Stellantis N.V. Q1 FY2020 Earnings Call

Good afternoon, ladies and gentlemen and welcome to today’s Fiat Chrysler Automobiles Group Results for First Quarter 2020. For your information today's conference is being recorded. At this time, I would like to turn the call over to Joe Veltri, Head of FCA Global Investor Relations. Mr. Veltri, please go ahead sir.

Thank you, Jody. And welcome to everyone joining us today as we review FCA’s 2020 first quarter results. First, however, I would just like to express my personal wishes that you and all of your loved ones are safe and well during this unprecedented situation we are all going through right now. For today's call, the presentation material as well as the related earnings release can be found under the Investors section of FCA's Group website. Our call today will be hosted by the Group's Chief Executive Officer, Mike Manley; and Richard Palmer, the Group's CFO. After their initial presentation, both Mike and Richard will be available to answer the questions. However, before we begin, I just want to point out that any forward-looking statements that might be made during today's call are subject to both the risks and uncertainties that are laid out in the Safe Harbor statement, which you can find on Page 2 of today's presentation. And as always, the call will be governed by this language. With that, I'm going to turn the call over to Mike.

Yes, well thank you Joe. Good afternoon, good morning everybody. I am just going to also amend my opening to the rest of the FCA colleagues. Wishes to Joe for the opening call. Hopefully everybody in your family, as he said, are safe and well. So as customary, I'm going to take you briefly through our operational highlights for the quarter and also explain the actions we have taken in response to the COVID-19 pandemic. So firstly, and very importantly, we protect and support our employees and the communities in which we operate. Secondly, we must protect our company to ensure we transition through this crisis. Richard will then walk you through the financials in more detail. Now as you're seeing the same with many other companies, COVID-19 has had a significant impact on our Q1 results. So when Richard is taking you through, I will be back to talk about our rigorous plan for getting the business back up and running in each region and for the immediate actions that are taken to preserve liquidity and implement new safety protocols. I believe that we will emerge from this crisis stronger than ever. So now before we go through the slides, I'd also like to personally thank all of our employees for their continued dedication during this unprecedented period. The numbers of you applying your skills – …

Thank you, Mike. So just to continue on some further details on Page 6, as Mike mentioned, our adjusted EBITDA was down 95%, following the abrupt loss of volumes in March. And that led to an adjusted net loss of €471 million driven by the reduction in adjusted EBIT. Finance charges were slightly down but offset by higher taxes at an adjusted level due to the balance sheet re-measurement of our Mexican operations deferred tax liabilities as a result of the weakening of the Mexican peso. The net loss of €1.7 billion included impairment charges of €0.6 billion and deferred tax asset write-offs of €0.5 billion, mainly as a result of the estimated impact of the COVID-19 pandemic on the market outlook of the Group's operations, mainly in EMEA and Latin America. Industrial free cash flows as Mike mentioned were negative €5.1 billion, driven by the working capital absorption and increased CapEx. Our available liquidity was reduced by €4.5 billion with part of the negative cash flow offset by reduced financial services portfolio and debt insurances. The liquidity at 31 of March does not include the $3.5 billion bridge to bond facility signed on March 26 and syndicated in April with a group of 13 banks.

Thank you, Richard. So as you saw, the pandemic had a significant impact on our Q1 results. While throughout this unprecedented global event, our first priority has been the safety and well-being of our employees and local community. Our leadership team has also spent a great deal of time planning and executing on how we’re going to restart our business. And I can tell you that having worked side-by-side with the majority of this vastly experienced leadership team over the past 10 years and through other crises, I am extremely confident in the robustness and successful execution of these plans. In our plants, we’ve evaluated several thousand workstations and other work areas and reconfigured certain workstations as required as well as implemented best practices based on our global expertise to ensure maximum protection for our employees. I have made regular checks of the work being done in our Technology Center in Auburn Hills and changes will be evident to our people before they even enter the building.

Yes, thanks Mike. So, obviously, Patrick, in the second quarter, all depends on how we start up demand and particularly the plants in the key markets. I think we have a good plan for that, as Mike explained in the deck. And so, we expect to be shipping cars back into May and June. And that will allow us to start to obviously mitigate the working capital impacts that we will continue to have through the first – well, through the quarter basically with our payment days sort of on average about 60 days. We had a €3.5 billion negative in Q1. I would expect that number to be larger in Q2 as we basically run down the payables, about 75% of our payables. The rest of our payables actually included a lot of accruals and longer-dated payables for CapEx, which probably will go further out through the end of the year.

Well, I'll take the CapEx question and Richard you can take the second. Clearly, we can go much deeper than the €1 billion. We can go significantly deeper than that. Obviously what we have identified is the various triggers that we may need to pull depending on what we see developing from here so that we can, as I said before, manage our organization through this whole period. So we understand what levers to pull with everything that we are seeing in terms of our plant restart, the demand from dealers, for example, here in North America, the way the market is holding up, the way the mix favors us at this moment in time, I'm comfortable with the €1 billion, but we have obviously identified significantly deeper cuts in CapEx based upon priority and future impacts on the company.

Thank you, Mike. Jody, I think we can now open up the lines for questions, please.

We will take our first question from Giulio Pescatore from HSBC. Please go ahead.

Hello, thank you for taking my question. I would just like some clarification around the cost saving plan. I mean how much of that is linked to the government support in terms of salaries, especially in Europe? And how much of that is actually something that can be maintained beyond Q2?

Yes. Thanks for the question. Richard, I’m going to answer this one first and then where I mess up, if I mess up, you can correct me. But the €2.2 billion is really split across four key areas. Manufacturing will account for about 30% of that. Our R&D – and I talked about the postponement of the projects, around 10%. The largest portion of it is in selling expenses, marketing included, which is around 50%. And then we have 10% G&A reduction. Quite a lot of the €2 billion is structural.

No. I have nothing to add, Mike. I agree.

Thank you. Thank you for the great color. Then second one, I mean I’m very interested in this – in the changing buyer behavior that you may be witnessing as you sell more online. Do you think that this can be maintained beyond the crisis? Do you think that we’re going to see a change in the way you sell cars in terms of the mix of cars you sell? And are you witnessing anything interesting in terms of how people spend online versus the dealership?

Just a little bit of my observations on what we see. And I think what we have learned so much in such a short space of time, not just in terms of how people are buying, but in terms of how we as an organization can work very effectively and efficiently. And I think one of the things we’ve constantly told ourselves is that as we work our way through this and we understand and discover more, many of the things, I think, are going to continue to stay with us as we go forward. We have to continue to develop our muscle in terms of online retailing, not because I expect us to be in this situation again in the future, but because I think it offers our consumers such a level of customer service.

Okay. Sorry, I apologize in advance for this last one question. You mentioned that – going back on the merger with PSA, you mentioned that the deal terms have not changed. I just want to clarify. Do you mean that you don’t expect a change in the major terms so that so far there hasn’t been any discussion?

I mean, obviously, it’s very difficult for me to predict the future. But what I can tell you is that we have worked very well together on all of the elements to progress as rapidly as possible to the conclusion of the merger. And that includes maintaining our original timeline pre-crisis for all the regulatory filings and all the approvals that we need. Those have progressed incredibly well. And at this point in time, all of the terms and conditions that we agreed as part of the merger process have not changed.

Yes. Good morning. Good afternoon. Thank you. I’ve got three, if I can. The first one is how much payment to Tesla have you accrued so far this year? And how much of that is cash out?

This I am going to defer to Richard because I’m not sure we have been that explicit in terms of payments to Tesla. And if we haven’t been that explicit, we’re not going to be that explicit on this call. So that’s my cautionary note. What I would tell is that we have partnered with Tesla for a long time. It has been a very clear part of our strategy. They’re an important partner for us, and that will continue going forward with the commitments that we’ve made.

No, Mike. What I think it’s appropriate to give details like that, frankly.

Okay. All right. And I was just wondering otherwise there’s been some reports from dealers through the press about a shortage or maybe a looming shortage of full-size pickups in the U.S. Is that something that you observe where you might have the biggest opportunity to make up since you were talking about focusing on highly mixed vehicles? Do you see that shortage in your numbers?

Well, I’ve reviewed the inventory across all of our regions at the end of April. From memory, our inventory in the U.S. dropped down to something like 470,000 units. And I have not seen inventory levels that low for – well, I can’t remember when. And obviously, days supply gets distorted with where we are. But when you get down to that level of inventory, given the number of configurations on truck, you’re bound to be running short of certain high-volume truck configurations.

All right. And if I can squeeze, the last one was, we have this kind of shock update from Manheim on used prices in mid-April, which is misleading because there was no market basically. As we see more dealers re-open, et cetera, what do you see right now in terms of both pricing on used cars but also demand as an indicator of the health of the market?

Yes. According to our portfolio, we are seeing a short – I believe a short-term 8%, roughly 8% to 10% reduction in terms of residual values going through the auction. I do believe it is relatively temporary. We will see what happens in terms of potential stimulus around the world because that can, as you know, distort the traditional volume of new to used. But I think, at this moment in time, I tend to view that as relatively temporary.

Hi, everybody. And first I want to offer my thoughts on the impact on FCA. I know you’ve lost several souls, and I wanted to share thoughts there. I’m sorry. With the opportunity to score, Mike, Richard, any message you wanted to convey to regulators, particularly in the United States, but also in Europe perhaps, on what the industry might need short-term, not limited to cash for clunkers, but things of that nature, any thoughts on what we might need – what the consumer might need into the summer as we start to thaw on the restrictions?

Thank you, Adam. This is Mike, and I personally and from my colleagues, appreciate your comment. Unfortunately across our growth, we have lost 22 colleagues to this point, and their families are in our thoughts and will be in our thoughts for many, many years to come. And to your specific question, I think, they are going to be – I think there has to be two things that the regulators are looking at. Firstly, I do believe medium – a medium-term stimulus, people talk about infrastructure – infrastructure investment. I think that is a – I would probably classify that as a slow burn, but is always one that benefits many different industries.

Thanks, Richard. Thanks, Mike.

Thank you. I want to acknowledge the unprecedented nature of this event and all the hard work our people are doing to adapt in these challenging times. We are confident that we will navigate through this and emerge successfully.

We will take our next question from Martino De Ambroggi from Equita. Please go ahead.

Thank you. Good morning, good afternoon everybody. Back to your presentation in June 18 when you presented a slide with the industry downturn 30% across the board, unfortunately, this seems to be the case this year. And I was wondering if you could update this sensitivity because I suppose that the decline is so sudden but you are probably not the same – we are not proceeding at the same speed as the decline in the market to get the same sensitivity you had in projected – you have projected in 2018, assuming 13% decline for the market.

Yes, hi this is Mike. Rich, I'll go first and you moderate. As I mentioned, we have run numerous scenarios not just to check our liquidity but also to continue to work that we had started in prior years in terms of driving down our breakeven. We believe our breakeven is actually marginally below that. And if you looked at all of the projections that we have seen, including our internal projection for this year the industry was 30%, job is not going to get anywhere close to that break even, which is why I mentioned before the cash stress test that we've done at 50% reductions of industry. So hopefully that answered the question, Martino.

Yes. And on the cash flow, I suppose the reduction of €1 billion in CapEx could be for probably the first step, but can be reduced further in case of need. And still on the free cash flow, you commented net working capital. I was wondering if among providers and dealers there is some action you need to support some of them?

Well, I'll take the CapEx question and Richard you can take the second. Clearly, we can go much deeper than the €1 billion. We can go significantly deeper than that. Obviously what we have identified is the various triggers that we may need to pull depending on what we see developing from here so that we can, as I said before, manage our organization through this whole period. So we understand what levers to pull with everything that we are seeing in terms of our plant restart, the demand from dealers, for example, here in North America, the way the market is holding up, the way the mix favors us at this moment in time, I'm comfortable with the €1 billion, but we have obviously identified significantly deeper cuts in CapEx based upon priority and future impacts on the company. Thank you, Richard. So as we wrap up the call, I cannot stress enough our number one priority has been and will always be the safety and well-being of our employees and our communities. And after taking a hard look through our cost base, we’ve developed an action plan that is expected to net over €2 billion of operating cost savings in 2020.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.