https://seekingalpha.com/article/4091677-fiat-chrysler-automobiles-nv-fcau-q2-2017-results-earnings-call-transcript?part=single...
Richard Keith Palmer - Fiat Chrysler Automobiles NVThank you, Joe. Good afternoon and good morning to everybody. I will start on page 3 with the highlights of the quarter. We had record Q1 results. And we've posted now another set of very strong numbers for Q2, with a record adjusted EBIT of €1.9 billion and margins up 90 basis points to 6.7%. Adjusted net profit of €1.1 billion, up over 50% year-over-year.
All our operating segments showed margin improvements year-over-year. And in particular, NAFTA posted an 8.4% margin, which is a record for that region. And Maserati showed again double-digit margins for the fourth quarter (sic) [fourth consecutive quarter] (02:11) at 14.2%, doubling them compared to last year.
Our cash generation from operations show a reduction on net industrial debt of €0.9 billion to €4.2 billion. And we continue to slim down our balance sheet in the quarter, with gross debt reduced through the pay down of €1.4 billion of debt as of cash on hand.
And so overall, I think, it was a strong quarter with the progress we've made in the first half of the year, we are confirming our full year guidance.
We move to page 4. We see some continued news on the product front. In Latin America, we are launching now the all-new hatchback the Argo, which was unveiled in May, in Brazil. It's built at our Betim plant and replaces the Punto and Bravo models. It's also powered by a new small gas engine called the Firefly.
In Maserati, we revealed the restyled GT and GC products, which also include a new infotainment system, a system which is something that customers have been asking for. And these two vehicles will be available from Q3. And in Asia-Pacific, we showed a concept PHEV SUV for Jeep, a three-row vehicle, which is conceived is being designed specifically for the Chinese market.
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George Galliers - Evercore ISIGreat. And then the third question I had was just when we look at the improvement you're seeing at Maserati, as I think about the end of next year, I guess, Maserati and Alfa Romeo combined could look like a 250,000-unit per annum company, with around €12 billion of revenue, €1 billion of EBIT, a margin in excess of 8%. That sounds like a pretty healthy and respectable standalone OEM and one which could attract a good multiple, given the growth profile it will have seen. Are there any platform or powertrain constraints, which could make a separation of those two as a unit unviable?
Sergio Marchionne - Fiat Chrysler Automobiles NVI'm going to answer your question by answering the last portion of what you said, which is that there are no restrictions – there are no structural, industrial or engineering restrictions for the separation of Alfa and Maserati. That means nothing. Because it does – that's not an acknowledgement of the fact that either it can be done or would be done.
There's a statement, which, I think, is still in the press release about the fact that we have – or in the analyst deck about the fact that we're holding an Investors Day in the first half of 2018. And I realize that there's been a relatively large amount of excitement out there caused by initiatives both on this autonomous driving front, on the electrification, on this whole notion of separation of businesses.
And I think that given the fact that we're bringing to conclusion a five-year plan and so far, to the best of my knowledge, we're on track to achieve its objectives and all its elements, including net debt by the end of next year.
We thought it was – that it was proper that we sort of update the market again on what we consider to be the next five years of FCA 2014 – sorry, 2018 to 2022. And we intend doing that within the first semester of 2018, notwithstanding the fact that I will not be here when that cycle continues.
The reason why we're doing this is because although we are now – we started doing this at the end of 2016, we're doing it today, we're doing it next year, we're not committing capital that we will – that will not see any economic results until well after the completion of the 2018 plan. And I think it seems sort of improper that we keep on committing capital and reveal these numbers on a quarterly basis without giving an indication of what it is that we're working on.
I'll give you a couple of broad sort of indications of where we are today in terms of the delineation of the post 2018 FCA. The first one and I've mentioned this in passing and other occasions about the fact that there's nothing that will prevent an OEM from engaging in the type of development work that Tesla has done so far. We have been – as you well know, we have been reluctant to embrace that avenue until we saw a clear – a path forward. I think we're now in a position to acknowledge at least one of our brands and in particular Maserati will, when it completes the development of its next two models effectively switch all of its portfolio to electrification.
And as these products come up for renewal post 2019, it will start launching vehicles, which are all electric and which will embody, I think, what we consider to be state-of-the-art technology. It's an integral part of the development of the Group and I think it's an integral part of a broader strategy on electrification, which will see more than half of its fleet – by the time we hit the conclusion of the plan in 2022, it will see more than half of its fleet incorporated in electrification.
Some of that money has been spent already, some of it will be spent within 2017 and 2018 and some of it will be spent as we launch products in the 2019 to 2022 timeframe. I think it is important that we reserve judgment on what you suggested as being a possible avenue. Until we hear that story in the first half of next year, the only thing I can tell you for sure is that when we look at the portfolio of activities that FCA carries out, there are things, which are associated with automotive but are fundamentally non-OEM activities.
And when we have looked at the development of the sector over the last two or three years, we have come to the conclusion that the differences in valuation between what we currently achieve as an OEM and some of the activities they carryout including Marelli, no longer justify aggregation. And I think that when we speak to you next year in the first half after having discussed this with the board at some length, it is my view that we will show you a much clearer portfolio of OEM activities by the end of 2018, and I think that forms an integral part of the plan going out to 2022.
But other than that, I will not speak about anything else and I will – really will not discuss anything else in terms of disaggregation of activities within the Group. There are some things, which have been inside the Group for a number of years, and which we have worked on now in terms of profitability over the last two or three in a very intensive way, and which in all likelihood required us to see the light of day on their own merits and away from something which appears to be not as loved by the markets as traditional OEMs. So we need to reserve all this until the first half of 2018.
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Adam Michael Jonas - Morgan Stanley & Co. LLCOkay. All right. Yeah, we love to confirm that. All right. Just one last one on Jeep. Can you bridge – I mean, I'm using round numbers here deliberately, but you're going to do around 1.5 million units this year, you're targeting over 2 million next year. Can you refresh us on where you see the bridge of that roughly 500,000 unit gap in volumes from one year to the next either geographically or by model line? Thanks everybody.
Sergio Marchionne - Fiat Chrysler Automobiles NVThere are two fundamental reasons for the bridge to 2018 and 2 million. And is fundamentally the rollout of the Compass on a global scale. We have now launched the Compass out of India. I think we're shipping – we started shipping today. We're going full blast with the Compass in the U.S. now out of Toluca, China is ramping up.
And the second non-inconsequential piece of this is the fact that the Cherokee is going to have a facelift or substantial intervention in the beginning of 2018 in an environment, which has a higher capacity than it used to have up in Toledo.
And in addition to this, obviously, we're launching the Wrangler. The Wrangler is coming on stream in November of this year. This is a big piece of the portfolio. When you add up all the shifts between 2016 and 2018, those three products are – by themselves account for nearly 100% of the shift in volumes.
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John Murphy - Bank of America Merrill LynchOkay. And then also on the Ram, what is the timing of the launches of Ram next year because that's obviously a big ticket item as well?
Sergio Marchionne - Fiat Chrysler Automobiles NVDetroit Auto Show 2018.
John Murphy - Bank of America Merrill LynchAnd NSOP?
Sergio Marchionne - Fiat Chrysler Automobiles NVIt's just about then, Q1 of 2018.
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Patrick Hummel - UBS AGOkay. Thank you. My second question is relating to the Alfa Stelvio, and the new Jeep Compass in terms of the order situation and the markets where it's already on sale, and also the pricing and profitability level. You rightly emphasized, Richard, that this is a rapidly growing segment, but it's also a very competitive one. And I would just be curious in terms of your expectations on pricing and margins, whether what you see so far is meeting your expectations or maybe even exceeding it?
Richard Keith Palmer - Fiat Chrysler Automobiles NVNo, I think we're positioning Alfa against the premium brands. And I think that's the type of pricing that we expect to obtain. So far we've been successful. Obviously, the launch of the Stelvio is in progress now, 30 days. But I think the reception of both the brand and the vehicle would indicate that we should be able to execute at those levels.
On the Jeep side, Compass, reception has been extremely strong in Brazil. We're leading the SUV segments down there with Renegade and Compass. The reception in the U.S., we expect to be similarly strong. I think for a number of years we've had Patriot and Compass in those segments with the vehicles that were a little out of date in terms of technical content and we've upgraded significantly with the new Compass.
And so I think it will help both us to be more competitive in that segment and also to manage the price steps more logically between Renegade, the Compass, the Cherokee. So I think we transact at very good price levels in the U.S. with the Jeep brand. I don't see any reason why Compass to be different. Obviously, Compass in Europe is in the heart of the segment in terms of the European market.
So we've seen very strong performance in the Renegade in Europe, but the Compass segment is much larger. And again, I think we'll be competing on the premium end with that vehicle, near premium, let's say. I think it's a brand which clearly has something to say beyond the sort of mass market, crossover vehicles that abound in those – in that market.
And then obviously we talked about China. We're launching the localized production of both Renegade and now the Compass. The reception has been very strong. Obviously it's a very competitive market also. The Jeep brand, I think, means something different to the Chinese than to the Americans or the Brazilians. And we're working very hard to ensure that we position the brand properly, both sort of from a marketing, from an emotional point of view in terms of the content and the reasons for purchase beyond just the pricing. But I think, we've seen great traction everywhere we've launched Jeep so far. And that's why we've been confident with the globalization strategy. And we'll continue to update you as we go through this process. But so far we don't have anything bad to say.
Sergio Marchionne - Fiat Chrysler Automobiles NVI'm just going to leave you with one thought. The internal discussion that we're having with our people in Jeep is that, to the extent that UV (01:11:03) market is at all relevant to the automotive space and as we have seen, it is. If there is one brand out there that has the right to claim the ability to have one out of five, 20% of that market belong to it, it's Jeep.
And I think that everything we've been doing, including the work that we've been doing on the Wagoneer and the Grand Wagoneer and the development of the Renegade, the Compass, the Cherokees, the new Grand Cherokee that's coming out, all this work, including the possibility of having five and seven seaters, all these things are designed to provide a complete coverage to the biggest growth segment in the automotive space that we have seen in the last 20 years.
So our prognostication is that this market – out of the global market is going to be roughly between 33 million and 35 million cars globally. If we're right in the estimation that Jeep needs to own 20% of that market, we're talking about over 7 million vehicles. You know what? If that's the ambition, this industry and this business, especially, has got a long, long way to go before it's saturated.
So I think we need to continue to be consistent with that objective. I think that's really – it's a very long-term view. I think it will take a number of years to get there. But I think the road is relatively clear for the brand.
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Stephen M. Reitman - Société Générale SA (UK)Hi. Thank you very much. Good morning, good afternoon. Looking at Alfa Romeo and Maserati, first of all, could you give some idea about the production cadence you're seeing at Alfa Romeo, roughly what the volumes were like in the first half or the second quarter? And also where we are in terms of Levante? I think you mentioned that you're launching it in all markets. Where are we now in terms of utilization and capacity? Thank you.
Richard Keith Palmer - Fiat Chrysler Automobiles NVIn terms of Alfa Romeo, we shipped just over 12,000 units in the first quarter worldwide and 22,000 in the second. And obviously we're still in the process of launching Stelvio, so a large part of those units were Giulia (01:16:54) production.
Sergio Marchionne - Fiat Chrysler Automobiles NVGiulia
Richard Keith Palmer - Fiat Chrysler Automobiles NVGiulia.
Sergio Marchionne - Fiat Chrysler Automobiles NVI'll give you my read of those numbers. I think Stelvio has just started launching. We started showing it to the markets here in the U.S. We're beginning to get some units on the ground now. Reception is quite good, as well as one could expect, they're probably in line with the reception that Giulia received when it was launched. It is because of the fact that the ambitions and the commitments that were made to the architectures were totally different than they were from Maserati. We're not seeing the same type of economic benefit from the launch of these two vehicles than we did from the launch of the Quattroporte and the Ghibli.
These are much larger investments that were much wider in scope in terms of technology, the engines that were launched and associated with these products. So I think it's going to take the remainder of the product line-up fill out, which will take until 2019 or 2020 initially to try and get the full benefit of Alfa onto the table. It will include one EUV, one larger EUV on top of the Stelvio, which ultimately will share something with the U (01:18:13) families of that size. So there's more work to be done. But the reaction has been superb and the brand is performing incredibly well across the markets. I mean the recognition and familiarity is quite high.
Stephen M. Reitman - Société Générale SA (UK)So I understand there was a figure mentioned around the first quarter of about 170,000 units of Alfa Romeo targeted for this year with a run rate of close to 200,000 units by the end of the year, which brings close to profitability or brings to breakeven. Are we on track on that?
Sergio Marchionne - Fiat Chrysler Automobiles NVYes. For the whole Alfa range, right? That includes MiTo, Giulietta, Giulia and the Stelvio and a few 4Cs, which you will on the rounding.
Stephen M. Reitman - Société Générale SA (UK)So the 12,000 and the 22000 units in Q1 and Q2 relate to the Stelvio and the Giulia?
Sergio Marchionne - Fiat Chrysler Automobiles NVYes.
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