Fiat Group on Tuesday reported a first-quarter 2003 net loss of EUR699 million, compared with EUR663 million in the first three months of 2002.

For the Fiat Auto division, in Western Europe, the contraction that characterised the car market in 2002 continued during the first quarter of 2003. Overall demand was down 2.7%, aided in part by an increase of 5.8% in Italy, where motorists took advantage of environmental incentives provided by the government during the last three months of this programme. The Polish market continued to improve, but a credit crunch had a negative impact on demand in Brazil.

Fiat Auto reported an operating loss of EUR334 million in the first quarter of 2003 (loss of EUR429 million in the same period last year). The improvement over the loss incurred in the first three months of 2002 shows that the sector is beginning to respond to restructuring and cost-cutting efforts and reflects the benefits of the synergies developed with General Motors and of programmes implemented to increase the quality of its sales.

Planning for the medium term, Fiat is in the process of finalising an agreement with General Motors to develop another common architecture for cars, this time in the "C" segment, which is the most important in Europe.

Rising sales of Maserati cars helped Ferrari post higher revenues in the first quarter of 2003. However, it reported an operating loss due to normal seasonal factors, higher research and development outlays, and unfavorable foreign exchange rates.

The main reasons for the group loss were the costs and lost profits resulting from the flood that completely stopped production at the Termoli engine plant last January and two charges of a temporary nature: an entry booked to mark to market the equity securities held by Toro Assicurazioni and the adjustment of the total return equity swap on General Motors shares, which was booked to reflect the fair market value of these shares at March 31, 2003.

This loss, however, would almost totally disappear if the shares were valued at Tuesday's market prices. There were also some positive factors, including the extraordinary income earned on the sale of the Brazilian automobile retail financing activities.

The operating loss for the quarter totaled EUR342 million, compared with EUR299 million in the first three months of 2002, when the bottom line benefited from higher gains (about EUR50 million) earned on the sale of real estate assets, especially by Toro Assicurazioni.

Overall, while Fiat Auto narrowed its loss, the group's other businesses saw their operating profits fall, even though, in the aggregate, they operated close to breakeven.

Revenues amounted to about EUR12.3 billion, compared with EUR14.1 billion in the first three months of 2002.

The decline was about 10% on a comparable consolidation basis. This shortfall is largely the result of lower unit sales by Fiat Auto and CNH and of non-operating factors, including the impact of the conversion of CNH's dollar-denominated revenues into Euros (which reduced revenues by about EUR500 million) and, of lesser magnitude, the divestitures of certain group businesses in 2002 and at the beginning of 2003 (Teksid's Aluminum Business Unit and Iveco's Fraikin).

2003 will be a difficult and challenging transition year for the Fiat Group, since it will be working to overcome its operational difficulties, especially those that have been penalising Fiat Auto's profitability, in an economic climate characterised by low growth and aggressive competition.

The group's key markets are not expected to show appreciable signs of a turnaround until later this year. In Europe, demand for cars will be lower than in 2002.

The market for agricultural equipment should hold relatively steady, but sales of construction equipment are expected to decline further. Demand for commercial vehicles will be down across the board. Despite such an unfavourable environment, all group sectors are working hard to achieve significant improvements in operating results and cash flow through rigorous cost-cutting programmes and other measures.

The exceptionally rapid pace at which the divestitures of Fidis, Toro and FiatAvio were completed in recent months underscores the group's commitment to meet the debt-reduction requirements agreed upon with its lending banks and to permanently strengthen its balance sheet.

By June, the group's management intends to present to the financial markets the industrial and financial action guidelines that it will implement to achieve a lasting structural turnaround of its operations.

At that time, management will also be able to provide a better forecast of the group's performance for all of 2003. It can already be stated that, though the operating result is expected to remain negative, it should mark an improvement from the full year 2002 level.

At March 31, 2003, the net financial position showed net borrowings of EUR5.2 billion, up about EUR1.4 billion from December 31, 2002 but down from the EUR6.6 billion recorded at March 31, 2002. The increase from the beginning of the year was due mainly to a rise in working capital caused by higher inventories held by CNH (due to seasonal factors) and Iveco (due to seasonal factors and the launch of new products), a drop in the amount of trade receivables held by Fiat Auto and a rise in receivables owed by the tax authorities.

Another factor affecting the level of indebtedness was the negative cash flow experienced during this period. The resources absorbed by these factors were replaced in part by the proceeds generated by divestitures.