Fiat Returns to Net Profitability During 2010

Fiat SpA has announced the financial results of the now demerged group for 2010, with an improvement in both sales and profitability. In a statement released by the automaker, for the year ending 31 December 2010, the combined businesses saw sales revenues increase by 12.3% year-on-year (y/y) to 56,258 million euro (US$77,119.6 million). This helped it to a trading profit more than double 2009's, rising from 1,058 million euro to 2,204 million euro. Operating earnings and net income also improved significantly. In the case of the former, profits increased almost six-fold from 359 million euro to 2,009 million euro, while the latter jumped from a loss of 848 million euro to a profit of 600 million euro. As was also the case earlier in 2010, the fourth-quarter financials offered further contribution to these improvements. In the fourth quarter, sales revenues rose by 10.4% y/y to 15,017 million euro, as trading profit grew 26% y/y to 615 million euro, operating profits improved from 63 million euro to 443 million, and net earnings turned from a loss of 283 million euro to a profit of 318 million euro. Fiat revealed that during the year it had also reduced its net industrial debt from 4,418 million euro to 2,442 billion euro, thanks to a strong operating performance from all its businesses and continued management of its working capital. Under the demerger of Fiat Industrial from Fiat SpA that took place on 1 January, this debt has been split 1.9 billion euro and 0.542 billion euro respectively. Its liquidity also increased from 12.4 billion euro in 2009 to 15.9 billion euro, with 3.7 billion euro being shifted to Fiat Industrial under the demerger, and the remainder held by Fiat SpA.

On a unit basis, the businesses tha make up the core of the now spun-off Fiat Industrial offered some of the biggest profit gains during the year. The Iveco commercial vehicle business witnessed a gain in revenues of 15.6% y/y during the year to 8,307 million euro, on higher sales from the overall global recovery in this sector compared to 2009, and its total deliveries increased by 24.8% y/y to 129,630 units. This in turn resulted in trading profits almost trebling from 105 million euro to 270 million euro, helped by these improved sales as well as additional production efficiencies. The Case New Holland (CNH) agricultural and construction equipment business also improved, as sales revenues grew by 17.8% y/y to 11,906 million euro, thanks to increased levels of demand from its Americas and rest of the world markets. The impact of improvements made in volumes, plant utilisation, cost-containment measures and a favourable product mix have all combined to lift this unit's trading profit from 337 million euro to 755 million euro.

In the important Fiat Group Automobiles (FGA) business, which now forms the core of Fiat SpA following the demerger, the picture for 2010 has been less positive. Sales revenues of this unit in the year rose by 6.0% y/y to 27,860 million euro with a 1.8% y/y retreat taking place in the final quarter to 7,120 million euro. Overall light vehicle deliveries fell by 3.2% to 2.08 million units, and passenger car sales fell by 8.2% y/y to 1.69 million. Its European market has been the main cause of this fall as passenger car sales fell by 15.1% y/y to 963,000 units due to the high base of comparison caused by the scrapping incentives which benefited the automaker during 2009. It was in turn not helped by measures to realign dealer inventory with demand, as well as a decision to hold off some new launches until the market in the region picked up. However, despite the withdrawal of incentives in Brazil, demand has risen a further 1.6% y/y to 761,400 units. Overall, because of the increase in purchasing and manufacturing efficiencies, improved product/market mix, particularly in the area of light commercial vehicles (LCVs), it still recorded a 29.1% y/y improvement in trading profits to 607 million euro.

Separately, Fiat's luxury sports car brands saw an ongoing improvement in fortunes during the period. Ferrari's revenues have risen by 7.9% y/y to 1,919 million euro, coming from an improvement in unit sales thanks to the new 458 Italia model and its customisation programme. These benefits and improved manufacturing efficiencies have improved trading profit the year from 238 million euro to 303 million euro. Maserati recorded an even greater increase in sales revenues with an increase of 30.8% y/y to 586 million euro, supported by the new GranCabrio, which helped towards an increased trading profit from 11 million euro to 24 million euro.

In the rest of its businesses, its engine and transmission development and manufacturing arm, FPT Powertrain Technologies benefited from the consolidation of Fiat-GM Powertrain Polska following the acquisition of General Motors' (GM's) 50% stake, and which has seen a 24.9% y/y increase in revenues to 4,211 million euro. However, even on a like-for-like basis, this was still up by 11.1% y/y. Improved manufacturing efficiencies has seen its trading profit gain from 104 million euro 140 million euro. Split down under its new organisation following the demerger, the FPT Industrial business contributed 2,415 million euro, an increase of 52.8% y/y, while trading earnings recovered from a loss of 131 million euro to a profit of 65 million euro. Magneti Marelli ended the year on the positive trend that it had seen through the year as its sales revenues increased by 19.3% y/y to 5,402 million euro, and it has achieved a trading profit of 98 million euro compared to 25 million euro a year ago.

Outlook and Implications

Having successfully completed the demerger process of the business, the now separate entities can now fully focus on their plans leading to growth in the medium term. Significant improvements need to be made at Fiat SpA, and particularly the FGA business. Key to this will be improving the productivity of its domestic manufacturing operations through the gaining concessions from employees to work more hours and stopping the absenteeism that is rife at its plants. It has already reached agreements with the majority of workers at the Pomigliano d'Arco and Mirafiori sites, and is now eyeing similar conditions at its Cassino and Melfi facilities. However, despite this, there could well be growing opposition against this programme as the success at Mirafiori was marginal at best. This has not been helped by the activism of the FIOM union, which has rejected the proposals for both plants and is organising strike action for today, the turnout for which is likely to be a good indicator of support and the chances of the automaker making these plans a success.

However, Fiat is also looking at becoming less dependent on Italy for its future growth. During the past year it has announced the investment in a second plant in Brazil (see Brazil – Italy: 15 December 2010: Fiat Confirms Investment in New Brazilian Plant, Receives Approval for Separate Industrial Unit from Italian Stock Exchange), as well as beginning construction at a new joint venture (JV) plant in China which will give it a stepping stone into the market. Fiat is also nearing the completion of its investment in Serbia from which it will produce two new small multi-purpose vehicles (MPVs), as well as signing a substantial JV contract with Russia's Sollers (see Russia: 12 February 2010: Fiat, Daimler Increase Exposure to Russian Market). Having surpassed a milestone giving it 25% of Chrysler, this relationship is also further developing. The first fruits of this will come during 2010 when the first Chrysler-built Fiat 500s reach North American customers, while European customers will start receiving some of the U.S. automaker's vehicles as Lancia and Fiat-branded models. During the analyst call following the release of its financial results, Marchionne hinted that the company has "an abundant cash cushion" to fund investments and lift its stake in Chrysler by 16%. However, he added that "the proposal entails an agreement among many parties." Marchionne also said that Chrysler's "business has gone well" and that its results are in line with guidance, but warned that interest rates attached to government loans had kept it from profit, according to Bloomberg News.

For 2011, Fiat is forecasting that the separate entities will achieve financial results in line with those given at the unveiling of its 2011-2014 mid-term strategy. This anticipated that Fiat SpA would achieve sales revenues of around 37,000 million euro, trading profit of between 900 million and 1,200 million euro and a net profit of around 300 million euro. It also expects a net industrial debt of between 1,500 million and 1,800 million euro, while capital expenditure (capex) will stand between 4,000 million and 4,500 million euro. Fiat Industrial expects sales revenues of around 22,000 million euro, trading profit of between 1,200 million and 1,400 million euro and a net profit of around 600 million euro. It also expects to see net industrial debt of between 1,800 million and 2,000 million euro, while capex will stand at around 1,400 million euro.