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Feb 7, 2019

Fiat Chrysler shares tumble on weak outlook after sale of unit

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Already standing in the long shadow of his predecessor, Fiat Chrysler Automobiles NV Chief Executive Officer Mike Manley faces a series of challenges to keep the automaker on track after less than a year at the helm.

After disappointing investors on Thursday with a lower-than-expected outlook, Manley is under pressure to keep a commitment to reinstate dividend payments for the first time in a decade even as he struggles to engineer a turnaround in Europe and Asia.

Fiat Chrysler shares plunged as investors registered disappointment with its latest results. The company pointed to stronger earnings growth in North America, which is its largest and most profitable market, but analysts fixated on higher-than-expected costs in the region in the fourth quarter.

The Italian-American automaker’s full year forecast for 6.7 billion euros (US$7.6 billion) in adjusted earnings before interest and taxes fell well below targets that ranged as much as 28 per cent higher. The stock drop was the worst since July 25, shortly after Manley took over from an ailing Sergio Marchionne.

Manley, 54, is battling issues left over from the Marchionne reign, as well as new ones that have emerged on his watch. The Chinese market weakened substantially in the second half of the year, and the automaker had difficulty ramping up production of a new Ram truck.

Lessons Learned

“We’ve learned some lessons in 2018 and encountered some new challenges,” Manley said on a call with analysts. “We are starting the year with new leadership team members with the experience and the mandate to improve our operations.”

Fiat shares were down 12 per cent at 3:00 p.m. in New York. They’ve declined 20 per cent since Manley made his debut with investors in July.

Fiat Chrysler expects full-year earnings of 2.70 euros a share, down from 3.00 euros a share in 2018. That gloomier outlook contrasts with forecasts for growth this year from Detroit rivals General Motors Co. and Ford Motor Co., despite similar headwinds.

“Even if FCA’s problems and 2019 pressures can be attributed to external factors, common across the industry, it’s inevitable that concerns about management and strategy will now intensify,” Max Warburton, an analyst with Sanford C. Bernstein & Co., wrote in a note to clients.

The automaker posted strong quarterly profit and sales gains in North America, but costs failed to come down as much as it predicted last year, causing it to miss analysts’ earnings expectations. Manley had said expenses would come down as the company completed its ramp-up of a new Ram 1500 full-size pickup, but those savings failed to materialize, Demian Flowers, an analyst with Commerzbank, said in an email.

“It doesn’t fill you with confidence,” he noted.

Diminished Outlook

The carmaker also forecast a jump in capital expenditures that diminished the outlook for industrial free cash flow in 2019 as it steps up investment to launch its all-new Jeep Wagoneer and Grand Wagoneer SUVs, and electrify its lineup to meet tightening emissions regulations.

In Asia, Fiat Chrysler swung to a loss of 296 million euros in the fourth quarter, as sales of the Jeep Cherokee SUV disappointed and competition in the segment intensified. Under Marchionne, Fiat Chrysler had difficulty establishing itself in China, the world’s largest car market. It has tweaked its SUV lineup there to appeal more to local preferences, but that effort has stalled as Chinese vehicle demand experienced the first annual slump in 20 years.

Sales of luxury brand Maserati also continued to be weak, a stubborn problem Manley identified soon after taking over as CEO. The brand, split off from Alfa Romeo in October as part of a broader shake-up, gets about 50 per cent of its profit from China. Manley has said he didn’t expect a rebound in sales until the second half of 2019.

Updated Guidance

“A lot has changed in a lot of different places since the last updated guidance,” Bloomberg Intelligence analyst Kevin Tynan said.

The auto industry has come through a difficult few months, marred by trade tensions and falling sales in the U.S., Europe and China, the world’s biggest market. The demand headwinds add to the strains caused by spending to develop self-driving and electric vehicles, as those investments will take years to pay off.

Daimler AG, the world’s largest maker of heavy trucks, issued two profit warnings last year, partly because of China’s trade spat with the U.S., which led to added tariffs on its Alabama-made SUVs.

As recently as October, Fiat Chrysler tamped down speculation it was interested in a deal that would compromise its independence, but Manley said Thursday he is open to partnerships with other automakers to cut costs and maximize production capacity. The CEO specifically cited Europe as ripe for collaboration, a region where last year the company’s sales dropped, inventories rose, and profit margins fell by nearly half to 1.8 per cent.

“What you’re going to see is more collaboration in Europe to try and drive the scale that will drive the cost down, particularly as you get into the early to mid 2020’s,” said Manley, who noted Fiat Chrysler’s collaboration with Peugot SA on commercial vehicles, and BMW AG on autonomous vehicles.

Betting Heavily

In the meantime, Manley, the former head of the Jeep and Ram division, is betting heavily that new Ram brand pickups and the Jeep Gladiator midsize truck due out later this year will pump up profits despite a flattening U.S. sales environment this year.

North America posted adjusted Ebit margin equaling 8.6 per cent of sales in 2018, up from 7.9 per cent a year ago. Overall, profit margins are expected to stay steady at 6.1 per cent of sales this year.

“On the whole there was a lot of downward adjustment to many countries, but NAFTA’s still strong,” Tynan said.

Fiat Chrysler is counting on continued demand for high profit margin vehicles in North America to fund an expected payout to shareholders. When pressed on the call, company executives expressed confidence they can deliver on the promised dividend despite increasing uncertainty in global markets.