Fiat Chrysler Automobiles NV (FCAU) Sergio Marchionne on Q2 2016 Results - Earnings Call Transcript

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Fiat Chrysler Automobiles NV (NYSE:FCAU) Q2 2016 Earnings Call July 27, 2016 7:30 AM ET

Executives

Joseph Veltri - Vice President - Global Investor Relations

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Analysts

John J. Murphy - Bank of America Merrill Lynch

Adam Michael Jonas - Morgan Stanley & Co. LLC

Massimo Vecchio - Mediobanca Banca di Credito Finanziario SpA (Broker)

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Martino De Ambroggi - Equita SIM SpA

Thomas Besson - Kepler Cheuvreux SA

Stephen M. Reitman - Société Générale SA (Broker)

Mike Tyndall - Citigroup Global Markets Ltd.

Alberto Villa - Intermonte Sim SpA

Patrick Hummel - UBS AG (Broker)

Gabriele Gambarova - Banca Akros SpA

José Asumendi - JPMorgan Securities Plc

Operator

Good afternoon or good morning, ladies and gentlemen, and welcome to today's Fiat Chrysler Automobiles 2016 Second Quarter and First Half Year Results Webcast and Conference Call. For your information, today's conference is being recorded.

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

Joseph Veltri - Vice President - Global Investor Relations

Thank you, Jillian, and thank you to everyone for joining us today. The earnings release that we issued earlier today, along with the presentation material that will be used for this webcast and conference call can be found on the Investors section of the FCA website.

Today's call will be hosted by our group's Chief Executive, Sergio Marchionne, and Richard Palmer, the group's Chief Financial Officer. After their introductory remarks, both of these gentlemen will be available to answer your questions.

As a reminder, I will note 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 today's presentation. And as always, the call will be governed by this language.

With that, I'd like to turn the call over to Richard Palmer.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

So, good morning and good afternoon to everybody. So moving to page four, we have a summary of the second quarter. I would say overall, we had a strong operating quarter. Our adjusted EBIT margin reached 5.8%, up 90 basis points year-over-year. NAFTA margins reached 7.9% and EMEA margin more than doubled to 2.5%.

Our net industrial debt was reduced by €1.1 billion to €5.5 billion despite some negative FX translation. So overall we had a good quarter. We did take a charge in the quarter for Takata airbag, the May expansion of the population in NAFTA of about €400 million, which was excluded from adjusted EBIT.

Moving down the page, FCA entered into an important collaboration, the first of its kind for an auto manufacturer with Google, regarding the integration of Google's self-driving technology into the Chrysler Pacifica, which is an important move I think for FCA showing our being evolved upfront in this type of technology application.

Our NAFTA capacity realignment, we've spoken about before, regarding reorganization of some of our manufacturing footprint in the U.S. is proceeding on schedule. And will result in us having increased capacity allocated to Jeep and Ram from the middle of next year. And we proceeded with the commercial launches of the Alfa Romeo Giulia and Maserati Levante in Europe. This is an important milestone showing our continued progress in the premium brand strategies. And the U.S. launches are planned for the second half of the year.

During the quarter, Moody's upgraded our corporate credit rating from B1 to Ba3, following S&Ps upgrade in March. So this is also a positive reflection of the progress we're making on the balance sheet.

And as a result of the first half results, we are revising upwards our full year guidance to increase the adjusted EBIT to more than €5.5 billion from more than €5 billion, increasing net profit to over €2 billion from €1.9 billion. And confirming our net industrial debt target, at current exchange rates notwithstanding, the fact that compared to our initial guidance, the strengthening in the real has contributed to a negative impact on translation of nearly €800 million.

So moving onto page five, we can see some of the important product news in the second quarter. We continue to rollout the Fiat Tipo family, adding the new hatchback version to go along with the sedan and station wagon models already launched. And continuing to increase our presence in the C-segment in the European market, which is the second-largest segment there, historically not a segment, the Fiat brand has been particularly successful and we are seeing very good progress with this new product family. We sold 23,000 units in the first half. And as I said, adding this new version, the hatchback, will continue to grow into the second half of the year.

We also launched the Fiat Fullback, which is a one metric ton midsize pickup, which will be selling in Europe initially and also in Latin America. That just launched in the quarter. And so we are looking at the volumes increasing through Q3. And then for Maserati, we started to deliver the model year 2017 Quattroporte, which has a restart exterior, some interior refinements, some more safety features and electronic content. And so that further improves our product line up on the Maserati to go with the launch of the Levante, which is ongoing.

So moving to page six, talking about the quarter in a bit more detail. You can see that our shipments were down year-over-year by 1%. If we adjust for the change in our shipments in China, due to the localization of Jeep through the JV, our combined shipments including the JV shipments would have been up 1%, to 1.2 million units, driven by an increase in EMEA of 14% offsetting Latin America, which was down 19%.

Net revenues were down – but reported revenues were down, but they were up 1% at constant exchange with contributions and positive mix in NAFTA, LATAM and EMEA.

Our adjusted EBIT, as I mentioned, was up 16%, with margins of 5.8% from 4.9% last year. And year-to-date, adjusted EBIT is just over €3 billion, up 43% compared to last year.

Moving to adjusted net profit on the top right hand side, we were up to €709 million, nearly double last year's number of €372 million. Net financial charges were down as we continue to reduce our overall gross debt and refinance at lower rates. And taxes were more or less flat at an adjusted net profit level.

We already mentioned the industrial debt improvement of €1.1 billion. And we will look at a bit more the detail on the following pages. And our liquidity was basically around flat at €24.7 billion. Our gross industrial debt closed at just over €24 billion. Sequentially, down €1.2 billion from March, despite negative FX and due to a repayment of a bond in the quarter. And so that takes our gross debt reduction compared to June 2015, with various actions including obviously the spin of Ferrari to over €6 billion.

Moving to page seven, here you can see the contribution of the various segments to the improvement in our adjusted EBIT of €227 million in the quarter. NAFTA margins, as I mentioned before, were up to 7.9%, up from 7.7% last year and from 7.2% in Q1. LATAM achieved a breakeven in the quarter, up €79 million compared to last year and EMEA more than doubled, contributing an improvement of €86 million through the second quarter. All segments were up versus the first quarter, except for LATAM where investments in marketing of the launch cost of the new Fiat Toro impacted the EBIT.

Then moving on to page eight show the Group adjusted EBIT improvement again, but this time looking at the operational drivers across all the regions. So you can see that the main improvement was basically volume and mix, but clearly as I mentioned, our volumes were pretty flat, so in actual fact principally mix, which was driven by NAFTA and EMEA, but also some positive mix in LATAM as we continue with the launches of the vehicle from Pernambuco.

The increase in industrial costs was driven by some product content in NAFTA, the cost of the Pacifica being higher than the predecessor vehicle. We had some efficiencies which offset in Latin America due to the non-repeat of launch costs that we had in Pernambuco last year.

And the SG&A increase is basically marketing costs as we continue with the launches of the Pacifica, the Tipo family, the Fullback and the Levante as well as others in the quarter.

We move to page nine; can see the net industrial debt walk from March to June. So as you remember in Q1, on the industrial debt increased by €1.5 billion due to working capital absorption and negative FX translation. We had mentioned at the time we expected the working capital to reverse and that's what it did. So the seasonality in Q2 together with production resuming in Toluca for the Journey and the Fiat 500 in May brought our working capital up, and a positive contribution to cash of €1.2 billion in the quarter. And so basically flat through the first six months of the year. The EBITDA in the quarter was €3.1 billion, 11.3% margins, compared to last year which was under 10%. So some good improvement in margins and EBITDA, obviously because we're also covering higher D&A for the new product launches.

And so, you can see also that our adjusted industrial EBITDA was also over €1 billion higher than the CapEx number at just over €2 billion. We did have a negative translation again in the quarter, basically because of the real of about €0.5 billion, which you can see in the column on the right-hand side. So overall, I think a good quarter in terms of the industrial debt.

Moving to the regions, on page 10, we can see the NAFTA performance. The sales metrics here do reflect the new methodology that we described in our press release yesterday. So the industry sales were down 1% in the U.S. And our NAFTA sales and the U.S. sales were up 2% overall; Jeep and Ram, driving the increase with double-digit increases year-over-year.

Our days supply was down compared to Q1. Obviously a lot of that due to the seasonality of the market with building inventory in Q1 to meet demand of the higher seasonality of sales in Q2. So we closed with 75 days supply, very similar to last year's 74 days.

Our U.S. fleet mix was up slightly from 21% last year to 24% this year, although positively our Rent-A-Car volume within the fleet mix was down 5% year-over-year and obviously that's something we need to continue to work on to improve our overall channel mix within the fleet business.

In Canada, we maintained our market leadership with share of 15.2%. Our shipments in the quarter were down 2% basically due to reductions in 200, Dart and Journey, as I mentioned where Toluca was down for the month of April. And those reductions in shipments were partly offset by more shipments of Ram, Jeep and Minivans but not entirely. And obviously that mix impact was the main driver not of the €250 million you can see in the EBIT walk on the bottom left. The improved mix is the main driver of the improvement in our profitability. We did have some positive pricing in the marketplace, but that was offset by negative impacts of exchange mainly on the Canadian dollar.

And in terms of industrial cost, as I mentioned earlier, we have purchasing efficiencies in the quarter. But they were offset by higher DNA and higher cost of principally, the Pacifica launched with more content than its predecessor vehicle. But overall, 98% margins and continuing the improvement we have been seeing in the last few quarters in our NAFTA performance.

Moving to page 11, Latin America, the industry was down 12%. Our sales were actually down 22%, as we continue to focus very much on profitability here. We shipped 112 units in the quarter. And about a quarter of that was Pernambuco volume, so about 25,000 to 26,000 vehicles there, of which half were Renegade and half were the Fiat Toro new launch.

Our revenues were down 9% at constant exchange with the lower volumes being partially offset by the better product mix from Pernambuco.

In terms of the adjusted EBIT walk on the left, you can see the main driver of the improvement year-over-year was the reduction in industrial costs, better efficiencies in the plants and also non-repeat of the launch cost we had in Pernambuco last year, in part because of the actual physical industrial launch in the plant. And also because we have now reached the sort of our target level of local content in those vehicles whereas last year, we were still shipping in parts as we completed the localization process.

Moving to APAC, on page 12, you can see that these numbers continue to reflect the transition to the joint venture of our Jeep production. So our sales were flat at 55,000 units. And of those, you can see that we had 30,000 units sold through the JV, up 200% from the 10,000 we had last year. So that transition continuing.

Our sales in China were up 17% and in Japan, we were up 21%. We were down in Australia as we continue to price to try and cover the exchange impact we were having there.

Jeep, Ram represented 73% of the region's sales and obviously driven strongly by the locally produced Jeep Cherokee in China.

Moving to the adjusted EBIT walk, I think the most important thing here. You can see the volume mix impact which is basically the move to the JV volumes and so not consolidated and not producing volume mix through our income statement and then offset with costs industrially and SG&A was going into the JV.

In the other column we have the improvement in the JV result and so that's important as we start to see the effects of the Cherokee and the Renegade volumes ramping up in Q2 and which will continue through Q3 in a joint venture. We will also be launching in September a third product in the joint-venture which is the all-new Jeep C-SUV which is basically the Compass Patriot replacement, the first launch of that car is in China, then we'll be subsequently launching in other regions.

Moving to EMEA, on the next page, you can see that the industry was up 10%, with Italy being up 17%. Our sales in the EU were up 17% so our market share was up 40 basis points. So you can see that was driven by positive performance in all of the major markets on passenger car.

If we move to LCVs, the industry was up 14% and we were basically up flat with that just under 13%.Our shipments were up 16% to 75,000 units, positive performance on LCV. And you can see in the bottom left the adjusted EBIT walk. We had both positive volume and positive mix, driven by the 500 family, the Tipo vehicles, I mentioned earlier, and LCV. And you can see that partially offset with more SG&A to fund the marketing of these new product launches.

Moving to Maserati on page 14, our shipments were down 17%. I think we're getting to the end of the process of cleansing, which we've talked about in the last few quarters. Our inventory levels in North America and in Europe were high. I think we're getting to the end of that. That's reflected in the shipments being down in America by 26% and in Europe by 17%. We did have improved shipments in China, up 20% and that together with some higher mix on Quattroporte helped us to improve our margins sequentially.

Last quarter in Q1, we were at 3.1%, this quarter we are at 6.2%. So we are starting to see a recovery sequentially in the Maserati margins. And I think what will be important is to see how the Levante continues to perform. We have had a very good reception for that product in the marketplace. Orders are strong. And we will see production and shipments ramping up in Q3.

Moving to components on page 15, our revenues were up reflecting an improvement in revenues in Marelli and also margins were up from 3.8% to 4.6% driven basically, entirely by 90 basis points improvement in our Magneti Marelli margins. Order intake in Marelli was also good, up – flat year-over-year with €603 million of orders with non-captive at nearly 60%. And the Comau order backlog was also up from March by nearly €200 million.

Moving to page 16, our outlook for the year, no real changes in terms of our views on the industries. NAFTA continues to be strong. U.S. SAAR was still at 17.5 million in the second quarter consistent with the first quarter trend. And so we are still positive around the outlook for the NAFTA markets. Asia-Pacific continues unchanged in our forecasted numbers. LATAM is clearly still struggling. We are hoping that the political uncertainty will resolve in Q3. And maybe we will start to see some improvement in confidence going into Q4. But we're looking at a number at the bottom end of the range of 3.6 million for the year.

And then EMEA, the last forecast is unchanged but we believe we will be at the high end of this range. Some of the noise around Brexit seems to be diminishing and the European market continues to perform well.

So moving to the last page in the presentation pack, our guidance again, we raised revenues slightly on the back of good performance in EMEA and NAFTA. Our EBIT is up to over €5.5 billion and net profit up to above €2 billion. And as I mentioned before, net industrial debt we are holding it at less than €5 billion with the improved performance on the economic side offsetting the negative translation we've seen in the first half.

So with that, I will hand it back to Joe. Thank you.

Joseph Veltri - Vice President - Global Investor Relations

Thank you, Richard. Jillian, I am going to now turn the call over to you to please begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. We will now take our first question from John Murphy from Bank of America. Please go ahead.

John J. Murphy - Bank of America Merrill Lynch

Good morning, guys. Just a first question on North American margins, obviously, there was a little bit of an improvement here. But when you look at what was just printed by one of your large cross town rivals, 12.1%, you are still significantly behind here. I'm just curious, what you ultimately think your margins can get to – if they can get to that range. And if this changeover of Sterling Heights to the Ram might help, just sort of, the idea of getting to those levels from where you are right now. Is that possible and how do you get there?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

We announced the reindustrialization of the U.S. manufacturing footprint, probably a couple of quarters ago. I think the last announcement that was made in connection with Sterling Heights was out a couple of days ago. By the time we're finished with this, hopefully, all of our production assets in the United States, if we exclude Canada and Mexico from the fold, all those U.S. plants will be producing either Jeeps or Rams. There will be no passenger cars that will be produced in the U.S. And therefore our expectation is that that concentration will give us a possibility to get to very close to those numbers that you mentioned earlier.

I think they were exceptional results. I think they should be complimented for an outstanding delivery into Q2. And I think that we have every expectation that after this realignment that we should be getting very close, if not dead-on those numbers.

John J. Murphy - Bank of America Merrill Lynch

Okay. And then just a follow-on to that. Have you made any progress in finding a car manufacturing partner? And is that required to get to these levels? Or is that something where you think you can produce in Mexico, and can go it alone on car production?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

I think we have made progress. We're not in a position to announce anything. Although, I think that any progress on that front would be actually margin dilutive. They may not be in absolute terms, but it will be margin dilutive.

John J. Murphy - Bank of America Merrill Lynch

Okay. And then if we think about the guidance range you guys are talking about, €5.5 billion plus, for the full year you've done €3 billion year-to-date in the first half, is this an indication that we might see a fade in EBIT through the second half of the year, or is this a level of conservatism and there's kind of a big range around that plus sign after €5.5 billion.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

My view is that I think there's a big plus sign. And Richard has historically been conservative. I'm not going to change him now. He's too old. So we'll leave him be as it is. We'll wait for Q3 and we'll take stock of how far we've gone.

John J. Murphy - Bank of America Merrill Lynch

Got it. And then, lastly, just the last question for me. On CapEx, it's running just over €2 billion year-to-date. So if you could just remind us of your full year guidance on CapEx, or expectation there. And why is it so back half loaded or appears to be so back half loaded?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Yeah. Our full year number as we have already indicated at the beginning of the year is €8.5 billion to €9 billion. And I think as we go through Q2, we'll get a bit more precise around where we think that's trending up. But the numbers of projects we've been talking about are coming online in the second half. So we think that's still a good estimate.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Yeah. Although, at the upper end of what's likely to be spent. There's a physical limitation on the ability to cut checks between now and December 31.

John J. Murphy - Bank of America Merrill Lynch

Yeah. It seems a little bit tight. Will that impact your net debt guidance? It just seems like if you hit those numbers, it's going to be hard to hit your net debt guidance as well.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

It's going to be hard to – you mean we're going to be much lower to the €5 billion, or much higher?

John J. Murphy - Bank of America Merrill Lynch

Well, I mean, if you hit the €8.5 billion to €9 billion on CapEx, it seems like it's going to be hard to achieve your target on net debt of €5 billion or lower. I mean, it seems like it would be tough to produce enough cash to get to that level.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Well, I think, in the second half, John, I think we're going to see some positive working capital, as well in the second half we are in the process of launching the Giulia. We're in the process of launching the Levante. We're in the process of ramping up the Pacifica. I think in the second half, within that range of CapEx, we can make the less than €5 billion of net industrial debt.

John J. Murphy - Bank of America Merrill Lynch

Okay, great. Thank you very much.

Operator

We will now take our next question from Adam Jonas from Morgan Stanley. Please go ahead.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Hey, everybody. First question is just, can you give us a little color on your discussions with your financial partners, the Italian bank sponsors, et cetera, following Brexit, just give us a tone for how your discussions have been for the strength there?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Well, I think our exposure in the U.K. is fairly limited, on the balance sheet very limited. In terms of volumes, we sell about 100,000 cars and LTVs in the UK, obviously the 8% I think weakening, something like that, sort of stabilize that, sterling to euro, we'll have an impact if it sits there through next year. This year we do have some hedges in place et cetera. So I think that the impact for this year is going to be minimal. So in terms of the localized impact related to the UK, not that significant. In terms of the wider relationship with our Italian banks, it is very good. We don't have any issues with the financial community. As you have seen, our ratings have improved and I think going forward we continue to execute on our plan to deleverage the group through 2018, so.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

And I'm not sure I understood the question about the relationship with the Italian bank?

Adam Michael Jonas - Morgan Stanley & Co. LLC

No, I just think some investors here are not familiar with the strong history between Fiat Chrysler and your banking relationships, may underestimate how durable these relationships are and how important they are?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

No, they are important. I think that one of the things that we have done in the last 13 years, and I think your institution has been a beneficiary of that too is that we have internationalized our banking relationships beyond the Italian boundaries. And I think that we have been able to establish a sound rapport with a number of large global international firms which have provided a lot of support to the financing transactions that FCA has carried out in the last 13 years. Certainly they've been very, very active in the disintermediation of some of the assets out of Fiat Chrysler, the creation of CNH Industrial and Ferrari. All those things have been accomplished with the help and the assistance of large international financial houses.

So I don't think that the issue for us is one of resilience or credibility with the financial community at all. I think that if you go back to the question that was made earlier, I think our biggest task now is to close the operating margin gap with our competitors. It remains a permanent fixation that we have inside the house that we need to get off of our butts and get that done.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Thank you. One more question on financing. Richard, can you give us an update on the factored trade receivable activity, maybe a total balance or any deltas in the quarter. I couldn't tease that out of the results.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

I don't have the exact number. There is no significant change quarter-over-quarter in that level of that activity.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Okay. Okay. And then maybe – that's fine. And then last one for Sergio. You mentioned no passenger – you are kind of getting to a position where you're not producing any passenger cars in the U.S. It's Jeep and Ram only when this is done. At what point do you think you are at that level? Is that at 18 month, 24 month or?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

I think we will be de-car-ed the U.S. by probably the end of Q1 of 2017.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Okay. And I'm just curious....

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

And the problem that we got, as you know well know Adam, as we move through transition we'll have to go through downtimes in some of our plants in order to allow for conversion.

Having said this, I think that we face this in such a way as to not impact our profit forecast and the maintenance of the 2018 objective, which is still €9 billion in operating profit. So that number has not been moved. I think the question is how much over €9 billion do we get to and how quick can we get there.

Adam Michael Jonas - Morgan Stanley & Co. LLC

Okay. Thank you. So just a final on that to extend on that last question is, could you share with us perhaps kind of the tenor of what you are hearing, the tone from the UAW? And Dennis how supportive are they of this transition? Can you explain to the audience, the level of awareness at the UAW and the UAW leadership of the challenges that face this industry on a secular basis? And the need to kind of really utilize those North American assets, those higher cost assets to the fullest extent with as little risk as possible. I'm just curious if you're able to share that?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Yeah, Adam, I don't want to speak on behalf of Dennis. I think Dennis can be probably even more articulate than I will be on the topic. But I can only give you my understanding of discussions that I have had with Dennis now over the last couple of years about the manufacturing asset base in the U.S.

And it was a relevant issue when we were discussing the renewal of the contract. And I fully understand, I think, the pressures that he had to deal with from within the UAW, to try and accomplish as favorable a compensation package for the membership as he got in September of last year. I think the real issue for us is that, when you look at the economics of car manufacturing, I'm talking about traditional cars as opposed to SUVs or pickups, the margins that we were getting from our experience with both the Dart and the Chrysler 200, as well intentioned as those programs were and as technologically relevant as they were for the marketplace, yielded returns that were not on a comparative basis, match even anything close or remotely close to what we could derive from the utilization of those assets in the Jeep or Ram world.

And so we have made that shift, I think it was a painful shift. It took us a long time to analyze and reanalyze the cost and the alternatives. I think we feel comfortable now that we've positioned the U.S. assets in the right place. And that it will guarantee fuller levels of employment and a higher opportunity for the UAW membership to benefit from that growth.

The residual issue which has to do how does the UAW and the membership deal with their relevance and the participation in cars, is unresolved, because it is not just a question of wages, although that's important. But it will certainly require different operating environment than we currently have at the UAW, which extends beyond wages.

And so we would have to rethink the model completely. I've opened the discussion with Dennis. I think we need to sit down and have a heart-to-heart on this and see whether we can find a solution going forward. But as it stands today, economically, it will be very, very difficult for us to justify an investment in car on a U.S. manufacturing basis. It's just not there.

Adam Michael Jonas - Morgan Stanley & Co. LLC

That's clear. So, thank you. Thanks team.

Operator

We will now take our next question from Massimo Vecchio from Mediobanca. Please go ahead.

Massimo Vecchio - Mediobanca Banca di Credito Finanziario SpA (Broker)

Good afternoon, everybody. My first question is on the agreement with Google. Clearly, you are following a different strategy from your industry peers, which are developing every single one of them, their own solution. Now, I know your view on the industry's tendency to overspend in CapEx. But strategically, what is your strategy with this agreement? And will you differ with your competitors what you are seeing that the others are not seeing?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

By the way, I will plead ignorance and I will tell you that I'm mono-fanatic in my vision and not blame anybody else for seeing something else. I can only give you my views and I think it's up to you and the markets to judge as to what is the wiser course. But I've stated this publicly and I'll repeat it here again, that I think that it's a world that is rapidly changing, and where preferences which are being expressed by existing or potential intruders into the auto space, keep on changing at the speed of light.

And I think that one of the worst things we could do is to commit capital in a very certain unequivocal fashion to a particular technology choice, or a particular strategic platform without exploring potentials for development with a variety of actors. And I think we remain open as we have been, as we stated in private discussions with some of these so-called intruders and even in public assertions that the group has made. But the fact that we are willing to explore alternatives without expending a phenomenal amount of capital for us to try and understand what the ultimate economic model looks like. Because it is not just a question of exploration and capital permits when it's a question of understanding what the economics look like after we finish.

We are and have been historically manufacturers of cars out of a very traditional industry. This is a completely different way in which the market is going to be potentially developing. And I think we need to be open and not prejudicial in making choices. And so the Google experience hopefully will not be the last experience with a so-called intruder.

We have open discussions with others. Hopefully, it will give us a chance to learn and on the base of that knowledge, I think we will make a final determination as to what the strategic stance is. I think it's way too early to call today and it's way too early to make large capital commitments for something which we have limited knowledge of and we understand little of in terms of future development.

Massimo Vecchio - Mediobanca Banca di Credito Finanziario SpA (Broker)

Okay. So you haven't take already the decision if you want to be a supplier of your partners or if you want to develop your own solution, you are exploring and trying to understand?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Yes. The transition, whatever that is, is not going to be a painless transition. I think that we all need to understand this. It looks quite rosy sitting behind a desk. I think the transition is not going to be that obvious and it is not going to be that easy. And I think we need to be ready to handle this to make sure that we reap the highest possible economic benefit to FCA as the transition happens. One will happen of some caliber, I think we need to remain open on choices.

Massimo Vecchio - Mediobanca Banca di Credito Finanziario SpA (Broker)

My second question is on Maserati. It seems from your wording that the reason for the fall in volumes here, is related to mostly to the Ghibli. So first question is, if it is correct?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

No. I think the reduction in volumes is due to the fact that we have got through a destocking exercise where we overstuffed distribution channel, that happened in 2015. And which has taken a while to digest through the system. And I think that we're seeing the benefits now of a reestablished supply/demand condition. I think that the introduction of the Levante will effectively reinvigorate the relevance of that portfolio going forward. I think we need to see, I don't think there is anything that the numbers say about Ghibli as being particularly wounded. It has been an incredibly successful car. We were fully aware that given its price positioning, that it will be eroding some of the values that are associated with the Quattroporte.

And that was built into the case at the time in which we originally approved the investment. I think as we keep on rejuvenating both the QP and Ghibli, you will see – and together with the Levante, I think you will see Maserati play a more significant role in the markets. And volumes and margins should follow.

So, I think, we need to give it the rest of the year to see what the impact of the Levante is on the marketplace and certainly the whole of 2017 to see the full benefits from this range of products, including stuff that is now being worked on. One of the things that we decided in the last three or four days is a series of relatively small investments, so we'll keep the GranTurismo and the GranCabrio alive until the end of 2017, possibly going into 2018.

So I think the portfolio is sound. I think we just need to execute. I think Reid in his new function now has been sort of commissioned with the task, I expect much better results going forward in the remainder of 2016 and in the next couple of years.

Massimo Vecchio - Mediobanca Banca di Credito Finanziario SpA (Broker)

Okay. Thank you very much.

Joseph Veltri - Vice President - Global Investor Relations

Jillian, are you there?

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Hello?

Joseph Veltri - Vice President - Global Investor Relations

Go ahead, Monica.

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Hello?

Joseph Veltri - Vice President - Global Investor Relations

Monica?

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Hi.

Joseph Veltri - Vice President - Global Investor Relations

Go ahead, please.

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Hi, everyone. I'd some questions. The first one is – how do you – okay, fine, 2016 is fine. But I was wondering what about 2017, also on the back of the Brexit, I'm just trying to figure out what could happen for Maserati and Giulia in case of the slowdown of the demand in U.K. for a high, top of the range car. And also, what do you expect for the European car market in 2017?

And my second question is on the target for 2016, could you please better explain to me the upside revision in revenues? Is it because of the price mix? Is it because of mix?

And the second – and the last question is on the adjustments between adjusted EBIT and the reported EBIT. My estimates accounted for the full year roughly €500 million. And now we are at more than €600 million. So I'm just trying to figure out if you can give us some roughly indication about the final number for this year. Thank you very much.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

If I can just give you an answer on Maserati, I think Maserati, one of the values of Maserati is the fact that it is a global brand. I've just asked our guys here to give me the exact numbers on Maserati sales in 2015. I think there were 1,500 cars that were sold in the U.K.

And I can also tell you from my experience on the Ferrari side, we have not seen a decrease in the level of interest in these premium brands. I think that they will continue and they will occupy a particular space in the spectrum of cars. These are not volume cars.

I think Richard made reference to the fact that we have sold about 100,000 cars in the U.K. A large portion of those I think are also commercial vehicles, which have been at the heart of our presence in the UK now, at least until the introduction of the new portfolio.

I don't think that Brexit is painful as it's been from a political standpoint. It's going to have very negative implications on volumes or on our profitability in Europe going forward. What is unclear to me, to be honest, is what happens to U.K. produced assets. The UK produced cars that will eventually find their way into the rest of Europe. And how stable is the euro – this euro/sterling relationship going forward. These are things that we'll only be able to assess going forward. Having said all this, whatever the possible outcomes of all those factors, I don't think they are going to be negatively impacted by Brexit. The second point, while we were looking for this number, Monica, I think we unfortunately lost track of your question. And I'm looking at Richard, who looks as puzzled as I am. Can you give us a short version of your second question?

Monica Bosio - Intesa Sanpaolo SpA (Broker)

My second question is about if you can give us more color on the revision of the revenues, because I believe that it could be the mix. Just if you can confirm me this. Because if I look at the number for the first half and if I compare to my estimates, I'm fine with a upside in the guidance with adjusted EBIT. But it seems to me that the revision in revenues might be a bit aggressive, but maybe I'm wrong. And if I may, another follow-up on the political situation. Okay, Brexit might not have an impact on the European car market. But what do you think about Turkey? Is it a temporary situation or it could be something that in the long-term might be a impact?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

No, I actually think that whatever the duration of Brexit is, and I would expect it to be permanent in nature, whatever the ramifications are, they ultimately will not impact the portfolio choices or economic performance of the group going forward. Unless this Brexit situation deteriorates and another set of conditions that I'm not aware of. But based on what I know today, I think our views on profitability of the group and earnings generation is unimpacted by the consequences of Brexit.

Vis-à-vis your question on revenue, you may be right. I think this is best – I don't think you are, but I think you may be right. And if you are, I don't think it's going to change materially our view of the world going forward, if we don't hit the €112 billion. Our best estimate is that, it is in excess of €112 billion. We will see as the numbers come in for the third quarter as to whether we have to revise those numbers and tell you that you're right. I don't think so. But we will see.

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Okay. And the last was about the adjustment between the adjusted EBIT and the EBIT, if you can give us a rough indication for the full year? Thank you very much.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Monica, given that these are charges we take on a sort of unusual basis, to be frank, the best estimate really is the year-to-date number. We don't anticipate having today any unusual charges in the second half of the year.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Yes, if we knew them, we would have booked them.

Monica Bosio - Intesa Sanpaolo SpA (Broker)

Okay. Thank you very much. Thank you.

Operator

We will now take our next question from Martino De Ambroggi from Equita. Please go ahead.

Martino De Ambroggi - Equita SIM SpA

Yes. Thank you. Good afternoon, everybody. Three questions. The first is on EMEA region, 2.5% return on sales is the peak over quite a long period. But I suppose that it was impacted by launch cost because SG&A was the only negative variable in the quarter. So could you elaborate on what is the operating leverage, considering the environment we can discuss a long time on Brexit impact? But volumes growing like they are growing today, we've never seen this kind of trend in the recent past. So 2.5% can be considered sort of a cap rate for Europe?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

I would say, no, it's not a cap. Obviously we just saw one of our competitors reporting significantly higher margins. So as we mentioned earlier, our goal is to improve our profitability to the top end of where our car competitors compete with in NAFTA and in EMEA. I think, we've seen some good traction in the last six months from EMEA. There are a number of products, which are still being launched, in particular the Tipo family of vehicles. We just launched a Spider. We are pushing very hard to improve the brand position of Fiat with that vehicle. I think going into the second half, we will continue to work to improve our margin performance in the European market. So it is not a cap.

Martino De Ambroggi - Equita SIM SpA

Yes. I was trying to have a – I'm not talking about a target but something more specific in terms of potential, because high-single digit is quite difficult to imagine at least in the short term?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

I agree. And I don't want to give you a target because we've given you a plan out for 2018, and we're starting to get to those sorts of levels already. So I think we need to continue to improve the margins in EMEA. And to be frank, the 2.5% isn't good enough, given where some of our competition is performing.

Martino De Ambroggi - Equita SIM SpA

Okay. And the second question is on the free cash flow of the net debt. Richard, if you could help us in understanding what are the non-recurring items impacting on your guidance for debt. I am referring to cash-out for non-recurring costs that you booked and forex effect or any other impact in order to have a better understanding of the clean free cash flow?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Well, in the first half, the biggest impact is exchange. So, as I mentioned, there were €1 billion of negative exchange impact in the first half principally because of the Brazilian real and the debt we have there with the strengthening of the real. So that's the biggest change. So if exchange had not moved as much as it did there, we would have been a €1 billion better at this stage.

Martino De Ambroggi - Equita SIM SpA

Okay. And what's the underlying assumption in your full-year guidance?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

We're basically assuming the rates stay substantially where they are today.

Martino De Ambroggi - Equita SIM SpA

Okay. And in terms of cash-out referring to non-recurring items?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

There's nothing else significant. Apart from exchange, everything else is – for example, the campaign costs I mentioned before on Takata are going to be spread out over time and they're not significant enough in this year and also because in large part, the campaign process is delayed as the industry works through the parts availability, as you're aware, with the supplier. So those sorts of liabilities have a very long tails on them, so they're not going to impact this year significantly.

Martino De Ambroggi - Equita SIM SpA

Okay. Very last on net pricing, which was negative in NAFTA region for the first time since Q1 2014. What should we expect going forward on these items?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

The biggest impact really is that last year we had the hedges in position on the Canadian dollar. And so now you're seeing a delta on exchange, which isn't reflective of the actual exchange rate difference spot to spot, because we had a hedge position last year. Those aren't on anymore. So I would expect now as we get comps at normalized rates, having reflected the weakening in the Canadian dollar in the last 12 months, we should start to see positive pricing in NAFTA or not negative pricing anyway. That's our target, especially as we launch Pacifica and...

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

You will see positive pricing going forward.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

...continue work on that.

Martino De Ambroggi - Equita SIM SpA

Okay, perfect. Thank you.

Operator

We will now take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead.

Thomas Besson - Kepler Cheuvreux SA

Hi. Thank you very much. I had just a few follow-up questions please. Can you give us some qualitative or quantitative elements on the Giulia and Levante reception so far in Europe? I understand it's not been launched globally and give us an idea of what you would anticipate to be the approximate volumes of the vehicle in 2017?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

In 2013, it's kind of late, because the year has passed.

Thomas Besson - Kepler Cheuvreux SA

I said 2017, sir.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Yes, down worry about it. I skipped four years already in my head. But we have not given volume indications for the vehicle, either at launch or now, and I think we'll have to wait until the end of the year to give you better guidance on volumes on global distribution of the Giulia as opposed to European numbers. I can only tell you, when I was talking to our operating people in Europe, now we're producing over 100 Levantes a day. Now I think we're at about 130 Levantes, 140 Levantes a day. So the car is picking up steam. We've begun our production of the model for the U.S., which was a huge portion of the market to be covered by the Levante.

So the reception initially from both dealers and from the customer base has been quite good. We remain confident of the fact that both of these cars will perform well and effectively our forecast expects, at least today, that we would have a significant improvement in margins at Maserati in the second half of this year based on Levante traction. And the introduction of the models, as Richard mentioned, the facelifts on the cars that we introduced for the 2017 model year. We will give you a better update on Giulia as the car gets fully operational and we start shipping into the U.S., which hopefully will happen in Q4 of this year.

Thomas Besson - Kepler Cheuvreux SA

Okay. Second question, please, on your debt, you've mentioned the big currency impact. Can you give us a rough idea of the exposure by currency or at least of the real of your current gross debt please?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Our exposure to real is about R$17 billion.

Thomas Besson - Kepler Cheuvreux SA

R$ 17 billion.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Yes.

Thomas Besson - Kepler Cheuvreux SA

Okay. Thank you very much. And last quick question for me. Could you give us an indication of the net pension deficit at the end of Q2? Is it still up around €10.5 billion or has it moved significantly?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Well, it will have moved a bit, but I don't have a precise recap. We don't do that on a quarterly basis. But obviously discount rates are down a bit. So I would anticipate that the net liability is up. We'll see how discount rates perform in the second half.

Thomas Besson - Kepler Cheuvreux SA

Great. Thank you very much.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Thank you.

Operator

We will now take our next question from Stephen Reitman from Société Générale. Please go ahead.

Stephen M. Reitman - Société Générale SA (Broker)

Yes. Good day. I've got some questions on North America, specifically on slide 10. My first question, you mentioned that the fleet mix, 24%, there have been some improvement within the channels. Historically I understand that rental has been roughly about 75% of the fleet mix. So has that changed? Has that declined in the second quarter?

My second question is about the adjusted EBIT walk down, and you say obviously that the EBIT excludes €519 million related to Takata and incremental cost of the NAFTA capacity realignment plan. Could you give some indication of how much of that relates to NAFTA capacity realignment plan? And are such change of plans normally also – at least is this the standard way of accounting also for your U.S. peers?

And third question, just in terms of R&D capitalization, traditionally, I think the impact on the Chrysler result was equivalents to about 90 basis points if you bring us to sort of a U.S. GAAP equivalent type figure. Does that still hold for the second quarter? Thank you.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

In terms of the Takata impact and the NAFTA capacity, the NAFTA capacity was about €100 million of the €519 million. And given it's related to restructuring plan of the footprint, I think it'd be normal for that to be classified as it is. So I don't think we're unusual compared to our peers in that regard. In terms of R&D capitalization, I need to get you the precise number to be frank. I don't want to give you an incorrect number. It's not material on NAFTA, but it is definitely lower than the number you're saying because we've been investing over the last five years. And so the impact between amortization and capitalization is negligible. And sorry, the first question, I missed it.

Stephen M. Reitman - Société Générale SA (Broker)

The...

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Fleet mix, we were down about 5% in terms of rent-a-car mix year-over-year.

Stephen M. Reitman - Société Générale SA (Broker)

So that means that the proportion of the 24% would have been...

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Yes, I think we were about 80% last year. We're at 75% this year, quarter-over-quarter.

Stephen M. Reitman - Société Générale SA (Broker)

Thank you very much.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

And we continue obviously to work on that because it's an important driver of overall mix in the profitability and fleet.

Stephen M. Reitman - Société Générale SA (Broker)

Understood. Thank you.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Thank you, Stephen.

Operator

We will now take our next question from Michael Tyndall from Citi. Please go ahead.

Mike Tyndall - Citigroup Global Markets Ltd.

Yes, hi, there. It's Mike Tyndall from Citi. Just two questions, if I may. The first relates to the U.S., again. Just around recalls. In Q3 of last year, you added quite a significant amount to your forward assumption on recalls. I'm wondering how we're looking in terms of the cadence. Let's put Takata to one side. Are you seeing recalls pretty much in line with what you're expecting? Or are you seeing potentially a pickup? Because if we look at some of the numbers for your recalls, it does feel like the cadence is perhaps a little bit higher than it is for your industry peers?

The second question relates to the EBIT walk for Europe. And specifically, just the contribution from other, if I'm not wrong, that includes financial services and Tofas and presumably the Spider. So at plus 4% I'm wondering is it just simply too early to see the benefits of those coming through? Or is this something else that's driving that where we're not seeing the benefit of those JVs coming through in terms of what you're seeing in growth in Europe? Thanks.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

I'll give you an answer to both. I think that the question that you've asked about the recalls, I don't have a better view today than what has already been booked as the potential recall obligations that FCA has in the United States. I think we have booked and are booking everything that we think requires intervention. I did mention that and started probably a couple of years ago that as a result of I think the heightened level of concern that we together with the regulators have now developed vis-à-vis the safety of our cars that we would see an adjustment process that it really reflects past practices and which reflects a zero acceptance of risk in relation to products that we sell or at least to the best of our abilities.

I think we're done with that adjustment process. We will continue to look at these populations for early signs of deterioration in performance in the event that somethings were missed. But I have no better information today, the numbers that are reflected and the numbers year-to-date as to what the recall population is. I just know that our efforts, the ones that are going on inside the house today, are such that we've heightened the level of scrutiny of our activities. We have devoted significant resources, both in manpower and skills to this task. I think it's the best that we know of today. And I don't really have a way of judging as to whether future activities will yield additional recall requirements.

I can only tell you that if we knew them, we would have booked them. But I think this is as good as it gets for now. The whole house is tuned to a different level now, not just in terms of products that are currently in the marketplace, but also products in development. So hopefully, this activity should diminish. And I think it will be a return to normalization for the industry, which I think is long overdue.

Mike Tyndall - Citigroup Global Markets Ltd.

Okay. Thank you. And on the European contribution?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Too early to tell.

Mike Tyndall - Citigroup Global Markets Ltd.

Yes, that's fair.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

We'll know more by December.

Mike Tyndall - Citigroup Global Markets Ltd.

Brilliant. Thank you very much.

Operator

We will now take our next question from Alberto Villa from Intermonte. Please go ahead.

Alberto Villa - Intermonte Sim SpA

Hi couple of questions. The first one is on the liquidity level that remained stable during the period. I wonder if we can expect a reduction in the available liquidity in the future. And how you think it will be phased in the next quarters? And the second one is related to the noise about emission in Germany and so on and so forth. We have heard about in the last few months. Now it's quiet period in terms of news flowing on that side? Can you update us on what are your expectations in terms of this issue, which remains pretty difficult to understand from the outside?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

We probably have slightly better knowledge than you do. But let me deal with – Richard will come back to you on the first issue. But I'll give you my views on this emission story. I think that the reason why most of us, including the general public is somewhat either confused or not sufficiently knowledgeable on this is because the way in which the European structure works. The rule or the rules, which impact this matter, are effectively established at the European level and delegation is given to the member states to apply them.

Lack of clarity at European level has left for a – has left a variety of possible interpretations available to the homologating jurisdictions of cars. And therefore, a view that is expressed from country X doesn't necessarily have to coincide with the view that is expressed from country Y.

Historically FCA has homologated nearly all of its cars through the Italian homologation system, which are – is reflective of its history in the country. And I think that the reason why this issue acquired this, as much prominence as it did is because a non-homologating authority in Germany decided to express an opinion on the homologation process which was outside of its jurisdiction.

I think the assumption or responsibility by the Italian authorities on this I think is reflective of the way in which the European structure was designed to work. And I think, we will continue to work with the entity to which we're responsible for our homologation activities to ensure compliance with the rules. There's a broader question that underlies all this, which has to do with the level of specificity of the European rule and the way in which it is being applied across the country.

And I think, it is up to Brussels to be able to provide the specificity. It is not up to us as carmakers to try and interpret what that is. I think it is only reasonable that carmakers interpret that rule in the absence of specific indications about content in the manner which produces the optimal results for the house.

And I think we've done so and a number of automakers have interpreted European rules in such a way. I think, it is absolutely improper for some people to express a moral opinion about compliance, when the thing does meet the requirements of the legal system in Europe.

And I think it's an issue that Brussels needs to wrestle to the ground with the help of the member states. But I think, we have done all we can, and I would expect that this issue at least for the time being will stop until Europe and the member countries try and find a resolution going forward which meets the requirements of all member countries.

Alberto Villa - Intermonte Sim SpA

Thank you.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

And Alberto on the – on liquidity, I would expect this to be around €23 billion compared to the €24.7 billion we have at June, basically we'll be repaying some maturities from now to year-end. We have €1 billion bond in October.

We have a CHF400 million bond in November. We have some maturities in Brazil, so we'll be taking it down to about €23 billion and taking down the gross debt accordingly.

Alberto Villa - Intermonte Sim SpA

Okay. But in the mid-term what is the liquidity we can expect as a target range?

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

Well, we've been talking about holding a cash balance compared to today of around €15 billion, so we're working through that. Obviously, we have maturities in 2017 and 2018. We need to continue to improve our EBITDA performance, generate cash flow, but obviously our target is to get our total liquidity to between €15 billion, €20 billion.

Alberto Villa - Intermonte Sim SpA

Okay. Thank you.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

The €20 billion was a slip. He really meant €15 billion.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

You're right.

Alberto Villa - Intermonte Sim SpA

Okay.

Operator

We will now take our next question from Patrick Hummel from UBS. Please go ahead.

Patrick Hummel - UBS AG (Broker)

Yes, good afternoon. Three questions left please. First as far as the EMEA performance is concerned, the 2.5% you indicated you're still not happy with that and talked about the product side and volume and mix effect coming from that. I was just curious as far as the cost side and efficiency side of things is concern, is there any acceleration of your effort to be expected? Because I guess the 2.5% is not what you can remotely be happy about given the peer results we see in the region. Should I just ask all three questions in a row? And then you can answer all three of them right away?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Well, I can give you the answer to the acceleration question. The answer is, yes. I mean, obviously, whenever these numbers come out and as much as I am appreciative of the performance of others. And I'm respectful of our competitors' earnings generation, the simple question that we asked ourselves is why can't we not do that, or be better than them?

And I think that that message has now been driven through the organization. We've seen this happen both in NAFTA and we've seen it happen in EMEA. EMEA has come a long way given its earnings profile over the last three years or four years. I think it needs to go the next yard and really try and claim best-in-class margins in EMEA.

I think it's a process that's undergoing. I think we'll see some improvement as the casino plan comes to full fruition with the introduction of the cars for Alfa Romeo and I think the benefit of the full ramp up of Levante will go a long way in terms of absorbing part of the industrial cost structure. But I think, we understand the task and I think we're working on it. (1:10:21)

Patrick Hummel - UBS AG (Broker)

Okay. And my second question. In the U.S. pickup segment, we saw – one of your competitors being quite aggressive with incentives as of late, namely the Chevy Silverado. I was just wondering if you could give us an updated view on how you see the Ram family doing in that environment and what your expectations are for the next couple of quarters.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

I will not pass – I will not give you an opinion as to what you suggested from our competitors as being the case. We did see this activity in the marketplace. It was a relatively short-lived flash, less than two weeks. And so we – I can only tell you that we did not follow our competitor down that path. We've maintained our pricing discipline. And I think that – and I'm not taking that as an indication of things going forward. I think that the sector continues to provide opportunity for all market players to try and achieve decent results. And I do not see any deterioration in the underlying economics of this business.

Patrick Hummel - UBS AG (Broker)

Okay. Thank you. And the last question, regarding the car production. I appreciate you're still in progress, in terms of looking for a partner. For the case, that this partner is not going to be found, is it an option to actually discontinue some of the models? And could that imply further financial charges not just write-downs, but also cash out?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

No. I think that we have made – even in that event which is in my view, unlikely, I think, we have taken all relevant charges to the best of our knowledge on the discontinuation of our involvement in car manufacturing in the continental United States. And so there will be no additional charges. I don't see this as having a negative impact on our activities in the U.S. Although I think it would – it may impact on a marginal relevance of some of our brands not being present – even though it's a decreasing market for passenger cars, it continues to be large. And so the ability to play is important to us. I think we're making every effort to replace both the Dodge Dart and the Chrysler 200 with equivalent products on a basis which is much more economical to us than yesterday. But I don't expect any drastic or draconian charges to happen in the event that a partner were not to be found. There aren't any.

Patrick Hummel - UBS AG (Broker)

Okay. Very good. Thank you very much.

Operator

We will now take our next question from Gabriele Gambarova from Banca Akros. Please go ahead.

Gabriele Gambarova - Banca Akros SpA

Yes, good afternoon to everybody. I was wondering if you could give me some more color on the Jeep market acceptance in China, Richard Palmer said that you're going to introduce the new C-SUV already in September. It seems to me if there is a stronger solution (1:13:41).

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

I think, Mr. Richard – Mr. Palmer was carried away by enthusiasm, he was actually thinking of Latin America.

Gabriele Gambarova - Banca Akros SpA

Okay.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

So as hardworking as we are, I think, it would have been almost impossible for us to launch the C-SUV in China by September, since we just launched the Renegade in March.

Gabriele Gambarova - Banca Akros SpA

Okay.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

But having said that and putting that issue aside, the Jeep C-SUV will come to China, it's coming to China in 2017. The first launch of the SUV is out of Pernambuco in Brazil that will be launched in September, which will be followed by the launch of the vehicle in Toluca for North American use. And then it will go to China immediately thereafter. But the reaction – the – a broader answer to your question is, I think the acceptance of both the Cherokee and the Renegade in China so far has been quite good.

And I think it is confirming our expectations, that the Jeep brand has phenomenal traction in that country. We now having achieved local production, I think we are in a position to be fully competitive with – in the Chinese market. I think, we need to wait. I think that our ambitions to sell 500,000 jeeps in China by 2018 remains unchanged. And so that's the target.

Gabriele Gambarova - Banca Akros SpA

And if I can, just a brief follow-up on Brazil. The local association said that 2017 maybe, let's say, a flat year in terms of registrations? Do you share this view? What do you see – what you can see there?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

I think, a lot of it depends on the resolution of the political impasse in Brazil in the next two months or three months. There is a view which I think we at least partially subscribe to that says that the second half of 2016 will indicate the beginning of a recovery in the Brazilian market.

I think we're comforted by the fact that the Argentinian market continues to perform well, which has been a historical problem for us because of uncertainty associated with the governance in that jurisdiction.

I think if the issue in Brazil clears from a government standpoint, I think that we're much more hopeful than the forecast that you mentioned about recovery in 2017. It will not be stellar.

But we're now sitting on volumes that I don't think I have seen since I've been involved in FCA. I mean, I have to go back and look at 2004 levels. But we expect the numbers to be between 1.8 million and 1.9 million cars in 2016. And that's a number, that's about half of what the original forecast was for that market in 2016.

So a 50% reduction in volumes is as bad as it gets. I think, it's highly unlikely that we'll continue to see a deterioration in that number. At least a flattening out of that number for a prolonged period of time. There has to be a bounce. When that bounce happens is unclear to me. But I'm hopeful that it will happen in 2017.

Gabriele Gambarova - Banca Akros SpA

Okay. Crystal clear. Many thanks.

Operator

We will now take our last question from José Asumendi from JPMorgan. Please go ahead.

José Asumendi - JPMorgan Securities Plc

Thank you. José, JPMorgan. Just one item please. So you're running CapEx about €0.5 billion lower in the first half year-on-year. And I was just hoping you could revisit the theme of hitting the net cash position in 2018 and give us an update on two items. Number one, your CapEx target for 2017 possibly declining year-on-year? And second, what is going to be the net impact of producing less sedans in the U.S. versus increasing the CapEx a bit on SUVs and pickup trucks? Thank you.

Richard Keith Palmer - Chief Financial Officer, COO-Systems & Casting

José, to be frank, I think we'll gives you guidance on 2017 CapEx when we get there. I don't think it's going to be substantially different from the sorts of numbers we've been running at. We do have some significant investments going through in the U.S. as we renew the light-duty truck in shop and the Wrangler. So we'll work through it and give you a better idea of that as we get towards 2017.

José Asumendi - JPMorgan Securities Plc

(1:18:12) of higher CapEx 2017 versus 2016?

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

That's unlikely. But let's finish 2016, let's see where we are. And I think we'll give you – I think that the interesting thing is that vis-à-vis the 2018 plan, at the end of 2016, we will have an incredibly granular view of what we intend to spend in the next 24 months. And that's going to make our life a lot easier in terms of helping you – in helping – in guiding you toward a number for the end of 2018.

The only thing I know is that, as of now, based on the numbers that we've seen and the expected performance from the launches that we have planned between now and 2018, that the – I can give you confirmation of the fact that this leadership team believes that the numbers for 2018 are achievable.

And the level of comfort with those targets has increased substantially from when we launched the plan back in 2014. So just bear with us as we work our way through the details. But I think we'll give you a better view in – at the beginning of 2017 as we launch into the second-last year of this plan and see whether we can bring it home.

José Asumendi - JPMorgan Securities Plc

Okay. Thank you.

Sergio Marchionne - Chief Executive Officer of Fiat Chrysler Automobiles N.V. and Chairman and CEO of FCA US LLC.

Thanks.

Operator

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 - Vice President - Global Investor Relations

Thank you, Jillian. And once again, thanks everyone for joining us today. Have a pleasant 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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