The Piaggio Group operates internationally in the light vehicles sector, a sector which the Group helped to define in 1946 with the introduction of the Vespa and in 1948 with the introduction of the Ape, thus anticipating the emerging need for individual mobility which is still a feature of modern society. The light vehicle sector includes two, three and four wheel transport, for private or professional use, which, above all in major urban centres, enables the resolution of the main problems of mobility, thanks to the technical characteristics of safety, manoeuvrability and low environmental impact. Against this background, the research and development activity of the Piaggio Group takes an innovative approach not only in terms of style, but also in terms of the technical solutions that are deployed. Moreover, this is in line with the mission of vehicle use and with the emerging expectations of customers. This approach is evidenced by the numerous innovative concepts of form and function and by the technological firsts which are part of Piaggio’s past and present.

Today the Group is one of the leading global operators, and confirmed European leader, in the development, production and distribution of two-wheel vehicles (scooters from 50 to 500 cc and motorbikes from 50 to 1,100 cc). The Group also operates in the development, production and distribution of three and four wheel light commercial vehicles (LTV) in the markets of Europe and India (where it is the second largest operator). The vehicles produced by the Group are distributed in over 50 countries under the brand names of “Piaggio” (scooters and three and four wheel vehicles), “Vespa” (scooters), “Gilera” (scooters and motorbikes), “Derbi” (scooters and motorbikes), “Aprilia” (scooters and motorbikes), “Scarabeo” (scooters), and “Moto Guzzi” (motorbikes).

As part of the light vehicle sector, this Report considers the data relating to the two business areas into which the Group’s activity is divided.

TWO-WHEEL MARKET

The world market for motorised two-wheel transport in 2005 confirmed the marked expansion that had already been seen in previous years, exceeding 40 million vehicles sold, up by 9% compared to 2004. Asia remains undoubtedly the main driver for this result: the People’s Republic of China confirmed its position as the world’s leading market by increasing volumes by 9% with over 18 million vehicles. India
was again in second place with growth of 10% and more than 6.7 million vehicles sold. Also South East Asia in 2005 confirmed the growth of recent years, reaching almost 9 million vehicles (+13% compared to 2004): among the countries in this area, Indonesia covers around half of the sales, followed by Thailand and Vietnam which respectively account for 25% and 20%. The crisis of the Japanese market seems to have ended and it saw a slight positive trend compared to 2004; sales volumes in 2005 were just over 706,000 units (+1%).

The positive trend in North America (of which more than 90% is concentrated in the USA) continued with growth of 4% and sales in excess of one million units. As for Latin America, Brazil maintained its marked growth (90% of the area), also in this case with sales volumes of over one million units (+12% compared to 2004).

Europe, the main area for the Piaggio Group’s businesses, for the second year running saw a rising trend (+5% compared to 2004, of which +6% for scooters and +4% for motorbikes). This result arose once again from the solid performance of the over 50 cc segment (+9%) which made up for the fall in the 50 cc segment (–3%); unlike 2004, in 2005 the over 50 cc scooter segment (+13%) recorded a higher rise than that for the over 50 cc motorbikes (+6%); thus there was a continuation in the trend by which in coming years the over 50 cc scooter segment should surpass the 50 cc motorbike segment which is still over half of the European market.

The scooter market

Italy: The Italian scooter market ended 2005 at 395 thousand vehicles sold compared to 403 thousand in the same period of 2004 (-2%), thus confirming the change in the mix that has occurred between 50 cc and over 50 cc vehicles in favour of the latter. The 50 cc segment fell from 130 thousand units in 2004 to 122 thousand units in 2005 (-7%). The market for over 50 cc vehicles at December 31, 2005 stood at 273 thousand units and was thus stable compared to 2004.

Europe: In 2005 the scooter market in Europe grew, going from 1,102,000 units in 2004 to 1,164,000 (+6%). The 50 cc scooter segment fell slightly from 593 thousand units in 2004 to 590 thousand in 2005. The over 50 cc scooter segment rose to 574 thousand units compared to 509 thousand in the same period of 2004 (+13%).

The main market is the Italian one (395 thousand units) followed by Spain (172 thousand), France (168 thousand), Germany (99 thousand), Greece (82 thousand), and Great Britain (40 thousand). The French market saw overall growth compared to the previous year, rising from 157 thousand units to 168 thousand (+7%), due both to the increase in 50 cc scooters and licence plate registered scooters (+4% and +14% respectively compared to the previous year). The Spanish market stood at 172 thousand vehicles, an increase of 34% compared to the same period in 2004, which is not representative of the sharp change in the type of demand. In fact against a fall in the market of 6% for 50 cc scooters, the market for over 50 cc scooters grew by 94%. In Greece too the market recorded growth of 19%, while the German market saw an overall fall of 5% due to a negative trend in the 50 cc market (-10%), not fully reabsorbed by the growth in the over 50 cc segment (+9%). Finally, the British market stood at 40 thousand vehicles, a fall of 12% compared to the same period of 2004, due to a negative trend in both the 50 cc and over 50 cc segments (–9% and -14% respectively).

USA: The scooter market in the USA in 2005 saw growth from 48 thousand units in 2004 to 57 thousand units in 2005 (+17%). The 50 cc scooter segment saw growth of 11% and the over 50 cc scooter segment rose by 27%.

The market for motorbikes

Italy: In Italy the market for motorbikes (including 50 cc motorbikes) rose from 152 thousand units in 2004 to 155 thousand in 2005, thus recording growth of 2%. The segment for 50 cc motorbikes fell (-1%) from 6,500 units in 2004 to 6,400 units in 2005. There was, however, a marked rise in 51-125 cc motorbikes, which moved from 8,600 units in 2004 to 9,700 in 2005, an increase of 14%. The segment for over 125 cc motorbikes grew by 1% with 139 thousand registrations at 31 December 2005 compared to 137 thousand in 2004. In particular the 126-750 cc motorbike segment grew by 1% (87 thousand vehicles compared to 86 thousand in 2004), while the over 750 cc motorbikes saw slight growth of 1% (52 thousand vehicles compared to 51 thousand in 2004).

Europe: The market for motorbikes in Europe rose from 823 thousand units in 2004 to 854 thousand units in 2005 (+4%). While the 50 cc segment fell from 91 thousand to 76 thousand units (-17%), the 51-125 cc segment grew by 31%, going from 98 thousand units in 2004 to 129 thousand units in 2005, and the over 125 cc segment stood at 650 thousand units compared to 634 thousand in the previous year (+2%). The main market is the French one which outstripped Italy by 736 units (155 thousand units in both France and Italy). Germany is the third European market with 140 thousand units, followed by Spain (121 thousand units) and Great Britain (91 thousand units).

In Europe the main segment is that for 126-750 cc motorbikes, where the Group is represented by the Aprilia brand, followed by that for maxi motorbikes of over 750 cc where the Group is present with the Aprilia and Moto Guzzi brands. In 2005, the over 750 cc segment fell slightly (-1%), while the segment for intermediate 126-750 cc motorbikes grew compared to the previous year (+5%). Turning to the key European market for Moto Guzzi (over 750 cc), Germany, although remaining the leading European market, saw its market drop by 7% mainly due to a fall in the touring segment of 17% and the sports road bike segment of 16%, custom bikes fell by 14%, naked bikes lost 7%, and enduro bikes 1%, while sport touring bikes, thanks also to the introduction of two new BMW models, grew by 14%. The French market, the third in Europe, grew by 5% rising from 41 thousand in 2004 to 43 thousand units registered in 2005, mainly thanks to the touring segment which saw a rise of 9%, followed by the naked segment 9%, custom 9% and sport touring 2%. On the other hand, the segments for sport,
down by 16%, and enduro, down by 2%, fell compared to 2004.

The fourth European market is the UK which was stable in 2005 at around 39 thousand units; demand fell in the sport (–12%), sport touring (–23%) and naked (–1%) segments. The values were partly offset by the growth in the enduro (18%), touring (4%) and custom (4%) segments. In the UK market Moto Guzzi grew from 0.6%, with 223 motorbikes registered, to 0.8% in 2005, or 301 units. The Spanish market, the fifth largest in Europe, saw significant growth of 34%, going from 14 thousand units registered in 2004 to 19 thousand in 2005 with a 58% rise in the naked segment, 52% in sport touring, 40% in touring, 48% in enduro and 43% in custom. The only segment which fell back was the sport segment, down by 12%.

USA: In 2005 the motorbike market in the USA grew overall (+4%). In more detail, while the 51-125 cc segment fell (-12%), the over 125 cc motorbike segment grew (+7%). In particular, again in relation to 750 cc motorbikes, there was growth of 5% from 459 thousand in 2004 to 482 thousand registrations in 2005.

LIGHT TRANSPORTATION VEHICLES MARKET

In 2005 the European market for light transportation vehicles (vehicles with a gross weight of up to 3.5 tonnes) saw further recovery of 3.5% compared to 2004. Italy, however, went against the trend and fell by 2.4%. The Italian market, therefore, stood at 216,160 units compared to 221,500 in 2004. The drive to buy light transportation vehicles on the Italian market is, therefore, still “lukewarm” and influenced by
a continuing economic situation which is not positive. The Indian market, where Piaggio Vehicle Private Limited, a subsidiary of Piaggio & C. S.p.A., successfully operates, continued to enjoy a positive growth trend, up by 12.1% compared to 2004.

During 2005, in terms of sales to the final customer in the segments in which PVPL is present, it totalled 339,780 units for 3 wheel vehicles compared to around 303,000 units recorded in 2004. Within the market, the passenger vehicle segment (3 and 6 seaters), stood at 194,636 units in 2005, slightly up on 2004 (+7.2%). The trend in the Cargo segment shows a much more marked rise. Between 2004 and 2005 the segment grew by 19.5% from 121,500 to 145,145 units sold. The Cargo market therefore, even if smaller in terms of size than the Passenger segment, is the growth driver for the Indian market. At the end of 2005 PVPL enjoyed a 38% share of the Indian market for three wheel cargo vehicles and
24% for Passenger vehicles.

THE REGULATORY FRAMEWORK

Italy: On June 21, 2005, the Ministry of the Environment issued the reimbursements for the incentive campaign contributions for 2003 and 2004. Piaggio, the Ministry’s main creditor, received a full reimbursement of 11.3 million euro (9.6 million relating to 2003 and 1.7 million relating to 2004). Aprilia obtained a repayment of 7.3 million euro (6.3 million accrued in 2003 and 1.0 million in 2004). As at April 18, 2005 there was the finalisation of the supplement to the Programme Agreement signed on February 12, 2002 between the Ministry of the Environment and ANCMA, for the continuation of the supply of contributions for the purchase of low-polluting mopeds. The funds for the 2005 campaign were made available as from May 20, 2005 for an overall sum of 25,000,000 euro. A contribution of 250 euro (including sales tax) was provided for every low-polluting moped. As at December 2005, the Group brands had obtained the following contributions: Piaggio 8,381,250 euro, Aprilia 4,588,500 euro, and Derbi 361,250 euro. The contributions for the purchase of electric traction vehicles were refinanced and the campaign continued in 2005.

On October 1st, 2004, the Region of Lombardy launched its own incentive campaign with contributions in favour of low-polluting mopeds and motorbikes (up to 250 cc). This initiative continued throughout 2005 and negotiations are underway with ANCMA for a renewal of the campaign in 2006. On October 25, 2005, with a resolution presented by the Assessor of the Environment for the Region of Lazio, an incentive campaign was started for the purchase of low-polluting vehicles, and it is ongoing. In this case too the incentives are for mopeds and motorbikes (limited to 200 cc) and it is expected to continue in 2006. In 2005 there continued the coming into force of the regulations contained in the Legislative Decree on the New Highway Code. Public, media and market attention was very high, above all owing to the numerous innovations announced for two wheel vehicles. In particular the obligation to obtain the mini licence for scooters (as the Code defines all two wheel vehicles up to 50 cc) was extended to adults who do not possess any other licence as from 01.10.2005. In addition, it was made compulsory for all candidates for the mini licences to present a medical certificate of driving suitability. Despite the
toughening of the obligations, once the regulatory requirement had been clarified, there were no negative consequences on the market for both 2 wheel mopeds and for the Ape 50. Nonetheless, it must be recalled that such products were covered by the government contribution as low-polluting vehicles. At December 31, 2005 the Ministry figures relating to the issue of mini licences showed a total of 1,076,590 since the obligation was introduced. The Group’s initiatives to support education campaigns and schools are continuing, in particular with the involvement of its own dealers to provide part of the free courses at schools. At the same time as the coming into force of the mini licence for adults, Parliament modified article 213 of the Highway Code extending the cases in which the additional sanction of confiscating the vehicle (moped or motorcycle) is applied, to cases of riding without a helmet, illegally increasing the bike’s performance, dangerous driving and unauthorised transport of a passenger on a moped. Among the other changes made to the Highway Code relating to the 50 cc segment, note should be made of: a) the possibility of transporting a passenger on a moped; b) the circulation document – which will be for a nominated person – as well as; c) the new registration system for mopeds. These measures too were envisaged to be applied as from 01.07.2004, but are still a dead letter today given that the Implementing decree, although approved by the Cabinet in January 2006, is still not in force. Ministerial sources indicate the likely coming into force for the end of the April 2006. A consequence will be that the envisaged phase of undertaking an administrative re-examination of all the mopeds currently in circulation (around six million vehicles), which could lead to a further drive to replace old vehicles with new ones which already conform to the regulation, will be further postponed to the end of 2006.

Again in Italy, there have been no important changes as regards insurance rates. The average premiums for insurance policies for mopeds rose further or remained at the very high level of the previous two years. This occurred despite a slight fall in the overall number of accidents and in the absence of increases in the cost of parts and labour. Depending on the geographic area and the age of the rider, the total annual insurance premium is up to 50% of the list price of the vehicle (especially in the case of mopeds), although on average it is never lower than 15%, and represents the main barrier to purchase, as seen in statistical studies on the population carried out by specialist institutes. It should be noted that since December 2003 road insurance of mopeds has been included in the so called ISTAT Basket for the calculation of inflation. During 2005, by means of a specific Ministerial Decree of November 22, 2005 Italy adopted the European Directive 2005/30 which regulates the issue of EU approvals for replacement silencers, containing catalysers to limit polluting emissions. This directive is applied to non-original (after market) silencers which are freely traded. Although at the request of the manufacturer it is already in force, the obligation of approval in accordance with the directive will start as from May 18, 2006.

Europe: For the whole of 2005 the regulatory activity continued in the institutions of Brussels that led to the establishment of new pollution limits for the so-called “Euro3” phase for motorcycles and to the proposal of a directive for corresponding Euro3 limits for 2/3/4 wheel mopeds, motorised tricycles and quadricycles. While the Euro3 parameters for motorcycles have been obligatorily in force throughout Europe since January 1st, 2006 for all new approvals and since January 1st, 2007 for all registrations of
motorcycles, for other categories of vehicle such dates and corresponding limits have not yet been identified.

Since January 1st, 2005, for new approvals, the Euro4 phase of pollution limits has entered into force for commercial vans (N1 - Porter). Since January 1st, 2006 this obligation has been extended to all production. A consequence of this regulation has been the termination of the Porter Diesel line, while the petrol version has been updated to the new parameters. Following the discussion in Brussels on the final report of the study carried out by TuV - Technische UberwachungsVerein – on tampering with mopeds and motorcycles, France put forward a proposal to change the related European legislation in a way that would be extremely detrimental for producers, by extending the existing prescriptions to other categories of vehicles. Piaggio, in collaboration with the European Association ACEM, has managed to bring the discussion back to more rational ground which can protect its interests. As a consequence the European Commission has reserved the right to present a proposal to modify the existing regulation to take the needs of constructors into account also.

Approval of the text of the New EU Directive on driving licences continues to be put back owing to the impossibility of the EU Council of Ministers reaching agreement on the text to be approved. In particular Germany, France and Poland refuse to support a compromise text prepared by the
Luxembourg Presidency and subsequently by the British Presidency. At the moment it is not possible to make a forecast about the progress of this directive. However, it is unlikely that there will be progress during 2006, in consideration of the “weakness” of the Austrian and Finnish presidencies (being small countries). It is very likely that the procedure will be unblocked under the German Presidency in the first half of 2007. We should recall that with the approval of this directive, for the first time the requirements for riding mopeds, which are currently based on national regulations, will be regulated at a European level. Piaggio has guaranteed, and will continue to guarantee, proactive monitoring of the content of the provision, with particular reference to driving specifications for tricycles and quadricycles, as well as to the possibility for member states to keep the conditions established by domestic laws, such as for example, for some countries to keep 14 as the minimum age to use a motorbike and the equivalence between licence B and licence A1.

Finally, the definition of internationally harmonised regulations regarding noise, braking and pollutant emission from two wheel vehicles continued throughout 2005. Piaggio made a significant contribution to the progress of research studies on which the new regulations will be based. This commitment saw Piaggio involved both in Europe (Brussels) and internationally (UN/Geneva), in prima persona and through the category associations to which it belongs, protecting the interests of the Group in all the issues as they were addressed. Overall, the products of the Piaggio Group conform to the strictest regulations currently in force in Europe and, with particular adaptations, in the USA regarding the environment and safety and they also conform to other existing non-EU regulations which are generally less restrictive.

In 2005 the Piaggio, Vespa and Gilera brands maintained their leadership of the scooter market with a 25.1% share. Looking at the individual brands, 2005 was a very good year for Vespa which recorded annual global sales of 87,800 units thanks to the launch of two new models: LX 50/125/150, restyling of the ET launched in 1996, and of the GTS, the first 250 cc Vespa equipped with a latest generation electronic injection engine well before the Euro 3 regulation comes into force. Thus the share in Europe of the most famous brand in the Piaggio Group grew in 2005 by almost one percentage point from 4.4% to 5.2%.

After a 2004 characterised by the restyling of the Liberty and Beverly models and by the excellent performance of the X8, Piaggio volumes in 2005 stood at 195,900 units, or a 17.5% share. Gilera ended 2005 with 35,100 units sold or a 2.5% share. The initial market indications seen at the end of 2005 following the launch of Runner, offered good prospects for 2006.

The expansion of the Piaggio Group in the USA continued in 2005 too: the distribution network was enhanced by increasing the Vespa Boutiques which are spread all over the country to around 120. Vespa remains the Group’s leading product with around 8,700 units sold, while the market share remained largely stable at 16.0%. As for other non-European countries, the Piaggio Group’s commitment remains directed to those markets which are the most structured and where customers have a high level of spending power. Derbi too confirmed its position as European leader in its key sector, that for 50 cc motorbikes, with a market share of 33.8% (+4.7% compared to 2004) and the Senda confirmed its position as the best18 selling 50 cc motorbike in Europe (26,347 units), albeit the market in general fell by around 17% compared to the previous year.

Despite the presence in the subsectors of 125 cc motorbikes – where Derbi maintained a 2.2% share – and of scooters (up to and including 50 cc), this fall in the main subsector where the brand operates led to a fall of 2.5% in net sales for 2005. As for the scooter subsector, with 84,988 vehicles sold in Europe, in 2005 the Aprilia brand raised its share to 7.3% (+0.2%), while in the motorbike segment, with 18,114 units sold in Europe, Aprilia’s share in 2005 fell to 2.1% (-0.8%). As for the American market, up compared to 2004, the presence of Aprilia and Guzzi underwent a structural reorganisation which will bear fruit as from the second quarter of 2006. Albeit in a slightly negative market, Moto Guzzi, with 1.7%, regained share in its niche market. Thanks also to the launch of the new Breva 1100 cc and Griso 1100 cc, volumes in 2005 stood at 6,975 motorcycles sold with net sales worth 43.8 million euro (+90% compared to 2004).

THE TWO-WHEEL PRODUCT RANGE

The Piaggio, Vespa, and Gilera series consist of a wide range of products, which are regularly in the leading positions in sales tables, with excellent coverage of the various market segments. There were three models which in 2005 made a particular impact: Vespa LX, Liberty and Beverly. Vespa LX was the Group’s best-selling scooter with almost 55,000 units, or net sales of 94.1 million euro; the sales of the Liberty model were over 46,000 units which enabled net sales of 65.9 million euro. Just under 40,000 units were sold of the Beverly (114.4 million euro in net sales) which continued to have a leading role in the Piaggio range.

Significant volumes were also achieved by the pair of “big” Vespas, the Gran Turismo and the GTS, which together reached almost 21,000 units sold at 54.6 million euro in net sales. The results for the two Piaggio Gran Turismo models were also outstanding: the X9 and X8 in 2005 both recorded sales of around 18,500 units, with net sales of 43.9 million euro and 54.6 million euro respectively.

The main new product presented during 2005 was the GTS: it is a product aimed at a particularly sophisticated and demanding customer who wishes to combine the elegance and classic styling which are typical of a Vespa, with the advanced technology and performance worthy of a real Gran Turismo scooter. There was also a significant success for the LX, which was a worthy successor to the ET. Gilera meanwhile presented the new version of the Runner, the scooter with a motorbike inside, while Piaggio proposed a new version of the Zip 4 Stroke, the first scooter wholly manufactured at the plant in Foshan in the People’s Republic of China. This will be Piaggio’s response to the fastest growing segment for 50 cc vehicles, that of low-priced classic bikes. In 2006 Zip with the addition of a 100 cc 4 Stroke engine will increase its potential in the over 50 cc segment as well.
 

The range of Aprilia products consists of a diversified range of scooters and motorbikes of varying engine sizes. The models which in 2005 particularly stood out were, for scooters, the Scarabeo in various engine sizes (26,122 vehicles sold), the Sport City 125/200 (17,274 vehicles), the SR 50 (22,968 vehicles), the Atlantic 125/250/500 (13,428 vehicles); and for motorcycles, the RS 125 (4,327 vehicles), the Pegaso (3,045 vehicles) and the RSV 1000 (1,853 vehicles). The Moto Guzzi range in 2005 saw the introduction of the new Euro 3 twin spark 1100 engine, which
uses a new six speed gearbox and a new patented transmission system, and which was adopted as from May 2005 on the Breva 1100 and as from September on the Griso 1100.

LIGHT TRANSPORTATION VEHICLES

The Light Transportation Vehicles (LTV) Division ended 2005 with 121,400 units sold, up by 33.9% compared to volumes in 2004. This growth arose especially from the success of the associated Indian company PVPL (Piaggio Vehicles Private Ltd) which further reinforced its presence on the domestic market in India and gradually increased the capacity of its production facility at Baramati. Moreover, in 2005 there was an excellent performance from the European market which, following several years in decline, started to grow again thanks to the new commercial and marketing policy and to the introduction of the new Quargo product. Therefore, it rose from around 18,500 units sold in 2004 to 20,021 vehicles recorded at the end of 2005. Growth in Europe, therefore, stood at a significant level of 7.6% which not only enabled an inversion in the trend by generating positive growth in net sales, but also caused a real turnaround in the business and in the contribution which Piaggio LTV Europe makes to the Group.

Despite the unique nature of the product, in the European market (mainly Italy), Ape continues to show signs of being weighed down by the mature phase of its product life cycle and saw a fall of 16.4% compared to 2004. The fall in the 3 wheel segment, however, was more than made up for by the
marked growth in the 4 wheel segment (Porter and the new Quargo) which rose from 8,146 units in 2004 to more than 11,200 in 2005 (+38.2%).

Overall net sales of Piaggio LTV rose from 237.6 ML€ in 2004 to 304.0 ML€ in 2005 (+27.8%). Net sales generated in Europe totalled 146.8 ML€, while India, following the sharp growth in volumes, reached 157.2 ML€ in net sales. In the domestic market, in particular, the Group rose from 4,837 Porters sold in 2004 to 4,873 in 2005 (largely stable with +0.7%), however increasing its market share in the N1 segment which reached 2.3% (Source ANFIA: declared deliveries). In particular, then, in the pick-up and chassis versions, in which the Porter range has an important competitive advantage compared to its rivals, Piaggio’s market share consolidated at 21.3% (ANFIA figures: December 2005).

As a consequence Piaggio reinforced its role as a key player in the sector of compact commercial vehicles which are small, highly manoeuvrable and have a high load-bearing capacity in relation to their size. In addition, in the Heavy Quadricycle / 3 wheel segment, where Piaggio has always played a leading role, the new Quargo performed well. Launched at the end of 2004, in 2005 Quargo sales were around 3,500 units. This performance more than made up for the fall in the Ape estimated at around 1,500 units. It is also worth highlighting an important effect of the mix since the average price and unit value of the modern 4 wheel range (Quargo and Porter), is higher than that for the 3 wheel range (Ape).

The Indian market, where Piaggio Vehicle Private Limited, a subsidiary of Piaggio & C. S.p.A., operates successfully, continued to grow, up by 12.1% compared to 2004. During 2005, in terms of sales to the end customer in the segments in which PVPL is present, 339,780 3 wheel units were sold compared to around 303,000 units recorded at the end of 2004. In India the key market for 3 wheel commercial vehicles continued to grow, with an increase of 12.1% compared to 2004. Against this background, the performance of the associated Indian company PVPL continued to show a marked increase and an interesting growth rate. Sales rose from almost 72,000 units in 2004 to over 100,000 units during 2005. The growth rate for PVPL, therefore, stood at 41.4%. This marked growth enabled PVPL to significantly increase its market share which rose from 23% of the total 3 wheel market in 2004 to the current 30%. Looking in detail at the market, PVPL consolidated its role as market leader in the Cargo segment (goods transport) and as a key, dynamic and innovative follower in the Passenger segment (passenger transport).

In the Cargo segment (0.5 ton and 0.75 ton), thanks in particular to the “Piaggio Ape 501” and the numerous customisation possibilities it offers to meet the varying needs of customers in timely fashion, PVPL’s market share stood at 38%. The key follower, an Indian manufacturer, stood at just 23% (SIAM / PVPL figures). In the Passenger segment (3 and 6 seaters) PVPL’s performance saw solid growth and it continued to confirm its role as a valid alternative to the historic local market leader, increasing its market share by a full 10 percentage points from 14% in 2004 to 24% in 2005.

The reasons for the continual growth on the Indian market, which led PVPL to have an overall, and constantly increasing, market share of 30%, are a high quality product and, above all, a value proposition that is enhanced by advanced service that meets the needs of end users. As for the product range, 2005 was dedicated to the commercial and marketing launch of the Quargo – the new compact professional vehicle – which was presented in autumn 2004. 2005, therefore, saw management of the marketing mix which was aimed at consolidating the “customer base” of Piaggio LTV – and they are very loyal to the brand – as well as seeking new customer targets who in the new product can find the best solution to their professional needs. During 2005 further versions of the Quargo were also launched (i.e. Tilt-frame body, Van, Heavy Duties) in order to better command the various key market segments. The results obtained, expressed in terms of net sales, were significant.

During 2005 the new version of the Porter (which replaced the previous one) was also put on the market, equipped with a more comfortable cabin so as to better meet the needs of professional customers. At the end of 2005 the Piaggio Trackmaster was presented, an off-road vehicle destined for the professional utility sector (ideal for agricultural and leisure use) which requires an extreme vehicle suitable for every type of surface or incline.

SPARE PARTS

2005 was the first year in which the Piaggio Group chose to concentrate in a single Corporate structure the spare parts division, with the aim, on the one hand, of optimising customer service levels, and, on the other, creating synergies between the various Group brands. As for the level of service, 2005 ended with values over 93% in the first instance. Although demand was largely unchanged, the objective of making an overall improvement in the competitive positioning of our brands and the consequent development of the business was confirmed.

CORPORATE BUSINESS

2005 saw good results both at the level of volumes and in the consolidation of relations with the public administration, institutions and national service companies. There was clear development in the European market, the first important supplies to the overseas market in general (Albanian Ministry of Industry - LTV, Algerian Ministry of the Interior - Vespa, Argentine Ministry of the Interior – Breva) and a marked consolidation of the domestic market (Italy). At a European level the development of supplies was particularly positive in the postal services sector (4,000 vehicles + 60% compared to 2004) and involved France, Holland, Spain, Austria, Switzerland, Germany and Greece.

The domestic market, in addition to the awarding of the supply for the Italian post office, saw significant results in the services sector generally and in particular in public utilities. In the LTV sector the increase in vehicles (1,600 compared to 700 in 2004) was achieved through the development of new commercial relations and through the consolidation of existing relations.

In relation to the range of motorbikes (Guzzi and Aprilia), during the year contacts were re-established with the central administration and town councils to guarantee the offer conditions and the company’s involvement in future tenders. In addition, the public administration market segment was strongly affected by the fall in financial resources (budget cuts), a situation which will involve this market segment in 2006 as well.

RESEARCH AND DEVELOPMENT

During 2005, the Piaggio Group continued with its policy of research and development activities, allocating overall resources of 54.9 ML€ (of which 31.2 ML€ for Piaggio, 4.0 ML€ for Nacional Motor, 16.2 ML€ for Aprilia, and 3.4 ML€ for Moto Guzzi), with a ratio to net sales of 3.8%. The associated Indian company Piaggio Vehicles Pvt Ltd for its new products largely relied on the development undertaken by the parent company Piaggio & C. S.p.A. in the LTV business area. In particular the development activities related to new vehicles and new engines (above all from an environmental aspect and already conformed with the new Euro 3 regulation). Following the development activities for new two wheel products, for an overall cost of 31.2 ML€ the
Piaggio brand started production of completely new vehicles and engines for products already in the range such as:
· The new Euro 3 engines for all the Group’s scooters and the new Euro 4 version for
the Porter
· Vespa GTS and LX with the related engines
· Runner
· Quargo INDIA.
As for the Aprilia brand, 2005 with overall expenditure of 16.2 ML€, saw the start of production for:
· Atlantic 500 Sprint
· Pegaso 650, in both the road and Enduro versions
· Scarabeo 50 with the new 2 stroke Piaggio engine
· TUONO 1000 R
The activities to design and industrialise the “off road” bicylinder range complete with Cross, Motard and Enduro versions also continued. In addition, Aprilia over coming months will see to the “updating” of the range of its sports motorbikes with the restyling of the RSV 1000 and of all the vehicles over 50 cc conforming to the Euro3 regulation. As for Guzzi, following overall expenditure of 3.4 ML€, during 2005 the BREVA 1100 and GRISO 1100 went into production. Finally, Derbi, with overall expenditure of 3.9 ML€, started production of the GP1 50 cc, Senda R and SM and Boulevard 200.

OPERATIONS

The restructuring of the facility dedicated to the production of scooter engines was completed by finishing the complete reorganisation of the buildings through civil engineering and plant works and defining a new production arrangement through new layouts of the manufacturing areas with the aim
of streamlining the various processes and improving the environmental hygiene. During 2005 work started to reorganise the 2Bis facility dedicated to the production of motorbike engines in the low and high cylinder capacity ranges. As part of the 2 wheel business, the project was launched to rationalise the facility at Scorzè which envisages the redefinition of the logistical flow and the streamlining of production processes through the new layout of the Motorbike and Scooter assembly areas. In 2005 the reorganisation of the Motorbike factory was completed, while the Scooter factory will be completed during 2006.

In the LTV Operations at Pontedera, among the various activities undertaken, work was started on the production lines for the new vehicles which are planned for phase-in during 2005/2006. In the Indian plant of Baramati production capacity of 90,000 Ape vehicles per year was increased by 36,000 Ape passenger vehicles per year with the completion of a new factory and the implementation of new production facilities for vehicle assembly and painting.

CUSTOMER MANAGEMENT AND QUALITY

The “organisational model” to support the Group’s quality management system, realisation of which started in 2004, has been developed in line with a customer perspective for the results of the individual processes (product development, sales and post-sales); in particular, it has been agreed to parallel the orientation to technological innovation with a customer orientation, as an expression of their needs and expectations, in order to create a company with a significant ability to ensure the loyalty of its customers to the Group’s brands.

Customer satisfaction and loyalty are in fact the best measure of the quality level of the company’s system; they are periodically analysed by the Group, and are decisive factors in identifying the priorities in the growth and development plans. The information regarding “customer perception” is also closely tied to internal performance monitoring in relation to the reliability level of products and services, the quality of parts and the production processes for the various types of vehicles and engines. The customer satisfaction and product and process reliability targets have since 2004 been a decisive element in reward systems for all staff (not only managers), as a mechanism to reinforce the realisation and development of the organisational model described above.

The Piaggio Group, in its new dimension (Piaggio, Aprilia, and Moto Guzzi), strengthened its own business model, creating a central division dedicated to the design and development of methodologies and tools to check product and process quality and “company quality assurance systems”. The division coordinates all the activities needed to define a Quality and Customer satisfaction plan and to check product quality, through the definition of standards, which it certifies with reliability tests on products in the various phases of the development and construction of the Group’s vehicles.

During 2005 Piaggio saw a consolidation of the improving trends in product reliability as perceived by customers (50% in the period 04-05 - 12% in 2005 – ratio of perceived defects) which enabled an improvement and competitive continuation of the level of customer satisfaction at the end of 2005. These results can be seen in a marked reduction in product support costs (warranty costs) and in the improved production quality indicators and in the quality level of parts. In 2005, in addition, the company was engaged in disseminating these tools and methods throughout all the Group companies and brands and, at the end of the year, customer satisfaction surveys had already started to record the first results for the Aprilia and Moto Guzzi brands.

As regards Customer Satisfaction, 2005 was characterised by a repositioning of the after-sales technical and commercial assistance service, which will be completed in 2006. Commercial assistance is offered, alongside and by way of support to the distribution network for various Group brands, through a call centre and an online customer service (Brands website); here more than 100,000 contacts have been handled, offering information on the retail prices recommended by the constructor for its products and services, information on the content of promotions and on the commercial and assistance network, as well as on the management of customer claims supported by specific support initiatives.

As for technical assistance, alongside the traditional assistance service during the vehicle’s warranty period, there are new services such as: extended guarantees (3 and 4 years), prepaid packages for routine maintenance with or without extended warranties; in particular for fleets, services are available (corporate business customers) and product technical management services (routine and non-routine maintenance) which in some cases are extended to the point of managing the entire product life cycle. In 2005 3,800 service packages were handled in total, such as those above, of which more than 1,000 with complete technical management of the product.

HUMAN RESOURCES - EMPLOYEES

Piaggio Group’s employees as at December 31, 2005 numbered 6,353 units including seasonal workers (834 units of which 807 in Piaggio Vehicles), with an increase of 182 units compared to the previous year which includes an increase of 323 units in Piaggio Vehicles alone. As for the parent company at December 31, 2005 employees of the Piaggio brand totalled 3,110, with a decrease of 85 units compared to the previous year, while the employees of the Aprilia brand totalled 935, with an increase of 13 units compared to 2004. In the period from February to September 2005 the Piaggio brand took on 750 people on fixed-term contracts (annual average 265 units), while the Aprilia brand in the period from January to June employed 243 people on fixed-term contracts.

RESOURCE MANAGEMENT AND DEVELOPMENT

2005 saw the implementation of new Management and Development programmes for human resources with particular reference to three specific projects: People Satisfaction - Talent Recruiting - Key people.

People Satisfaction: In response to the indications that emerged from the mood survey carried out in 2004 an Operational plan for 2005 was developed with particular regard to the areas of “Communication”, “Involvement”, “Training”, “Resource Management and Development” and “Work Life balance”. During November 2005 the survey was repeated for all Group staff by extending the initiative to Aprilia and Moto Guzzi both in Italy and abroad. Following the results an improvement plan will be drawn up, as with the previous survey, to be implemented during 2006.

Talent Recruitment: The project, launched in 2004 with the aim of selecting talented graduates from engineering and economics faculties, continued also in 2005 with Career days undertaken at the Luigi Bocconi University in Milan, the Milan Polytechnic and the L.U.I.S.S Guido Carli University of Rome, with the presence of around 300 graduates from the universities involved. Following the selections, around 30 apprenticeship projects were launched, with the award of some study grants and, for some candidates, the possibility of a permanent contract. The project will also continue in 2006, with the involvement of other Italian universities.

Key People: In 2005, the project – aimed at activating an exchange between the company and key interlocutors – was put into operation with the nomination of the key resources and the activation of the “individual value creation plans”, for the resources under Piaggio and Derbi. During 2006, the identification of the Key People in Aprilia and MotoGuzzi with the related application of the policy will take place.

FINANCIAL AND BUSINESS PERFORMANCE OF THE PIAGGIO GROUP

BUSINESS PERFORMANCE

Consolidated net sales of the Piaggio Group totalled 1,451.8 ML€, of which 1,135.3 ML€ relating to Piaggio and 351.0 ML€ relating to Aprilia, with an overall increase of 367.6 ML€, or 33.9%, compared to 1,084.2 ML€ in 2004, of which 351.0 ML€ was due to the different consolidation area. The further increase in net sales can be attributed to the 2 wheel business which, thanks to the launch of new products which occurred in the higher range segments, recorded an increase of 0.6% compared to the previous year. Also the LTV Business saw an improvement compared to 2004 (+27.9% in terms of net sales), largely due to the performance of the Indian market where the Piaggio Group strengthened its presence thanks to the increase, compared to the previous year, in sales volumes of 40.6% and in net sales of 46.2%.

Gross margin: Gross margin was 438.7 ML€, up by 115.8 ML€ compared to the previous year (+39.1%). As a percentage of net sales, efficiency gains improved the ratio from 29.8% in 2004 to 30.2% in 2005.

Operating costs: Operating costs, 343.9 ML€ (+83.3 ML€ compared to 2004), included amortisation and depreciation of 45.4 ML€ and costs of 298.5 ML€, of which research and developments costs were 25.7 ML€. Amortisation of the capitalised research and development costs at 31 December 2005 totalled 32.7 ML€. The total research and development costs recorded in 2005 income statement was 58.4 ML€, while total spending, including the capitalised portion, was 57.6 ML€ (-0.8 ML€ compared to 2004). Following the adoption of new international accounting standards, operating costs also include income and charges which mainly arise from: 18.6 ML€ anti-pollution incentives from the Ministry of the Environment; 2.0 ML€ extraordinary income; (3.5) ML€ writedowns of intangible assets; (2.3) ML€ writedowns of tangible assets; (23.0) ML€ provision for risks and other provisions; (6.0) ML€ income and non-income taxes.

EBITDA: Group consolidated EBITDA at 31.12.2005 – recorded in the table on Page 3 - was 184.8 ML€ (12.7% of net sales), compared to 122.7 ML€ in the previous year (11.3% of net sales).

Depreciation, amortisation and writedowns: The amortisation of productive assets included under industrial costs totalled 45.1 ML€. Amortisation included under operating costs totalled 45.4 ML€, of which 32.7 ML€ related to research and development as already set out. Therefore, the total cost of depreciation and amortisation involved in creating the operating income totalled 90.5 ML€. Following the adoption of the new IAS/IFRS international accounting standards, the consolidation difference recorded in the Group balance sheet at January 1st, 2004 is no longer amortised, but is, on at least an annual basis, subjected to an impairment test. The impairment test carried out confirmed that the values recorded on the balance sheet need not be subjected to writedown. As for the acquisition of Aprilia, the goodwill deriving from the operations was recorded as the value of the Aprilia brand. The amortisation of the brands recorded in the Group financial statement totalled 8,1ML€ at December 31, 2005.

Operating income: The trend in net sales and costs set out above led to operating income of 94.3 ML€ compared to 62.3 ML€ in the previous year. The ratio of operating income to net sales thus rose from 5.7% in 2004 to 6.5% in 2005.

Financial charges: Net these totalled 30.3 ML€ (2.1% of net sales), compared to 21.4 ML€ in 2004 (2.0% of net sales)

Net income: Net income stood at 38.1 ML€ compared to 26.3 ML€ in the previous year. The net profit attributable to minority interest was 0.2 ML€ compared to 0.3 ML€ in 2004.