(shout-out to
@Prunesquallor,
@ByeByeJohnny,
@generalenthu,
@KarenRei,
@ReflexFunds and others interested in the FCA pooling agreement.)
So here's just a raw dump of all information that FCA disclosed so far in their conference calls - I'd ignore most of the media reports at this point. I included all paragraphs that discuss the following keywords and their variants: Tesla, regulatory, credit, pool, CO2, fines, compliance, powertrain, electrification, BEV, emissions and hybrids. All the quotes are verbatim and are in chronological order.
Q1 call:
Edited Transcript of FCA.MI earnings conference call or presentation 3-May-19 12:00pm GMT
FCA CEO Manley:
"The Jeep Renegade and Compass plug-in hybrid vehicles were revealed at the Geneva Auto Show in March, and these will start production early 2020 and represent the initial ramp-up of high-voltage vehicles for our European fleet. And they will be followed by the all-new Fiat 500 BEV and 10 additional launches of heavy -- heavily electrified vehicles over the following 2 years."
"Now in line with our previously announced compliance strategy for both the U.S. and EMEA, we also executed agreements to buy regulatory credits. These credit purchases are designed to minimize FCA's cost to compliance and provide us with a strong hedge against the potential for a lower price recovery in the market than the cost of the technology. Now this is a complementary action to our continued investment, development and deployment of our electrified fleet, which will reach 17 nameplates by 2022. And it will bridge the period until we see the combination of market acceptance, technology cost and infrastructure development reaching the point that makes sales of heavily electrified vehicles more financially rational. The cost of these combined actions was envisaged and embedded in our guidance and our business plan."
"Now the development of our electrified fleet is well underway and we'll build on our proven capabilities because, as you know, we currently have the seventh highest selling BEV and the fourth highest selling plug-in hybrid in mainstream segments within North America."
...
"In EMEA, we faced a number of headwinds due to negative market pricing, adverse exchange rates and higher compliance costs, including the incorporation of our new powertrain technologies. We've made progress to reduce our inventory with dealer stocks down 13,000 units, so more work to be done, but good progress so far. And the effects of improving our channel mix is more than offset by the volume of shipments increase. This will come through to the bottom line. We have our compliance cost contained, and other restructuring actions will progressively yield benefits throughout the year. And our expectation is subsequent quarters will see a return to profitability with the region recovering to around a 3% margin by the fourth quarter."
Notes: I think this section outlines FCA's thinking about regulatory compliance: they consider the CO₂ fines a given circumstance, which they will try to "recover" from the market by selling hybrids and BEVs.
FCA CFO Palmer:
"Our industrial cost performance improved significantly due to net direct material savings, reduced launch and logistics costs, particularly in America, offset by increased product cost for the new Ram heavy-duty and increased compliance costs mainly in North America and in EMEA."
...
"And as mentioned by Mike, we're talking about or compliance strategy. We did enter into various agreements in the quarter to ensure that we have access to regulatory credits to complement our vehicle launch strategy towards meeting emissions compliance in EMEA and NAFTA going forward. So the total commitment under those contracts is about EUR 1.8 billion, which will be spent over the next 3 years. Last year, we had cash outlays between credits and compliance payments of about EUR 600 million included in our cash flow. We expect 2019 number to be moderately up from that. And we think it's important that we have managed to secure these credits, which we believe to be a very economic way of complementing our compliance strategy through the launch of the electric vehicles that Mike mentioned."
...
"We had positive performance in terms of reduction in launch costs and logistics costs, positive contribution from purchasing savings, offsetting higher compliance costs and the cost of the new Ram heavy-duty."
...
"Important also to note that our industrial costs were negative in the quarter due mainly to negative FX on euro-dollar impacting imported vehicles and emissions compliance costs."
...
Responses to analyst questions:
FCA CFO Palmer:
"In terms of your last -- well, in terms of the second question, the compliance costs for EMEA for this year, we're target -- we're expecting at around EUR 120 million. Going into the next year, we would expect that to increase. However, the fact that we bought -- we've entered into the pooling agreement with Tesla will significantly mitigate the increase. So we think -- I think it's a bit early to give you a number on that given as we are working on this. And we'll obviously keep you updated as we work through the launches of the vehicles for the heavy electrification strategy, which we have launching the Renegade, the Compass and the Fiat BEV next year. And obviously, our focus is on launching vehicles and being compliant through selling those EVs, but it's also true to say that I think we believe the strategy to augment that with the use of the pooling agreement will help us to be more flexible as we launch those vehicles and wait for the market acceptance more generally of EV vehicles and the volumes that we all need to hit."
FCA CEO Manley:
"With Wrangler, what -- remember, what's happening with Wrangler is the plant is going to go down for a period of time now in preparation for the plug-in hybrid."
Analyst question:
"And my first question is on -- going back to EMEA CO2 compliance. So you've got to make up around 30 to 35 grams in order to hit your target. And on my math, the pooling agreement with Tesla will get you, let's say, a quarter of the way there. So -- well, my first question is does that sort of square roughly with the way that you think about the benefit that you get from that. And then secondly, of the remainder that you're going to make up, what's the split that comes from plug-ins and EV that you're going to launch versus the part that comes from improvements that you can make to the traditional parts of the rest of your fleet?"
FCA CEO Manley replies:
"I'm going to answer your first question because I actually -- it's obviously on many people's minds, so I'm going try and be as accurate and as explicit as I can on this area. If I think about 2019, as we came into the year with 2019, with the fleet that we had without making dramatic changes that would have impacted our profit, I estimate -- and I'm looking at Richard, I estimate, we probably would have picked up a fine of around EUR 350 million, EUR 375 million, something like."
FCA CFO Palmer interrupts, citing a precise number:
"EUR 390 million."
Notes: This part looks important because the FCA CEO discloses their raw regulatory fines estimate for 2019, absent any ZEV agreements.
FCA CEO Manley continues:
"EUR 390 million in the marketplace. The route that we've taken has dramatically, dramatically reduced that number, and we will achieve compliance. So in 2019, what you're going to see in terms of my split and, obviously, it's not going to be -- it is going to be close, but it's not going to be exact, I would say, we will achieve compliance roughly with 20% of conventional technology because we're in the process of now rolling out high-efficiency energy and other technologies to reduce vehicle demand. Now remember, most of our competitors have already done that. We chose to do it this year. That will bring us about 20% there. The rest 80% will be through credit pooling. But when I think then through 2021, for example, obviously, in 2020, we will have the 2 plug-in hybrids and the battery electric vehicle. In 2021, I think that conventional tech will give us about 40% of our compliance. Electrification by that time, we will then have 5 vehicles -- we'll have more than that. We'll have 3 from 2020, plus another 6 coming onstream in Europe. 45% of our compliance will probably come from electrification, about 15% from purchase credits. And then as we get into 2022, I think electrification, roughly 50% to 60%. Conventional tech 40%. And if there is a need for pooling, it will be very, very small. So I think we have a picture and a strategy that we'll do 2 things. One, I think it will be a good hedge for us in terms of -- if pricing is not available to fully recover the cost of that technology. And obviously, there is still some work to do to roll out infrastructure and drive consumer demand. And secondly, I would stress that we are continuing and have continued with the investment and development of our electric vehicles, so we have flexibility in terms of how we achieve it over that period of time. But that's how I'm thinking about it, that's how I'm thinking about the part of our compliance strategy that involves credit purchasing in Europe. Is that helpful?"
Another analyst question later on:
"Can you talk a bit about the sale partnership with Peugeot? And would you consider using various LCV architecture, which has now been also electrified by, the way? Would you consider building LCVs using Peugeot's electric architecture?"
FCA CEO Manley, mostly dodging the question, but also provides this hope of FCA, that their BEV efforts might increase utilization in their European factories:
"But also, as you know, one of the areas where we have been weak compared to our peers in Europe is the utilization of our plants. Some of that gets fixed with the investments we're making in terms of electrification that we talked of in the fourth quarter."
(Analyst re-ask the electrification strategy question, but Manley dodges it again.)
Q2 call:
Edited Transcript of FCA.MI earnings conference call or presentation 31-Jul-19 12:00pm GMT
FCA CEO Manley:
"And the EMEA team is working hard with our dealers in all markets to improve our retail sales, and this will we helped by the launches of variants of our Fiat and Jeep models, that will have improved CO2."
...
"In EMEA, we continued to face a number of challenges, but we're taking disciplined and rigorous actions, and we are committed to returning the region to targeted levels of profitability. We have our compliance cost contained and other restructuring actions that will progressively yield benefits throughout the year."
...
"Now in addition, the group moved forward in some other major projects. We're currently preparing our plants to start production of new electrified vehicles, including our Melfi plant in Italy. That will build the plug-in hybrid Jeep Renegade and Compass beginning towards the end of Q1, early Q2 next year. Mirafiori plant in Turin that will build the new Fiat 500 BEV, which will start in the second quarter next year. And the Toledo North plant in Ohio that will be producing the new plug-in hybrid Jeep Wrangler in early 2020."
FCA CFO Palmer:
"Our industrial free cash flow was over EUR 750 million and included payments of nearly EUR 400 million for U.S. diesel emissions matters."
Notes: I believe these "diesel emissions matters" are diesel fraud legal settlements and fines, not ZEV purchases - i.e. unrelated to Tesla.
[EMEA]: "Compliance costs increased fixed cost and absorption and some supplier claims, only partially offset by industrial efficiencies and restructuring actions in SG&A."
FCA CEO Manley:
"I just wanted to quickly talk about compliance in terms of CO2 emissions standards in Europe. Because obviously, last quarter, on the Q&A, we discussed that strategy to reach compliance with European emission standards for a combination of continued deployment of more fuel-efficient traditional technologies. And then I told a little bit about the progressive rollout of electrified vehicles and obviously, the use of pooling arrangements within EU. And I just want to have a little bit clarity before we go to the Q&A session."
"So in 2019, we obviously continue to roll out traditional technology improvements. But we have fuel efficiency of our vehicles, and that does include our new combustion engines. So the latest GSE engines are now being rolled out progressively across Europe, which will give us a significant help. And these actions combined with the credit pooling agreement with Tesla, that I discussed before will mean that FCA will not pay fines this year. Now in 2020, we are going to launch the Fiat 500 BEV, that I mentioned earlier, along with the Jeep Compass, Renegade and Wrangler plug-in hybrids. And -- which I think will probably get to the sales mix somewhere in the order of around 5%. And these vehicles along with the increased use of non-hybrids combined with our Tesla credit pooling agreement, means that we're forecasting to be compliant in 2020, with a combination of those things."
"Now in 2021, we'll add another battery electric vehicle to our fleet, another plug-in hybrid and 4 more mild hybrid applications. And that will be as we transition to meeting emissions standards in 2022 with our own products, rather than in combination with credit. So what we're looking at is really a transition from where we sit today, progressive transition, I think, with the right investments in our electrified vehicle fleet to back end of '21, '22, where we will flew our own products, as I just mentioned to be completely compliant."
[In the Q&A session FCA CEO Manley dodges a question about electrification benefits from the PSA merger.]
Analyst question:
"First, can you just talk a little bit more about how we should be thinking about the trajectory of the Europe industrial costs into next year's, the electrified vehicles rise to 5% of your volume?"
FCA CFO Palmer replying:
"Rod, as Mike said, we're looking at up to 5% of heavy electrification next year. We've talked about in the past, expecting to recover up to 60% of that in terms of pricing. I think that's still our target. In terms of the absolute impact on our industrial costs for 2021 and rather it's going to be closer to 2020 and give you a better view of our role in EMEA than just talking about the industrial cost area. So clearly, the impact of electrification will be significant in terms of overall cost. But we're working with the teams on a lot of actions also, on our overall product cost levels going forward. And I think that's a big focus for us as it is for the rest of the industry to try and offset some of the increasing costs. So we'll give you a better view, I think, as we get closer to 2020."
FCA CEO Manley adds another response to the same analyst question:
"I just want to add something, if it's okay. Just in terms of the overall costs to compliance in Europe. Obviously, the electrification is one element of the costs. But as I mentioned before, we're also rolling out our new GSE engines, both our 1 liter and 1.3 liter this year, which comes, obviously, with higher costs than the previous engines that yield significant CO2 benefits."
"So as we go to the next 2 to 3 years, clearly, we're going to pick up a number of costs. And we've said in the past, obviously, this plan relies on a -- will be based, I think what I predicated, on a 60% recovery of the cost of electrification. But we're looking at it, I think, somewhat more broadly than that as the total cost that we believe we're being picked up in the business as we go forward. And then how and where we can look to recover that cost, some of which is our peer pricing because of the benefits of electrifications it consumes and some of which will have to come from other areas as we go forward with our business. So it's going to be a collection of things that I think recover the overall investments in terms of variable costs that we're making."
Notes: Upon re-reading this part, I agree with
@KarenRei that this "60% recovery" here is of the capex, not regulatory payments.
Analyst question:
"Can you quantify the costs related to outside your product line, on pooling and CO2 compliance in Europe, order magnitude impact on operating margin in EMEA, we're talking 200, 300 basis points. I don't know if you could kind of quantify the margin drag in a range for us, not -- I'm not trying to get you to the decimal points. Just so as we're thinking as that evaporate."
FCA CFO Palmer:
"Half a point of margin."
Analyst question:
"the other question is, maybe a bit more complicated, is I'm just looking at -- so if I look at your roadmap to -- towards CO2 compliance in 2020, the limited data have so far shows that the CO2 sales in Europe in the first half of this year haven't gone down at all compared to 2018 across the market. I assume it's the same for you. The most OEMs are now working towards making their stock of vehicles at the end of 2019 as CO2 compliant as they can. So they can start selling cars early in 2020 to meet the target. Again, I'm assuming that you'll be behind on this, but I'd love to know what kind of progress you're doing because most of your compliance effort this year for 2020 is going to be on the ICE side. So I'm just trying to understand if I'm right that you're CO2 footprint last year was about 124 grams in Europe, what -- by how much can you crush your CO2 production output in the second half of this year to try to get close to compliance."
FCA CEO Manley:
"This is Mike. I'm going to just try to be a little bit more specific for the purpose of this. I've seen loads of different comparisons of our CO2 performance against our target compared to other people and where they are. And I think there's no doubt that the factual point in time measures. I think sometimes, some of the things that have driven currently output is not been taken into account. For example, we are just in the process of rolling out our 1 liter and our 1.3 liter new-generation engine, and we will see other CO2 improvements in our existing fleets. So those things will help us progressively this year, and they will contribute towards the achievement of the targets that we've got to hit by the end of this year. And then the remaining difference will be covered by our pooling agreement that we have with Tesla. So that's why I said in the beginning, combination of the things. As we see it today, and you know it's very dynamic, it's something that's looked down there, certainly a daily, weekly basis of income to our committees every month. Because as we see it today, the combination of things will get us compliant in 2019."
"Obviously, you got to think beyond the year that you're in and set your fleets off as best you can for the coming year. I'm trying to make sure that you're compliant clearly. We will not be in a position to do that because the vehicles that will contribute to our improvement next year will not be in production as we get into January to some extent, given the levels of penetration that we need to achieve, I'm not overly concerned by that. And that's why we extended our credit pooling into next year to take into account, the fact, those vehicles are not going to production on January 1. So we will get our fleet as compliant with the conventional technologies by the end of this year. And then it will be complemented in the first and second quarter next year with our plug-in hybrid and our battery-electric 500."
Q3 conference call:
Edited Transcript of FCA.MI earnings conference call or presentation 31-Oct-19 1:00pm GMT
FCA CFO Palmer:
"This noncash impairment charge relates to the changes Mike mentioned regarding our product plan going forward leading to a rationalized European plan, which will focus on [our] certain vehicle platforms to facilitate electrification and portfolio renewal, while maximizing investment efficiency and part commonality. The charges relate mainly to the Alfa Giorgio platform for EUR 800 million and the A-segment mini platform in Europe for EUR 400 million."
Notes: clearly their 2021 hopes of avoiding CO₂ fines primarily rest in the almost 1 billion Euros investment into the "Giorgio" platform. It's a primarily sedan platform shared with various FCA brands (such as Maserati), with a shared powertrain. I believe they intend this to be a Model 3 and Model S competitor - I do expect them to have trouble displacing Tesla sales though ...
...
"Industrial costs were negative due to EUR 30 million of compliance cost"
FCA CEO Manley:
"Now the strategy with Maserati is to refresh or renew the entire portfolio by 2023, with product action starting next year. The first all new product you will see is the Maserati sports car, which we'll launch late next year, but you're going to see it probably in the first half, which will also include a cabrio version to launch in 2021. Now this vehicle is already highly anticipated and it will be available with a full battery electric powertrain and provide defining expression to the brand. Now this will be the pivot point for Maserati to enter the ever-increasing electrified world as all products launched thereafter will also be available with a full BEV variant."
...
"And remember all of these product plans include a full range of electrified powertrains."
...
"We also, as you would expect, have higher regulatory compliance cost in North America and EMEA and high CapEx spending year-over-year from planned product portfolio actions and development of electrified powertrains."
Analyst question:
"Just based on in Europe, the industry pricing announcements that you're seeing, do you have any updated views on regulatory costs that would be absorbed and what you're expecting will be passed along?"
FCA CEO Manley:
"I have to tell you that when I look at the pricing in Europe, in particular, for electrified vehicles, I'm actually much more encouraged now than I was a few months ago, particularly on the full battery electric side. Take rates seem to be improving and there seems to be a degree of discipline in the market for pricing."
"Obviously, it is very early, really, and we'll see it to develop a more as we get into next year, but as I said, I personally I'm more optimistic now than I was several quarters ago. We still carry in our plans just as a matter of record about a 60% recovery."
FCA CEO Manley replying to another analyst question:
"And the same with EMEA, we've done a number of actions that you are going to begin to see the benefit because our portfolio will begin to get renewed next year with the launch of our full battery electric Fiat 500, our plug-in hybrid Jeep Renegade, our plug-in hybrid Jeep Compass as well as refreshers on our Alfa products in the marketplace."
FCA CEO Manley replying to another analyst question about the future:
"What is absolutely clear is that there are some projects that are time sensitive, particularly as you go into the later stages of compliance of 2024, 2025, 2026 in Europe, but we also recognized the time that it takes for us to produce vehicles through the normal cycle. I think we've taken a reasonable view to make sure that the synergies we're talking about in terms of steady-state are real, and I think we have hard to reflect that there are some investments that need to continue to make sure that compliance is achieved. But I don't want to -- even Joe has forbidden me to talk too much about it. So obviously, as we work our way through this, I'm sure there will be plenty of opportunity for us to discuss in more detail the plan."
Notes: Frankly, this section is mind-boggling to me: Fiat apparently considered their current electrification that will bear fruits in 2024, 2025 and 2026 an
accelerated schedule that is time-sensitive... I do think they will be super surprised by this thing called GF4, and I think Tesla should start GF5 and GF6 in Europe right now as well, because these guys are delusional IMHO and we European customers will need proper new cars to buy - the old clunkers will make do only so long ...
Note the final two sentences: there appear to be some secret BEV plans with PSA.
FCA CEO Manley replying to another analyst question about the "Giorgio" vehicle platform:
"The Giorgio platform is a phenomenal platform and has done well underpinning Giulia and Stelvio. Remember, what we needed to do though is make sure that it's capable of full electrification going forward. So there's been significant changes to that platform to enable not just a full battery electric, but plug-in hybrid. We've changed the suspension, we've updated all of the electrical architecture in that so that it can take the next-generation infotainment as well as very, very advanced high-tech features."
Analyst question:
"Can you possibly be specific on how much you're actually paying Tesla for the pooling credits? There's just so many while I have seen numbers ranging from EUR 200 million to EUR 2 billion. Can you just help us and genuinely to help with that delta from '19 to '20 on that?"
FCA CEO Manley refuses to answer, but answers a Tesla skateboard question in the negative:
"For sure, in terms of these transactions, it's a one-way relationship. But the relationship has helped us. When I think about the credit pooling, so let me just step back from this. We -- FCA are absolutely committed to the journey of reducing CO2 emissions around the world, and we're absolutely, committed through our own sustainability policy to drive significant improvements in this area. What I don't want FCA to be -- I don't want FCA's sustainability practices to be totally and only driven by compliance needs in the regions. FCA has a vision beyond that, and that will become more apparent in the months to come. So I viewed the Tesla relationship somewhat as a hedge because we begin to launch obviously our electrified vehicles next year and into '21, technically, we could with very high penetrations in '21 reach compliance on paper. The reality is, it's still not entirely sure, even though I made positive comments, which I do believe at the beginning of this call, still not 100% sure of take rates [in] real price and recovery. So for me, the Tesla was a hedge, but it's done in '21. Because in '22, we get the full benefit of all of the investments that we've made. And as I've said before, if the merger goes forward, that will be even more beneficial for us for obvious reasons. But it is not something that is done other than to be able to give us, if you like a floor on the cost that may be there in the marketplace."
"In terms of would we be open to buying a skateboard from other people. I mean, that is the -- probably if you think about what we're going to hopefully achieve if the merger goes forward, we're going to do that on a grand scale. Therefore, it would be wrong of me to say, no, I wouldn't be interested in someone else's skateboard because it basically talks about conservation of capital. And there are certain things that I strongly believe the customer will be agnostic to and that is one of them so as long as you can tune the suspension, and tune the drive to suit your brands, which you can do."
Analyst question:
"The first one, staying on the subject of Tesla. When you guide to an adjusted EBIT above EUR 7 billion next year, does that include any payment to Tesla, or would you treat those as nonrecurring?"
FCA CFO Palmer:
"It includes the utilization of any credits that cover any compliance in the income statement, yes included Philippe."
Notes: as much as they are swearing that the regulatory credits will stop in 2021, they are not accounting them as nonrecurring, i.e. one-time payments.
Anyway, these are all the disclosures they made in the three conference calls, and I concur with
@KarenRei that the 60% was about something else, and that the €1.8b payments to Tesla over the 2019,2020,2021 time frame are still operative guidance.
