the CE side I think we were successful and so that depleting the inventory levels of CNH we have under produced the demand by a significant amount that has given rise to some significant cash generation in the fourth quarter of 2010.
Iveco continues its recovery. The fourth quarter has been exceptionally strong in terms of trading performance. In FPT Industrial, the engine business is run for at least for CNH and Iveco plus third party customers has had a significant rebound in performance. Revenues were 50% higher than they were the year prior but more importantly I think we had a nearly EUR200 million swing in trading profit 2009 to 2010.
Slide 22 deals with our performance across the various segmentations of tractors and the various geographic areas for combines I think in the tractor performance in <40hp tractors was expected. It was quite intentional on our part. We are busy in reconfiguring our offering in that market segment. We have had a series of – across the uncompetitive units in the marketplace therefore in (inaudible) those are in the process of being completely rejuvenated and hopefully we will be able to see a reversal of that position in 2011.
We continue to perform well when you see that negative sign for 40hp plus range. That category is incredibly wide. It goes up to 400hp tractors. We have done incredibly well in the large equipment area in four-wheel drives and large horsepower equipment. And the other issues are really been a result of capacity constraints across some of our industrial sites which hopefully will be corrected in 2011.
We are quite encouraged by the performance in combines. I think the overall 2011 forecast will be a better year than 2010 and so we are certainly gearing up our industrial machines to a significant increase in volumes in 2011. I think CNH had their conference call earlier today. They may have indicated that we do expect to have a top line growth for crossover business of roughly 10% or thereabout.
Good indications of what the market will end up in 2011 and the same is visible on page 23 which relates to the construction equipment slide so significant increase in demand in both light equipment and heavy for 2011.
Page 24 deals with the in business sort of a snapshot of some of the things that we have gone – that have gone on in 2010 in connection with international operations. This is only some of the more of the striking things about the CNH’s effectively its international reach. We have completed the joint venture we have come up in Russia for the local manufacture of tractors and combines. We continue to expand our operations in China and the northern part of the country in connection with our (inaudible) facility up in Harbin, and we continue to perform well in Turkey which has had a phenomenal year, a good recovery from the 2009 slump. And we continue to increase our involvement in India, which both in terms of manufacturing, in terms of local distribution.
Iveco also had a good year. I think that a market demand is showing at least a healthy signs of recovery. This was visible on the fourth quarter of this year. It was not a widespread phenomenon across the whole of 2010, but certainly in the fourth quarter we were encouraged by what we saw. Latin America continues to perform well. The order intake for the business has improved significantly. And I think we are now managing a healthy level of both dealer and company inventories. We ended up the year with roughly I think with 25% reduction in overall inventory levels compared to 2009.
Slide 26 deals with China and Brazil. We continue to make and if we keep on doing this eventually hopefully it will become a well-known fact, but we are the largest foreign truck maker in China through Iveco and volumes have gone up significantly in 2010.
Brazil continues to perform incredibly well. We have focused on that business going back on 2006. We sort of neglected it in terms of strategic development but I there will be initiatives that we put and place some of the local leadership in Brazil has done a tremendous job of bringing Iveco back. We are now at roughly 9% market share and we do expect the bulk on the basis of increased volumes and repositioning in terms of market share of Iveco that these numbers will continue to improve in the years to come.
FIAT Industrial, FTP Industrial again is another success stories. We have significant volume ramped up on the engine side more than half, more than 50% improvement over 2009 improving also in Gearboxes. A third of our sales narrowed to 3rd parties, which is a significant achievement given the fact that we started this business as a stand-alone back in 2005 and we were able to diversify our order book and our customer base.
We have significant recovery in earnings nearly 200 million in recovery year-over-year and I do not have the digits of the bottom part of the slide that deals with what we consider to be a significant technological know-how that sits within FPT in which I think will endow FPT engines with a significant cost advantage against the relevant competitor class.
Slide 28 deals with the forecast. Again, this is a photocopy of what we told you on April 21st in terms of performance. It is again a confirmation of the 2011 and 2014 plan. And as you can see the fundamentally different financial performance of this business is not clearly visible. We will generate roughly between 1.2 or 1.4 billion probably the upper end of that guidance and significant cash generation that allows us to see a decrease in net indebtedness by about half a billion in the end of 2011.
I think then you would rather gaze in your slides as appendices which we will be more than happy to answer questions on, but I think we are done.
Thank you, Mr. Marchionne. Now we are ready to start our Q&A session. Bettina, please retrieve the first question.
Ladies and gentlemen, today’s Question-and-Answer session will be conducted electronically. We will take our first questions from Martino De Ambroggi from Equita. Please, go ahead.
Martino De Ambroggi – Equita
Yes, good morning, good afternoon, everybody. If I may, on the last point you mentioned for debt reduction for the current year for FIAT Industrial, because the official guidance EUR1.8 billion, it was unavailable before, but you mentioned after end operating profit means EUR500 million of debt reduction for the current year, and I was also asking this because I was trying to match the guidance for debt of this year with the debt-free position you expect in 2013 that you mentioned during the last meeting in December. That was the first question on FIAT Industrial. The second one if it's possible to have a rough indication on what you have in your guidance in terms of raw materials impact for both entities and restructuring unusual items, and the very last consideration on cost synergies you mentioned in slide eight for Chrysler, what was the amount for 2010 and what is the expectation for 2011 if something is changing versus the previous business plan presentation, how things are going with Chrysler. Thank you.
Well I got distracted. We were trying to collect some information on your raw material question. I am going to answer that back but then you are going to have to come back and just fill in more at least of the questions through your last. In terms of the net debt reduction, if you look at slide number 28, I mean it is almost self-evident at about 2013 this thing is going to be debt-free. The difference between EBITDA and CapEx just from the 2013 will be enough to extinguish any indebtedness that we have within the system so I think we were sufficiently cautious when calling the day to see how well we do. It may be earlier but we are going to stay towards guidance of 2013 as being the – I am looking at Mr. Rossotto here who refuse to be shaking his head apparently in agreement in doing so.
So 2013 or earlier in terms of the what we expect in raw material in 2011, I think we are looking at 200 million number compared to 380 that we were able to achieve this year so we have built in some significant (inaudible) in terms of raw materials price hikes in which is reflected in the guidance that we have given you. The update on price is going to be given to you officially on January 31 which is next Monday when I will be back on Detroit. I think the business has gone well sort of in line with the guidance that we gave on the last conference call. I think we will have to wait for Monday to get additional details. Now, you have asked something else which I ignored. Can you repeat it?
Martino De Ambroggi – Equita
Probably restructuring unusual items included in the guidance?
There is nothing else of significance in 2011or later years. I think we continued to clean up residual matters that is what is reflected in the 2010 numbers but there is nothing of significance that we have going forward.
Martino De Ambroggi – Equita
Okay. Thank you and if I may, a very last follow up on the M&A side, because during the meeting in December you mentioned the only very unlikely deal is the sale of the entire stake in Ferrari. I understand it's difficult to answer to a question on the M&A, but we saw Elkann stating that Magnetti is not for sale. Today Wester is repeating the same for Alfa. Is it possible to restrict, I'll say the perimeter of the potential M&A deals?
That is a really good question and the answer is that I will not restrict this. I cannot restrict the scope of M&A deals. I think we need to be very, very careful. One of the things that has distinguished this group from others certainly – and I do not want to take ownership for this but it is the same in the last few years is the fact that I think we have been able to move with the speed of light to try and occupy spaces that have been made available by a market that for whatever reason have become inefficient for a period of time. I think it will be incredibly unwise for us to try and predict this to other occasions like this will recur. The only thing I can tell you is that FIAT is going to be there. I think our presence in Chrysler could not have been forecast and certainly in hindsight it was probably one of the best things that could have happened to FIAT. I think one of the best things that could have happened to Chrysler, too but I think it will be unwise to try and restrict the scope of what we do. I think we have drawn out and made reference to and I think the air code and (inaudible) has comments that we are not actively pursuing deals. This is not – we are not engaged in sole disposal activities here but I think it will be incredibly foolish to come up with categorical statements over the fact that nothing will happen. We have seen what has happened here in the last seven years and I think we need to remain open and to give these businesses the freedom to execute on strategic alternatives that become available to them.
I can tell you that I do not have any intention today of dealing with particular assets. The Ferrari story I think has been dealt out of proportion. The only comment that I have made is that we think that there is – we do believe that and I continue to believe this and I think the numbers indicate it clearly. The Ferrari is the significant repository of value. It is a value which we see undisturbed that not hampered by competitor’s behavior on the market place that is a unique brand, that is a unique set of activities has really no counterpart in terms of the marketplace. They are unique and I think that the fact that they do represent the value for FIAT is comforting to us but we made no commitment about executing a partial (inaudible) strategy or retaining our current shareholding of Ferrari. This is what it is but I can tell you and John I think was clear on this. We are not shocked in the absence but on the other hand I think we need to remain absolutely open about what possibly could benefit the business going forward.
Martino De Ambroggi – Equita
Okay, thank you.
Our next question comes from Alexis Albert from Nomura. Please go ahead.
Alexis Albert – Nomura
Hi, good afternoon. This is Alexis Albert from Nomura. I have just one question regarding FIAT Industrial. I don't quite understand why you are not changing the outlook for 2014 especially 2011, because if I look at CNH and if I look at Iveco, it looks to me like the top line is already pretty much reached at the end of 2010. The same applies to Iveco and it looks to me like the guidance that has been given by CNH is above the one we are – you are giving us in the 2010-2014 business plan for 2011. So I'm really surprised why you don't – you're so reluctant to change this guidance, especially since I believe the world is a bit better right now than it was at the end of February 2010. This is my only question.
Mr. Alexis, you got (inaudible). Are you still there? Or are off the line?
Alexis Albert - Nomura
Yes, yes, I am still here. Yes.
I think look, we are in the habit here of raising guidance at the appropriate time. We have never to this date, at least since I have been here, misguidance that we have given the market. I think that we recognized that we have had a very good year in 2010 and all indications are that 2011 is going to be stronger than 2010 as being I want to see confirmation of the trading performance in the first quarter of this year before we have guidance. It has been on the tradition of the house that we are not going to move it today.
Alexis Albert - Nomura
Okay. Thank you.
Our next question comes from Christina Church of Barclays Capital. Please go ahead.
Christina Church - Barclays Capital
Oh, hi, yes. It's Christina Church from Barclays Capital. I've got a couple of questions. Firstly, I was just wondering if you could elaborate a little bit more on the net debt split. I notice that it's an 80/20 split between the auto business and the industrial business. I was just wondering if you could sort of talk about – I know you're talking about CapEx going up substantially in the auto business and whether – obviously, you'd already given the guidance for the CapEx, which remains unchanged so whether the outlook has got more negative for the auto industry and hence why you're leaving less net debt in that group. And then possibly maybe, whether you could talk a little bit whether – how you see the potential to move further 16% of Chrysler, what sort of cash implication that might have and whether that could explain some of the difference in the debt split? And then the second question is more related to the Fabbrica Italia. I'm just wondering what the next steps are there following the two plants that you have reached concessions with, where will the next steps be taken in the Fabbrica Italia plan? Thank you.
I am going to deal with these – the last two questions but that is (inaudible) I think we are in the middle of the deal with the net debt split. I think that we need to take a breather here on Fabbrica Italia. I think we have gotten two significant projects which in total costs about EUR2 billion that have been committed to this at least from the FIAT side. I think we are going to see the implementation on the first one within 2011 and we are surely going to have spent starters spending money in commensurate with the Mirafiori plant that we will see for the operation hopefully within the next 24 months. I think that what we are going to be dealing with Fabbrica Italia is taking these projects one at a time as they go forward and I think we will tackle them one at a time. I think that we have seen the difficulty with regard encountered into getting sort of wholesale agreement across a pretty broadly defined plan of investments in this country. I think we need to go back and modestly approach this on a case by case basis if we move forward. I do not – the amount of money that is involved here is substantial. I want to have all the certainties that is required which is something that I have repeated (inaudible) now but the ability to govern these plans using these rules that we have now agreed. I think we will not chance what others the fact that they can be achieved and I think we will tackle investments as they come in a case by case system.
The second question that you have asked about the 16% in Chrysler, I think that I mentioned this during the road show pre-demerger. Our objective is, and I think it is a wise objective is to if at all possible is effectively be in the position exercise that 16% call option. You can see from the financial activity that FIAT SpA is maintained that it can execute on the proposal of one were to come that proposal obviously in the acceleration of that call option entails an agreement amongst multiple parties – I do not to the best of my knowledge that agreement is not in place today. I think it will be surely pretty mature on my part to claim that this is a near event I think that the party needs to go through and discuss this matter at length. I remain as convinced as I was during the various – you know at the time that I was at Detroit about ten days ago but I think that the opening up of the capital markets window in the US is real and I think it will be perhaps unwise for Chrysler not to take advantage of that opening. I think FIAT is ready to do what it can do to facilitate that process but it must do it on terms that FIAT finds acceptable and that the undertaking associated with the investments so I am on – I cannot tell you. I cannot give an indication of timing. I can only confirm what I have always said and that is that I hope all these things will happen in 2011. We need to get everybody else to agree to apply and then we are not there. And I will leave it to Camillo to explain the net debt.
Thanks. You could see that if you were to look at slide 32 as a support for my served explanation I think it is fair to recognize that our guidance on that debt split is moved from a 50-50 original to 60-40 type of range and then we kind of moved to more absolute values type of guidance and you will recognize that the 1.9 billion at FIAT Industrial it exceeds the 2-2.4 billion by bit while on the FIAT side we are also very clear in stating that at a certain point after allocating a severe amount of debt it would have been – officially the final split would have been driven by actual operating cash flow performance and so a typical occurs in the fourth quarter. We had the positive generation from working capital at FIAT Alto that has reduced the absolute amount of debt on FIAT Alto from the originally guided the 1.5 to 0.5. That is also on the back if could see in the space of CapEx and working capital and all debt on slide 32, it is on the back of a reduced CapEx at the FIAT Alto versus the original sort of budget guidance for 2010, which is obviously determined a lower amount of debt on FIAT. So I know that answered your question but I think that we moved from 8 percentage to an absolute amount and then we executed on a 2.5 billion over debt-free positioning from FIAT to FIAT Industrial and then it ended up to be the final number that you see now in the count.
Christina Church - Barclays Capital
Okay, thank you.
We will take now our next question from Jose Asumendi of RBS. Please go ahead.
Jose Asumendi - RBS
Yes, thank you very much. Three questions, please. First one, I just wondered if the negotiations on Cassino and Melfi, do you expect them to close in mid-2011 or is this sort of end of the year or 2012? Second question, on working capital on the auto side, the strong inflow there, is it inventories, payables or receivables? If just give us some details behind that number. And then, on Brazil, I mean, you are not over-optimistic on the guidance since I believe it is something like flat to 6% growth, but you do mentioned that you would want to make the same money in '11 as in 2010. So I am just wondering what is going to be the sort of the incremental positive coming for this market if you have, probably, pricing being a little bit negative and raw materials rising? Thanks.
Yeah, just the question about Brazil, right? We have assumed the market there will be as a minimum flat in all likelihood up single digits over 2010 were forecast that given – and certainly some of the concerns that I have had voiced, that I have heard voiced from some of you guys about the competitive nature in Brazil, we have put in to our numbers sort of an implicit assumption which hopefully will not materialize that we will have to give up some market share to allow for the competition to occupy some space given the fact it is a growing market. The forecast that we put in place sees a continuation or repetition of earnings in 2011. I do not think that the raw material story in Brazil is going to significantly impact earnings. Surely based on the agreements that had been reached for suppliers to date and so I remain confident that we will be able to at least duplicate 2010 performance in Brazil.
The question that you have asked about Cassino and Melfi, I do not know what it is going to be at the 2011 set of events. I know that we are concerning the case of Melfi. What we have on the table now is the renewal of the (inaudible) and architecture and the recommitment to the next phase of the B segment in FIAT. This event may happen in 2011 but I think the timing as of now is uncertain. I think we have done a lot of work from the engineering side and also in terms of style to make choices about what the next vehicle will look like. It is unclear to me as to whether we will be asking for a similar agreement in Melfi in 2011. I think one thing you need to understand is that the work practice that is in Melfi today already involves a three shift operation and it has been going on at this rate now for a number of years and therefore I think that the obstacle associated with getting these changes and labor practices is going to be significantly lower. I think Mr. Rossotto has already given answer on working capital.
Jose Asumendi – RBS
Is it the same case on Cassino as on Melfi?
I think Cassino also from an environmental standpoint in terms of labor relation to where I think the labor forces today, I would expect that it may be a somewhat easier task to try and convey than assessing to uptake working practices to reflect – well, I think it is required in internationally competitive market. This may not be at 2011 event. I think that we have enough volume coming from that plant for the remainder of the year that may not require us to go back although we will not know this until probably the conclusion of the first half for this year.
Jose Asumendi – RBS
Sorry, may I follow up? Just – I think you plan to be breakeven in Europe by 2013. Is that still built in having got all four plants already negotiated with the unions? Or is that how we should be looking at this?
Yes. I think the objective is to be breakeven at least by 2013.
Okay, Jose the working capital change for the full year, the 1.9 billion is almost evenly split between inventory reduction across the sectors payable increased due to the higher level of productions at CNH and Iveco mostly and the collection of the famous around a million Euros of scrap and receivable from the previous year. While for the first quarter, for the fourth quarter it was a combination of almost evenly split between inventory reduction so it is kind of permanent and payable to increase due to the fact that we pay a lower amount of production in the fourth than we accumulate from the books in terms payables so they will eventually reverse in the fourth quarter of 2011.
Jose Asumendi – RBS
Okay. Can I just may – well, last one on financial expenses, how should we ask– how we should think about this on the auto side for 2011? Sort of deterioration or improvement or?
Look, we had provided the split on a national basis for 2010 and that the net of the – sorry, on page 36. On slide 36, you have the sort of the breakdown by the drivers of the national expenses for the group and then we have provided the press release the split up between the FIAT and FIAT Industrial. That would be 400 million for FIAT and 505 for FIAT Industrial. Now net of the one of the 111 million for FIAT on the equity swap that fully attributed to FIAT. So I think the way you should think about it going into 2011 is pretty much the same level with some reduction as we will reduce the cost to carry there but I think that you can use that as a proxy for next year.
Jose Asumendi – RBS
Okay. Thanks. Thank you very much.
Our final question comes from Brian Johnson from Barclays Capital. Please go ahead.
Brian Johnson - Barclays Capital
Yes. Good afternoon there. Could you comment a bit – and I have asked this before but just how you see pricing shaping up in your three core markets in FIAT Group Auto, Western European Auto, LCVs in Western Europe and then Brazil, especially if you are right that growth will slow a bit?
You do repeat the question.
Brian Johnson - Barclays Capital
The question is how do you see pricing developing in 2011 in the three core FGA markets, European Auto, European LCV and Brazil?
I think European LCV is not an issue. I think it is a disciplined market. I think we have been able to maintain pricing in 2010 even in 2009 when markets were significantly down. The car side in Europe was more difficult to predict. I think we have seen certainly as the incentives came off some erratic pricing behavior which has sort of prevented us from planning and we have not engage in what I consider to be unnecessary de-pricing of our products. I think it is very, very difficult to call as long as the market continues to be down year over year I think that the pricing picture is going to be made incredibly competitive. I think we will response while we can but I think it is unhealthy. It goes back to what I said earlier about the fact that this business at least on European side needs some take-up of capacity. I think as a result of the actions that we have taken in connection with the (inaudible) plant and certainly the recent s that has been taken with GM by GM in connection with the (inaudible) plant, I think was beginning to see the implementation of a reduction strategy and capacity and hopefully that will benefit pricing but I think it is still early to tell as what that. I think I can give you an update as we go through quarter by quarter.
On the Brazilian side, we are not concerned. I think that we have intelligently allowed adjustments in both from our market share and presence of our competitors. I think that the market is growing. I think there is enough demand to justify the current pricing mechanism and we do not see this being negatively impacted in 2011. If I just go back to the previous question that was asked was about the interest split and other – Camillo was valiantly trying to answer the question – and just to give you some indication as to where the numbers would be, we are looking at roughly 400 million for each one of these businesses in 2011 in terms of interest structures.
Brian Johnson - Barclays Capital
Okay. And just one last question, on the international theme, when should we think about in the 2014 plan that you might turn your attention to Asia and China, now that we seem to at least see the game plan for North America. We see the game plan for Europe and South America. Is that even on the mid-term strategic agenda?
We started our involvement in China for real and the last 24 months. I think we signed up significant joint venture with Guangzhou Automotive. The plant will be fully up and running in 2012 and we will be introducing a C segment car under the FIAT batch of based off in architecture which is being used today by Chrysler to launch a C-segment Sedan in the United States. We are going to be in the marketplace with the FIAT500 with products coming out of Mexico into China by the third quarter of this year. I think we are showing up late at the party but I think we are coming in properly. I think that certainly in terms of the manufacturing facilities that we are putting in place, these are significant investments that we are making with our joint venture partner but it is a built story from here. We have had a number of unfortunate wrong starts in China up to now but I think we have found the right partner to build this business on going forward and so the numbers in 2014 do reflect the presence in terms of worldwide volumes. I do not have the exact data here but I think investor relations can tell you what we built in terms of 2014, I can tell you that in terms of equity pickup or the (inaudible) of profit to FIAT as a result of that joint venture, there was nothing that was put in for the plan and there will be sufficiently material to change the forecast. Obviously we expect to have these businesses be both cash and earnings generative in the future but given the fact that we are on the early phase of development it is impossible for us to make that call. But I agree with you that this seems to be and has been a weak point. I think most of our competitors have made significant inroads for a number years in China and we are late. I think for the fact that we are now approaching Asia with a friend the Chrysler is only going to strengthen I think the penetration of this market we are relying especially in the G brand as being together with Alpine and FIAT being sort of the drivers of that growth. I had the chance to review Asia Pacific for Chrysler last weekend. We see a minimum of half a million cars beings distributed to that region by 2014 for Chrysler and I think you need to add this to the type of volumes that we are going to be driving under the joint venture in China so I am hopeful. I think we need to see this thing take form as time progresses but it is not area that has been neglected.
Brian Johnson - Barclays Capital
Okay, thank you.
Our final question comes from Lora Lemka from Morgan Stanley. Please go ahead.
Lora Lemka - Morgan Stanley
Yes, good afternoon. I have got a question on Iveco. I was wondering if you could, maybe, talk a little bit about the pricing dynamics you are seeing in the European truck market right now, both in terms of Western and Eastern Europe, because I saw in your profit bridge that you actually had a negative net pricing impact, although it was quite small so I am just wondering how that actually developed in Q4 in particular? And also if that negative pricing impact actually includes raw materials? Thank you.
The answer is it does not include raw materials. The number that you saw on the slide is reflective of four months’ performance. It is untrue of Q4 of 2010 where pricing conditions have recovered both from Western and Eastern Europe.
Lora Lemka - Morgan Stanley
Okay. Could you maybe give a bit more detail on that?
Preferably not because I do not think any of our competitors are giving you that information out. This has been a call of concern for us as we worked our way through the slump in 2008 and 2009. Margins have been impacted by aggressive pricing by our competitors. The only thing I can tell you is that market conditions are recovering and we are seeing a restoration on normal trading conditions, a gradual restoration of trading conditions in the market.
Lora Lemka - Morgan Stanley
Okay, thank you.
If you can get information from other competitors, by all means pass them on to us. We would be delighted to take them to accounts.
That will conclude the Question-and-Answer session. I would now like to turn the call back over to Marco Auriemma for any additional or closing remarks.
Thank you, Bettina. We would like to thank everyone for attending the call with us. We look forward to following up with any question. Have a good evening. Bye.
That will conclude today’s conference call. Thank you for your participations. Ladies and gentlemen, you may now disconnect.
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