Chrysler Group reported an increase in modified operating profit of 21.9% to USD985 million in the second quarter, as well as a 22.1% increase in net income to USD619 million. The company also reported worldwide vehicle shipments up by 727,000 units. However, net income showed a loss of USD71 million for the first half of 2014, compared with USD673 million in the corresponding period of last year.
IHS Automotive perspective | |
Significance | Chrysler Group’s second-quarter results represented an improvement on the first quarter, without the payments required to enable Fiat to take full control of the Chrysler group being reflected; as a result, all quarterly measures increased. Net income increased 22.1% to USD619 million, while modified operating profit increased to USD985 million, also up to 4.8% of net revenue from 4.5% compared with the second quarter of 2013. Free cash flow of USD1.0 billion helped increase cash on hand (USD13.3 billion). The group reported a change from net industrial debt in second-quarter 2013 to net industrial cash in Q2 2014 (USD331 million). Chrysler Group worldwide shipments increased 10% from a year ago, to 727,000 units in the second quarter, pushing revenues up 14%, to USD20,454 million. Reviewing the first half results, however, a stronger operating profit and higher revenues were not strong enough to offset expenses, and Chrysler Group recorded a net loss of USD71 million for the first half of 2014. |
Implications | While the company saw gains on higher volumes, with stronger product mix and pricing, higher incentives on older models, higher industrial costs and advertising costs associated with the launch of the all-new Chrysler 200, and adverse currency exchange effects relative to the Canadian dollar offset those gains. While worldwide deliveries and sales are up, North America is still the group’s largest and most important market. This means the company’s increased market share for the US and Canada bodes well going forward. Incentives on “legacy” models were cited as a drag on operating profit, something that may continue into the next quarter. Refreshed Dodge Challenger and Charger do not arrive until fourth quarter 2014, with a replacement for the minivans and Journey not penciled until after 2015. |
Outlook | The increased incentive spend on older vehicles may continue to play a part in the company’s results, though CEO Sergio Marchionne and CFO Richard Palmer, in the earnings call, also indicated that focus on balancing the margin equation remains critical. Overall, Chrysler Group again confirmed its targets for 2014, including net revenue of USD80 billion, modified operating profit of USD3.7 to 4.0 billion, and adjusted net income of USD2.3 to 2.5 billion. The company did increase its forecasted worldwide vehicle shipments up from 2.8 million to about 2.9 million units; the guidance for free cash flow of USD0.5 to USD1.0 billion is unchanged, but may be revised after third-quarter or fourth-quarter results. Chrysler is now working toward ambitious goals for 2018 that require “nearly perfect” product launch execution, according to Marchionne, and would see Chrysler Group’s North American sales increase by 48% to 3.1 million units by 2018. The full process of integrating Chrysler Group and Fiat Group into Fiat Chrysler Automobiles is on track and expected to be completed by the close of 2014. It is not clear if the Chrysler Group will report separate earnings after that. |
Chrysler Group, which continues to report earnings separately from the Fiat Group, has reported a return to profitability, after reporting a loss in net income in the first quarter. The loss in the first quarter was related to a one-time payment aimed at enabling Fiat’s purchase of Chrysler and was not expected to be repeated. However, the company may not have fully recovered from that loss, as results for the second quarter show a net loss of USD71 million. Chrysler has reported a loss in net income for the first quarter of 2014 of USD690million. The company posted USD20.4billion in revenue for the quarter, a 13.7% increase over the second quarter of 2013. For the first six months, Chrysler reports revenue of USD39.4 billion, supporting its assertion that its guidance of reaching USD80 billion in revenue for the full year, presuming stronger performance in the second half of the year. In a call with analysts regarding the first quarter, company chief financial officer Richard Palmer indicated said he expected a strong second quarter, as well as benefits later in the year by the full production and distribution of the latest Chrysler 200. In the second-quarter call, he indicated that is still the case, as some costs are expected to decline and the 200 is expected to also improve pricing and mix. The operating profit increased by 21.9%, from USD808 million in the second quarter of 2013 to USD985 million in the first quarter of 2014. The increase also reflects a stronger margin, at 4.8% of net revenue in second quarter 2014 versus 4.5% in the same period of 2013. Chrysler Group has advised a target of USD3.7-4.0 billion modified operating profit for the full year, also leaving ground to recover over the rest of the year. Free cash flow totalled USD1.0 billion at the end of the second quarter of 2014 and USD1.9 billion for the first half, enabling a change from net industrial debt to net industrial cash of USD331million. Cash on hand increased by 12.0%.
Chrysler Q2 and ytd 2014 financial results (USD, mil.) | ||||||
Q2 2014 | Q2 2013 | % change | Ytd 2014 | Ytd 2013 | % change | |
Net revenues | 20,454 | 17,994 | 13.7 | 39,444 | 33,379 | 18.2 |
Modified EBITDA | 1,697 | 1,484 | 14.4 | 2,979 | 2,533 | 17.6 |
Modified operating profit (loss) | 985 | 808 | 21.9 | 2,979 | 2,533 | 26.4 |
Net income (loss) | 619 | 507 | 22.1 | (71) | 673 | -110.5 |
Cash on hand | 13,310 | 11,811 | 12.0 |
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In a statement and in a call with analysts, the company attributed the increase in revenue on the increase in vehicle shipments, including of the Jeep Cherokee and the Chrysler 200. While Chrysler was able to reverse its first-quarter net loss with second-quarter results, the first half still shows a loss. Further, while Chrysler Group claimed an increase in earnings before interest, taxation, depreciation, and amortisation (EBITDA), Fiat Group’s results showed a decline in EBIT, which it attributed in part to the increased incentives and costs (see United States - Italy: 31 July 2014: Fiat Group reports lower net profit and EBIT on higher sales volume in Q2).
Outlook and implications
Among the positive signs in the results shared from second-quarter 2014 include an increase in operating profit (to 4.8%, still below much of the competition), an overall decrease in the reliance on fleet sales, and continued increases in overall sales, with improving mix and pricing on the newer products. Fleet sales dropped to 21%, compared with 22% for second-quarter 2013 and 23% in first-quarter 2014. Fleet percentage has been highest during the first quarter over the past few years; we may continue to see Chrysler drop its fleet percentage of sales through the final two quarters of 2014. Fleet sales hit a low point in 2013 at 18% of US sales during the third quarter. Inventory in 2014 is, however, higher than it has been over the past two years, with days' supply about the same in the second quarter as the first, 72 days for second-quarter 2014. Much of the story has not changed from the first quarter to the second quarter, with the company focused on growing volume in the second half with the 200 and improving margins. As well as the increase in incentives for legacy products being a concern, Palmer mentioned balancing the increase in leasing as well, which he said has reached 17% for Chrysler in the second quarter. Palmer said again that there is some increased cost as a result of running US plants at exceptionally high capacity utilisation rates, which the company is looking to address through decreasing bottlenecks at its own as well as supplier plants. On the call to analysts, Fiat Chrysler chief executive officer Sergio Marchionne again reiterated that he does not believe increasing structural capacity through new plants is the right action, and that we should not expect increased volumes to come from increasing the number of plants. Palmer does expect to see industrialisation costs decline in the second half as Chrysler debottlenecks the system. Continued increases in sales and market share to date are encouraging, with much riding on the Chrysler 200 launch, as the 200 fills the mid-size space of both the 200 it replaced and the empty slot left in the Dodge showroom as the Avenger is out of production.
Regarding the final merger steps, in the analyst call, Marchionne said he "remains as committed" as ever. While the company’s stock has fallen over the past few days, with speculation blaming the decline on investigation into Chrysler in China and on disgruntled stockholders selling off, Marchionne said he is not particularly concerned. Most stockholders approved the merger of Fiat and Chrysler into Fiat Chrysler Automobiles on 1 August (see United States - Italy: 4 August 2014: Fiat stockholders approve Chrysler Group merger), but those who dissented have the right to exercise a put and force Fiat to buy them out at an agreed-upon EUR7.727 per share. If the total number of opt-outs exceeds EUR500 million (USD665 million), the final remaining steps of this merger will be delayed. However, in the call, Marchionne reiterated that the operational merger was complete effective from 1 January 2014, and that the company’s forward plan as laid out on 6 May does not depend on this step being completed. The effect of the merger is to provide the combined company "global presence and access to capital markets", especially in the United States.
The Chrysler Group again confirmed targets for 2014, though increased guidance for overall deliveries from about 2.8 million to about 2.9 million (see World: 7 May 2014: FCA looks to reach 7 mil. global sales in 2018 and North America: 8 May 1014: Fiat Chrysler sets new strategies for brands in North America; targets 15.5% regional market share). Guidance includes net revenue of USD80 billion, modified operating profit of USD3.7 to 4.0 billion, and adjusted net income of USD2.3 to 2.5 billion - below the USD2.8 billion the company earned in net income in 2013. The company has set ambitious goals for 2018 that require "nearly perfect" product launch execution, according to Marchionne, and would see Chrysler Group’s sales in North America increase by 48% to 3.1 million units by 2018, in a market the company forecasts to have a flat seasonally adjusted annual rate (SAAR) over the same period. The ambitions are set in terms of Fiat Chrysler Automobiles - despite the possibility of the merger hitting a snag with stockholders, the full process of legally acquiring Chrysler Group and creating a new global economic entity, as well as operational organisation, is expected to be completed by the close of 2014.