The Board of Directors of Pininfarina S.p.A. met on Tuesday under the chairmanship of Andrea Pininfarina and approved the report on operations of the Group in the first half of 2006. The semi-annual financial statements at June 30, 2006 were prepared in accordance with the international accounting principles set forth in IAS 34 and comply with IFRS guidelines. The accounting principles applied are substantially the same as those that were used for the first time in the preparation of the data at June 30, 2005 and again at December 31, 2005.

At June 30, 2006, consolidated value of production totalled 309.2 million euros, or 50.5% more than in the first six months of 2005 (205.5 million euros). This sharp increase reflects the contribution of the Alfa Romeo Brera and Mitsubishi Colt CZC production lines, which are running at full capacity.

EBIT (which represents the profit or loss from operations) was negative by 13.5 million euros, as compared with positive EBIT of 15 million euros at June 30, 2005. To correctly interpret these data, it is necessary to keep in mind that the two periods that are being compared were significantly different. Specifically: The first half of 2005 benefited from a gain of 30.2 million euros on the sale of the investment in the Open Air System joint venture, while the data for the first six months of 2006 include a gain of 13.4 million euros on the sale of buildings. When extraordinary items are excluded, the negative change in EBIT amounts to 11.7 million euros; The 2006 production orders have smaller margins than those of 2005 due to the burdensome cost structure that is typical of the production start-up phase; The service operations experienced a reduction in business, due mainly to the shift that is currently under way from providing services for internal production orders to a stand-alone profile and to the in-depth restructuring of the Pininfarina Deutschland GmbH subsidiary.

The Group closed the first half of 2006 with a net loss of 8.9 million euros, compared with net profit of 15.7 million euros in the same period last year. A breakdown by quarter of the cumulative loss at June 30, 2006 shows that the loss was minimal in the second quarter (loss of 8.1 million euros at March 31, 2006).

A review of the contribution provided by the individual business segments in the first half of 2006 shows that the manufacturing operations generated value of production of 238.1 million euros (slightly more than double the amount for the first six months of 2005), which is equal to 77% of total consolidated value of production (55.3% in the same period last year). As explained above, the startup of new production orders accounts for this significant increase. Production of the new Alfa Romeo Spider and Ford Focus Coupé Cabriolet models is scheduled to begin in the second half of 2006, completing a new lineup of five models (with the Volvo C70) that the Group will have launched from the end of 2005 through 2006 by dint of an unprecedented financial and manufacturing effort.

In the first half of 2006, the value of production generated by the Group’s service businesses, which include design, industrial design and engineering, amounted to 71.1 million euros, or 22.7% less than at June 30, 2005. These operations accounted for 23.0% of total value of production for the Group (44.7% in the first six months of 2005, when the contribution of the manufacturing operations was severely curtailed by a change in product mix). The net financial position, while negative by 3.7 million euros (positive balance of 48.7 million euros at June 30, 2005), improved compared with December 31, 2005, when the negative balance was 6.9 million euros.

Outlook for the Balance of 2006

Forecasts for the balance of the year call for consolidated value of production to reach about 640 million euros, or about 67% more than at December 31, 2005. The main reason for this scaled-back projection, as compared with previous forecasts (value of production in excess of 700 million euros), is a delay in the start-up of production of the new models.
 

The figure cited above does not include the value of production generated by the Pininfarina Sverige AB joint venture (which is expected to total about 390 million euros) because this Pininfarina affiliate is consolidated by the equity method.

The startup of new production runs, redefined in accordance with the new dates, will have an adverse impact on the Group’s operating results, which will be negative for the year as a whole (the previous forecast called for a virtual breakeven). Put simply, even though operating performance is expected to improve during the second half of 2006, the improvement will not be sufficient to attain breakeven. The net financial position will be negative by a greater amount than at June 30, 2006 due to the need to complete the capital investment program. The results reported thus far in 2006 demonstrate that there is a need to reduce overhead if the Group is to attain its profitability targets. Programs specifically designed to achieve long-term objectives in this area will be created and launched in the fourth quarter of the year.

Significant Events Occurring After June 30, 2006

The two most important events that occurred after June 30, 2006 took place in Germany, where the Pininfarina Group is working to strengthen its presence as a supplier of engineering services that have a high value added. To achieve this goal, the mission of Pininfarina Deutschland has been refocused and made more consistent with the Group’s engineering operations. In addition, a new business unit that can be readily integrated both technically and commercially to offer Pininfarina services has been acquired. More specifically: On July 20, 2006, the recently established MPX GmbH subsidiary bought the design operations of MSX International Engineering GmbH, which are based in Munich, for 3.5 million euros. This acquisition gives the Pininfarina Group a significant presence in this market (this business already has 115 employees) through a company that is already integrated with its engineering operations in Germany, operates in a steadily growing market segment and has a portfolio of top-level customers; On July 28, 2006, the Pininfarina Deutschland subsidiary signed a contract to sell its operations that manufacture models and calipers, effective October 1, 2006. It did not sell its engineering operations, which in the coming years will be strengthened and integrated with the newly acquired MPX GmbH.

The sharing of activities and expertise with the engineering hubs in Italy and France will help improve the profitability of the entire engineering operation. Moreover, the interaction with the design operations and with the two manufacturing hubs in Italy and Sweden will increase the efficiency and profitability of the entire Group.