Coronavirus major question mark as Detroit 3 project earnings
Fiat Chrysler Automobiles NV reaffirmed Thursday that it expects to make a best-ever $7.7 billion in pre-tax earnings in 2020 even as the coronavirus outbreak in China presents uncertainty there for the Detroit's three automakers early this year.
In announcing their full-year 2019 financial results this week, the companies agreed it is too early to determine the impact of quarantines and business closures in the eastern Asian country because of the flu-like respiratory illness, compounding challenges surrounding trade tensions with the United States, slumping demand and products that are lagging against the competition there.
"These forecasts assume there is no prolonged impact from the coronavirus issue on either demand or the global supply chain's ability to avoid any disruption in supply," Richard Palmer, Fiat Chrysler's chief financial officer, said Thursday on a conference call. "We are clearly monitoring the evolution of this situation closely."
The Italian American automaker has identified a manufacturing facility in Europe that received parts shipments from China and could be at risk within the next two to four weeks "if the situation in China continues to worsen," FCA spokeswoman Shawn Morgan confirmed after Reuters first reported the news. Hyundai Motor Corp. already has suspended some weekend production in South Korea because of a shortage of parts.
The virus is another challenge the automaker faces in right-sizing its Asian business, which lost $39.6 million last year. The automaker last spring underwent a restructuring of its Chinese joint venture with Guangzhou Automobiles Group and restarted marketing efforts in the fourth quarter there. It also is in talks with Taiwan-based iPhone manufacturer Foxconn Technology Group to produce electric vehicles in China.
The Detroit Three have delayed business travel to China because of the virus and are following government recommendations, saying they will keep factories closed until Sunday for an extra week following the week-long Lunar New Year holiday. Some automakers such as France's Renault SA have postponed workers' return for even longer.
General Motors Co. in China predicts a one-million vehicle decrease for the year even before figuring the coronavirus's impact — a third consecutive year of decreasing volume there. Overall for 2020, GM forecasts a flat year for pre-tax earnings per share in the range of $5.75 to $6.25.
"In terms of the impact on sales, there will be, I believe, a near-term impact on the overall industry," Matt Tsien, president of GM China, said Wednesday. "Fundamentally, dealerships have been closed for the Lunar New Year. In some regions, they're slowly ramping back up. In many other regions, they still remain closed. So we expect that there will be an impact on volume in the near term."
Tsien also recognized some pent-up demand because of the shutdowns, noting there could be a small bump in sales when business restarts.
Ford Motor Co. CEO Jim Hackett on Tuesday said it was possible the Dearborn automaker "could absorb a modest impact from the virus within" its $5.6 billion to $6.6 billion pre-tax earnings guidance range.
"China is only now starting to come back from an extended New Year holiday, and many companies, including Ford, are currently hoping to resume large parts of their industrial operations next week," Hackett said, adding the company is donating money and equipment to help. "And that is most experts are already saying, and we agree, that it will take weeks to begin to understand the implications of the outbreak."
Meantime, record Ram pickup sales and stronger margins at Jeep were not enough to prevent Fiat Chrysler from seeing a 19% decline in net income last year to $3 billion. A nearly $800 million settlement over alleged emissions cheating, restructuring charges and $440 million for United Auto Workers ratification bonuses weighed on its annual finances.
The Italian American automaker made $1.92 per share on $119 billion in revenue for the year, a 2% decrease, as shipments fell 9% from stock reductions in North America, falling sales in China and discontinued products in Europe. Pre-tax earnings were down 1% to $7.3 billion, just missing its more than $7.4 billion guidance for the year.
Pickups and SUVs did drive Fiat Chrysler's net income 35% in the fourth quarter to $1.74 billion. Shares were rising 0.8% Thursday morning slightly above increasing market indexes.
"2019 was an important year for our company," FCA CEO Mike Manley said Thursday. "Not only did we deliver strong financial results, but we took actions designed to position us for sustainable success in the future."
The company in December signed a binding agreement to merge with French automaker Groupe PSA, maker of Peugeot vehicles. The companies hope to complete within the next year or so.
"It was an impressive release for FCAU, particularly following a disappointing release from 'Detroit Three' peer Ford earlier this week," Garrett Nelson, senior equity analyst at CFRA Research, said in a note upgrading the firm's opinion on Fiat Chrysler's stock. "While we think the lengthy timeline of its planned merger with PSA Group could continue to weigh on sentiment toward the shares, we find the stock too cheap to ignore at current levels and view the combination favorably for reasons including the massive expected synergies and the special dividend shareholders will be paid prior to closing."
FCA made $7.4 billion before interest and taxes in North America, fueled by record Ram pickup sales that surpassed for the first time General Motors Co.'s Chevrolet Silverado for second place in the full-size U.S. pickup segment as FCA sells older model Rams alongside the 2018 redesigned versions.
Jeep, on the other hand, saw sales fall 5% last year. Although the Grand Cherokee SUV had its best year to date, the Renegade, Cherokee and Compass saw double-digit percentage losses. The company also has said it temporarily will idle Illinois' Belvidere Assembly for a third time in the past six months.
"This was because we decided to focus on margin rather than chase volume, a choice that helped to underpin our strong North American margins," Manley said.
Fiat Chrysler posted a 9.1% margin in North America, up from 8.6% in 2018. The automaker will give eligible hourly full-time UAW-represented employees up to $7,280 profit-sharing checks this year, an increase of $1,280 from a year ago.
Industrial-free cash flow was down 52% to $2.3 billion from the start of 2019. That still beat expectations of $1.7 billion. Net financial expenses were $1.1 billion in 2019, a 5% decrease.
Fiat Chrysler continues to transform its former Mack Avenue Engine Complex on Detroit's east side into a $1.6 billion assembly plant for a three-row, full-size Jeep SUV to be built there by the end of the year; it also will assemble the next-generation Jeep Grand Cherokee SUV. Additionally, the company will retool its truck assembly plant in Warren for 14 weeks this year to build the new Jeep Wagoneer and Grand Wagoneer SUVs.
For the year, the transatlantic automaker lost $6.6 million in Europe, where it was expected to complete a turnaround plan in December that includes a 5,000-employee reduction. The company is addressing its product portfolio there, planning to focus on higher-margin passenger cars, to reduce its average portfolio age by four years before 2024 and to address the struggling Alfa Romeo brand. It also is introducing electrified vehicles to meet carbon emission standards.
PSA CEO Carlos Tavares, who would lead the combined company, has a history of turning around businesses after taking over the struggling PSA in 2014 and acquiring General Motor Co.'s money-losing European Opel and Vauxhall brands in 2017.
"Tavares will have his work cut out for him as the company looks to cut costs, improve profitability, establish a greater presence in China and catch up to competitors in EV production," David Kudla, chief investment strategist at Grand Blanc-based Mainstay Capital Management LLC, said in a statement ahead of earnings.
Fiat Chrysler also made $551 million in South America as increased sales in Brazil offset declines in other markets, particularly Argentina.
The luxury Maserati brand lost $219 million in 2019. With new leadership at the helm, the brand is investing $1.8 billion in its Italian production and expects to launch 10 products through 2023, including a hybrid Ghibli sedan, a new super sports car and all-electric models.
"A lot of the work we did resulted in delivery inventory being reduced by 50% — very painful but necessary and behind us," Manley said. "It is worth noting that without the residual value and dealer destock we took in 2019, Maserati would have been substantially break-even."
Fiat Chrysler's annual results beat at least one crosstown rival. Ford Motor Co.'s net income dropped 99% to $47 million in 2019 as it faced operational challenges with the launch of redesigned Explorer SUV.
General Motors Co.'s profits fell 17% last year to $6.7 billion as it was hit by a 40-day national UAW strike this fall that cost the Detroit automaker $3.6 billion.