FCAU - Fiat Chrysler Automobiles

[ZenaidaMacroura]

This also came up in a search -though I imagine it's not a big deal as I never heard of it?

 

http://www.leftlanenews.com/dealer-claims-maserati-demanded-falsified-sales-numbers-89564.html

[ZenaidaMacroura]

I'm guessing the more impactful story is this?

 

http://www.bloomberg.com/news/articles/2016-01-14/renault-shares-drop-on-report-of-fraud-probe-into-emission-tests

[merkhet]

Fiat Shares Suspended Several Times in Milan After Heavy Losses

Shares hit by news report on U.S. lawsuit

 

http://www.wsj.com/articles/fiat-shares-suspended-several-times-in-milan-after-heavy-losses-1452775574?mod=yahoo_hs

[merkhet]

http://cookcountyrecord.com/stories/510657760-napleton-auto-group-hits-fiat-chrysler-with-rico-suit-over-dealer-incentive-program-market-share-metrics

 

A bit more clarity on what the suit is about

[cmlber]

Wow... :(...time to run for the hills??

 

I am more inclined to think this is not a massive issue. It will be hard to fake sales when you keep reporting numbers that increase 10-13% a year. Usually companies may fake sales if WS analysts like the consistent growth story and the company highly touts the consistent growth. FCAU's month to month sales increase is pretty volatile already, so it will be hard to imagine that they fake it so they can report a 13% increase instead of 12.9%.

 

I'd like to hear from other members.  :) ::)

 

Isn't revenue recognized when vehicles are shipped to the dealer?  That's what the 10k says.  If that's the case, the dealers sale to the customer doesn't effect the financial statements at all.  So the only thing this might effect is the monthly unit volume reports.

 

If it was being done on a widespread basis, you would expect dealer inventories to pile up which should result in accounts receivable piling up on FCAUs balance sheet, which hasn't happened...

[merkhet]

Wow... :(...time to run for the hills??

 

I am more inclined to think this is not a massive issue. It will be hard to fake sales when you keep reporting numbers that increase 10-13% a year. Usually companies may fake sales if WS analysts like the consistent growth story and the company highly touts the consistent growth. FCAU's month to month sales increase is pretty volatile already, so it will be hard to imagine that they fake it so they can report a 13% increase instead of 12.9%.

 

I'd like to hear from other members.  :) ::)

 

Isn't revenue recognized when vehicles are shipped to the dealer?  That's what the 10k says.  If that's the case, the dealers sale to the customer doesn't effect the financial statements at all.  So the only thing this might effect is the monthly unit volume reports.

 

If it was being done on a widespread basis, you would expect dealer inventories to pile up which should result in accounts receivable piling up on FCAUs balance sheet, which hasn't happened...

 

Yes, revenues are recognized at the time of shipment to the dealer.

From the 2014 Annual Report, on page 162:

 

Revenue from sale of vehicles and service parts is recognized if it is probable that the economic bene ts associated with a transaction will  ow to the Group and the revenue can be reliably measured. Revenue is recognized when the risks and rewards of ownership are transferred to the customer, the sales price is agreed or determinable and collectability is reasonably assured. For vehicles, this generally corresponds to the date when the vehicles are made available to dealers, or when the vehicle is released to the carrier responsible for transporting vehicles to dealers.

 

Revenues are recognized net of discounts, including but not limited to, sales incentives and customer bonuses.

 

The estimated costs of sales incentive programs include incentives offered to dealers and retail customers, and granting of retail  nancing at a signi cant discount to market interest rates. These costs are recognized at the time of the sale of the vehicle.

[muscleman]

Wow... :(...time to run for the hills??

 

I am more inclined to think this is not a massive issue. It will be hard to fake sales when you keep reporting numbers that increase 10-13% a year. Usually companies may fake sales if WS analysts like the consistent growth story and the company highly touts the consistent growth. FCAU's month to month sales increase is pretty volatile already, so it will be hard to imagine that they fake it so they can report a 13% increase instead of 12.9%.

 

I'd like to hear from other members.  :) ::)

 

Isn't revenue recognized when vehicles are shipped to the dealer?  That's what the 10k says.  If that's the case, the dealers sale to the customer doesn't effect the financial statements at all.  So the only thing this might effect is the monthly unit volume reports.

 

If it was being done on a widespread basis, you would expect dealer inventories to pile up which should result in accounts receivable piling up on FCAUs balance sheet, which hasn't happened...

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000011/fca2014123120f.htm

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000026/exhibit991fcanv20150331int.htm

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000065/exhibit991fcanv20150630int.htm

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000086/exhibit991fcanv20150930int.htm

 

Trade receivables

2,564 2014 Q4

2949  2015 Q1

2702 2015 Q2

3,387 2015 Q3

"(b) €811 million increase in trade receivables primarily as a result of the limited plant activity at December 31, 2014 due to the holiday shutdown". This is their explanation compared to 2014 Q4.

 

The number is higher in 2014 Q3 (3030).

The trade receivables seem to be inline with the revenue and seasonal fluctuations. I bet Sergio doesn't know this and there is some roach in this big corporation house that need to be exposed under sun light and cleaned up.

 

The only purpose seems to be inflating the monthly sales number. I wonder if SEC would press any charges?

 

[cmlber]

Wow... :(...time to run for the hills??

 

I am more inclined to think this is not a massive issue. It will be hard to fake sales when you keep reporting numbers that increase 10-13% a year. Usually companies may fake sales if WS analysts like the consistent growth story and the company highly touts the consistent growth. FCAU's month to month sales increase is pretty volatile already, so it will be hard to imagine that they fake it so they can report a 13% increase instead of 12.9%.

 

I'd like to hear from other members.  :) ::)

 

Isn't revenue recognized when vehicles are shipped to the dealer?  That's what the 10k says.  If that's the case, the dealers sale to the customer doesn't effect the financial statements at all.  So the only thing this might effect is the monthly unit volume reports.

 

If it was being done on a widespread basis, you would expect dealer inventories to pile up which should result in accounts receivable piling up on FCAUs balance sheet, which hasn't happened...

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000011/fca2014123120f.htm

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000026/exhibit991fcanv20150331int.htm

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000065/exhibit991fcanv20150630int.htm

http://www.sec.gov/Archives/edgar/data/1605484/000160548415000086/exhibit991fcanv20150930int.htm

 

Trade receivables

2,564 2014 Q4

2949  2015 Q1

2702 2015 Q2

3,387 2015 Q3

"(b) €811 million increase in trade receivables primarily as a result of the limited plant activity at December 31, 2014 due to the holiday shutdown". This is their explanation compared to 2014 Q4.

 

The number is higher in 2014 Q3 (3030).

The trade receivables seem to be inline with the revenue and seasonal fluctuations. I bet Sergio doesn't know this and there is some roach in this big corporation house that need to be exposed under sun light and cleaned up.

 

The only purpose seems to be inflating the monthly sales number. I wonder if SEC would press any charges?

 

Over that same period financing receivables went down ~700 million.  You would expect dealers hoarding inventory at Fiats request would also expect financing on the inventory to be extended...

[muscleman]

Does anyone know the difference between trade receivable and Receivables from financing activities?

My understanding is that trade receivables is when cars are shipped to dealership. Revenue is booked then and trade receivable is increased by this number. When dealer sells the car, cash is collected and trade receivables decrease.

 

"Receivables from financing activities" is explained as followed. I wonder if "dealer financing" means dealers sold the car under some FCAU low interest loan, so basically this item means FCAU provides a loan to the consumer? But I think Santandar is doing this for FCAU, not FCAU itself? What about "retail financing"?

 

===========================================

Receivables from financing activities include the following:

 

At June 30, 2015

 

At December 31, 2014

 

(€ million)

Dealer financing

1,845

 

 

2,313

 

Retail financing

1,110

 

 

1,039

 

Finance leases

365

 

 

349

 

Other

196

 

 

142

 

Total Receivables from financing activities

3,516

 

 

3,843

 

[TwoCitiesCapital]

From everything I read in that article, the VGP program sounds like it simply rewards dealers for more sales. That, in and of itself, isn't a bad thing. The specific instances of the dealership being approached with sums of money in reward for artificially reporting sales would be - but that also means the problem is likely not systemic.

 

It simply could be the representatives who works with these particular dealers trying to get raises/bonuses by showing higher than expected sales and etc. Not that this would void responsibility at FCA, but it'd be a lot better than if it was a systemic, nationwide program of fraud and deceit which I would find hard to believe. It is far more likely to be a localized occurrence.

 

[karthikpm]

PR Newswire

 

Statement Regarding a Claim Filed by a US Dealer Against FCA US

 

Released : Thursday, January 14, 2016 9:44 AM

 

LONDON, January 14, 2016 /PRNewswire/ --

 

Fiat Chrysler Automobiles N.V. ("FCA") (NYSE: FCAU / MTA: FCA) Fiat Chrysler Automobile N.V. (FCA) has become aware that a lawsuit has been filed against FCA US LLC (FCA US) by a dealer in the U.S. alleging that FCA US offered it financial incentives to falsely report vehicle sales by reporting retail unit sales in one month and reversing them in the following month. 

 

While the lawsuit has not yet been served on FCA US, the company believes that the claim is without merit and was filed by internal counsel to the dealer group as FCA US has concurrently been discussing with the dealer group the need to meet its obligations under some of its dealer agreements. 

 

The company is confident in the integrity of its business processes and dealer arrangements and intends to defend this action vigorously.

 

This press release contains forward-looking statements. These statements are based on current expectations and projections about future events and, by their nature, are subject to inherent risks and uncertainties. They relate to events and depend on circumstances that may or may not occur or exist in the future and, as such, undue reliance should not be placed on them. Actual results may differ materially from those expressed in such statements as a result of a variety of factors, most of which are outside of the control of FCA. 

 

SOURCE Fiat Chrysler Automobiles

 

I think this would mean that the entire car industry is falsifying sales .. Every auto manufacturer is reporting huge increases in sales. Unless FCA is falsifying sales to show they are doing as well as the rest. Seems a bit far fetched to me

[cmlber]

YoY Q3 A/R was up 12%, financing receivables were down 18%, and revenue was up 17%.  Doesn't paint the picture of channel stuffing.

[fareastwarriors]

Is anyone buying more on weakness?

8)

[LC]

Is anyone buying more on weakness?

8)

 

Not me. I sold my RACE, and had sold 2/5ths of my FCAU position in the 16.00s (pre-Ferrari spin). So I probably still own only 25% of my original investment in Fiat, and I'm going to hold that until around 2017/2018 and let Marchionne play out his hand.

 

The reason I'm not adding more is that the auto industry generally sucks, seems both bloated and competitive, and players do not appear to be rational (see GM's response to Sergio's approach). I won't add more but I want to keep my remaining share to let Sergio play his hand.

[TwoCitiesCapital]

Is anyone buying more on weakness?

8)

 

Not me. I sold my RACE, and had sold 2/5ths of my FCAU position in the 16.00s (pre-Ferrari spin). So I probably still own only 25% of my original investment in Fiat, and I'm going to hold that until around 2017/2018 and let Marchionne play out his hand.

 

The reason I'm not adding more is that the auto industry generally sucks, seems both bloated and competitive, and players do not appear to be rational (see GM's response to Sergio's approach). I won't add more but I want to keep my remaining share to let Sergio play his hand.

 

This is why I'm hesitant to add to my core exposure and have generally been trading around the position in shares and options. Also, a 5% price drop hardly makes it more attractive. I try to force myself to wait for a 15-20% drop before increasing holdings in a name significantly so I don't prematurely accumulate.

[GregS]

Has anyone seen a copy of the actual complaint?

 

I'm skeptical of any claims of outright fraud by FCA.  Reading the Cook County Record article, it really sounds to me like the dealership group in question wasn't meeting their goals under the volume growth program.  I'm not 100% clear from the article, but in essence this seems to be a claim that the FCA VGP has encouraged fraud by other dealers, such as booking then backing out sales.  There might be an incentive problem going on with the VGP, where it could be encouraging bad behavior as dealers try to hit month end targets.  But as others have pointed out, if it was systematic and widespread we'd see it in the numbers as dealer inventory piled up.

 

The one specific allegation regarding numbers is telling.  $20,000 for 40 vehicles that weren't actually sold?  $500 per car?  Why would FCA pay that much to fake sales on cars they still have to sell?  Over and over again?  That sounds like a bona fide sales incentive to me, but I think we can all see how an incentive program like that could cause some dealers to cheat.  Again, they still have the inventory, and still have to sell the cars, but in any given month it might make sense to do it to hit numbers.

 

This American Life did a podcast on a dealership in NY trying to hit their monthly numbers.  It is absolutely worth a listen.  It describes the wheeling and dealing they do to hit the monthly number and how stressful it is for them. 

 

http://www.thisamericanlife.org/radio-archives/episode/513/129-cars

 

I will reserve judgment until I have at least read the complaint, but I suspect this is a dealership group hasn't hit their numbers, is under pressure from FCA and is angry about it.  However, I wouldn't be shocked if there has been some manipulation at the dealer level.  Widespread fraud?  RICO?  I doubt it.

 

[karthikpm]

Is anyone buying more on weakness?

8)

 

Not me. I sold my RACE, and had sold 2/5ths of my FCAU position in the 16.00s (pre-Ferrari spin). So I probably still own only 25% of my original investment in Fiat, and I'm going to hold that until around 2017/2018 and let Marchionne play out his hand.

 

The reason I'm not adding more is that the auto industry generally sucks, seems both bloated and competitive, and players do not appear to be rational (see GM's response to Sergio's approach). I won't add more but I want to keep my remaining share to let Sergio play his hand.

 

+1, exactly what I did ( took cost+ ferrari out). Especially in a global recession, auto could suck no matter how skilled the operator is.

[Chalk bag]

I think Fiat is a short here. Pricing / margin is peakish, no FCF generation, and we are very close to late cycle. The company is sub-scale and too levered, and it might not survive the next crisis especially with the technological disruption happening in the auto space.

[Picasso]

I think Fiat is a short here. Pricing / margin is peakish, no FCF generation, and we are very close to late cycle. The company is sub-scale and too levered, and it might not survive the next crisis especially with the technological disruption happening in the auto space.

 

It's been a short ever since the RACE IPO.  I should go back to my comments back then, but I'm not sure why Pabrai or anyone thought this would take off once the RACE catalyst was over.  It was like SoftBank/Alibaba all over again. 

[fareastwarriors]

Goldman Sachs;

Peeling the onion; reiterate CL-Buy;

1/5/16

Goldman_-_FCAU.pdf

[bonkers]

GregS, you can find the complaint here:

http://www.autonews.com/assets/PDF/CA103358114.PDF

 

To me it reads like some dealers complaining how they have been mistreated by FCA vis-a-vis some competing dealers in the same area or rest of the nation, NOT like FCA running a huge sales figures fraud. It's peanuts.

 

One can think that FCA corporation had a motive to inflate sales figures, and establishing a system to both blackmail dealers with too demanding sales targets and giving them small bribes might be a way to achieve this. However, this (first and so far only) complaint

- has been filed by (only) 2 dealers of the same Napleton group (that has "dozens" of dealers),

- one of which has a troubled history with FCA (FCA threatened to terminate the co-operation 7 times between 2010-2015, and urged them to repair the FL facility which they finally did),

- covers all kinds of things - big and small -, and

- has a bitter tone to it, seeking personal damages (not greater justice)

So I dare to doubt it.

 

More likely, the 2 dealers in question happened to be located in more competed geographies, did not meet their somewhat arbitrary and/or unclear volume targets from FCA, and so did not get on board the VGP like some competing dealers. The "clawback clause" then made it too hard for them to get on board later, so they understandably got angry because of this, especially having invested in new facilities, etc. In fact they seem to complain that others got paid (by VGP bonuses), and they did not.

 

Probably the incentive system has flaws that can be misused by the dealers (to get more of the best-selling cars, etc.). Well, which incentive system doesn't? The complaint also asserts that FCA's local managers (Business Center Directors) can reach their bonus targets and benefit personally (along with some BC underlings) by making claimed artificial sales. However, in both cases the business interest of FCA the corporation would be hurt (misallocation of cars, higher wage costs), so in fact I think

1) it is hardly FCA's intention, or done on purpose

2) in fact, FCA would be generally well served by and thus support eliminating such practices (as long as its best dealers are kept happy)

 

They claim to have personal experience on Midwest BC director and his underling engaging in such practices, and that it also goes all the way to FCA VP of U.S. sales operations, who all accepted this silently.

 

Well, I can imagine there to have been maybe some favoritism from FCA's side involved, helping their best dealers to "remain in the program" (that has rigid rules) in spite of falling little short of targets. I'm not a lawyer, but don't think this is a major crime (e.g. RICO, major price discrimination under Robinson-Patman act, etc.). Which good manager has never given any slack to good subordinates that did not once meet their goals? Perhaps it resulted in loss of bonuses for the plaintiff, but if so, the case should be settled by simply reimbursing the omitted bonuses & extra costs, maybe few millions $ in damages.

 

Of course, if there are many more dealers who also feel mistreated, this could be multiplied. But I wonder if this is just common industry practice, in which case I doubt it will prevail in court.

 

In fact, the only benefit they claim for FCA the corporation from all this is inflating the sales figures that are also reported to the public, potential future dealers, and the investment community. Especially, this could raise the value of the shares and make FCA more attractive as a merger partner. Well again, maybe, but this was hardly the motive for the systems or the conduct. It's probably an unintended side effect. So hardly a huge liability for FCA.

 

[The warranty thing I do not understand. I just suppose it means the sales were cancelled before they were somehow fed to the system (that starts warranty as well).]

[bonkers]

Chalk bag, Picasso

 

First, my humble observation:

-Even if car companies do not produce much FCF or earn their CoC, for some reason they have historically been given some value by the market. By the way, same seems to apply to many other industries. ;D

 

Then, the LONG thesis:

-U.S. car sales have been substantially under trend levels for the (truly exceptional) years 2008-2013

-outside of another financial crisis (rare event) the sales will not come down for a few years due to pent-up demand

-(if sales figures are roughly right, and no foolish incentives used) FCA has still been winning little share in the U.S. as one of the only major car companies; at least it is not losing share

-EU car sales are following a similar patterns, but with a delay. Italy reached trough only 2013, and Marchionne just mentioned how quickly Europe is recovering

-FCA management has stated that they have been increasing NAFTA margins quickly, and are soon at par with peers

-Marchionne recently said that FCA 2015 earnings are going to beat market's expectations

-Marchionne seems to have traditionally underpromised and overdelivered. He just confirmed and upgraded his profit and leverage goals for 2018 (in spite of seeing what happens in China and LATAM)

 

-Removal of balance sheet cash ring fencing is maybe weeks or months away. This allows de-leveraging, and lower financing costs, halving interest costs to 2017 and beyond

-Note that "no FCF until 2018" is based on increasing volumes by +50 %; if plans are scaled down (e.g. in case of recession), FCF will probably come earlier (but smaller)

-Declining oil prices support consumers buying cars, declinig iron prices boost FCA cash flow with a slight delay

-Unlikely options include unlocking more value from the company, or a merger

-Car companies trade at little higher-than-cycle-average valuations, and FCA trades at a significant discount to peers

[vinod1]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

[Chalk bag]

Chalk bag, Picasso

 

First, my humble observation:

-Even if car companies do not produce much FCF or earn their CoC, for some reason they have historically been given some value by the market. By the way, same seems to apply to many other industries. ;D

 

Then, the LONG thesis:

-U.S. car sales have been substantially under trend levels for the (truly exceptional) years 2008-2013

-outside of another financial crisis (rare event) the sales will not come down for a few years due to pent-up demand

-(if sales figures are roughly right, and no foolish incentives used) FCA has still been winning little share in the U.S. as one of the only major car companies; at least it is not losing share

-EU car sales are following a similar patterns, but with a delay. Italy reached trough only 2013, and Marchionne just mentioned how quickly Europe is recovering

-FCA management has stated that they have been increasing NAFTA margins quickly, and are soon at par with peers

-Marchionne recently said that FCA 2015 earnings are going to beat market's expectations

-Marchionne seems to have traditionally underpromised and overdelivered. He just confirmed and upgraded his profit and leverage goals for 2018 (in spite of seeing what happens in China and LATAM)

 

-Removal of balance sheet cash ring fencing is maybe weeks or months away. This allows de-leveraging, and lower financing costs, halving interest costs to 2017 and beyond

-Note that "no FCF until 2018" is based on increasing volumes by +50 %; if plans are scaled down (e.g. in case of recession), FCF will probably come earlier (but smaller)

-Declining oil prices support consumers buying cars, declinig iron prices boost FCA cash flow with a slight delay

-Unlikely options include unlocking more value from the company, or a merger

-Car companies trade at little higher-than-cycle-average valuations, and FCA trades at a significant discount to peers

 

Good luck my friend.

[Phaceliacapital]

You forgot Alfa Romeo revival....