FCAU - Fiat Chrysler Automobiles

[jay21]

The end of the Q&A was very interesting, particularly his talk about getting out of the mass market.

 

Also, there's some subtext about Germany going on in the last question, and he seemed to be getting pretty heated about it.

 

http://seekingalpha.com/article/1790552-fiats-ceo-discusses-q3-2013-results-earnings-call-transcript?part=single

 

This was great, glad you pointed it out.  There were two great questions and responses at the end of the call.

 

First question:

 

Deutsche Bank

Okay maybe then jumping on to the second part. I think now it’s been a number of years where they’re not just on a stand alone basis and appreciating the one-time aspect of your bet increase. But Fiat on a relative basis against most of your global competitors is one of the most leverage entities. And while you are struggling to generate cash flow pretty much most of your competitors are currently highly cash generators and therefore much more in the position to continue to invest in the business and even in areas where from at least your perspective it doesn’t make it on a sense like in EMEA. Why should we not be afraid that if this gap continues to widen that with the current net debt position of Fiat your competitiveness is getting structurally impaired?

 

Sergio Marchionne - Chief Executive Officer

For one very simple reason the amount that’s less in terms of the investments of the investments that you’re making reference to post decision to postpone investments in EMEA the number is the best marginal. So I really wouldn’t worry about impairing anything unless you’re suggesting that the strategy of moving upscale of Maserati – in pending expansion into the premium brand with Alfa is born, is effectively born with a structural flaw and therefore would require a write-down thereafter.

 

But I'm not sure that we’re talking about significant impairment with any assets that are left over and you got to remember that the most significant investment that we’ve made in the last five years on the European side has been the introduction of the Panda and (indiscernible) and that brand is performing well. We have refused to invest and renew any of the other product lines in our midst because of the inability to recover never mind the cost of capital but just recovering capital exactly for the point that you raised the rewarding impairment charges which would have become inevitable going forward.

 

The general comment that you’ve made about us being excessive leverage, we’re going to have a lot of discussion about what the profit capital structure is if you compare to our competitors. That’s not, and there is also another single doubt that we do have a large amount of that which is also probably the large amount of liquidity which is unusual for somebody in our position.

 

We were born with a different capital structure than most others. [b]And I agree with you that we have not generated sufficient cash out of the current business to try and out of the mass-market business to try and justify having an optimistic view of the future or Fiat involved in the mass-market. That is a view that I have by the across all the competitors in the mass-market side its not just the Fiat view which is a reason why we have slowly but surely kept on defocusing the mass-market from the EMEA side of operation and try to build an industrial strategy that matches the brand development of two of the brands within the fold which have gone so far unexploited and which are capable of internationalization.

 

That process started and it’s by far not complete. And I think you will be incredibly premature and undoubtedly unwise to start forecasting impairment of capital yet to be committed if you adopt that you may have the relative success of the strategy of repositioning the Fiat as a group, all the Fiat as a group. And so I would wait before I sort of express the final view on this, especially view of the numbers that have been released by Maserati as an initial indication of the relative success of that strategy that we’ve outlined.

 

But it doesn’t take away from your fundamental contention about the fact that we are levered more than most but the different I think between us and anybody else was played historically in the mass-market and that’s something that we’re trying to leave behind because we realize that it’s some incredibly unrewarding activity. It’s unrewarding in terms of not just pricing its unrewarding in terms of recovering capital and the cost of capital associated with that commitment. We cannot do this anymore and so I won’t. And which is the reason why we’ve attracted a sufficient amount of criticism from I think spectators and other people alike on the wisdom of the strategy. The reality is that we have to protect the house and the only way to protect the house is to move the sandbox and replace somewhere else. The sandbox today in Europe is completely over crowded and I’ve seen nothing and I repeat this category we have seen nothing in terms of industry movements in Europe that will suggest any level of optimism of our performance in 2013 or 2014 regardless of what you hear from anybody else. We live in a market place everyday and some of the pricing practices that I’ve seen across Europe are things that I’ve never, ever seen since I came here in 2004. So this cannot continue nothing is going to have to give and it’s not going to be Fiat.

 

My comments:

 

This was a great response.  He clearly acknowledges there is a problem and he references his strategy of moving out of the mass market production and focusing on premiumization as a way for Fiat to combat the problem.  He mentioned that he has been criticized for spending too much on capex, but he notes none of the capex is targeted in Europe.  Maserati is now starting to see the benefit of that capex spend and he believes that the investments made will be successful.

[jay21]

I have to say, that was a brilliant response by Marchionne about the relative factors affecting the European car business.  I recommend anyone listen to the last 17 minutes of the conference call (starting @ 1hr 4min) : http://www.media-server.com/m/p/5y8x3523

 

Just to summarize, the problem is essentially a game of chicken. Who will be the first to cut production in Europe? Marchionne hits it on the head: the first person to do it, loses! Everyone left can absorb the incremental capacity and run their plants at a higher utilization.

 

Therefore nobody does it. So Marchionne calls for a Euro-wide process under which all car makers do it equally, but that won't happen due to all the bloody politics that go on with an issue like that. So in the meantime, he pursues a strategy of using that excess capacity to other ends. To other regions, and to move up the ladder into luxury car production. It's the best move possible.

 

Really a brilliant guy, I encourage again to listen to the CC.

 

This is a great summary of the second question I alluded to:

 

UBS

I don’t disagree with you at all. I'm just looking the – you’ve been more conscious about excess capital spending than anybody else in the industry and that’s good. At the same time you’ve been vocal about excess capacity you talked about it more than anybody else probably etcetera. Today you have the worst excess capacity probably in Europe and you are doing the least without it compared to even (indiscernible) GM, Renault and forth.

 

Sergio Marchionne - Chief Executive Officer

Philippe let me tell you something. When you have $100 worth of available demand and you got 200%, $200 worth of available supply the only thing I could have done to worsen the situation is by turning on additional capacity to make the number larger than 200. So if I play the game that you suggested and I’ve been in the market like everybody else has and has invested equally to the competitors and I present the products fighting for the same market for which the current market participants are having a phenomenal difficulty in trying to acquire. We would have only made the situation worse.

 

My investment which by the way has been redirected and not postponed as selective strategy whereby the mass-market presence of Fiat is going to get seriously sequentially in a very disciplined way reduced overtime. Whatever capital I need to spend I need to spend on premium brand for which I have a higher level of certainty that they will have commercial success at a price. They cannot be done by continuing to repeat the historical mistakes that we’ve made here and I will not allow Fiat to do it. I just won’t.

 

So regardless of what everybody else thinks about whether we have or not, we are spending €8 billion worth of capital across the organization. That is not chicken money. On the one side I keep on being attacked of what we’re spending in the U.S. and on the other side I keep on being told that I'm under spending in Europe I got it. But the investment to me is absolutely fundable and it’s absolutely transferable. I don’t particularly where I invest in the architecture as long as I invest in it. Once I have that architecture established and installed it can be replicated on the fracture of the cost anywhere else.

 

The issue is who can afford that installation. Is it EMEA or is it some other part of the Fiat world can carry the burden. And if the answer is that some other part of the Fiat or the Fiat world had the other part carry it. But I cannot keep on fooling myself that Europe one day is going to wake up and make money at the other side of the channel it won’t. And by the way just to remind you last year four of the large European mass-market including Fiat lost $8 billion at operating level in running new operations. And I don’t know of an industry I’ve been in banking they can take that kind of punishment and survive into the long term.

 

Philippe Houchois - UBS

Yes I don’t think I'm suggesting what you’re saying I'm suggesting I'm just trying to draw you somewhere you probably don’t want to go to is the fact that you have not addressed the excess capacity you’ve narrated in Europe and until you do so…

 

Sergio Marchionne - Chief Executive Officer

Philippe listen to me. The question is now one day when we got time I’ll tell you joke about Harold and the Lord. The thing is why me.

 

Philippe Houchois - UBS

But others are doing…

 

Sergio Marchionne - Chief Executive Officer

As you start the question, the inherent problem is over capacity in the European context is the first mover disadvantage. The minute that you shutdown you benefit everybody else which is the reason I’ve been calling for coordinated activity across Europe to avoid any single company having to bear the burden of an industry restructuring which is European wide. Okay now you put your bloody finger on the bloody problem again and I'm not the guy who is supposed, is you wont know the opposition come from another country in a very consistent way about this being address. And I'm sitting here as the only Italian, as the only automaker in Italy representing a relatively seeable force across the European context.

 

The recent activity on the Co2 issue and the dominants of the German collision on Brazil tells you exactly where the power sits in running of this business across Europe. We have nothing to say. And I'm not going to be the facilitator of the strengthening of that – of that position out of Germany I will not be the guy. We will not be shutting down plants to facilitate the domination of the European car market for Germany I will not do it. And so we will shift our production capacity in accordance with our premium brand strategy and we will utilize what we have in defense of what we have. But unless Europe stands up and takes this issue and makes it its issue and makes it a European issue the solution is not going to really available and its not going to be available out of itself never.

 

My comments:

 

This stuff is absolutely fascinating to me.  I agree with what he is doing 100%. I may increase my position here after I re-review some fundamentals.

[phil_Buffett]

the call was great. i also added big to my Holdings.

 

also interesting was the short part about chrysler.

 

Alberto Villa - Intermonte

Thanks that’s helpful. The second one is just a curiosity the timing of your presentation of the forecast for the next five years many things might happen in the coming weeks and months with Chrysler stake eventually going public or not and so on. So I was wondering if that’s not I mean something that could impact your forecast that on the five year plan so if…

 

Sergio Marchionne - Chief Executive Officer

If you’re right there is one more justification to hold it at the end of Q1 of next year.

Alberto Villa - Intermonte

Okay.

Sergio Marchionne - Chief Executive Officer

By then all those smoke would have cleared.

 

so this sounds for me they buy chrysler till then. why would Sergio otherwise plans about a five year plan?

 

from now until q1 the will settle the chyrsler Thing and then start the engine

 

 

[phil_Buffett]

http://www.youtube.com/user/dodge?feature=watch

 

the new dodge Durango 2014

[fareastwarriors]

http://blogs.wsj.com/moneybeat/2013/11/04/chrysler-adds-boa-merrill-lynch-to-underwrite-ipo/?mod=WSJ_hp_LEFTWhatsNewsCollection

 

 

Chrysler Adds BofA Merrill Lynch to Underwrite IPO

[Ian L]

Euro rate cut to 0.25 and a weaker euro should help matters in Europe as well as Fiat's losses in Europe being lowered compared to profits elsewhere.

[txlaw]

Don't think these were posted:

http://www.freep.com/article/20131111/BUSINESS0103/311110075/1206/business01/2-Chrysler-execs-take-lead-roles-Maserati

http://www.freep.com/article/20131117/COL14/311170063/Mark-Phelan-Saad-Chehab-Chrysler-Maserati

[phil_Buffett]

Don't think these were posted:

http://www.freep.com/article/20131111/BUSINESS0103/311110075/1206/business01/2-Chrysler-execs-take-lead-roles-Maserati

http://www.freep.com/article/20131117/COL14/311170063/Mark-Phelan-Saad-Chehab-Chrysler-Maserati

 

sounds very good. i think in the next time we will see a Settlement between fiat and the veba

[nikhil25]

Great reviews for Fiat 500E:

http://green.autoblog.com/2013/11/18/fiat-500e-named-road-and-tracks-best-electric-car-for-2013/

http://www.autoblog.com/2013/08/20/2013-fiat-500e-review/

 

Expansion mode in India:

http://www.business-standard.com/article/companies/jeep-dealerships-to-be-different-from-fiat-nagesh-basavanhalli-113111800750_1.html

[Phaceliacapital]

Thanks!

[nikhil25]

Fiat to expand production at China venture:

http://online.wsj.com/news/articles/SB10001424052702304337404579211373525376940

"John Burton, general manager of GAC Fiat Automobiles Co., said it would add a second shift at its plant in the city of Changsha starting in April 2014. Currently it has one eight-hour shift producing 32 cars per hour, he said.

 

The Italian company's venture is now in the process of hiring up to 800 mainly production-related staff to add to its current staff of 2,400, he said.

 

The increase comes as the company moves toward putting its Ottimo into full production next year with an eye toward entering Chinese showrooms in spring, after the Lunar New Year holiday, he said."

 

Fiat to build second model in China:

http://online.wsj.com/news/articles/SB10001424052702303653004579210102844379412

"MILAN--Italy's Fiat F.MI +1.12%  SpA plans to produce a second car in China as it looks to increase its presence in the world's biggest market, where its sales trail far behind those of its competitors, a person familiar with the matter said Wednesday.

 

Fiat will show the Ottimo at the Guangzhou motor show Thursday, according to a person. The hatchback is derived from the Viaggio sedan, which is the only other model that it builds in the country.

 

Despite the region's small contribution to Fiat's earnings, it is nevertheless more profitable than the Italian auto maker's traditional European market, where demand is stagnant due to the weak economy in the euro zone. In the first nine months of the year, the Asia-Pacific made 270 million euros ($364.87 million) in earnings before interest and taxes, or Ebit, compared with a loss of €304 million in Europe."

 

 

[nikhil25]

Chrysler shooting for a December IPO:

http://finance.yahoo.com/news/chrysler-adds-four-underwriters-eyes-222847587.html

[Phaceliacapital]

http://www.bloomberg.com/news/2013-11-21/chrysler-banks-said-to-weigh-ipo-valuation-of-about-10-billion.html

[phil_Buffett]

http://www.bloomberg.com/news/2013-11-21/chrysler-banks-said-to-weigh-ipo-valuation-of-about-10-billion.html

 

so at 10b. $ the stake from the uaw is only worth 4,2b$ that would be good for fiat.

i think the settle short before the ipo.

[fareastwarriors]

.

[indirect]

I agree that as soon as street valuation is done, Sergio will close the the deal, maybe before year end.

 

I predict that Fiat will pop 30%.

[phil_Buffett]

I agree that as soon as street valuation is done, Sergio will close the the deal, maybe before year end.

 

I predict that Fiat will pop 30%.

 

@indirect: i agree with you. i also think it will be Close before years end.

[indirect]

$4.1 would be saving ~$2 billion on the contractual cap, which would make this IPO process totally worth it! 

[plato1976]

only 30% ?

 

I am counting on this baby to double for me

 

I agree that as soon as street valuation is done, Sergio will close the the deal, maybe before year end.

 

I predict that Fiat will pop 30%.

[phil_Buffett]

http://europe.autonews.com/article/20131122/ANE/311229994/fiat-seen-as-winner-with-chrysler-valued-at-10-billion#axzz2lODyKvje

[Cunninghamew]

This quote made me laugh:

 

Marchionne has offered the trust at least $1 billion less than what the labor group is asking, and said the UAW "should buy a ticket for the lottery" if it wants $5 billion or more.

[muscleman]

I agree that as soon as street valuation is done, Sergio will close the the deal, maybe before year end.

 

I predict that Fiat will pop 30%.

 

@indirect: i agree with you. i also think it will be Close before years end.

 

Yeah. I added today. Now I have 23% instead of 13% in this baby. :)

[arbcon]

so the thesis of this investment is cost cuts coming out of Chrysler-Fiat will offset losses in Europe? Or, that spinoffs (Ferrari) will protect value? Brazil and Italy are still issues I'm wrestling with. How should we view this?

[muscleman]

so the thesis of this investment is cost cuts coming out of Chrysler-Fiat will offset losses in Europe? Or, that spinoffs (Ferrari) will protect value? Brazil and Italy are still issues I'm wrestling with. How should we view this?

 

Ferrari is worth 5.5 per share on spin off. The rest is just a call option.

Actually, if you believe Chrysler is also worth more than 2.6 per share, Alfa and Maserati are just call options.

[phil_Buffett]

I agree that as soon as street valuation is done, Sergio will close the the deal, maybe before year end.

 

I predict that Fiat will pop 30%.

 

@indirect: i agree with you. i also think it will be Close before years end.

 

Yeah. I added today. Now I have 23% instead of 13% in this baby. :)

 

nice muscleman that you added today :)

 

the Company is today worth 10b.$ and have so much nice assets as muscleman mentioned. I love that.

way undervalued