Stellantis N.V. (STLAM) Earnings Call Transcript & Summary

For our next session, which obviously is incredibly well attended. So thank you. I'm delighted to welcome Doug Ostermann, new CFO of Stellantis. Doug has a very extensive career within the automotive industry. And I think that obviously, given some of the challenges facing the industry and also Stellantis, that experience is going to prove invaluable as we look to the next 12 to 24 months. Doug, thank you so much for joining us, particularly given the news flow over the weekend.

And maybe we could just start with that. I think obviously, there was a management shakeup back in October, you became CFO. But at that point, it looked like Carlos is very committed to fulfilling his contract through Q1 2026. Perhaps you could just to start with, confirm does the company stick to its 2024 guidance, has anything changed operationally that has led to the decision in the last few days? And maybe also, as we look forward, you can just also highlight some of the issues that were cited in the press release in terms of maybe where Tavares and the Board had different views on how the next 12 months should evolve?

Okay. Yes, sure. Sure. It seems to be kind of a question of the day, by the way. But yes, we did confirm the guidance, as you saw in the announcement over the weekend. So we are still with guidance of AOI between 5.5% and 7% for the full year and negative free cash flow in the negative 5 -- negative $5 billion to negative $10 billion range. And I'd say in the fourth quarter, we've made quite a bit of progress so far. We had talked in the Q3 call about trying to bring U.S. deal inventories down below the 330,000 unit level before end of the -- originally, the target was to do that before the end of Q1, then we kind of said, "Well, we'd like to accomplish it this year." In the Q3 call, I said, well, we'll probably actually hit that in November. And in fact, we hit below that level in the second week in November. And at the end of the month, I think we were more around the 310,000 level. So we've made a good progress on that front. You'll also have seen that we've kind of adjusted a lot of pricing and things like that to help the sales pace. This month, in particular, we had some headwinds on market share. Some of the plants that are key to our production, we had down, obviously, to help correct the inventory situation. So we weren't able to deliver a lot of fleet sales this -- in November. And so that impacts our market share. But that's more of a kind of temporary situation. So I think we're making some good progress on kind of bringing things back into alignment, if you will. And that should give us a lot of confidence to be able to launch into than 2025 in a much more healthy way. And I think we need to be able to show the industry and the investor community really what the -- what our business is capable of. And certainly, this year is not representative of that. On the kind of second part of your question because I do want to address that one, it seems to be kind of the big question in the room is -- on Carlos' departure, and I worked with Carlos for the last 4 or 5 years. I have a huge amount of respect for him. And of course, everybody at Stellantis is very grateful for all the contributions that he made really in bringing the company together initially bringing 2 different groups from the 2 organizations together to kind of be one team and really to realize such a large chunk of the synergy potential within the first few years. So really incredible track record. But I think in the last, I would say, 3 to 6 months, and certainly, I wasn't part of all of the discussions between Carlos and the Board. So I don't want to -- there's only so much perspective I can give you. But I think there's kind of an increasing divergence on -- as I perceive it on kind of 2 topics. One, clearly, I think there was some disagreement on what the priorities should be and how to run the business kind of in the remaining time of his tenure, which would have been kind of 15, 16 months. And so -- and I think from my perspective, most of those related to kind of tactical issues on how to run business over that kind of short-term time period, and what actions should be taken in regard to kind of short-term metrics versus kind of longer-term benefit of the company. And the second area I would say was really in kind of how we interact with our key stakeholders. And by our key stakeholders, I mean, really, our dealers, our suppliers, our unions, the governments in all the regions in which we operate, those are areas where, I think, clearly, we need to build back trust. And so I think there's a strong desire among the management team today to really work on that. And it will take time. But I think that's an area that we wanted to address pretty directly. That being said, I think that I also want to make clear that I don't think there were any real disagreements in terms of long-term strategy. If you look at key elements of our strategy in terms of going with multi-energy platforms, going with a product plan that really will -- is down from kind of 20 platforms to eventually more like 4 platforms. Our asset-light strategy in China, our partnership with Leapmotors, our desire to build up kind of this strong third engine between Latin America, EMEA, IAP as kind of a diversification of the income of the company, all those things, we feel very confident in. I think they're all very solid strategy. I think in hindsight, some of them are trying now to be even stronger than we thought going in. And so I don't think there was any divergence on those things. I don't think you'll see any change in that direction.

Obviously, one of the questions that is always raised when we see management changes is, does that mean the strategy changes? And Stellantis has their forward 2030 strategy in place. How do you think about that strategy, some of the transformational targets that the company is looking to achieve and specifically the double-digit margin target that the company has had for many years?

Yes. I mean I think most of the elements of Dare Forward are clearly in place. And as I kind of outlined, some of the main strategy elements, I think, are turning out to be quite advantageous. So for instance, if you look at our decision on multi-energy platforms, I think there's a lot of kind of criticism at the time from various corners really questioning whether or not we could create efficient bets off of multi-energy platforms where we're trying to have kind of one foot in both worlds and would this work out. And I think if you look at our new launches, for instance, the E-3008. The larger battery version of that has a range of 700 kilometers. If you look at the ratio of kind of battery size, range, it's right up there in terms of efficiency with the best vehicles in the market. Now to be fair, our engineering community designed those platforms to be BEV first, to be super efficient BEVs and then package protected for the ICE and mild hybrid-type powertrains, right? But we, I think, have shown that you can be multi-energy in a platform and really deliver great BEV products. And so of course, in the shifting sands that we see on this EV adoption rate, this is turning out to be actually quite a good strategy. Part of it, of course, was because we're a global company. And we saw that there are different adoption rates in different parts of the world. I mean, I just spent the last 2.5 years in China, where today, like over 50% of the vehicles sold have some sort of battery in them, right? So it's a completely different level of adoption than what we see, for instance in the U.S. And so it made sense for us to be multi energy. But I think now that we also see the impact of shifting administrations, different priorities, this strategy is turning out to be quite strong. Now in terms of kind of the double digit, which I know you want me to address, we, of course, delivered on the double digit pretty strongly over the last couple of years. This year, obviously, because we're in the mode of correcting some heavy levels of inventory, kind of adjusting our pricing as we kind of come out of this period of scarcity. This year is clearly not representative of kind of the long-term potential of the company. Whether or not the environment going forward, if double-digit is the right number or not, we'll have to see. But clearly, I think there is some very strong reasons to believe that we will be able to show significant improvement next year because of a couple of things. One, we're correcting kind of this inventory and pricing situation that we have this year, but also really filling in a lot of those white spaces kind of that we have in our market offer, both in the United States and in Europe. And we have a lot of great and very exciting product that hasn't been launched on time but it is coming in the coming months. And so we'll be able to fill in some of those holes in the product gap. Most exciting probably is midyear, we're going to get the Cherokee replacement in the United States. That is, as you know, the largest segment in the market, it's 20% of the market. We have no product there. So that's a big hole for us that's impacting, of course, market share that new charger Challenger, which will be the Charger Daytona coming in, WagoneerS, Recon, we've got so many great products coming and also on the full-size truck lineup, which, of course, is a big money maker for us. We have the new HD products coming in the first quarter. The Ram 2500, 3500. We have a new BEV version of that pickup. And I think really, really importantly, we have a new range extender version of that powertrain, which I think is going to be very exciting, coming from China, that's like one of the fastest-growing powertrains in China. And it's just, I think, going to offer a lot of advantages. We'll be the first people to offer that a full-size pick up and then later in a full-size utility. I think it's going to be a very exciting product. And then in Europe, really filling in the B segment and C segment, which were effectively have very few products in today but have many sister cars coming that will fill in that should help our market share in Europe quite a bit as well. So I think there's some strong reasons to when we look forward to be very confident about our ability to perform in 2025.

I think one area which investors have been very focused on is the loss of market share in North America, and you kind of answered it with respect to the Cherokee, for example, and certain white spaces where you just don't have the product today. Is that the principal driver of why you have seen so much market share loss over the course of the last 12 to 24 months? Or has there also been an element of maybe your pricing has been too ambitious?

I think to be fair and balanced, there has been an element of the price. We came into the year with price that was on many of our vehicles, $2,000 to $3,000 above our main competitors, and you see that in the average transaction price data, we had some pretty strong pricing. We were kind of exiting this period of kind of relative scarcity where we had taken a lot of pricing. And I think, to be fair, the management team in North America really didn't just quickly enough. And of course, we heard that very clearly and lovely from our dealer body as well, both privately and publicly. So we did need to make some adjustment there. And of course, we have adjusted price significantly, particularly on the '24 and older models that the dealers really were holding and we needed to put some incentives into the market to kind of clean up that stock. That's been pretty successful over the last kind of 2 to 3 months, we've seen increasing market share in North America. This month in November, as I mentioned, is a little bit of an outlier because of the fleet situation. But clearly, part of it was the pricing piece. But I would say a big, big chunk of the decline in market share is simply because we have been blanking some very key opportunistic segments, right? So not to have any SUV entry in the largest segment of the market for a brand like Jeep is a big hole to fill. And we're very excited about filling it and offering people what's going to be a great product with mild hybrid powertrain, which has been very, very popular both in Europe and in the United States. So I think that's going to be really great. But we don't get it until kind of midyear. So it will take time to fill in all those holes.

Obviously, lower price points should help the volume and the share. But investors here will be saying, well, if I take $1,000 of price off the table and times it by the volume, we're running into billions of dollars of EBIT sacrifice. What are you doing on the verbal costs to offset the price down? And how -- what's the capability to neutralize the cut in price in terms of taking the variable costs down?

Yes. So a couple of things there. One, a lot of the incentives that we've been putting on, we're focused on kind of the '24 and older models. And we've been successful at kind of drawing that down. As the mix changes, we'll have to look at where we go with the '25s. As you may know, we've announced that we've adjusted the MSRP on 4 of our main cheap products to be lower to reposition the cars a bit, but we'll also be bringing down the incentive spend. So average transaction price probably won't change much from where it is today. But -- and clearly, a lot of the market share build will be on the new vehicles that I mentioned, right? We have kind of 4 new EV vehicles. We have the new HD pickups, the new Cherokee replacement, et cetera. A lot of those will be kind of white space entries. So we won't be -- we should be able to get pretty strong pricing on those. But on the cost side, there is, of course, always a lot of work to do. And we have an organization that is well known for that, right? I mean we have a good reputation in that area. I think we have a strong team in that area, and we're going to continue to work on with our suppliers to both engineer cost out of the products themselves but also around the globe looking at kind of best cost or low-cost countries for sourcing opportunities. So in Europe, that's Eastern Europe and to an extent China, Latin America, where we're very strong and we're the market share leader in Latin America. So we have a lot of opportunity in those markets where we have kind of deep expertise to take advantage of supply chain that should support cost downs for us.

Maybe just a final one on the U.S. Clearly, trade and tariffs have been very topical, and there's been discussions around USMCA. What contingency actions can you take in the event that tariffs on Mexican and Canadian cars are increased?

Yes, we obviously have been looking at it. I think we've been very open and public about the fact that we have roughly 40% of our products are produced in Canada and Mexico. And we have a great plants there. I mean, very good quality, very good cost. And so I think while we look at all these scenarios, we also are reaching out and as we have with past administrations, hoping to have a good dialogue, give them input, right, and help shape. But we understand that it's their responsibility to manage U.S. trade policy and obviously, we'll adjust as needed. I think when I look at our footprint, we have available capacity in the United States that will allow us to adjust if and when those types of tariffs come into place. A lot of our Ram products, we have industrialized in Michigan and the Detroit area, but we also have them industrialized in Mexico. So there's opportunities to shift some of the mix more into the plants. We've already industrialized the product in both locations. So we would have an opportunity to shift some of the mix and debottleneck things like that to try and help the capacity. But we also have, as you know, some unallocated plants. So for instance, Belvidere and Illinois, we have capacity around that we can make those shifts. It's not ideal for us as it won't be for any of the automakers. But I think we have perhaps a more flexible footprint when I look at the United States and many of our competitors. And so we should be in a good position to adjust if and when needed.

Maybe switching back to Europe a little bit. You already mentioned that also in Europe, product delays had led to white space in the market, and we've seen that in your sales data and the market share of your evolution in Europe. What led to those product delays in Europe? And when will that product be readily available, not just in the new markets, but across Europe more generally.

Yes. So as I mentioned earlier, we're introducing kind of these 4 new platforms. Many of them are being introduced at kind of plants that haven't produced that size vehicle before as well. So -- and when you introduce kind of multi-energy platforms, there's a lot of work that goes along with that to producing both the ICE powertrain and the BEV powertrain in the same place. These new vehicles we're basically coming in with the first top hats off of these brand-new platforms at new plants oftentimes, not new to our system, but it's the first time maybe they produce multi-energy. And there's a lot of software frankly, in these new vehicles. I mean the consumer experience is fantastic because you have this -- all these screens and this great amount of electronics. You've got these new powertrains that are super efficient, deliver kind of instant torque and they're fun to drive. They have great NVH and noise vibration handling, just really nice. But to get the first product off of a new platform right with all this new technology is extremely important for us. We've seen a lot of our competitors struggle with software in particular. We have not been immune to that either. So we want to get it right. And that oftentimes drives whether the consumer kind of in that -- those first days has a great experience or as a disappointing experience, right? And so to get the first top hat off the new platform right is extremely important, not only for the benefit of that vehicle in building a good reputation from the get-go in the market, but also for, of course, all the sister vehicles. But of course, the downside is when you delay the first vehicle, you delay out the sister vehicles. But in the B segment case, we've had successful launch now of the C3 and eC3, the order bank for the eC3 is particularly strong, which is great to see. It's well above what we would need for percentage of compliance, et cetera, in Europe, even though the compliance standard has gone way up. And so we're very encouraged by that. Of course, the eC3 is one of the most affordable EVs out there. It's about EUR 23,000. We have a version coming in the near future with a slightly smarter battery, that will be under EUR 20,000. I mean that's a great deal for fantastic BEV vehicle. But we're still missing the launch of C3 Aircross, Opel Frontera, the Fiat Grande Panda, which will be a huge car for us. So those are all coming in the next few months. So in kind of the first quarter of next year, and we're very excited. But until we get them into the market, we're still going to have that kind of market share gap.

You mentioned the eC3's contribution to CO2 compliance. How confident do you feel about CO2 compliance in Europe in 2025 based off your sort of existing planning assumptions? And obviously, fairly muted demand for battery electric vehicles in Europe at this point in time?

Yes. I mean we've been -- I mean the standard jump is pretty significant. So it's a good question, right? It's a fair question. And -- but we've been planning for it for years. We've known it's coming. And we have a lot of exciting EV product and mild hybrid product that's coming in Europe. The initial consumer response to -- which, of course, in Europe is real typically sold orders as opposed to the United States, where you have dealers kind of ordering for stock. The consumer orders out of Europe for those products, the new 3008, 5008, the new eC3 has been fantastic, much higher percentage than what we need for compliance, as I mentioned. If that carries through to the sister vehicles, I think we'll be in good shape. But it's early days. It's early days. In addition, of course, we have some other levers that we're looking at. Of course, as you know, we are just launching the Leapmotors brand in Europe. And we have over 200 dealers now supporting Leapmotors brand, which is mainly EV, although we'll be introducing some range extenders there as well. But I think that's very exciting. It's a way to also generate some compliance activity as well. So I think there's multiple levers that we'll be looking at in meeting our compliance obligations in Europe. But I think we're well prepared. And I think that's why Carlos historically had been not very aggressive in terms of saying well, let's change the rules or anything like that because we feel prepared.

I think, obviously, you have also experienced as Treasurer of SCA. And so cash management is probably very core to your heart. Stellantis has run with negative net working capital for many years. And sometimes, the corporates say, what's wrong with that, I'm getting the cash in early, and I'm not paying people until I have to. But we see the pain of that this year in the free cash flow. How do you think about the amount of negative net working capital on the balance sheet going forward? And given you'll probably finish this year a lot closer to neutral than you have been in some time. Is that a level you want to sustain going forward?

Yes. So it's a great question. And you're right, it is very near and dear to my heart. So a couple of things on that topic. One, I would like to see us get to a more neutral working capital position because when you have -- we operate in a volatile industry that's also very cyclical. So you're going to have times where things are in the downswing. And if you have a significant negative working capital cycle, as you know, you get these big shifts in cash flow. And that's why I think some people were a little shocked by the revised guidance, right, to say, "Oh, wow, is it really that big?" Okay. Well, that's part of it, right? And so I think if we could get -- part of my objective is to get to a more neutral position. And I think it will reduce the volatility that we see in our cash flow. And also on the back of that, I think if we're more respectful of kind of supplier terms and things like that. We can also help the relationship with our suppliers, frankly, right, by not stretching them so much. So I think there's opportunity there that, that could be a win-win for us and win for the supplier base as well. And I think a lot of -- some of those adjustments can be managed within the guidance that we have for this year as well. So there's an opportunity for us. In addition, I personally would like to work on cash conversion because I think the company, even historically, even if you ignore this year, and you just look historically, I don't think we've been as strong on cash conversion as we can be. We've been at lower percentages than many of our competitors. And I think it's, again, an opportunity for us to do a better job. So both those are high on my list.

Obviously, given the free cash flow evolution this year, a lot of questions are asking what is Stellantis' commitment to shareholder returns, both with respect to the dividend and the buybacks. How are you -- maybe it's too early, but how are you kind of conceptually thinking about this? Are you looking at 2024 in isolation? Are you taking into consideration the $23 billion plus you generated in the 2 years prior to this year? What's your sort of initial take on how you should think about shareholder returns over the next 12 months?

Yes. Thanks for the question. Yes, that's too early. No, I'm just kidding. I'll talk a little bit about it. Look, I mean, part of what I'm working as the former Group Treasurer, was to build a fortress balance sheet. And the reason we built up a fortress balance sheet was because, as I said, we operate in a volatile industry, in a cyclical industry. We know there are going to be those downswing periods, right? And so we prepared the company for years like this. And we did that so that we don't have to address all those things like change our capital policy and things like that. And so I think there are 2 key factors that will go into that discussion with the Board. And one is that our balance sheet can sustain this and still remain within the ranges that we've talked about, which is 25% to 30% liquidity target as a percentage of trailing revenue, right? And so when we look at that, we were way above that for quite a while. We're running at like 40%. I think this year will bring us down more into the range. But we're in kind of that range of what we think is efficient, right? So I think that's one factor. And the second factor is really our confidence in the ability of the business to generate cash and perform in 2025. And I think given those factors, I feel strongly that we will have a dividend, we will have a good discussion, I think, also around buybacks. Given where our stock is at right now, I think it's pretty attractive for us. But as you mentioned, we'll have all those discussions. Once we have kind of finalized numbers for the year, we have our full business plan built and approved by the Board for next year, we look at them in combination and we'll make those decisions. But I think it will be quite a good discussion.

And obviously, it's definitely too early to provide any guidance on '25. But '25 is clearly going to be a challenging year for the industry, both in terms of volume evolution, price mix and some of the headwinds from CO2 compliance. But for Stellantis, given some of the one-off items that have happened this year or arguably one-off items, is '25 an opportunity for you to get things back on track?

For sure. And the first step in that is making sure we do a good job of the corrective actions this year, right? What we don't want to do is to carry some of these issues into next year and cloud our performance and then have to say, well, that's also not really our potential. We want '25 to show the full potential of the company and get things really as painful as it is, get things really aligned this year in the business. But I think next year is a tremendous opportunity to show improvement from a number of perspectives, one, correcting the misalignments we had this year. But two, just this new product rollout that we have that is going to fill in so many white spaces that we're just playing in, right, a significant upside on volumes and share. So I think that's very important. And then also take advantage of this consolidation of greater volumes on these new platforms to drive down cost, right? Because the key componentry, you have a limited ability to do that across 20 platforms that were designed and implemented by 2 different companies historically, right? Now you have 1 set of 4 platforms to drive common components sets on larger volumes for our suppliers, greater spread of overhead. And hopefully, we can both share in that and it will be a good opportunity for them and for us.

Great. Well, we have a few minutes left. Sorry, I've monopolized most of your time, but a few minutes left to open it to the floor if there are any questions.

What you've learned with Leapmotor [indiscernible] pretty big EVs start-ups [indiscernible] something you know a lot about [indiscernible]. So what can you learn with Leapmotor about [indiscernible] and what can you bring to the international markets, particularly since at least my perception that Europe and U.S. are way behind China with regard to intelligent mobility.

Yes. Great question. I need like a couple of hours to really answer that question. So we'll find time. Yes. But top line, look, I was very instrumental in that transaction, and I currently sit on the board of Leapmotor. And I think they're a very impressive company for all the reasons that you stated. And what can we learn from them? Well, a couple of things. One, deep commitment to vertical integration and really understanding kind of a systematic approach to EVs, right? I think that's very, very interesting. The fact that when you really dig down into the management team and the leadership of Leapmotors, what you find is fundamentally a bunch of electrical engineers. And they approach the vehicle from that perspective. I can go on for hours on what that means. But I think you get a general idea. It's a very different approach, right, and a very interesting approach. And then similar to us, I mean -- and this is one of the reasons I thought it was such a nice company to work with and to acquire 21% of and to be involved with is that they have a very similar culture in attacking costs and really driving down costs over time and taking advantage of a supply chain, which we understand part of in China, but they're deeply into in China. And of course, that's a supply chain in China that we need to take more advantage of. And it's a supply chain that has a different cost structure for a number of reasons, but one of the most obvious is that when 50% -- actually over 50% of the vehicles sold in China today have this battery electric componentry, the scale of the supply community is just completely different, right? And so -- and the advancement of the technology in each area, right, is also different because they have that level of volume, right? And so we need to take more advantage of that as well. But I can go on for hours, so I'll stop there, but those are 3 biggest.

[indiscernible] intelligent mobility, for example [indiscernible].

Yes. I mean, look, I mean, when you talk to these guys, it's a foregone conclusion that they're going to do all the software themselves. Of course, they are, right? Because they come at it from this kind of a little bit different perspective of having been kind of electrical engineers, right? So again, this kind of integration, doing everything yourself, having it all worked together, doing all your own software. And the amount of resource they dedicate to different parts of the vehicle is very interesting. There's -- the way they do their development cycle is very different. So there's a lot to work, a lot to work.

[indiscernible] Stellantis [indiscernible] you adopt the sort of same Apple full stack approach as Leapmotor might be doing? Or will you like Mercedes [indiscernible].

Yes. I mean I'm not here to announce any new developments with Leapmotors, but let me talk more generally, okay? I think it's a partnership that is going very well right now. The launch of their products in Europe being supported by over 200 dealers today. The first 2 months has been fantastic. The reception has been really strong. And so I think that bodes well for the JV that we control by the way, that has exclusivity on all sales and manufacturing of Leap products outside of China. So I think that piece of it, it's going to go very well. But I think that's just scratching the surface. I think there's a lot more to come.

Great. Well, look, thank you, everyone, for joining this session. And a big thank you to Doug for joining us so early.