Detroit Three signal cautious optimism for second half of 2020
Detroit's three automakers are cautiously optimistic for the next six months after second-quarter earnings took a beating because of the coronavirus. Performance predictions hinge on specific conditions, but other actions signal a brighter future.
“We expect a much, much better second half,” Fiat Chrysler Automobiles NV CEO Mike Manley said Friday during a conference call after the company recorded a net loss of $1.24 billion for the April-through-June quarter.
Uncertainty still abounds, and consumer sentiment fell in July amid increasing COVID-19 cases and as federal relief expires for the unemployed. Fiat Chrysler declined to provide updated guidance for the year, citing a lack of visibility. GM, meanwhile, expects an operating profit up to $5 billion — so long as U.S. sales total at least 14 million, production is not interrupted and it can increase inventory levels. Ford Motor Co. still predicts a net loss for 2020.
"We're not out of the woods yet," said Jessica Caldwell, executive director of insights for auto information website Edmunds.com Inc., noting major markets such as Los Angeles could face another shelter-in-place as COVID-19 cases rise. "You can say the worst is behind you, which is likely, but until there is a vaccine, the next year is still pretty questionable."
But the companies are moving away from using the pandemic as a "crutch," Caldwell said. After a two-month production shutdown, the companies' ramp-ups have gone smoothly and demand remains resilient. GM expects to pay down some of the debt it has incurred and is ending salaried employee pay deferrals early. Ford, too, has begun paying back debt. Fiat Chrysler's order books are better than before the shutdown, Manley said, and it has resumed fully its product development activities.
The fallout from the pandemic was not as dire as some forecasts had expected in March and early April. Ford's $1.9 billion pre-tax loss in the second quarter was well shy of its predicted $5 billion loss. The companies are working to restock low dealer inventories with popular trucks and SUVs.
Cost-cutting measures in North America yielded $46 million in pre-tax earnings for Fiat Chrysler in the second quarter. Such actions will help the company "come out of this stronger than ever," Manley said.
Some measures are returning to normal. FCA's capital expenditures for the year are expected to be $10.1 billion, a little more than $1 billion less than the automaker forecast last year for 2020, so that investments in new product and electrification remain on track.
Senior executive pay cuts up to 50% and 20% salary deferrals for a majority of white-collar workers ended after three months on July 1. GM is ending and scaling back salary deferrals on Aug. 1 — two months early.
FCA's Manley resisted stating whether there will be a change to the $6.1 billion dividend to shareholders ahead of its merger with French automaker Groupe PSA. Shares closed down 3.3% in afternoon trading.
The tie-up, despite a lengthened investigation by the European Union's executive branch into the effects of the combination on commercial van competition, still is expected to finish by the end of the first quarter of 2021, Manley said. Twelve of 22 jurisdictions have approved the deal that would create the combined entity known as Stellantis.
Fiat Chrysler's revenue fell by 56% year-over-year for the second quarter to $13.9 billion (11.7 billion euros). Its Detroit rivals outperformed. General Motors Co. reported a net loss of $758 million on revenue of $16.8 billion. Ford Motor Co. posted a $1.1 billion net income thanks to its investment in self-driving startup Argo AI, but its revenues halved to $19.4 billion for the quarter. And Silicon Valley electric-car maker Tesla Inc. posted profits of $129 million in the second quarter, though revenues fell 5% to $6 billion.
Fiat Chrysler's U.S. sales had paled in comparison to its crosstown rivals, falling 39% year-over-year with Ram trucks dropping 35% and the Jeep brand falling 27%.
"Although it has been an extraordinary few months, we still view FCA’s quarter as lackluster compared to its Detroit competitors," David Kudla, chief investment strategist for Grand Blanc-based Mainstay Capital Management LLC, said in a statement ahead of the company reporting earnings.
And now, FCA is facing challenges on its turf. Its profit-heavy SUVs are seeing new competition from the return of Ford Motor Co.'s Bronco, Caldwell said. Ford has received 150,000 reservations for the vehicle.
"The off-road SUV niche is one that was long ago abandoned in favor of more comfortable crossovers, and Jeep happily sat uncontested in that space," she said in a statement. "Now that the segment seems to be making a comeback, this places enormous pressure on the Jeep brand and all eyes are on how FCA maneuvers its sudden flip to a defensive position."
Ahead of the Bronco's debut earlier in July, Jeep did share details of a concept Wrangler SUV with a V-8 engine, though it is unclear if the company will produce it. Jeep also will provide more information on its plug-in hybrid Wrangler this quarter along with a performance Ram TRX truck.
"We’ve very used to competition, and I think our product and our people have proven that they are up to that challenge," Manley said. "I view 2021 very positively, and frankly, the activity that we’ve got in the second half of this year will help our momentum as we get into 2021."
Despite FCA's individual results, Kudla added, investors are more interested in the potential of FCA's pending merger with PSA. Although revenues for the first half of the year fell by 35%, the maker of Peugeot and Citroën vehicles reported $62 million in net income. FCA's loss for the first six months of 2020 was $3.08 billion.
Production stoppages weighed on Fiat Chrysler's balance sheet, dropping its industrial-free cash flow to $5.8 billion (4.9 billion euros). Cash is critical for automakers to weather the production shutdown and is an asset analysts are watching closely. Available liquidity totaled $20.7 billion (17.5 billion euros) at the end of the second quarter.
In addition to borrowing $3.8 billion in credit facilities in April, the automaker received an Italian government-backed loan for $7.1 billion. Its board also nixed an annual dividend in May, and non-executive members of the board forfeited their remaining 2020 compensation starting in April.
In the second quarter, adjusted pre-tax losses were $1.1 billion (928 million euros), down 161%. Diluted losses per share were $0.78 (0.66 euro), down 232%. FCA's 0.5% pre-tax margin in North America fell from 8.9% a year earlier.
Fiat Chrysler also reported second-quarter adjusted pre-tax losses of $698 million (589 million euros) in Europe, $70 million (59 million euros) in Asia and $114 million (96 million euros) in Latin America. The Maserati luxury brand lost $117 million (99 million euros).
"Q2 clearly was expected to be the worst quarter of 2020," Manley said. "And even though we remain cautious on this continued impact on certain things as a result of the pandemic, you have heard and I think we’ve demonstrated, the second half will be a strong finish to the year."