Joseph Veltri - Fiat Chrysler Automobiles NV Michael Mark Manley - Fiat Chrysler Automobiles NV Richard Keith Palmer - Fiat Chrysler Automobiles NV.

George Galliers - Evercore ISI John Murphy - Bank of America Merrill Lynch Adam Michael Jonas - Morgan Stanley & Co. LLC José M. Asumendi - JPMorgan Securities Plc Thomas Besson - Kepler Cheuvreux SA Dominic O'Brien - Exane Ltd. Brian A. Johnson - Barclays Capital, Inc.

Martino De Ambroggi - Equita SIM SpA Stephen Reitman - Société Générale SA (UK) Giulio Pescatore - HSBC Trinkaus & Burkhardt AG (Broker).

Good afternoon or good morning, ladies and gentlemen, and welcome to today's Fiat Chrysler Automobiles 2018 Second Quarter Results Webcast and 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..

Thank you, Sebastian, and welcome to all of you who are joining us today. You will find today's Q2 presentation material along with the related earnings press release under the Investors section of our corporate website.

Our call today will be hosted by Mike Manley, the group's Chief Executive Officer, and Richard Palmer, the group's Chief Financial Officer. After their presentations, we will be hosting the customary question-and-answer session.

Before we begin, I would just like to point out that any forward-looking statements that might be made during today's call are subject to the risks and uncertainties as noted in the Safe Harbor statement that you can find on page 2 of today's presentation material, and that the call will be governed by this language.

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

Thank you, Joe, and good afternoon, good morning, everybody. I'm going to begin today by talking about Sergio. We received the news this morning that Sergio had passed away and, clearly, this is a very sad and difficult time, and our thoughts and prayers go out to Sergio's family, friends and colleagues.

Now, personally, having spent the last nine years of my life seeing or talking to Sergio almost on a daily basis, this morning's news is heartbreaking and I know that it will also be heartbreaking for many other people. There is no doubt that Sergio was a very special, unique man and there is no doubt that he's going to be sorely missed.

I don't think that there is anything I could say about Sergio's exceptional leadership and character that isn't known by all of you on this call.

And over the years I've worked for Sergio, I've listened to or watched many of the interactions that you and him have had together; and, what was absolutely clear to me is that he truly had a special relationship with you. Now, I know that from his perspective this relationship was based upon transparency, delivery, but most importantly, respect.

Now, I have read many of the reports you've recently published about Sergio since the news of his health became public and I've also seen numerous messages of support sent both to the company and to Sergio's family. I can tell you those messages mean a lot and I'd like to personally thank you for them.

So before we get on the call, if I may, I'd like us to take a minute's silence in memory of a very special person. Thank you. Okay. Now, as you'll recall, Sergio stated in his closing remarks during our Capital Markets Day in Balocco that Q2 was going to be a tough quarter, and it has proven to be just that. Let me start with some good news.

This was also signaled in Balocco with the famous wearing of the tie, and we can confirm that we indeed ended the quarter in a net cash position. And also, on the positive side, we delivered improved earnings over Q1 with NAFTA posting a record Q2 profit. Our retail share in the U.S.

increased, driven by Wrangler, Cherokee and our all-new Ram Light Duty. In LATAM, we regained our market leadership in Brazil and our progress continued with a profit contribution up nearly 70%. Now, on a previous topic that has been discussed before in this forum, I just want to address it now and that's our Light Duty production.

I'm pleased that we have made significant progress during the quarter in resolving many of the production ramp-up issues that we had with our new Light Duty Ram, and I think it's largely behind us now. My expectation is that we will reach full production in the fourth quarter.

Clearly, when you step back and look at our results for the quarter, the biggest challenges we face, and frankly we're going to continue to face to some extent for the balance of the year, are all focused in China.

With the duty changes that were announced, these particularly impacted Maserati, which resulted in a significant slowdown in sales and shipments to dealers.

Now, with the term, all of these duty changes behind us, I'm clearly expecting improved sales performance, though we now enter a period where we have to manage our inventory in anticipation of the transition to China's 6 emission regulations, and that will impact our second half shipments; and, that is reflected in our revised guidance.

APAC underperformed with our expectations with our China import business, also being affected by duty changes.

Our joint venture volumes were down, partly because of the contraction in the SUV segments, but also the need for us to accelerate the work to reposition the Jeep brand in the market that I mentioned and discussed while we were in Capital Markets Day. But it's obvious, China is clearly a key priority for me in the coming weeks.

We do understand the issues that we face and, more importantly, we know what to do to correct our performance. These actions are already underway and will continue to be taken during the second half.

But based on the first half results and the time needed to work through a number of these performance issues, we are adjusting our guidance for the full year. Full year revenue forecast is adjusted down to €115 billion to €118 billion.

EBIT margin is going to significantly increase in the second half with improved production of Light Duty, obviously, the elimination of the launch costs and improved mix, and this is going to result in a forecasted EBIT range of €7.5 billion to €8 billion. Adjusted net profit of €5 billion remains unchanged and is confirmed.

Now finally, net industrial cash is adjusted down to €3 billion, and I'm going to hand over to Richard in a minute, who'll explain and take you through the rest of the details.

Richard?.

lower EBITDA, given the reduction in the EBIT guidance, and lower positive working capital of about €1 billion due to the reduction in our revenues, offset by less CapEx of about €0.5 billion compared to our prior guidance. We're looking at CapEx in the range – the prior range we gave was €8 billion to €8.5 billion.

I think we're now looking at €7.5 billion to €8 billion range, and so – and also, we're having lower cash taxes given the tax rate I mentioned earlier.

But given these changes, putting them into context, if we think about the new guidance compared to 2017 at constant exchange to look at our performance transparently, the net revenue number at the midpoint would still be up 10%, adjusted EBIT would be up 15%, adjusted net profit would be up over 40% of which about half is due to U.S.

tax reform, but the other half is performance in the business, and the improvement in our net industrial debt for 2018 will be more than double the performance we had in 2017.

Now, having said all of that, the last comment is, notwithstanding the guidance revision for 2018, we do confirm the remaining business plan targets for the period through 2022. And with that, I thank you and hand over to Joe for Q&A..

Thank you, Richard. Sebastian, I think we're ready to start Q&A, so if you could begin that process, please..

Ladies and gentlemen, today's question-and-answer session will be conducted electronically. We'll now take our first question from George Galliers from Evercore. Please go ahead, sir..

Thank you for taking my questions on what is a very sad day. And, Mike, as you already said most eloquently, I believe everyone's thought are with Sergio's family and friends as well as the FCA team. With Sergio in mind, the first question I had was just with respect to the guidance.

I believe Sergio took great pride in the company's record of holding and hitting guidance.

With the change to guidance something which, as a management team, you had a chance to discuss with Sergio before he fell ill, do you think he would've done the same had he been with us today?.

Richard, I think it's probably more appropriate for you to answer that..

Sure. Thanks, Mike. It's obviously a question we've been toying with ourselves. I think the simple answer is, yes, I do believe he would've changed the guidance. Notwithstanding that, as you can imagine, my meetings with him regarding such actions were always fairly colorful. As you are all aware, though, S.M.

was very factual, very fact-based in his reasoning and he was very transparent in his communications to the financial markets and to yourselves, which he held in great esteem. So I think, as Mike said earlier, he did allude to the fact that the second quarter was going to be a tough quarter when we were at our Capital Markets Day on June the 1st.

He was conscious that we would need to take a thorough look at the full-year guidance as the Q2 numbers came in and as we prepared this second quarter reporting process. So I am confident that he would have understood that the guidance needed to be revised.

And not to labor the point, but as I already mentioned, the revised guidance still represents an extremely strong year for FCA in 2018..

Thank you. And then – no, that's very helpful. And as a second question just on North America, could you provide any detail on where the new Ram production is today versus plan and versus cycle? I think at Q1 you mentioned 60%.

Could you give an update to that number and perhaps some insight into any unresolved problems outstanding and what the future costs in fixing those might be?.

Yeah. If I may, I'll take that first piece. I think you're right. It was 50%, 55% in the first quarter. We're now at 80%, 85% to full production. We're now beginning to bring on a number of the options that were scheduled later in production as the ramp-up improved, including the full range of powertrains.

And I think what we're now working on is the focus to bring those options on and, as I think both Richard and I said, we'll be in full production in fourth quarter..

Look, with regards to launch costs, George, I think we've had launch costs in both Q1 and Q2 of around €300 million, and we expect those to be significantly reduced in Q3 and substantially eliminated in Q4. So obviously, that's going to give us a lot of tailwind as we go into the second half in terms of margin generation..

Understood.

And then, just finally on the issues that you're facing in China, or the challenges, in terms of what happened with the tariffs, is it correct to assume that the consumer was looking for the reduction in the list price as the consequence of the fallen duty ahead of the fallen duty actually being implemented? And if that's the case, does that mean that now that you benefit from the lower duty, that kind of headwind diminishes in the second half?.

Yeah. No, I think that's exactly the situation. Having worked in the past in China for a long time, they are very, very cost conscious or value conscious, probably, in the segment that Maserati plays in. So we saw a contraction there.

And as you may know, many, many factories, including us, had to move early with a repricing of our existing inventory in country to try and stimulate sales. And even with that, the large number of consumers is still wanting to wait. But that noise, as I mentioned before, is now behind us.

And particularly with the source of Maserati, we do benefit in the marketplace, which is why I think our sales rate will increase.

What we do need to do now, as Richard talked to, is in January we move into a China 6 emission standard, which means we have to very carefully manage our inventory, particularly with a brand like Maserati, and that's our intention now.

So I expect increasing sales, but our shipments will be aligned to the balancing of that inventory, and that's reflected in our guidance..

Great. Thank you very much..

We now take our next question from John Murphy. Your line is open..

Just to sort of echo everything – can you hear me?.

Yes, we can, John..

Hello, can you hear me? Okay. Yeah..

Yes, we can..

I'm sorry about that. Just wanted to say our thoughts and prayers are with you really in this surreal time, you know Sergio passing. I mean, he'll really be missed, but I would say one thing. It's really a credit to you as a team, and definitely to his legacy, that you're marching on with this call.

It's really impressive that everything is still moving forward as planned. So to you guys, that's a great credit.

Just a first question, when we think about the trucks, GM this morning was talking about price and mix on their outgoing truck as a bit challenged, and sort of was a source of pain for them in the quarter and potentially a little bit going forward.

Just curious what you're seeing in the market on trucks in North America even post getting the Ram ramped up?.

Yeah. This is Mike, John. Firstly, I'll answer the question in a couple of ways if I may. At this moment in time in the truck market in the U.S., I would say it is very price competitive.

One of the things that we've been able to do, though, with the strategy of our Classic truck, as you know, and our new truck is to make sure that we can maintain margin on our new vehicle. And in fact, Richard already alluded that our pricing covered all of the increase in terms of the variable cost of those vehicles.

So despite the fact that it is competitive, we're up around 11% on the retail side, we've more than recovered the incremental cost. I think that the pressure in the market will continue and that's where we've been able to mix to Classic and mix into the very high trim levels on the new Light Duty, and we're going to continue to do that.

And one of the things that we have done is start our fleet channels so that we can maximize that margin mix and, of course, when production continues to improve, we'll get the benefit of that in our margin in the fourth quarter..

Okay. That's helpful. And then, just a second question around the price elasticity of demand, both in North America and China. What do you think it is, at this point, because there's two sort of headwinds here? It's potentially tariffs and potentially raw mats – or raw mats are rising and you're going to need to offset both those cost potentially.

I mean, how much pricing power do you think you have in both those markets across your product portfolio?.

Well, I just covered truck and I think that's going to continue, certainly, for the balance of this year and hopefully through 2019. We are holding significant pricing power in our new launches, Wrangler, for example, new Cherokee compared to old Cherokee, but they're very competitive segments and that will diminish over time.

In China, part of the repositioning of Jeep which is very important for us to get our Jeep volume moving in the right direction is the launch of the new Commander, our K8. That vehicle was designed for China.

All new vehicles in China for a period of time are able to hold pricing power, and then obviously, follow the curve depending on the strength of the brand. So I think for the balance of this year for quite a lot of the volume that we have in our plan, we're in good shape; and then, we'll see how 2019.

In terms of material cost, I'll let Richard jump in..

In terms of the costs themselves, yes, we are obviously seeing some pressure there. On steel we have, basically, we have fixed priced contracts for most of our steel buy through 2018. I think it's going to be interesting to see, as the discussions around tariffs, duties, et cetera, get clarified, where the steel price goes.

We have built into our plan what I would consider for 2019 a reasonable level of commodity price increase, but we will see an increase in 2019 at current prices, especially for steel. If we look at the duty side of it, most of the duties themselves aren't the key issue. The issue is how those duties affect price.

We buy most of our steel in the local jurisdictions where we produce. And even in situations like in NAFTA, where we do buy steel, say, in the U.S. and export it to Mexico, Canada, then come back, we do have the opportunity, I think, to use duty drawback to eliminate the impact.

So not overly concerned today, John, but we obviously need to keep a real eye on commodity price as we move into the first part of 2019..

And Richard, maybe just one last follow-up to that. We've seen almost a $1,500 increase in the raw mat complex going into an average vehicle in the U.S. over the course of the last two years.

How much of that increase and sort of the total of horseshoes and hand grenades of about $3,500 of raw mats going into a vehicle is on your books, and how much of it is on the supplier books? Really, who's at risk on this, particularly on the increase? And can you potentially push some of that raw mat pressure back down to the suppliers that are earning much higher margins than you are right now?.

Yeah, I like the last part of how you phrased that question, because I think it clearly is going to be a negotiation with the suppliers. The impact clearly will be something that we'll need to look at given that we are in the phase of continuing to improve our product portfolio and invest in key products.

Those types of investments give us leverage with the supply base, obviously, and negotiating power, and we will be discussing with suppliers how we can share the impacts of raw material increases as we go into 2019, for sure..

Are those annual discussions? I'm sorry..

How much we can discuss with suppliers?.

Yeah, I'm sorry, but the timing of those discussions, are those annual or are those at contract RFPs when you're going through the bid process and those are locked in for a four to five-year period?.

It largely actually depends on the jurisdiction. We tend to have a higher level of indexing in North America than we have in the rest of the world, so it depends a little bit on the jurisdiction, John..

Okay. Thank you very much, guys..

Substantially, we have both..

We now take our next question from Adam Jonas. Please go ahead, please..

I don't have any questions for the call. I just wanted to say that I still feel Sergio's presence on the call. I think he – a light has gone out, a very bright light, but he kindled a lot of other lights and the company is in good hands. Joe, I'll follow-up with you after the call..

Thank you, Adam, for the kind words..

We now take our next question from José Asumendi from JPMorgan. Please go ahead, sir..

José from JPMorgan. I echo also the comments on Sergio. Thank you, Mike and Richard. Maybe three items; the first one on Europe, WLTP.

Where are we on personal certification of cars into WLTP? Is there any risk or opportunity for you going forward? Second, in terms of the U.S., North America and the ramp-up issues from the Ram 1500, I appreciate the comments on the percentages, how the car – the truck has been rolled out.

Can you maybe give us some color in terms of the unit sales or the increase in production rate in the second half versus the first half? Maybe in units in production, how is the step-up in Q3, Q4 versus the first half? That would be very useful. And then finally, in looking at Brazil, you're printing nearly 5% margins.

I think there's a very strong EBIT opportunity here for the coming two years. There's definitely a change in product mix with the Jeep. Can you talk a bit about the Pernambuco plant? How many Jeep products do you have rolled out there? How is that changing the product mix in Brazil? Any details would be very useful. Thank you..

Thanks, José. It's Mike. With regard to WLTP, obviously, the standard's in from 1st of September because, as you know, the changes – it will change fleet average CO2 emissions and, therefore, unless we are proactive in managing that back down, the consequences are clearly that you're going to pay more money.

We've already started work on the new certification to manage our CO2 from a fleet corporate average and that's by driving, where we can in the short term, additional emission reductions. The other thing that we have to protect us is, obviously, mix.

We know that we can move mix, but I still think there will be a residual effect on our corporate fleet, really, as we get into 2019. That number, we've made an assessment and clearly at this moment in time we're baking it in, but the teams are still working to get us back to the corporate-average fleet number that we had pre the change.

In terms of the production numbers on Ram, you okay with that one, Richard?.

Yeah. So obviously, we have two impacts in the second half compared to the first half, both the Light Duty and the Heavy Duty.

So substantially between the two, we have about 100,000 units of pickups more in the second half than in the first half as we restart the Heavy Duty for about 40,000 and we continued to ramp up the Light Duty, the new truck, for around 60,000..

And I'm not entirely sure I'll answer the question in Brazil. I'm going to make an attempt, but you can redirect, obviously. Clearly, Pernambuco produces for us both Compass and Renegade. And you can see from our Jeep growth in not just Brazil, but also Argentina and across the region, how that mix is changing and changing dramatically.

But we are very, very strong with our Fiat brand and, as we said earlier, we've just regained our market leadership, and that's really from the launches of the two new vehicles.

So when I think about Brazil, I really think about it as having opportunity on both sides, and what we're able to do with our Jeep brand is to make sure it's premium priced, even in segments that don't traditionally overlap because, in Brazil, many people shop on price. So the guys in Brazil, I think, have done a good job managing that walk.

They've done a good job with their separation of their networks, and you're going to continue to see Jeep and, I think, Fiat grow. Obviously, we need to get through the elections later this year and make sure we're settled down as we go into 2019..

Thank you. Thank you very much..

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

Thank you very much. I also echo these comments on Sergio, and have two questions, please. First, I'd like to check with you the EBIT guidance change. So you take it down by €700 million to a €1.2 billion, and I understand that the two main negatives are effectively China linked with Maserati and APAC.

But still, with these two alone, I struggle a bit to justify such an adjustment. So can you tell me if I'm missing something, if one of the other divisions is also affected by your change in assumptions? Second question is on the U.S. Finco you have mentioned of a possibility for the near future for FCA.

Is there any update on that? Is it still something you are strongly considering? And can we know where you stand there? Thank you..

Well, Thomas, I think that your second is about process of the Finco. Yeah. I mean, we're still working on this, as we discussed on June 1.

I think we see this as an interesting opportunity to deploy capital into our core business and into the NAFTA region, which is obviously the heart of our profitability and where we generate a portfolio for financial partners today to make earnings off. And I think we see that as being a potential good investment from a capital point of view.

Plus, I think it brings very positive impacts to our relationship with both dealers and customers as we get – be able to be more creative, faster into the market, work on loyalty, et cetera. So I don't have anything specific as an update today.

It is still a work in progress, but nothing has changed as regards our intention to look at this very carefully..

Thank you. And on the other question, basically Maserati is a....

Yeah, so clearly – yeah, the guidance, yeah. So we continue to have a slower ramp-up also in NAFTA for the Light Duty truck in second quarter. And as I mentioned, whilst we expected launch costs to be down in Q2, they were actually flat.

So our first half NAFTA performance is another factor in our moving our guidance for the full year, together with, as you mentioned, the performance in China related to both Asia-Pacific and Maserati..

Great. Thank you very much..

Thank you..

We now take our next question from Dominic O'Brien from Exane. Please go ahead, sir..

Hi, everyone. Thanks for taking my questions. Firstly, I don't think I can add much to what has been said earlier, so I just wanted to offer my deepest sympathies, and my thoughts are with his family, friends, and to all of you guys on the team. Into my questions. I think my first question is on product mix in NAFTA.

Can you give us a bit more detail on why you highlight unfavorable vehicle mix in the quarter, please? It didn't seem to be an issue in Q1, and in Q2 it looked like shipments were very strong and pricing was good.

So is this a launch schedule issue or is something else going on, and how should we expect that to progress into the second half? And my second question is on Maserati.

Was there a natural inventory write-down that you had in the quarter there on the Chinese product? And then, my final question is on CapEx, just why was it so low in Q2? And even under the new guidance it looks like you'll have an incredibly burdensome second half, so what drives the massive uplift in the second half? Thank you..

It's Richard. Thanks for your comments, Dominic. The bigger item in Q2, really, is the Heavy Duty volumes were down, as I mentioned, so we had the shutdown in that plant for 40 days in the quarter related to retooling activity in preparation for the launch of that new vehicle in the beginning of 2019; so, that hurt our mix.

We also had – compared to Q1, we also had an impact of much higher Cherokee volumes as we're building up the new Cherokee, which is performing well in the marketplace, which obviously doesn't have the same level of margins as some of our other products.

And in Q1, we had the benefit of both the old Wrangler and the new Wrangler, and we're not seeing that in Q2. I think going forward, as we mentioned before, the important thing is we'll have both the Heavy Duty truck back and higher Light Duty volumes in the second half, so that we expect to see positive mix coming back in the second half.

On Maserati, we didn't have an inventory write-down, no. We just adjusted our price positions in the marketplace for other reasons we outlined. And on CapEx, it's basically, as we also talked about in Q1, we are in the process of ramping up spending on some key products, notably the new Grand Cherokee and the new Grand Wagoneer.

Depending on how quickly those go, we will have much higher spending in the second half of the year. And obviously, last year we were in full spending for the Light Duty truck and the Wrangler, and that has basically impacted the year-over-year comparison in the first half..

Okay. Thank you. Just one follow-up, quickly, on mix.

So there's no comment at all, no noticeable impact of any sort of trading down within segments or within products?.

Nope..

To lower trim levels, for example..

Nope. Nope..

Okay. Thank you..

We now take our next question from Brian Johnson from Barclays. Please go ahead, sir..

Yes, I want to echo all the notes of sympathy and certainly will be extremely difficult shoes to fill, but I have some confidence. I have a housekeeping question, then, as more of a question in terms of the management structure. The housekeeping question is other OEMs, particularly GM this morning, flagged commodities really hitting now.

Is there something about your hedges and/or timing of steel contracts that protect your second half and make it more of maybe a 2019 issue?.

Basically, yes, Brian. As I mentioned before, we have fixed price contracts through 2018, so if we – we will see an issue in 2019. Obviously, if the current commodity prices continue, there will be an impact in 2019. A large part of that, I believe, is built into our forecast, but we will look at that at the right time..

Okay.

And second, when we think about all the many great things that Sergio was on top of, I'm struck by his consistent thinking and spearheading of strategic options, including of course, the spinouts of Ferrari and CNH and the upcoming Magneti Marelli, as well as his political dexterity dealing with changes in government that kind of shifted from left to right, and in Italy at least, both at the same time, in Italy, Brazil, and now in the U.S.

How are you thinking about those aspects beyond the day-to-day managing of the product line and the decisions and how you as a management team along with the board and the chairman are going to address those?.

In terms of the relationships, clearly that's a big part of the early days in my job to continue to development. You don't build relationships as strong as Sergio does overnight, but I believe because those relationships were there, at least the doors are open and I can sit and we can have the same discussions.

Our approach, clearly as Sergio's, is going to be very similar in terms of our thinking because he was, as you said, adept at doing that, and it was directed, I think, to help us achieve the things that we've agreed to achieve. So that clearly is something that we'll work on, clearly a responsibility of mine and other members of the team.

There was another question in there. Sorry, I missed it..

Well, that was the diplomatic relations.

How about spearheading, just thinking where the corporation is going in terms of strategic options and the sort of deal-making he was known for?.

Firstly, one of the things that I had a lot of time working with Sergio on was obviously our five-year plan, which sets the course of the company, as you know, over the period. What we've always demonstrated in the past is the ability to be flexible, because circumstances change and that flexibility is important as well.

And if that flexibility includes the need to make deals or gives us the opportunity to do that, we're going to. But fundamentally, my mandate is to deliver that five-year plan. We have all of the resources that we need over the period and my intention is to deliver the plan as a strong independent FCA, and my team's focus is on that as well..

Okay. Thank you. And again, my sympathy..

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

Yeah. Good afternoon, John and all of you, and my thoughts go to Sergio and his family. I have two questions. One on the guidance, Richard, just to have an idea, a very rough indication on what portion of the downward revision of the guidance at adjusted EBITDA is attributable to Maserati very, very roughly.

And still on the guidance, I understand the lower tax rate, it was 25%, not 21%, but there is something more in order to match the revised adjusted EBITDA with the net profit which remain unchanged..

So to the midpoint of the €1 billion of reduction in EBIT, about a third is Maserati. We're being prudent on our projections into the second half. We expect them to do better, but obviously the guidance is giving us enough time to react to the issues that Mike mentioned.

In terms of the net profit, I think, as you're aware, we had some headroom in our net profit guidance compared to the EBIT, which we discussed when we announced the guidance. So basically, we have covered some of the reduction in the EBIT with the tax rate and some reduction in finance charges. We work on both those levers to maximize our net income..

Okay.

The 21% is structural going forward or exceptional for the current year?.

I think as we work through the new tax laws in the U.S. and some of the issues that those have created, I think we'll give you a better idea of our long-term tax rate, but I think it's probably a little bit higher than the 21%, around 25%..

Okay.

And the last question for Mike, first of all, what's your feeling about the business plan? What are the most challenging targets that you presented in the business plan? And you already answered to your mandate, so to pursue the five-year business plan, remaining independent, but what's your personal feeling on the need of aggregation, which was long discussed with Sergio in the past?.

I'll answer in reverse order. As I said, I think we're at the position now that we can deliver our five-year business plan as an independent, strong organization. That doesn't mean to say that we can cooperate on components or other elements as part of our business.

But we're very, very focused, as I said, on that independence during this period, and the delivery of the business plan.

In terms of risk in the business plan, when I look at the targets that we've laid out, and of course we're now covering a period where we're going to see significant electrification and we're going to see more and more autonomy in the marketplace, more and more connectivity, clearly, what we will see is the deployment of all of that technology.

So in my mind, it is not the development of our brands. It is not the development of our volumes. It's always, and invariably does come down to, how we execute. Execution will be the difference between us hitting the plan or not hitting the plan, in my opinion. And that's why we're incredibly focused in terms of the product development that's coming up.

So hopefully, that answers the question..

Okay. Thank you..

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

Yes. Good afternoon. Also, I'd like to add my sympathies for very sad day. If I could turn to two topics, please, Maserati and APAC, you've obviously very clearly explained the issues, you say, relating to China.

But when you look at the shipments, obviously, there was a quite substantial drop in most of the other areas; North America down by 22%, Europe down by 23%, and Other down by 35%, and also Japan down as well.

Was there any scope for redirecting vehicles that maybe were destined for China to other markets? Judging by, you can see the shipments here, that doesn't seem to have occurred.

So you could you comment maybe on the state of Maserati, the level of inventories globally, and how do you think, also, you're going to fix that, the issues outside China? And secondly, relating to China as well, you mentioned, of course, the issues with the SUVs there and about your hopes for the Grand Commander, but when I look at the other vehicles you've got on sale in China, Cherokee, Renegade and Compass, your wholesales, I think, were down by about 34% in the first half of the year.

The overall SUV market in China was up almost 10%, so clearly a significant underperformance there. So it needs more than the Grand Commander. What else – what other kind of factors do you think you're going to put into play to really to change this quite negative trend? Thank you..

Maserati shipments were down in other areas, but as I mentioned, 70% of the issue is all focused on China. Other areas, for example in the U.S. as you probably know in the premium part of the segment that we cover, we saw a slowdown in terms of the E-SUV and E-sedans.

So notwithstanding the fact that they were down, as I said, this is really a China story. I have confidence in the Maserati team and in those other areas to make up whatever the shortfall that they've had today sales-wise. Inventory is another question because we mentioned the management of the inventory in China and that's clearly our biggest focus.

In terms of absolute numbers, I don't know.

Richard, do you have those?.

Overall in dealer inventory worldwide, we have about three months of stock on an average basis and that number is higher for China. We also have property stock as well, which we need to work through. So, Stephen, one of the reasons why we've adjusted the guidance is because, frankly, the Maserati inventory position is too high.

I think to Mike's point, the way you resolve that is we need to execute better commercially, and so I think that's key for the second half of the year..

Moving on to China, you're right. It's not just going to be fixed by Grand Commander, because we have a number of other products in the market that we need to sell.

You'll see, and we have done consistently, really pulled back quite heavily on our marketing whilst we work our way through the message and the tone of voice of the brand as we reposition that I mentioned before. I think the other thing that needs work for us is the strength of our dealer network.

We're still not where I would like us to be in terms of the strength of our distribution channel, so that is a key target for us. And then, finally, we're getting into a period where we are making updates on our vehicles, particularly as we get to the end of this year and next year, whether it's engine updates or changes.

And that's important in China as well. So there are certainly a combination of things that we need to fix. That process has started. I think it will take the balance of the year for us to really see the progress that I'm looking for, but the good news is I think we know what they are.

We can certainly fix them and I think we have a team in place that will do just that..

And are your dealers reporting any anti-American sentiment, similar to those issues that Hyundai faced when Korea and China squared off over – territorially, from the U.S. from the rhetoric surrounding tariffs and the like..

I spoke to our head of the joint venture on that topic. The feedback that I've got at this moment in time is nothing discernible, but it's really kind of anecdotal at the moment.

I think we're going to have to see, because I do remember when the backlash against Japan happened, it was a growing momentum; but, at this moment in time, nothing that I would say has materially impacted us, just that duty change that caused all the disruption in the segments..

Thank you..

Our final question comes from Giulio Pescatore from HSBC. Please go ahead, sir..

Hello to everybody and I would like to echo the comments of my colleagues. Moving on to the question, I have two, if I may. The first one it's a follow-up on APAC. You mentioned the impact of increased local competition in the market.

Is there something that surprised you, and do you expect local competition to be affecting your long-term plan as you try to better penetrate the market? And the second one, maybe if you could give us a comment on the departure of Mr.

Altavilla and is his departure likely to affect your strategy for the EMEA region, and particularly when we look at localized production in Italy? So thank you..

Let me start with Alfredo Altavilla. You know, what I would say is his departure was unfortunate, but it was not unforeseen. And in my press release, as I think was right and proper given his tenure with the company, we needed to thank him for his work. Clearly, he brought EMEA back up to, I think, we said to just around a 3% margin.

Now, obviously, there's a new benchmark in the marketplace, so I don't see his departure at all impacting our strategy. In fact, his replacement, which by the way will be announced in the near future, is going to be someone that's capable, really, of closing the gap to that new benchmark and setting a new FCA standard.

So for me, I think I wish Alfredo the best of luck and looking forward to the new leadership. With regard to China, it's no surprise that there's a lot of pressure from local manufacturers. As you know, they fall into those two categories.

What we have seen is, obviously, the local brands improving in traction in the marketplace, but they still sit at lower price points than us. And if you look at the contraction in the SUV segments that we saw in the second quarter apart from the large SUV, the contraction was even larger in local brands.

So I think as we tailor our vehicles more to China, which has been a big point for us because in the past, really, they've received our global vehicles, and we tailor our message, not make it so American with the language we would use to describe our brand there and make it more applicable, more accessible, I think we get more competitive.

But you can rest assured, we know the Chinese are formidable competitors and we're going to continue the work that we've done to make sure that we can get to the volumes and share we need..

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 remark..

Thank you, Sebastian. I think with that, we will close today's call. I would like to thank you all, again, for joining us and, on behalf of the entire FCA family, thank you for all your kind words and thoughts. Have a pleasant day..

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