Fiat Chrysler Automobiles NV (FCAU) Sergio Marchionne on Q4 2015 Results - Earnings Call Transcript

| About: Fiat Chrysler (FCAU)

Fiat Chrysler Automobiles NV (NYSE:FCAU)

Q4 2015 Earnings Conference Call

January 27, 2016 10:30 AM ET

Executives

Joseph Veltri - Investor Relations

Sergio Marchionne - Chief Executive Officer

Richard Palmer - Chief Financial Officer

Analysts

Rod Lache - Deutsche Bank

John Murphy - Bank of America Merrill Lynch

Charles Winston - Redburn Partners

Massimo Becchio - Mediobanca

George Galliers - Evercore ISI

Martino De Ambroggi - Equita SIM

Jose Asumendi - JPMorgan

Brian Jacoby - Goldman Sachs

Richard Hilgert - Morningstar

Christophe Boulanger - Barclays

Monica Bosio - Banca IMI,

Rodolphe Ranouil - RBS

Operator

Good afternoon, or good morning ladies and gentlemen, and welcome to today's FCA 2015 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 Joe Veltri, Head of FCA-Global Investor Relations. Mr. Veltri, please go ahead, sir.

Joseph Veltri

Thank you, Rhonda and good day to everyone on today's call. As we have previously noted, in addition to covering the Group’s 2015 results, we will also present an update to our five year business plan which was originally presented in May 2014.

The presentation for both the earnings and for the business plan have been posted to our investor relations website. Today's call will be hosted by our Group's Chief Executive Officer, Sergio Marchionne; and Richard Palmer, our Chief Financial Officer. After presenting both the full year results and the business plan update, they will be available to answer your questions.

Before we begin, let me remind you that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included on page two of both presentations. And as always, the call will be governed by this language.

With that, I'd like to turn the call over to Mr. Marchionne.

Sergio Marchionne

Thank you, Joe. I just want to make a - sort of an opening remark before I pass it on to Richard who as usual will be doing most of the heavy lifting during this call. We have made a decision here to conform our guidance to what other industry participants has chosen as an appropriate set of parameter and in contrary to what we’ve done in the past what we have provided a phenomenal amount of granularity in the forecast.

We have decided to live in ourselves to what we consider to be sort of directional shift in the movements of the key metrics that govern this business. And I think it’s been done in order to provide sort of a very simple set of reference points within which we can manage the business and they can act as a point of reference and measurement in terms of the achievements that we intend to deliver certainly within 2016 and ultimately the completion of the 2018 plan.

So, I apologize for not giving you sort of all the glory details that go into the preparation of this forecast, but I think it’s better for all of us to stick to a set of simple parameters that will guide the business going forward. And on that notice - on that note, I will pass it on to Mr. Palmer who is going to try and explain what I consider to be a phenomenal year for FCA. Thank you.

Richard Palmer

Thank you and good morning, good afternoon to everybody. Before starting, I would like to remind you that the Group’s results presented today include those of Ferrari unless otherwise stated this is from a comparability with prior periods, the prior quarters of the year and our previously provided guidance. Under IFRS accounting standards for the 2015 financial statements Ferrari will be accounted for as a discontinued operation for 2015 and for prior periods.

Clearly, beginning from Q1 2016, FCA will no longer include Ferrari’s reported results. Ferrari will be having a – is planning to have an announcement of its results from February the 2nd and will comment on its results, then so we won’t be commenting on Ferrari performance during this call.

Looking at the Group’s results for 2015, we closed S well in excess of guidance. Worldwide shipments totaled 4.6 million units with the Jeep brand continuing its strong performance posting an all time record shipments number of 1.3 million units, up 21% year-over-year. As a result, Group revenues were up to €113 billion. Our adjusted EBIT was €5.3 billion with 4.7% margins, up from 3.9% last year and with all segments profitable in Q4.

Adjusted EBIT margin in NAFTA was 6.4% for the full year and reached 7.1% in Q4 in excess of our previously given guidance. Adjusted net profit was just over €2 billion for the year. In Q4, we recognized a one-off charge of €830 million due to the realignment of our US production portfolio which we will discuss later in the NAFTA section.

After giving effect to the January 2016 Ferrari spin-off, our net industrial debt stood at €5 billion and total available liquidity stood at €24.6 billion.

The key product launches for the year in 2015 included the commercialization of the Jeep Renegade on a global scale. The start of the local production of Jeep Cherokee in China of the new Fiat Tipo Sedan in EMEA and the new Fiat Toro mid-size pickup truck in Latin America.

In December, we prepaid the FCA US 2021 senior secured notes using cash on hand and this is another important step towards our plan to remove the ring-fencing provisions around our debt in the first quarter of 2016.

Our guidance for the full year 2016 is as follows; net revenues greater than €110 billion, adjusted EBIT in excess of €5 billion, adjusted net profit in excess of €1.9 billion and our net industrial debt will improve below the €5 billion level that it stands out today.

Moving on to Slide 5. This shows the operating highlights for the year. As I mentioned, Group shipments were inline with last year with EMEA up 12% and NAFTA up 9%. These increases offset declines in LATAM, APAC and Maserati.

Group net revenues were up 18% to €113 billion, up 6% at constant exchange driven mainly by the growth in NAFTA and EMEA. Our adjusted EBIT at €5.3 billion was 40% higher than 2014 and our margin was up 80 basis points to 4.7%. The adjusted net profit number was just over €2 billion, up 91% from prior year.

Net industrial debt was reduced to €5 billion, post the Ferrari spin-off from €7.7 billion at the end of last year driven by the €1.5 billion from the separation of Ferrari positive cash flows from operating activities and some favorable FX mainly due to the devaluation of the real.

Total available liquidity, as I said, was €24.6 billion post the Ferrari spin-off and included €2.5 billion of the syndicated to RCF which would increase to €5 billion of availability after removal of the ring-fencing provisions.

Turning to Slide 6, you can see the year-over-year changes in adjusted EBIT for the various segments of the Group of which I will provide details in the respective sections. Adjusted EBIT increased by €1.5 billion in the year and was driven by strong improvements in NAFTA, EMEA, Ferrari and the Components businesses, which more than offset the drop in Other segment.

Moving to Slide 7, we detail the reduction in net industrial debt from the €7.7 billion at December 2014 to the €5 billion. This reduction is comprised of positive cash flows from operating activities driven by improved EBITDA up to €10.7 billion and net of capital expenditures which came in at €9.2 billion for the year. There were positive translation impacts of about €0.7 billion and the €1.5 billion impact of the IPO and spin-off of Ferrari.

We’ll now move to the performance by region beginning with NAFTA on Page 8. The industry in both the US and Canada remained strong in 2015 reaching record sales levels while Group sales in NAFTA were up 7% year-over-year.

In the US, the Group sold 2.2 million vehicles, up 7% with market share up 20 basis points to 12.6%. The Jeep brand posted its best sales ever, up 25% from the prior year to 865,000 vehicles. The Jeep Grand Cherokee had its strongest sales in the US since 2005 and all other Jeep models reported all-time record sales in the United States.

Ram sales were up 5% to 494,000 units in the US making its best year since 2005 and the sixth consecutive year of sales growth for the brand. The Chrysler brand was also up 5% for the year and despite the slowdown at the end of the year for the changeover of the minivan.

Dodge brand was down 10% for the year due to the discontinuance of the Avenger model. Our fleet mix was substantially in line with prior year at 22%. US dealer inventory ended the year at 81 days of supply versus 76 at the end of September. The increase was primarily driven by product changeovers.

In Canada, the Group was the market leader reaching market share of 15.2% with a record vehicle sales of 293,000 units. The Jeep and the Ram brands both posted record annual sales.

In Mexico, we had our best annual sales since 2013 with sales up 13% to 87,000 vehicles. At the November Lost Angeles Auto Show, we presented the all new Fiat Spider, which will support Fiat brand expansion in North America and the Jeep Wrangler backcountry special edition.

Moving to Slide 9, NAFTA shipments were up 9% year-over-year to 2.7 million vehicles with growth in each market. Net revenues increased to €70 billion due to higher shipments, positive net pricing and favorable FX translation.

Adjusted EBIT more than doubled versus 2014 to €4.5 billion. Adjusted EBIT margin for the year was 6.4%, up 220 basis points year-over-year and 7.1% for Q4. The strong improvement in adjusted EBIT was primarily driven by volume growth mainly from the Jeep and Ram brands led by the Jeep Renegade and Cherokee, also by positive net pricing, which more than offset the FX impact of the Canadian dollar and Mexican peso.

This was partially offset by higher industrial cost due to vehicle content enhancements, as well as warranty and recall costs, partially offset by purchasing efficiencies.

NAFTA 2015 adjusted EBIT excludes the charges previously mentioned regarding the realignment of the production capacity to better align with market demand and the €760 million charge recognized in Q3 related to the change in estimate of recall campaign costs.

Moving to Slide 10, LATAM industry was down 21% versus 2014 driven by continued macroeconomic weakness with Brazil down 26%. Sales for the Group were down 30%. The decrease was larger than the industry decline as pricing actions were taken to protect margins. The Group remains the market leader in Brazil and increase its lead of its nearest competitor to 380 basis points. However market share in Brazil declined by 170 basis points to 19.5% due to strong competition and pricing pressures.

FCA also maintained its leadership in the Brazil A/B segment with a 22% share. Fiat Strada and Fiorino confirmed their leadership with segment share at 54% and 70%, respectively. The all new Jeep Renegade continued its growth trend reaching a 30% segment share in Brazil for the fourth quarter.

In Argentina, market share was 12%, 150 basis points down from 2014 mainly due to continued import restrictions. Stock levels in the region were at 39 days of supply inline with the end of September. The Jeep Renegade was named Brazil’s 2016 Car of The Year and in July the Renegade earned the title of Safest Brazilian Made Vehicle by Latin NCAP achieving five-star safety rating.

Moving to Slide 11, shipments in LATAM were down 33% with Brazil down 35% and Argentina down 18%. Other results, net revenues were down 25%. Adjusted EBIT was a negative €87 million for the year compared to a positive €289 million for the prior year, mainly due to the lower volumes.

Positive pricing actions more than offset higher industrial costs related to import cost inflation and the start-up cost of the Pernambuco plant while SG&A increased to support the Jeep Renegade launch costs.

Adjusted EBIT margin was negative 1.4% and adjusted EBIT margin in the fourth quarter was positive. 2015 adjusted EBIT excludes charges of €219 million, basically related – both related to devaluations in Venezuela and Argentina.

Moving to APAC on Slide 12. Industry increased by 5% with growth in all major markets except Japan. Group sales declined 16% due to the contraction in demand for imported vehicles in China as competition from local producers continued to intensify as well as the interruption in supply due to the Tianjin port explosion in August.

Sales in Australia declined 21% with demand impacted by price increases made to offset the weakness of the Australian dollar. Jeep continues to represent more than half of the Group sales in the region. Inventories at the end of December were down to 84,000 units from 99,000 units at the end of Q3.

In November, full production of the Jeep Cherokee began at our joint venture plant in Changsha.

Turning to Slide 13, shipments in APAC were down 32% resulting in a 22% decrease in revenues, mainly due to strong competition from local producers and the Tianjin port issue. Adjusted EBIT for the year was €52 million driven by the lower volumes, negative net pricing due to higher incentives in China and unfavorable FX impacts, partially offset by reduced SG&A.

Adjusted EBIT margin for the year was 1.1%. 2015 adjusted EBIT excludes charges of €200 million, primarily related to the Tianjin port explosion.

For the EMEA region, slide 14, the passenger car industry for EU28+EFTA was up 9% to 14 million vehicles with growth in all major markets. Group sales rose 11% to 988,000 units with sales in the EU up 14%. The Jeep brand set an all-time record in Europe with a 118,000 units sold, up 56% year-over-year.

Group share was up 30 basis points in the EU driven by growth in Italy, France, and Spain with Germany and UK flat. In Europe, Fiat continues its market leadership in mini car and small MPV segments with combined share of 27.7% in the year.

The new Fiat 500X achieved the leadership in its segment in Italy with market share at 18.1%. Inventories at December end were 62 days of supply versus 64 at end of September.

In Q4, Fiat launched the new Tipo compact Sedan in Turkey and Italy. The Tipo will be available in the rest of Europe from first quarter 2016. Light commercial vehicle industry in Europe was up 11% to 1.9 million vehicles driven by continued growth in all major markets. Fiat Professional sales were up inline with the market at 11% with a share of 11.3% and Ducato confirmed its segment leadership with 13% growth.

Looking at EMEA’s financial performance on Slide 15, shipments were up 12% to 1.1 million units with passenger cars and LCV shipments up 12% and 10% respectively. Adjusted EBIT improved by €254 million to €213 million for the year driven by higher volumes and mix, positive pricing actions in non-EU markets and some FX in the UK.

Industrial costs were impacted by stronger US dollar for imported vehicles, partially offset by cost efficiencies. SG&A increase was due to the commercial launches of the 500X and the Renegade.

Turning to Slide 16 on Maserati, shipments were down 11% or 32.5000 units with China down 28% and North America down 14%. Net revenues were down 13% to €2.4 billion, primarily due to decreased Quattroporte volumes resulting from weaker segment demand in the U.S. and China.

Adjusted EBIT decreased to €105 million due to the lower volumes, and unfavorable mix Adjusted EBIT margin was 4.4% for the year.

Moving to Slide 17, the Components businesses, Magneti Marelli had a good year with net revenues up 12% to €7.3 billion. Adjusted EBIT was up 40% to €321 million driven by higher volumes and cost containment actions.

Adjusted EBIT margin improved to 4.4% versus 3.5% in the prior year and reached 5.7% in the fourth quarter. Comau also had a solid year with net revenues were up 26% to € 2 billion and adjusted EBIT increased 20% from 2014 to €72 million.

Teksid net revenues were down slightly to €631 million. Adjusted EBIT was €2 million for the year compared to a €4 million loss in 2014.

Slide 18 provides an update on some key events as part of the spin-off of Ferrari, Ferrari common shares also being on trading in Milan on January the 4th. The all new Chrysler Pacifica was revealed at the North American International Auto Show in January. It is based on an all new platform with class-leading power trains and later in the year it will be available as the industry’s first hybrid minivan with an expected rating of 80 miles per gallon.

The all-new Fiat 124 Spider will make its European debut at the upcoming Geneva Motor Show and it will be available in dealerships from Q2 in Europe.

And now move to Slide 19 to review our expectations for full year 2016 market demand by region. For NAFTA, we expect the industry to be flat to slightly higher between 21 million units and 21.5 million units. The LATAM industry is uncertain and we expect it to be flat to down again this year between 3.6 million units to 4.1 million units reflecting a continuation of a challenging trading conditions in Brazil.

In APAC the passenger car industry for key markets where FCA operates is projected up slightly to approximately 29 million units. And for the EU, the industry is expected to be slightly up at between 16.1 million units to 16.6 million units.

Finally, turning to Page 20, the Group indicates the following full year 2016 guidance. Net revenues, as I said before, €110 billion or higher, adjusted EBIT in excess of €5 billion, adjusted net profit above €1.9 billion an improvement in net debt below €5 billion.

This guidance is based on expected continued improvement in NAFTA and EMEA margins with LATAM and APAC seeing improved results in the second half as a result of local production of new Jeep products and Maserati also improving in the second half following the launch of the new Levante. CapEx is expected to be inline with 2015 between €8.5 and €9 billion.

Thank you and with that, we will proceed with the presentation of the update to our business plan.

Sergio Marchionne

Thank you, Rich, and I am going to start – I am going to give you a brief introduction to the plan. And we want to start with the Slide number 3 which includes the quotation of a statement that was published by Mark Twain a number of years ago. This was introduced in the pitch in the last couple of days and it follows the announcement that was made by Max Warburton that he will be leaving this industry after 16 years after spending 16 years trying to understand the car business.

And in connection with his departure he has issued the longest dear John letter I have ever seen in my life, 422 pages, what is described or his call for the demise of this industry in a very negative view on the sector going forward.

Apart from the fact that Max has probably outlived the most automotive CEOs in this business. I think he is the longest serving non-CEO, CEO that I’ve ever seen in the sector. I think, over the last few years, we have had heat of exchanges and diametrically opposed views about how this business will evolve, I think it’s been done, it’s been done well.

I think we are going to miss Max certainly out of FCA he has provided a good sparring partner for the development of our strategy. We do wish him the best. But, just as a general remark about the type of literature that is not coming out, not only from analysts, but also in the press about the negative side of this industry.

We are not inside FCA of the view that this industry is facing an impending demise and I think that part of this presentation today is designed to provide you with some comfort that we have appropriate or adequate controls over the strategic development of those business that we do feel that we will be able to navigate through these rough waters and that we will come out of this process as better organizations.

And I made the comment not just on behalf of FCA but I think on behalf of the industry which I think is unfortunately been the subject of some severe criticisms in some cases justify.

But I think that ultimately trying to move the discussion the way from the concept of auto making, trying to re-pitch our future as being involved in the transportation business in the broadest sense of the term we doesn’t do much service to the sort of needs and objectives of the sector that it faces today.

I think, even if I were to assume for a moment that this new world that we are describing which is a much wider and much more encompassing world of transportation were effectively to materialize, we need to be able to cross the desert.

We need to get it to the other side, I think the purpose of our presentation here is to give you the comfort that you need in understanding how FCA intends to travel to that desert and the fact that at the end of that process we will be in a much better position that we are in today.

I think the last – less than two years since we pitched the plan and if I can just move for a second to Slide number 4 and then I’ll give it back to Richard for comments. But, we have been able to accomplish a lot in less than two years. We talked to you again on the plan back in May of 2014.

We took you through a one day marathon of the development of the brands and the development of our businesses across the four regions. But in the interim, we have been able to accomplish a lot we’ve unlocked, finally, we have unlocked the value of Ferrari out of FCA.

We have been able to move margins in NAFTA up to levels that we had effectively pitched for 2018. We were able to move EMEA to a profitability in the last quarter of EMEA which made over €100 million as an indication of the intensity with which that organization is reacting to the challenge.

Jeep has had a phenomenal year. We are well in excess of 1,200,000 cars more than 200,000 more than we sold last year and as we deploy the architectures globally, we will see this number increase and Richard will explain to you that we’ve targeted a number in excess of 2 million.

The mandatory convertible went a long way in terms of providing comfort on the capital side where we are able to lock in about €3 billion worth of capital as a result of that issuance in 2014. And I think the thing that people keep on ignoring is the fact that as of today, we started 2016 with a €5 billion number, which is significantly ahead of any internal expectations that we had for what we would be at the end of 2015.

On the negative side, obviously Brazil that’s come out of less fielding left most of us steering at a set of a very uncertain market conditions notwithstanding that we continue to be profitable in the region. I think we are heading now levels and it’s very difficult to call the bottom of this market. But I think 2016 will tell a lot about the speed of recovery of that market.

China, again has also come out on a less field for a variety of reasons not only the fire in Tianjin but the significant shift in market conditions as it impacts premium luxury goods has slowed down by necessity and development of both the Maserati and the Alfa Romeo.

Branding on the Alfa Romeo side is required a slowdown of the rollout of the development plans for Alfa and Richard will take you through that, but fundamentally, we conform the direction we confirm the development of the architectures and the models that we had in the original plan is going to take us longer to get there because our primary area of focus for the development of Alfa is not going to be NAFTA and EMEA and I think China will play more of a secondary role in the development of that brand.

The other thing that’s obviously happened and was absolutely unforeseen was the development of a much greater degree of consciousness when it comes to emissions and the regulatory environment, some of them which were caused by the industry, some of which I think a result of something which is been brewing within the system especially in the EMEA side now for a number of years.

With all these things we will require resolution over the next three or four years and it will have cost which we have incorporated in our plan.

But, when I look back at the last two years, I feel comfortable that we have been able to create an organization that has got a much more defensive, a much more durable capital structure and as you will see, when we go through the proposed realignment of our manufacturing footprint in the US that we’ve taken some relatively decisive steps in ensuring that we have the right manufacturing framework to deal with expected permanent changes in demand which we have now seen developed over the last two years.

So on that note, I’ll pass it on to Richard. Richard will take you through the next set of slides. Slide number 5 and I’ll make on brief comment about the achievement of the 2014 and 2015 plan. Those things are not inconsequential.

Our travel to 2018 was a relatively well articulated five-year program that had milestones, tangible milestones of achievement of financial results. Those continue to be the key drivers of this plan and the reformulation of the targets going forward. We’ve upgraded the guidance on all the key metrics.

I know that sooner or later, somewhere in this phone call there is going to be somebody who is going to asking the question about where is the 7 million car number that has been – that was presented back in 2014 and the answer is fundamentally it doesn’t matter. It doesn’t matter because, the 7 million number was a number that was substantiating or supporting a view of markets as we saw them back in May 2014, we have readjusted all of our plans to reflect current market conditions.

We have seen the Brazilian market which was expected to perform much, much better, lose over 1 million cars in less than 18 to 24 months which has had pretty significant impacts on our volume ambitions. So we have recast all those. We are going to stay away going forward from enunciating goals that relate to volumes because the real key issue for us is the achievement of the financial metrics that you see on page five and on that note, I’ll pass it to Richard.

Richard Palmer

Thank you. So, on the forward-looking part of Page 5, we have basically given you a look in the column which says 2018 May 2014 plan at Ferrari what we look like in terms of our original plan objective for 2018 excluding Ferrari and the impacts of the capital markets transactions at the end of 2014. So you can see that compared to that comparable metric we stated.

Now for 2018, we are looking at revenues being up at €136 billion for the 2018 period. Adjusted EBIT in a range between €8.7 billion to €9.8 billion with margins at the same level of those with the plan ex Ferrari. Adjusted net profit of €4.7 billion to €5.5 billion, up from the restated number and a net cash number by the end of the plan period at between €4 billion and €5 billion.

Clearly, we are ahead of our original plan at the end of 2015, our original plan as you remember said that we would be at around €9.8 billion to €10.3 billion of net industrial debt in the period through 2016. So we are about €5 billion better. And so that is reflected.

Going forward, €1 billion of that is performance and we are looking at the end of the plan and bringing in another €1.5 billion, €1 billion to €1.5 billion of better performance. That to bring us up to a €4 billion to €5 billion cash number by the end of the plan period.

I will talk a little bit about that in the next few pages. So Page 6. Basically it talks about how we have clearly been focused on the de-leveraging of our balance sheet. We’ve undertaken a series of transactions since May 2014 the impact of which have been just under €4 billion on our net industrial debt number.

In addition, this has also allowed us to act quickly regarding the repayment of the FCA US senior secured notes in April and December of last year and so, clearly we are moving forward with speed to remove the ring-fencing provisions in our current debt agreements in the FCA US area so that we can move towards a unified financing platform from the second half of 2016.

Moving on to Slide 7 and in this following slide we are going to talk a little bit about the status of each region and our margin – our market and margin expectations. Sales have been stronger in NAFTA than our original plan and we are forecasting industry volume levels in 2015 – in 2016 to remain at what we consider a peak level. But we do see the industry remaining strong throughout the plan period for NAFTA at around 20 million units with US market sales remaining above 16 million through 2018.

We’ve seen a trend of low fuel prices that we expect to continue and this is part of the reason and that we are seeing also a shift in market demand away from passenger cars towards trucks and UVs.

This is obviously been a part of our ability to achieve margin expansion faster than we had envisioned our original plan. And so, in order to continue to capitalize on this market shift, we have made some plans to shift some of our production capacity to be able to – to address more fully the demand of truck and UV going forward.

So, in terms of that, our impact – that impacts in our margins. Our original plan had adjusted EBIT margin range of 6% to 7% by 2018. We’ve already hit 6.4% in 2015 and we are increasing our margin expectations for the NAFTA region to be around 9% by 2018.

If we move on to Slide 8, on LATAM, we expect the market uncertainties to continue in Brazil and the industry in the region to reach around 4.5 million units in 2018 with Brazil recovering but not to the levels that we had expected in our original plan to around 3 million units. Despite the challenges in the market, we have been profitable in the last two quarters of 2015 and have been taking pricing actions to offset inflation.

Going forward, the key to our strategy remains the Pernambuco plant and our ability to capitalize on the Jeep brand introduction into Latin America. By the end of this year, we will introduce the third vehicle into Pernambuco to add to the very successful launch of the Jeep Renegade and the current launch of the Fiat Toro Pickup from that production plant.

We have decided to moderate our margin expectations given the market performance in LATAM. So instead of more than 10% target, we are looking at margins greater than 7% by the end of the plan period, very much sustained by the Pernambuco products and the shift in mix and profitability that the new products from that plant provides.

Moving to Slide 9, Asia-Pacific, we have clearly impacted significantly given our import structure at present by the import segments in the Chinese market. And this has significantly slowed down our volumes and we’ve also been hit by competitive pressures obviously from local Chinese brands.

Outside of China, also Australia has been impacted by a much weaker Aussie dollar which – for which we have priced but that’s also impacted negatively our volumes. Obviously, the key for us in Asia-Pacific is to quickly localize the Jeep brand which we have been working on.

We have started production of the Jeep Cherokee and we are working towards two more jeeps during 2016. And ultimately we will also be launching the Alfa Romeo brand, but we’ve looked to recadence that launch based on the pressures in the premium segment and the import segment of the Chinese market to refocus it principally on EMEA and North America in the short-term.

Given all of that, localization is the key to Asia-Pacific and Jeep is the focus. We expect to become a 500,000 unit brand by 2018 from our local production sites and we consider a 10% plus margin target is still a reasonable target to set for the Jeep brand and the localized footprint.

Moving to Slide 10, EMEA. The recovery in the region that we have been seeing slowly but surely we forecast to continue through 2018 with a market in the EU to reach around 17 million units by the end of the plan period. From a performance standpoint, our margin improvement is ahead of schedule. Thanks to the strong performance of the new products like the Jeep Renegade, the Fiat 500X.

And so, our guidance for EMEA in terms of margins has been revised upwards from 2% to 3% in our original plan to an excess of 4% by 2018 and obviously we are very focused still on continuing to increase the volume of Jeep brand and also to maintain a very tight control on the cost profile of the EMEA business.

Moving to Slide 11. Maserati, the key really for the next – the short-term of Maserati is the launch of the new crossover, the Levante. So that is coming in the second quarter of this year.

That vehicle would allow us to address the largest luxury segment worldwide. An important segment in China and in the US, we have the opportunity as we work towards also the Alfa brand launches to strengthen our network presence in these key markets. And so we expect to bring Maserati to 15% margins by the end of the plan as was our original target in May 2014.

As regard to components businesses, I think driven primarily by the improvement we are seeing in Marelli margins. We have revised our expectations from a 4% to 5% margin to an excess of 6% driven by continued success of some of the more profitable businesses within Marelli.

Moving to Slide 12, we talked a lot about Jeep and clearly Jeep is the bedrock of this business plan. We originally had a target to produce and sell more than 1.9 million units in the May 2014 plan. We are revising our upwards to be in excess of 2 million by 2018.

This is on the back of a strong performance since 2009 across all the products we’ve launched under the Jeep brand and in all regions. Brands have grown over 250% to 1.2 million units, significantly outpacing the global UV industry which grew by over 150%. But obviously it’s a growth segment, so this is a very important focus for us.

Sales in Jeep’s main NAFTA market grew by nearly 250% between 2009 and 2015. And sales in EMEA and APAC both reached over 100,000 units in 2015. On a product-line basis, each model from the Wrangler the compasses more than double volumes since 2009 and global Cherokee sales reached 233,000 units in 2015.

So, I’ll move on to Page 13 for EMEA, the commitment to the overall brand remains in place as does the product strategy. We are looking at – as I mentioned before, a different cadence to our launches given the tough situation of the Chinese premium and import market and also because of some of the restrictions around imports. We are shifting our focus initially to be primarily on EMEA and NAFTA and retiming some of the product introductions which will also allow us to reduce the CapEx relating to 2018. And obviously the first launch of this brand is coming shortly with the Julia.

Now I hand over back to Mr. Marchionne. Thank you.

Sergio Marchionne

Maybe trying the – the next couple of slides. The first one was deals with the assembly plant loading from NAFTA. This is very much a US-centric view. We have seen a significant shift in the product mix of cars being sold. Part of this is been driven as Richard has said by continuing low prices which certainly in terms of our forecast period we do not expect to see fundamentally change directionally.

I have said this before and I continue to repeat here that I have always viewed the development of our portfolio in the United States as being already driven by the regulatory environment and this by the need for all of in the market to achieve the 2025 standards and to achieve the greenhouse gas emission targets that we have all signed up to. And so, one of the things that we have seen, although the actual absolute number is obviously from 2009 and 2015 have gone up.

There has been, in our view, a permanent shift towards UVs and pick up trucks and we have seen, certainly in terms of our ability to meet market demand some severe restriction in terms of the dexterity of our manufacturing system to accomplish that end.

And so, one of the things that we have decided to do is to effectively defocus from a manufacturing standpoint in the US to defocus the passenger car market. There are two cars in particular the Dodge Dart and the Chrysler 200 which will run their course. But without creating additional capacity in the United States, we need to re-utilize those plant infrastructure to try and deal with the development of both Jeep and the Ram brands.

So there will be a number of things that will be put in place in the next 18 months, things that have been agreed and detailed effectively. We draw the current Chrysler 200 and Dodge Dart from the marketplace over for a long period of time during which we will be continuing discussions with potential partners that will be able to allow us to access that architecture an effectively provide us the product from their facilities that will allow us to continue to cover the market.

The important thing is that as we transition to these new vehicles, the new Wrangler that’s coming out of Toledo in 2017, the continuation of the Cherokee, which as you well know is essential to the development of the brand especially in NAFTA.

These things happen with us – without us losing any volume in the Jeep or the Ram brands. These are things which are fundamental and I think that they have obviously had some cost in terms of the achievement of the objective, but it is a cost that is managed and certainly justified in terms of the margin generation associated with the shift.

So we continue to work with our partners, hopefully in the relatively short period of time, we will be able to detail the cooperation plan going forward. I think the important thing for us to reinforce is the fact that the Wrangler in its new home in Toledo will have additional production capacity available to try and meet demand on a global scale.

And I think it’s important for us to have found the home for the Grand Wagoneer family both the Grand Wagoneer and the Wagoneer in whatever shape they come and then we find that space without creating additional production capacity. I think we’ve been able to accomplish that as a result of the realignment decision that we’ve made. I think we have taken a one-off charge in 2015 to account for some of the costs associated with that realignment we think that the cost that will justify the view of the significant expansion of margins that we will be able to obtain from the US.

Now, I am not going to spend a lot of time on Page 15 which deals with the regulatory compliance plan in terms of greenhouse gas on a global scale. I think we all know that there is directionally a desire to bring down CO2 emissions.

I think, as I read some of the reports that have been issued in connection with FCA that appears to be some concern that we do not have adequate technologies to try to deal with this.

So I am going to spend a couple of slides trying to reassure you that all the things that are required to try and make the numbers are in fact in place and available and I won’t take you through all these items that are listed on Slide 15, but the introduction of electrification in our world is not avoidable and I think that we are going to be seeing applications on a mile hybrid for the first time in 2018 with the introduction of the Ram pickup truck.

You will see, in addition to hybrid vehicles, which were already launched by Chrysler back in 2008 prior to the bankruptcy.

A continuation of the development of both hybrid and plug-in hybrids throughout the plan, I think the objective obviously is to optimize and leverage the know how the Group across its regions to ensure that we achieved the least cost to the compliance scheme that we can. And if you look at page 16, there was unfortunately a rather misinformed article that came out a few days ago that dealt with our greenhouse gas compliance.

And I think one of the things you can see from the chart is that, as a result of the combination of what I consider to be economically sound acquisitions of credits and the rollout of technologies that were well ahead of the curve in terms of achieving the targets that we have throughout the plan.

There is – I will make the point here that it appears to be sort of a negative view that we’ve accessed purchase credits as a means of making the targets. The reality is that we always run numbers internally about the possibility of avoiding the rollout of technology if we can purchase the credits in a more reasonable price and I think that analysis will continue. Going forward, I think it’s essential that economically base decisions are made in terms that a rollout technology in a marketplace especially when margins are being threatened.

And if you look at Page 17, this is only designed to give you an idea of how at least three of the significant vehicles that we have in our plan will make the numbers and you can see those from the chart that these vehicles really have to meet certain targets based on the footprint of the vehicle and therefore the larger the vehicle which is one of the reasons why people keep on favoring these in terms of the development is because there is more latitude involved in terms of achieving the target.

But as you can see, both the current Ram 1500 which today is compliant with 2015 standards will and its next incarnation when the truck is launched in 2018 meet both the 2018 and 2022 targets. And that’s same is true of the Wrangler’s two other Town and Country.

And I think it’s important to keep this in mind. The house has been busy and it continues to be busy on optimized methods to achieve the targets that we’ll continue to do so and it will do this in a most cost-effective way.

One word on the European side. I think that after the advent of the diesel gate for a lack of a better term, FCA is undertaking a pretty thorough review and a thorough audit of its compliance schemes and I think we feel comfortable in making the statement that there are no defeat mechanisms or devices present in our vehicles. I think the car has performed in the same way on the road as they do in the lab under the same operating conditions.

This is an area of heightened concern and so we’ve put in, we have established now as part of our compliance mechanism training for all emission calibration engineers. We do have a best practice program to ensure that we calibrate and certify properly and I think that we will just to make sure that the system is not going after reservation and we will carry out random checks of our fleet to make sure that we achieve compliance.

And on that note, I’ll give it to Richard who is still punching away numbers to trying to reconcile his targets on Page 19. Go ahead Richard.

Richard Palmer

Thanks for the transparency to hold on listeners. So, the key takeaway is on Page 19. We have, basically confirmed our key initiatives as per our plan remain in tact. There are no significant changes in the strategy.

I think we’ve made some important progress towards deleveraging and strengthening our balance sheet both through operating performance and through that the transactions we have – and we have completed regarding the M&G convertible and Ferrari. As a result, I think we feel that our plan is somewhat derisked in that regard.

The targets, despite the exit of Ferrari have been revised upwards and in particular, I think we feel confident that going forward we can generate positive cash flow in each of the remaining three years of the plan to get us to the €4 billion to € 5 billion net cash target that is obviously front and center for us by the end of 2018.

Sergio Marchionne

Thanks, Richard. Before we turn it over to the question and answer, I just want to point out that, as Ferrari is now a publicly traded company, as Richard mentioned before, they are going to publish and release their results here around February 2 and therefore we would appreciate if you would hold any questions you have on Ferrari in this call in order to allow them to publish their results. And with that I want to turn it back to Rhonda and we will begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take the first question from Rod Lache of Deutsche Bank. Please go ahead.

Rod Lache

Hello everybody. Thanks for taking my question. I had a couple of things I wanted to ask. One is just at a very high level. There is a lot of discussion in the industry about spending in preparation for new mobility paradigms and it’s expected by a lot of people to require autonomous driving and investments in transportation platforms and I think you alluded to some of these comments in your prepared remarks. Ford actually mentioned that their investments are – one of the reasons why their North American margins will be down in 2016. So, if you can just maybe give us your sense of what the house view is on mobility how that’s going to change, whether you need to invest in that and whether that’s contemplated in this plan?

Sergio Marchionne

Well, the answer is that it is contemplated in this plan and I think – I think we need to be very, very careful about describing sort of mobility paradigm is that, sort of an unclear economic context and an unclear economic outcome. I am absolutely convinced that all the things that have been talked about by other industry participants will effectively materialize over a period of time and I am absolutely convinced that the relevance of the automaker in that process is not going to be as key as it has been historically in terms of the development of the automotive sector. We are going to have to rely by necessity in efficient supplier base and there is one which continues to break barriers and continues to provide solutions which are going to be available to us and to others. And so, one of the things and I raise this issue just and I am not sure that it can be debated but, one of the questions that we all have to ask ourselves is what is the value of a brand in the presence of autonomous driving if effectively at the end of the day, it is not the driver that effectively exercises control and the way in which that reflects itself in margins and positioning and the relevance of the brands in the marketplace is an unknown issue. And so we need to be very, very careful that we don’t spend – we have done, by the way, this industry has done a tremendous amount, if you look at its – even its recent past, it has always looked for ways to sort of defocus its primary function of making cars and making them relevant in the marketplace by looking for ancillary side solutions and somehow we will change the paradigm. We have done this with rental cars. We have owned rental car companies. We have all owned finance companies, we have all owned a variety of things historically that is tended to defocus the actual objective of making a car and making it relevant in the marketplace. So I accept the challenge and I think we are on the page and I think the capital program that Richard talked about encompasses an adequate amount of spending to explore and make that technology and relevant in the cars that we sell. I do not think that between now and 2018, that technology is going to fundamentally change the paradigm. I do think that the capital that’s required to make us relevant post 2019 is in the plan and I think it will defend the business going forward.

Rod Lache

Okay, thank you and just in terms of the now through 2018 plan, could you give us a little bit more insight into the magnitude of this capacity change. How much additional capacity do you think you can come up with for Jeep and pickups, you are still selling 22% of your business in cars, does that get diminished significantly? And do you subscribe to the view that just generally, margins are going to come under increased pressure within NAFTA. It sounds like you do subscribe to the view that volumes are peaking.

Sergio Marchionne

No, I do subscribe to the motion that we are looking at top-ish volumes today. The rate of adjustment is unknown. I also know that there is a phenomenal amount of allowed amplitude and the isolation of volumes. I mean, if we went to 16 million, it’s not going to be the end of the world in terms of size and I think that we will all adjust to reflect those market conditions. It is my experience at least in the last six years that – than in the majority of cases there is adequate price discipline in the marketplace that then nobody has done anything which I consider to be irrational and out of bounds in terms of managing their pricing expectations. But, to answer your question Rod, I think it would be improper for us to try and talk about how much more volume we will get out of Ram and how much more we will get out of Jeep as a result of the realignment, because, we have – we are structurally constrained in both pickup trucks and Wranglers and those are the single largest drivers of the shift in the manufacturing footprints in the US. For purposes of this analysis, the partnered vehicles that will replace – over time that will replace the passenger cars that are currently in production in the US, we have assumed to have negligible margin contribution to the overall plan. So, even in the absence of those vehicles, we are not going to drastically change our forecast and I think we contain any adjustment associated with that from – within the numbers that we’ve published. So I don’t – I would defocus, if I can make a suggestion, I would defocus everybody from focusing on absolute numbers of cars being sold. I am not trying to set up a system to acquire an abnormal amount of share. I just think we need to be physically present and active with proper supply in the key segments that are relevant to FCA which is our pickup trucks and UVs through Jeep.

Rod Lache

Great. Thank you.

Operator

Thank you. We will take the next question from John Murphy of Bank of America. Please go ahead.

John Murphy

Good morning. Can you hear me?

Sergio Marchionne

Yes.

John Murphy

Just if I can follow-up, just first off on Rod’s question, because it’s mix shift in North America, it seems like it’s such a critical swing factor in your plans going forward. Can you just – if you could sort of tell us what your current capacity utilization is on pickups, Wranglers and UVs in North America? And also, I know you are not going to give an exact number on what percent of your total mix will be trucks and UVs going forward, but I mean, is there any sort of asymptotic limit or is this the kind of thing that could potentially which is going to a 100%?

Sergio Marchionne

No, nothing could ever go to a 100%. I mean, I understand the suggestion. Let me – in terms of capacity utilization, we have debottlenecked our pickup truck plan to the extent that we can and one of the unfortunate consequences of the prior – of prior management arrangements is unfortunately a truck plant not been kept after a relevant manufacturing standard and I think it requires as a result of its current state would require a substantial amount of investment. But, I’d give you a couple of data points which I think are – make our life somewhat uncomfortable. We are running flat out today out of Toledo. We are running effectively nearly seven days a week with almost no shutdown at the Wrangler plant to try and satisfy demand and we got nearly a similar arrangement in our truck plant. So that is unsustainable even if I use a harbor definition, we blown to the 100% mark consistently now, probably the last five or six years and I think that needs to be adjusted. So, the capacity that’s coming on stream to deal with the new Wrangler and with the new pickup truck will avoid the excessive utilization of that capacity. It’s just – it’s unhealthy and I think it’s causing some substantial manufacturing inefficiency because of the speed at which we are driving that bus. Without giving you numbers, I think that, whatever we’ve put in place will deal with demand and unmet demand as we see it today.

John Murphy

Okay, and then just as a follow-up as we think about the mid-term review on CAFÉ and emission standards in the US in 2017, I mean are you expecting any changes there? I mean when those initially put in place gas was around $4, we are now sub $2, it seems like there is a lot of discussion around potentially easing those standards. Could you get a lot of help from that? And also as you think about that and implementing hybridization whether it be irregular hybrid of plugging in your fleet going forward, what percentage of your fleet do you think it ultimately be hybridized or electrified?

Sergio Marchionne

Well, look, in the medium-term I’d say more than half of our fleet in the United States is going to be in some form of hybrid. Calling the right time for the conversion is difficult to tell. I mean, if you include 48 volt systems, Bell Star Generators as a solution that’s going to occupy the majority of the pickup production in the United States anyway. So we are going to be marrying hybridization as a way of life relatively quickly. In terms of the mid-term review of the standards, I think it will be improper for me to express our views on this on this call. There is not a single doubt that a relaxation of the standards will be helpful. But I think that, we are talking about a relaxation of the standards only in terms of timing and not necessarily of direction of quantum. So if it does come, I think you will alleviate some of the concerns that we have in terms of capital. But it will not maybe a sure go away. I think those fix is our structure and they are needed over time. Interventions in terms of time are more than welcome that I don’t think we can change the direction.

John Murphy

Okay, and then just lastly, as we look at the plan up to 2018 or maybe even beyond, would you contemplate any other asset sales or are there any other actions as part of that business that you think you can monetize going forward?

Sergio Marchionne

The answer is yes. There are things that I can monetize. I mean, including my office chair, the question is do I need to do that. And the plan is calling for a €5 billion cash holding by the end of 2018. I think you guys should be asking for distributions and that point of time is opposed to my – worrying about monetizing assets.

John Murphy

And we hope leap along to your seat. Thank you very much.

Operator

Thank you. We will move to the next question from Charles Winston of Redburn Partners. Please go ahead.

Charles Winston

Yes, hi, good afternoon. Charles from Redburn. Couple of quick questions if you don’t mind. Just firstly, I guess, in terms of the revision to the 2018 targets, would you have made the revisions where you reporting in dollars? In other words, when you set the targets in 2014, I think the dollar was about 1.36 to the euro, it’s now about 1.09. You’ve seen about 718 or roughly 700 million of FX gain on translation in 2015 which is actually bigger than the upgrade you’ve made in your EBIT. In other words, is this basically an FX move or is this something more fundamental than that? And I guess the second question is…

Sergio Marchionne

Guys are devious.

Charles Winston

The second question is just in terms of the OCO2 strategy. Purchasing credits is surely a risky strategy, because as others potentially need to start buying credits as well. GMs brings to mind, particularly when the flexible credit system disappears, the danger is the price of credits goes on. So, you all going to have to comply in some shape or form and I just was thinking about the business risk here. Could you comment from that at all and in particular – in model year 2014 you’ll tailpipe emissions actually went up slightly from 344 to 346 gram miles. So, just really just think about the business risk here in terms of that strategy. Thank you.

Sergio Marchionne

Yes, by the way, I read the same article you read on the tailpipe emissions and I agree, we got a number is as reported. What it doesn’t do is, it doesn’t tell you the percentage by which the number has been coming down over the last three or four years and our starting point. Just as a general remark about your fear about the pricing of credits, and the fact that – it may become prohibitive in terms – to acquire them in terms of compliance. I made the comment in my remarks that as long as we find an economically justifiable model, that justifies the price that we pay, we will take it over the rollout of technology in the vehicles. But it’s subject to an economic model supporting the acquisition and we have walked away from at least in the past, not recently, but we have walked away from potential offers what we thought that the request was outside of the boundaries of our economic model. So that’s not the issue. But, and so we won’t buy them, which means that we just rollout technology instead and that’s life and think that will impact all of us across the whole industry as the pricing equation adjusts on credits. That’s the first issue, the second one which, I think it is a devious question. I think that we would still be revising – we would have still been revising our targets going forward regardless of what our reporting currency was.

Charles Winston

Okay, even – forgive me, even though you’ve got about €700 million of gain so far, just looking at the translation effect in 2015?

Sergio Marchionne

Even with those in.

Charles Winston

Okay. Thank you.

Operator

Thank you. We will take the next question from Massimo Becchio of Mediobanca. Please go ahead.

Massimo Becchio

Yes, good afternoon. Couple of questions from my side. I am trying to understand what your 2016 EBIT margin could be in NAFTA. Number of differences with 2015 new label contract and recall provisions on the negative side, minivan, tooling and dealer discount on the positive side. All of those factors were already in play in Q4 2015 and you had a 7.1% margin. So, is the 7.1% a good indication of what could happen in NAFTA in 2016 or are there any other forces?

Sergio Marchionne

The number is greater than it was for 2015.

Massimo Becchio

Okay, but still below the 8%, 9% target for 2017. Sorry, for 2018, so this should be a kind of progression going there.

Sergio Marchionne

It’s a transition year to the 2018 target. Yes.

Massimo Becchio

Okay. Second question if I may, what is your capacity utilization in Italy or in Europe right now?

Sergio Marchionne

I am going off the top of my head, but on our basis it’s about 72%, 73% on a combined basis across all plants.

Massimo Becchio

Okay. Last question, there were unions in Italy saying that the Julia production could start in March. Can you give some indication on when we could expect this car coming to the road?

Sergio Marchionne

Q1, it will be starting to get produced in Q1.

Massimo Becchio

Okay. All right. Thank you very much.

Operator

Thank you. We will take the next question from George Galliers of Evercore. Please go ahead.

George Galliers

Thank you for taking my questions. First one, you made great strides on net debt, and for 2015 you came in significantly ahead of guidance, you now forecast net debt less than €5 billion this year improving to net cash of €5 billion in 2018. Can you give some indication on the cadence of the improvement in net debt and how much improvement we will see in 2016 versus 2017 and 2018?

Richard Palmer

Yes, George, well, basically, as we’ve guided, we are going to generate cash in 2016. I think it’s a bit early to give you any more precision in that given obviously there are some – there is some uncertainty about our Latin America position in particular. But I think we are confident it’s going to be a positive number. The cadence of cash is biased towards 2017 and 2018 though, because especially as we go through this realignment of the production capacity in NAFTA, that is going to help us obviously to get a further increase in our NAFTA margins and improved cash flow as a subsequent – in subsequent to that. So, I don’t want to get into giving you an overly precise numbers that it would be falsely precise. But I think what’s important is that we will cash positive each year, this year we are going to be cash positive which is a continuation of a very positive performance also in 2015 and this is reducing the level of risk that we had an original plan where obviously a lot more of our cash flow was bunched into 2018.

George Galliers

Thank you. And then, secondly, just on NAFTA where you’ve made similarly big progress on the NAFTA margins. The plan in place to further 2.6 to some margin expansion, given the comment that 2015, 2016 as seen as industry peak years. Could you maybe shed some light on what you assume for pricing at a market level and we’ll say for FCA in NAFTA between today and 2018?

Richard Palmer

Well, I think the key for us is, we are not depending – we are not going to depend on pricing – price increases across the market. We expect the pricing to remain relatively benign and disciplined as it has been. We think that the saw is going to be strong. We’ve been prudent about expectations around 2018 I think to be as really as to get possible in terms of sales. We don’t expect any significant degradation in pricing. I think our pricing specifically, obviously we have some important vehicle launches in the next three years. The minivan being the first coming now. The new Wrangler which we mentioned earlier the new pickup and those will give us I think some pricing opportunity. But we aren’t basing our performance through 2018 on unrealistic pricing expectations.

Sergio Marchionne

One correction to the question that was asked on capacity utilization in EMEA, it’s 85% in 2015 using harbor.

George Galliers

Great. Thank you very much.

Richard Palmer

Thank you.

Operator

Thank you. We will now move to Martino De Ambroggi of Equita. Please go ahead.

Martino De Ambroggi

Thank you. Good afternoon and good morning everybody. The first question is on 2018 targets. Just wondering what are the CapEx implied in the guidance for 2017 and 2019? And, what is a rough indication of the R&D net capitalization effect and if possible so for 2015?

Richard Palmer

So, I think the positive thing is that we – as I said, we are going to be generating cash through the plan period and we don’t expect any significant spikes in CapEx going forward. I think, therefore, we have some benefit of the changing cadence of the launches in Alfa which will help us. And so, I think there is going to be some changes, some increase in CapEx, maybe in 2017, 2018 compared to current runrate but nothing overly significant. I think a number up to €9.5 billion compared to the €8.5 billion to €9 billion, €9.5 billion to €10 billion will the maximum level on an annual basis. But we are – we will be working through this as we complete the plan and we don’t expect to exceed significantly the level of CapEx we are guiding to for 2016. In terms of R&D capitalization, there is nothing significantly different going forward to what we’ve seen in the past.

Martino De Ambroggi

Okay. If I may, short-term question regarding LATAM. You stated that you expect a positive EBIT this year and you are guiding for market between flat and minus 12%. So, just to understand the resilience of your business, are you able to confirm the positive EBIT maybe slightly positive even in the worst case scenario of market down double-digit and you are performing more or less in line?

Richard Palmer

Martino, the key to our performance in Latin America obviously is Brazil and the Pernambuco plant. So, we’ve launched commercially, the Renegade is performing extremely well as we mentioned, we are top of the segment after five months of activity. I think, we are now launching the Toro, the Fiat pickup out of Pernambuco and then at the end of the year, well, in Q3, we will launching the second Jeep. So we’ll have three vehicles in that plant by Q3 and really the key to our ability to make money in a market that could still be down is the success of the Pernambuco installation. The mix of fact of those units both because of that position in the market, the branding and the incentives package we have out of Pernambuco help those be very positive compared to our production out of the team. So, that is our focus and it gives us a reasonable basis for targeting a positive EBIT for the year.

Martino De Ambroggi

Okay. Thank you and just one more question. and I was anticipating that the EMEA improvement in terms of return on sales above 4% is essentially driven by mix effects, because I remember in Detroit when you presented the business plan, the 1%, 2% return on sale was already considered a very, very difficult target to be achieved.

Sergio Marchionne

Yes, when we talked about this in Detroit in May of 2014, we had a much more negative view of Europe and its development that we are currently seeing. So it’s a combination of mix of volume, but volume does play a part. I think we are also encouraged by the results of our utilization of our plant into the production of the Renegade and the 500X and its export functions when the combination of this gives us a much better feel for the absorption rate of fixed cost with the region.

Martino De Ambroggi

Okay, despite the delay in Alfa Romeo?

Sergio Marchionne

Yes, notwithstanding the delay in Alfa Romeo, it doesn’t matter. But it was much more important for us to launch a perfect product, to launch a product early and incomplete and the project is a complicated project. You will see it when the people start driving the car. So we will….

Martino De Ambroggi

Okay.

Sergio Marchionne

Thanks.

Martino De Ambroggi

Thank you.

Operator

Thank you. We will take the next question from Jose Asumendi of JPMorgan. Please go ahead.

Jose Asumendi

Thanks very much. I just wanted to come back again to this North American margins in 2016 and just confirm, so Richard, you are guiding for a margin expansion in 2016 versus 2015 in North America, is that how we are reading it?

Richard Palmer

Yes.

Jose Asumendi

And, Richard, just can you, just help me little bit so, volume obviously positive contribution, mix also positive, meaningful contribution in 2016?

Richard Palmer

Yes, marginally.

Jose Asumendi

Marginally.

Richard Palmer

There is also a positive impact on materials, commodities, particularly in NAFTA and obviously the carryover of our pricing actions and the dealer discount actions we took in 2015 also.

Jose Asumendi

Right. So on raw material price action offsets the incremental labor costs, is that the original way of looking at it maybe?

Richard Palmer

Yes, we are offsetting all those labor costs basically with our material performance.

Jose Asumendi

Got you. And then, are there any productivity gains that you had planned last year with properly running, you have the ramp of the Pacifica, that’s how meaningful is that in terms of earnings contribution in 2016?

Richard Palmer

Well, I think really it’s the volume impact of the minivan, because obviously we are going to have the plan up for the full year and obviously it depends on the success of the Pacifica, but the initial reactions have been extremely positive to the unveiling at the auto show.

Jose Asumendi

Okay and then, so we are – I am trying to – with this standard how pricing is going to be a meaningful positive contribution in 2016? And are we now in the latest stage of the cycle with no need to increase incentives to sell additional light trucks and SUVs, or I am getting wrong in terms of the cycle?

Richard Palmer

No, as I said before, I don’t think we are looking at any meaningful pricing impact being necessary for us to continue to improve our margins in NAFTA. I mean, we need to work on the mix impact as you said. We need to – really our product portfolio which we are doing, we need to work on the cost function and the efficiency in the manufacturing footprint as we mentioned earlier, which is also helped by this realignment of our capacity. So, all those aspects will allow us to continue to expand margins.

Jose Asumendi

And this is all based on IFRS and when are you moving to US GAAP?

Richard Palmer

This is based on IFRS is that what we are showing today. So I am not going to get – make it more complicated and try and tell you what it would look like in a different accounting system.

Jose Asumendi

And when are you moving to US GAAP?

Richard Palmer

What we’ve – we’ve looked to that and at the moment we are not – I am not going to give you an exact date for moving to US GAAP because we are still considering the timing of that implementation.

Sergio Marchionne

But, we are going to look at this at the end of 2016, we know we’ll need to go.

Jose Asumendi

Thank you very much.

Operator

Thank you. We will take the next question from Brian Jacoby of Goldman Sachs. Please go ahead.

Brian Jacoby

Hi, thanks for taking my question. Just a quick one regarding the ring-fencing. Is it accurate to assume that you have to refinance all the first-lien term loans at FCA US in order to get complete removal of the ring-fencing and should we interpret that the aim is to unify and bring all the debt up to the FCA parent company level and do it through that means, if you could clarify that that’d be helpful. Thank you.

Sergio Marchionne

We don’t have to repay all the debt. I think we can get there without and I think you will be economically not advantageous to repay that today and refi.

Brian Jacoby

Would you need to get some type of concession related to the governance or you think…

Sergio Marchionne

That’s right.

Brian Jacoby

Okay. All right. thank you very much. Appreciated.

Sergio Marchionne

You are welcome.

Richard Palmer

Thanks, Brian.

Operator

Thank you. We will now move to Richard Hilgert of Morningstar. Please go ahead.

Richard Hilgert

Hi, thanks for taking my question this morning. I wanted to get a little bit more color around some of the guidance. If I take a look at the markets which you are calling for your updated 2018 plan, I look around, I see, relatively peak-ish NAFTA, maybe another slight decline in LATAM, possibly trough APAC, or peak depending on which markets you are looking at, EMEA, a nascent recovery, a richer product mix and kind of little bit confused on why the base guidance for net revenue would be €110 billion versus €111 billion excluding Ferrari in 2015.

Sergio Marchionne

Richard, it’s greater than €111 billion. It’s a type of – if you said the €110 billion, the only thing we try to tell you that it’s more than last year.

Richard Hilgert

Okay, and then is the adjusted EBIT and adjusted net profit guidance there being greater than those numbers that you’ve got, is that a base off of €111 billion in revenue? Or is that based on a higher amount of revenue greater than €111 billion. It’s whatever may for the number work and the revenues are in excess of €111 billion.

Sergio Marchionne

The EBIT is going to be in excess of €5 billion. Those are the only kind of – and I made this comment when opened the conference today. But the fact that, it is better for us to give you directional views on the movement of the key metrics that impact this business as opposed to giving you granular targets that we are going to be chasing for the rest of the year. We are going to do better than €111 billion, we are going to do better €5 billion in operating profit in EBIT.

Richard Hilgert

All right. And congratulations on the third year in a row of having the diesel from the Ram in the Wards top 10 best engines list.

Sergio Marchionne

Thank you.

Richard Hilgert

Your plan for achieving the CO2 and the CAFÉ standards, you’ve talked mostly about electrification of the portfolio to get there. Given that you have this quality of an engine in the portfolio, would it be unreasonable to see more diesel in the portfolio or especially in North America or do you think Volkswagen is pretty much poisoned the well for that type of power trade in the United States?

Sergio Marchionne

No, actually I don’t think that the well has been poisoned by anybody. But, I do think that there is, just the way in which the regulations worked is a point in time in which diesel and its present configuration becomes offensive to the fleet. And let’s not discuss the timing of that inversion. Right now, diesel got positive to the fleet. I think between now and sometime in the next five years, it will become offensive and because of the changes in regulation and so at that point in time, I think we need to take a very hard look at diesel and find out whether it’s worth keeping it in the structure.

Richard Hilgert

Okay, great. Thanks again for taking my question.

Operator

Thank you. We will take the next question from Christophe Boulanger of Barclays. Please go ahead.

Christophe Boulanger

Yes, hi, good afternoon. I will ask a question on balance sheet management and specifically on your target of liquidity of €15 billion to €20 billion by the end of the plan. First I want to know whether you confirm this target and then secondly, will you be using the excess liquidity to repay this indebt and if so under what timing?

Richard Palmer

We confirm the target, Christophe, and yes, we will obviously, as we move forward here be using some of the cash as and when we think it’s appropriate to reduce our gross debt levels.

Christophe Boulanger

So, basically just to be clear, if we include the €2.5 billion of additional liquidity, you would get post removal of the ring-fencing, you are standing at €27 billion of liquidity, is it correct?

Richard Palmer

Correct.

Christophe Boulanger

And you target €15 billion to €20 billion?

Richard Palmer

Yes, we have more than enough cash to significantly reduce our debt levels in the next couple of years.

Christophe Boulanger

Okay. Thank you.

Richard Palmer

Thank you.

Operator

Thank you. We will take the next question from Monica Bosio of Banca IMI. Please go ahead.

Monica Bosio

Good afternoon everyone. I would have a question on the pricing outlook in APAC. As you mentioned at the – you told that APAC will have a too speed year in 2016. I am just wondering if you are still expecting a positive adjusted EBIT for the APAC contracted countries.

Richard Palmer

Yes, we are targeting to make money in APAC in 2016, but as I said there could be a ramp up as we go through the localization process being completed in the first half.

Monica Bosio

Okay, so basically, do you expect a positive adjusted EBIT?

Sergio Marchionne

By the end of the year, yes.

Monica Bosio

Okay, at the end of the year, okay, thank you. And the second question is, I am just trying to figure out what could be the extraordinary figures for 2016? Do you expect further realignment in the capacity production or further one-off…

Sergio Marchionne

Hopefully not.

Monica Bosio

Okay, so we shouldn’t project a similar number.

Sergio Marchionne

I don’t have any notion today of booking any one-offs, any…

Monica Bosio

Okay, thank you very much. Thank you.

Operator

Thank you. We will take the last question from Rodolphe Ranouil of RBS. Please go ahead.

Rodolphe Ranouil

Yes, good morning to you and thank you for that clear presentation. I just have one question regarding the plan delivery change, liquidity, cash flow generation, all of that is trending up very significantly in the next two to three years. Have you shared all of these with the rating agencies or have you basically given up?

Sergio Marchionne

Not that we share with you first and then we go hit them. What do you think?

Richard Palmer

I think that’s probably a better course. We work obviously joking apart consistently with the rating agencies and we expect these, as we execute these numbers our rating to improve going forward, so, that’s clearly a big focus for us.

Rodolphe Ranouil

Okay, thank you very much.

Richard Palmer

Thank you.

Operator

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

Joseph Veltri

Thank you, Rhonda and we’d like to thank everybody for joining the call today. If you have follow-up questions, you can please contact me or others on the IR team. Thank you and have a great day.

Operator

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

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