Stellantis N.V. Q3 FY2024 Earnings Call

Ladies and gentlemen, welcome to the Stellantis Third Quarter 2024 Shipments and Revenues Call. I will now hand you over to your host, Mr. Ed Ditmire, Head of Investor Relations at Stellantis. Mr. Ditmire, please go ahead.

Thank you. Hello, everyone and thank you for joining us as we review Stellantis' Q3 2024 shipments and revenues. Earlier today in the presentation along with the press release were posted under the Investors section of the Stellantis Group website. Today our call is hosted by Doug Ostermann the company's Chief Financial Officer. After his presentation, Mr. Ostermann 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 the risks and uncertainties mentioned in the Safe Harbor statement included on Page 2 of today's presentation. As customary, the call will be governed by that language. Now, I would like to hand over the call to Doug Ostermann, CFO of Stellantis.

Thank you, Ed. Hello, everyone. Thank you for joining. I'm excited to talk with you today. I want to express my gratitude to our CEO, Carlos Tavares; our Chairman John Elkann; and the Board of Directors for the opportunity to work with the leadership team in tackling challenges and advancing our strategic goals. I also want to acknowledge my predecessors, Stellantis CFOs Natalie Knight and Richard Palmer, for the valuable lessons I've learned from them. I look forward to connecting with many of you soon, sharing your insights about Stellantis, and exploring ways to create value. Today, we'll review our shipment and revenue figures for the third quarter of 2024. The main focus is Clearing the Path for 2025, and there are three key aspects to discuss today. First, our revenue and shipment performance was disappointing and not where we aspire to be. We will explain the significant impact of our operational actions and developments during this period and where we are making improvements. Second, we'll highlight our strong progress in reducing excess inventories, particularly among US dealer stocks, which is vital for enhancing our shipment levels in 2025 and beyond. Third, we will keep you informed about our advancements in launching a new generation of products, aimed at reducing platform complexity, offering exceptional multi-energy flexibility, and better serving rapidly growing market segments. Now, let’s take a look at the top line results. Shipments of 1.15 million units were down 20% or 279,000 units compared to the previous year, which is 5 points lower than the 15% decline in sales to customers. Revenues of €33 billion fell by 27%, a decline steeper than shipments, attributed to various challenges including product mix, pricing actions primarily in North America, and foreign exchange impacts. Breaking down the 20% decline in shipments, we see two main factors at play. First, we are making significant progress in addressing the excess inventory issue. Total group inventories decreased by 70,000 units in the third quarter, contrasting with a 10,000 unit increase in the same period last year. This difference accounts for 80,000 of the year-over-year shipment decline. Second, we have an exciting product wave facilitating platform consolidation and multi-energy flexibility; however, this transition has caused temporary gaps in our product lineup as factories underwent major retooling, resulting in launch delays for some innovative new vehicles to meet quality standards. This accounted for around 150,000 shipments in the year-over-year comparison, roughly 100,000 in Europe and 50,000 in North America. We expect this challenge to peak in the latter half of 2024 and significantly improve as we progress into 2025. Now, let’s review our key figures. Before we delve deeper, I want to emphasize that at Stellantis, we recognize that the decline in top-line results in Q3 2024 and our full-year guidance indicate performance is not reflective of our potential. Consolidated shipments fell by 20% or 279,000 units year-over-year. Of this, 150,000 were linked to temporary gaps in our model lineup, 80,000 to efforts to stabilize inventory levels, and the remaining 50,000 stemmed from lower sales performance and industry challenges, especially in Europe. Combined shipments, including joint venture volumes, dropped by 21%. Net revenues decreased by 27%, impacted not only by the 20% drop in consolidated shipments but also by significant challenges in mix, pricing, and foreign exchange rates. On the next page, we will explore these figures in greater depth. Looking at the year-over-year revenue decline at the group level, approximately 22 percentage points of the 27% drop in revenue can be attributed to volume and mix, with adverse mix effects from shifts in regional performance. We experienced softer volumes and high average selling prices in North America, while volumes remained more resilient, albeit with lower average selling prices in third engine regions. Net pricing negatively impacted by €1.3 billion, mainly driven by North America, a trend likely to persist through the year. Additionally, foreign exchange translation resulted in a negative impact of €1.1 billion, predominantly in South America, with the weaker Brazilian real being the major contributor, alongside effects from the Argentinian peso, Turkish lira, and US dollar fluctuations. Now, let’s discuss performance by segment. In North America, shipments decreased by 36% or 170,000 units, with nearly 50,000 of this decline linked to nameplates currently on hold pending the launch of next-generation successors, while 80,000 were related to inventory normalization, which is crucial. Pricing suffered significantly due to temporarily increased incentives. In Europe, amid a 5% decline in industry volume, our shipments fell by 17% or 103,000 units, largely due to a temporary gap in our B-segment lineup for high-volume nameplates, including the Citroën C3, C3 Aircross, and Opel Frontera, which retired prior generation models before new successors launched. Conversely, we've seen success with the new offerings in the fee segment like the Stellantis Medium-based Peugeot 3008, which launched in Q2 and performed well in Q3. Shifting focus to our third engine, in the Middle East and Africa, consolidated shipments fell by 26% or 27,000 units, largely in Algeria due to temporary import restrictions, affecting sales of several Fiat models and delaying the ramp-up of Algerian-produced Fiat 500 and Doblò. Revenues plunged more steeply by 37%, mainly due to foreign exchange headwinds, with about 8 points of translation impact and around €500 million in revenue losses triggered by easing inflation effects in Turkey. Now, let’s examine the remaining segments. In South America, where Stellantis holds the number one market share, revenues decreased by 2% despite a 14% increase in shipments and growth in parts and services revenue, offset by foreign exchange impacts, primarily in the Brazilian real and the Argentinian peso, both of which weakened against the euro. In China, India, and Asia-Pacific, consolidated shipments declined by 30% amid heightened competition from Chinese OEM expansion and a tighter focus on our asset-light strategy. At Maserati, the 3,200 unit decline in shipments is attributed to lower volumes of the Grecale SUV and drops in other models, including the retirement of three products at the end of 2023. New leadership at Maserati has taken the helm, and they are diligently working to restore profitability. Moving on to inventories, there are clear signs of improvement. Group inventories decreased by 9% since the start of the year and fell by 6% in the last quarter alone. In the first six months of 2024, we made notable progress with 50,000 units, primarily in Europe, followed by almost 80,000 units in the third quarter, mostly achieved in North America, where we focused our efforts. Now, let’s look at U.S. inventories, which remain a priority. We are consistently reducing stock levels at U.S. dealers, which helps improve profitability for our partners and better positions them for the launch of new products. U.S. dealer stock was approximately 430,000 units at midyear, and we aim to reduce it to 330,000, with plans to achieve a substantial reduction of 100,000 units in the second half of the year. This improvement is expected to facilitate stronger plant utilization in December and throughout 2025. With some moderate sales volume improvements, which I will elaborate on shortly, day supply is improving from around 94 days at the end of June to a projected 85 days at the end of October. While we still have work to do, we are enthusiastic about the potential for our performance in 2025. Next, let's discuss improvements in North America, particularly in sales effectiveness. We have undertaken a comprehensive review of our go-to-market strategy and identified enhancements to boost performance at different stages of the purchase funnel. In Q3, we increased incentives on 2024 and older model year vehicles, raising both the amount and visibility to customers. For some 2025 model year vehicles, we are lowering MSRPs to enhance transparency and reduce the need for incentives. I’m happy to report positive early signs, including improved market share in August and September, and we're seeing increased qualified leads for our dealers. October looks promising, though we haven't finalized the numbers yet, we expect about a 10% increase in unit sales compared to September. Now, moving on to the significant multi-year portfolio transition we are launching in 2024. We have made clear that this product wave positions us strongly, not just with appealing products, but also from a business perspective, allowing us to focus on faster-growing market segments, outstanding multi-energy flexibility, and a reduction in platform complexity. However, I want to explicitly address some of the challenges we’re encountering in implementing this enhanced product portfolio. For instance, when an assembly facility shifts to multi-energy for the first time, the requirement for new equipment and associated training can extend factory downtime and slow down the launch of new products. Additionally, the technological demands of today's offerings can create new difficulties during the final stages of vehicle preparations for launch; we have prioritized taking the necessary time to address these issues before releasing products. It's worth noting the diversity of brands illustrated here reflects the considerable opportunity to leverage our investments in technology across a wide range of customer and geographic segments, which serves as a strategic advantage for Stellantis. Turning now to our partnership with Leapmotor, which I am particularly passionate about due to my previous role in developing our strategy in China. We launched this partnership on schedule, with the initial European rollout kicking off in late September through a scaled distribution network with over 200 dealers and plans to expand into IAP and the Middle East in Q4, and South America by 2025. We will continue to move swiftly, as we believe the market responds well to the high-tech, affordable, and efficient Leapmotor products. A recent announcement at the Paris Auto Show in October highlighted that we will expand the nameplates available in Europe, starting with the T03 and C10 BEVs, to include a range-extender C10 variant, the BEV B10 by the end of 2025, along with three additional models by the end of 2027, offering a comprehensive lineup of Leapmotor products in the region. We're also exploring opportunities to utilize Stellantis' European assembly capabilities for quicker localization compared to competitors. We maintain our outlook of achieving over 500,000 annual sales globally through the Leapmotor international joint venture by 2030. Next, let's highlight some notable new products we've recently introduced. The Citroën C3 and eC3 are particularly exciting as they demonstrate how Stellantis can capitalize on global capabilities. This innovative vehicle, initially designed for emerging markets, has been swiftly adapted for European consumers, offering impressive capabilities and appeal at very competitive price points. The C3 and eC3 began shipping in late September, receiving over 500,000 initial orders, with about 50% of customers opting for the BEV variant and many selecting higher trim levels. The core value proposition of the C3 and eC3 will also be reflected in the upcoming C3 Aircross, Opel Frontera, and Fiat Grande Panda models, all built on the Smart Car platform. The BEV versions of these four models present a compelling blend of European design and affordability, playing a crucial role in meeting stricter European emission standards from 2025 onward. Moving on to the Peugeot 3008 and E-3008, these C-segment vehicles represent an upgrade and are a vital, profitable, and scalable franchise alongside the 5008. They mark the first product launch on the new STLA Medium platform, designed with BEV-first engineering and extensive multi-energy flexibility. The E-3008 crossover sets a new standard for EV performance with up to 700 kilometers of range, leading its segment with exceptional efficiency. The Q2 launch was very successful, with strong order volumes, where 60% opted for high-end trims and 25% for the BEV powertrain configuration. This success is promising, given that its core capabilities will also be shared with the 5008 and E-5008 models, along with the Opel Grandland and the newly announced Citroen C5 Aircross. Lastly, regarding our financial guidance for the full year, in late September, we adjusted our expectations, reflecting significant costs for corrective actions to tackle North American inventory levels and sales performance, as well as lower projections for Europe where market volumes have softened and where we've faced considerable impacts from delayed product launches. We are reaffirming our full-year guidance of between 5.5% and 7% AOI margins and a projected industrial free cash flow of negative €5 billion to negative €10 billion. I want to be clear that the AOI guidance range for 2024 is below our potential and broader than what analysts and investors might prefer. While I hope to provide more specifics later, it is crucial to acknowledge that we are continuously assessing how to better position ourselves for improved top-line and cost performance in 2025 and beyond. The wider range gives us the flexibility to take necessary actions for significant improvements. In terms of free cash flow, I find the projected outflows unacceptable given the scale, profitability, and capital efficiency of our business and am prioritizing opportunities to enhance cash conversion. Regarding capital return support in 2025 and beyond, I can confirm that our robust balance sheet allows us to manage anticipated cash outflows in 2024 without altering our long-term return policies. We will adhere to the capital guidelines that inform our dividend and liquidity strategies as we determine the 2025 capital return program in early 2025. Before we proceed to Q&A, let me summarize the main points. We are navigating a transition year, which has posed a mix of difficult industry challenges, temporary effects from upgrading our product portfolio, and the notable costs of addressing operational issues. I'm eager to collaborate with the leadership team and Stellantis associates globally to capitalize on our scale advantages and leverage new platforms, which are finally hitting the market, while maximizing the benefits of our renowned brand portfolio. Thank you for your attention. I will now hand it over to our operator to begin the Q&A.

Thank you, sir. The first question comes from George Galliers at Goldman Sachs. Your line is open. Please go ahead.

Yeah. Doug welcome to the new position and congratulations. And thank you for taking the question. The question I had was just with respect to the inventory situation in North America. Obviously, this target of 330,000 units was set I think before you assumed the role and I just wanted to get your thoughts on that target and whether or not you think it's enough. If I do some sort of rough maths, I assume a 16 million SAAR I assume that your market share is around 8% then I think that at 330,000 units your days supply will still be fairly elevated in the context of peers. And actually to get to GM, which we describe as best-in-class at this point, you'd actually need to see the inventory closer to 280,000 units. So really the question I had was, do you see scope and would you like it to go further than the 330,000 units to get your days supply to a similar level to GM? The alternative, obviously, would be that you improve your market share. If that is the case, how do you intend to do that? Will you do that through pricing? Or do you have new products that you believe can help address the market share situation in the near-term? Thank you.

Hi, George thanks for the question. A couple of things to say on that, one, really normalizing the inventory in North America and in the US specifically is a very important short-term corrective action for us. And that's why we have been working so hard at it and have accelerated the timeline, and right now as I mentioned we have a good line of sight to hit the initial target of 330,000 before the end of November. So I think that's a great achievement for the team. That being said at the same time, we are working clearly on sales effectiveness. And so when we think about days supply, we're really trying to hit it from both angles. We're not satisfied with the sales pace and of course the inventory level, which combined for the days supply. I think roughly we're around probably 85 days supply right now. And we certainly don't intend to stop working on all those things that are improving our market share and accelerating our market share improvement. That's a big, big focus for all of us. And I have just relocated to North America. I'm going to be working very closely with the North American team on all of our initiatives around sales effectiveness. I think like I said, we've seen some good progress, some early signs of the things we're putting in place are working. But clearly we want to get the sales rate up so that ultimately the days supply is lower than we're at today.

Great. Thank you.

Thank you.

The next question comes from the line of Jose Asumendi from JPMorgan. Please go ahead.

Thank you. Hi, guys. It's Jose from JPMorgan. A couple of questions please. When we think about the pricing and inventory situation in North America, I'm wondering if there are any processes, which need to be changed in house in order to keep tighter control over these metrics, which eventually will allow you to reduce the earnings volatility in the region? And also any changes in how you plan to monitor financials in general across the group? The second question, follow-up would be related to the dividend payment. I know it's very early days. But in the light of the severe cash burn in 2024 is the dividend policy still in place for next year? Thank you.

Thanks for the question, Jose. Regarding pricing, the new team is focusing on various strategies. We're not solely concentrating on price, as consumers appreciate our brands and are willing to pay a premium for them, recognizing the technology and value we offer. We are enhancing our presence at the top of the funnel to ensure consumers are aware of our excellent products. We're also collaborating closely with our dealers to turn leads into dealership visits, where potential customers can truly connect with our products. Pricing is, of course, a part of this strategy. Many customers are focused on payment options, so our team is dedicated to developing the right lease and subvention programs to meet those needs. Additionally, we will adjust MSRPs for certain 3G products in our 2025 models, while also reducing incentive spending. We believe this will create more transparency for consumers and make our products more accessible from a pricing standpoint, which should positively impact our sales. There's good initial feedback on this approach, but we need to observe how it performs in the market. Now, regarding your second question about cash burn and our dividend policy for 2025. As someone with experience in financial management, I share your concerns about our current cash conversion. However, we have a solid balance sheet and strong liquidity, and we trust our business model's performance. The issues we've discussed are temporary operational challenges. We are confident in our business's potential for 2025 and beyond. Our balance sheet can support what we expect to be a negative cash flow this year, and I don't see this as significant enough to alter our policy. We'll continue to evaluate the situation and have discussions at the appropriate time. Furthermore, regarding share buybacks, given our stock's current trading level, I believe it warrants discussion, although I can't predict the outcome. This is certainly a topic for consideration as we move into 2025. Thanks again for the question, Jose.

The next question comes from the line of Thomas Besson from Kepler Cheuvreux. Please go ahead.

Thank you very much. Its Thomas Besson from Kepler Cheuvreux. Welcome as well from my side. Two topics please, Doug. First, I'd like to come back on the guidance range. You mentioned, you like to keep options open, but I'd like you to be a bit more specific on what would imply you're closer to 5.5% or 7% and €5 billion to €10 billion cash burn and whether you can help us as well understanding where you are in terms of underlying performance for H2 given the temporary nature of a lot of operational topics you mentioned. That's the first question. And the second, I'd like you to outline the timeline for key new products, not all of them the key ones in terms of commercial launches and their impact. Maybe talk about frame in the US and how long it takes from BEV version to a PHEV version and finally the timing of the Cherokee successor. So, one on the guidance and underlying performance and one on products please.

On the first question, as I mentioned during the call, we don't see the need to narrow the guidance range at this point. We've recently had changes in leadership in North America and Europe, particularly with Maserati and Alfa. We are still in the process of developing the improvements that will enhance our performance through the end of the year. I don’t want to restrict the team by setting a narrow range when they've only had a couple of weeks to assess the business and start planning. We're already seeing promising ideas, and I don’t want to hinder that progress. I won't be providing a narrower range until we have more clarity on our strategic actions. There are many great ideas coming forward that we need to evaluate for implementation. I believe we have significant opportunities with this new team in place. Regarding your second question about core launches in North America, I'm very enthusiastic about the Dodge Charger Daytona. From my perspective as a car enthusiast, it's an incredible product, and the sooner we can launch it, the better. We are currently building batches of those vehicles, and there's excitement throughout the company. The same goes for the Wagoneer S, which is also in the early launch stages. The key is that these new products incorporate a lot of technology, both in hardware and software, which requires extra attention from our team to ensure flawless quality upon launch. These initial adopters are critical as they experience our first BEV products in North America, and we want their experience to be exceptional. We aim for strong word-of-mouth to ensure these products are recognized as outstanding. Quality is paramount and must take priority over timing, as making the right decision for the business and our brands long-term is essential. Also, there are financial implications since we want to avoid significant warranty costs associated with these vehicles. Therefore, it's beneficial from a financial perspective as well. We need to ensure our brands are maintained and that customers have fantastic experiences. As for the Cherokee, we've been clear that it is scheduled for the second half of 2025. This is a major product for Jeep, and we are eagerly anticipating the launch of the new Cherokee to fill in the gaps I mentioned in the presentation. Thank you for your question.

Thank you, Doug.

Our next question comes from the line of Patrick Hummel from UBS.

Yes, thank you. Hi, Doug. First question on the US business. Your launch pipeline for the next few quarters is quite EV heavy, and I'm just wondering what that's going to do to the mix from an AOI standpoint? Where would you see yourself relative to GM and Ford in terms of EV profitability? You obviously have a very different approach with the multi-energy platforms. And I'm hopeful that profitability would be better for that reason. But if you can just give a little bit of context how you see the US mix evolving from an AOI standpoint with these EV launches kicking in over the next few quarters? And my second question as far as enlarged Europe is concerned, with – despite the delays now the product – the ramp-up happening is Q4 already more or less a normal quarter in Europe in your view in terms of the run rate? Or is there still a bit of a lag here to be expected that gives us some more momentum in 2025? And how in Europe, do you think about this complex of CO2 compliance and EV? I'm wondering because there were some comments out of Stellantis. You would push for more EVs production schedule from November onwards accordingly. My impression was that Stellantis is doing relatively well compared to competition. So why are you pushing EVs aggressively? And are you actually aiming at monetizing a long position in the European CO2 market here? Or what's the strategy behind? Thank you.

Okay. Well, thanks for all the questions. Let me see if I can cover all those. Look, when we look at North America in our EV mix and EV profitability, it's a little bit tough to predict at this time. We're just kind of in the very early stages of the start of production of our first EVs. But I can tell you that we've been pretty open about the fact that we are profitable on our EV products in Europe, and that we are driving with a clear objective to hit profitability parity over time between our BEV products and our ICE products. Now that's a very challenging goal but we've been making steady progress on it and it's probably going to take a few more years frankly for some of the EV componentry, battery, cell prices, etc. to come down. But we're very, very focused on that. And North America of course, we are excited about these BEV products I think customers are going to love them. And – but I think even if they have very successful launches ultimately there in 2025 there's still going to be a pretty small percentage of our North American mix. Now when we look at Europe to your question about BEVs well, look the regulations are getting much stricter in Europe and we've known that for a long time. So we've made the investments. We have a fantastic lineup that is deep and long across all of our brands of BEV products. And not just because of regulations of course, but because we think BEV products are very exciting. And we think our customers are exciting. And I talked about a couple of them and the high percentage that mix that we have among the initial customer orders. So that's very encouraging, of course. Now when we think about Europe's performance next year and you asked the question is kind of this quarter and next quarter really kind of at what we expect to see in terms of European performance for 2025? I would say, no, because we still have a lot of products that will launch in the first half of 2025 across our brands. I mentioned a number of them in the presentation but those are certainly going to add to our product offer in a lot of segments that were blank in right now and should help to drive more volumes and market share. Thanks for the question.

Next question comes from the line of Bruno Dossena from Wolfe Research. Please go ahead.

Hi, thanks Doug for taking the questions. Look, I recognize the progress the company has already made destocking inventories. But to me I think the key issue is sell-through not supply. And we've heard Stellantis talk about changes to sales and marketing strategies including shifts between MSRPs and incentives for most of this year. During this time sell-through in the U.S. has remained stable, but at very low levels. To me the simplest answer is that too many consumers cannot afford Stellantis vehicles or are not willing to pay that premium. So I was hoping you could give us more context around how you and the new management team may rethink the overall pricing strategy? Or if you are rethinking the overall pricing strategy? Or at what point would it be time to actually make a change? Thanks.

Thank you for your question. You raised several important topics. Regarding sales momentum, we are noticing some encouraging signs based on the improvements we've made in the quality of our leads. It takes time for these qualified leads to progress through the sales funnel, so we anticipate seeing more enhancements in the coming months as our strategies take effect. However, we acknowledge that we must also focus on improving sell-through. It’s essential that we address both production levels and sell-through rates effectively. Our new leadership team understands this and is actively exploring the best ways to engage customers. Finance plays a crucial role in evaluating our strategies and expenditures to ensure we are making the most of our resources. I also want to discuss affordability, as it poses a challenge for the entire industry. At Stellantis, our goal is to provide clean, safe, and affordable mobility for everyone. The increasing technology in vehicles has led some manufacturers to stray from true affordability, which is a significant concern for both our company and the industry overall. As the new CFO, one of my priorities is to focus on cost and affordability over time. Thankfully, we have Carlos Tavares leading us, who is very focused on cost, and I expect to receive considerable support and direction in this area. Addressing affordability is a crucial part of our business strategy. Thank you for your question.

Thank you. I would like to ask a quick follow-up. Regarding free cash flow, it is low this year and is clearly affected by lower earnings, but there are also significant challenges from negative working capital and other accruals related to the lower volume. I was hoping you could provide some insight into the extent of the working capital and other challenges, so we can establish a clearer free cash flow excluding working capital as we prepare for the 2025 free cash flow. Thank you.

Yes, I believe our earnings guidance provides some clarity on where we expect to end up. There is a working capital effect due to lower production volumes and the industry's negative working capital cycle. The production cuts we made in the third quarter have impacted us. The key factor for our year-end results will be how effectively we operate in the last six to eight weeks of the year. I'm optimistic about our marketing initiatives that are beginning to show positive results, as a strong order book is essential for us to perform well in this final period, significantly influencing our cash situation. Additionally, building the order book is vital for 2025 since reducing plant operations to address short-term inventory problems leads to increased off-standard costs. With less volume to allocate fixed costs, we encounter various challenges. Therefore, achieving the right inventory levels and a solid order book is crucial for us to operate efficiently in 2025, which will help in spreading fixed costs and improving margins. It's essential that we conclude this year on the right track with our business properly aligned. Thank you for your question.

The next question comes from the line of Philippe Houchois from Jefferies. Please go ahead.

Yeah. Thank you very much, and congratulations on your responsibilities. I have two questions. The first one is talk about this captive finance organization that you've been trying to build in the US. With all the changes in pricing and maybe more limited capital at your disposal to build out at Cinco, how is that proceeding? And do you think the current situation is helpful? Or is that kind of impairing your ability to actually improve that sell-through which I completely agree is as important as the supply side of the equation?

I've been an advocate for establishing a captive finance organization for a long time, so I'm pleased to see it developing in the United States. A well-managed captive finance organization presents not only a significant profit opportunity but also a valuable loyalty tool. Customers who are financed through a captive organization tend to show much higher loyalty rates. This is because the captive finance group has a strong incentive to bring them back into one of our vehicles, unlike the banks we work with, which aim simply to sell you a vehicle again. The captive can maintain a relationship with the customer throughout their entire ownership experience, providing offers for their vehicle and potential upgrades. This creates numerous loyalty advantages, which makes me quite excited about the prospects. As you know, we have acquired a sub-prime lender, and building out the necessary components of the business will take time. We're working on developing the prime book, the wholesale floor plan, and lease options, which are crucial, especially as we move into the battery electric vehicle market where leasing is prevalent. This will be an essential tool for us. Regarding your question about capital constraints affecting our ability to build the book, I can assure you that is not the case. The book is expanding quickly, and we are pleased with the progress made by our team. We will continue to support this business as it grows, but it remains relatively small compared to what we observe from our competitors.

Yes, indeed. And if I can follow with another question, I always have an issue between your balance sheet at Stellantis or before the predecessor companies, because you have a lot of net cash these days, but also a lot of negative net working capital that was touched upon. Your predecessors have said, they would reduce the negative net working capital. What I've seen so far is, yes, you sell fewer receivables, but you keep having very long payables. And that inflates the cash flow in good years and that creates a big cash burn when all of a sudden you have declines in volume, even without the de-stocking impact. So where do you stand on this? Are you determined to properly reduce that negative working capital and effectively improve the risk profile of the balance sheet, because it's not as strong as it looks basically?

I understand your point. If you look at our half-year numbers, particularly the Q2 figures, you'll see that in terms of trade working capital, we're close to neutral. We are making progress on that front. Some of my predecessor CFOs had mentioned that we aim to be neutral in working capital by around 2026. We believe this is important, as it will reduce volatility in our cash flows. We're actively monitoring it, and while we're not far from achieving a nearly neutral position in trade working capital, we recognize there's still some work needed. Thank you for your question.

Next question comes from the line of Stephen Reitman from Bernstein. Please go ahead.

Yes, good afternoon and congratulations on your new position. I would like to ask about your experience so far and the feedback mechanisms within the organization, as it's evident that the issues stemmed from long-standing plans by many dealers. How do you feel the feedback channels are progressing within Stellantis to prevent similar service situations in the future? Have you had the opportunity to meet with the dealer groups yet? Thank you.

Well, the answer to the second question is no, I have not had time to meet with dealer groups yet. That being said, I just relocated to the United States. My office is right next to Antonio's office, and we're going to be working very closely together. So I would love to be included in those dealer meetings, and I look forward to it. As you may know from my background, I was a zone manager for a while during my time at General Motors. I worked with dealers in the Northeast region every day all day. I have a very healthy respect and admiration for dealers and I understand their business. And yes, I look forward to being a part of that feedback loop that you mentioned. But look, when you look at our inventory build last year, in 2023, which happened for a number of reasons, right? We were going into labor negotiations. And so we built up some inventory. We did not want our dealers to run out of vehicles to sell. We didn't know how those labor negotiations were going to go, if they were going to lead to a protracted strike, etc. And so we built some inventory. We knew that some of the vehicles were going to be in an extended changeover period charger, challenger, etc. And so we've built some inventory, again at the dealerships to make sure that they would have product to sell until the new product came out. And then I think we were pretty clear in the Q2 call on, we had some marketing initiatives, where, while we recognized that the end of kind of the scarcity period, if you will was coming to an end, our marketing initiatives in the first half in North America just were not as effective as we were hoping they would be. And when you have dealers that have taken a bunch of inventory for good reasons, but you then come out with marketing programs that aren't as effective as you'd like to of course, it's going to impact their business and that's not where we want to be. And so we do need to have more effective marketing of course number one. But also we need to work with the dealers to understand what kind of headwinds they're experiencing and where can we be more effective? And of course, it's not just about price. It's about how we provide a high-quality leads, how we work with them to get those customers familiar with the products and treat them well and all that kind of stuff. So it's pretty broad. But look, I think given my background, I hope I can be helpful in those discussions and support the business. But I think it's a very important area to your point. Thank you for your question.

Could you comment on the quality of the dealer inventory? Obviously, you've made progress reducing the absolute figures. But in terms of where it stands at the moment between 2023s and 2024s and 2025s in the mix, is there anything you could say about that?

Yes. I mean look, the majority of our incentive dollars have been put on the 2024 and older bonds early, right? I mean that's where we're focused on bringing down the inventories is kind of the age stock. And that's obviously crucial to the health of our dealers because those are the older units that they're eating up their floor plan dollars. And of course, interest charges for them and the like. So we're very focused and I think very aligned in that regard.

The last question comes from the line of Michael Jacks from Bank of America. Please go ahead.

Hi, Doug. Thanks for taking my question. Well, I just have one left. The US-Mexico-Canada agreement and more broadly imports from Mexico are one of the focus points for the US presidential race. Could you perhaps try to frame for us what the potential challenges are here for Stellantis? And the measures or levers you might have to help offset a more adverse trade outcome here? Thank you.

Yes. Look, the US presidential election as a fellow American, it's just so close it's too close to call. And of course, everybody in the industry is trying to study the different policy positions of the two potential administrations, right? And when things could take effect and how they could impact us of course on trade and emissions and other things. I think the key for us is not being able to accurately predict which way things are going. But to put in place the type of flexibility that regardless of which – which way things go that we can adjust and adapt. And to your point look, in terms of emission policy, which I know wasn't part of your question but I think it's an important issue as well. Our multi-energy platforms clearly can allow us the type of flexibility to adjust to adoption rates of EVs that may get accelerated by fiscal policies or may get retarded by fiscal policy. So I think we've built in flexibility there. Likewise, we have plants all over North America, and there are many products that are built in multiple locations even. So in the near-term, we can adjust on the edge. In the longer-term, of course, it would be more significant to really move away and make big adjustments. But like I said, we have plants all over North America and I think we have the flexibility to deal with these policy changes.

Helpful. Thank you.

This ends today's Q&A session. I now hand over to Doug Ostermann for closing remarks.

Thank you. Look, I'd just like to thank everyone for taking the time to follow the Stellantis story and your interest in the company. As I think I made clear, we have a lot of opportunity, but we really have a lot to do to secure it. And I very much look forward to continuing the dialogue that we've started today in the months to come. I'll be scheduling some meetings with investors at various conferences and also really look forward to getting to ask you some questions and hear your views on the company as well. So thanks again for your time and we'll talk to you soon.

Thank you for joining today's call. You may now disconnect your lines.