Fiat Posts Strong Q1 2006 Results, Raises Auto Division’s Targets

Fiat reported stronger-than-expected first-quarter financial results yesterday, providing further confirmation that the company's turnaround is proceeding according to plan.

Fiat Posts Strong Q1 Results

Fiat yesterday reported that its first-quarter net income climbed to 151 million euro (US$190 million) on the back of a 16.7% year-on-year (y/y) increase in quarterly revenues to 12.556 billion euro. In the same period last year, the company made a 293 million euro profit but this was thanks to large one-time gains. Excluding special items, Fiat posted a 212 million euro loss in the first quarter of 2005. No special items were booked in the first quarter this year.

Vehicle sales increased by 23.2% y/y to 6.1 billion euro. Robust construction equipment sales boosted revenues at CNH by 123.7% y/y to 2.7 billion euro, while Iveco gained on the back of higher volumes and increased its quarterly revenues by 5% y/y to 2.1 billion euro. Revenues in the Components and Production Systems division rose 12% y/y to 3.2 billion euro thanks to higher revenues at Fiat Powertrain, Magneti Marelli and Teksid.

The 276 million euro increase in group trading profit to 323 million euro reflected the contribution of Fiat Auto, which earned 57 million euro. Group operating income fell from 729 million euro to 323 million euro, but this was due to the fact that the company had booked a 715 million euro unusual gain in the first quarter of 2005 following the ending of its relationship with General Motors (GM). Net industrial debt decreased by 293 million euro to 2.9 billion euro. Its cash position increased from 7 billion euro at the end of the first quarter of 2005 to 8.8 billion euro thanks to bond issuances of 1.4 billion euro.

Fiat Auto Gains on Back of Higher Volumes

The surge in sales volumes was cited by Fiat as a particular growth driver for its core automotive operations. Fiat Auto, which comprises the core Fiat badge as well as Alfa Romeo and Lancia, registered a 23.7% y/y increase in quarterly revenues to 5.7 billion euro. Volume growth allowed Fiat Auto to swing from a 129 million euro loss in the first quarter of 2005 to a 57 million euro trading profit. In addition to higher volumes, Fiat attributed the 186 million euro increase to an improved product mix and containment of governance costs.

Fiat Auto deliveries increased by 15.8% y/y to 485,000 units thanks to strong model launches and the Grande Punto in particular. Vehicle deliveries in Italy increased by 20.7%, boosting Fiat's market share to 30.7%. The 16.8% increase in deliveries elsewhere in Western Europe boosted Fiat's market share in this region by one percentage point to 8%. Its Brazilian market share remained unchanged at around 23.8%, while positive developments were reported in Poland, where Fiat managed to retain its 11% market share despite an overall market decline.

Mixed fortunes were reported by Fiat's two upmarket sports-car brands, Ferrari and Maserati. While Ferrari registered a 27.3% y/y increase in quarterly revenues to 317 million euro, Maserati saw its first-quarter revenues stall. The 6.2% drop in revenues to 121 million euro came as strong Quattroporte sales were unable to offset lower demand for the Coupé and Spider. As a result, Maserati booked a trading loss of 19 million euro, while Ferrari swung from an 8 million euro trading loss in the first quarter of 2005 to an 11 million euro profit.

New Bond Due, Tata Takes Up Board Seat

Coinciding with the release of the quarterly results, Fiat also confirmed that it will proceed with plans to issue another bond to refinance its debt, while the shareholders’ meeting saw the appointment of three new members to the company's board. The terms of the planned 1 billion euro five-year bond will depend on market conditions. The bond will be issued on the Irish Stock Exchange. As expected, the chief executive of India's Tata, Ratan Tata, was among the three new board members.

Outlook and Implications

While the positive first-quarter financial results provide confirmation that Fiat's turnaround is proceeding according to plan for the time being, the operating environment remains extremely tough and challenges persist. Car sales in Fiat's biggest regional market, Western Europe, are not expected to increase significantly in the coming years and Fiat is competing against a number of ambitious automakers. Japan's Toyota, for example, is gearing up its efforts in Europe's 'Big Five' markets, including Italy, while competitors such as Peugeot and Opel are looking to capture their share of sales in the important B segment with new key models this year, making life more difficult for Fiat's Grande Punto, which has so far this year reigned in the compact segment. Stiff competition is likely to lead to pricing pressures, while Fiat will need to keep its promotional spending up to secure that the positive image currently enjoyed by its brands continues.

On a positive note, Fiat's new Punto has proven a solid success in most markets, while new key models from Alfa Romeo have also been well-received. Coupled with a rationalised manufacturing and purchasing strategy, Fiat Auto's chances of meeting its bullish targets appear within reach this year. Upon announcing the auto division's return to the black in the first quarter, Chief Executive Sergio Marchionne said that Fiat Auto would target the upper end of its operating profit forecast range, at 200 million euro, while other group targets, including net income of at least 700 million euro, were confirmed. 'We are beginning to see the benefits of the work we have done', Marchionne said. However, a lot more work lies ahead before the Italian company's turnaround can be completed after years of heavy market-share losses, and efforts to strike up new industrial alliances will feature on Marchionne's agenda in the next year or so as he looks to boost efficiency.