Recall costs detrimental to Fiat Chrysler 3Q earnings
A $334 million loss in the third quarter for Fiat Chrysler Automobiles NV did not deter CEO Sergio Marchionne on the automaker’s ambitions to increase North American profit margins and achieve global company goals.
The loss was due to two charges of more than $1 billion: $850.2 million (761 million euro) pre-tax charge for estimated future recall campaign costs for vehicles sold in prior periods in North America; and a $158.6 million (142 million euro) hit from costs related to vehicles damaged in the massive August explosion at a port in northern China — expenses the company expects to recover through insurance.
Barring the special items, the company performed fairly well. It increased revenue to $30.7 billion (27.5 billion euro) — beating Wall Street expectations of $27.21 billion; and reported an adjusted profit of roughly $338.5 million (303 million euro), up 31.7 percent from a year ago.
“We’re encouraged by the results that we’ve obtained so far, especially in terms of (North American and Latin America) performance,” Marchionne said Wednesday during a conference call with financial analysts and news media.
The company was profitable in all of its markets in the third quarter except Asia-Pacific, where it lost $92.7 million (83 million euro) due to a 45 percent decline in shipments due to the “Tianjin (China) port explosion, strong competition from local producers in China and reduced shipments in Australia due to pricing actions.”
North America continues to be Fiat Chrysler’s strongest market with about $1.3 billion (1.2 billion euro) earned, up $706 million (632 million euro) from a year ago. Other regions: Latin America was down $38 million (34 million euro) to $31.3 million (28 million euro) in earnings; Europe was up $88.3 million (79 million euro) from 2014 to $22.3 million (20 million euro).
While Ford Motor Co. and General Motors Co. shares were trading up a bit, Fiat Chrysler shares on the New York Stock Exchange closed down nearly 4.48 percent trading at $14.72 per share.
Profit margin envy
Fiat Chrysler’s North American profit margins increased in the third quarter to 6.7 percent, up from 4.2 percent from a year ago. Through the first nine months, the company’s North American margin improved to 6.1 percent from 4.1 percent for the same period last year.
Marchionne said the company is happy with its gains, but he remains “envious” of the more than 11 percent margins for the quarter of crosstown rivals General Motors Co. and Ford Motor Co.
“There are impressive numbers coming out of both Ford and General Motors, and obvious we are envious of those numbers,” he said. “We’ve been able to try and understand the structural differences between our reported earnings and theirs.”
Fundamentally, Marchionne said the differences are in the amount of vehicles sold and the company’s product portfolio being “skewed.”
“I think we’re underrepresented in some significant areas of the large SUV market,” he said, adding that the Ram Truck brand “may offer some interesting opportunities going forward.”
A large Ram SUV was not part of the company’s 2014-2018 product plan. A a three-row luxury SUV for the Jeep brand was expected in 2018 at the earliest.
Marchionne said a “better update” will be provided in early-2016.
Fiat Chrysler shipped 1.1 million vehicles from July through August — in line with the same time period a year ago. Jeep shipments were up 27 percent, putting it on pace for its fourth-consecutive year of record global sales.
Hope seen for diesels,VW
Marchionne does not expect the ongoing Volkswagen AG scandal involving up to 11 million cars worldwide having deceptive software to cheat federal regulations to put an end to diesel engines.
“The origin of this problem was a corporate governance failure,” he said. “It was not the failure of technology.”
Marchionne said he is not taking the stance “that diesel is dead,” or that the scandal will kill the German automaker.
“I continue to believe that VW will come out of this stronger after its adjustment process,” Marchionne said. “And ultimately, it will come back to be a viable competitor in the marketplace. I am not dismissing them at all.”
Diesel was one part of Fiat Chrysler’s strategy to help meet stringent upcoming fleet average fuel economy regulations of 54.5 miles per gallon by 2015. Many analysts have pointed to Fiat Chrysler lagging in new fuel-efficient technologies such as hybrid vehicles.
Marchionne said the company’s new minivan — expected in early-2016 — will be its first hybrid vehicle, with “most of the fleet” being hybrids by the 2020-2025 time frame.
Retaining 2018 targets
Despite demand lowering in China, increased recall costs and higher labor expenses under a new four-year contract, Marchionne said the company remains on track for 2015 targets and beyond.
“We are maintaining and confirming targets for 2015, and certainly, I have no indication today that 2018 targets are not achievable.”
The company’s 2015 guidance includes shipping about 4.8 million vehicles; revenue over 110 billion euro ($122.9 billion); and net profit of 1.2 billion euro ($1.3 billion).
The 2018 plan — outlined in May 2014 — includes exporting Jeeps globally, growing net profit five-fold and increasing sales 60 percent by 2018.
All U.S. dollar earnings from the third quarter are based on the Sept. 30 exchange rate.