Fiat Chrysler Automobiles' (FCA) second-quarter results show global shipments slipped almost 1%, flat revenue, and increased adjusted EBIT and net profit. FCA's North American sales declined, offset by improvements in Europe, the Middle East and Africa and at Maserati.
IHS Markit perspective
- Significance: Fiat Chrysler Automobiles' (FCA) shipments fell 0.6% year on year in the second quarter. Revenue in the quarter was even y/y, coming in at EUR27.9 billion. Adjusted net profit increased by 52.3% in the quarter, pushing the adjusted EBIT margin to 6.7%; in the year to date, the metric increased to 6.1%.
- Implications: FCA's results delivered a profitable quarter in all regions in the second quarter, as well as an increased adjusted EBIT margin in North America.
- Outlook: With the second-quarter results, FCA confirmed its full-year guidance for 2017, in particular that it expects progress in 2017 that will enable it to meet 2018 financial targets. CEO Sergio Marchionne also confirmed FCA will release a new five-year plan in the first half of 2018 and indicated that Maserati will be the company's key brand for electrification.
Fiat Chrysler Automobiles (FCA) has released its financial results for second quarter 2017, including an increase in net profit and adjusted EBIT (earnings before interest and taxation). FCA's shipments were down by 0.6% year on year (y/y) in the quarter and revenues were flat. Shipments were down in the North American Free Trade Agreement (NAFTA) area, with a cooling US market, winding down of the prior Jeep Patriot and Compass in the United States, and some lost output of the Jeep Cherokee as production transitioned from one plant to another in the US. FCA's adjusted net profit increased by 52.3% y/y in the second quarter.
The group's net revenues came in at EUR27.9 billion (USD32.6 billion) in the quarter, essentially the same as in second quarter 2016. FCA's second-quarter 2017 net revenues declined year on year in the NAFTA area, but increased in Asia-Pacific (APAC), Latin America (LATAM), Europe, the Middle East and Africa (EMEA), and at Maserati. FCA's adjusted EBIT increased 14.7% y/y to EUR1.9 million in the second quarter.
FCA's adjusted EBIT improved in all regions except the NAFTA area. In North America, adjusted EBIT declined 1.7% in the second quarter, with lower volumes on capacity realignment and transition to the all-new Compass, although the vehicle mix has been positive with the company's exit from the mid-size car market; increased incentives and negative currency transaction effects also contributed to a lower adjusted EBIT of EUR1,351 million. The adjusted EBIT margin for the NAFTA region improved despite the lower sales, coming in at 8.4% rather than 7.9% in second quarter 2016. Second quarter 2017's adjusted EBIT grew 4.5% in Asia-Pacific, as Alfa Romeo is being introduced and contributed to increased sales of 20,000 units, compared with 15,000 units in second quarter 2016. Combined joint-venture (JV) and imported volumes in China reached 72,000 units in the second quarter. Jeep now builds three products in China (the Cherokee, Compass, and Renegade), which has shifted marketing costs to the JV, while imported products have returned better vehicle mix; increased industrial costs and launch activities surrounding Alfa Romeo were a drag on the adjusted EBIT in the region. The adjusted EBIT margin improved slightly, from 4.4% to 4.5% in APAC. In EMEA, the adjusted EBIT increased as well, rising 39.7% to EUR200 million. Shipments increased in EMEA, with the higher volume also delivering a positive mix, and gains in purchasing and manufacturing efficiencies offsetting higher incentives and unfavourable currency exchange. FCA's margin in EMEA reached 3.3%, compared with 2.5% in second quarter 2016. Maserati drastically improved the adjusted EBIT for a second consecutive quarter, on additive sales of the Levante. In second quarter 2017, FCA reported an adjusted EBIT of EUR152 million for Maserati, compared with only EUR36 million in the second quarter of 2016; adjusted EBIT margin improved to 14.2% and revenue reached EUR1.1 billion in the quarter. North America delivered the highest adjusted EBIT for FCA, contributing 72.3% of the total in the second quarter of 2017, compared with 84% in second quarter 2016 and 84.7% in full-year 2016. FCA's reliance on the NAFTA area is declining on globalisation of Jeep and improvements in LATAM and Maserati.
North America remains FCA's largest contributor to revenues as well. The NAFTA area's EUR16.1 billion second-quarter 2017 revenue accounted for 57.6% of the total, compared with 62.3% in second quarter 2016, on lower shipments in the region. Shipments in the second quarter fell 4.6% y/y, on the transition to the all-new Jeep Compass, as well as the residual impact of discontinuation of the Dodge Dart and Chrysler 200. FCA delivered 664,000 vehicles in the NAFTA area in the second quarter of 2017, compared with 696,000 units in second quarter 2016.
The Latin American region showed positive adjusted EBIT in the second quarter, recovering from a loss in first quarter 2017 and compared with breakeven in second quarter 2016, as the Brazilian market saw some improvement and FCA's shipments increased. In May, the Fiat Argo hatchback was launched to replace the Punto, contributing to a positive mix for the quarter. In second quarter 2017, FCA delivered 127,000 vehicles in LATAM, compared with 112,000 in second quarter 2016. New products meant positive vehicle mix and pricing improved, although FCA reported increased production costs on inflation.
FCA's results in Asia-Pacific in the second quarter were impacted by localisation of Jeep production, reducing shipments by 20% y/y. However, combined FCA and JV shipments increased by 31% y/y. FCA's adjusted EBIT grew to EUR44 million in the second quarter, compared with EUR42 million in second quarter 2016. The launch of the Alfa Romeo Giulia and Stelvio increased selling, general and administrative (SG&A) costs, although FCA also reported favourable vehicle mix. Net pricing declined on pressure in the region. Net revenue in the region increased 2% to EUR976 million in second quarter 2017, compared with EUR957 million in second quarter 2016.
Fiat saw shipments increase 6.8% to 395,000 units in EMEA in the second quarter. Net revenues rose 3.4% to EUR6.0 billion in the second quarter. The adjusted EBIT (EUR200 million) increased 39.8% y/y. Volume and mix contributed significantly to this, driven by the Fiat Talento and the Alfa Romeo Giulia and Stelvio, although there was also a negative impact from higher incentives. Higher purchasing and manufacturing efficiencies had positive impacts on FCA's adjusted EBIT in EMEA. FCA's adjusted EBIT margin improved to 3.3% in EMEA in the second quarter, compared with 2.5% a year earlier.
Maserati's second-quarter shipments jumped 91% to 13,400 units on the new Levante. The division's second-quarter 2017 adjusted EBIT grew to EUR152 million on those volumes, compared with EUR36 billion in second quarter 2016. The adjusted EBIT margin grew from 6.2% to 14.2%. Maserati also saw shipments to China increase significantly, from 2,000 units in second quarter 2016 to 4,800 units. China was Maserati's largest market in the second quarter. In the second quarter, Maserati also introduced a facelifted Gran Turismo, due to launch in third quarter 2017.
The results for FCA's components businesses showed net revenues growing to EUR2.7 billion in the second quarter, from EUR2.4 billion in second quarter 2016, with adjusted EBIT increasing to EUR130 million. These improvements led to the margin increasing from 4.6% in the second quarter of 2016 to 4.9% in second quarter 2017. FCA did not provide details of the components section performances, though it indicated that all businesses saw higher volumes. The adjusted EBIT improvement was on higher net revenues and industrial efficiencies.
Outlook and implications
With the second-quarter results, FCA confirmed its full-year guidance for 2017, in particular that it expects progress in 2017 will enable it to meet 2018 financial targets. For 2017, the company expects net revenues of between EUR115 billion and EUR120 billion, adjusted EBIT of more than EUR7.0 billion, an adjusted net profit of more than EUR3.0 billion, and a reduction in net industrial debt to less than EUR2.5 billion. In the second quarter, FCA reduced its net industrial and gross debt. CEO Sergio Marchionne also confirmed FCA will release a new five-year plan in the first half of 2018 and indicated that Maserati will be the company's key brand for electrification.
In the company's second-quarter call, the always blunt executive addressed questions about his successor (it will be someone from the current leadership team, although he declined to name a short list); indicated that Maserati will see more electrified products, possibly going all-electric, as an answer to Tesla and electric vehicle (EV) start-ups; and promised that a new five-year plan would be revealed at an investors' day presentation sometime during the first half of 2018.
On electrification, Marchionne indicated that more than half of Maserati's fleet would incorporate electrification by 2022. The move to leverage the Maserati premium brand for FCA's play in the EV market should help address the cost issues ‒ instead of attacking the market from the low end, Maserati is likely to carry a premium price. The move will be a policy reversal for Marchionne, who has railed against EVs previously. The executive acknowledged the change during the analysts' call, also stating that his prior objection to EVs was simply on cost. However, Marchionne said that the fate of diesels has made electrification mandatory. Marchionne said, "I think we're now in a position to acknowledge that 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… be considered state-of-the-art technology."
FCA's new five-year plan will cover 2018‒22. Although Marchionne will be on hand for the presentation of the plan, he will exit FCA by April 2019, and his successor will execute the plan. As the company's plan is for the CEO's successor to be someone from the current leadership team, Marchionne expects that person will also be invested in the next five-year plan, having had a role in its architecture.
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