Thursday, 21 August 2014

Companies Focus – The Global 11 Automakers – Vis a Vis Recent Market Correction

Greenspan's use of the phrase “irrational exuberance” before 2008, has now become a hackneyed phrase almost seared into capital markets' mass consciousness.

However since 2009 bottom, whilst feverish in its first rebound phase, thereafter the ever rising main western stock indices in the USA, UK and Europe have experienced slower but still powerfully strong upward trajectories, but critically these have been logically generated trajectories given the impetus of US, UK (and Japanese QE) along with critically a largely positive “dashboard” of still fragile but confidence ratifying economic indicators.

Given the initial scale of the rebound, as critical has been the cautionary manner by which professional investment organisations have periodically “taken profits” so creating 'corrections', and critically utilised such price drops as re-buy opportunities; often so from an enlarging cash-pool from various client sources, the re-growth of private and company based pension scheme contributions a primary conduit.

For some months previously throughout May and June the financial press had been highlighting the danger of apparent irrationality of high averaged index P/E figures, though generally not stating how such high valuations had been heavily skewed by the “tech-story” effect, whilst ironically recognising the irrationality within the intrinsic dynamic of the web-tech sector itself. this effect obviously very much USA centric.

Nonetheless, across the western hemisphere, given that the 5 year rally has whilst endemically powerful also been largely conservatively driven, with it seems even the notional “early bird / catch the worm” speculators actually staying on-board for longer given the rising tide effect of what has been much reduced volatility and the general rise in most financial instruments given the massive amount of liquidity being force-fed then 'taper' drip-fed into US, UK and Japanese economies.

Given the success of previous QE programmes, juxtaposed against the EU's present contracted growth dilemma, it is almost unthinkable that the ECB would not now instigate its own closely monitored programme now that the painful but required path to economic reform is now under-way.

Exempting the obvious 'global agenda' vagaries of Wall Street's unflinching over-support for California's tech-sector, it appears that overall western 'real world' economic traction though slow is sustainable.

This exemplified by instances of corporate share buy-backs highlighting the manner in which large companies themselves seek to balance labour rates against CapEx against their own desire to build internal reserves given their own international M&A and organic growth ambitions.

This in itself an argument for general confidence amongst various investor types.

Of greatest obvious impact since 2008 have been periods of heavy geo-political headwinds, Europe suffering most with at first the 'sovereign debt crisis' of 2010-11 (itself presenting a golden buy opportunity) whilst over recent months the much increased social and military tensions across the buffer nation that is Ukraine and the Middle East (Gaza and Iraq) have undermined near-term confidence.

The Ukraine issue with its low probability but high impact long term potential to fracture the inter-relationships of Euro-zone member states immediately created concerns for EU - Russia trade relations, leaving Germany most exposed given its importation of energy and exportation of vehicles, industrial tooling and chemicals. This in turn undermining internal investment confidence across the German economic engine and the other core nations of France and The Netherlands.

Middle Eastern tensions are of more immediate but remote affect the US, given its close ties to Israel regards Gaza, and a desire to defend via proxy actions the flow of energy interests in the Middle-East. Though of less pronounced impact upon its own stock indices given the combination of homeland economic re-strengthening and exposure to many EM markets via its conglomerates.
Thus we note that European stocks have contracted most so over preceding months – see attached chart for the effect on Autos – potentially offering a new buy opportunity. That opportunity now seemingly availed with the easing of Ukraine tensions through consolatory words by President Putin.

As stated for many years now by investment-auto-motives, investors today sit within an unparalleled new world era of western rebuild, BRIC rebound and broad EM growth.

Furthermore, for the west, and Europe in particular, this economic process now effectively underwritten by administrative policies and actions given the still existent debilitating economic stresses which exists for much of the western populace: from Southern Europe's ex-middle class to the renewed social spark in Ferguson, Missouri.

Though presently socially unpleasant, it is within this continued 'society rebuild' context that investor confidence appears wholly sustainable.

And so to this crucial juncture.

Prior to the provision of 'Coupled Ratios Analysis', investment-auto-motives will simplistically convey the 'drop from the top' that has been witnessed amongst the 'global 11' auto-makers.

Price and % Drop

                  of of 20.08.14

GM                    $38.........$33.11 (-13%).......$34.57 (-9%)
Ford                  $17.75....$16.82 (-5%).........$17.36 (-2.2%)
FIAT-Chrysler  €9.00......€6.85 (-24%).........€7.20 (-20%)
VW                  €195.......€165 (-15%)..........€172 (-12%)
BMW               €95.50....€86.90 (-9%).........€88.55 (-7%)
Daimler             €70.........€59.50 (-15%).......€61.10 (-12.7%)
Peugeot*          €11.50....€10.00 (-13.5%)....€10.60 (-7.8%)
Renault             €72.........€59 (-18%)............€59.30 (-17.6%)
Toyota**         $130.......$116.70 (-11%).....$117 (-10)
Honda**          $42.........$34 (-19%)............$7.90 (-18.8%)
* Peugeot previous high measured within period after Dongfeng dilution
** Toyota and Honda measured from 'Abenomics' induced high

The attached chart illustrates the above.

It demonstrates how the 'Detroit 2' have remained relatively unscathed, GM's drop the internally created micro-consequences of the massive recall. European producers now climbing back from macro-surpression. Japanese having to re-climb primarily via operational efforts with reduced domestic assistance. S.Korean experienced no negative fall given upturn in S.Korean economy.

Monday, 11 August 2014

Companies Focus – The Global 11 Automakers - Q2 2014 Results...Part 3

The last portion of VM Q2 reports and assessment. Further to the previous highlighting of respective Q1 positioning, below are the continued summaries and associated analysis which will allow for the plotting of Q2 based 'Coupled Ratios' analysis.

Provided relative to the respective release schedule below:

Previously -
Daimler: 23.07.2014
GM: 24.07.2014
Ford: 24.07.2014
Hyundai 24.07.2014

Herein -
Honda 29.07.2014
Renault 29.07.2014
Peugeot 30.07.2014
FIAT-Chrysler 30.07.2014

To Come -
Volkswagen 31.07.2014
BMW 05.08.2014
Toyota 05.08.2014

Details of the remaining three follow.

Volkswagen Group-

Unit Sales:
Q2 2,645,000 (vs 2,498,000 Q2 '13) +5.9%
H1 5,207,000 (vs 4,873,000) +6.8%
Q2 €50.977bn (vs €52.122bn) -2.2%
H1 €98.808bn (vs €98.687) +0.1%
Q2 €3.33bn (vs €3.437bn) -3.1%
H1 €6.186bn (vs €5.78bn) +7% [exc €2.6bn China JV equity income]
% of Rev:
Q2 6.5% (vs 6.6%)
H1 6.3% (vs 5.9%)
Q2 €4.42bn (vs €3.93bn) +12.4%
H1 €7.777bn (vs €6.62bn) +17.5%
H1 7.9% (vs 6.7%)
Net Income:
Q2 €3.249bn (vs €2.847bn) +14.1%
H1 €5.716bn (€4.793bn) +19.3%
EPS (ord):
Q2 €
H1 €11.33 (vs €10.04)
Net Liquidity
H1 €13.979bn (vs €11.313bn) [vs €16.9bn YE2013]
Operating C-F
Q2 €6.167bn (vs €4.904bn) +25.2%
H1 €8.388bn (vs €8.431bn) –0.5%
Free Cash Flow
Q2 €2.97bn (vs €1.645bn) +80%
H1 €2.92bn (vs €1.23bn) + 238%

- flat H1 YoY sales revenue because of negative € FX effects
- Chinese JV income and 'other' assisted PbT and Net Profit
- Scania share-hold acquisition..budget balanced by...
- issuance of Pref Shares and Hybrid Note
- worldwide deliveries surpass global TIV growth
- face-lifted Jetta / Toureg / Golf 40th
- S7 variant of A7 / Leon CUPRA / Cayman GTS, Boxster GTS
- previews of new TT cross-over variant
- preview of possible Bentley Mulsanne 'plug-in hybrid'
- anti-trust probes (VW, BMW, Daimler, FCA)

By Division:


VW Group H1 Deliveries vs TIV growth / unit sales by region -
North America...-3.2% vs 4% / 422k (vs 450k previously)
South America... -20.2% vs -11.2% / 368k (vs 485k)
Western Europe...7.1% vs 5.5% / 1,695 (vs 1,586k)
Mid and Eastern Europe...6.3% vs -3.3% / 344k (vs 326k)
Asia-Pacific...15.9% vs 9.2% / 2,138k (vs 1,810)
Rest of World...-5.5% vs -0.9% / 213k (vs 224k)

H1 Unit Sales / Revenue / EBIT by brand (vs H1 2013) -
VW...2,302k (vs 2,376k) / €49.26bn (€50.36bn) / €1.01bn (vs €1.494bn)
Audi...750k (vs 692k) / €26.69bn (vs €25.234bn) / €2.67bn (vs €2.644bn)
Skoda...426k (vs 362k) / €5.974bn (vs €4.966bn) / €0.425bn (vs €0.243bn)
SEAT...258k (vs 244k) / €3.95bn (vs €3.63bn) / €-0.037bn (vs €-0.040bn)
Porsche...89k (vs 78k) / €8.162bn (vs €7.025bn) / €1.398bn (vs €1.294bn)
Bentley...6k (vs 4k) / €0.887bn (vs €0.69bn) / €0.095bn (vs €0.058bn)

Commercial Vehicles:
H1 Unit Sales / Revenue / EBIT by brand (vs H1 2013)-
VW...221k (vs 220k) / €4.724bn (vs €4.777bn) / €0.280bn (vs €0.246bn)
Scania...38k (vs 38k) / €5.067bn (vs €5.095bn) / €0.476bn (vs €0.464bn)
MAN...58k (65k) / €6.7bn (vs €7.63bn) / €0.222bn (vs €-0.124bn)

VW China
(not included in Group figures but calculated as equity method contribution)
FAW + SAIC...1,847k (vs 1,517k) / revenues n/a / €2.622bn (vs €2.370bn)

Financial Services:
H1 Revenue / EBIT
VW FS...€10.423bn (vs €9.688bn) / €0.776bn (vs €0.696bn)

Group Total
H1 Unit Sales / Revenue / EBIT (vs H1 2013) -
5,207k (vs 4,873k) / €98.808bn (vs €98.687bn) / €6.186bn (vs €5.780bn)


Deliveries expected +4.9% to 9.731m units
Revenues expected +2.2% to €197bn
Operating RoS expected -0.1% to 5.9%

we expect..
- to moderately increase deliveries yoy in 2014 in a still challenging market environment
- 2014 sales move within a range of 3% around previous year, depending on conditions
- Op RoS between 5.5 - 6.5% (Cars division similar)
- Op RoS for Commercial Vehicles + Power Engineering to moderately exceed 2013
- Op RoS for Financial Services between 8 - 9%


As seen, the ideal for any global VM is to gain both from the rising tide of growing regions so as to counter-act the negative headwinds of any other contracting regions. This should but, does not always, promise favourable revenue earnings in growth markets, especially so if a firm's own competitive position 'on the ground' is not at or near its own 'sweet spot'.

H1 for VW Group may be regarded as only semi-successful, given that the 4% market uplift in N. America did not directly feed into overall VW Group sales. Instead VW N.A. seeing overall sales reduction, due to much declined Golf / Beetle / CC, marginally reduced Jetta / Passat, slippage of Tiguan / Toureg and end of life for the (Chrysler JV assembled) Routan. Declines were also seen across the model board at Audi in the USA for A4 / A5 / A6, though fortunately the introduction of A3 provided much uplift as did the flat yoy trend for Q5 and 9% rise in Q7 sales.

Nonetheless, the perfect storm of: a) the buoyant but pressurised sales environment (including sooner incoming new models from BMW and Mercedes-Benz), b) VW's desire to maintain unit pricing on current models so as not to undermine later new model launch and c) reduced demand for 'personal' cars such as Beetle and Eos, took a toll on overall sales performance.

Positive market out-performance across the whole of Europe and Asia (China specifically) did help counter-act US market headwinds, supporting the overall +5.9% rise in Q2 world sales and the +6.8% for H1.

[NB of the BRIC nations, Brazil 301k units (vs 370k) -18.7% , Russia 143k (vs 156k) -8.4% , India 34k (vs 50k) -33%, China 1,814k (vs 1,544k) + 17.5%].

Unfortunately, these increased unit sales, primarily in a still price-bound Europe and price-sensitive Asia, did not translate directly into equivalent revenue rises, as seen by the -2.2% yoy revenue intake in Q2 and the virtually flat-lined +0.1% in H1. Nonetheless, the balancing of additional CapExR+D against operational savings provided H1 operating cash-flow of €8.4bn; primarily boosted in the Q2 period (worth €6.16bn). CapEx as a % of Revenues for H1 was 4.1%.

As the above figures demonstrate, the H1 top-line and EBIT income was undermined by VW passenger car sales to the tune of €-1.1bn vs previous year, this counteracted by the increased Asian popularity of Audi drawing in an additional €1.46bn yoy.

Like the Porsche 918 hybrid hypercar concept, the preview of the 'eco' orientated plug-in Bentley Mulsanne hybrid concept highlights VW's dedication to becoming recognised as a leading light in eco-luxury. The subtle use of copper detailing as an aesthetic metaphor for the conduit of electrical energy, a suitably understated differentiator.

Acquisition of Scania truck shares expended €-6.5bn of liquidity, this temporary loss of liquidity regained from: issuance of additional preferred shares + issuance of Hybrid bond + equity capital increase at VW Financial Services + transfer of MAN AG Financial Services equity into the Group.

By way of a subtle demonstration of slightly improved Q3 and H2 economic and sales expectations, it was noted that Q1 and Q2 saw a small rise in production numbers over sales numbers, so providing small surplus added to dealer inventories of 9k units in Q1 and 4k units in Q2. This of particular note compared to Q2 2013's overtly lean “one out, one in” inventory replacement policy. Thus we see the tentative yet erratic beginnings of a 'loading-up' process of dealer inventory in anticipation of increasing demand for 'in-stock' vehicles for quick delivery. The small surplus also presumably highlighting Volkswagen's desire to tightly manage and maintain a 'price-floor' of per unit margins. This also seen through media advertising on Golf, with the humorous “you get what you pay for” campaign.

Creating demand and supply inelasticity so as to support new model pricing and used car residuals and thus a virtuous circle of valuations is obvious positive for the medium and long terms. Yet, this deliberate control of price policy has short-term drawbacks if the model mix is not strong, as viewed in N. America, where VW seeks to not follow the pack with sales incentives, as it has in the past to its detriment. This denting sales and so impacted overall unit contributions. But, positively, the major lift in Chinese demand (25%) provided the anti-cyclical basis by which US and (later) European 'pricing floors' can be implemented, so boosted tomorrow's unit margins and overall RoS.

Thus it appears VW has been willing to experience near-term pain (where others have undoubted gained market-share) in order to gain longer term value.

BMW Group-

Unit Sales
Q2 €19.905bn (vs €19.552bn) +1.8% yoy
H1 €38.140bn (vs €37.098bn) +2.8% yoy
Q2 €2.603bn (vs €2.066bn) +26%
H1 €4.693bn (vs €4.104bn) +14.4%
Q2 €2.660bn (vs €2.032bn) +30.9% yoy
H1 €4.826bn (vs €4.035bn) +19.6%
Net Income
Q2 €1.771bn (vs €1.392bn) +27.2% yoy
H1 €3.233bn (vs €2.704bn) +19.6% yoy
EPS (ord)
Q2 €2.69 (vs €2.11) +27.5%
H1 €4.91 (vs €4.10) +19.8%
Q2 n/a
H1 €10.62bn (vs €8.072bn)
Operating C-F
Q2 n/a
H1 €1.896bn (vs €2.253bn)
Free Cash Flow
Q2 n/a
H1 €1.3bn (vs €1.673bn)

- H1 record for BMW and Rolss-Royce vehicle sales
- significant rise in Group PbT
- non-FX influenced revenue +5.2% (vs stated +1.8%)
- Q2 Europe & US launch of advanced i3
- H2 China launch of advanced i3 (after Euro,US, Japan)
- Q1 launch of 2-series Active Tourer / 4 series convertible
- Q2 launch of facelift X3, X4 and Mini
- Q3 launch of M4 and Ghost II
- plans to rebalance production and research...
- per geographic sales (China, S.Korea, USA)
- new in-car tech ventures (eg JustPark)
- China anti-trust probes (VW, BMW, Daimler, FCA)

By Division:

Deliveries Q2 / H1 by brand
458k (+8.3%) / 886.3k (+10.2%)
74k (-10.4%) / 131.9k (-11.4%)
Rolls Royce...
1.071k (+28.6%) / 1.968k (+33.4%)
533.18k (+5.3%) / 1,020k (+6.9%)

Deliveries Q2 / H1 by region
Europe 232k (vs 229.5k) +1.1% / 446.19k (vs 436,71k) +2.2%
Americas 121.4k (vs 117.4k) +3.5% / 221.28k (vs 213.86k) +3.5%
Asia 164.36k (vs 142.72k) +15.2% / 322.94k (vs 272,94k) +18.3%
RoW 15.4K (vs 16.75k) -8% / 29.8k (vs 31k) -3.9%
Total 533.19k (vs 506.32k) +5.3% / 1,020.21k (vs 954.25k) +6.9%

Revenues Q2 / H1
18.504bn (vs €18.201bn) +1.7% / €35.063bn (vs €34.108bn) +2.8%
EBIT Q2 / H1
2.161bn (€1.755bn) +23.1% / €3.741bn (€3.335bn) +12.2%
Op C-F Q2 / H1
1.370bn (vs €2.378bn*) -42.4% [first use *IFRS adjusted]
3.502bn (vs €4.349bn*) -19.5% [first use *IFRS adjusted]
FCF Q2 / H1
n/a / €1.032bn
CapEx H1
2.58bn (German plants) +8% rise yoy and a CapEx to Revenue 6.8%
EBIT Margin Q2 / H1
11.7% (vs 9.6%) / 10.7 (vs 9.8%)
RoS Q2 / H1
12.2% (vs 9.1%) / 11.1 (vs 9.3%)

Deliveries Q2 / H1
42.26k (+5.1%) / 70.98k (+9.3%)
Revenues Q2 / H1
0.528bn (vs €0.475bn) 11.2% / €1.0bn (vs €0.911bn) 9.8%
EBIT Q2 / H1
0.055bn (€0.046bn) 19.6% / €0.119bn (€0.097bn) +22.7%
Op C-F Q2 / H1
n/a / €1.896bn
Free Cash Flow Q2 / H1
EBIT Margin Q2 / H1
10.4% (vs 9.7%) / 11.9% (vs 10.6%)
RoS Q2 / H1
10.2% (vs 9.5%) / 11.7% (vs 10.4%)

Financial Services
Contracts Q2 / H1
380,842 (vs 388,290) /
Revenue Q2 / H1
5.155bn (vs €5.058bn) / €10.045bn (vs €9.888bn)
EBIT Q2 / H1
0.459bn (vs €0.468) / €0.924bn (vs €0.918bn)
Op C-F Q2 / H1
n/a / €-0.941bn (vs €-1.527bn)

Global expectations of FY2014 are that the global economy grows at approximately 2.9%. Of this:
China 7.4%, India 5.3%, USA 2.2% (higher probable), Japan 1.5%. Brazil 1.2%, Europe 1.1%.
Within Europe the UK highest at 3.0%, Germany 2.0%, Spain 1.1%, France 0.9%, Italy 0.4%. Russia falters at 0.4% given current affairs impact.

Automotive markets' TIV expected as: Global 3.2% (+12.7m units). Of which USA 3.9% (reaching 16.2m), China 12% (18.3m), In Europe: Germany +1.6% (reaching 3m), France 3.5% (reaching 1.8m), Italy 4.1% (1.4m), UK 6.1% (2.4m), Spain 15.4% (0.83m). Japan -8.9% (4.8m), Russian -4.7% (2.5m), Brazil -10.3% (3.2m).

Motorcycle markets simply described as showing revival in 500cc+ segments after years of decline and stagnation.

Autos CapEx for FY2014 expected to exceed previous >7% guidence, but below 8.8% of FY2013

We expect that the high levels of expenditure on future technologies, intense competition and higher personnel expenses will again have an adverse impact....Nonetheless BMW Group forecasts another successful year with PbT signifacntly up on previous year's €7.913bn


Whilst top-line income grew very moderately as expected, it has been the major jump in in Q2 EBIT of 26%, boosting the yoy H1 revenue rise to 14%, that will have surprised many. That translated to PbT increase of near 31% for Q2 and near 20% for the half year, and into respective 27% and 20% rises for Net Proft.

These figures demonstrate how BMW has gained momentum on two fronts. Firstly, as a relative late entrant into Asia / China compared to Audi and Mercedes-Benz, it could be argued to hold a slightly greater degree of comparable attraction to these important markets (though sales growths remain comparible). Secondly, throughout the western down-turn BMW set itself the task of “coming out of the stalls” strongly. This gained not only from the strong open taps of new US demand, but exploited well with perceptively different new vehicle portfolio, with both new series identification system, which highlights the separateness of coupes and convertibles so providing pricing elasticity, and thus allows for a wider range of variant possibilities within more mainstream model series.

This act has essentially re-cast BMW for future opportunity.

From an historical perspective, unlike the more disparate vehicle divisions of Daimler and VW, BMW has been adroitly positioned since the beginning of the modern global economic boom; starting in early1980s America, spreading to Europe by the late 1980s, into Eastern Europe by the mid 1990s and onto BRIC and other EM regions since.

Though a partial cliché in the west (so assisting Audi and Mercedes sales), its performance engineering prowess and now entrenched legacy means that it remains a powerful staple symbol of the aspirational lifestyle, upper level models such X6 and 'halo' M-series variants as acting as the BMW brand's ambassadors regards the mass-premium of 3-series and below.

Thus as a (perhaps 'the') reference-point symbol of an ever growing, ever wealthier world – though temporarily impacted by the 2008 financial crisis and its global repercussions – the core BMW division continues to thrive.

The acquisition and deployment of both Mini and Rolls-Royce provided for broad client demographic coverage, the seemingly ever expanding model ranges of all three marques providing for captive and migratory buyer choices within the group. The creation of eco-centric iBMW with small i3 citycar and large i8 GT coupe does likewise.

Hence BMW group continues to evolve its business base simply but very effectively.

Though its innate 'brand equity' is primarily drawn from the ethos of “the ultimate driving machine” - as applied to rear-wheel drive cars with unadulterated front steering - the social cache of the badge has become so powerful in its own right it is now viewed as able to ( and at last, to necessarily) deploy front-wheel technology; for more recent consumer interest in more spacious smaller cars.

Hence new 2-series Active Tourer (a full 20 years after BMW first started exploring the idea via FWD Rover Cars, and given adoptive credence via Mini stable-mate and Mini platform technology).

Though unstated, this fringe re-formatting of the still instrinsically dedicated BMW technical package was required to :

a) enter the monospace sub-segment with 2-series Active Tourer
b) compete with Mercedes A and B class at premium end
c) beat Audi's expectantly matured bigger A2 / gain conquest sales from high-trim VWs
d) allow BMW to possibly partner in future with other manufacturers in this sub-segment
e) expectantly gain from worldwide (esp EM) demand for roomier small cars
Thus, though presently possibly viewed as an oddity by BMW purists, now that the badge has become far more than the literal sum of its technical parts, the departure into 2-series is as market relevant as the previous 1999 departure into X5.

And the fact that 2-series Active Tourer appears within the same time-frame as more radical i3 and i8 is no doubt wholly strategic so as to highlight its relative conventionality compared to the truly different /advanced.

Toyota -
(Q1 2015 – Apr to June 2014)

Unit Sales
2.241m units (vs 2.232m previous year) +9k units
¥ 6,390.6bn (vs ¥ 6,255.3bn) +2.2%
¥ 692.7bn (vs ¥ 663.3bn) +4.4%
Net Income
¥ 587.7bn (vs ¥ 562.1bn) +4.6%
EPS (ord)
¥ 185.43 (vs ¥ 177.32) + ¥8.02
Net Liquidity
Operating C-F
¥ 692.7bn (vs ¥ 663.3bn) + ¥ 29.3bn
Free Cash Flow
Margin on Net Income
9.2% (vs 9.0%)

- After effects of 'Abenomics' still evident but much weakened
- especially so upon home turf, still +ve elsewhere
- positive FX effects of weaker Yen vs $ and €
- FX + cost-savings + finance instruments off-set...
-...poorer volume / model mix and higher labour and research costs

By Division:

Cars -
by region

Unit Sales / Op Inc Margin %
Revenue /EBIT

506k (vs 526k) -20k / 11.1% (vs 13.2%)
¥ 3,296.5bn (vs ¥ 3,456.1bn) / ¥ 365.9bn (vs ¥ 456bn)
North America
710k (vs 689k) +21k / 6.6% (vs 4.9%)
¥ 2,259.1bn (vs ¥ 2,105,2bn) / ¥149.7bn (vs ¥ 103.5bn)
207k (vs 193k) +14k / 1.7% (vs 0.9%)
¥ 650.6bn (vs ¥ 596bn) / ¥ 10.8bn (vs ¥ 5.3bn)
385k (vs 394k) -9k / 9.2% (vs 8.6%)
¥ 1,197.4bn (vs 1,218bn) / ¥ 110.3bn (vs ¥ 104.1bn) +¥ 6.2bn /
(Central + S. America, Oceana, Africa and Mid East)
433k (vs 430k) +3k / 5.8% (vs 7%)
¥ 591.9bn (vs ¥ 608.9bn / ¥34bn (vs ¥42.5bn) -¥ 8.5bn /

¥ 5,914.6bn (vs ¥ 5,817bn) +1.7%
¥ 586.7bn (vs ¥ 608.4bn) – 3.6%

Financial Services -
¥ 377.4bn (vs ¥ 339.9) +11%
¥ 98.2bn (vs ¥ 51.3bn) +91.6%

Affiliated Companies -

¥ 105.3bn (vs ¥89.9bn) + ¥15.4bn
of which
Japan ¥ 68.7bn (vs ¥65.2bn) + ¥3.5bn
China ¥ 27.9bn (vs ¥16.4bn) + ¥11.5bn [sales of 228k vs 185k]
Other ¥ 8.6bn (vs ¥8.1bn) + ¥0.5bn


Toyota's updated FY2015 global forecast expects to see a total of 9.1m units sold; similar to previous stated expectations. Of these the company expects to experience stagnant demand in flat-line Japan (2.21m), a +90k unit improvement in N. America (to 2.71m), a +10k unit growth in Europe (0.860m), Asia to see a loss 0f -50k units (to 1.58m) and RoW similar -50k loss (to 1.74m)

Correspondingly, line item forecast remain constant. Net Revenues at ¥ 25,700bn (flat) , Operating Income (EBIT) at ¥ 2,300bn (+0.3%), Net Income of ¥ 1,780bn (-2.8%), Net Margin at 6.9%. These figure very close to the FY2014 results. Likewise R+D and CapEx both remain constant, respectively at ¥ 960bn and ¥ 1,020bn, illustrating an upward rebound rise since 2011.


Compared to the initial massive boost effect of a very much weakened Yen and last year's +14% revenue boost and +88% EbIT boost, the present Q1 2015 growth of 2.2% and 4.4% respectively appears very pedestrian.

However, the situation may be read as the remit of Abenomics being to put Japanese firms simply 'back on course' having been previously hit by an unsurpassed multiplicity of challenges, from the 2008 western collapse to the natural disasters which shut-down both domestic and prime Asian operations aswell as the China Sea island tensions. Given the scale of headwinds Abenomics was seen by Japanese executives as simply “re-levelling the global playing field”.

Hence, with such “Q1 2015” results (as per Q2 2014), Toyota could be viewed as having returned to an approximate of normality, with 1.7% increase in turnover, even if EBIT reduced by -3.6% because of overhead increases.

Given the generally improving but still fragile mainstream auto markets, as for all auto-makers, that return to a much desired 'normality' is an unusually lengthy and volatile a process.

Japan sales decline with buyers seeking lower value models hurt local EBIT. N. American sales growth coupled with cost-saving exercises boosted local EBIT. European proporitionately small sales growth together with cost-savings more than doubled local EBIT. Asia sales decline more than off-set by combination of Yen positive FX effects and cost savings. RoW saw flat-line sales yoy, yet EBIT contracted notably, the result of reduced local production and weakened local currencies; (Toyota seemingly seeking to post-pone local demand until negative FX effects shift).

Regards Financial Services, it was actually the 'fair value' recorded valuation gains of interest rate swaps amongst Toyota's sales financing subsidiaries that gave the large EBIT boost. So although revenues increased 11%, profitability buoyancy did not derive directly from increased lending balance (“loan book”) or simply the translational effects of generally stronger foreign currencies. Thus whilst 'fair' so as to mark-to-market, also an accounting ploy to revitalise the division and counter loss of consumer and business finance momentum in Japan.

As for products, the company obviously still deploys its reputation for styling conventionality alongside its eco-credentials as the biggest hybrid vehicle producer; the landmark series of Prius models, which enabled volume scaling of batteries and energy management systems, now wholly cross-pollinated with most of the mainstream models as standard or option depending on market: Camry, (not Avensis), (not Verso), Civic, Auris and Yaris, with the smaller, lighter Aygo and iQ deemed presently in no need of hybrid drive given standard higher fuel efficiency and obvious package constrained system installation issues, instead suited to pure EV.

So as to avoid the Toyota brand becoming perceived as overtly 'eco' (with inherent dangers of hybrid vehicle commoditisation) the company has been in recent years seeking to recapture its previous RWD performance spirit of the 1980s (TA22 Celica GT, AE86 Corolla, MR2 and Supra). Hence the previous release of the affordable RWD GT86 and the latter FT-1 concept as larger coupe; possibility envisaged in possible production as a curvaceous competitor to the more brutal Nissan GT-R.

As per new 'youth orientated' 'X-face' Aygo, investment-auto-motives suspects that given a similar 'X-face' PR “teaser” images from Volkswagen's SEAT division, that either:
a) SEAT seeking to gain conquest sales from the Toyota, or more possibly...
b) VW and Toyota possibly in secret talks to create a youth orientated JV business model.

This is pure conjecture, but such a scheme might be a cost-effective, shared risk approach to gaining the custom of what is a harder to reach and convince, reduced driving generation. The precedence for Toyota is that of the previous and present PSA JV for Aygo / C1 / 108, an alliance which has fulfilled its strategic intent as has the Suburu JV on GT86 / Scion FRS / BRZ. Thus search for a new or additional European partner to offer a 'Euro-Scion' type of car or range appears within the bounds of possibility.

For VW, doing so would bolster the improving but problematic SEAT. Resulting in both companies attracting the 17-30 aged 'cyber-youth' (17-30) with X-face, whilst and separately attracting the older 'young at heart' groups with a dynamic value for money offering with evolved 'razor' styling. Combining dual personas across both brands to reduce individual cormpany's CapeX and boost sales volumes.

A mutually arranged sharing of 'X-face' would need to be explored properly, not only regards production, but also possibly singular or complementary on-line marketing channels, and indeed possibly as shared sub-brand and with dedicated secular JV commercial entity. (Having first learned the lessons of GM's Saturn and Scion USA itself).

This is presently pure conjecture from investment-auto-motives, and requires major research, but appears a plausible strategic avenue for mutual exploration by both companies.

Post Script –

As press reports intimate, China's recent announcement of anti-trust investigations into foreign multi-national companies – with car-makers' alleged price-fixing of parts – does indeed appear to be yet another episode of less than subtle industrial policy.

Initial reaction is to see the move as a providing advantage to China's home-grown brands, as part of a wider rebalancing of cross-sector market-shares, so as to aid domestic firms as part of a 'great rejuvenation'.

However, in real terms closing the pricing-gap (between typically better quality foreign badged cars vs lesser quality domestic badged products) only serves to increase pressure on Geely, BYD, Great Wall et al, since the rational to buy domestic diminishes.

investment-auto-motives believes that the intended impact is not in fact simply to scold the foreign interests of Sino-foreign enterprises, but to drive a one or two-fold gain.

1. price deflation
2. option of expanded consumer tax

Firstly, forced price reductions obviously creates internal price deflation across the auto-sector, affecting initially those foreign brands, but latterly domestic brands as they seek to maintain the price gap which for them beholds a value offering. So price-cuts pushed down to Tier 2 suppliers, all to advantage of the end consumer.

Secondly, to aid national or state-wide budgeting, the resultant price reductions in each sector could be partially or wholly absorbed by additional consumption taxation. Thus, the public gains with either a slightly price reduction, or at worst a “price-stabilised” product, whilst the government gains income and public favour.

So, under the banner of Chinese nationalism, either singularly or combined, points 1 and 2 “rejuvenate” domestic momentum.

The anti-trust moves seen thus far have been set against the likes of BMW, Daimler and Jaguar Land-Rover, marques that essentially operate in a luxury class of their own, so any price reductions would ironically be to the gain of China's wealthy, who themselves have seen their own apparent progress slow as the economy cooled. Cheaper luxury cars would off-set any possible loss of motivation.

Lowering the cost of component input prices (Daimler posits -15%) obviously lowers the BOM (bill of materials) and thus provides for greater ex-factory pricing elasticity. This in turn enables pricing flexibility down-stream, amongst distributors / dealers, their own intermediate-level purchase costs determined by scale economy reductions. Those per unit savings either wholly or proportionately passed onto the end buyer.

Previous press reports highlighted China's continued over-production and so over-supply of input materials - especially so in steel. It was envisaged by investment-auto-motives, and mentioned in this web-log at the time, that this had been sanctioned so as to create a lower-cost materials input base, by which Sino industry could flex its own intermediate and consumer prices to expectantly generate additional household demand as income and savings were re-directed away from the property bubble and to high and mid-price consumer durables.

With the PRC's approval, even with current general over-capacity, the Sino-foreign joint ventures continue their capacity expansion projects largely located in Western and Southern China. And so obviously require pseudo-massaged distributor, dealer and consumer demand. Official demands for orchestrating reduced input prices allows for this; and so promotes aspirational consumerism to the gain of both JV partners.

[NB It should be remembered that foreign car-makers receive their quarterly income not as cash earnings, but either as dividends or as equity revaluation, both typically determined by the Chinese partner].

The country's leadership well recognises that it must delicately manage the present ' economic tight-rope' period given contraction in Asian and EM directed exports, and restrictions in state administration spending given the municipal credit bubble.

Ultimately, such state imbued 'invisible' transfer-pricing directly into the marketplace is simply part of the overall economic rebalancing. This, as well recognised by all, toward greater internal private demand vs previous overt reliance on now slowed infrastructure expenditure and previous dependence upon low low-value / low margin exported goods (the export rebound seeking to create higher value)

Monday, 4 August 2014

Companies Focus – The Global 11 Automakers - Q2 2014 Results (thus far)...Part 2

As the successive adjunct to a previous detailing of Q1 positioning, below are the continued summaries and analysis commentary to date from most recently availed Q2 reports.

Provided relative to the respective release schedule below:

Previously -
Daimler: 23.07.2014
GM: 24.07.2014
Ford: 24.07.2014
Hyundai 24.07.2014

Herein -
Honda 29.07.2014
Renault 29.07.2014
Peugeot 30.07.2014
FIAT-Chrysler 30.07.2014

To Come -
Volkswagen 31.07.2014
BMW 05.08.2014
Toyota 05.08.2014

Honda -
(Q1 2015 = Q2 2014)

Unit Sales
Group Level: 6.708m (across motorcycyles, cars, power products)
Consolidated: 4.862m (across motorcycles, cars, power products)
Group Level n/a
Consolidated ¥2,988.2bn (+5.4%)
Group Level n/a
Consolidated ¥198bn (+7.6%)
Net Income
Group Level n/a
Consolidated ¥146.5bn (+19.6%)
EPS (ord) ¥81.29 (+¥13.32)
Net Liquidity ¥1,084.4bn (-5.6%)
Operating C-F ¥58bn (EBIT - ¥140bn CapEx)
Free Cash Flow ¥13.5bn
Profit Margin 6.6%

- EBIT gains driven by volume and model mix
- boosted by replacement and all new model launches in Japan and Asia
- positive FX impact of weaker Yen vs US$ and €
- overhead cost-down exercises
- increases in SG/A costs
- increase in depreciation charges for new plant start-up
- CapEx reduced by 18,2% yoy

By Division:

Geographically, Honda saw its operating income and margins in Japan remain flat, that of N. America contract, Europe substantially improve but just below break-eve, Asia improve substantially and ROW decline.

Motorcycles -
At the Group Level 4.137m units (+2%), whilst at Consolidated Level 2.457m units (+3.6%). Revenue ¥407.7bn, EBIT ¥ 43.9bn (+3.3%), Operating Margin 10.8% (from 10.7)
Sales in Japan dropped to 48k units (from 54k the previous year), N. America was flat at 62k yoy, Europe up to 60k (from 52k), Asia up to 3,593k (from 3,479), RoW down to 374k (from 407k).
India proved the greatest demand driver, with the well entrenched Activa, CB Shine and Dream Yuga selling well. However other EM regions such as Thailand, Africa and S. America saw sales falls. Capital Expenditure fell to ¥8.8bn (from ¥12.5bn a year previously)

Cars -
At the Group Level 1.061m units (+6.2%), Consolidated Level 0.895m units (up +4.3%).
Revenue ¥2,319.5bn, EBIT ¥99.8bn (+3.6%), Operating Margin 4.3%
Sales in Japan grew well to 202k units (from 140k a year previous), N. America contracted -3% to 445K (from 459k), Europe flat at 40k yoy, Asia at 316k (from 285k), RoW down to 58K (from 75k).
The cross-segment effects of a remodelled Fit (Jazz) B-segment car and Odyssey mid-size MPV plus all new N-WGN kei car and Vezel cross-over boosted Japanese sales, whilst D-segment CRIDER sedan and Jade estate/wagon was favoured in China.
CapEx reduced to ¥129.8bn (from ¥155.4bn)

Power Products -
At the Group Level 1.51m units (-5%), Consolidated Level likewise.
Revenue ¥77bn, EBIT ¥2.3bn (+77%), Operating Margin 3.1 %
Generally, an increase of small engine sales to OEMs in Japan as prime component parts for various applications at 68k units (from 63k), but decrease for similar in N. America at 773k (from 828k), and a decrease in engine sales for agricultural uses across Thailand and Indonesia, creating Asian contraction at 336k (from 364k).
CapEx reduced to ¥1.8bn (from ¥3.3bn)

Financial Services -
At the Group Level the full vale of total subsiduary inclusive assets rose to ¥8,009bn (+ 11%).
Revenue ¥189.3bn (+12.5%, EBIT ¥51.8bn (+16.1%), Operating Margin 27.4%
CapEx grew to ¥0.1bn (from ¥0bn a year previously)

Announced Outlook:

Honda Motor views the FY2015 financial year (running March '14 to March '15) as promising the following: net sales ¥12,800bn (+8.1%), EBIT ¥755bn (+3.6%), operating margin of 6%, equity income of affiliates ¥155bn (+17%), net income ¥600bn (+4.5%), EPS ¥332.91 (up ¥14.37).

This based upon essentially flat cross-divisional sales: Motorcycles -0.9%, Cars flat 0% and Power Products -0.2%.


Like all Japanese auto-makers, Honda has sought to re-orientate itself toward the advantages of pan-Asian market expansion. This seen by the manner in which specific model names (City and Mobilio specifically) have been applied to enlarged vehicle packages from over successive generations so as to move lock-step with improved populace purchasing power and desire for enlarged size and comfort from small city cars to sub-compacts

India's previous upward market dynamic from the Suzuki Alto based Maruti 600 to newer larger models reflective of the general pan SE Asian trend, yet recognised as within the lower-cost category. This seen by Honda's 'dedication' of the new sub-compact Mobilio 7-seat estate/wagon for Indonesia (derived from the Brio), even if intentionally priced at the higher end of 'lower-cost'.

Though somewhat blighted by the damaging sales reduction impact of the previous geo-political impact of the 'island tensions' in 2013, the present dispersal of the military concern has buoyed important China market sales.

However, N. America obviously still retains market importance, especially so at present. Thus Honda has chosen to be more brazen about pricing elasticity on run-out models such as 'old' Accord, seeking to boost volume sales in a still value conscious market versus Camry, Fusion, Malibu and Chrysler 200. Beyond pricing regards product function added-value, Honda has sought the provision of low cost 'lifestyle solutions'. The 2014/5 Odyssey Minivan is fitted with an optional stow-away vacuum cleaner within a rear internal trunk panel: a simple but very effective USP that recognises the lifestyle and profession requirements of its users, from that of young families' to courtesy-car drivers.

As for Honda's executive presented FY2015 'outlook' of essentially flat overall sales expectation appears slightly conservative. This given the slightly more subdued but still healthy uptick in N.America, a well managed “soft landing” at 7.5% growth in China and what looks to be a well executed effort to re-align corporate transitions (and new enterprise opportunity) away from state-power links, which in turn bodes well for the pan-Asian supply chain and so pan-Asian economies.

However, slightly greater confidence is shown within the financial forecast, with Revenue +8.1%, EBIT + 3.6% and Net Income +4.6%. Furthermore the overall reduction in CapEx, Depreciation and Research/Development should conserve ¥26bn.

Renault -
(only H1 figures reported,
so, calculated as H1 - Q1 = Q2)

Unit Sales 729,759 (1,365,998 - 636,239) [H1 +4.7%]
Revenue €11.56bn (€19.820bn - €8.257bn) [H1 -3%]
EBIT €0.232bn avg (€0.464bn / 2 quarters) [H1 +270% approx]
Net Income €0.4005bn avg (€0.801bn / 2 quarters) [H1 +900%approx]
EPS (ord) €2.75 [H1]
Net Liquidity €-0.970bn (from €1.742bn year previous) [-55%]
Cash at Hand €11.3bn (+€0.6bn over H1)
Operating C-F €-123.5bn (EBIT - [€0.711bn / 2 quarters])
Free Cash Flow €-0.36bn (from €-0.031bn year previous) [>-1000%]


- negative H1 € currency headwinds (€800m in variance analysis)
- positive ongoing 'monozukuri' cost-down efforts to off-set FX effect.
- ongoing deployment of 'push-pull' inventory ordering to 'wave balance' overall stock levels across independent and group dealerships

By Division:
Automotive -
Although registrations grew 4.7% over H1, Autos revenues actually fell by 3.3% to €18.739bn vs €19.383bn a year previously. Since the Q1 report showed Autos revenue of €7.727bn, it is calculated that Q2 offered an improved turnover of €11.012bn.

Of H1's 4.7% worldwide increase in car and LCV registrations (vs 4.1% TIV), Renault saw a majority of 11 country gains amongst its 'top 15' countries; its top 2 regions, France and Brazil offering the best revenue stream marriage of improved volumes and market-share.

Though a problem previously during the EM good times, Renault's still overtly Euro-centric template (representing 57% of all sales and 10.2% market-share) experienced a strong overall boost +18% yoy. It gained 2.3% share in France, able to reach 27.3% domestic sales share. So overcoming losses in other regions. Eurasia -7%, Euro-Med-Africa -15%, the Americas -2% and Asia-Pacific -12%. However, Turkey (Oyak-Renault) saw small marginal gains, as did S.Korea (Renault-Samsung). Russian sales (via Avtovaz) stayed flat yoy.

Critically for H1, whilst the yoy sales growth of Renault badged vehicles has been effectively flat (at 1.063m units), the loss of yoy sales across much of the range has been partially countered by the newer compact cross-over Captur. However it seems Dacia's 24.4% increase (to 263,311 units from 211,607 previously) substantially supported the bottom-line, given the high 'in-built' margins (via amortised components and lower fixed and variable costs) of the Romanian company's business model.

However, as was the strategic intention when Renault-Nissan was created – to create an pan-regional and anti-cyclical entity – it was Nissan's contributions of €0.415b in Q1 and €0.374bn in Q2 that has been of crucial support.

In a similar manner, but closer to home, in order to create an off-set business model during these uncertain times, Renault has sought to create what it calls a 'virtuous' network of sales channels, with proportionate sales between private retail and fleet, and lesser to rental companies and others.

Financial Services
RCI Banque saw a revenue improvement for H1 to €1.081bn from €1.058 a year previously. Given that RCI's Q1 revenue was €0.53bn, its Q2 turnover is obviously calculated as €0.551, showing a 4% improvement.

Now operating as a banking entity taking deposits under the ZESTO name – operating beyond conventional auto financing and insurance realms since 2012 – RCI has gained account deposits of €5.107bn, primarily from German customers (75% or so of savings base), French customers and now as of May 2014, a new avenue of Austrian savers.

Announced Outlook:
Given the challenges previously faced by mainstream European VM firms from 2009 onward, it was little surprise that reporting and guidance transparency was generally opaque. However, Renault's previous non existent, then scant, guidance has now taken on a more cautiously optimistic expanded manner for H2:

Positives - reduced headwinds by € FX effect, ongoing operational cost-down efforts”.

Negatives – European market momentum*, ongoing EM regional decline, product life-cycle effects”

[NB * investment-auto-motives recognises that for “Euro markets momentum” Renault actually sees it positioned as a mid-positioned, unavailable 'amber light'].

CEO and Chairman Ghosn and his executive Board do however state that...

In the first half, trends in the Group's key markets were contrasted”. While its main emerging markets were slowing down, the European market recovery was stronger than foreseen. In this still uncertain environment, the Group expects a continuing decline in the market of its emerging countries, but upgrades its previous 2014 expectations for the European market at 3-4%, from 2-3% previously”.

Renault confirms its guidance:
- increased registrations and Group revenues (at constant FX rates)
- improved Group and Auto Division operating profit
- achievement of +ve Autos FCF


Renault's model range maintains its conventional hatchback's with Twingo, Clio, Megane, and its lead in compact MPVs with Scenic. Megane and Scenic however have become 'long in the tooth'. Newer Twingo has from its inception been under pressure from competitors (eg Hyundai i10, Skoda Citigo) hence the rational for its shared-costs development work with Daimler, thus projected volume sales may be problematic outside of France. Positively however, though late by sector standards new Captur provides for an “urban cross-over”. The modus operandi being to intentionally arrive 'late' so as not to cannibalise Nissan's European sales of Juke, and to also critically deploy much of Juke's (Clio shared) amortised platform and components for the seemingly “all new” vehicle; so able to boost per unit ex-factory margins. Reports indicate that sales-wise across Europe since Q4 2013, it now leads its sibling models Juke and Dacia Duster, and badged as the Samsung QM3 is expected to sell well locally given renewed S. Korean economic strength.

The Dacia brand continues to demonstrate its worth as the value-marque during these value conscious times. The highly positive customer reaction to Duster since 2010 demonstrates its relative uniqueness. Though conventionally engineered from a car platform, its SUV-like character (rather than that of softer cross-over) and relative 'on-demand' off-road capability appeals to a broad section of buyers, from suburban families seeking more on-road presence, spacious functionality and winter safety, to small enterprise 'tradies' (plumbers, carpenters etc) choosing its comfort, style and (construction site) useful 4WD. over that of a small van; a similar need to those (farmers and others) who live in the countryside.

Thus Renault-Nissan holds the top three best-selling cross-over/SUVs in Europe, with the possibility that ex-Juke owners seeking a change opt for Captur or Duster, so retaining much of the customer-base.

Critically (unlike Daimler's constant reporting of its Van division) Renault's H1 presentation failed to spotlight the importance that its LCV division plays. Renault is a European sector leader providing obviously own-branded vans of Kangoo, (Dacia) Dokker, Trafic and Master rebadged as Nissan when useful (eg Interstar). Moreover, Trafic is also licensed to GM's Vauxhall-Opel so bring-in either per unit royalties or an annual license fee.

Since during any economic upturn, van sales volumes gain from the commercial imperative to order LCVs, as opposed to the typical latter wave of private car sales.

Somewhat hidden away within accompanying earnings report, a list of H1 registration and productions statistics was provided. This showed:

- Kangoo +6.7% (74.4k units vs 69.7k year previous)
- Dokker +28.5% (27.9k units vs 21.7k)
- Trafic + 11.8% (35.1k units vs 31.5k)
- Master -2.5% (43.8k units vs 44.9k)

[NB Master now under greater pressure from Merrcedes Sprinter and VW Crafter]

Given the headwinds presented by the ongoing FX effect of the comparitively strong Euro, Renault's executive team may well be hoping that the ECB's “Draghai's Put” will be brought into play to provide an export earnings boost from Chinese JV equity contributions, continuing Nissan contribution primarily from N.America and its own portion of non-European sales.

Whilst overall unit sales have suffered in S. America and Central America, with Renault's sales down likewise, it has managed to pick-up market-share with obviotus marketing exercises such as the 'GT-Line' (Renault badged) Sandero, so offering the appeal of value and apparent sportiness.

Whilst Renault is well placed to enjoy the European economic revival, when finally under-way, given its updated model range and prevelence in compact cross-over/SUVs, the equity market's general confidence – seen in Renault's high p/e levels – has been premature; hence the unsurprising stock correction upon H1 earnings release.

Peugeot SA-
(only H1 figures reported,
so, calculated as H1 - Q1 = Q2,
or as Autos and Parts+Financial Services)

Unit Sales
Revenue (Cons) €14.3bn (H1 €27.616bn – Q1 €13.3bn) [H1 -0.44%]
EBIT €0.2385bn (H1 €0.305bn + €0.172bn = €0.477bn / 2 qtrs) [H1 >+600%]
Net Income €0.1885bn (H1 €0.207bn + €0.17bn = €0.377bn/ 2 qtrs) [
Consolidated €0.021bn (H1 €-0.145bn + €0.103bn = €-0.042bn / 2 qtrs)
EPS (ord) €-0.25
Net Liquidity €11.872bn (from €9.91bn year previously)
Operating C-F €0.83bn (H1 €1.66bn / 2 qtrs)
Free Cash Flow €0.755bn (H1 €1.514bn / 2 qtrs)

- agreement of new €3bn syndicated credit facility in April
- negative € FX impact for H1 of €251m
- favourable impact of pricing policy, model mix, profit channels
- France and Italy market share beats national TIV uplifts
- H1 China launch of 2008 and DS5 LS / H2 China launch DS6 WR
- H1 Europe launch of new C1 and C4 Cactus / H2 Europe 508
- reduced 2014 CapEx to >7% (thereafter 7-8% of revenues)
- vehicle inventories in midst of reduction (valued €4.5bn in '13, €3.5bn '16)
- Banque PSA alliance with Santander in Europe

By Division:
Autos -
H1 revenues of €18.61bn, which when Q1 revenues of €8.925bn are subtracted, shows €9.685bn for Q2. H1 Operating income of €0.007bn, when divide over 2 qtrs showed €0.0035, impacted by the H1 €-0.1bn special item charge for restructuring costs. PSA's variance analysis shows that the general operating environment gave a headwind of €-0.333bn, but more than countered by internal gains of €0.878bn for the H1 period.

H1 Worldwide sales up +5.5% to 1.541m units. Of which: Europe +11.7% to 956k units, China and SE Asia +27.7% to 360k, Latin America down -26.8% to 107k, Eurasia down -26.5% to 27k, India and Pacific down -3.7% approx 10k, Middle East / Africa down 37.2% to 82k. Altogether, ex Europe 'International' sales contracted by -3.2%.

Components -
Faurecia had H1 revenues of €9.328bn, which subtracting Q1 revenues of €4.518bn, shows Q2 of €4.81bn. H1 revenues marginally improved by +0.68%, with EBIT improved by €0.055bn to €0.266bn.

Financial Services -
Banque PSA had H1 revenues of €0.848bn, which subtracting Q1 revenues of €0.418bn, shows Q2 of €0.43bn. H1 revenues down by €-0.04bn, with EBIT down €-0.026bn. Its penetration rate dropped by 1.4% to 27.3%, whilst the number of new lease and finance contracts fell by 15,039 to 360,781, as the total outstanding loan value contracted by €0.5bn to €21.9bn.

Consolidated -
As reported excludes €0.121bn H1 income from China's DPCA and CAPSA alliances, which when re-merged shows Net Income of €0.1885 + €0.0605 = €0.249bn. The major item of note is the rise in FCF at €1.514: primarily consisting of: €1,459bn Faurecia provision + €1.139bn in Autos working capital + the large equity derived cash injection of €2.944bn. Set against primary cost of CapEx of €1.159.

Announced Outlook:
In 2014 PSA expects to see automotive demand increase by around 3% in Europe and 10% in China, but decline some 7% in Latin America and around 10% in Russia”

It is aiming to deliver recurring positive Group operating free cash flow by 2016 at the latest, and an aggregate €2bn in Group operating free cash flow over the 2016-18 period. It is also targeting an operating margin of 2% in 2018 in the Automotive division, with the objective of reaching 5% over the period of the next medium-term plan, covering 2019-23”


PSA executives note the need to alter the dealer forecourt vehicle inventory management of independent and group dealers. Previously old stock had accumulated through the downturn with governmental eco-schemes to support national auto-sector also adding an influx of new capacity so raising to inventory levels to record highs. Now that that the pressure to “sell, sell, sell” has retracted somewhat, the value of lower inventory levels should be seen in policy-driven “floor pricing” on new models, which provides for improving stable units margins and so better dealer relationships.

Renewal of the model range will continue to improve sought modernity. Peugeot and Citroen, respectively gaining evolutionary and revolutionary aesthetics befitting respective brand values, whilst DS (yet to be properly dealer differentiated in Europe, though so in China) continues its unique cosmetic path.

The perennial b-segment hatchbacks (208 / C3) though face-lifted in 2013 appear “long in the tooth” because – as with many auto-makers - of necessarily postponed new model capex budgeting. Previously, limited CapEx was directed at what PSA recognised as immediate requirements. Such as that pertaining to urgent a-segment replacement in its JV with Toyota, and the need to maintain its leadership within the important compact-MPV class.

These efforts have resulted in the new C1, which sought to adopt and merge the now segment endemic retro-face (from upscale Mini and 500) into an own-brand avant-garde aesthetic (see C4 Picasso). That avant-garde cosmetic extended yet further with the more radical C4 Cactus, a new variant-themed sibling to C4 Picasso. C4 Cactus is essentially the C4 MPV morphed into Urban SUV, presenting itself with 'impact-capable' front, rear and sides, door skins wearing external “impact pads” which though do offer some protection, in reality have been created to mimic the touch-pad and screen-icons effect of personal mobile devices, so engendering similar user attachment and affection within customer psychology.

So the b-segment and c-segment model line (C3/208 and C4/308 continues to develop onward from previous hatchback and MPV variants, to today for Peugeot include 'mono-boxes' with respectively cross-over influence (5008/3008/2008), and for Citroen, now 'style-SUVs'. (The 'Cactus' cosmetic far more convincing than that of the necessarily cost-constrained C3 Aircross of Latin America).

Thus with a broader portfolio of plausible variants providing enhanced product characterisation, able to support higher volume sales, PSA is now able to more cost effectively deploy its developed dual-axle powertrains: either conventionally so with an ICE based 4WD system to reduce costs and increase acceptance in EM regions, and for mature markets and higher price point eco-models (as with 3008Hybrid4) the hybrid-driven alternative.

Given the critical nature of the Euro LCV market to Peugeot, vans have been partially highlighted in H1 results, with the statement that PSA retains its LCV l;eadership with 21.2% share.

However, in March (whilst European TIV is still slack) it was seen that China had become PSA's lar gest market, this well anticipated in advance given the prime focus on China for some years, and a timely point for Dongfeng's 14% equity investment. The 360k units sold in H1 represented 4.2% market share (up from 3.8%). DPCA announced its plan for a 4th SUV dedicated factory, whilst CAPSA to see 60 dealers by beginning of H2.

Whilst extending its credit facility by €3bn in April, an exercise that went hand-in-hand with the new shares and warrants created, PSA recognised the complimentary need to build its liquidity reserves in cash and marketable securities, so has over the last wisely boosted the total from €9.91bn to €11.872bn. Even if (as likely) European market demand does indeed grow as predicted, the terrain will be very competitive, especially vis a vis Renault, thus a portion of this sum may then be deployed for both necessary sales incentives to maintain and grow market share,  to allow working capital to feed the business growth path, and latterly enhance share dividend.

The major present drawback for PSA is its still uncompetitive labour rates overhead (labour costs equal to 15.1% of revenues in 2013), with plans to reduce that figure to <14 .5="" 11="" 2014="" 2015.="" all="" and="" benchmark="" font="" in="" level="" oems.="" of="" relative="" the="" to="">

However, whilst its 'social contract' with the unions promises to see high-cost seniors replaced by lower-cost new employees, investors would expect to see greater transparency in wage cost structures, specifically that of specific skills-based accordant grading, and the implementation of the now industry standard 'bankable hours' approach, critically imposed at the individual factory level; so as true truly reduce labour rates. Otherwise the present 15.1% will simply be seen to fall as a function and consequence of general economic growth and improved production capacity utilisation.

FIAT-Chrysler -

Unit Sales 1.2 units(+2%) [vs 1.159 previous year]
Revenue €23.328bn (+5%) [vs €22.281]
EBIT €0.961bn (inc €0.004 special items) [vs €1.073bn]
Net Income €0.197bn
PbT €0.455bn [vs €0.556bn]
EPS (ord)
Net Liquidity €18.7bn
Operating C-F €0.6bn
Free Cash Flow

- May SOP of all new Chrysler 200
- this the 3rd model from 'US compact-wide' platform
- Chinese agreement with GAC to produce 3 Jeep models in 2015
- July €850m corporate bond issuance (4.75% coupon) matures in 2022
- SEC administration undertaken for establishment of FIAT-Chrysler Automobiles NV
- 'FCA' NYSE exchange listing planned for October 2014
- improved volume and mix (with higher retail)
- legacy product incentives undermined raised (feature-enhanced) new product pricing
- improvements undermined by industrial costs, SG/A, R+D, 'unusuals' and € FX effect
- Jeep US sales +28% yoy, Ram has (ten year) record sales
- H2 Jeep expansion in China (Cherokee Trailhawk,
- Q3 SOP of Dodge Challenger SRT

By Division:

Autos -
Q1 geographic deliveries / revenues / EBIT as:
NAFTA - 627k units (+2%) / €12.258bn (+7%) / €0.598bn (-18%) (with 4.9% margin)
EMEA - 286k (flat) / €4.61bn (-3%) / €-0.006bn (-0.1%)
LATAM 203k (-21%) / €2.188bn (-23%) / €0.062bn (-72%) (with 2.8% margin)
APAC 54k (+42%) / €1.522bn (+34%) / €0.106bn (+20%) (with 7% margin)
Luxury brands 11k (165%) / €1.406bn (+59%) / €0.166bn (+58%) (11.8% margin)

A summary focus upon the leading region shows that the NAFTA region saw Q2 TIV gains in USA of 0.3m units (+7%) with FIAT-Chrysler gaining 13% uplift in sales. Canadian TIV grew by 0.02m units (+4%), with the company gaining +6% sales increase. FIAT-Chrysler, now at 12.1% US market share, has gained 1.5% share since Q2 2011. At 15.3% in Canada, it has gained 0.4% over the same period. Unsurprisingly, pick-up trucks lead sales growth, up +10% in USA and +7% in Canada vs 4% growth in US cars and stagnancy in Canadian cars.

Likewise focus on Asia-Pacific (given present complementary support) shows overall regional TIV up 0.5m units yoy (+9%), Sales gains seemingly well in excess of TIV growth, since from low sales base. General growth in China, India and S. Korea over-coming declines in Japan and Australia.
FIAT-Chrysler's country by country market-shares of: China 1%, India 0.3%, Japan 0.4%, Australia 3.9%.

EMEA (Europe, Middle-East and Africa) has seen marked improvements, with EBIT rising from €-69m in Q2 2013 to €-6m today, one year on. Broad Euro TIV increased by 40k units compared to Q2 2013, reaching 450k, though Italy faired 'flat' yoy. In this environment the company took 13% of Euro share (a declining dynamic since Q2 2011's 14.5%), but gains in homeland Italy to 44.5% (re-reaching in Q2 2011 mark). The combination of improved sales volume / model mix (500 family, Jeep and LCV [esp large van Ducato]) and industrial cost savings outpacing falls in net pricing and SG/A. The intense pricing competition amongst mass vehicle producers undermined the positive pricing effects of LCVs. Ducato is presently the #1 European large LCV with 25.7% share. Improved JV results and non re-occurrence of 'unusual items' helped to lift profitability to just below break-even.

Expectantly, the new confidence in western economies, especially within financial and property service sectors, helped boost the luxury cars division' top and bottom lines.

Ferrari shipped 1,932 street cars (-2%) but with better mix and pricing. Though stated as “capped volumes to maintain exclusivity” this total also reflects the off-setting of new N.American demand (+18%) versus the socially conscious surpression of conspicuous consumption in China (-12%). Europe down -3% and Asia down -10%. However, the client demand for large margin V12 cars (F12 Berlinetta and FF) grew by +1% excluding the unstated, but highly positive contribution, from the limited series LaFerrari 'hyper-car'. Ferrari revenue of €729m (+16%) and EBIT of €105m (+9%).
Maserati delievred 9,491 units, +400% yoy increase due to new Quattroporte and all new lower segment Ghibli. N.America took 3,500 vehicles, whilst China took 2,600, Europe 1,700 cars. Maserati revenues of €738m (+162%), with EBIT of €61m (vs €9m previous year).

Components -
(Magneti Marelli – Lighting, Electrics and Electronics, Powertrain)
(Teksid – Castings of Iron and Alumium)
(Comau – Production Processes)

Overall revenues of €2.074bn (-2%), EBIT of €0.060bn (2.9%)
Magneti Marelli: revenue €1.592bn (vs €1.587 year previous), EBIT €0.05bn (vs €0.049bn).
Teksid: revenue €0.166bn (vs €0.189), EBIT €-0.001bn (vs €0.001)
Comau: revenue €0.336bn (vs €0.358bn), EBIT €0.011bn (vs €0.010).

Consolidated -
As is present obvious constant in the auto-industry, North America continues to do much of the 'heavy lifting' regards group turnover and net income, with the China element of Asia providing complimentary support, ultimately providing a 5% uplift in global turnover. EBIT however down overall by -10%. Thereafter a hike in US 'book basis' taxation (from 22% to 57%), affected more so, this though counteracted by general decline (esp NAFTA) of cross-regional special item charges.

Announced Outlook:

Confirmation of FY expectations given May 6th -
- global deliveries of approx 4.7m units (vs previous 4.55m)
- revenues of €93bn
- EBITwithin €3.6-4.0bn range (exc special items)
- net profit of €0.6-0.8bn
- EPS of €0.44 - €0.60
- net industrial debt €9.8 - €10.3 range


Since Marchionne's pronouncement of the necessary 6m unit 21st century volume manufacturer, Chrysler has, chunk by chunk, become ever more integrated within FIAT. The theoretical last hurdle to the full acquisition was overcome just a few days ago, when (as a formality) over 80% of FIAT shareholders attending the required meeting approved.

Previously, Chrysler's resuscitation process - within the re-expanding but still very competitive automotive world – was kick-started by Washington's relaxed inward direct investment policies, Capital Hill's financial assistance, and union recognition that its members would be best served by VEBA stake-hold release; so as to entice a new set of private and institutional American investors via the NYSE; so far beyond the liquidity limits of Milan and Europe.

As part of that process Marchionne has sought to demonstrate the apparent strategic potential of an operationally and geographically re-balanced and revitalised entity. Named FIAT-Chrysler Automobiles NV using corporate registration in the Netherlands, it is to be officially established as an improved 'going concern' having already gained from the much re-strengthened US economy.

The showcasing of apparent global future potential came via the presentation of ambitious pan-geographic growth targets, associated brand sales, their revenue impact and investor appeal. This rightly gained a mixed reaction regards the feasibility of implementation from investment analysts.

Response was that whilst appreciating the rising tide of NAFTA sales,and those of a slower re-bounding Europe and eventual returned strength of EM regions, and that FIAT obviously has the necessary industrial small car and LCV competence, the process of actually gaining such sizeable new conquest sales elsewhere around the globe would prove tougher than the rebounding of already established markets.

The FIAT board must convince investors, and understandably views its ploy - the ability to use the income of one economically strengthened region to gain market-share in the next upturn region – as wholly logical.

However, whilst the company has a long precedence in EM regions / RoW markets, given licensing history of its products (to many such as India's Premier and Poland's Polski) with today full ownership of Serbia's Zastava brand, the FIAT brand today may well lack the level of 'brand equity' (ie presence and associations) enjoyed by various of its international competitors.

Although the 500 has re-energised the FIAT brand in Europe and to a degree in the N.America amongst private buyers, its European LCVs through 'Professional' are regaining status, and the inalienable fact that FIAT is #1 in Latin America (though likewise vulnerable), elsewhere around the globe it must essentially re-connect (possibly re-invent) itself to become meaningful.

The theory to this re-invention process appears well under-way, with the investor presentation describing the continued strategic deployment of a dual aspect marque personality. That of extending and translating the dualistic product design DNA (ie 500 chic vs Panda FUNctionality) into dealership layouts. As seen, the 'chic' element also conjoined by the sporting Abarth moniker, this intentionally the bridge to Alfa Romeo.

As a child of FIAT's own historical cyclical fortunes, Alfa Romeo has yet to properly re-start a new growth phase. The b-segment Mito and c-segment Giulietta deployed as core mainstream market income providers and brand representatives during the western recession., whilst the limited series, mid-engined sportcar 4C seeks to convey the purist performance 'halo' with associated high-value price point. Alfa's future execution is vitally important if the brand is to gain true premium status, by balancing probable new cross-over product stream income with brand integrity, and so FIAT-Chrysler gain associated high unit margins. A case of wait and watch business model developments.

Little needs to be said about the luxury division's Ferrari and Maserati, given the capable manner they have been run, especially that of Maserati's expanded range with Ghibli (see respective income above).

[NB investment-auto-motives suspects that FIAT-Chrysler will deploy the aluminium-steel Ghibli structure for future Alfa Romeo models in the similar exec-class size and also for “specials”. Just as Jaguar has gained strong learning in volume aluminium vehicle production, so Alfa Romeo must likewise. Thus the production learning of relatively low volume Maseratis will be transferred into higher volumes using latest learning production methods and tools (assisted by JLR) via Comau and others, so as to provide Alfa with the necessary technical standing. The exact proportion of aluminium to steel is expected to alter relative to model type and respective volumes, lower-end Alfas with more steel content, whilst future Maserati's gain ever more aluminium and composits].

As well understood by Marchionne et al, for the near to medium term, beyond the US rise in Chrysler cars and higher margin Ram truck sales and the slow but welcome rebound of Europe, it is worldwide brand power of Jeep that offers good potential.

Jeep now offers a broad model range with target customer appropriate styling and packaging, its small urban vehicles wisely echoing Wrangler for innate brand appeal, their 'boxy' functionality and perceived durability. Of course, internationally, much relies upon Jeep, able to leverage its historical and iconic presence across Asia in the post WW2 era, both as the Willys original, as well as the various 'domesticised' models in India, China born from licensing rights aswell as the Philippines' own re-invented Jeepney.

However, as to how FIAT and Chrysler badged models will fair in international markets (esp India, SE Asia and Africa) given the stiff competition from Japanese, S.Koreans and now Detroit counterparts (such as Ford's efforts in Africa), is presently questionable.

The concern is that FIAT and Chrysler will not able to generate the necessary 'brand equity'. This obviously home-grown over a long period, through sustainable vehicle engineering and product design quality and through powerful on-going marketing messages – both aspects well understood by Marchionne. If unable to simultaneously improve and attract – so creating a virtuous circle of sales and re-investment – inevitably a company eventually becomes involved in local market price wars which, even if funded from the profits of other regions, obviously slowly undermines investor rational.

FIAT's historical presence and immense success in Brazil since the 1970s might appear to to the investment community that the Turin company has the perfect credentials to conquer EM and RoW markets. Yet it should be recognised that this success was born from very accommodating Brazilian industrial policy-setting, then reaching-out to counter the in-market dominance of VW, GM and Ford and critically to expand the country's then fledgling automotive base. Conversely, today within a new-order world, indigenous industrial policy power is very much in the hands of EM governments (hence the central idea of the “BRIC Bank”) and increasingly so (with BRICs assistance) within those of newer 'Pioneer' countries.

Thus, FIAT's continued EM success story will very much depend upon a government relations as well as the critical mix of product quality / integrity, “in-market” corporate dedication and the ability to create deep brand connection.

For mainstream markets (beyond Jeep) whilst better research, development and production approaches and executive will can be proactively applied, the latter aspect of 'brand connection' will require a more sensitive and exacting approach. Case studies across automotive and FMCG sectors to do so will be sought out.

The obvious case-study is that of the Japanese adoration for “retro Euro chic”' especially original Minis and Cinquecentos. Whilst that has and will continue to serve well amongst a a small select sliver of trend-setting EM buyers – themselves promoting such purchases to aspirant others -
as time passes even seemingly pertinent yesteryear “cultural contexts” and USPs (ie the 1950s/60s Italian Romanticism of 'La Dolce Vita' or the 1930s American glamour and prowess of the Chrysler Building) may well become more culturally remote as EM people's look to their own self-built consumer culture futures.

Thus, new ideologies of indigenous “future chic” will need to be created – that story partially seen to date in the designer-fashion clothing sector.

But, vitally important for mainstream volume vehicle sales, it will be the ability to find the appropriate local culture 'brand hooks' for dependability, practicality and charcaterisation (ie FUNctionality) in products and their marketing that will be critical to reach the broad mosaic that is the EM mass customer base.

FIAT's May investor presentation was lengthy, considered and detailed, so as to obviously try and convince. Marchionne has posited strong argument regards Jeep's EM future (supported by initial sales growth and plant investment plans). And the dual-directional philosophy of the FIAT brand - whilst itself ostensibly regurgitating FIAT's past approaches – actually makes simple sense.

Until presentational rhetoric is crystallised through global sales traction beyond the US, Europe and Brazil, FIAT-Chrysler's long-term global success remains presently a story of ambition. Given the scale of international competition from others in the “global 11” automotive pack, a degree of medium-term caution from the investment community, after the given western rebound, is inevitable.

FIAT-Chrysler then must demonstrate to investors its own uniqueness within EM realms. Others have already proven themselves or otherwise started their respective stories.