Tariffs cause GM, FCA to trim 2018 profit forecasts, stocks hit

By Nick Carey and Ben Klayman

DETROIT (Reuters) - Tariffs were partly to blame for lowered full-year forecasts by General Motors Co (N:GM) and Fiat Chrysler Automobiles NV (FCA) (MI:FCHA) (N:FCAU), pummeling the stocks of both automakers on Wednesday as investors feared escalating trade disputes would hurt margins and sales.

GM cited higher steel and aluminum costs for its 2018 profit forecast reduction as a result of tariffs imposed by U.S. President Donald Trump's administration, sending its shares down 7 percent.

Chief Financial Officer Chuck Stevens said GM put in a "solid performance" in the second quarter "despite some fairly significant headwinds that have built throughout the year."

Stevens told analysts GM would partially offset the commodity hit by negotiating price reductions with suppliers, raising prices on more popular models, and cost cutting.

In FCA's case, Chinese demand slumped in the quarter ahead of a July cut in import duties, resulting in higher incentive spending and an increase in unsold vehicle stocks that "particularly affected Maserati," new Chief Executive Mike Manley told analysts on a conference call.

Manley said "very, very cost conscious" Chinese consumers sat on the sidelines during the second quarter waiting for prices to come down. A rise in the group's inventory will continue to impact results as stocks are cleared ahead of new emissions regulations, he added.

FCA shares were down 15 percent on the New York Stock Exchange.

The automakers' results were overshadowed by news former CEO Sergio Marchionne died after suffering complications from surgery.

FCA said it has fixed-price contracts for most raw steel through 2018, but would see increases in 2019 at current prices.

The warnings from both automakers come amid growing fears over a trade war. Economists polled by Reuters said a now-robust U.S. economy will soon lose momentum on rising interest rates and escalating trade disputes.

GM said commodity costs and unfavorable currency in Brazil and Argentina would have a net impact of around $1 billion on its 2018 results. Previously, GM had expected those costs would total around $500 million.

Most of the costs affect North America, GM's main profit driver. GM's 2018 pre-tax adjusted margin should now be between 9 percent and 10 percent, down from its earlier forecast of 10 percent.

GM buys most of its steel from U.S. producers, who have raised prices in reaction to tariffs on imported steel imposed by the Donald Trump administration.

GM's U.S. sales performed well in the second quarter and the automaker said its full-size pickup truck plants are still running at more than 100 percent capacity to keep up with demand. GM will start selling its new full-size pickup trucks to customers next month.

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Both GM and FCA are betting on redesigned pickup trucks to lift U.S. sales. Around 80 percent of FCA's second-quarter profit came from the U.S. market and the automaker said its new trucks should help lift its North American pre-tax adjusted margin to 10 percent in the second half of 2018.

Despite the tariffs, GM CFO Stevens said the recent U.S. tax overhaul and low unemployment should help keep industry-wide U.S. new vehicle sales at a robust level either slightly below or on par with sales in 2017.

"What happens beyond 2018, there’s a lot of uncertainty in this space at this point in time," he said.

GM also said higher costs would reduce adjusted automotive free cash flow by around $1 billion to $4 billion.

FCA said its net industrial cash flow in 2018 would fall to 3 billion euros ($3.50 billion) from a previous forecast of 4 billion euros.

GM said it now expects to earn around $6 per share, down from its previous forecast of $6.30 to $6.60.

"The magnitude is greater than expected and the headwinds could’ve probably been better communicated in advance," Citi analyst Itay Michaeli said in a research note, who described GM's outlook as "disappointing."

In May, Japan's SoftBank Group Corp (T:9984) said it would invest $2.25 billion in GM's autonomous vehicle unit Cruise, sending the automaker's shares up nearly 13 percent.

With the profit warning on Wednesday, all of those share price gains have now been lost.

FCA said it expected 2018 net revenues between 115 billion and 118 billion euros, down from a previous forecast of around 125 billion euros, while adjusted EBIT is expected at between 7.5-8.0 billion euros from at least 8.7 billion.

Ford Motor Co (N:F) will report results after the close of trading on Wednesday.