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Chrysler Tops Annual Profit Outlook; Delays Increase

Chrysler Group reported a second-quarter net loss
Sergio Marchionne, chief executive officer of Chrysler LLC, listens during the production launch of the 2011 Jeep Grand Cherokee. Photographer: Jeff Kowalsky/Bloomberg

Chrysler Group LLC, the automaker that topped its full-year operating profit forecast in the first half today, said it won’t increase its guidance until after the third quarter. Fiat SpA, which runs Chrysler, fell on the news.

Chrysler’s net loss narrowed in the second quarter to $172 million from $197 million (129 million euros) in the first three months of the year while operating profit rose 28 percent to $183 million. Through June, Chrysler’s operating profit reached $326 million, exceeding the automaker’s guidance that operating profit would be between break-even and $200 million.

While Chrysler and Fiat Chief Executive Officer Sergio Marchionne said it is “highly likely that both profits and cash flow” will be upgraded after the third quarter, he said he didn’t do it today because he wants to see how the redesigned Jeep Grand Cherokee sells and how the overall industry performs. Fiat shares fell 4 percent from their intraday high.

“The market was clearly looking for more,” Michael Tyndall, an automotive specialist at Nomura Securities in London, said in a telephone interview. He said investors may have expected that the full-year outlook would be increased today. “Marchionne did the exact same thing at Fiat where he said ‘I’m going to wait for Q3 before I’m actually going to make any changes.’ ”

Fiat SpA, which controls the U.S. automaker, fell 20 cents, or 2 percent, to 10.01 euros in Milan trading today. Fiat had gained as much as 22 cents before the Chrysler report.

Along with the operating profit projection, the automaker has said it expects to use $1 billion in cash in 2010. The company has forecast full-year revenue of $40 billion to $45 billion and $2.5 billion to $2.7 billion in earnings before interest, taxes, depreciation, amortization and other expenses.

‘Mathematically Impossible’

“It is mathematically impossible for us not to exceed the targets that we set out for 2010,” Marchionne said on a conference call with analysts and reporters. He also said 2011’s targets could be changed. “It is possible that we may be significantly ahead of plan.”

The title of Chrysler’s presentation even hinted at improvement: “Gearing up for a guidance upgrade.”

Second-quarter revenue rose 8.2 percent to $10.5 billion compared with the first three months of the year, the Auburn Hills, Michigan-based automaker said today in a statement.

Marchionne is benefiting from lower costs after last year’s bankruptcy, while carrying higher customer discounts and expenses related to the production of the redesigned Jeep Grand Cherokee. Marchionne has said the company may sell shares to the public next year.

‘Solid Step’

“It’s a solid step on the way toward going public and validating going public,” Joe Magyer, a senior analyst at The Motley Fool in Alexandria, Virginia, said in a telephone interview before the release.

Worldwide vehicle sales rose to 407,000 cars and trucks in the second quarter, from 334,000 in the first three months of the year, Chrysler said. The 22 percent increase in vehicle sales outstripped the 8.2 percent revenue gain, indicating that Chrysler is getting less money for its cars and trucks. The automaker cited “moderate increases in incentive programs.”

Profit margins below expectations and complications with the Grand Cherokee introduction mean “the numbers have fallen slightly short of recently built hopes,” Max Warburton, a senior analyst at Bernstein Research in London, said today in an e-mail.

“I don’t think there’s anything in these numbers that will change anyone’s fundamental views,” he added.

New Jeep

The changeover to the redesigned Grand Cherokee, which began production in the second quarter, cost around $50 million, largely driven by pre-production and testing expenses, Richard Palmer, chief financial officer, said on the call.

The automaker has about 70,000 orders for the vehicle already, Marchionne said, who called it a “ significant success.”

Chrysler’s U.S. sales in the period rose 31 percent from a year earlier, when the company was restructuring in bankruptcy, while the overall industry increased 18 percent, according to Autodata Corp., a research company based in Woodcliff Lake, New Jersey. Chrysler’s U.S. deliveries have gained 11.9 percent in the first half, trailing the industry’s 16.7 percent increase.

“The second-quarter operating profit confirms that Chrysler Group is on track to achieve its goals, yet an extraordinary amount of work still lies ahead,” Marchionne said in a statement.

Second Hint

This wasn’t the first time Marchionne hinted at improving the year’s forecast. In May, he said Chrysler may beat its forecast and generate cash this year if results through September did as well as in the first quarter. He reiterated his confidence today.

“We may be the smallest of the three in Detroit but we’re not the dumbest,” he said.

Ford Motor Co. in July reported second-quarter net income of $2.6 billion, its fifth straight profitable quarter. General Motors Co., which reported a first-quarter profit of $865 million, today announced plans to release its second-quarter results Aug. 12.

Chrysler said its cash increased to $7.84 billion at the end of June from $7.37 billion on March 31. The company said it can draw on $2.3 billion in credit from U.S. and Canadian governments.

Cash Needs

The company needs to keep a minimum cash balance of about $3 billion to pay for intra-month working capital requirements, Bruce Clark, senior vice president at Moody’s Investors Service, said in a November 2009 note.

Chrysler owes $5.8 billion to the U.S. Treasury, which holds a 10 percent stake in the company. Canada owns 2.5 percent, and a UAW trust for retiree medical costs holds 68 percent.

Fiat, which owns 20 percent of Chrysler, can increase its stake by meeting certain milestones. Marchionne, who also is Fiat’s CEO, has said he expects to increase the stake by 5 percent this year by introducing the Fiat 500 in the U.S.

Marchionne on July 30 told reporters in Detroit that Chrysler could be profitable on a net basis if it wasn’t making interest payments to the U.S. government.

“We have enough cash to pay it all off but you can’t run a business without cash,” he said.

The automaker today also said it identified 119 markets in the U.S. being considered for Fiat dealerships. Those markets have strong small-car registration and growth potential for that segment over the next five years, the company said in a statement on its website.

Fiat Dealerships

Chrysler invited 600 of its dealers from those markets to an Aug. 30 meeting in Detroit to hear about the company’s plans for the Fiat brand in the country. Dealers may submit Fiat franchise proposals through Sept. 22, the company said.

Chrysler is looking to open as many as 200 Fiat locations, said Ralph Kisiel, a spokesman.

“The requirements for Fiat are straightforward: separate sales and display at launch, transitioning to a full dealership facility as the volume grows,” Peter Grady, Chrysler vice president of network development and fleet, said in the statement. “Our goal is to establish a retail network appropriately sized to serve the market opportunity.”

Dealers will be selected in early October, the company said.

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