Q3 2015 Fiat Chrysler Automobiles NV Earnings Call
Oct 28, 2015 AM EDT
FCA.MI - Fiat Chrysler Automobiles NV
Q3 2015 Fiat Chrysler Automobiles NV Earnings Call
Oct 28, 2015 / 04:00PM GMT
==============================
Corporate Participants
==============================
* Joe Veltri
Fiat Chrysler Automobiles - IR
* Richard Palmer
Fiat Chrysler Automobiles - CFO
* Sergio Marchionne
Fiat Chrysler Automobiles - CEO
==============================
Conference Call Participants
==============================
* John Murphy
BofA Merrill Lynch - Analyst
* Martino De Ambroggi
Equita - Analyst
* Brian Johnson
Barclays Capital - Analyst
* Thomas Besson
Kepler Cheuvreux - Analyst
* Mark Clothier
Bloomberg News - Analyst
* Alberto Villa
Intermonte SIM - Analyst
* Larry Vellequette
Automotive News - Analyst
* Rod Lache
Deutsche Bank - Analyst
* Richard Hilgert
Morningstar - Analyst
* Stephen Reitman
Societe Generale - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Good afternoon, ladies and gentlemen. Welcome to today's Fiat Chrysler Automobiles 2015 third-quarter results conference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Joe Veltri, Head of FCA Global Investor Relations.
Mr. Veltri, please go ahead, sir.
------------------------------
Joe Veltri, Fiat Chrysler Automobiles - IR [2]
------------------------------
Thank you, Tara Leigh.
Good day to everyone on today's call.
The earnings release that we issued earlier today, together with the presentation material from this call, are now available on the FCA Investor Relations website. Today's call will be hosted by the group's Chief Executive, Sergio Marchionne, and Richard Palmer, the group's Chief Financial Officer. After introductory marks by Mr. Palmer and concluding remarks by Mr. Marchionne, they will be available to answer your questions.
Before we begin, let me remind you that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included on page 2 of today's presentation. As always, the call will be governed by this language.
With that, I'd like to turn the call over to Richard.
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [3]
------------------------------
Thanks, Joe.
Good morning or good afternoon to everybody. We can now move to slide 4 of the deck outlining the results for Q3.
Worldwide shipments were up 1% at 1.1 million units, with the Jeep brand continuing strong performance, with shipments up 27% versus the same quarter of last year and up 22% year to date at 956,000 units. Group net revenues were EUR27.5 billion, up 17% or 6% at constant exchange. Adjusted EBIT was EUR1.3 billion, with adjusted EBIT margin for the group up 4.7% from 4.1% last year. And in NAFTA, adjusted EBIT margin was at 6.7%. Adjusted net profit for the group was EUR303 million.
The group recorded a quarterly net loss of EUR299 million after EUR943 million of unusual items, of which EUR761 million was due to a recall campaign with low adjustments in NAFTA. And EUR142 million was due to incremental incentives and inventory writedowns related to vehicles damaged in the Tianjin port explosion in China in the beginning of August. The Tianjin impacts are expected to be recovered in future quarters through insurance claims.
At September 30, 2015, net industrial debt was EUR7.8 billion versus EUR8 billion at the end of June. And total available liquidity was EUR24.9 billion.
During the quarter, the all new Fiat Toro midsize pickup truck was presented in Brazil. And the Jeep Renegade was introduced in Japan and in South Korea. On July 30, 2015, S&P rated the outlook on FCA and raised it to positive from stable. Also, FCA was once again named to the Dow Jones Sustainability Index.
On October 20, 2015, the IPO of 10% of Ferrari was priced with net proceeds for FCA of EUR0.9 billion. We're on schedule to complete the spin-off for the remaining 80% in January 2016.
On October 22, 2015,a new labor agreement was signed in the US. The four-year agreement, with wage increases for all eligible US hourly and salary represented employees.
Finally, we are confirming our full-year guidance. Worldwide shipments are expected around 4.8 million units, net revenues over EUR110 billion, adjusted EBIT equal to or in excess of EUR4.5 billion, and adjusted net profit of around EUR1.2 billion. Our net industrial debt has been adjusted to EUR6.6 billion to EUR7.1 billion range, from the EUR7.5 to EUR8 billion previously, to the reflect transactions completed in connection with the Ferrari IPO.
These guidance figures do not reflect the impact of the previously-announced spin-off of Ferrari planned for January 2016. And it should be noted that we expect that Ferrari will be reported as discontinued operations in FCA's 2015 year-end financial statements, following the approval of the spin-off transaction expected at the shareholders meeting scheduled for December 3, 2015.
Moving to slide 5, this shows the group's operating highlights for the quarter. Shipments were up double digits in EMEA and NAFTA, offsetting declines in LATAM and APAC, resulting in a 1% increase at group level. Net revenues were up 17%, or 6% at constant exchange, driven by the higher revenues in NAFTA, EMEA, Ferrari, and components offsetting lower revenues in other sectors.
Adjusted EBIT for the group increased by 35% to EUR1.3 billion, with NAFTA more than doubling and LATAM returning to profitability despite continuing poor market conditions in the region. Margins increased to 4.7%, compared to 4.1% in Q3 2014, driven by NAFTA that improved to 6.7% from 4.45% in the prior year.
Adjusted net profit for the quarter was EUR303 million. As already mentioned, the net loss of EUR299 million includes the after-tax impact of the unusual items of EUR602 million. Net industrial debt was EUR7.8 billion, down USD0.2 billion from June 30.
Turning to page 6, we can see the euro via changes in adjusted EBIT for the various areas of the group. NAFTA, again, was the main contributor to growth, with adjusted EBIT more than doubling. EMEA improved by EUR79 million from prior year, with Ferrari and components also showing higher results. These improvements more than offset declines in APAC, LATAM and Maserati.
Adjusted EBIT includes the positive FX benefit of approximately EUR200 million, mainly due to the translation impact from the strengthening US dollar year over year. Compared to Q2 2015, adjusted EBIT declined by EUR200 million, with improvements in Ferrari and LATAM driven by increases in Pernambuco volumes, with from 10,000 to 20,000 units being more than offset by declines in Asia-Pacific, due to market conditions and to the Tianjin port disaster mentioned previously.
Moving to slide 7, we show the change in net industrial debt during the quarter, which was reduced by EUR0.2 billion compared to end of June, mainly reflecting positive FX impacts from translation related to devaluation of the Brazilian real. Cash flows from operating activities were EUR1.4 billion, driven by adjusted EBIDTA of EUR2.7 billion, and the negative impact from seasonal working capital from EUR1.2 billion. CapEx for the quarter was EUR2.2 billion.
We will now review the performance by region, beginning with NAFTA on page 8. Industry in the US and Canada continued to strengthen, and group sales were up 7% year over year.
In the US, we sold 573,000 vehicles, an increase of 7% over Q3 2014, driven by Jeep, which was up 26%, resulting in the best-ever quarterly performance for the brand. Ram brand increased by 4%, while Chrysler was down 4% and Dodge down 9%, mainly due to the discontinuance of the Dodge Avenger and lower Grand Caravan sales.
Total market share was 12.4%, up 10 basis points, with fleet mix at 18%, flat versus prior year. US dealer inventory ended September, at 76 days of supply versus 71 days last year. The main reason for the increase is due to the Renegade launch and the Fiat 500X launch. In Canada, vehicle sales were up 1% to 79,000 units. The Ram brand was up 10% and Jeep was up 8%.
In Texas, which is the largest truck and SUV market in the US, the Jeep Grand Cherokee, Cherokee, and Renegade each received the top award in their segment from the Texas Auto Writers Association. While the Ram 1500 and 2500 were both recognized as the Truck of Texas in their respective categories.
Moving to slide 9, shipments in NAFTA were up 12% year-over-year to 685,000 with growth across all markets. Net revenues increased by 35%, or 15% of constant exchange, driven by the higher shipments. NAFTA adjusted EBIT more than doubled to EUR1.2 billion. And adjusted EBIT margin came in at 6.7%.
For the first nine months of 2015, NAFTA adjusted EBIT margins improved to 6.1% from 4.1% last year. And we're on track to achieve the full-year target of 5.5% to 6%. The strong improvement in adjusted EBIT was driven by volume growth due to the Jeep brand, led by the recently-launched Jeep Renegade.
Our net price increase is due to policy pricing actions and dealer discount reductions, which more than offset increased industrial costs due to the increased recall accrual rates and product costs for vehicle content enhancements, partially offset by purchasing efficiencies. Other primarily reflects the policy impact of FX translation mentioned earlier. Compared to the previous quarter, adjusted EBIT declined by EUR140 million, mainly due to higher industrial costs, partially offset by volume and mix effects.
As mentioned previously, moving to page 10, during the quarter, we recognized an adjustment to our recall campaign accrual in the US and Canada resulting from a change in accounting estimates. This change is due to the continued increased trend in the frequency and size of recall campaigns. And the changes in the regulatory and operating environments that have been evolving in recent periods, but which crystallized for FCA during the third quarter.
As a result of these events, we have reviewed our campaign reserve adequacy process. We've concluded that while the campaign adequacy model is sound, it needs to be updated to incorporate actuarial methodologies that give greater weight to the more recent calendar year trends and weaker campaign activity. This resulted in EUR761 million charge in the US and Canada for the estimated future recall campaign costs for vehicles sold in prior periods. As this relates to prior period sales, the change in estimate was excluded from adjusted EBIT in NAFTA for the period.
This review also resulted in an adjustment to the accrual rates for campaign reserves recognized in the period in which vehicles are sold. The result of this increase amounted to approximately EUR65 million of extra costs for Q3 2015, which is included in adjusted EBIT for NAFTA.
Moving to slide 11, LATAM, the industry was down by 19% versus last year, driven by continued macroeconomic weakness, particularly in Brazil, which was down 25%. While in Argentina was up 4%, driven by advanced purchases due to political uncertainties. Sales for the group were down 28%, with share in the region of 14% for the quarter. In Brazil, market share declined by 160 basis points, due to strong competitive pressure; however, FCA increased its market leadership over the nearest competitor to 500 basis points, which is 140 basis points higher than the Q2.
FCA also maintained it's leadership in the A/B segment, with a 21.2% share. The all new Jeep Renegade continued its growth trend, reaching a 25.2% segment share in the quarter, doubling from the 13% in Q2 2015. Stock levels in the region were at 39 days of supply versus 36 last year. In September, the all new Fiat Toro midsize pickup was presented in Brazil, with production to start in Pernambuco in Q4 of this year.
Moving to slide 12, shipments in LATAM were down 31%, with Brazil down 35% and Argentina down 9%. As a result, net revenues were down 30% or 15% at constant exchange.
Adjusted EBIT was EUR28 million positive again compared to EUR62 million a year ago. The decrease is primarily related to lower volumes, higher input cost inflation and Pernambuco staff costs, partially offset by variable net pricing and positive product mix, mainly attributable to the new Jeep Renegade. Adjusted EBIT margin was 1.8% versus 2.9% last year.
Moving to APAC on slide 13. Industry demand rose by 3%, with growth in all major markets except Japan. Group sales declined 23% year over year, mainly driven by China, down 26%, due to a significant contraction in demand for imported vehicles, as competition from local producers intensified. And also due to the interruption of supply due to the Tianjin port explosion.
Sales in Australia were down 32%, with demand impacted by price increases required to offset the Australian dollar weakness. Group share in the region declined by 21 basis points compared to last year, with share losses in China, Australia, India and South Korea and with Japan slightly up. Inventories at the end of September were at 99,000 units versus 115,000 units at the end of Q3 2014. With 22,000 units of China inventory still blocked at the port as a consequence of the explosion. In September, the all new Jeep Renegade was launched in Japan and South Korea, with the units imported from the Melfi plant.
Going to slide 14, shipments in APAC were down 45%. And half of the reduction was due to the blockage of shipment from the Tianjin port. All brands were down year over year. Net revenues were down 47% on the back of the lower volumes.
Adjusted EBIT for the quarter was a loss of EUR83 million versus a positive EUR160 million last year, reflecting the lower volumes, negative net pricing, particularly in China, and partially offset by lower marketing spending. Compared to Q2 2015, adjusted EBIT declined by EUR130 million, mainly due to lower volumes and negative impacts of FX.
For the EMEA region on slide 15, the European passenger car industry in the quarter was up 10%, to 3.4 million vehicles, driven by growth in all major markets. For the group, sales rose 12% to 222,000 units. In the EU, group share increased by 20 basis points, driven by growth in Italy, France and Germany, while share was flat in Spain and the UK.
In Europe, the Fiat brand maintained its market leadership in the A and L0 segments. And the new Fiat 500X confirmed its leadership in its segment in Italy, with a 19.6% percent share. For light commercial vehicles, the industry in Europe was up 10% year over year, with growth in all major markets except Germany. Group sales were up 6%, with share in the EU at 10.7%.
The Ducato maintained its segment leadership, with 12% sales growth. In September, the Fiat Professional brand received its second consecutive Van Fleet Manufacturer of the Year award, while both the Fiorino and Doblo commercial vans received individual awards in their categories.
Moving to slide 16, shipments in EMEA were up 15%, to 250,000 units, with passenger cars up 16% and LCVs up 10%. Net revenues were up 13% on the back of these higher volumes. Adjusted EBIT for the quarter was EUR20 million versus the loss of EUR59 million last year.
This represents the fourth consecutive quarter of positive results for the region. This was achieved with higher volumes and better mix, thanks to the new Jeep Renegade and 500X, and improved net pricing driven by favorable FX, as well as pricing actions in non-EU markets. This was partially offset by higher industrial costs resulting from the higher cost of vehicles imported from the US due to the stronger US dollar.
Higher SG&A primarily related to advertising for the new launches. Compared to the previous quarter, adjusted EBIT was down by EUR37 million, mainly due to the seasonal impact of lower volume.
Moving to Ferrari on slide 17, there will be a separate call for Ferrari following this call. But the results were that shipments were up for the quarter, up 21% to 1,949 vehicles. And the business created an operating margin, EBIT margin, in the quarter of 19.4% versus 15.7% in the prior year.
Turning to slide 18 on Maserati, shipments in Q3 declined by 22% with North America down 41%; greater China down 24%; and Europe up 5%. Net revenues were down 21%, primarily due to decreased volumes down, in line with weaker segment demand in the US and in China. Adjusted EBIT decreased to EUR12 million from EUR90 million last year, due to the lower volumes, unfavorable mix, and industrial costs, also including start-up costs for the upcoming Levante SUV.
Slide 19 covers the Components businesses. Magneti Marelli had a strong quarter, with net revenues up 9%, while adjusted EBIT was up 75% to EUR84 million, driven by the higher volumes, by cost-containment actions, and efficiencies. Adjusted EBIT margin was 4.8% versus 3% last year. Order intake was EUR562 million with over two-thirds of those orders coming from non-FCA group customers.
For Comau, net revenues were up 43%, due to body assembly, powertrain, and robotics businesses. Adjusted EBIT rose by EUR7 million, due to the increased volumes. For Teksid, net revenues were down 7% year over year, mainly due to a 13% decrease in the cast iron business volumes, partially offset by an 18% increase in aluminum. Adjusted EBIT was negative EUR2 million, down from positive EUR2 million the prior year.
Slide 20 outlines the main events that occurred after the end of Q3. The IPO of 10% of Ferrari was successfully completed. And the stock was listed on the US Stock Exchange under the ticker symbol RACE. It was listed on the October 21, 2015, at $52 per share. The top of the price range with the offering being well oversubscribed.
The spin-off of FCA's remaining Ferrari shares to FCA shareholders is proposed for approval at the Extraordinary General Meeting on December 3, 2015. And the transaction is expected to be completed in early January 2016. FCA's net industrial debt is expected to be reduced by a total of one EUR1.6 billion, as a result of the net proceeds from the IPO and the impact of the transactions related to the spin-off.
In the US, FCA reached a new four-year labor agreement with UAW, with wage increases for all eligible US hourly and salaried represented employees. The agreement eliminates the Two-Tier wage structure via a multi-year wage progression plan.
The cost impact on Q4 2015 compared to year-to-date run rate is expected at around EUR30 million. And for 2016, at around EUR380 million for the full year. In China, the new GAC-FCA joint venture plant in Changsha started production October 19, 2015. The plant has annual production capacity of 275,000 vehicles, and will produce the Jeep Cherokee to go on sale in China later this year.
Now moving to slide 21, we will review our expectations for the industry demand in 2015.
For NAFTA, we now see the industry to go to 21 million units from the 20.5 million units we were projecting in Q2. This reflects a higher forecast of the US market to 17.8 million vehicles for the year. The LATAM industry is now forecasted for further decline, to 4.1 million vehicles, versus our Q2 forecast of 4.2 million, due to continued for continued poor trading conditions. In APAC, the industry is forecasted to decline by 0.5 million units versus our Q2 estimate, to 27.8 million units, due to reduction in the Chinese industry, with expectations now at 18.2 million units versus 18.7 million in Q2.
Forecasts for India, Australia and South Korea are confirmed. The forecast for EMEA has been revised up to 16 million units, versus 15.7 million in Q2, with the Italian market now expected to grow by 12%.
Finally, on slide 22, we are confirming our full-year guidance, as mentioned before. And with that, I will bring my comments to a close. I'll hand over to Mr. Marchionne. Thank you.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [4]
------------------------------
Thanks, Richard.
Just a couple of general comments about the quarter and some of the things that we have seen since the last time we spoke.
One about the quarter itself. I think we're encouraged by the results that we've obtained so far, especially in terms of EMEA and Latin American performance. We've been obviously highlighting the costs compared to most of our Brazilian operations. And I think that even in market conditions which are less than exciting, we have been able to pull some profit. And I think it's the beginning of a recovery path. I'm encouraged especially by the performance of the Jeep brand in Brazil, which is now leading the segment with Jeep Renegade, well ahead of our competitors. And that's only happened in roughly about four months after launch.
I think the traction that Jeep is achieving in the jurisdiction is impressive. And I think it's an indication of the way in which the brand is being received on a global scale. Especially in terms of North American margins, which have improved over Q3 of 2014.
The real issue for us, especially in view of the reported earnings from our other two Detroit colleagues here in the last couple of days. Not only are there impressive numbers coming out of both Ford and General Motors and, obviously, we're envious of those numbers. And so we've been able to try and understand the structural differences between our reported earnings and theirs. And fundamentally, we can break them down into two buckets.
The first one is we have simulated our earnings on the assumption that we match the portfolio distribution of our competitors. And we get to roughly double-digit margins by just simulating a similar portfolio to theirs, using our own products and not theirs, which obviously we have no privy of information to. We have no access to their margins. But we get to roughly double-digits. And I think the spread between that and what they reported in Q3 is really a volume issue, which doesn't necessarily make me feel better, but at least it's understandable.
And so there are number of things that we're doing. I think I'm encouraged by the volume growth that we've had over the last five years. And I think as long as we continue on that trend, we will close the gap, at least on one part of the differential in relatively short order.
What concerns me more, obviously, is the fact that the portfolio is skewed in a way which does not reflect our competitors. As a result of that, I think we're going to be spending some significant amount of time here over the next quarter to try and understand how we can improve the offering to the market. Especially in view of what I consider to be a generally believed fact, that gasoline prices will continue to stay at the low end of the spectrum, at least in the foreseeable future.
I think that we're underrepresented in some significant areas in the large SUV market which, given the work that we're doing now and the renewal of the Ram brand, may offer interesting opportunities going forward. I'll leave it at this. I think we'll give you a better update as we complete the quarter and we enter 2016.
I think it would be incredibly foolish for anybody who sits in my shoes to ignore the magnitude of the events that have characterized the third quarter from an operational standpoint. And I'd like to go through some of them if we can, just so that we get our bearings fixed on what I consider to be significant shifts in the position of the industry.
The first one has to do with what we've seen in China in the last quarter. Not only are our results were disappointing, but we recognized a couple of things. One, obviously the impact of the fire in Tianjin has been devastating. Not just because of the loss that we booked on the destroyed material that was at the port, but also the fact that we were impacted by having a number of vehicles locked in pending resolution. And therefore, we were absent from the market.
But I think when you also look at the performance of Maserati and you combine it with the Jeep story, you recognized two things. And I think that the import function into China is going through a fundamental change. And this has got a bunch of ramifications in terms of our expectations going forward. One, I think it reinforces the wisdom of the decision to localize Jeep. The fact that we're going to be in the market with a locally-produced Cherokee within this year and we'll start production on the Renegade in the first half of 2016 is an indication of what I consider to be a very wise move not to get trapped by this stiffening of the import function into China.
And so while it certainly has no impact on our ambition for Jeep on a global scale because of the localization push that we've undertaken, and as a matter of fact, I think the 1.9 million number that we set as a target for 2018 is probably understated, based on what I know today. But I think it does have implications for the development of Maserati and for the development of Alfa. Pending resolution of that issue and getting a better clarity on the market dynamics in China, one of the things that we will be doing is looking at the pacing of our Alfa Romeo development on a global scale.
I don't know whether as a big chunk, but a relatively significant portion of our volume ambitions for 2018 for Alfa were China-driven. I'm still of the view that the total potential of the brand in terms of an expressed volume unit target of 400,000 by 2018 is achievable. I think we need to be very careful not to create excessive expectations, while we are trying to contribute to the objective. And I think it requires us to rethink the sequencing of the product launch. My gut, and right now it's purely gut, if my gut is right, I think we will see a positive impact on the amount of capital that's being absorbed by Alfa between now and 2018.
I think that the plan, in terms of its product content, is unchanged. But the sequencing will change. And I think the number itself of 400,000, I think, will probably hold. But the origin of that volume, I think, will have to change in view of what we know about China.
The other thing in which I think Richard has been incredibly articulate on is this question about the recall provision. We have debated this at length inside our shop. I think it would be negligent on our part not to recognize the fact that there have been structural changes in which the regulatory environment and OEMs are now interfacing.
There's a heightened level of scrutiny, both from the outside and internally as a result of that external pressure, which has caused and will cause going forward, I think, a different approach to the way in which recalls have been executed. I think the prudent thing to do is not to ignore that fact, but to build into our economics a recognition of that change. And effectively use that as a means of changing our pricing approach to ensure that we recover that part of the equation, which has so far appeared to be anomalous as a one-off. I think it's going to be much more structural, at least in the foreseeable future. And I think it was only prudent that we take the provision itself.
A couple of comments about this dieselgate story, and then we'll open up to questions. I've, obviously, as a number of you have done in the last little while, have gone through an incredible barrage of articles and speculations about this dieselgate story -- the implications, the origins and the problems. And I think we can all sit here and speculate, I think, unnecessarily about this issue. There is not a doubt that the problem does exist.
I think we cannot confuse the events in terms of their importance. The origin of this problem was a governance failure; it was not the failure of technology. I think there was nothing that I read or that I know that would suggest that diesel as a means of providing combustion power units is either in danger or should be eliminated because of the potential malfeasance of an agent in the market. I do not think, and I have not taken the view, that diesel is dead. I don't think it is.
And as a one additional factor on the question of Volkswagen, I have the utmost respect for the organization. I've had it since I've been involved in this industry for a long period of time. And I think it would be improper. And I certainly on my part think it would be improper to make any type of disparaging remarks about their performance. Failures like this, as unfortunate as they are, could happen to anybody, I think.
The size of this is unfortunate because it is relatively large. But I continue believe that VW will come out of this stronger after its adjustment process. And that ultimately will come back to be a viable competitor in the marketplace. I'm not dismissing them at all moving forward. I think the important thing to realize is that most organizations that are faced with issues of this caliber will end up carrying out initially some commercial practices that all of us in the marketplace may find a bit unnerving.
We are really seeing, at least on the European side, a level of generosity in pricing which has been caused by this event. I think hopefully it will correct over time so that we can restore some level of profit expectation in the marketplace, in a market which has already been plagued by what I consider to be unnecessary pricing pressure.
So I think we need to be careful of looking at this going forward. I'm not changing my view of our profitability targets in EMEA. I think we may be living through some skittish times over the next one or two quarters until we get stability in the marketplace.
Overall, the business is in good shape. We continue to perform well across a variety of fronts. I think we need to see clarity, certainly, on the APAC issue. Especially in view of the weakness of some of the currencies in the jurisdiction and some of the changes in the environment, especially in China. But overall, I think we're maintaining and confirming targets for 2015. And certainly, I have no indication today that 2018 targets are not achievable.
------------------------------
Joe Veltri, Fiat Chrysler Automobiles - IR [5]
------------------------------
Thank you, Mr. Marchionne.
Before we begin Q&A, I just want to note that, as Richard mentioned in his comments, last week Ferrari began trading as a public company following their IPO. And as a result, the management of Ferrari will conduct their initial analyst call later today to review their Q3 results. In order not to preempt that call, we would prefer not to comment on Ferrari's quarterly performance beyond the prepared remarks already made. Therefore, we would appreciate your cooperation by holding any questions on those topics for the Ferrari call later today.
With that, I'd like to turn it over to Tara to begin the Q&A session, please.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions)
We will take our first question from John Murphy, Bank of America Merrill Lynch. Please go ahead.
------------------------------
John Murphy, BofA Merrill Lynch - Analyst [2]
------------------------------
Good afternoon, guys. Just a first question, you highlighted the fact that you think the major differential from your operating margins versus GM and Ford's is a function of mix. I'm just curious how you think you'll get there as far as pushing the product and imagine the Durango would be a big part of it?
But also as we look at that mix it getting larger and maybe less fuel-efficient, how much investment would you need to make, not just in the product development itself, but also in Powertrain development to meet CAFE standards in North America?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [3]
------------------------------
I'm going to give you a dumb answer to the question, because in the detailed articulation of an answer's going to take an hour. One, there is nothing that we currently have -- there's not a thing in terms of matching product portfolio that currently does not exist within the environment that we're managing. The amount of work that's gone on the last, probably, 24 months in preparation of the renewal of -- certainly of the pickup truck and the SUV world would allow us to enter that market in relatively inexpensive and relatively acceptable cost in an area which I think has been left to the near exclusive use of some others.
I think it is important that we recognize that, given the strength of the brands and given what we've been able to do over the last five years, that we have a reasonable chance of getting at least a part of that market. And without causing sort of additional strain on our capital exposure profile or on our commitments to Powertrain. The Powertrains solutions are already baked into our development. They equally impact, not only the vehicles that we're thinking of getting involved in, but they impact vehicles that would have been developed to replace current ones. I do not see any seismic shift in terms of our capital profile.
I do see an unexplored potential and I want to try access those markets and I think we need to do it in all conscience. We're going to be spending the next 60 days taking a very hard look in view of the fact that we're going to have to launch some investments now in North America to replace some of vehicles in the 2017 to 2019 timeframe. Adding on this product development to an existing program is not going to twist us into a pretzel.
I think we'll be able to do it and I'm not at all concerned about the Powertrain impositions because actually, given the size of the vehicles, they're quite beneficial given the technology that we have available. They're actually beneficial to the Jeep story.
------------------------------
John Murphy, BofA Merrill Lynch - Analyst [4]
------------------------------
The second question is on the UAW contract. Obviously, there's some puts and takes here. There are certainly different interpretations.
Just curious, as you look at this, does the contract that you agreed to at this point, change anything as far as your view of profitability going forward? Or is it really just a continuation of what you had with some opportunity to work on things in the next couple of contracts?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [5]
------------------------------
Two broad comments; one, obviously, to the extent there were increasing labor costs, it has an implication and does have implications on our profitability. And so there's, obviously, a very clear sharing of the objective with UAW to do a full and complete rollout of our WCM, our world-class manufacturing initiatives, across the whole plant. And I would expect that we will get of those increased costs back in terms of efficiency, just running our industrial footprint better.
I think that it would be foolish to assume that whatever we've passed is going to end up -- whatever we absorbed as additional cost is going to end up as a margin erosion. I think that we will have to find ways to offset the increase in cost.
I, as you well know from public statements that I made, I shared with William the view that somehow we need to increase the distribution to our workers and the question was a timeframe within which we were going to do this. I think that we're now, we have now agreed a timeframe that's going to govern this well into 2023, because of the progression with the Tier 2 and so it's livable. I would not, on the basis of this agreement, change any of the product plans that we have put together, nor what I change our view as to what gets allocated.
It is undoubtedly clear that, to the extent that you've got higher-margin products that are potentially available for production in the US. The build up should be favored in terms of localizing because of the fact that they have the best chance of margin absorption.
It's a complicated question, given the extent to which we've already invested in other places. But as a general comment, to the extent that this ends up being a structural change, it only makes the sole issue about the capital returns even more of a difficult issue to try and solve because we end up -- at least where I sit, I end up looking at an equation where we appear to be inadequately compensating our workers and we certainly have an adequate compensation on the capital providers side.
As managers of this distribution of wealth between capital and labor, which is the classic economic quandary, we've agreed now to a set of escalating costs. Some people have bended around the cost of USD2 billion over the period between now and 2019.
The number is actually less than that, but it is broadly in line with the cumulative cost increase that we're expecting over period of time. That number needs to come out either on the market in terms of pricing or it needs to come out of the capital structure and the cost of running this thing. And I don't have an immediate answer but --
------------------------------
John Murphy, BofA Merrill Lynch - Analyst [6]
------------------------------
Just a last one, so I don't take up too much time. As you look at the globalization of the Jeep brands, obviously, it appears to be going a little bit faster and maybe better than we had anticipated and you cited potentially getting more than 1.9 million units as your target in 2018. What do you think the upside is and what market do you think you're really going to get that in?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [7]
------------------------------
Look, I made the comment because I think the rate at which -- we sold more Jeeps in Europe in the first nine months than we sold in the whole 12 months of 2014. As of today, we sold more Jeeps worldwide than we sold in the whole of 2014 on a global scale. This brand is now getting a phenomenal amount of traction. We need to make sure that we are supporting it as it expands. We'll give you an update at the end of January as to what we think a possible revised target is going forward and we're not to speculate on that number today.
------------------------------
John Murphy, BofA Merrill Lynch - Analyst [8]
------------------------------
Okay. Thank you very much.
------------------------------
Operator [9]
------------------------------
We will now take our next question from Martino De Ambroggi of Equita.
------------------------------
Martino De Ambroggi, Equita - Analyst [10]
------------------------------
Thank you. First question is on the NAFTA region, you gave a target of a run rate in Q4 of 7%. I understand maybe ForEx is helping a little, but did you confirm a 7% or maybe you should revise it upward for Q4? And my question is obviously, if you do not want to talk about next year, but should we take the 7% as a floor for next year, roughly?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [11]
------------------------------
The 7% is doable. I don't know of a reason why we would go back in 2016.
------------------------------
Martino De Ambroggi, Equita - Analyst [12]
------------------------------
Okay. I suppose it could have been revised backwards of the 7%, at least in Q4, since you already achieve it --
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [13]
------------------------------
If it is, it's going to happen in January of next year. We're not going to offer anything today.
------------------------------
Martino De Ambroggi, Equita - Analyst [14]
------------------------------
Okay. And the second question is on financial cost.
If I remember correctly, you had a target of EUR1 billion reduction for different reasons non-recurring costs and so on this year would be higher than last year? Could you update your view following also the Ferrari deal, what are the targets in terms of financial cost and in which timeframe?
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [15]
------------------------------
That number obviously was through 2018 time frame originally. I think we're going to make some significant reductions in our financial charges next year, given obviously that we are getting the proceeds from the Ferrari transaction. We are also going to actively look to remove the debt in the FCA US company and the ring --
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [16]
------------------------------
We are going to remove the ring (inaudible) next year. Just not actively. It's done.
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [17]
------------------------------
That's going to give us the opportunity, obviously, to utilize our cash more freely on a global basis and reduce the amount of the cost of carry that we have in our financial charges. We're going to give you some guidance for 2016 as was mentioned in January, but I would expect our financial charges to be a very positive contributor to the year-over-year improvement from 2015 to 2016, based on those actions we'll be taking.
------------------------------
Martino De Ambroggi, Equita - Analyst [18]
------------------------------
Okay. If I may have a one more question on the Chinese port explosion. You quantified EUR142 million provision, but did you quantify also enough indication of what was the impact on the profitability for the missed volumes are for the APAC region. And I was wondering if also Maserati was affected?
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [19]
------------------------------
In terms of the port, Maserati wasn't affected. In terms of the volumes, about half of our volume mix was a quarter in terms of shipments as it related to the port, so I think we could quantify a number --
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [20]
------------------------------
Richard is looking for the --
------------------------------
Martino De Ambroggi, Equita - Analyst [21]
------------------------------
No problem.
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [22]
------------------------------
About EUR80 million to EUR100 million of the impact of the year-over-year change was due to that volume reduction due to shipments not being made out of the port.
------------------------------
Martino De Ambroggi, Equita - Analyst [23]
------------------------------
Okay. Thank you.
------------------------------
Operator [24]
------------------------------
We will now take our next question from Brian Johnson of Barclays Capital. Please go ahead.
------------------------------
Brian Johnson, Barclays Capital - Analyst [25]
------------------------------
I have a couple questions. First, again to go on the differences with the other big Detroit-based part of the businesses.
We did see, in a couple of the others, and Ford was fairly open about it, a significant commodity tailwind in their margin. You don't flag that in your comments. Of course, it's great to think that production costs efficiencies and spire relations drive it, but are you seeing a commodity cost impact? If not, why not and when could it come through given, at least on the US dollar basis, where all the commodities have gone?
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [26]
------------------------------
Brian, we're not seeing a significant impact yet because of the length of the contracts we have in place and we expect to start to see more of an impact going into Q1 of next year.
------------------------------
Brian Johnson, Barclays Capital - Analyst [27]
------------------------------
Okay. So it really relates to the timing of the supply contracts?
The second question ties into the longer-term effects of Volkswagen. Whether you agree with the regulator approach or not, it seems like they are making the internal combustion energy, whether diesel or gas, increasingly more expensive. I certainly understand your view that, on a footprint adjusted basis, you can be in good shape for 2017 to 2020.
But if we kind of think about the hockey stick currently for 2020 to 2025 in Europe, C02 and US CAFE, how do you think being a skeptic seems on electric? What you're going to need to do with hybrids? What you're going to need with EVs to have a competitive cost-effective lineup in say 2023?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [28]
------------------------------
I actually think, Brian, that most of the fleet will go to hybrid by that period of time.
------------------------------
Brian Johnson, Barclays Capital - Analyst [29]
------------------------------
And in terms of what efforts you have underway and the capital investment to get your fleet there?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [30]
------------------------------
The issue about the capital is in our plans and it's already in the 2018 target numbers. The real issue to me is not capital, it's a question of being paid for all this technology that's going in.
And everybody has had these wonderful ideas about the fact that battery cost per kilowatt hours would drop drastically drop. We've seen indications of people expect these costs to be less that $250 a kilowatt hour, it's just -- one, we haven't seen it yet. I think it may be overly optimistic in terms of where I think technology will ultimately deliver price. I think a lot of this has to be seen.
The costs are significant and I think we're experiencing now we're going to be launching our first plug-in hybrid in the first half of 2016, I think, for the new minivan. I think we'll be able to experience the pain of that technology and the cost of the technology going into the vehicle by going to the market.
It's an unresolved issue to me, but having said that, regulations will dictate its introduction. We have zero options.
------------------------------
Brian Johnson, Barclays Capital - Analyst [31]
------------------------------
And that gets us to the point you made in the spring around redundant CapEx.
Final question, since your share of pickups as a percent of NAFTA sales is, as you mentioned, lower than other competitors, are you implying that you would increase capacity or increase your share in pickups? Or are there other very profitable niches that you could be gaining presence in?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [32]
------------------------------
I mean it's both because I think we have a unique opportunity now with the renewal of the pickup line with a new architecture that's coming in, with the Powertrain that we selected to significantly increase output. I think it's something that we have studied. I can confirm to you that numbers will go up, the availability of pickups will increase.
And that we'll also be exploring, as a result of that investment, ways to enter into other segments. I think it's important. There are very few markets in the US that can be characterized as oligopolies and that's one of them. And I think that we need to go out there and just start to get a fair share of that market.
------------------------------
Brian Johnson, Barclays Capital - Analyst [33]
------------------------------
Just to close that, can you do that without upsetting the delicate pricing balance?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [34]
------------------------------
Yes.
------------------------------
Brian Johnson, Barclays Capital - Analyst [35]
------------------------------
Okay. Thank you.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [36]
------------------------------
You can see this from our market share gains in Ram over the last five years.
------------------------------
Brian Johnson, Barclays Capital - Analyst [37]
------------------------------
Thank you.
------------------------------
Operator [38]
------------------------------
We will now take our next question from Thomas Besson of Kepler Cheuvreux.
------------------------------
Thomas Besson, Kepler Cheuvreux - Analyst [39]
------------------------------
Thank you very much. I have a few simple questions please.
Could you first confirm that the Q3 2015 NAFTA-adjusted EBIT margin is a fully comparable with what you showed in Q3 2014, given the changes you have made on the condition of future recall costs? I think it's not [complete] here for the market.
Second question, can you please make a comment about the prospects for the APAC margins, at least in Q4, if not in 2016? Have you found another way into China other than the Tianjin port or should we think that the profit margins from APAC is going to stay negative in Q4? What's the timeline to get back into profits?
And last question, you suggest that in NAFTA some positive pricing action to compensate for the higher industry recall costs. We've just had, this afternoon, Ford coming out with friends and family infant seat program for November and December. Do you think that with the industry margins for the Detroit 3 OEMs at the highest level it's ever been that you can still raise prices here? Thank you.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [40]
------------------------------
The ability to raise price is a market determined exercise. If the market will not bear it, we will not pass it on.
I can tell you, from our experience over the last six years, that whenever we have, for cost reasons, tackled this issue, we've been successful in obtaining them. I think a lot of the gains 2014 to 2015 are also due to the fact that pricing has improved and effectively, we have, in some fashion, shared that pain with the dealer network. I think that this issue is inevitable.
It happens now, it happens later, whether somebody else joins the bandwagon or not is almost an irrelevant issue. It needs to happen because I think these costs are structural and they will impact on our margin performance going forward.
On the China issue, obviously, we're working pretty diligently to try to get to a break even or positive numbering in Q4. I think time will tell. I do not have a view today, but I think certainly the loss that we booked in Q3 should be substantially reduced in Q4.
I have expectations that it will be positive and next year, notwithstanding the changes in market conditions. I think the biggest upside for us is going to be in terms of the earnings from the joint venture that we have with the production of the Cherokee and the Renegade in 2016, with the industrialization of the Cherokee starting as early as Q4 of this year.
On the first question that you asked about whether our numbers are comparable Q3 2015 to Q3 of 2014, the impact of the adjustment was roughly EUR65 million in the quarter. Technically, they're not comparable. There was an additional charge of EUR65 million the quarter for that -- for the revised year on recalls, but otherwise the numbers are absolutely calculated on the same basis.
------------------------------
Thomas Besson, Kepler Cheuvreux - Analyst [41]
------------------------------
Good. One small question that I forgot if I may, could you please specify the exact timing of Ferrari's 80% is division? Should we expect it to be at the very beginning of January of next year? And will it occur in just one shot or in several instances?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [42]
------------------------------
We're not going to use multiple shot to do this, it will be a one-time event. The actual date has to be voted on by the shareholders. That will be on December 3. It's my expectation we will do this on the first business day of 2016 which, based on my calendar, is January 4 of next year.
------------------------------
Thomas Besson, Kepler Cheuvreux - Analyst [43]
------------------------------
Great. Thank you. Very clear.
------------------------------
Operator [44]
------------------------------
We'll now take our next question from Mark Clothier of Bloomberg News.
------------------------------
Mark Clothier, Bloomberg News - Analyst [45]
------------------------------
Thanks for taking some questions. At the UAW press conference last month, you said that once the UAW wrapped and Ferrari was listed that consolidation would be next on your list.
So what's next as you work on that? Secondly, has VW's crisis change your preferences in any way?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [46]
------------------------------
The consolidation story was not the flavor of the season. It's something that's structural to this industry it didn't go away.
I think the Volkswagen story and they costs associated with -- what I can tell you to be a very stiffening environment of regulations and of compliance only makes that thesis more valid today than it even was back in April. I haven't given up on the notion. I think what I would now do what I can -- is effectively start speculating about what our next moves are because this is something that needs to be discussed and understood, not just with me but also with our Board. And this issue has been debated, it's been canvassed at length with them.
We have had some industry contacts, as we would expect it to have with other people who are -- share this view. I think it is incredibly premature for us to express a definitive view and my preference has a fundamentally not changed, but that doesn't mean anything. At the end of the day, this is something which, in the scheme of things, is inevitable.
And so whether it happens now, it happens next quarter, three quarters from now, the direction is right. And I think that the economic justification for the move is right.
And I also think that we need to get ourselves out of this problem of alleged wealth distribution between labor and capital. I think we're doing both of them an incredible amount of disservice and I think we need to resolve this issue. I have nothing [to add].
------------------------------
Mark Clothier, Bloomberg News - Analyst [47]
------------------------------
When you say industry -- discussions with industry contacts who share this view, do you mean other automakers?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [48]
------------------------------
Those are the only kind of guys that would have a relevant role to play.
------------------------------
Mark Clothier, Bloomberg News - Analyst [49]
------------------------------
So that's a positive development, right? You had not gotten feedback like that before?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [50]
------------------------------
I'm not sure that's true. I think there's noise in the background that has existed for quite a while. There are a number of people -- we're not lunatics here, there are a number of people who run the business who understand the implications. You just have to look at their numbers. That reality is shared, not just by me but by some others.
And so whether they are the ideal people whom them to strike something or not is a separate question. I think that there is, at least in some parts of the industry, there's a shared belief that this fix needs to happen and there needs to be a paradigm shift and the way in which we approach this business.
By the way, I think we shouldn't be speculating about who we're talking to or not talking to. I think we'll waste and you're going to write lots of stuff on this and people will be called and said you've been talking to Sergio and in the end, it doesn't solve anything.
My advice is to let the industry come to its senses and work its way through the issues. It will happen. Give it time.
------------------------------
Mark Clothier, Bloomberg News - Analyst [51]
------------------------------
Thanks.
------------------------------
Operator [52]
------------------------------
Our next question from Alberto Villa, Intermonte SIM.
------------------------------
Alberto Villa, Intermonte SIM - Analyst [53]
------------------------------
Good afternoon. First question is on the LATAM resilience in terms of operating profit.
I was wondering if you can give us an idea -- what is your view? Because we are seeing volumes going down again in the fourth quarter as far as we have data and you have been able to turn positive. I just wanted to know --
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [54]
------------------------------
You should be delighted. You should be absolutely delighted.
------------------------------
Alberto Villa, Intermonte SIM - Analyst [55]
------------------------------
I am, but just to understand whether they were temporary layoff components or things that are not structural --
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [56]
------------------------------
I think whatever we're doing, everyone else is doing.
------------------------------
Alberto Villa, Intermonte SIM - Analyst [57]
------------------------------
But, for example, you'd don't cut price as much as your competitors do. You are losing some volumes to preserve profitability.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [58]
------------------------------
I'm not sure that's quite relevant. To be perfectly honest, you're now asking what we do in terms of tactics of maintaining profitability in Latin America and to be perfectly honest, I think that's a comparative issue vis a vis (inaudible).
------------------------------
Alberto Villa, Intermonte SIM - Analyst [59]
------------------------------
I'm just wondering --
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [60]
------------------------------
I've been repeating ad nauseum and I will repeat it again just to avoid confusion. We do have the lowest cost structure of any other car producer compared to any other car producer in Latin America. It's that simple.
Somebody else believes I can break even. If they breakeven, I make money.
------------------------------
Alberto Villa, Intermonte SIM - Analyst [61]
------------------------------
Okay. Thanks.
The second question is on Maserati performance in the US, which was not so delightful in the third quarter. I was wondering if there are specific reasons behind the drop in volumes?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [62]
------------------------------
No. I think we need to -- this is reflective of what I think the brand should be doing. I think we need to pace ourselves in these markets.
The total volume ambitions from Maserati until 2018 is 75,000 cars. That's the number I outlined for 2018. It's the number that should not be violated and we should not be rushing to try and get there. What happened in the last 12 months is I think we've accelerated the pace of beyond what I consider to be the natural absorption rate in the markets.
We need to slow it down. We need to take a deep breath and just work our way through the issues. And effectively get ready for the Levante launch and manage that in a very tight way as a premium brand managed distribution and to be perfectly honest, I don't think that was done. We're in correction mode now and I think we need to work our way through that issue; hopefully, by 2016 we should be back on, especially with the Levante being in the market.
------------------------------
Alberto Villa, Intermonte SIM - Analyst [63]
------------------------------
Okay, thanks. The last one is on the recalls.
The cost of EUR73 million that you booked pertaining to the quarter. I'm trying to understand because this issue of recalls is becoming more and more recurrent, what in the future might be the cost of recalls that could be reasonably forecastable for us?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [64]
------------------------------
I think the provision that we have made, and I want to preempt Richard from answering. The provision that we have booked reflects our understanding and our expectations as to what our exposure will be on the recall side, based on what we know today. It's our best estimate of the impact of this new regulatory environment and the response rate that FCA has experienced of these issues.
Just read it as that. I have no better information. If I had better information that suggested a cost higher than this, I would have booked it.
------------------------------
Alberto Villa, Intermonte SIM - Analyst [65]
------------------------------
Okay. Thank you.
------------------------------
Operator [66]
------------------------------
We'll now take our next question from Larry Vellequette, Automotive News.
------------------------------
Larry Vellequette, Automotive News - Analyst [67]
------------------------------
Thank you for taking my question. I'd like to discuss one, in the UAW contract, you outlined a series of product allocations and that schedule. And I was wondering if, in doing this, you identified whether or not any more manufacturing capacity and North America was necessary going forward?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [68]
------------------------------
Well, in terms of sight, not. In terms of capacity, yes.
------------------------------
Larry Vellequette, Automotive News - Analyst [69]
------------------------------
So, you're just going to be making that up through increased efficiency?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [70]
------------------------------
Or increased headcount, one of the two.
------------------------------
Larry Vellequette, Automotive News - Analyst [71]
------------------------------
Okay.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [72]
------------------------------
Or a combination of both.
------------------------------
Larry Vellequette, Automotive News - Analyst [73]
------------------------------
Okay. And the other question I had, regarding your earlier comments about your rethink of Ram and moving into segments, I'm going to go out on a limb here and make an assumption that you're talking about a large SUV, a truck-based SUV. I'm wondering, if that's the case, how might that square with a Grand Wagoneer that you've said might be delayed until 2019?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [74]
------------------------------
Not the same animal, as you well know. Those are two different -- I don't think anybody who buys a large SUV today would ever be confused about trading it for a Range Rover.
------------------------------
Larry Vellequette, Automotive News - Analyst [75]
------------------------------
Right. But do you think there's room in a large truck-based body and frame SUV for a Ram to make some headway?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [76]
------------------------------
There's 300,000 people a year that believe that story.
------------------------------
Larry Vellequette, Automotive News - Analyst [77]
------------------------------
(laughing) They're going elsewhere. All right. Thank you very much.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [78]
------------------------------
For now. Yes. Thanks.
------------------------------
Operator [79]
------------------------------
We will now take our next question from Rod Lache, Deutsche Bank.
------------------------------
Rod Lache, Deutsche Bank - Analyst [80]
------------------------------
Good afternoon, everybody. A couple questions, one is there have already been a few questions on this change in direction in NAFTA. Can give us a sense in the magnitude of what you're contemplating in terms of your expansion in trucks?
Is there a commensurate reduction, also, in expansion for other areas of the Company which would be facing maybe structural or competitive challenges? When you assess the market's ability to absorb this without it affecting price, is it your thinking that demand for the segments is going to grow in the future?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [81]
------------------------------
Yes. I think is absolutely premature to try to discuss what compensation maneuvers we will carry out.
A couple of basic points which are going to be shared by everybody whether they tell you this or not is that there's not a single doubt that margin generation out of the larger vehicles is significantly higher than it is in what I consider the commodity end of passenger cars. It's something that we've struggled with now for the last three or four years, especially after interaction of the Dart and the Chrysler 200. It is an issue that needs to be addressed.
It needs to be addressed because industrialization and variable cost of these things are just not paying the piper. And so we need to find a better way to manage this. And that's a separate and completely separate discussion from our willingness to enter what I consider to be more profitable market segments.
The answer to your question, just to give you a benign answer, I think that there's additional volume potential for these vehicles and that we will just be writing the growth curve of that segment. I don't think anybody's threatening others with taking current volumes away from the competitor. I think the market itself will bear enough of an opportunity for us to be present.
------------------------------
Rod Lache, Deutsche Bank - Analyst [82]
------------------------------
Can you address the deficiencies in some of these challenging segments by stopping investment and exiting there or do you always believe that the Company needs to be in those segments?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [83]
------------------------------
I think the Company needs to find an intelligent way of being present. Because of our global footprint and the fact that a lot of these cars are really mainstay products in other jurisdictions, we need to learn how to make them in an intelligent way.
To be perfectly honest, I fail to see why people like the asians can effectively compete here and we can't. We need to understand that much better and I think that we're in discovery mode now. I think we have a lot of work to do on our end, but I'm comfortable that we'll find a solution that will put that issue to bed.
Certainly, when you look at prioritizing investments, if any human rational human being, given current market condition will favor larger vehicles given their margin generation than the smaller stuff. By the way, I am not offended by this from an environmental standpoint, because technology will compensate for the size. I think that these vehicles will require additional technology in the Powertrain side to compensate for the emission status and I think the market will bear it and I think the vehicles will be interesting to drive.
We'll see what happens when the introduction of the plug in hybrid with the minivan. But I think there are other things, obviously, that are going to be rolled our from our product portfolio including generators, things of that caliber, which will keep on reducing the impact on the environment from the larger vehicles. We need to continue to work and I think we'll give you an update on that on our portfolio strategy at the end of the year.
------------------------------
Rod Lache, Deutsche Bank - Analyst [84]
------------------------------
Lastly, I was hoping you could comment on the Latin America trajectory from here, maybe just tell us what the run rate of Pernambuco is right now. Obviously, it ramps up to the middle of next year.
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [85]
------------------------------
I'm just giving you numbers off the top of my head, I think its probably running between 65,000 and 75,000 cars a year on an annualized basis. It will probably -- by the time we finish ramping it up, it will be over 100,000 -- it will be clocking over 100,000 by the second quarter of 2016.
------------------------------
Rod Lache, Deutsche Bank - Analyst [86]
------------------------------
Thank you.
------------------------------
Operator [87]
------------------------------
We will now take our next question from Richard Hilgert, Morningstar.
------------------------------
Richard Hilgert, Morningstar - Analyst [88]
------------------------------
Thanks for taking my questions. A couple, just to get a little better understanding, I know it's been asked a couple of times, most of my questions regarding NAFTA and other regions have already been asked.
But LATAM, with the improvement in the third quarter, how much of that could be attributable to the Renegade launch? Then are we -- or should we expect to see further improvement in the fourth quarter or is this pretty much where we're going to be at going into the beginning of 2016?
My second question is on the performance of the Ghibli in Maserati. Given your earlier comments about how Maserati has -- you wanted to dial back the volume and have a steadier growth rate going through your 2018 target. Was that Ghibli -- was that the model that you dialed back or is there a demand issue going on with the Ghibli that volume wasn't or isn't as good as what you might have thought it would have been?
And given the decline in volume at Maserati, I was surprised to see the EBIT drop as much as it did. I was wondering if you could comment a little bit there? Maybe there are some costs going in because of the SUV ramp up that might have affected that?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [89]
------------------------------
Just to deal with the Maserati issue, the quarter has been impacted by ramp-up costs of the Levante, which will go into production at the end of this year, beginning of next. I think we need to be -- we're not going to decompose it, but just to give you a broad answer on the Ghibli. The Ghibli is absolutely fine.
I think there's a natural absorption rate of a vehicle on the market. And I think that the minute that you try and exceed those or you misread the absorption rate, which I think has happened here in Maserati, you end up having to dial it back. Our own ambitions for the brand have never been built on volumes which were the run rate that we had, certainly, in some parts of 2015 and the early part of the end of 2014. We have probably broken the speed of sound and I think we need to dial it back and try to re-allow this brand to build a piece of the time to get the 75,000 vehicles a year.
On the Latin front, which is the target for 2018. In terms of the Latin American numbers, the best way to assume the profitability is to assume that we're making zero profits out of the [bellarezonte] plant and we're making 1.8% margins is all attributable to the other side. That's probably the easiest way for you to understand.
------------------------------
Richard Hilgert, Morningstar - Analyst [90]
------------------------------
Okay. One last follow-up on a housekeeping item, if I take a look at the EBITDA in your slide deck, you've got EUR2.665 billion. If I back into an adjusted EBIDTA number using what you've got in the press release for adjusted EBIT and the difference there between that and your EBIDTA number in the press release, I come up with an adjusted EBIDTA number of EUR2.726 billion. Is the difference there financial services?
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [91]
------------------------------
Yes, it is.
------------------------------
Richard Hilgert, Morningstar - Analyst [92]
------------------------------
Thanks, Richard.
------------------------------
Richard Palmer, Fiat Chrysler Automobiles - CFO [93]
------------------------------
Thank you.
------------------------------
Operator [94]
------------------------------
We'll take our next question from Stephen Reitman, Societe Generale.
------------------------------
Stephen Reitman, Societe Generale - Analyst [95]
------------------------------
Thank you and good afternoon. Moving onto Alfa Romeo, I took your comment that you're keeping the 400,000 unit target for 2018, but you've adjusted some of the destination, in particular in relation to China. Could you give some indication of where you think that you will be redirecting those units?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [96]
------------------------------
Everywhere else but China. I have to give you a dumb answer, because I gave you a broad indication of what I think market conditions in China are going to dictate. It's based on what I see today in terms of market performance. I still think that Alfa belongs in China.
The expectations of a volumes out of the total pool of 400,000 cars by that date were, I think, given current market dishes not achievable. We need to find somewhere else. I think Europe and NAFTA are probably the best areas to deliver it.
That's going to require a re-jigging of the launch of the cars because there are cars that are more ideally suited for these markets than they would've been for China. We need to work over the next 30 days, 60 days to try and refine them and give you a better answer in January of next year.
Two things, one, the product plan is confirmed. The sequencing is going to be adjusted. It may yield to a capital save overall by 2018 overall but over the term to 2019 or 2020, we'll spend a fair amount of money as was originally forecast and the numbers are not changing.
------------------------------
Stephen Reitman, Societe Generale - Analyst [97]
------------------------------
And in terms of going back to Maserati, your comments about finding -- the natural rhythm of the models. You think basically by the beginning of 2016, you will have effectively played out the inventory in the dealers?
------------------------------
Sergio Marchionne, Fiat Chrysler Automobiles - CEO [98]
------------------------------
Absolutely.
------------------------------
Stephen Reitman, Societe Generale - Analyst [99]
------------------------------
Okay. Thank you.
------------------------------
Operator [100]
------------------------------
That will conclude the question-and-answer session. I would now like to turn the call back over to Joe Veltri for any additional or closing remarks.
------------------------------
Joe Veltri, Fiat Chrysler Automobiles - IR [101]
------------------------------
Thank you, Tara Leigh, and thanks to everyone for joining the call today. Any subsequent questions you have can be directed to the IR team after this call. Thank you and have a pleasant day.
------------------------------
Operator [102]
------------------------------
That shall conclude today's covered call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------