Stellantis - Q3 2022

Transcript

Operator (participant)

Hello, and welcome to the Stellantis third quarter 2022 revenue. My name is Saskia, and I'll be your coordinator for today's event. Today's call is being recorded. I would now like to hand you over to your host, Mr. Andrea Bandinelli, Head of Investor Relations at Stellantis. Please go ahead.

Andrea Bandinelli (Head of Investor Relations)

Thank you, Saskia, and welcome to everyone joining us today as we review Stellantis' revenues for third quarter 2022. Earlier today, the presentation material used during this call, along with the related press release, was posted under the Investor section of Stellantis Group's website. Today, our call is hosted by Richard Palmer, the company's Chief Financial Officer. After this presentation, Mr. Palmer will be available to answer questions from the analysts. Before we begin, I want to point out that any forward-looking statements we might make during today's call are subject to risks and uncertainties mentioned in the safe harbor statement included on page two of today's presentation. As customary, the call will be governed by that language. Now, I would like to hand over to Richard Palmer, CFO of Stellantis.

Richard Palmer (CFO)

Thank you, Andrea. Good day to everybody, and good to be with you all. As you know, we are reporting our shipments, revenues, and commercial performance today as we do for all Q3s and Q1s. Moving to page four, we present the key highlights for the quarter. Our revenues in the quarter reached EUR 42.1 billion, up 29% year-over-year, and reflecting a 13% increase in our consolidated shipments with continued strong net pricing performance. We also benefited from positive FX translation, mainly due to the devaluation of the euro against the U.S. dollar and the Brazilian real. We'll address the drivers for revenue performance in more details on the next pages.

For the quarter, we have again achieved the highest U.S. ATP across our portfolio versus our direct peers, with an average transaction price of EUR 53,000 per unit for the quarter. In North America, our market share was down 20 basis points from prior year at 10.8%, with the 70 basis points drop in the U.S., more than offsetting market share gains in Canada of 250 basis points and Mexico of 40 basis points. Our American-rooted brands continue to show great sales performance versus Q3 2021, with the successor models such as the Dodge Durango up 39% and the Charger up 23%, as well as the Chrysler Pacifica up 42% and the Ram ProMaster up more than 50%.

However, the Jeep brand was down 17% year-over-year, mainly due to the discontinuation of production of the prior generation Grand Cherokee in Q1 of this year and the continued production ramp up at Jefferson North Assembly, where we are now producing the next-gen two-row Grand Cherokee alongside the Dodge Durango, complementing the new generation two-row, three-row, and the PHEV versions already being produced at Mack Assembly. In South America, we maintained our leadership in the region with a 22.6% market share, despite a 150 basis points drop versus the prior year, with our closest competitor lagging by nearly 10 percentage points. We also maintained market leadership in Brazil and Argentina.

Our total sales were up 5%, thanks to the solid performances of the Fiat Strada, which remains the number one selling vehicle in Brazil, and also the new Fiat Pulse and Jeep Commander, as well as the Fiat Cronos and Peugeot 208, which are the number one and number two selling vehicles in Argentina. In EU30, our total sales were down 7%, while the industry was down 2%. We suffered continued production disruptions from unfilled semiconductor orders, as well as outbound logistics challenges due to rail car, truck, and driver shortages, as well as ship availability. As a result, our market share decreased 90 basis points to 19.2%. We nonetheless continued to capitalize on our very successful lineup.

In the commercial vehicles business, we continue to be the market leader in both South America and EU30, with 30.8% and 29.2% market shares respectively. We're continuing to execute on our Dare Forward 2030 electrification roadmap, evidenced by our strong year-over-year improvement in global EV sales. BEV sales were up 41% year-over-year to 68,000 units, mainly driven by strong demand for the Fiat 500e, the Peugeot e-208, and the Opel Mokka-e. LEV sales reached a total of 112,000 units, up 21,000 units versus the same period last year, also highlighting the success of our PHEVs. Our BEV product strategy is continuing to gain momentum.

In September, the Jeep brand announced its plans to become the global leader in SUV electrification, starting with the launches of four all new BEVs in North America and Europe by 2025. The first of these is the all new Jeep Avenger, which was unveiled at the Paris Motor Show, with pre-bookings for the first edition opening the same day. In September, we also announced that our Mirafiori complex in Italy will be home to a new electrified transmissions assembly facility with our joint venture partner, Punch Powertrain, to increase production of the future generation electrified dual-clutch transmissions for Stellantis hybrid and plug-in hybrid vehicles. The facility is expected to open in the second half of 2024, and will complement the existing capacity in Metz, France.

The Mirafiori complex will also be home to our first circular economy hub, which will open in 2023, and will ensure sustainable manufacturing and consumption models. These two major initiatives will power our efforts to become a sustainable mobility tech company and support our Dare Forward 2030 strategic plan. Next, moving to page five, we focus a little bit on the all-new Jeep Avenger. As commented before, the Avenger is the brand's first fully electric SUV, and will be available in Europe at the end of Q1 2023. We're thrilled to bring such a great product to the market, as it fully embodies the Jeep brand's DNA, all within compact dimensions and zero emissions.

With a range of 400 km in WLTP, equivalent to 550 km in urban cycles, we believe the all-electric Avenger will be successful in one of the most competitive industry segments. Its mission is simple, to become the best-selling model within the brand's portfolio in Europe by 2024, and show consumers that the leading SUV brand in the world believes that 4xe is the new 4x4. The Jeep Avenger, which will be produced in our Tychy plant in Poland, will be equipped with the first electric motor to be launched by Emotors, our joint venture with Nidec. Finally, we have no doubt this vehicle will strengthen our already very competitive BEV lineup at Stellantis, furthering our electrification plans. On page six, we show the shipments and revenues for the group for the quarter.

As commented before, our consolidated shipments were up 13% in Q3 to 1.3 million units, benefiting from an improvement in semiconductor order fulfillment versus the same period last year, which was significantly impacted by specific issues in the supply chain in Malaysia due to COVID outbreaks. Our net revenues grew by 29% to EUR 42.1 billion, supported by the increased volumes, by strong net pricing, favorable mix, and positive FX translation. Regarding the semiconductors, the third quarter of 2022 showed some incremental improvements. However, we continue to see volatility in the supply chain. We are implementing various short, medium, and long-term actions to better protect supply. Looking ahead, we believe that we will continue to see sequential improvements, but we don't expect the situation to be back to normal before the end of next year.

Next on page seven, we show the walk from Q3 2021 revenues to Q3 2022. All segments posted positive year-over-year growth in revenues, with the main contributors being North America, Enlarged Europe, and South America up 36%, 16%, and 56% respectively. Volume and mix contributed EUR 3 billion, with North America and Enlarged Europe growing at a similar pace with volumes up 47,000 units in North America and 68,000 units in Enlarged Europe. These two regions were also the biggest contributors for vehicle net price and content, adding an aggregate of EUR 2.5 billion versus prior year. Pricing actions were also strong in Middle East and Africa and South America. North America accounted for more than half of the positive impact coming from vehicle line mix, with South America contributing an additional EUR 200 million.

FX translation effect was also a very strong contributor in the quarter, with a EUR 3.4 billion positive impact. Moving to page eight, we review the segments. Starting with North America, as mentioned, our market share decreased by 20 basis points to 10.8 in a market that was down 1%. Total sales reached 445,000 units, down 4%, with shipments of 441,000 units, up 12%. This led to a minor reduction in our dealer stock levels, which finished the quarter at 300,000 units, while our company inventory increased by 10,000. Shipment growth was driven by Durango, Compass, Cherokee, Wagoneer, and Ram 1500, with Grand Cherokee down due to the discontinuation of the prior generation, as already mentioned.

Revenues were up 36%, or EUR 5.5 billion, with higher volumes as well as very favorable net price and vehicle mix all contributing as our new products continue to sustain the region's ongoing strong performance. FX translation due to the stronger U.S. dollar also impacted very positively the Q3 revenues. Moving to Enlarged Europe, the industry was down 10% year-over-year for the quarter, mostly due to the impacts of the war in Ukraine on Russian and Ukrainian markets. The EU30 market was down slightly at 2% down. Our total sales in Enlarged Europe were 591,000 units, down 7.5%, but exceeding our total shipments of 538,000 units. As a result, our dealer inventories were down 38,000 units from June.

This reduction was despite year-over-year improvement in production levels and was caused by outbound logistics challenges which are impacting the industry as a whole in Europe. Shipments were still up 14%, mainly due to increased volumes of the Fiat 500 and Panda, Peugeot 208 and 308, and Citroën C3. Shipments were also up due to strong demand for our BEVs, such as the Fiat New 500 and the Opel Mokka-e. Revenues were up 16% to EUR 13.5 billion, primarily due to the higher volumes, positive net pricing, and improvements in vehicle mix on new car revenues, which were driven by recently launched vehicles and increased BEV volumes. Regarding Middle East and Africa, our market share was up 100 basis points to 11.1% in an industry down 4%.

Total sales were up 5,000 units in the region, with our improved performance in Turkey more than offsetting the volumes lost in Egypt due to import restrictions and logistics delays. Consolidated shipments were up 6% year-over-year to 52,000 units, driven by increased volumes of Opel Mokka, Peugeot Rifter and Fiat Ducato. Those are partially offset by less Peugeot 3008 and Jeep Wrangler and Grand Cherokee due to ocean freight logistics challenges. Revenues reached EUR 1.3 billion, up 27%, driven by strong pricing actions which more than compensated for the Turkish lira devaluation. Moving to page nine and starting with South America, our market share was down 150 basis points to 22.6% in a market up 13%.

We can highlight the strong performance of the all-new Fiat Pulse and Strada, selling 17,000 and 37,000 units respectively. Those two models, along with the all-new Jeep Commander and Citroën C3 and partially offset by reduced volumes of Toro and Renegade, drove a 15% increase in shipments in the region. Revenues were up a very strong 56% to EUR 4 billion, supported by higher volumes, as mentioned, coupled with favorable net pricing and mix and positive FX translations. Regarding China and India and Asia Pacific, consolidated shipments were up 11% to 30,000 units, thanks to the recent launches of the all-new Citroën C3 and Jeep Meridian in India. We also recorded higher volumes in the region for the Peugeot 2008 and 3008, as well as the Ram 1500, more than offsetting the drop in volumes for the Jeep Compass and Renegade.

Revenues increased by 20% year-over-year to EUR 1.1 billion, and same as the other regions benefited from positive effects coming from higher volumes from the India launches, partially offset by negative market mix, strong net pricing and favorable vehicle mix and positive translations. Finally, Maserati shipments were up 14% to 6,600 units. This was mainly driven by the recent launch of the all-new Grecale, which contributed around 3,000 units in the quarter, as well as higher volumes of the MC20, partially offset by less Levante and Ghibli volumes, particularly in China and India and Asia Pacific. Here again, higher volumes, positive net pricing and favorable effects more than offset the impact of a higher mix of the all-new Grecale, which has a lower average price point than the rest of the portfolio.

This led to a 23% growth in revenues. On page 10, we present the status of our new vehicle inventory. When comparing against the end of June, our dealer inventories declined from 704,000 units to 651,000 units at the end of the quarter due to seasonal declines in most regions, but mainly in enlarged Europe, down 38,000 units. This compared to a decline in Q3 last year of 231,000 units, which was abnormally high due to significant production interruptions as a result of Malaysian COVID outbreaks impacting semiconductor supply chains. Company-owned inventory increased by 134,000 units since June.

This was due to a combination of increased production in Q3, reaching 1.4 million units, up 19% year-over-year, and outbound logistics challenges, mainly in Europe, with the region accounting for approximately 90,000 of the 134,000 unit increase. Our teams are working on a daily basis to ease these challenges and bring alternative solutions to smooth deliveries of vehicles to our dealers and final customers, and we expect company-owned inventory to substantially reduce by year-end. Finally, on page 11, we review our full year outlook and guidance. Looking ahead, we have maintained the outlook we provided during our H1 2022 call at the end of July for all regions, with the exception of China, where we've increased our forecast from stable to +5%.

We continue to see North America down around 8% and enlarged Europe down around 12%, due mainly to supply chain and logistics challenges, not allowing us to meet demand, which last year was met in H1 by the strong reduction in dealer inventories. We see South America and Middle East and Africa remaining stable, while India and Asia Pacific will increase +5% for the year. On the back of our strong performance for the first nine months, we confirm our full year 2022 guidance of double-digit adjusted operating income margin and positive industrial free cash flows. Coming into the last quarter of the year, the successful launches we have had at the end of last year and earlier this year will continue to bring further benefits to our already competitive lineup. We're on track to achieve another successful year.

Lastly, but very importantly, I want to reiterate the Ram brand's announcement of a couple of days ago. We look forward to welcoming you to the Ram Revolution Electrification and Technology event at CES in Las Vegas in early January, where the Ram 1500 Revolution BEV concept will make its worldwide debut. Thanks to all of you for attending this call. We can now move to Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, to ask a question today, please signal by pressing star one on your telephone keypad. That is star one for your questions. Our first questioner is George Galliers of Goldman Sachs. Please go ahead.

George Galliers (Head of European Automotive Investment Research)

Hi, Richard. Thank you for taking my questions. The first question I had was just on the price mix, sequentially, if we were to kind of factor out the FX. Did you see the price mix continue to improve sequentially in the third quarter versus the first half? Is there any reason why it would be any worse in Q4 versus the year-to-date runway rate? The second question I had was just with respect to what you're seeing in the end markets. Could you perhaps just elaborate on where your greatest concern lies today? From a sort of timing perspective, when do you think the deterioration we're seeing in the macro is most likely to start to impact your financials given the order books? Is it the start of next year? Is it midpoint of next year? Or would it be later than that? Thank you.

Richard Palmer (CFO)

Thanks, George. In terms of price mix, we continue to see strong performance across the portfolio. You know, you saw about 7% on price, a couple of percent on mix year-over-year, and also sequentially, we continue to see improvements. So I think we'll continue to see strong positive performance also in Q4 on price mix. In terms of end market concerns, you know, it's a bit of an ongoing debate that we all have, I think, is where is demand given that it's somewhat concealed by the supply challenges that we have. You know, if we look at our main markets, we continue to see very strong demand in North America, I would say.

We're also having more challenges on semiconductors in North America at the moment in our portfolio than we're having in Europe. The fact is that our vehicles are turning very fast on dealer lots in the U.S. The real constraint at the moment continues to be supply due to semiconductors, but also due to some logistic challenges both for us and for our suppliers in the North America market. I think so far, we're not seeing any particular concerns in terms of the demand function given you know the very fast turn that we're seeing on dealer lots. In Europe, obviously the macro in Europe is more challenging, which gives me pause personally.

At the moment, we continue to see good demand and also vehicles turning fast on the lots. In Europe at the moment, our semiconductor challenges compared to last year are less evident. Our production was up, I think, 26% in Q3 in Europe, so a good, strong improvement. You didn't see that going into the shipments number because we're having a lot of challenges with outbound logistics. We only got 14% improvement in shipments despite the 26% improvement in production. I don't think we can say that's a demand issue at the moment. It's just our ability to fulfill orders. We have a strong order book which gets us well into Q2 of next year.

I think at the minute, you know, if I were to tell you where I have a concern, it would be more Europe than anywhere else, really based on the macro. We do have a strong order book today, which gets us well into, you know, the middle of next year. Then it comes down. At the moment in the shorter term, it's more a challenge of us fulfilling orders and shipping the units to dealers and customers.

George Galliers (Head of European Automotive Investment Research)

Understood. It sounds like you're in a similar position, I guess, to the rest of us in terms of the supply constraints make it very difficult to forecast at the moment when you will actually see that kind of matching of supply versus demand.

Richard Palmer (CFO)

Yeah, 'cause you know, at the moment we can't build enough cars. The ones we can build in Europe at the moment, we're struggling to get them to the point of sale. I think those are the two biggest challenges we have and continue to be a big focus. I think it's true to say that, you know, the European context is looking pretty tough from a macro point of view. Clearly, we continue to focus very much on maintaining a very healthy break-even point across our business globally, so that, you know, we're ready for any eventual softness in demand. At the minute, that's not the primary concern, frankly.

George Galliers (Head of European Automotive Investment Research)

Understood. Thank you very much.

Richard Palmer (CFO)

Thanks.

Operator (participant)

Thank you. We now move on to our next questioner, which is Philippe Houchois of Jefferies. Please go ahead.

Philippe Houchois (Autos and Auto Parts Analyst)

Yes. Good afternoon. Thanks, [Flora], and good afternoon, Richard. I've got two questions. The first one on FinCo. Now, you're building a FinCo right now in the U.S. You don't have one in Europe. As a CFO, would you rather be in the current position and not having to deal with a FinCo for the next 18-24 months, or would you rather have a FinCo already, operating despite the risks that are accumulating on reasonable values or funding costs?

Richard Palmer (CFO)

I think, Philippe, honestly, I'd rather have a well-run FinCo. I think, you know, I think through the cycle it's an asset. Obviously you can pick and choose your moments for having certain assets in the portfolio, but that's obviously not realistic. I think I'd rather have a FinCo, a well-run FinCo, because it gets us closer to our customers and all the, you know, the loyalty part of the equation. As we go into, you know, you know some changes in the way people are buying mobility, I think the FinCo becomes even more strategic, potentially. I'd rather have one and I think we're making good progress on the U.S. FinCo following the acquisition.

It's proceeding very well in terms of launching products into the marketplace, and we expect to see a pickup in activity as those products become mature in the market in 2023. Yeah, I understand your point, but I think a well-run FinCo with the appropriate, you know, separation between the FinCo management and the management of the sales and marketing function in the CarCo, which is obviously something that everybody who does that has. I think it's an asset.

Philippe Houchois (Autos and Auto Parts Analyst)

Okay. Thank you. Can I ask about your China setup now? If I understand correctly, for Jeep or Maserati, you're going to be an exporter, and you're gonna continue operating joint ventures and a dealer network with the Peugeot and Citroën brands. Any convergence of these? I mean, are you able to leverage your relationship with Dongfeng or the dealer network to have a proper presence for the Jeep and Maserati brands, or are you kind of locked into a relatively niche position for Jeep? What's your thinking there?

Richard Palmer (CFO)

I think we like keeping them separate. I think the Jeep brand has a network, the Maserati brand has its network. I think it's an asset to have a dedicated network given you know the fact that those brands have a very distinct customer target. In terms of the export model that we're looking at, clearly we need to have a very clear focus on certain parts of the Chinese market because we're not going to be a volume player. We're going to be somewhat of a niche player with you know very attractive products going in to satisfy certain types of customer demand. I don't see any benefit in putting together networks where today we have, you know, we have separation, and separation is normally something that a helpful distinguisher for those types of brands.

Philippe Houchois (Autos and Auto Parts Analyst)

Thank you very much.

Operator (participant)

Thank you. Up next, we have Tom Narayan of RBC. Please go ahead.

Tom Narayan (Global Autos and Auto Parts Analyst)

Hi, yes, Tom Narayan, RBC. Thanks for taking the question, Richard. My first question has to do with slide 10. I think you said the company-owned inventory will come down significantly by year-end. Just wondering how this might translate into Q4 in terms of shipments and unit sales. A second question, just curious as to your specific Italy production exposure as it might relate to nat gas. Obviously, Italy is another country that has significant Russian nat gas exposure. Thanks.

Richard Palmer (CFO)

Yeah, in terms of page 10, you know, clearly we have, as I mentioned, a higher level of company inventories than we've had in the past. You can see that by looking at the page. We're probably about 100,000 units long compared to where we would wanna be. We expect that number to come down. I think Q4 shipments, you know, last year we were around 1.6 million units. As I said, I think in the H1 call, I think the type of volume we're looking at is probably a similar level to last year. I don't have any reason to change that.

You know, the biggest challenge we have there is to resolve the challenges we're having in Europe on outbound transportation. In terms of Italy exposure and nat gas, I think, you know, I think the good thing about our footprint is that we are diversified. You know, we have exposure in most of the main European jurisdictions. They may or may not have more or less exposure to Russian gas, but I think we have a fair amount of flexibility in the footprint to be able to build cars, obviously in France, Germany, Spain, Italy, Czech Republic, Poland. We have a lot of flexibility. I'm not particularly concerned about any one jurisdiction any more than any other, frankly.

It's not visible where problems might arise. If they do, we do have compensating factories that can continue to produce. I think that's the main message. Okay, thanks.

Operator (participant)

Thank you. We now take a question from Thomas Besson of Kepler Cheuvreux. Please go ahead.

Thomas Besson (Head of Automotive Research)

Thank you. It's Thomas Besson, Kepler Cheuvreux. A couple of questions for you. Richard, with the positive price mix trends and volume shaping to be broadly at last year's level in Q4. Is it reasonable to believe that the second half of the year could look like the first in a lot of respects, assuming you managed to solve some of the distribution and logistics issues in Europe?

Richard Palmer (CFO)

Yeah, I think that's a fair description. I think the biggest challenge we have. Well, we have two challenges. One is not new to you. That is semiconductors, because semiconductors at the moment is impacting more North American business, which obviously from a profitability point of view is a big contributor. So, you know, we're managing through that. In Europe, it's our outbound logistics is the biggest challenge, which we obviously are very focused on. Those issues, we think we can manage them through the H2 performance. I don't see any significant reason why we should be significantly different in H2 compared to H1 in terms of margins.

In terms of cash flow, we would be slightly different because obviously there's more different seasonality, and we expect more CapEx R&D in H2 compared to H1, and some other activity on restructuring, et cetera. I would expect our cash flow to be lower than H1, not significantly so, but slightly lower, because H1 was very strong, over EUR 5 billion. You know, overall, I think our H2 numbers should be quite comparable.

Thomas Besson (Head of Automotive Research)

Thank you. Another one on Maserati. You're just ramping up Grecale, and you have a lot of new products coming in. Can you give us just qualitative comments on the turning points we are seeing in that business? Do you manage this time around to make it something that can last, and not the boom and bust as we have seen in the past? I don't know what exactly you can tell us at this point.

Richard Palmer (CFO)

Yeah, you strike to the core when you talk to me about the boom and bust of Maserati. You're right, that has been our past pattern, and I'm pretty confident personally that we can break that pattern with the new team and the product plan we have. You know, I think we have a good level of stability in the product plan. The frequency of launches is a big focus, which I think in the past has been our biggest issue because we've launched a vehicle and then we've sort of left an excessive gap to the next new vehicle, and it's just hurt the portfolio.

I think the important thing for us now is to have a good frequency of launches to maintain a you know enough novelty value in the lineup and to continue to refresh it. I think the team in Maserati is doing a great job of that starting with the Grecale. I think Grecale will be a first important step. We have GT/GC and we have other vehicles that you know about coming which will help the brand get to the types of margins you would expect from a luxury car maker. I'm very positive about it, Thomas.

Thomas Besson (Head of Automotive Research)

Great. Thank you very much, Richard.

Operator (participant)

Thank you. From UBS, we have Patrick Hummel with our next question. Please go ahead.

Patrick Hummel (Head of Autos Team)

Yeah, thank you. Good afternoon, Richard. My first question is simply about the supplier cost situation. Some of your competitors had pretty steep increases in their supplier costs, also some retroactive payments. I'm just curious, what's the situation at Stellantis in that regard. If you can already, some initial expectations for next year as far as the total supplier and commodity cost complex is concerned. That'd be my first question.

Richard Palmer (CFO)

Yep. Hi, Patrick. Yeah, yeah, we're definitely having similar impacts. Our you know the sort of normal type of productivity you would expect from our purchasing function, we're not getting it. It's being totally offset by, you know, the need to support our suppliers through some of their cost increases due to challenges on their supply chain. We are seeing that. It's sort of baked into our numbers. Also, you know, we did move very fast on the price function. I think, you know, we continue to see positive price mix, which is offsetting both raw material inflation, other types of inflation on logistics and energy, and also, you know, claims from suppliers for some of their challenges on the cost base.

All those things you're seeing in our. You saw some of that in our H1 numbers. You'll see more of it in our H2 numbers, but you'll also see continued benefits from the commercial organization on pricing and mix, which offset those impacts. In terms of 2023, I think that will continue. We'll continue to see positive carryover from pricing actions, continued pricing actions, a lot of discipline on pricing and on inventory and production to ensure that we don't get into a situation where we have too much stock or too much supply. That doesn't appear to be a high risk at the moment, given that semiconductors continue to be a challenge, and we expect them to continue to be a challenge through the first part of 2023 at least.

You know, I think what we will see in 2023 is a lower impact from raw material inflation than the one we're seeing this year. The magnitude of the inflation impacts, I think, will be lower in 2023. Obviously, we're working on 2023, and I'm not gonna get into giving you detailed guidance, but I think, you know, directionally, price will continue to be positive. Inflation may be higher on other elements of the cost curve, but they are of a lower magnitude compared to raw materials this year, and raw materials will be down compared to this year in terms of impact. You know, I think we're relatively confident we can continue to see, you know, strong earnings supported by price mix offsetting the cost challenges.

Patrick Hummel (Head of Autos Team)

Understood. My second question is just in terms of potential action that might help the share price over and beyond just good execution of the operational business. You must have by now a pretty strong visibility on second half cash flow, and I'm just curious if you have any updated thoughts on capital allocation. The B part of that question is also when it comes to the portfolio. You have seen that Porsche has listed very successfully in the market. Maserati, you talked about in a fairly upbeat manner, with a more stable high margin business in the years ahead. Is that something you would be revisiting as a potential standalone company anytime soon?

Richard Palmer (CFO)

Well, regarding Maserati, I think I can respond in terms of anytime soon. Anytime soon, I think the answer is no, because clearly we need to continue the launch of the brand with the products that are coming. I am very optimistic and confident that we can build a very interesting luxury car business with the Maserati brand. Eventually at some point in time, that may be an interesting asset that can stand in the market on its own because, you know, clearly it has a very strong brand. It has its own network, and substantially, you know, a very independent type of business, even in the way we run it inside Stellantis.

I think that's a possibility, but no decisions have been taken, and at the moment, we're very much focused on the execution of the plan and to make Maserati a very, you know, a very sustainable luxury brand and a strong performer. In terms of the capital allocation, I don't have anything new to say. I think, you know, our cash flow is strong. We're going to execute on our 2022 numbers here. We do have, I think, as a primary focus, the execution. I think execution is underappreciated in this context. You know, I think investors are very focused on the execution. They're gonna see that we continue to perform very strongly in, despite the challenges facing the industry.

I think we have a very strong and diversified brand and business portfolio. I think that has to be the primary focus for us regarding the stock price. Secondly, clearly, the technology part of the equation is also key. You know, we're gonna be talking about the Ram BEV truck in January of next year at CES, which we think is clearly a very important point where we can underline the progress we're making towards the launching of an electrified pickup in North America, which will be very competitive and very technically advanced.

I think, you know, we've seen that the Jeep vehicle that we talked about today, the Avenger in Europe, which I think is really important to sort of start to further incrementally change consumers' views of Jeep, following on from the PHEVs that we have in the market today, as being, you know, a technical and a green brand. I think all those things are really key. I know the dividend is also gonna be an important part of our capital allocation. I think our results for the year will be strong. Our payout percentage will give shareholders an important dividend payout, all else being equal as we go through the rest of this year.

We'll continue to look at all the other options, but for the moment, I don't have anything more to say on capital allocation.

Patrick Hummel (Head of Autos Team)

Understood. As you mentioned, the truck, do you expect it to be eligible to the full EV tax credit, including the battery part from the beginning?

Richard Palmer (CFO)

Well, obviously we're launching our battery facilities in North America in 2024, 2025, so there'll be some level of transition as it goes through.

Patrick Hummel (Head of Autos Team)

Mm.

Richard Palmer (CFO)

That launch process. Immediately, we haven't announced anything in terms of.

Patrick Hummel (Head of Autos Team)

Right.

Richard Palmer (CFO)

... eligibility. I think we're in a similar place to our competition, where obviously we're transitioning into electrification, and there's a lot of ongoing activity on the supply chain. We'll be more specific about that as we get closer to launch.

Patrick Hummel (Head of Autos Team)

Thank you, Richard.

Richard Palmer (CFO)

Thank you.

Operator (participant)

Thank you. We now move on to José Asumendi of JPMorgan. Please go ahead.

José Asumendi (Head of European Autos Equity Research)

Thank you very much. Hi, Richard. It's José. Couple of questions, please. First one, can you comment on your confidence you have to maintain strong pricing power in North America? Which key variables or metrics are you looking to maintain this strong pricing power? Maybe when it comes to production or inventories. Second, can you comment on ACC or the battery ramp up, and how the operations are running? Three, can you comment please on working capital the second half, how should we think about that into the year-end? Thank you.

Richard Palmer (CFO)

Hi, José. Thanks for the question. North American pricing. I mean, the key obviously is to manage the product portfolio. I think we have some great products in the market for Ram, for Jeep, for Dodge. We need some new product for Chrysler and that's coming. I think our portfolio has never been better and is extremely competitive, and that's the primary reason why we're confident about being able to maintain strong price positions. Secondly, as you mentioned, inventory. We're not gonna grow inventory significantly beyond where we believe is the right level. You know, we've seen some level of increase in inventory. In reality, at the moment, the vehicles turn very fast on dealer lots.

We have a lot of in-transit inventory, more than we would normally expect to have because of supply chain challenges and logistics challenges. You know, I think, you know, the numbers taken at face value don't tell the full story. For the moment, you know, the inventory is not a problem. The real problem is meeting demand and getting a stable supply function, both from a supply build and outbound transportation point of view. You know, we're very focused on that execution and I think we're quite confident in terms of pricing because of the speed of units turning on dealer lots, as I mentioned. The ramp of ACC is on target.

We continue to execute with our partners, with Mercedes-Benz and with Total/Saft. Nothing untoward in terms of the trajectory. We're excited by that joint venture. I think it gives us a lot more autonomy than pure buy and more autonomy, frankly, than pure JVs with the battery manufacturers. I think it's an interesting step that will allow us to, you know, become more and more competent in battery cell manufacturing and extend the verticalization of our supply chain. It's performing on track.

Working capital for H2 really depends a lot, honestly, on how far we can reduce our company inventory levels that I talked about earlier in the call in terms of new unit inventory. We would normally expect working capital to be slightly positive in H2. You know, that would still be my expectation. Although compared to a more stable industrial environment, we do have the challenge on logistics, both inbound and outbound, and we're holding more inventory as a result to try and buffer against supply shocks. I don't think working capital will be a strong cash generator in the second half. I think it's gonna-

José Asumendi (Head of European Autos Equity Research)

Thank you very much.

Richard Palmer (CFO)

Thank you.

Operator (participant)

Thank you. Our next question now comes from Charles Coldicott of Redburn. Please go ahead.

Charles Coldicott (Head of Global Automotive Investment Research)

Hi. Thanks for taking my questions. In the US, it looks like incentives on some Stellantis models are a bit higher than peers. I think, for example, the average incentive on a Ram pickup is significantly higher than a Silverado or an F-150. I think incentives are quite high on the Wagoneer as well. You know, at the same time, as you mentioned, you know, the turn of vehicles at dealer lots is very quick. You're reporting really high ATPs, higher than your competitors. Can you maybe square the circle a little bit for us? You know, are you happy with the tactical incentives in the U.S.? Could they come down a bit more? Yeah, that would be my first question.

Richard Palmer (CFO)

Yep. Thanks, Charles. I think on the incentives, it depends a lot on a monthly basis. You know, people make moves, people don't make moves. I think, as you say, if you look at our ATPs being higher than our direct competition, and you look at our margins being higher than our direct competition, I think that is a good indication of the fact that our net price positions are very competitive. I think we're very happy with those net price positions and the job the sales teams and the brands are doing in North America to get full value for our very competitive product line up. I think it's maybe some of the data you look at depends on the month, depends on the vehicle line.

You know, overall, I think we've got a very strong price position compared to our competition. We've frankly improved it over the last two years from where we were, where we had some level of discount to Ford and GM on pickup. Now we don't. I think that's just been a very positive trend that the North America team has implemented. On your second question, which I've now forgotten.

Charles Coldicott (Head of Global Automotive Investment Research)

Oh, I haven't asked it yet, actually. My second question-

Richard Palmer (CFO)

Oh, sorry.

Charles Coldicott (Head of Global Automotive Investment Research)

Yeah. My second question was gonna be on currency.

Richard Palmer (CFO)

Yeah.

Charles Coldicott (Head of Global Automotive Investment Research)

Can you talk a little bit about how we should expect the impact of currency on your bottom line, given, you know, the breakdown of your costs and any hedging policies you have?

Richard Palmer (CFO)

Yeah. Well, our biggest exposure from a currency point of view, from a transactional point of view, are really Canadian dollar, British pound. You know, on both of those, there's been some weakening. On the currency, we do have hedging at different percentages going out, on average, up to three years. We do have some level of hedging, which insulates us from the initial moves in the spot FX. You know, I don't think that's gonna be a big issue in the short term or in the medium term, honestly. There are.

We don't have a significant net exposure to U.S. dollar euro either way, because we have some level of transactional exposure on the commercial side, but it's also offset by transactional exposure on the commodity buy that we have in dollars. In the end, the biggest impact we have is translation of the U.S. dollar results, the real results, the Turkish lira devaluation, and the Argentinian peso devaluation. Those things hit us and the Argentina hurts us in our financial charges because of the deval. Turkish lira does the same 'cause of hyperinflation. You can see them in the P&L also year to date. I don't expect any significant changes in those going forward. You're already seeing them.

The teams are doing a really good job pricing for those, so far, as I've mentioned on a number of occasions on these calls, both the South America team and the EMEA team. Overall, you know, the big impact on currency at the moment is really translation and Canadian dollar and British pound.

Charles Coldicott (Head of Global Automotive Investment Research)

Great. Thank you.

Richard Palmer (CFO)

Thanks.

Operator (participant)

Thank you. Up next we have Pierre-Yves Quemener of Stifel. Please go ahead.

Pierre-Yves Quemener (Director of Equity Research Automotive)

Yes, thank you. Hi, Richard. Hi, team. Hi, Andrea. Sorry I dialed in a bit late into the call, but the day is packed with a lot of competing events. Back to the pricing question. The pushback I get on your name is that Stellantis pricing might begin to fade, macro is worsening, and you won't be able to simply offset input cost inflation into 2023, albeit with a different mix, less raw mat, more labor, probably more energy, inflation. How do you address that kind of push back? And the second part of the question is, would you be able to state right now that you won't expect any price reversal into 2023?

Richard Palmer (CFO)

I don't expect any price reversal in 2023. I think we need to be very disciplined on pricing. Now, obviously, the fact is that that statement has a lot of assumptions based on what the market environment is gonna look like. I think we've shown that we have sort of industry-leading discipline on pricing. If we're suffering, then others will be suffering more. That's my view. That's partly because we have the best or at least as good as anybody's brand portfolio. The fact that we have, you know, a very specific focus on brands in specific segments I think is a definite plus in terms of our ability to find the best opportunities from a pricing point of view.

I think our product portfolio is extremely competitive in all of our jurisdictions, and our team is doing a great job of continuing to maintain a very strong product portfolio. So, you know, I think we have a good story to tell there based also on, you know, the last two years of performance and even prior performance from the management team. I'm quite confident that we will be, you know, a very strong relative performer in terms of pricing. And then you mentioned, you know, inflation and the impacts going into 2023.

I don't know whether you were on the call, but I sort of tried to articulate that it's true that what you say is true, that raw material inflation next year will probably be lower than the impact we had this year on raw materials, based on what we see in current market conditions. Other cost areas will probably be higher inflation, but those cost areas generally have a lower overall buy level than the raw materials. I would expect that the overall inflation impact next year will not be of the same size as this year. I'm not, you know, obviously giving you guidance for 2023 yet 'cause we're still working on it. Directionally, that's how I'm looking at it at the moment.

Pierre-Yves Quemener (Director of Equity Research Automotive)

You are fully confident to be able to offset those foreseeable inflation, though you won't quantify it at this stage, obviously?

Richard Palmer (CFO)

Yeah, I mean, like I said, I think it's a relative game, right?

Pierre-Yves Quemener (Director of Equity Research Automotive)

Yeah.

Richard Palmer (CFO)

I think relatively we are very disciplined on pricing, and our target is to continue to offset the inflation with very disciplined pricing.

Pierre-Yves Quemener (Director of Equity Research Automotive)

Okay. One last on inventories, if I may. You referred to, if I understood you correctly, Richard, an excess company inventory of 100,000 at the end of the third quarter. Will that completely unwind in the fourth quarter or just a fraction of that number? Thanks.

Richard Palmer (CFO)

Well, I didn't give you a number. I expect us to substantially unwind it, yes. Thank you for.

Pierre-Yves Quemener (Director of Equity Research Automotive)

Thanks much.

Richard Palmer (CFO)

Thank you.

Operator (participant)

Thank you. We're now moving on to our last question for today, which comes from Martino De Ambroggi of Equita. Please go ahead. Go ahead.

Martino De Ambroggi (Senior Financial Analyst)

Thank you. Good afternoon, Richard. The question on inventory. I remember you guided for 1 million units as the ideal level of inventory. When do you plan to achieve it? Could you split the ideal level for North America and Europe? The second question is on price, but from another perspective. If you could split the EUR 2.5 billion positive pricing content impact in Q3 among the different regions. Just a follow-up on the raw mat. Okay, next year will be lower. I remember the last indication you provided for 2022 was at EUR 6 billion. This was just for raw mat, and probably didn't change. What are the other inflation costs on 2022?

Richard Palmer (CFO)

Yeah. Hello, Martino. Yeah. In terms of raw materials, I mean, we haven't given a number on other inflation impacts. You know, I'm focused. I think we're pretty confident we can offset them into the second half and maintain the you know, strong double-digit margins. That's sort of all I wanna go into at the moment. I think in terms of looking into 2023, as I said, you know, the overall impact of raw materials I think is gonna be significantly down from the EUR 6 billion. It's not gonna be zero. And obviously the mix is changing between steel, which was a big driver of the negative impact this year, and it moving more towards you know, battery metals and particularly lithium up a lot.

That's gonna be a more significant part of the overall impact. You know, as I said, overall in terms of inflation, I think the important thing is that we continue to offset with price mix. As to your question on pricing, you know, the EUR 2.5 billion of net price, I think, you know, three quarters of that is coming from North America and Europe. Probably three quarters of that is North America. North America continues to be a big driver of positive pricing. We're seeing, frankly, strong pricing across all the regions.

From a percentage point of view, everybody is at a similar level, and you're seeing around 7%-8% year-over-year, and we're getting that type of impact across all the regions. Some are much higher because, you know, Middle East, Africa needs to offset the inflation, the devaluation of the Turkish lira. South America is offsetting big challenges on inflation and on currency. It's very much a broad-based effort on the pricing.

Martino De Ambroggi (Senior Financial Analyst)

Thank you. The inventory?

Richard Palmer (CFO)

Oh, yeah. I mean, inventory. I think we're high on company inventory at the moment. As I mentioned on dealer inventory, we actually went down partly because you know, we couldn't ship enough cars into inventory in Europe. That was the main reason why we were down. I think you know, you mentioned 1 million units. Yeah, we've talked about 1 million-1.2 million type areas being maybe the sweet spot at this sort of current size market. It also, you know, you need to go beyond the sort of face number and into the fact that at the moment the big challenge we're having is a lot of the inventory is not on the dealers' lots.

Even if it says dealer inventory, that includes in-transit inventory to the dealer, particularly in North America. 'Cause basically, as soon as we get the vehicle out of the plant and into transportation, it becomes dealer stock. That dealer stock needs to get to the dealer. What we're seeing is very fast turn times once the vehicles are at the dealer, but we're having some struggles getting the vehicles there as fast as we used to, particularly from Mexico into the U.S., and across the U.S. as well because of rail issues, but also road haulage as well.

You know, logistics is hurting us a lot, and that may mean that the FAS number goes up, but the reality is that we need to hold up more inventory than we would in an efficient scenario because of the challenges on the extended supply chain. I'm not worried about the level of inventory in an absolute sense. I think the problem we have is the inventory is not in the right places, and you can see that from the company inventory, but even within the dealer inventory, that is still a challenge. That's why we need to continue to improve the fulfillment of dealer and customer orders.

Martino De Ambroggi (Senior Financial Analyst)

Am I right in assuming the normal level will not be achieved until second half of next year?

Richard Palmer (CFO)

I honestly normally like I say the big focus is to get the inventory onto the dealers' lots and into the hands of the customers and at the moment that's being a bit of a struggle. I don't think the actual number is the focus frankly.

Martino De Ambroggi (Senior Financial Analyst)

Okay. Thank you.

Operator (participant)

Thank you.

Thank you. We have no further questions in the queue.

Richard Palmer (CFO)

Well, I'd like to thank everybody for joining the call, and spending time looking at Stellantis' Q3 numbers. Look forward to talking to you all again soon. Have a good day.

Operator (participant)

Thank you. That concludes today's call. Thank you for your participation. You may now disconnect.