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

Hello, and welcome to the Stellantis Q3 2026 Financial Results Call. [Operator Instructions] I now give the floor to Mr. Charles Christman, Head of Investor Relations, to begin today's conference. Sir, the floor is yours.

Thank you. Hello, everyone, and thank you for joining us today as we review the Stellantis Q3 2026 results. Earlier today, the presentation material for this call, along with the related press release were posted under the Investors section of the Stellantis Group website. Today, our call is hosted by Antonio Filosa, Chief Executive Officer; and Joao Laranjo, Chief Financial Officer. After their prepared remarks, Antonio and Joao will be available to answer your questions. . Before we begin, I want to point out that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included on Page 2 of today's presentation. As is customary, the call will be governed by that language. Now I will hand the call over to Antonio Filosa, Chief Executive Officer of Stellantis.

Thank you, Charlie, and thank you all for joining us today as we discuss our quarter 3 results. As we anticipated in our second quarter call, several factors have weighed in our third quarter performance, such as lower volumes due to the planned summer shutdowns, particularly in North America. And raw material inflation. That said, we are beginning to see early benefits as we execute our Fast Lane 2030 strategy. For example, we are heavily focused on implementing our value creation program or VCP, with many initiatives being implemented ahead of schedule. The strategy is delivering. And despite the end we improved across all our financial metrics year-over-year. Net revenues are up 1% despite volume being down 1%. AOI margin is up 50 basis points and it is positive in all regions, except Europe, where the pricing environment remains challenging. And industrial free cash flow, which is negative in quarter 3 due to the seasonality of our business, is up EUR 300 million compared to last year. Importantly, our industrial execution also continues to improve. Overall production efficiency was up year-over-year with North America improving by more than 10 percentage points, 3 months in services quality improved significantly year-over-year by 43% in North America and 13% in Europe. We continue to expand market coverage by introducing new products, which is a key pillar of our first-line strategy. In the quarter -- in the third quarter, we launched the Jeep Recon BV and the Pega 208 DTI, and we look forward to launching 7 more products in the coming months on time with the right cost and with the right quality. At the same time, we are making great progress with VCP. Based on what we have implemented already, I am confident that we will exceed our plan to implement 40% of the initiatives comprising the EUR 6 billion target by the end of this year. VCP already contributed to our results in quarter 3 and it will provide even more of a tailwind in quarter 4. With this, I can say we are on track to realize more than EUR 2.4 billion in '27 plus the partial benefits of all the initiatives we will implement in '27. In addition to this progress in market coverage and BCP, we are also accelerating our work with strategic partners which is a key pillar of our FaSTLAne plan. These partnerships are reducing fixed cost by absorbing excess of capacity, while at the same time, allowing us to be more efficient in capital spending. We look forward to sharing more in the coming months. With this and despite the market challenges you are all aware of, I'm pleased to again reaffirm our guidance for '26, including that we expect to be free cash flow positive in '27. Now let me touch on some quarter 3 regional highlights. In North America, Stellantis is among the fastest-growing OEMs year-to-date, once again gaining share year-over-year. REM has led the way as the fastest-growing brand in the region, both in the quarter and year-to-date. In the U.S. alone, the RAM 1,500 light duty pickup grew 73% year-over-year. Next, Remo will launch the Rumble B port truck which is already generating strong customer demand. Its initial allocation sold out within 24 hours of orders opening. We have also now launched the Jeep Recon the first and only BV to trail rated. And soon, we will be the first to market with 2 new products where no 1 else is competing today. The Ram ProMaster City will be the only midsized commercial van available in the U.S. and the Jeep Grand Bagoe rev will be the first and only large SUV to offer range-extended hybrid technology. Turning to Europe. The region remains challenging with ongoing Chinese competition and a difficult pricing environment. Despite this, we continued to grow in the region with strong demand for the Smart Card platform inputs and surging demand for BDs, particularly in France, Germany and the U.K. Our Eurotordy passenger car BV sales grew 65% year-over-year or 93%, including LiPmodel. Shifting to Pro One. We remain the market leader in light commercial vehicles with almost 27% market share. In November, we will expand our light commercial vehicle lineup with the introduction of the Pro One Smart Card compact then. In parallel, Leapmoder continues to grow rapidly. -- with volumes up fourfold year-over-year, demonstrating our first-line partnership strategy in action. Production of the C segment cars, starting with the ban have begun at our Saragosa plant in Spain with the B05 planned to follow in the first half of bringing these vehicles into our manufacturing footprint helps improve capacity utilization and absorption of fixed costs. Finally, it is important to note that threatening our competitiveness will also require the right conditions in Europe. Despite the strong growth in BV demand, timely action or CO2 flexibility and made in Europe framework are essential to creating a level playing field. Turning to South America. In a challenging market, sales declined 2% year-over-year when you include the Leapmotor. That said, we maintain our clear overall leadership position with almost 19% market share, including Leapmotor. Importantly, we also remain #1 in the region's 2 major markets, Brazil and Argentina, each with more than 25% market share. We increased sales in the region for important models, including a 33% increase for the Ram brand, driven by the all-new Dakota mid-size pickup. And in Brazil, we increased sales 5% year-over-year to over 200,000 units, mostly driven by Fiat and RAM pickups, which represent the largest profit pool in the region. Moving to Middle East and Africa. We remain resilient despite weaker market conditions, particularly in Turkey, where the transition from the Fiat to the upcoming fit Grisly contributed to a 1.5 point year-over-year decline in regional market share? At the same time, as planned in Fastly in 2030, we are increasing localization in the region. Small van production began in Turkey in October and sales of locally produced vehicles in Algeria, a very important profit pool increased 22%. Lastly, in APAC, while market share declined by 1 point, reflecting the increased competition in the region, it is important to note that the region is enabling the rapid advancement of our first lien partnership strategy. For example, in quarter 3, we began localizing production of the Leapmotor B10 and C10 in Malaysia. We also officially established our new joint venture, Dong Fang to Atlantis automotive technology, allowing for the development of 2 new Jeep and 2 new Pega models to be sold in markets around the world. In summary, we navigated a challenging quarter, including lower planned volumes and raw material headwinds and all while improving year-over-year across every key financial and operational metrics. We are reaffirming our '26 guidance and our commitment to positive free cash flow in 2027. The challenges are real, but our industrial performance shows that we have a firm grip on the business. Our structured evidence-based recovery is progressing. We are taking decisive action to lower industrial costs and build the foundation for stronger financial performance in '27. Let me now hand you to Joao to walk you through the numbers. Joao?

Thank you, Antonio. While the third quarter was soft as anticipated, we continue to make progress in our turnaround. Our actions are delivering results. with year-over-year improvements across our key financial metrics. Let me start with the key figures. Consolidated shipments were 1.3 million units, down 1% year-over-year as the increase in Europe largely offset anticipated lower volumes in North America. Net revenues were EUR 37.6 billion, up BRL 0.4 billion or 1% compared with the third quarter of last year despite volume being down 1% due to growth in financial services. . Adjusted operating income was EUR 256 million in Q3, an improvement of EUR 166 million or 184% versus last year. AOI margin improved to 0.7%, up 50 basis points year-over-year. Industrial free cash flow was negative EUR 4 billion in Q3 an improvement of EUR 0.3 billion compared with last year. And as Antonio made clear, we are reaffirming our guidance. Turning to the key drivers of our year-over-year AOI performance. First, on volume and mix. Overall volumes declined is likely with the increase in Europe, largely offset in lower volumes in North America and Middle East and Africa, resulting in unfavorable regional mix. Additionally, unfavorable mix was driven by higher LED penetration in Europe. Moving to net pricing. Pricing contributed a positive EUR 23 million with EUR 421 million improvement in North America offset by continued pricing pressures in Europe. Lastly, industrial costs. This was the single most significant driver of our performance with an EUR 828 million year-over-year improvement, reflecting another quarter of cost reduction. Let me highlight 2 factors that contributed to this strong performance. First, we maintain our diligent focus on structural cost reductions, purchasing efficiencies, including initial benefits from VCP accounted for the majority of the improvement. Importantly, we expect VCP contributions to accelerate in the fourth quarter and into 2027 as implementation continues to ramp up. Next, we also benefited from lower CO2 compliance and warranty costs, partially offset by commodity inflation. Overall, these results demonstrated our cost reduction actions are gaining traction and translate into measurable improvements in profitability. This will provide an important foundation for our continued improvement over time. Finally, SG&A and R&D expenses increased year-over-year, reflecting continued investment to support volume growth in our product pipeline. Moving to industrial free cash flow. As mentioned before, industrial free cash flow was negative EUR 4 billion in Q3, an improvement of EUR 0.3 billion compared with last year. This negative free cash flow was driven primarily by seasonal working capital movements, reflecting lower production and shipment volumes in Q3 compared to Q2. Looking ahead, we expect a reversal of this working capital dynamics in Q4, supported by higher volumes, particularly in Europe and the seasonal reduction in company inventory typically seen at year-end. Finally, capital expenditures declined by EUR 0.5 billion year-over-year. We expect full year CapEx in R&D spending to represent approximately 6.5% of net revenues for the year in line with the FastLane investment plan for 2026. Now shifting to inventory. Total inventory increased 14% year-over-year to 1.4 million units. That said, Dealer inventory declined by more than 50,000 units compared with Q2, primarily reflecting the planned production downtime discussed during our second quarter earnings call. In the United States, dealer inventory increased 23% compared to last year, but declined 6% sequentially, supported by our planned production adjustments in Q3. We -- we remain focused on aligned production with market demand, balancing volumes with profitability in an environment where we see the impact of higher interest rates on the offer of loan financing costs. Looking ahead, we expect to close 2026 with U.S. dealer inventory between 320,000 to 350,000 units compared with approximately 368,000 units at the end of September. Turning to our regional performance. Starting with North America. Adjusted operating income reached EUR 64 million, with a margin of 0.4% and representing BRL 539 million year-over-year improvement. This improvement was driven by continued industrial cost reductions, including early benefits from VCP and favorable pricing. Partially offset by lower volumes and higher R&D expenses. In Europe, adjusted operating income was negative EUR 31 million, a deterioration of EUR 468 million compared with last year. Despite higher volumes and continued industrial cost saving, profitability was impacted by unfavorable mix, reflecting higher BEV sales and persistent pricing pressure. In South America, adjusted operating income reached EUR 431 million, broadly in line with last year. Volumes increased 7% in Brazil, compensating for declines in Argentina and other markets. while favorable foreign exchange movements offset pricing and mix headwinds. Overall, South America continues to demonstrate resilience despite an increasingly competitive environment. In Middle East and Africa, adjusted operating income was EUR 244 million, down EUR 28 million year-over-year, primarily reflecting lower volumes in Turkey and the product transition to the fit crazy. Finally, in Asia Pacific, adjusted operating income improved by EUR 22 million, turning to a profit of EUR 18 million in the quarter. Looking ahead to the rest of the year. We are reaffirming our 2026 financial guidance as well as our expectation to generate positive industrial free cash flow in 2027. This reflects the continued execution of our Fast Lane plan, including consistent cost reduction actions. Let me highlight a few key assumptions underlying our outlook. First, our guidance includes approximately EUR 1 billion of net tariff costs, including the EPA credit recognized in Q1. This is a modest improvement from our previous estimate of EUR 1 billion to EUR 1.2 billion. Second, our industrial free cash flow outlook includes approximately EUR 1.6 billion of payments related to the charge recorded in the second half of which EUR 1.1 billion has already been paid through September. This compares with our previous assumption of EUR 2 billion for the full year. Finally, we expect CapEx and R&D spending to represent approximately 6.5% of net revenues in 2026, consistent with the investment framework outlined in our Fast Lane plan. Turning specifically to the fourth quarter, we expect several important developments. With regard to volumes, we remain focused on profitability and align production with demand. Overall, volumes are expected to be higher primarily driven by Europe. In North America, we are managing inventory in Q4 will convert to a similar level to where we began the year considering the introduction of new product offerings. Our outlook also assumes that ongoing labor negotiations in Canada conclude without production disruptions. Now on to pricing. We expect pricing to remain broadly stable overall. Price in North America is expected to remain positive, while price in Europe is stabilizing but remains a year-over-year headwind. On costs, we anticipate additional headwinds from memory ships and recall-related expenses. Regarding VCP savings, we expect savings accelerate in Q4 and reaching mid hundreds of millions of euros, including the carryover run rate of the many initiatives already implemented in Q3. Finally, on working capital. We expect a positive contribution from working capital in Q4, reflecting the normal seasonal dynamics of our business. All of these factors are embedded in our current full year guidance. In closing, while there is still substantial work ahead, we are making tangible progress. Our cost reduction initiatives are delivering results. Our operational discipline is improving. Including manufacturing efficiencies and quality improvements, and we expect these benefits to build as we move into 2027. Thank you. We will now ask the operator to open the line for questions.

[Operator Instructions] The first question comes from the line of Philippe Usha from Jefferies.

Two questions. The first 1 really is on the if you could quantify a little bit the working capital reversal because without growth, in North America. I'm assuming that most of the reversal in Europe as you have long payment terms and helping the reversal. So should we think maybe half of the reversal of Q3 in Q4 in terms of working capital? Or is that the wrong assumption? .

Philip, thanks for the question. We -- the -- we are expecting Q4 our reversal of free cash flow to basically on working capital to basically have working capital for the full year basically flat and the biggest driver of the working capital improvement in Q4 is actually inventory as we sell down the OEM inventory by the end of the year. Usually, we -- we've stopped production before Christmas, and we continue to invoice vehicles that we have on the stock. So -- in terms of analogy, you see -- it's similar to what we had in Q4 last year. So you see a buildup of OEM stock in the first half of the year. And then by the end of the year, we've reduced substantially OEM stock, and that's the primary driver of the basically full reversal of working capital in Q4.

And if I can stay on the cash flow and follow up on the CapEx, I think we've all noted that CapEx was down significantly year-over-year. You reduced the guidance. But -- can you tell us why is down so much? Are you -- is it better productivity? Is it better focus on spending on fewer areas? Or what is driving the reduction in CapEx? .

Well, so as we said on the prepared remarks, the CapEx, it's very consistent to what we had on the Fast Lane. As we know, we had reset at the end of 2025. We prepared a new product plan. And now we are on the working on the development of the new products. So this is just a normal ramp-up of developing the new products. And again, this is consistent. So there's no is slowed down, and we are executing first Lane according to what was presented in May. .

The next question comes from the line of Stuart Pearson from Oxcap Analytics. .

So can we just dig into the industrial cost tailwind a little bit more? I know there's obviously -- you've mentioned some ECP savings picking up there. But just as we look into Q4, I just wonder how big that bridge item I just remember from last year, there was EUR 2.1 billion of, I guess, nonrecurring items actually went into adjusted EBIT. There was warranty stuff, LCV, CO2 staff bankruptcy. And I guess a lot of that drops out, a lot of that would have been in Q4. I think you pulled it out for H2. So if we put that together with what you're saying on the pickup in VCP, I guess against that, there's some raw material costs. It feels like that could be quite a material acceleration in the industrial cost line in Q4. So I just wondered if you could help us Think about that. And also that number into 2027, I think you've talked about the run rate getting towards 2.4 billion is going into 27%. Is that still correct? If you're running ahead of that? And how do you get there from what you're actually doing in Q4 -- so that's going to the first question around industrial costs. And then 1 just quickly on the financial services business, maybe a bit more of a niche question. But obviously, with some strain the credit as the land is how do you see your ability to grow that captive in the U.S., in particular, is there a chance you might think about bringing a partner in there? Or do you think you can still be competitive on financing of the U.S.

For your question. I will take the first one, which is on VCP and industrial costs. And I will leave Joao answering the second one, which is on financial services. So on BCP -- as we introduced in fasten 2030, VCP is our way to address 1 of the 3 initial issues that we saw in the company, initial gaps. That was for product cost competitiveness, where we highlighted in our analysis, a gap with competitors. And we decided to address it with a very broad corporate program which we call VCP value creation program. So what does BCP attack? BCP attacked the full cost structure of Stellantis. And in simple terms, how this cost structure is divided. The first component is product cost, components, systems, subsystem that enter in our products. The second cost component of our cost structure is transformation costs, manufacturing cost. This is all the cost that happened in our plans to realize our production. The third component is logistic costs, both inbound and outbound, and then we have other components. So if we focus on product cost, we have more than 3,000 people working together on that. analyzing system by system, component by component, what are the technical and commercial savings that can be generated to reduce cost. And this is a presential exercise, cost and exercise a consistent exercise in all our regions. And I'll give you an example. We have been able, for instance, through many teardown and through many benchmark to reduce substantially cost of wiring harnesses by working on their layout on the components and on the mass of raw material that they carry. Then we switch into industrial cost, manufacturing cost, and I can give you an example there. In 1 of our French plant, our team has been able to generate an AI-powered tool that make more efficient and effective our method of preventive maintenance. So now in that plant, with the use of this I-Power tool, equipment and machines break less, Thus, we have more productivity and less in efficiency. And with the success of this pilot plant, we are expanding this solution to 100% of our manufacturing plants. Then when we move into logistic costs, and I'm going to provide an example about that as well. So we generated, we invented an AI power tool that we call Optima that is able every day real time to analyze logistics inbound routing and redesign them for the best cost-efficient solution. We started with 1 pilot plant, and now we are expanding the solution Optima to all the plants, and this is generating a lot of savings. And finally, the way we organize our business -- so for instance, in a plant in North America, we define it as important to in-source outstanding. This is a process that was in the hand of a supplier and now in the midterm, we will bring into our plans, and that will generate a lot of savings in the midterm and long-term future. So those are just, for example, one, each area of cost that is consistently and constantly attacking. The way we are today, I am extremely confident that we will exceed the milestones that we set for ourselves in FastLane 2030 around BCP. So we will exceed the EUR 2.4 billion cost saving that we set as a milestone to start 27 million and build on them and we will exceed the EUR 6 billion run rate cost saving by '28 and forward. Very optimistic, very confident because I see a lot of very good and other work that we've been deploying today in the company, and you see also that in the result of quarter 3. In quarter 4, the good job that we started in quarter 2 when continued in quarter 3 will get to multiply the saving that in quarter 3 we are observing. So there will be hundreds of millions euro that will be generated as additional cost savings on quarte 4 on financial services, please?

Yes. So as we discussed during our first line the required equity on financial steps in U.S. for 2027, it's relatively limited, especially when we see the total cash generation provided by our financial services across the world. And by 2028, 2029, we expect actually to start receiving dividends from the financial services. So we are not concerned about providing enough capital to grow properly our financial services in U.S. .

The next question comes from the line of Emmanuel Rosner from Wolf Research.

Great. My first question is on the commodities environment. This doesn't seem to be a factor that you're mentioning is sort of like a meaningful change to your outlook. Some of the automakers that have reported so far have sort of flagged it as essentially trending even with some near-term consequences. And so I was curious if you could just give us a refresh of what is sort of like the headwind you're now expecting for the full year and have seen -- have things changed recently?

Yes. So on commodities, during Q1 and Q2, we said that we would see a cost increase, especially in the second half of the year to be about 1% of revenue. So that's what we saw in Q3, and we are expecting in Q4. So in our guidance, we are expecting year-over-year causing -- 1% of revenue cost increase on commodities. We expect that to increase next year because of some firm contracts that we have that will be renewed, but that will be a discussion that we'll address when we -- at the full year earnings calls, we have the budget. So that's why we are not talking about specifically coats in Q4 because we see a similar impact on Q3. What we are highlighting related to that, it's memory ships that we are seeing pressure -- we didn't see much costs flowing through the P&L in Q4, but that pressure continues to increase. We are right now working to mitigate as much as we can. -- on negotiations and also alternatives. So we are not prepared to disclose a number, but that is on top of commodity headwinds, what we are seeing right now that also is going to build for '27.

Understood. And then my second question is on your inventory target for the end of the year, in particular, in the U.S. How do you plan on bringing it down? Are you planning to cut some production between now and the end of the year? Or is it through the market share gains? .

Very well. I'll take this question. So the way we plan to work in quarter 4 will be through a couple of elements. So we reaffirm the guidance of 4.26, as Joao and myself are stated in this call, including the 27% free cash flow positive, and we will manage the business by Element number 1 balancing volumes with profitability, balancing production with market demand, converging the dealer inventory in the U.S. in the range of 320,000 to 350,000 which is very similar to last year, and that includes also the new products that we've been launching this year. The second element of the way we will manage quarter 4 and the quarter forward will be through discipline in net pricing. So as you've seen in the result of quarter 3, we have been keeping a discipline in net pricing in North America, adding EUR 425 million a positive impact versus last year. We will stabilize net pricing in Europe as we started already, and we will build from there also in Europe, positive position for net pricing. To deemed will be through even further accelerating VCP value creation program cost saving. So you saw results in quarter 3 where industrial cost improvement driven also by BCP has been the largest contributor to quarter 3 results. The way we are seeing today VCP in the company we can foresee that we will multiply result in quarter 4 and then keep growing and accelerating in '27 and forward. So we are very confident, as I said before, that we will exceed our internal target that are EUR 2.4 billion to start '27 and building up on that and EUR 6 billion by '28 as a run rate cost savings. The fourth element that we'll be using to -- for quarter 4 for '27 is keep improving product quality. So you saw in the presentation that we improved product quality in North America by 46%. We also improved the product quality in Europe by 13%, and that will set up the foundation to enjoy the near and midterm, much better total warranty costs and much lower recall campaign costs to start. Most importantly, that will build the foundation to drive Stellantis to be top quartile in product quality in all of the segments in the industry where we compete by '28, and this is 1 of the targets of Fastlane 2030. And finally, the fifth element will be to successfully launch the new products. We have some that are coming still in '26 in quarter 4. One is the very much expected RAM sports truck. I want to remember that the first day of order opening, we went sold out in less than 24 hours. So a very promising start. And then at the very beginning of next year, we will launch also the Ramco master City, which will be for at least 2 or 3 years, the only compact midsized ban in the U.S. industry. '27 will also have other important launches such as a very important product of fancy 4G. We will launch the new Grand Cherqui, the new Jeep Wrangler, the new Gladiator in the second half of '27 as well as the new Dorado in the same second half of '27. So those are the 5 elements that we'll be using to manage quarter 4, full year and then to enter in '27 .

The next question comes from the line of Patrick Emel from UBS. .