Friday, 25 July 2014

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

As promised, as a successive adjunct to previous detailing of Q1 positioning, below are the summaries and investment-auto-motives analysis of recently availed Q2 reports.

Provided relative to the respective release dates of:

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

To Come -
Honda 29.07.2014
Renault 29.07.2014
Peugeot 30.07.2014
FIAT-Chrysler 30.07.2014
Volkswagen 31.07.2014
BMW 05.08.2014
Toyota 05.08.2014

[NB all too typically reporting inconsistencies exist at the line-item level between IR releases, executive announcements (indeed sometimes within) and chart presentations. An infernal reality which obviously clouds exactitude; often seemingly deliberately so.

Thus investment-auto-motives endeavours to pin-point the most convincing figures and statements].

Daimler -

Unit Sales 628,900 vehicles [+4%] (Cars,Vans, Buses, Trucks, Financial Services]
Revenue €31.5bn (from €29.7bn) [+4% yoy]
EBIT €2.5bn (from €2.2 billion) [+12% yoy] exc special items
Net Income €2.2 billion (from €4.6 billion) ['normalised' post €3.2bn EADS sale]
EPS (ord) €1.97 (from €2.65)
Net Liquidity €12.7bn (from €11.3bn) [YE2013]
Operating C-F €1.45bn [calculated as EBIT – (H1 CapEx / 2)]
Free Cash Flow €0.8bn (from €3.5bn) ['normalised' down by €2.2bn by EADS sale]

- Non-cash EBIT effect from Tesla equity hedge instrument
- Sale of half interest in Rolls Royce Power Systems (to RRPS)
- Manufacturing JV with Renault-Nissan in Mexico. (Extending technologies and package development relationship across premium (ie Merc-Infiniti), compact size and micro and citycar (Smart-Twingo) segments.
- “MercedesMe” city-centre brand-store roll-out.
- H2 launch of C-class and Smart (2 door and lwb 4 door)
By Division:
- Mercedes Cars: sales +3% yoy globally, USA +7%, China +13%, pan-European gains, with high margin new S-class providing boost to 7.9% Ros (vs 6.4 yoy). Costs included new model launches, technology research plant capacity expansion and FX headwinds of strong Euro. Revenue €17.8bn (+9%) and EBIT €1.41bn (+35%)
-Vans: sales +9% yoy globally. Revenue €2.5bn (+2%) and EBIT €0.242bn (+18.6%) with RoS of 9.7% (vs 8.4%). Strong demand in NAFTA and Europe countered by incurred launch costs of Vito and V-class models and € FX effects. EBIT promoted by €61m gain from reversal of impairment charge relating to Fujian-Benz JV of China.
- Trucks: sales +2% yoy globally, NAFTA +18%, Europe -7% (due to previous pull-forward sales of Euro VI emmisions), Mercosaur generally down but Brazil market-share up. Revenue flat yoy at €8bn, EBIT €0.455bn (+5%), Ros 5.7% (vs 5.4%). Tailwinds included freduced warranty costs.
- Buses: sales +2% yoy globally (for both bodied and chassis-cab types). Revenue €1bn (+11%), EBIT €0.05bn (+85%), RoS of 4.8% (vs 2.9%). EBIT gained from greater model mix of fully built ex-factory buses and general operational efficiency efforts.
-Financial Services: Revenues €11.5bn (+12%) with contract volumes +5% to €88bn, EBIT €0.336bn (+5.3%). This division beneficiary of the growth in Tesla shareholding by Daimler.
Announced Outlook:
Confirmed outlook for full-year: significant growth anticipated in unit sales, revenue and EBIT from ongoing business...We are growing profitably, our strategy is bearing fruit. We are steadily continuing along our path. Supported by our product offensive and the successful continuation of our efficiency programs. FY2014 expected as significantly better YoY.
The company previously suffered more than German peers (VW and BMW) up to late 2013 or so, given the its comparatively thinner segmental coverage directed at premium (M-B) and niche (Smart). Furthermore, the vitally important fact that the unusual cyclical dynamics of the pan-global contraction scuppered its typically counter-cyclical business model: spanning cars, vans, trucks and buses. Now though “later in the day” compared to previous recessionary rebounds, Daimler has started to fire upon all cylinders across all business divisions, gaining from the generally rising global economic tide (tho' Latin America still awaits).

The less conservative, sportier styling previously introduced since original CLS and with AMG influence means that M-B now sits squarely between the still retained teutonic of Audi and the more aggressive BMW. To this end M-B has achieved its ambition in attracting new popularity. Record M-B car sales highlight the migratory trend for new customers drawn from German brands and elsewhere., aswell as all new premium buyers drawn directly. 

However, Smart still poses a dilemma, specifically that of pricing strategy. The new models have indeed matured but they do not constitute a premium comparison to equal Mini, as Daimler states. Though priced accordingly lower than Mini, given smaller product dimensions and performance capability, so as to maintain notionally unique market space, the high expected retail price and small price gap between new 2 and lwb 4 door models means that whilst seemingly making sense on paper (to energise Smart's overall business case, not compete head-on with Twingo, and direct clients to the large car for brand ladder loyalty) the real world market dynamics look likely to scupper that theory (so missing projected lifetime volumes). 

The attempts to cross-breed its premium cars appeal into business and leisure vans continues as the space efficient 'white collar' exec-MPV contiues to gain broader appeal amongst specific users types after the success of the London tailored Vito Black Cab and similar V-class elsewhere. 

The smaller, but still relatively heavy payload Citan, has extended the range of vans. Such moves reflect not only the need to enter new segments, but also seemingly a new “over-engineering” ethos; presumably to regain its partially lost perceived quality lead in the 2000s; so feeding into residuals and new model pricing elasticity. Furthermore since 2010 the large Sprinter model has been brought back into the Daimler fold in the USA and Canada, re-re-badged as Freightliner (after contract manufacture for Dodge). Thus it appears the oft overlooked issue of vans – their strong profit margins given lesser trim/feature content - is again in the spotlight as a prime contributor to Daimler's overall corporate performance, even if over-shadowed by the Cars division's own strong sales improvements. 

Whilst the Euro VI regulations partly advanced and partly retarded the timing of European truck purchases, crating a Euro-vacuum in H1, now that the US economy appears in steady growth mode, Daimler's Freightliner (and other brands) truck division will be adding stronger income.
In short it appears that as of today – though by historical standards belatedly – Daimler is at last hitting its stride; assisted by its leaner structure since the disposal of EADS interests.

GM -
Unit Sales 1.5m GM globally / 2.5m inc China JVs
Revenue $39.6bn (+1.3% yoy)
EBIT (adj) $1.4bn (-20%)
Net Income $-0.5bn (-140%)
EPS (ord) $0.11 (-85%)
Net Liquidity $20.9bn
Operating C-F $-0.3bn (EBIT - $1.7bn Capex)
Free Cash Flow (adj) $1.9 (-27%)

- continued strong N. American sales
- average sales price up $3,000 (model mix effect)
- countered by increasing incentive offers in Q2
- heavily undermined by substantial compensatory recall costs
- 22m vehicle in Q2 of 29m to date,
- $1.2bn recall charge for Q2 ((plus $1.4bn in Q1)
- issue affects rental car company fleet demand
- record China deliveries
- improved market-share across Europe
- S. America seeing “core improvement”

By Division:

Geographically – GMNA revenue $25.7bn (+10%), EBIT (adj) $1.4bn (-30%) [$1bn recall charge], GME revenue $6bn (+7%), EBIT (adj) $-0.3bn (-200%), GMIO revenue $3.6bn (+12.5%), EBIT (adj) $0.3bn (+200%), GMSA revenue $3.2bn (+6.6%), EBIT (adj) $-0.1bn (-200%), GM Financial revenue $1.1bn, EBIT (adj) $0.3bn (flat)

GM views the majority of the ignition problem recall as having been absorbed in H1 2014, though a further $0.874bn may be the cost of recalls over the next decade for vehicle on the road today (presumably then maintaining a cash reserve of 87.4m per year for possible additional costs).

GM's emergence from Chapter 11 saw the new entity competitively placed well ahead of the VM crowd, able to gain from the then magic mix of N. American economic green shoots and little laden with the financial corporate legacy baggage that affects nearly all auto-makers. Though thereafter because of the previously faltering EM economic picture, and reactionary nature of the S&P 500 dynamic of American exposure to world markets, its share price was dragged well below its initial IPO price, the speedy progress of US re-strengthening allowed GM to take full advantage in recent years, seeing its sales and profit performance rise to new levels as domestic and international peers continued to struggle.

Such unhindered GM advancement has been seen in its p/e valuation level, near 19x/20x of late as often less sector informed investors – often institutionals (placing a certain level of monthly accrued client funds into supposed 'safe bets' – failed to recognise the true vehicle market dynamics behind the corporate rhetoric, and specifically GM's true competitive capabilities as its counterparts re-gained strength across N. America, China, Europe and elsewhere. Critically – well recognised by investment-auto-motives - given the company's historic major share of the US marketplace, even though corporate GM was reborn, the new entity would be much reliant upon replacement sales amongst its old pre-Chapter 11 customer base: from fleets to rental companies to SME's to private buyers; typically patriotic and loyal to GM brands. This a wide spectrum of buyers who themselves had been forced to defer new purchases, and so continue to run older vehicles, given the effects of the financial crisis.

The announced recall of 29m vehicles primarily centred around various ignition key / barrel faults the possible consequences of which are very concerning, and span back over a decade and seemingly affect all vehicle types. Having seen the new GM 'go gang-busters' since rebirth, yet recognising that during the previous 2000s decade product quality levels had demised (as GM sought to appease a largely domestic investor base comparing “smoke-stack” to “dotcom returns”), it was considered likely by investment-auto-motives, that a very widespread product quality issue might eventually arise given the inevitable flash-point of enormous scale volumes undergoing ongoing cost-down engineering exercises on ”invisible” components and those common items with apparent commodity functionality.

The immediate H1 toll of the recalls is plain to see upon the (herein unfortunately phrased) Q2 key figures, with as seen, the expectation of lower remedial costs over the coming years.

There is a silver-lining however.

That is the near fact that GM ostensibly has a captive replacement audience and market. Various factors interplay to effectively maintain much of its historical customer-base. As recalled vehicles are brought into dealerships, so sales-people will inevitably convince those still paying 3, 5 and 7 year contracts that the time is right to part-exchange old “faulty” vehicles for all new. This exercise will be promoted by the fact that any migratory (away from GM) will invariably find that a competitor dealer will pay only a poor exchange value for the traded-in 'faulty' vehicle, given that it will cost the dealer the price of recall repair (even if “at trade” cost) and will inevitably be required to affix a lower forecourt re-sale price given the model's now engrained reputation and the fact that the the GM vehicle is being sold by a foreign branded dealer. GM dealers however will be tempted to offer improved part-exchange values as part of their own incentive packages, will be able to retro-fit new ignition barrels and other necessary parts quickly on incoming vehicles and command higher re-sale values given that the cars are sold by official dealers.

However, this is a drawn-out process, which though no doubt adroitly scheduled by GM, is still reliant upon consumer behaviour patterns; so more a case of steady replacement flow rather than stampeding sales over Q3 and Q4.

Thus as GM presently suffers from exceptional recall costs, with immediate and short-term stock-price, the 2015 mid-term appears much improved.

Ford -

Unit Sales 1.66m (down 17k yoy)
Revenue $37.4bn (down $0.5bn)
EBIT $2.6bn (down $0.044bn)
Net Income $1.63bn (down $0.2bn)
EPS (ord) $0.32 (up $0.02)
Net Liquidity $10.4bn
Operating C-F $2.6bn
Free Cash Flow $0.6bn

- all geographies profitable except S.America (first European profit in 3 years)
- independent US product quality survey gains (JD Power)
- new Escort model and Lincoln launch in China
- record China deliveries
- started Transit van production in Kansas City
- new engine plant in Brazil
- agreements with German works council on (overhead sensitive) Fiesta
- share repurchase programme

By Division:

- Automotive: wholesale sales contracted by -1% yoy, revenues $35.3bn (vs $36bn) , EBIT $2.17bn (improved $0.66bn yoy and $1.25bn qoq), operating margin 6.6% (vs 6.4%). Profit drags from S. American division ($-0.295bn) and 'Other Automotive' aspects, primarily net interest expenses.

Geographically: N. America wholesales down -5%, revenues down -1.5%, operating margin +1%, EBIT +3.4%. S. America wholesales down -22%, revenues down -33%, operating margin down -19%, PaT down -300%. Europe wholesales flat, revenue up +10%, operating margin up 4.6% (to 0.2% profit, from previous loss), PaT up 105% (to $14m profit, from previous loss). Middle East/Africa wholesales down -5.7%, revenues down -8.3%, operating margin up +80%, Pat up +77%. Asia-Pacific wholesales up +20%, revenues up +7.4%, operating margin up 0.6% (to 5.5%), PaT up +22%

- Financial Services: EBIT $0.429bn (down $0.022bn yoy and $0.033bn qoq)

Re-confirms FY automotive revenue, EBIT of $7-8bn, and operating margin, with improving guidance on free cash flow. This gained from global growth of 2.5-3% with improved N. America at 2% (after weather induced slow Q1), S. America still stagnant, Europe with 1% growth (UK at 2.5-3%), Chin's soft landing at 7.5% and India improving beyond present 5% given election result.

Compared to the level of external governmental assistance and new ownership assistance of its Detroit peers, Ford has been forced to apply commercial and industrial logic more coherently so as to emerge from the after-effects of the 2008 crisis.

In historically typical 'Fordian' manner, it has used the opportunity of corporate metamorphosis to try and gain greater competitive technical and so customer perception advantage via the deployment of smaller capacity engines and advanced aluminium materials. The similarly surprising and unsurprising fact was that this has been most notably directed at the F-series pick-up truck, before presumable application on cars. This undoubtedly done because the it maintains F-series' own 'built tough' advertising distinction (with “military grade”, yet the high margins and scale volumes of America's #1 pick-up allow the procurement costs of the more expansive material (than steel) to be more easily absorbed into the new F-series business case given the near assurance of relatively predictable through life sales volumes.

Although Ford has stated that it seeks to remove itself from lower margin fleet and rental company sales, the fact that GM products have been tainted by the recall, means that Ford has greater opportunity to provide the (F-series induced) perception of technically advanced products to rental companies, so giving them an 'added value' appeal to their customers. (Serendipity saw the UK arm of Enterprise Car Rental highlight the transatlantic spelling of “aluminium” as its advertising ploy”).

With GM product quality now questioned by private and corporate buyers, compared to the apparent hi-tech appeal of Ford's far better aesthetically brand-unified vehicle range, and the fact that replacement and potential Chrysler buyers are still somewhat weary of what they see as foreign (Italian) engineered platforms re-skinned and re-badged as “American” means that the presently Ford is viewed as enjoying a top podium place in the presently very income critical US market.

Hyundai -
(previously for H1, now amended to include Q2)

Unit Sales 2,358,000 (+2.6%) (Cars, Vans, Trucks)
H1 KrW 44,402bn (-0.3%)
Q2 KrW 22,753bn
H1 KrW 4,026bn (-5.8%)
Q2 KrW 1,074bn
 Net Income 
H1 KrW 4,378bn (-5.1%)
Q2 KrW 2,350bn

EPS (ord) unstated
Net Liquidity KrW -23.6tr
Free Cash Flow KrW 366bn

- sales beat market growth in S.Korea with new model introductions (inc Hybrid variants)
- new Genesis and Sonata sedans in US spurs interest, low US sales incentivisation vs domestics
- new i10 citycar and ix35 c-segment cross-over sustain flat European sales levels
- Korean, China, Czech, Turkey, Russia and Brazil plants grow production output
- US and India plants production decrease
- larger car and cross-over models growth alters model mix
- strengthening of Korean Won [+5.1% vs US$ and +0.9% vs €] created FX headwind

By Division:

Vehicles: revenue KrW 36,193bn (-1.4%)
geographic sales split: China 545k units (+9.6%), USA 364k units (+0.9%), S. Korea 346k units (+6.2%), Europe 212k units (+0.2%), Elsewhere 892k units (-1.4%).

Finance: revenue KrW 5,389bn (+5.3%)

Others: revenue KrW 2,820bn (+3.9%)

- increase in COGS (cost of goods sold) of +0.8% countered by reduction in SG/A overhead costs of -2.7%

None officially provided in H1 reporting, but previous May investor meeting highlighted various strengths, including: previous performance in trough of global economic cycle, balanced sales growth, diversified vehicle portfolio, superior performance vis a vis peers, plus strategically: value growth leading to volume growth, improving cost structure and increasing eco-technology deployment.

Hyundai has taken great advantage of the post-2008 value-price driven environment to strengthen its place on many levels amongst its previously comparatively esteemed counterparts.

Whilst not the most technically advanced VM the company has undertaken global growth in a rational manner - as did the Japanese decades previously – the main distinction being the ability to create a worldwide manufacturing footprint – whereas Japanese firms took longer - so as to off-set specific regional economic cycles and to better off-set the FX effect upon the Korean Won; as seen recently by its 5% appreciation vs US$.

Moreover, as seen by strategic S. American actions in expanding capacity and production in Brazil, Hyundai seeks to also exploit regional down-turns to grow local market share, yet also hope to avoid local price-wars by growing perceived brand quality to equal or even better the more established local brands. This done so with ambitious exercises such as the more up-scale Genesis large sedan (and sub-brand) relatively earlier than the Japanese were able to, in reaction to the new global demand for affordable luxury amongst the older (now price discriminating) western middle-classes and the new set of EM middle-classes.

However, as seen by the Q2 figures, whilst Hyundai rode the 'affordability wave' since 2008, both the returned strength of American, Japanese and European brands have dented its expansion ambitions, with slightly reduced volume sales and revenues. This well countered by a targeting of internal costs so as to maintain leading profitability margins.

Though investment-auto-motives expects to see Hyundai's continuing constraint in the European arena given re-strengthened national players and associated entry-level brands. But the ability to take advantage of GM's near-term weakness in the USA indicates that Hyundai should maintain market traction in this critical region over the short-term. Whilst also continuing its brand and sales offensive in a somewhat pro-Korean, receptive China.

The well recognised need for Hyundai is to build brand and pricing power in the US before a) GM returns stronger, b) Ford creates an new intermediate/ near premium brand persona in blue oval with efforts such as the Vignale moniker (presumably sharing Lincoln technology), c) FIAT-Chrysler is able to create a similar workable proposition, and d) the Japanese seek to re-deploy Acura and Infiniti.

Doing so expediently, with perceptional brand trickle-down from Genesis into mainstream Hyundai will perhaps be the most important strategic and so earnings issue to monitor.