Research Update: Fasten Your Seat-Belts

Recent Bear’s Arguments & Our Responses

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "1

Sum of Parts (’16)

0 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000

Current EV Pro Forma Ferrari

2015 EBIT+DA

2016 EBIT+DA

Mark

et

Cap

Net Debt

Pension

D&A EBIT

2.6x 1.6x

Price €14.20 Period Indust. EBITDA

Adj. EV Multiple

x Shares 1.484 2014 (E) €8.66 4.1x

= Market Cap €21.1 2015 (E) €10.5 3.1x

+ Net Auto Debt €8.6 2016 (E) €13.9 2.0x

= Enterprise Value (EV) €29.7 Ferrari Stock Worth (p.11)

+ Pension €7.3 €3.65 @ 10x ’16 EBITDA

- Finance Co. €1.0 €4.45 @ 12x ’16 EBITDA

= Adjusted EV €36.1 €5.26 @ 14x ’16 EBITDA

One Page SummaryIn A Nutshell: The gift that keeps on giving. When you take a company hated by investors, add the best CEO in the industry, a group of under-invested brands, a focus on ROIC and margin expansion, all at a cyclical trough in Europe, you get a powerful brew of value-creating potions. While the company committed to significant margin expansion in 2017 and 2018, we believe the company will be able to make substantial progress over the next six quarters as it reduces North American incentives, starts up new factories in Brazil and China, and most importantly, fires up its Italian factories to support the European recovery along with the new Alfa Romeo Giulia and Maserati Levante. With the IPO of Ferrari coming up in October, and subsequent spin-out of its shares to FCA holders in the summer of 2016, we make the case that FCA shares could nearly triple by the end of next year. The two most-cited concerns we hear about the company are its low North American operating margins and its indebtedness. Both concerns will be alleviated in the near term. FCA remains our most attractive and largest position.

Valuation Considerations All figures in billions, except per share amounts Last Report’s Thesis:

North American pricing would start improving markedly Ferrari will be spun out Maserati sales would surpass 35k in 2014 Leverage will be declining U.S. auto sales would remain robust European sales would recovery on the back of the Renegade and 500X

• FCA is desperate to merge with another company because it’s at risk of missing its key industrial plan. Media rumors are completely false, and the company just committed to accelerating the plan.

• The U.S. automotive industry is peaking. While growth will be low to nonexistent in the next year or two, consumers are still catching up from years of pent-up demand and the fleet age remains at its all-time oldest levels.

• Chinese automotive demand is slowing in the middle of a robust capacity expansion in the country. Correct, it is slowing and capacity is still being added - including new Jeep capacity. Jeep localization will result in a 6-7x increase in its addressable market, offsetting weakness.

Wednesday, July 22, 2015

Industrial EBIT 7,315 482

Comps Valuation 8.05x 18.0x

Implied Adjusted EV 58,906 8,676

Industrial EBITDA 13,181 748

Comps Valuation 4.73x 12.0x

Implied Adjusted EV 62,327 8,976

Average Adj. EV 60,617 8,826

Adjustments -7,384 -715

Market Capitalization 53,232 8,111

Per FCA Share €35.86 €4.37

It seems that we have a recurring pattern. Every time we update our analysis on Fiat-Chrysler Automobiles (FCA IM or FCAU), the stock is wrapped up in volatile trading reactions to headlines about mergers and acquisitions (M&A). When we last updated our research in August of 2014 , traders had dramatically 1

negative responses to false stories that the merger with Chrysler was called into question. Obviously, the merger was agreed to on January 1 that same year, and the only doubt was whether or not the company would complete an up-listing on the NYSE and change its tax domicile. The merger ended up going through, the stock traded higher, and nothing fundamentally changed at the company.

Fast forward to the summer of 2015, and there are false merger stories circulating again on FCA. This series of mistruths began with Sergio Marchionne's excellent presentation Confessions of a Capital Junkie, in which he argued the entire auto industry was unable to earn its cost of capital, and the long-term viability of the industry depends on finding cheaper ways to innovate, which in turn translates into a need to eliminate wasteful and duplicative spending on next-generation engine and autonomous driving technology. We would encourage any readers that haven’t seen the presentation to stop right now, click the link and read one of the most honest and interesting management presentations we’ve ever seen.

In the ensuing weeks of Sergio’s presentation, M&A machinations of the media began circulating, which in turn led others to recirculate the same stories. News of one email that Sergio sent to the CEO of GM has turned into false allegations that FCA was actively recruiting activist investors and other constituents to encourage GM to entertain a merger with FCA. Sergio has directly refuted these reports, yet the M&A 2

stories continue. It seems stories about potential mergers sell so much better than the actual truth.

GM’s CEO has foolishly dismissed even the possibility, and although GM has a lot of wood to chop in bringing its own divisions up to competitive benchmarks, stubbornly rejecting a discussion without considering the argument or potential for significant industrial disruption is the correct way to obsolete a business over time. We thought it was interesting that Marchionne has met with Apple’s CEO Tim Cook as well as executives at Tesla. Sergio is leading the discussion with these aspirational car-markers so as to 3

position FCA front and center if and when Apple decides it wants to enter the automotive manufacturing business. We’ve always been intrigued by shares of GM given the valuation, but there’s no one we’d rather in the driver’s seat than Marchionne. There has to be some element of envy amongst the shareholder base of GM with regard to FCA - since the last time Chairman John Elkann approached GM about a potential merger in 2012, GM’s shares are up 30% and Fiat’s have tripled. And we think they’re about to triple 4

again - which is what brings us to the reason we’re writing today after all.

Triple. That’s right, shares have nearly quadrupled since we acquired shares of then Fiat SpA, and we think even without a recovery in China or Brazil, the company’s operating income expansion in the next

See Fiat SpA (F IM) Update: Preparing to Strike1

See Flak & Rebaudo, (6/24/15). Fiat Chrysler CEO says long way from lobbying GM investors.2

See Martell, (5/9/15). Fiat Chrysler CEO says met with Tesla, Apple CEOs.3

See Sylvers and Rogers, (7/6/15). Fiat Scion’s Strategy Toward GM: Patience.4

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "2

Full Research Update

two years, coupled with the spin-off of Ferrari and the likely sale of FCA’s components divisions, shares are worth over €40 per share.

Exhibit 1: FCA Stand-Alone and Ferrari Comparable Valuation Table

*Per FCA share metrics uses 80%, reflecting IPO

Skeptics will look at exhibit 1 and claim we’re being too aggressive on our financial projections for the company. These are the same skeptics that have repeatedly failed to grasp FCA’s underlying financial drivers, and still believe North American margins are permanently stuck in first gear. We would advise the skeptics to pay attention to our math, as our model has been pretty darn accurate over the last two years (outside of the unexpected 1-year delay in Alfa Romeo production). The last time we updated our thesis, we showed how North American pricing would be improving by $281 million by Q1 of 2015. This analysis was based on detailed model-level analysis of incentives and the refreshments of key vehicles that had become terribly old and had pricing that reflected the age. Actual pricing in North America improved by $233 million in the quarter, and we think the company will outperform our $281 million in the second quarter.

Cutting to the chase, exhibit 2 shows the main drivers of our near-term operating income estimates. The story centers around the Atlantic, with North America pricing and a European volumes recovery driving over 100% of this operating income expansion. Staring at the volatility in the Chinese stock market and a couple months of weak volumes, sell-side analysts are falling over themselves to downgrade automotive OEMs on the backs of a cloudy Chinese crystal ball. All major German OEMs as well as GM have been recently downgraded given these companies’ reliance on China for operating profits. This starkly contrasts to FCA, where Asia Pacific produced 15% of operating income last year, and we estimate it will be roughly

FCA Stand-Alone Ferrari*

2015 2016 2015 2016

Industrial EBIT 4,343 7,315 474 482

Comps Valuation 8.05x (F 8.98x, GM 7.13x) 18.0x

Implied Adjusted EV 34,972 58,906 8,532 8,676

Industrial EBITDA 9,802 13,181 740 748

Comps Valuation 4.73x (F 5.33x, GM 4.13x) 12.0x

Implied Adjusted EV 46,349 62,327 8,880 8,976

Average Adj. EV 40,661 60,617 8,706 8,826

Adjustments (Less Debt + Pension, Plus Finco BV)

-11,200 -7,384 -715 -715

Market Capitalization 29,461 53,232 7,991 8,111

Per FCA Share €19.85 €35.86 €4.31* €4.37*

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "3

2016 Sum of Parts:€40.24

10% this year. China remains a very positive story for FCA, as the company will start producing Jeeps in the country for the first time in nearly a decade.

Exhibit 2: FCA’s EBIT Bridge

Source: GreenWood Research and Estimates

Ignited by Sergio’s Confessions presentation, in which he argued consolidation was key to transforming the industry, the current media circus is completely focused on merger rumors about FCA. While it was a great presentation, it was a total side show that made the clown car, filled with short-term traders, focus on a longer-term dilemma that had no near-term influence on Fiat-Chrysler’s valuation. Just minutes before Sergio made the presentation, CFO Richard Palmer outlined all the initiatives the company was taking in North America. We were surprised by his public commitment to double operating profit margins by the fourth quarter of this year - a fairly aggressive time-table given the magnitude of the increase. Lower North American margins relative to GM and Ford have been the primary overhang on FCA’s valuation, and the CFO just committed to doubling them in the next nine months. It was huge news for the fundamental valuation of the company, but the clown car was focused on M&A rumors and missed it.

North America A Pricing Story

At its most fundamental level, implicit demand from motor vehicles comes from both new drivers being added on the roads and the replacement rate of vehicles. Vehicle quality has improved markedly in the last 15 years, although the gains have been a bit more muted than the improvement seen from the 1990s to the early 2000s. Because of this improvement in quality, and therefore durability, the average age of vehicles has hit fresh highs every year for the past decade. Yet, thanks to pent-up demand catching up from the financial crisis, the pace of increases in the average age of vehicles has moderated. Recent scrappage data has declined markedly, while the number of new drivers has started to pick up from abysmal levels, which means that the average age of the vehicle fleet is getting older as more people are coming onto the American road. Absent any further data revisions, which have all been retroactively revising scrappage higher in recent years, the current level of automotive sales is running slightly higher than our definition of implicit demand. That said, only 31.2% of the 9.32 million vehicle deficit in demand

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "4

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

10,000

2014

NAFTA

LATAM

EMEA APAC

Luxury Costs 2015

NAFTA

LATAM

EMEA APAC

Luxury Costs 2016

Volume Pricing

Consensu

s

Consensu

s

Actual

has caught up from the financial crisis period of 2008-2011. Vehicle selling levels at or around current levels looks underpinned by a release of this pent-up demand, which is manifesting itself in the rebound in number of drivers coming onto the road.

Exhibit 3: North American Implicit Demand

Data sources: IHS Automotive, NADA, RL Polk, Federal Highway Administration, Experian Automotive

The vehicle scrappage rate declined in the recessions as people eked more miles out of their hoopties, but much of the sales decline was actually the result of a significant decline in the net new licensed drivers. This has all been driven by a very pronounced decline in the number of young drivers on the roads, perhaps as a result of both this demographic’s more dramatic rise in unemployment or by an urbanism movement, or some combination of the two. Interestingly, 2013 saw the first increase in new licensed drivers aged 16-24 since the financial crisis got into full swing. This also coincided with vehicle sales ramping up beyond the implicit demand rate for the industry, as well as robust Jeep sales growth - which targets a slightly younger consumer.

Exhibit 4: Net New Drivers on the Roads

We’ve followed the North American auto industry since 2008, when we invested in shares of Ford as its CEO was being hauled in front of Congress along with then nearly-bankrupt GM and Chrysler. The North GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "5

-800,000

-400,000

0

400,000

800,000

1,200,000

1,600,000

2,000,000

2,400,000

-2,000,000

-1,000,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

Total Net New Drivers (LH) 16-24 Net New Drivers (RH)

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Millio

ns

of C

ars

Vehicles Sold

Implicit Demand* 10.0 mm Surplus

9.3 mm

Deficit

*Scrappage Rate + Net New Licensed Drivers

American auto industry has tremendous reams of data available on volumes, pricing, incentives and mix. Yet, even with all of this data available, we’ve found the pricing and incentives data to be particularly unhelpful. Rarely do the data provided by these services tie back to the company-reported financials. Thus, last August, as we wrote about the large incentive tailwinds Chrysler would experience going forward, we began tracking FCA’s incentives and MSRP’s ourselves. The result of the data collections are below in exhibit 5, and they tie back to Chrysler’s improvements in North American pricing it has been reporting for the past few quarters.

Exhibit 5: North American Pricing - Moving Higher

Source: GreenWood Research

While pricing is the main story in North America, a few new models will be helping to boost volumes over the next two years. About one third of the projected increase in profits coming from volumes will be coming from the Fiat 500X and the Alfa Romeo Giulia (assuming sales of 12k in 2016). We’ll review Alfa in greater detail in a few pages, but given Lincoln sells under-performing and un-differentiated middle-upper-luxury vehicles at 3x this rate in the U.S., we feel confident that a fresh Italian luxury car with engines and styling from Ferrari will have a decent shot at significantly outperforming our 12k estimate. The other two-thirds of the volume contributions from North America come from Jeep, as it will benefit from a full-year of Renegade sales as well as a refresh of the Compass and Cherokee. Chrysler will drive even more of this volume growth, partially at the expense of Dodge, as the Minivan refreshes in the Spring, and the compact Chrysler 100 launches later in the year. We expect Ram to lose market share to the F-150, and hence moderately decline in sales for the next year and a half. Dodge’s refreshed Journey and Dart will likely fail to offset the discontinuation of the minivan, and the brand’s sales will decrease by double-digit percentages. With all of this product movement at each brand, Chrysler will likely continue it’s year-over-year sales growth winning streak to over 80 months, but it will come close to showing contraction in a few months - particularly this November and next January.

We assume the North American industry growth stalls and even contracts in some months, but that with some key product refreshments and introductions, FCA will grow its volumes by about 5% both this year and next year. Contrary to what the EBIT bridge chart may insinuate, these are not aggressively bullish assumptions for a company with a good product cadence in an industry still recovering from the financial crisis.

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "6

$27,027

$28,458 $28,673 $28,753

8.7%

5.1%

4.1%

5.5%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

$26,000

$26,500

$27,000

$27,500

$28,000

$28,500

$29,000

Q3 2014 Q4 2014 Q1 2015 Q2 2015

Net Price (LH) Incentive (RH)

European Recovery Only Beginning

Last year, as observers of European auto sales claimed Fiat was losing market share because it failed to invest in new products throughout the down-turn, we corrected this view and showed that in most countries, the brand was winning market share. The largest factor for Fiat’s reduced market share was the shrinking Italian auto sales market, where Fiat sells just under one out of every three cars that are sold. Italy’s share of the European market declined from 15.6% in 2007 to 10.4% in 2014. The country started recovering in 2013, and auto sales growth has picked up steam, with auto sales up 17.5% in the most recent quarter. Fiat if outperforming this pace, as it is scaling production of the Jeep Renegade and Fiat 500X, two small SUVs which are addressing a significant product gap FCA had in its portfolio. The share of subcompact and compact SUVs in Italy has grown from 11.3% of the market in 2012 to 19.6% in the recent quarter, with similar trends in Western Europe, as the SUV segment now represents 21% of the European market. Thus, not only is Fiat growing its market share on the back of a more diverse product offering, but Italy’s share within the European market has started growing once again.

Exhibit 6: Italian Auto Sales, Rolling 3-Month Estimated Annualized Rate

In the first half of 2015, Jeep’s European sales have already eclipsed the full year 2014 figures, and FCA has done a great job introducing its new products in the hottest segments of Europe. Because of the better-than-expected recovery in Italy and other European markets, and the success its having with its new small SUVs, FCA is on track to hit its 2018 European operating income goals in 2016, a healthy two years ahead of its industrial plan.

Because the European market declined for six years in a row and created pent-up demand from the lower selling levels, particularly in peripheral countries where Fiat has a stronger market presence, the European auto sales recovery is likely to surprise to the upside. Yet, we still haven’t modeled a robust expansion, and are simply using ACEA’s 5% growth guidance for 2015 and no substantial pickup in 2016. Even with these assumptions, FCA will be growing its volumes, and accordingly, its operating income margins in EMEA. We estimate that nearly two thirds of the volume contribution to European operating income expansion in 2016 will come from the Alfa Romeo Giulia. FCA will be updating its subcompact (Punto) and compact GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "7

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

3,000,000

Jan-92

May-93

Sep-9

4

Jan-96

May-97

Sep-9

8

Jan-00

May-01

Sep-0

2

Jan-04

May-05

Sep-0

6

Jan-08

May-09

Sep-1

0

Jan-12

May-13

Sep-1

4

offering (Bravo) in 2015 and 2016, yet, we haven’t included any volume uplift of any significance from these refreshments, largely because FCA’s share of the compact segment is next to nothing and the Punto won’t refresh until the end of 2016. Yet with a second Alfa product introduction later in 2016 and a refreshed legacy line-up, Europe will be generating tailwinds for FCA for years to come.

Brazil & China: Jeep Will Offset Market Weakness Awareness of the Jeep brand in China is exceptionally high, and the word for SUV in the country is “Jeep.” FCA has already taken 1% of the Chinese market with only two locally produced Fiats - the Viaggio and the Ottimo. The rest of its line-up is subject to heavy import tariffs such that Jeeps frequently sell for over $100k. As we highlighted last summer, local production of the Cherokee will begin in a few short months, and the company will be able to cut price significantly, while keeping similar profit margins for the vehicles. The total addressable market will be going up by a significant margin, allowing the Jeep brand to finally conquest sales in the hottest segment of China (clearly, it’s not just Europe and China, but a global theme of robust SUV sales). At last year’s investor event, the company showed an interesting exhibit on the Jeep Compass, demonstrating that the price points at which tariffs forced FCA to sell the car only covered 6.5% of the segment by price range. Of this small sliver of the addressable market, the Compass commanded a 58% market share. As local production begins, Jeep will increase its addressable market by 6-7x on the Compass.

Exhibit 7: Jeep Compass Price/Volume Curve

Source: FCA’s 2014 Investor Day Slides on APAC

Because of this dramatic change in Jeep’s selling potential, FCA will remain less exposed to any market weakness in China. Even still, we’ve assumed Fiat’s line-up suffers pricing pressure and sales declines outside of the new Jeep entries into the market.

We’ve made similar assumptions for FCA’s Latin American operations. We’ve held auto sales flat in Brazil from their current levels, which have recently hit a seven-year low. The FCA’s new plant in Pernambuco

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "8

APAC

APAC Region

China C SUV Price Volume Curve

Compass Covers 6.5% of Segment by Price Total Segment Share of 4% 58% Share of Price Range

50K 500K

Segment Volume: 875K Units (2013) 1,600K Units (2018)*

Compass with No Duties Covers 43% of Segment by Price

Price (RMB)

Volu

me

Localization

*Source: Q4 2013 IHS

started production a few months ago, and the company’s Jeep sales are seeing 6-9x sales increases (year-over-year) in the first few months of Renegade production. Some of this incremental production will help stem the market share losses FCA has suffered recently in Brazil, but more importantly, it will substantially raise the group’s incremental profit margins. The Renegade carries higher profit margins on a stand-alone basis than the company’s small cars that dominate the Brazilian market, and production from the new plant also benefits from a special tax incentive package the government promised in order to get the plant built. SUVs represented 10% of the market in Brazil, and the compact (C-segment) represented another 10% in 2014. The new factory will be producing vehicles in these segments, both of which FCA is largely absent from in the Brazilian market.

Exhibit 8: Brazil’s Population-Adjusted SAAR

Pretty Red Things: Ferrari and Alfa Romeo

Ferrari During the second major crisis sparked by Greece, in 2012, the company’s stock was trading for €4.00, which we estimated at the time to be roughly the value of the company’s ownership of Ferrari. Sergio’s long-time ambitions have included the eventual separation of Ferrari from FCA. Given the company’s bond indentures do not limit a sale or spin-off of assets, in a nightmare scenario where the European crisis engulfed Fiat in a bankruptcy, we would actually have ended up owning Ferrari’s stock, and perhaps even Fiat’s 58.5% stake in Chrysler. Flash forward three years, and Ferrari is being spun out to shareholders, without FCA creditor approval, as we said at the time.

Ferrari has a tremendous global fan base. Formula1 has half a billion fans, and many, if not most of these are also fans of Ferrari. In fact, the brand’s presence is so important to fans that Ferrari is the only company that gets paid a special bonus just to show up to a race. This notable brand recognition extends beyond F1, as Brand Finance has consistently rated Ferrari as one of the world’s most powerful brands. Ferrari used to be #1 globally, but Lego benefitted from the release of its first motion picture in 2014, and it de-seated Ferrari’s top status. Brand Finance still rates the Ferrari brand as being incredibly valuable,

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "9

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

Jan-

00

Sep-

00

May

-01

Jan-

02

Sep-

02

May

-03

Jan-

04

Sep-

04

May

-05

Jan-

06

Sep-

06

May

-07

Jan-

08

Sep-

08

May

-09

Jan-

10

Sep-

10

May

-11

Jan-

12

Sep-

12

May

-13

Jan-

14

Sep-

14

May

-15

worth $4.7B in 2014 using its methodology. Unfortunately most of the companies on the most-powerful-5

brand list are either private or are very large consumer goods companies. Perhaps one relevant comparable, both from a brand and valuation perspective is Burberry, which is pictured in exhibit 9 along with other luxury goods makers.

There’s another public company with a similarly-large global fan base that sold 10% of its shares in a public offering in 2012, exactly the amount FCA plans to list in October 2015. Manchester United (MANU) commissioned a Kantar World Panel survey which quantified its global fan base at 659 million. Because of 6

the limited float to Manchester’s shares, and the large untapped revenue source implicit in the gigantic global fan base, shares of Manchester United command a formidable valuation, at 21.5x EBITDA. Given a similar global fan base to MANU, the exact same float monetization dynamics, and the fact that Ferrari’s products appreciate in value after the customer takes delivery of the vehicle, we believe shares of Ferrari will accordingly command a healthy valuation. Unfortunately comparable company valuations are scarce as the sales of Rolls Royce automobiles, Lamborghini and Bugatti all occurred in the late 1990s when each brand was either bankrupt or burning cash, so these M&A transactions help us very little in a Ferrari valuation. However, we’ve shown M&A multiples that both Aston Martin and Ducati received in the recent past, both brands we view to be inferior to that of Ferrari’s.

Exhibit 9: Ferrari’s Most Likely Comparable Valuations - EV / EBITDA

Backing out the company’s Formula 1 activities, we estimate the operating margins at Ferrari are in the high-teens, which means as the company slowly grows its sales from 7k units to 10k over the next few years, sales will be margin-expansive. Perhaps even more importantly, much of this sales growth will come from outside the eurozone area, leaving the company favorably exposed to its cost base denominated in a weak euro currency.

See Lego Overtakes Ferrari as the World’s Most Powerful Brand5

See World's most popular FC6

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "10

27.5x 23.8x

21.5x 20.4x

10.0- 14.0x

11.2x 11.0x 9.9x 9.3x 9.1x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

LVMH

Hermes

Manch

ester

Unit

ed

Prada

Ferra

ri Ran

ge

Burberr

y

Aston M

artin

'07

Aston M

artin

'12

Harley

Dav

idson

Ducati

'12

Luxury Group

Manufacturing Group

Fan-Based Group

Exhibit 10: Ferrari’s Historical Financials, With Our Projections

The last word from the company was that Ferrari would be able to be IPO’ed in October of 2015, after the 12th of the month given tax implications for the sale. The limited float should catch a robust bid, particularly from the Ferrari enthusiasts globally whose tenacity cannot be underestimated. That puts the time-table on the spin-off of the remaining 80% of the company to FCA shareholders some time in the summer of 2016, just as the refreshed minivan, Alfa Romeo Giulia and Chinese Jeep production drive FCA’s accelerating operating income. Given our estimates shown in exhibit 10, fair value of the value of that stock is shown in exhibit 11 at various EBITDA multiples. Exhibit 11: Ferrari’s Fair Value (80%) per FCA Share based on EV/EBITDA Multiples

Alfa Romeo Alfa is one brand about which most bulls and bears on Fiat agree: the company’s ambitious 400k targets are unachievable and FCA shouldn’t invest in the product renaissance at Alfa. The luxury market is crowded, just as the mass-market is crowded. No surprise.

Even shareholders that hold shares of FCA have publicly lamented that the investment in Alfa is a high-risk gamble which will generate subpar rates of return in a field the German OEMs dominate. While we agree that estimated sales volumes are anyone’s guess at this point, as Alfa has been a 2-car brand for the past decade, selling in the periphery of the luxury auto market. Yet, we disagree it’s a risky endeavor. Alfa isn’t starting its product refresh with a peripheral vehicle, but one sitting at the heart of the market: the midsize sedan. It will be following the Giulia up with the brand’s first SUV, also a cornerstone of the luxury vehicle market. We ask the bears to show us their math. We’ll show you ours.

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "11

€ 2.80

€ 3.60

€ 4.40

€ 5.19

€ 2.84

€ 3.65

€ 4.45

€ 5.26

€ 0.00

€ 1.00

€ 2.00

€ 3.00

€ 4.00

€ 5.00

€ 6.00

8.0x 10.0x 12.0x 14.0x

2015 (E) 2016 (E)

2010 2011 2012 2013 2014 2015 (E) 2016 (E) Shipments 6,538 7,159 7,318 6,922 7,225 7,714 8,485 Revenue € 1,919 € 2,251 € 2,433 € 2,335 € 2,762 € 3,031 € 3,218

EBITDA € 622 € 578 € 616 € 630 € 655 € 740 € 748 EBIT € 303 € 312 € 350 € 364 € 389 € 474 € 482 Margin 15.8% 13.9% 14.4% 15.6% 14.1% 15.6% 15.0%

Our best guess

Exhibit 12: Alfa Romeo Giulia’s Projected Rate of Return @ 50k annual sales

Exhibit 12 assumes a hypothetical average sales rate of 50k for the Giulia, which we think the model will outperform handily. The Giulia will be the first major Alfa model to launch in the US, and will also be the first significant product refreshment by the brand since 2010. In the first full year after its refreshment, the compact Giulietta sold nearly 80k units in Europe alone. The Giulia is launching with an even more competitive engine and design in a segment that has a higher segment share than the Giulietta’s compact market segment. We wouldn’t be surprised if the Giulia sold 100k units in 2016, but we aren’t counting on it. The car is equipped with a Ferrari-based engine (watch it perform here) and has been chaired by two senior managers from Ferrari. This isn’t the typical mass-market-re-badge luxury job that consumers are used to outside of the Germany OEMs. Excluding China, we think the model will sell roughly 65k units, mostly in Europe as our current estimates for the U.S. are conservatively anchored at about 1k units a month. The company has no doubt conducted extensive market research to justify its hopes of selling far more Giulias to U.S. consumers, but until the actual numbers come in, we’ll remain conservative. We estimate the Giulia sells ~54k units in Europe in 2016, which would compare to the Giulietta selling 41k units in Europe in 2015, five years after its 7

market launch.

Despite our conservative assumptions on the market’s reception to the Giulia, the program will still generate a rate of return of 38% to the company. Should the Giulia surprise everyone and actually sell 100k units next year, the model will generate a 69% rate of return to the company. Remember that we are paying a very small multiple for FCA’s cash-flow, and over the next two years, nearly all of this cash-flow will be re-invested in programs such as the Giulia. Thus, a large portion of our return will be driven by how well Sergio invests this cash-flow. Under nearly any scenario, he will be outperforming his industry’s benchmark ROIC of 7.8%.

Potpourri

Overstated Net Debt FCA’s current net industrial debt is overstated by two important factors. First, Ferrari will be flipping its net cash position to a net debt position prior to its separation from the group, to the tune of €715 million. The 8

IPO of Ferrari will be a de-leveraging event, both as FCA receives the proceeds from the 10% sale of stock, as well as the €715 million net debt transfer. In total, the Ferrari separation will deleverage FCA by about €1.6 billion.

See Left-Lane.com’s statistics on the Giulietta7

See Ferrari spin-off to reduce Fiat Chrysler debt by $894 million8

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "12

Year 2015 2016 2017 2018 2019 2020 2021 2022 Volumes (k) 5.0 57.5 50.0 45.0 57.5 50.0 45.0 45.0 Contribution (mm) € 24 € 271 € 236 € 212 € 271 € 236 € 212 € 212 Capex (mm) -€ 625 -€ 100 -€ 150 CF (mm) -€ 601 € 271 € 236 € 112 € 121 € 236 € 212 € 212 IRR 29%

Second, the mandatory convertible bond that converts to equity in late 2016 is partially included in the net debt figure, even though this will forcibly convert to equity and we’re already including the shares in the diluted share count. In the share count, we’re estimating the bond converts at the top end of the $11.00-$12.93 range given the stock has consistently traded above the $13 since the deal. This debt component of the mandatory convertible is overstating FCA’s net debt by €749 million. So just with these two announced / completed transactions, FCA’s net debt will be reduced by €2.4 billion. But wait, there’s more.

Sell-side analysts have done a remarkably terrible job modeling out FCA’s working capital effects on cash-flow and net debt. With rising production, particularly in Europe, working capital will contribute cash to the balance sheet, as negatively working capital generates cashflow as production grows. We estimate working capital movements will generate €800 million in 2015 and €1.9 billion in 2016 as production of the Alfa Romeo Giulia and the Maserati Levante boost the emerging recovery in European volumes.

In mid 2016, as the last Chrysler bond preventing a sharing of cash between Chrysler and Fiat is refinanced, the company will start to both meaningfully reduce the gross debt outstanding (currently in place to prevent any liquidity events from emerging should an unexpected recession emerge), as well as lower its cost of financing. Capital spending will also start coming down in late 2016, leading to very healthy free-cash-flow generation in the ensuing years. Yet, even before these cash-flow levers get pulled, we expect FCA will end 2016 with an insignificant amount of debt.

Exhibit 13: FCA’s Historical & Projected Leverage

FCA’s leverage and its low North American operating profit margins are the two most frequent deal killers for potential investors in Fiat Chrysler. Both situations will be resolved in the next six quarters, likely leading to a transformation in the low valuation at which FCA shares have historically traded.

Auto Parts Businesses: On the Block In the aftermath of last year’s investor day, we met with Marchionne and specifically asked him about the auto parts businesses still wrapped up in FCA. Nearly all other OEMs have completely monetized these components businesses, but FCA has held onto a few of them, the largest of which is Magneti Marelli. Marelli is very competitive in a few of its product lines, and has penetrated nearly every OEM with its differentiating head lamp designs and capability. If you’ve ever been wowed by the dramatic effects an GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "13

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

Mar-15

Sep-15

Mar-16

Sep-16

Historical Forecasted

Audi’s headlamps produce, you can thank the Italians, not the Germans. Marchionne’s response at the time was the parts businesses “don’t structurally belong with the group,” but that he needed to boost profitability in order to extract a fair value for the businesses.

One year later, profitability is higher, the automotive components industry in Europe is keen to consolidate, and Marchionne has high-priced bids stacking up on his desk, as a recent article purports. Profitability 9

has increased 32% since we last spoke to Marchionne about Marelli’s prospects, and using comparable peer valuations of 9.2x EBIT, fair value for Marelli without a take-over premium is currently €2.17 billion or €1.46 per FCA share. Of course, Marelli is growing quickly as the European auto market recovers, and full-year 2015 EBIT is likely to be quite a bit higher.

Exhibit 14: Magneti Marelli LTM EBIT

Unsurprisingly, Marchionne has reportedly been approached with multiple offers of €2.5 billion for Marelli, but Marchionne wouldn’t entertain anything less than €3.0 billion. Either he will continue to be patient while Marelli’s operating income expands, or someone will see the trajectory and pay a ~40% take-over premium relative to today’s publicly traded comparable valuations. Under any scenario, a sale would be substantially de-leveraging and accretive to our valuation, given FCA trades for just over 2.8x next year’s operating income.

UAW Negotiations Over the next two to three months, GM will take the lead in negotiating a new contract with the United Auto Workers (UAW). This is typical of past negotiations: one designated OEM leads discussions with the unions, and the other OEMs easily sign a contract along similar terms to the first. We have a sneaky suspicion that GM will fail to deliver a good contract for the OEMs, as it’s already foolishly spent its bargaining chips in the months before it began negotiations.

Typically the unions will attempt to extract some type of factory expansion commitments, to try and prevent the migration of their jobs south of the border. In the last few months, GM has preemptively announced $6.8 billion of investments in its U.S. factories. This is not only a substantial sum, but a very 10

large bargaining chip for the union negotiations, and it is now completely spent. Thanks, guys.

See Barbaglia & Flak. Exclusive: Fiat Chrysler exploring $3.3 billion sale of auto parts unit Magneti Marelli9

See GM Announced $5.4 Billion in U.S. Plant Investments & GM Invests $1.410

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "14

€ 150

€ 160

€ 170

€ 180

€ 190

€ 200

€ 210

€ 220

€ 230

Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15

In contrast, Marchionne has put future Jeep Wrangler production in doubt at its long-time Toledo, Ohio assembly plant. We had a chance to visit the factory, and it is industry-leading with its automated production systems and efficiencies. Yet, Wrangler remains capacity-constrained and transacts at substantial premiums to its small/midsize SUV competitors. Wrangler is one of the rare models in the industry to offer zero purchasing incentives, even while it raises the MSRP on its models.

Additionally, Marchionne has threatened to delay the introductions of new vehicles in the U.S., namely a redesigned full-size pickup (delayed by about six months), a redesigned Grand Cherokee and a refresh on the Jeep Wrangler to a more efficient platform. These are, in fact, the strongest products in FCA’s 11

portfolio and starkly contrast to other models in desperate need of a refresh, such as the company’s minivans.

Even if GM fails to negotiate a decent deal with the UAW, as we expect, moderate wage inflation will do very little to our 2016 North American operating income targets. We currently anticipate 10% wage inflation from contract negotiations. If GM lets things get out of hand and wages increase by 25%, 2016 EBIT would only decrease by 2.6% from our projections shown (incremental 15% wage inflation). Thus, while the next month or two may have headline risks if GM proves to be an incapable negotiator, UAW wage inflation would do little in the short-term. Longer term, should the negotiations go poorly, we believe FCA will move more Jeep production internationally, as it has already started in Italy, Brazil and China. Global capitalism will not support artificially high wages, no matter how many blue states try to protect unions.

In Short

Between Ferraris and Alfa Romeos, we personally think FCA produces some of the prettiest automobiles in the world. But we’ve never confused this attraction to believing FCA was a beautiful company. The company is the result of two very weak companies combining in order to ensure their long-term viability. The company has historically under-earned its cost of capital, but every vehicle Sergio has introduced at the combined FCA has been a margin-enhancing, or higher-ROIC vehicle. Perhaps the one exception to this claim is the Dodge Dart, which we estimate is neither high-margin or ROIC-enhancing. Yet, under the terms of the agreement with the government, Fiat was able to secure an additional 5% of the ownership of Chrysler by introducing the compact car. Investing a few hundred million in an underwhelming model turns out to be a great investment after all.

All of the capital Sergio has spent on developing new models has been allocated with one goal in mind: increase the company’s profit margins and generate acceptable rates of return. As a result of the investments in new Jeeps, Maseratis, Fiat 500 derivatives, Alfa Romeos as well as a refreshment of Chrysler ancient products, we believe Fiat is poised to meaningfully increase its operating profit margins. While the company committed to getting much of this done in 2017 and 2018, the recovery in European volumes and the initiatives the company has fast-tracked for North America will mean Marchionne can deliver on his industrial plan a bit earlier than he told us last year. It should be an exciting year ahead. We’ll keep our seat-belts on.

See Lienert, Exclusive: Fiat Chrysler delays many future vehicle programs.11

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "15

Historical and Projected Financial Information (Includes Ferrari)

This article has been distributed for informational purposes only.  Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets.  It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article.  Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article.  The author’s opinions are subject to change without notice.  Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources.  Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed.  Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article.  GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice.  No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC. Past performance is no guarantee of future results.

GreenWood Investors LLC www.gwinvestors.com Fasten Your Seat-Belts "16

2011 2012 2013 2014 2015 E 2016 E Key Market Sales (Thousands)

US 12,733 14,440 15,532 16,405 16,580 16,612 Brazil 3,394 3,584 3,571 3,324 2,583 2,641 Italy 1,748 1,402 1,301 1,360 1,571 1,798

FCA Wholesales (Thousands) NAFTA 1,783 2,115 2,238 2,493 2,641 2,776 LATAM 929 979 950 827 605 689 APAC (ex-JVs) 74 103 163 220 227 270 EMEA 1,180 1,012 979 1,024 1,161 1,317 Luxury 13 14 22 44 44 68 Total 3,979 4,223 4,352 4,608 4,677 5,120

Revenue (Millions) NAFTA 33,800 43,521 45,777 52,452 67,423 70,605 LATAM 11,068 11,062 9,973 8,629 6,550 7,493 APAC 2,086 3,128 4,621 6,259 7,177 8,568 EMEA 20,078 17,800 17,420 18,020 21,259 25,012 Luxury 2,839 3,067 3,994 5,529 5,643 8,218 Total 75,441 83,957 86,816 96,090 113,107 124,714

EBIT (Millions) NAFTA 1,770 2,443 2,219 2,224 3,799 4,963

Margin 5.2% 5.6% 4.8% 4.2% 5.6% 7.0% LATAM 1,385 1,032 564 289 170 456

Margin 12.5% 9.3% 5.7% 3.3% 2.6% 6.1% APAC 119 255 318 537 481 876

Margin 5.7% 8.2% 6.9% 8.6% 6.7% 10.2% EMEA -353 -544 -334 -105 319 1,117

Margin -1.8% -3.1% -1.9% -0.6% 1.5% 4.5% Luxury 352 392 470 664 724 1,211

Margin 12.4% 12.8% 11.8% 12.0% 12.8% 14.7% Total 2,953 3,921 3,491 3,651 4,923 7,934

Margin 3.9% 4.7% 4.0% 3.8% 4.4% 6.4%

EBITDA 7,458 7,782 8,065 8,549 10,688 14,213 Capex 5,525 7,530 7,433 8,161 8,815 10,577 Net Industrial Debt 5,772 6,545 6,469 7,654 4,813 890 Adjusted EV / EBITDA 3.6x 3.5x 3.4x 3.5x 3.0x 2.0x Adjusted EV / EBIT 8.7x 8.2x 8.9x 8.1x 6.5x 3.6x

(Porportional Debt, Uses Average Price) (Uses Current Stock Price)