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Fiat Chrysler close to completing turnaround as truck push lifts margins

Reuters, Agnieszka Flak, Nick Carey Jan 29 2018, 0:02 IST

Fiat Chrysler's (FCA) shift to sell more trucks and Special Utility Vehicles (SUVs) boosted margins yet again in its North American profit centre, making Chief Executive Sergio Marchionne confident he can hit most of the final targets of his five-year turnaround plan.

FCA has been retooling some US factories to boost output of lucrative sport-utility vehicles and trucks while ending production of some unprofitable sedans.

This put the worlds seventh-largest carmaker on track to become debt-free by the end of the year, and allowed Marchionne to make good on his promise to close the margin gap on larger US rivals General Motors (GM) and Ford.

As the 65-year-old executive prepares to hand over the reins to an internal successor next year, he said the improvements mean the company no longer needed a partner to survive.

The carmaker has often been the subject of merger speculation, especially after its unsuccessful 2015 attempt to tie up with GM.

"The necessity to find a partner, to try and guarantee our survival, going forward, is put to bed. I mean we're done," Marchionne told analysts on a post-results conference call.

North America accounted for 71% of earnings last quarter and profit margins in the region rose to 8 percent from 7.1% a year earlier, even as shipments fell 3 percent.

Meanwhile Ford's automotive margin for North America slipped to 6.8%, down from 8.5 percent a year earlier.

Analysts said the margin improvement was impressive, especially given that FCA was in the midst of replacing the Jeep Wrangler and Cherokee models and its RAM 1500 truck.

FCA trimmed its expectations for 2018 revenues and forecast adjusted operating profit of at least €8.7 billion, at the lower end of a previously given range.

Cancel debt

But the Italian-American carmaker expects to cancel all debt during 2018 - possibly already by the end of June - and generate around €4 billion in net cash by the end of the year.

"The 2018 forecast is an indication of what this machine can produce," Marchionne added. "We're going to run our business and we are going to run hard."

For the fourth quarter, FCA reported a 22% rise in adjusted earnings before interest and tax, in line with a Thomson Reuters poll of analysts, also helped by improvements in Europe and Latin America.

Milan-listed shares initially fell after the earnings, but they quickly recovered as analysts welcomed FCA's efforts to erase debt and improving performance across regions.

FCA is "a name where we continue to see attractive valuation, strong earnings growth and the need for positive earnings revisions by the street," said Evercore ISI analyst George Galliers, who has an "outperform" rating on the stock.

Marchionne said the 2018 cash forecast did not include any one-off measures, nor the impact from a potential spin-off of parts maker Magneti Marelli, which he plans to present to the board in February and execute in the course of 2018.

A US tax code overhaul passed in December is expected to provide a $1 billion boost this year.

Since taking over at Fiat in 2004, Marchionne has been widely credited with reviving one of Italy's top corporate names and rescuing US Chrysler from bankruptcy.

In 2014, he launched an ambitious five-year plan centred around reviving the Jeep, Maserati and Alfa Romeo brands. Erasing all debt was another key plank of that plan.

"We're now fighting with equal arms from a financial standpoint with the competitors," Marchionne said.

He will present the next strategy to 2022 in June.

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