Fiat Reports Q1 Net Loss, Announces Demerger of Industrial Units

The Fiat Group has announced that it has seen a trading profit during the first quarter of 2010, as it expanded revenues for the period. For the three months ending 31 March, the overall business saw its sales revenues increase by 14.7% year-on-year (y/y) to 12.9 billion euro (US$17.4 billion), and this has resulted in a trading profit of 352 million euro compared to the trading loss announced during the first quarter of 2009, while operating earnings also improved from a loss of 129 million euro to a profit of 352 million euro. However, Fiat did report that it had seen a net loss for the quarter of 21 million euro, although this was still better than the 411 million euro loss recorded a year ago. The Fiat Group also saw its net industrial debt rise by 300 million euro to around 4.7 billion euro, with a fall in its liquidity from 12.4 billion euro to 11.2 billion euro compared to three months ago, partly as a result of the repayment of a 1-billion-euro bond.

On a unit basis, the important Fiat Group Automobiles (FGA) business contributed to the strength of the revenues and profits. Sales revenues of this unit rose by 22.1% y/y to 6.84 billion euro, while trading earnings went from a loss of 30 million euro to a profit of 153 million euro. This was boosted by a combination of favourable currency exchange rates and improved volumes, as light vehicle sales rose by 14.6% y/y to 532,400 units. This was led by a 13.4% y/y improvement in its European markets where many of those that are offering or had previously offered government-backed incentives continued to surge. Its important Brazilian market also continued to grow compared to a year ago, but slower than the market rate, resulting in market share declining by 1.5 percentage points to 22.3%.

Separately, its luxury sports-car brands saw diverging fortunes during the period. The Ferrari brand's revenues dropped 6.1% y/y to 414 million euro, and trading profit declined 27.2% to 39 million euro. The reason for this was a less than favourable product mix in which the automaker had yet to feel the effects of its new 458 Italia model, as well as the first quarter of 2009 only reflecting the initial effect of the economic downturn on its business. Maserati on the other hand reported an increase in its revenues of 10.4% y/y to 127 million euro, supported by the new GranCabrio and improved trading profits from 3 million euro to 4 million euro.

Elsewhere, its other units also performed far better than the same quarter a year ago. The Iveco commercial vehicle business witnessed gains in revenues of 11.2% y/y to 1.69 billion euro, as the market for these vehicles began to recover, as the total number of deliveries made increased by 25.3% y/y to 26,919 units. This in turn resulted in trading earnings bouncing back from a loss of 12 million euro to a profit of 3 million euro, helped by an improvement in efficiencies offsetting reduced vehicle prices. Higher passenger car and commercial vehicle demand has also had a knock-on effect on the component supply businesses. Its engine and transmission development and manufacturing arm, FPT Powertrain Technologies witnessed an improvement in revenues of 23.2% y/y to 1.36 billion euro, as trading earnings improved from a loss of 58 million euro to a profit of 13 million euro. A similar situation has taken place at Magneti Marelli where revenues have improved by 30.4% y/y to 1.27 billion euro, and it has achieved a trading profit of 19 million euro compared to a loss of 40 million euro. Only its agricultural and construction equipment arm, Case New Holland (CNH), has seen sales revenues stagnate at 2.58 billion euro, due to the negative effects of currency exchange rates against the U.S. dollar. However, cost-containment measures helped improve trading profits from 49 million euro to 127 million euro.

Fiat Reveals Five-Year Strategy, Plans to Demerge Industrial Unit

Following the announcement of financial results for the first quarter of 2010, the Fiat Group revealed its plans for 2010-2014 during a six-hour meeting. Possibly the most significant details divulged were the plans to demerge the company's industrial units—comprising CNH, Iveco and FPT Industrial and Marine—from its automotive-based businesses of FGA, its stake in Chrysler, Ferrari, Maserati, Magneti Marelli, FPT Passenger and Commercial Vehicles, Teksid and Comau. Chief executive officer (CEO) of Fiat, Sergio Marchionne said that while in the past maintaining the structure had been favourable as the business returned to its feet, the differing earnings cycles, market volatility, capital requirements and returns on capital employed meant that a demerger would provide an improvement in strategy and coherence including the ability to unlock greater value and the ability to grow independently. The demerged unit of the company will be called Fiat Industrial and the shareholding structure in the company would mirror that of Fiat's current structure, with the three classes of shares being listed on the stock exchange in Milan (Italy). The split to shareholders would be on a 1:1 basis. The move is expected to take place over the next six months. Marchionne added that there were still decisions to be made on how the debts of the company will be allocated, with one idea splitting it 50:50. However, he added that bonds issued would remain with the automotive-based business.

Despite this headline moment, Fiat also laid out how it would approach the next five years. The aspects discussed included:

Product Plan: During this time, the automaker's European Union (EU)-based operations will launch a host of new models. These will include for Fiat:

• New city car in 2013.
• New entry-level B segment model in 2012 that will also be sold in the North American market.
• New five-seat and seven-seat multi-purpose vehicle (MPV) from 2012, the former also being sold in the North American market.
• Replacement C-segment hatchback, estate and sedan to be launched in 2012/13, the latter also being a North American model.
• Dodge Journey-based sport utility vehicle (SUV) from 2011.

The integration of the Lancia and Chrysler model line-ups will also take place in this time. Among the models to be launched are

• The New Lancia Ypsilon in 2011.
• Joint C-segment hatchback, estate and sedan to be launched in 2012, being manufactured by Chrysler.
• New D-segment sedan built by Fiat but primarily sold in North America.
• New Chrysler 300 C and Grand Voyager from 2011.
• New crossover that will be produced by Chrysler from 2013.

Despite rumours to the contrary earlier this year, there are also plans to invest in new models at Alfa Romeo beyond the recently launched Giulietta, which include:

• New five-door MiTo from 2013.
• New Giulia model to replace the 159 sedan and station model from 2012.
• New Spider.
• Two Chrysler developed small and medium-sized SUVs from 2012 and 2014.

Many of these Alfa Romeo models will be launched in to North America to coincide with the brand's re-entry there (see United States – Italy: 22 April 2010: Fiat Outlines Alfa Romeo's Return to U.S. Market).

The Fiat Professional range of commercial vehicles will also receive a refresh including new car-derived vans, a Doblo pick-up and a one-tonne pick-up derived from a Ram product and built in the United States.

European Production Strategy: Having caused controversy by its plans to close the Termini Imerese plant in Sicily (Italy) over the past six months, Fiat said that between 2010 and 2014 it was hoping the see capacity utilisation levels surge despite the facility's closure. All its plants will benefit from the new models, and if everything goes as anticipated, it is expecting production in Italy by this time to reach 1.4 million units of passenger cars and 250,000 commercial vehicles, with around 65% of this exported, up from 40% in 2014. However, it added that it would require maximum shift levels to reach this point, access to temporary lay-offs and rigorous containment of labour and overhead costs.

Outside its domestic market, Fiat is looking to increasingly bring the Kragujevac plant in Serbia on stream, with La Stampa reporting that this will build a redeveloped version of the new Brazilian-developed Uno for the European market (see United States – Turkey – Italy: 20 April 2010: Fiat Reportedly Launching Five-Door 500, New Small Car; Delays Introduction of Doblo to U.S.). However, while the Bursa plant in Turkey will also see a small rise in utilisation, the Polish Tychy facility will see a decline, perhaps not helped by the decision to shift Panda production to Italy (see Italy: 1 April 2010: Fiat Confirms Plans to Move Panda Production Back to Italy).

International Growth: Despite having failed to achieve some of the targets set out in a strategy session in 2006, most notably Russia and China, the automaker has returned with what it considers to be an improved plan. Having set the foundations with its joint ventures with Tata Motors in India, Guangzhou Automobile Group in China (see China – Italy: 7 July 2009: Fiat Signs Chinese Manufacturing Agreement with Guangzhou Auto), and Sollers in Russia (see Russia: 12 February 2010: Fiat, Daimler Increase Exposure to Russian Market) over the past few years, the company is now looking to build on this. In India, Fiat will use its experience in small cars and is looking to attain a 5% market share, around 130,000 units per annum (upa) by 2014. In China, five new models will go on sale beginning in 2012, including two in the popular C segment and two SUVs, which it hopes will achieve 300,000 unit sales by this time. In Russia, eight different Fiat- and Chrysler-based models will be introduced, from the B to D segments and comprising SUVs and light commercial vehicles (LCVs), targeting sales of 280,000 units by this point.

Fiat will also continue to expand its successful Brazilian operations, with plans to attain sales of 1.125 million units by the end of the period. North America is also expected to yield further sales, with all FGA, Fiat and Alfa Romeo products selling 105,000 units by 2014, excluding the locally built Fiat 500 which is expected to sell 100,000 upa.

Fiat-Chrysler Integration: The integration of Fiat and Chrysler has already been laid out from a product perspective, and this will continue during the course of the plan. Synergies will be gained from standardised architectures, components and sub-systems; the sharing of best practises and areas of common innovation, such as alternative powertrains. Estimates of the costs saved from purchasing, engineering, sales and powertrains over the next five years between Chrysler and FGA come to 1.5 billion euro, while the establishment of a Fiat-Chrysler group for purchasing is forecast to save 2.9 billion euro in materials, services, machinery and equipment. Chrysler will also continue to feel the benefits of Fiat's World Class Manufacturing (WCM) programme.

Outlook and Implications

Fiat has provided a detailed vision of its future plans. Despite the pressures that it faced in 2009, the efforts that it has already made and the strategy it has laid out should put it in a strong position to capitalise on the upswing in vehicle demand when it eventually takes place. The "New" automotive-focused Fiat is expecting to achieve sales revenues by the end of the term greater than that seen by the conglomerate prior to the crisis hitting fully in 2008, at 64 billion euro. By this time, trading profit is also expected to be around double that seen then, at between 3.2 billion euro and 3.8 billion euro, with an earnings before tax, depreciation and amortisation (EBITDA) of 6.9. This part of the business will also see its capital expenditure (capex) reaching a peak next year of 4.5 billion euro, before returning to a level of between 3.5 billion and 4 billion euro towards the end of the plan. When joined with the expected revitalised Chrysler Group, this is forecast to be a 100-billion-euro business with EBITDA of up to 14.6 billion euro. However, despite the optimism among management that this is attainable, it is likely to depend on the state of the global economy and the markets within it. The key year is likely to be 2011, when the company anticipates that the situation is going to pick up and when it is planning to make the bulk of its investment. If for any reason this does not take place, and the rate of recovery shifts or even reverses for any reason, it may well eat into the potential profits of the plan, and components of it will be delayed until they are more feasible. There is also the continued assumption that Chrysler will be able to contribute its part of the combined 6-million-unit sales. However, while its sales have not been setting the world on fire recently, the efforts by the new management to improve future prospects are already starting to pay dividends (see United States: 22 April 2010: Chrysler Announces H2 2009, Q1 2010 Financial Results), and while some of the claims for its future are optimistic, given Marchionne's efforts with Fiat in the past, they should not be discounted.

However, life will continue as normal while the company remains in its current structure, and it reiterated its expectations that 2010 will be a year of transition and stabilisation, with all businesses except the light vehicle unit seeing improvements. It will also continue with the cost cutting that it has implemented since late 2008, although the restrictions on capital expenditure are expected to ease, and rise by between 30% and 35% over 2009. It is now currently forecasting sales revenues of around 50 billion euro, with trading profits of around 1.2 billion euro. Net income is expected to break even now, having previously expected a profit of between 200 million euro and 300 million euro. It added that its net debt levels will be above 5 billion euro. This reduction in forecast has come as a result of the Italian market incentives being withdrawn. However, the company is already taking advantage of government schemes to halt production to keep a handle on costs, having halted production in February for two weeks. With this in mind, the company will no doubt continue to aggressively keep a handle on its inventory until normal levels can be resumed.