Fiat Chrysler Accelerates Debt Reduction as SUVs Boost Profit

  • Carmaker confirms plan to lift earnings, eliminate debt
  • Demand for Chrysler Jeeps, Maserati Levantes drove income

Fiat Chrysler Automobiles NV plans to cut debt by at least 45 percent this year as the Italian-American carmaker enters the final stretch of a project to turn liabilities into cash by selling more expensive autos.

Net industrial debt will narrow to less than 2.5 billion euros ($2.7 billion) from 4.6 billion euros at the end of 2016, Fiat Chrysler said Thursday in a statement. While that still puts the company far from a target of having at least 4 billion euros in net cash by the end of 2018, it represents a massive leap after cutting just 464 million euros from its debt load last year. The stock climbed to its highest level in nearly two years.

Eliminating debt is one of the key challenges Chief Executive Officer Sergio Marchionne faces to fulfill an ambitious financial plan before he retires in 2019. Another obstacle is an investigation announced by U.S. regulators in January over Fiat Chrysler’s alleged failure to disclose software that violated emissions rules. The company, which has disputed the claims, didn’t set aside any provisions for fines or recalls stemming from the probe and isn’t anticipating any, as the company appeals to President Donald Trump to ease past the issue.

Fiat Chrysler’s 2017 guidance, which includes a 16 percent jump in operating profit, “would suggest that the company is set to continue to grow earnings and beat expectations,” even as growth stalls in North America, George Galliers, an analyst with Evercore ISI, said in a note to clients. “The same cannot be said for the majority of other” carmakers.

The stock rose 1.2 percent to 10.33 euros at the close of Milan trading.

2018 Goals

The company, which has been expanding the Jeep brand and shifting into lucrative sport utility vehicles at the expensive sedans, said it’s confident that this year would put it on the path to achieving its ambitious 2018 goals, which include boosting adjusted earnings before interest and taxes to as much as 9.8 billion euros.

20162017 Targets2018 Targets

Net revenue
 
EU111b

EU115b-EU120b

~EU136b

Adj. EBIT

EU6.06b

>EU7b

~EU8.7b-EU9.8b

Net Industrial
(Debt)/Cash

(EU4.6b)

(<EU2.5b)

EU4b-EU5b

Marchionne’s strategy is starting to bear fruit, as profitability improved in all regions, despite slowing growth in the U.S. and Europe. In North America, the operating margin widened to 7.4 percent in 2016 from 6.4 percent a year earlier, even as deliveries slumped 5 percent. While the company remains dependent on profit from that region, earnings more than doubled in Europe and Asia, and it erased losses in Latin America.

Fiat Chrysler’s profit was also bolstered by demand for the luxury Maserati brand’s new Levante SUV. The unit’s earnings more than tripled to 339 million euros and its margin more doubled to 9.7 percent.

Trump Ties

Despite the emissions investigation, Marchionne has been off to a good start under the new U.S. administration. His $1 billion plan to assemble three new Jeep models in the U.S. and shift production of a Ram pickup truck from Mexico won plaudits from Trump, who’s pressuring the auto industry to manufacture north of the border.

At a meeting with Marchionne and other CEOs at the White House earlier this week, Trump pledged to ease off on environmental rules and taxes and offered incentives to draw new carmaking plants to the U.S. Fiat, which trails on fuel efficiency because of its shift to big cars, stands to gain more than its peers from looser environmental regulation.

Fiat’s willingness to cooperate with Trump is “clear,” and the carmaker will continue to look at an infrastructure shift to the U.S., Marchionne said on a call with analysts. The CEO said he didn’t discuss a scrapped plan to merge with General Motors Co. with the president, as he focuses on trimming debt and boosting earnings.

“I don’t want this house to be disturbed by anything other than the accomplishment of the 2018 plan,” said Marchionne. Still, a merger between GM and Fiat would create the world’s biggest automaker and could follow Trump’s “argument of ‘America first’.”

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