The Board of Directors of Pininfarina S.p.A. met last Friday under the chairmanship of Andrea Pininfarina and approved the report on operations of the Group in the first nine months of 2006. In the first nine months of 2006, value of production totalled 459.1 million euros, an increase of 68.5% over the 272.5 million euros reported at September 30, 2005. This improvement reflects the achievement of full production levels on the Alfa Romeo Brera and Mitsubishi Colt CZC orders. Despite this sharp increase in business volume, EBIT (which represents the profit or loss from operations) were negative by 22.5 million euros, as against positive EBIT of 9.2 million euros in the first nine months of 2005.

Certain developments that had an impact on the data comparison at June 30, 2006 should also be taken into consideration when reviewing the data for the first nine months of the year. Specifically: The data at September 30, 2005 benefited from the gains generated by the sale of the investment in the Open Air System joint venture and the liquidation of PF RE SA, a Luxembourg-based subsidiary, which yielded a combined total of 32.5 million euros. The data for the first six months of 2006 include a gain of 13.7 million euros on the sale of non-current assets. When extraordinary items are excluded, the negative change in EBIT amounts to 12.9 million euros. Also the 2006 production orders have smaller margins than those of 2005 due to the burdensome cost structure that is typical of the production startup phase.

Nevertheless, there was a deterioration in operating performance in the third quarter, due mainly to delays in the startups of production scheduled in that period, which impeded the growth of the Group’s value of production, resulted in operating inefficiencies, reduced the resources available to cover overhead and are causing temporary staff layoffs. This operating performance caused the Group to report a loss for the period of 16.3 million euros, as compared with a profit of 11.5 million euros in the first nine months of 2005.

The net financial position, which was negative by 91.5 million euros, showed a significant deterioration from June 30, 2006, when net indebtedness amounted to 3.7 million euros (indebtedness of 6.9 million euros at December 31, 2005).The increase in indebtedness is the result of several factors, including: the gradual completion of the capital investments required for the various production models, the start of repayments of most financing facilities and the changes in working capital caused by the delays in the start of production runs, as mentioned above.
 

An analysis by business segment shows that the manufacturing operations generated value of production of 355.4 million euros (more than double the 145.3 million euros reported in 2005), which is equal to 77.4% of total consolidated value of production (53.3% in the same period last year).

The value of production generated by the Group’s service businesses, which include design, industrial design and engineering, amounted to 103.7 million euros (127.2 million euros at September 30, 2005). These operations accounted for 22.6% of total value of production for the Group (46.7% in the first nine months of 2005). The salient event that occurred in this area was the completion of the restructuring of the German operations and the sale of the manufacturing activities of Pininfarina Deutschland GmbH on October 1, 2006. At the same time, mpx Entwicklung, a Munich-based company that was acquired this past July, has already begun to provide a positive contribution. Forecasts for the balance of the year call for consolidated value of production to increase by about 40% as compared with December 31, 2005. The main reason for this less optimistic projection, which has been scaled back from previous forecasts, is related to further delays in the startups of production compared with the scheduled program.

This delay will make it impossible to use the remaining months of the year to reduce the operating loss incurred thus far in 2006. The net financial position will decrease, compared with September 30 2006, reflecting the completion of investment programs and changes in net working capital. A turnaround is expected in 2007, when all models will achieve full production levels.

The year that is coming to an end was characterized by an unprecedented financial and industrial effort on the part of the Company due to the start up of production of five new models (Alfa Romeo Spider, Alfa Romeo Brera, Ford Focus Coupé-Cabriolet, Mitsubishi Colt CZC and Volvo C70), which was achieved without compromising Pininfarina’s traditional commitment and dedication to innovation and diversification. An example of this approach is the new T-Belt system installed at the Pininfarina wind tunnel facility (which will enable the Company to broaden its range of services in the car racing area) and the return to one-off car production such as the Ferrari 612 Scaglietti “K” and the Ferrari P4/5, manufactured for U.S. collectors.

The results reported thus far in 2006 demonstrate that there is a need to reorganize and reduce overhead if the Group is to attain its profitability targets. Accordingly, management is planning to meet with union representatives within the next 10 days to reach an agreement on how best to handle any staff redundancies. During the meeting, the independent Directors Franco Bernabè, Mario Deaglio, Edoardo Garrone and Carlo Pavesio designated Mario Deaglio as the “Lead Independent Director,” as required by rules of the Code of Conduct for Listed Companies. Lastly, the Board of Directors established a Strategic Guidelines Committee. The members of the Committee are: Andrea Pininfarina (Chairman and CEO), Paolo Pininfarina (Deputy Chairman), Lorenza Pininfarina (Committee Coordinator) and the above mentioned four independent Directors. The Strategic Guidelines Committee will provide consulting support to the Chairman and CEO.