Fiat targets improved Chrysler margins to meet '14 profit goal

Weak Q2 financial results in N.A. spur review

Fiat officials signaled today they plan to review leasing and sales incentives, mostly at the Chrysler Group, in North America to boost profit margins in the second half of 2014.
UPDATED: 7/31/14 8:40 am ET - adds Marchionne comments

MILAN -- Fiat plans to review its leasing and sales incentive practices in North America to boost profit margins in the region as it seeks to meet global full-year earnings targets despite persistent weakness in Latin America and further losses in Europe.

The North American operations, dominated by Chrysler Group, have become an increasingly important profit center for Fiat after its business in Europe was hit by a six-year market slump and now make up more than half of the group's global sales.

But second-quarter operating profit in the region fell 18 percent despite a 7 percent rise in sales, hit by higher incentives put in place to sell older Chrysler models and a higher proportion of leasing deals, which offer lower margins than retail sales to individual customers.

Fiat earnings were also hurt by unfavorable currency exchange rates in the region.

Fiat CFO Richard Palmer said "positive pricing actions to recover vehicle content enhancements" on newer models were "substantially offset by increased incentive spending on legacy products."

Some of those legacy models include the Dodge Caravan minivan, and Jeep Patriot and Compass crossovers.

Costs related to the launch of the new Jeep Cherokee and Chrysler 200 models also hit first-half earnings, but no similar costs are expected in the second half of the year.

"One of the big drivers for the improvement in the second half of the year has to be [North America] and those are the things we need to go after," Palmer told analysts in a post-results conference call.

"There is some opportunity to improve our margins in the second half of the year as we look at the commercial policy of those items," he added.

Sergio Marchionne, CEO of Fiat and Chrysler, said margin enhancement will be a priority in North America to take better advantage of the company's strong performance in a U.S. market that is forecast to remain solid.

He indicated Chrysler Group's U.S. deliveries are forecast to rise in July, extending the company's year-over-year sales gains for the 52nd consecutive month. 

"We need to become a lot more disciplined on the pricing side of this and I don’t think we seized every opportunity that’s available," Marchionne said on the conference call. "I don’t think that we are suffering from pricing pressures on a competitive basis. I don’t think we have been proactive enough in terms of pushing the portfolio in the market."

Chrysler Group's second-quarter results are scheduled to be released on Aug. 11.

Fiat Chrysler reaffirmed all of its full-year targets earlier on Wednesday and even slightly raised its forecast for global sales to around 4.7 million vehicles, but analysts had doubts.

"We expect many to remain sceptical that it will achieve these targets, which remain back-end-loaded," said Citi analyst Philip Watkins in a note.

“A large part of the miss came from Nafta [North America], where the company managed to make less money” even as revenue rose, George Galliers, an analyst at ISI Group in London, said in an e-mailed note.

Maserati’s profitability was also disappointing as Fiat ramps up volumes and sells more lower-priced Ghibli sedans, he said. 

Lower profit in the Nafta region “undermines the whole bull story about margins catching up with” profitability at Ford Motor Co. and General Motors, said Rabih Freiha, an analyst at Exane BNP Paribas in London. “If it’s pricing, as in the first quarter, then this would be a very negative signal.”

U.S. listing

Fiat is completing a merger with Chrysler to create Fiat Chrysler Automobiles as it seeks to boost the world's seventh-largest carmaker's appeal with international investors and to pave the way for a U.S. share listing for the combined entity in October this year.

Shareholders will vote on the merger at a meeting on Friday.

The full merger is part of a strategy Fiat unveiled in May, under which it plans to invest 48 billion euros ($64 billion) over five years to boost sales by 60 percent and increase net profit five-fold -- all targets analysts said were highly ambitious.

Fiat Chrysler plans to focus on exports of its Maserati, Alfa Romeo and Jeep brands to make up for some of the weak demand in its traditional markets, especially Italy, and increase its exposure to the more resilient premium brand market.

Reporting second-quarter results on Wednesday, the Italian carmaker posted a 10 percent drop in earnings before interest and taxes, including special items, to 961 million euros, weighed down by a persistently weak market in Latin America, a region that used to account for a quarter of Fiat's profits.

Analysts were expecting a poor performance in the region, because of the impact of the strong euro against local currencies and the end of a car buying incentive program in Brazil, but the 23 percent drop in sales there was bigger than some had expected.

Nevertheless global sales rose 5 percent to 23.3 billion euros in the three months, boosted by double-digit percentage increases in Asia and the company's luxury brands, which include Ferrari and Maserati.

Marchionne said the European market, where the group nearly broke even in the quarter helped by sales of Fiat 500 models, the new Fiat Ducato light truck and Jeeps, was stabilizing, although he warned that overcapacity and cost pressures were still hurting margins.

Net debt stood at 9.7 billion euros at the end of June, down from 10 billion at the end of March.

Shares in the company, which have risen 28 percent in the year to date, closed down 2 percent, underperforming a 1 percent fall in Milan's main market index.

Reuters and Bloomberg contributed to this report.

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