FCA’s Europe arm forecast to have break-even Q2; long-term outlook less positive

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Fiat Chrysler Automobiles is expected to report positive quarterly financial results on Wednesday as gains in North American are forecast to help offset the automaker’s slumping sales in Europe.

Demand for FCA models fell 11 percent to 524,846 in Europe during the first half of the year, according to JATO Dynamics, while the overall market declined 3.1 percent.

Evercore ISI analyst Arndt Ellinghorst said that while FCA’s European operations will likely remain in “break-even territory” in the short term he expects things to turn “more negative due to CO2 regulation in 2020.”

According to analysts from PA Consulting Group, FCA’s CO2 emissions in Europe will fall to 98.5 grams per kilometer by 2021 from 120g/km now, meaning the automaker will miss its regulatory target of 91.8g/km. This leaves FCA at risk of a European Union fine of 700 million euros ($780 million) in 2021, PA Consulting said in a report.

George Galliers, an analyst at Goldman Sachs, is also concerned about FCA’s emissions risks. “Given investment lead times, it will take time to bring the product portfolio up to date, leaving volumes, pricing and compliance at risk,” he wrote in a July 15 note to investors.

FCA plans to spend 1.8 billion euros ($2 billion) in the next three years to buy regulatory credits from brands such as Tesla to minimize the emissions-related fines it will pay in Europe.

The automaker also needs to combat a European sales slump that has affected most FCA brands in the first six months of the year.

  • The automaker’s flagship Fiat brand saw sales drop 13 percent to 366,779.
  • Alfa Romeo deliveries fell 42 percent to 29,059.
  • Maserati’s demand suffered a 31 percent drop to 3,040.
  • Jeep deliveries were up just 0.1 percent to 89,831.
  • Lancia was the only bright spot for FCA, with a 28 percent sales increase during the half.

Lancia, however, is a one-model, one-country brand, with the aging Ypsilon minicar selling 34,689 units in Italy. Yet it managed to outsell Alfa Romeo in Europe.

All of Alfa’s main models lost ground in the first half. The Giulietta compact hatchback saw sales plummet 47 percent, the Giulia midsize sedan dropped 44 percent, and the Stelvio midsize crossover was down 18 percent.

FCA has been cutting production at its Cassino, Italy, plant, which produces all three main Alfa models. According to the FIOM metalworkers union, the plant will have been idled for half of its working days through July, mainly through temporary layoffs.

Alfa Romeo was also outsold by Tesla’s Model 3, which, according to JATO Dynamics, accounted for 37,476 sales in the first half. The success of Tesla’s midsize electric sedan is actually good news for FCA because the more cars Tesla sells, the closer FCA gets to reaching its CO2 target.

FCA CEO Mike Manley told analysts in May that European passenger-car volumes in the first quarter were down “primarily as a result of discontinued models and the decision we have made to reduce dependence on low-margin channels including sales of self-registered cars.”

In the first quarter of 2019, FCA posted a 5 percent decline in revenue to 24.48 billion euros (about $27.3 billion). Earnings before interest and taxes, adjusted for exceptional items, were down 29 percent to 1.07 billion ($1.2 billion). Operating margin was down to 4.4 percent from 5.8 percent.

In Europe, the Middle East and Africa, Fiat Chrysler lost 19 million euros ($21.3 million) before interest and taxes, just its second quarterly loss since 2015.

Manley said FCA expects to restore profitability in Europe by the fourth quarter or earlier through measures including “a number of restructuring activities that begin to kick in late second quarter but into the second half.” He also said inventory reduction would be among the sources of improvement in the second half.

Analysts will be looking to see whether FCA has managed to keep inventory in check despite the sales decline.

In the U.S. FCA’s first-half sales slipped 1.7 percent, with a 28 percent jump in Ram pickup deliveries failing to compensate for declines in all other FCA brands. European brands Fiat and Alfa Romeo saw U.S. sales drop 38.4 percent and 26.3 percent, respectively.

The decline in Europe could hurt second-quarter results FCA plans to publish Wednesday. In the second quarter of 2018, the company reported a 188 million euro ($210 million) profit on 6.33 billion ($7 billion) in revenue.

Some European mass-market automakers have published positive results for the quarter and first half of 2019 despite the overall market decline.

European leader Volkswagen Group reported a 30 percent rise in second-quarter operating profit, thanks to the launch of higher-margin SUVs and an increase in volumes at its Porsche and Skoda subsidiaries. The second half will be “potentially difficult” in a “weaker market environment,” VW Chief Financial Officer Frank Witter told Bloomberg TV.

France’s PSA Group saw first-half operating profit rise 11 percent to 3.34 billion euros ($3.7 billion), with new model launches sustaining margins despite a fall in sales. PSA’s operating margin rose to a record 8.7 percent.

Renault, meanwhile, lowered its full-year revenue outlook after first-half profit was hit by weakening car demand in Europe, among other factors.

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