FCA counting on Tonale to sustain profit recovery in Europe

#1

The Giulia and Stelvio re-established the brand to many consumers, and the Tonale is key to keeping the sales momentum going.

MILAN — Fiat Chrysler Automobiles expects to restore profitability in Europe by the fourth quarter or earlier, CEO Mike Manley says, despite starting the year by reporting a loss.

Manley told analysts on FCA’s earnings call on May 5 that he expects “subsequent quarters will see a return to profitability, with the region recovering to around a 3 percent margin by the fourth quarter.”

FCA’s profit margin in Europe was 1.8 percent in 2018 after reaching a high of 3.23 percent in 2017, when Alfa Romeo production was running at full speed.

For the first quarter, however, FCA posted a loss of 19 million euros ($21.3 million) before interest and taxes in the Europe, Middle East and Africa region, just its second quarterly loss since 2015. In the same quarter last year, FCA posted a 182 million euro ($204 million) profit.

FCA revenue in the EMEA region fell 10 percent because of lower volumes. Vehicle shipments were down 44,000 units or 12 percent to 302,000, with the Alfa and Fiat brands accounting for nearly all the decline, Manley said.

Among the big players in the region, only Ford also announced first-quarter results. The U.S. automaker reported a 50 million euro ($57 million) profit, more than halved from the first quarter of 2018 but still a 0.7 percent margin.

Alfa sales drop
According to market researchers JATO Dynamics, sales of Alfa Romeo’s Giulietta hatchback dropped 42 percent in Europe in the first quarter, while deliveries of the Giulia midsize sedan fell 45 percent and the Stelvio midsize SUV was down 16 percent. In the U.S., Giulia sales were down 34 percent in the quarter, while Stelvio declined 16 percent.

All three Alfa Romeo models are produced in Cassino, Italy. FCA has cut production there to align it with declining demand. According to union sources, Cassino worked 10 days out of 21 in March and nine days out of 20 in April, with workers temporarily laid off.

FCA management said the decline in passenger car volume in the region primarily was a result of discontinued models and the decision to reduce dependence on low-margin channels, especially self-registrations. Dealer stock inventory was down 13,000 units from the end of the previous quarter.

Among the headwinds in the EMEA region, Manley also cited negative market pricing, adverse exchange rates and higher compliance costs, including the incorporation of new powertrain technologies.

Restructuring to save 100 million euros
“A number of factors” will drive the business to a better short-term performance, Manley said:

The reduction in sales through low-margin channels.
Jeep’s increase in sales.
“A number of restructuring activities” that will kick in late in the second quarter, although the full effect will not be seen until 2020. The head count reduction will affect both white and blue collars, Manley said. This year, he said, it will yield “a benefit between 80 and 100 million euros (run rate) by the fourth quarter.”
The restructuring is being driven by the need to “streamline the commercial side of the business,” Manley said, and by a weakness, compared to European peers, in how much of its plant capacity is being used. FCA will try to fix the latter both through its investments in electrification and by “working with the unions, making appropriate head count reduction,” he said.

Last December, FCA and the unions signed an agreement for up to 1,050 early retirements at the Mirafiori and Grugliasco plants, with 800 of those being blue-collar jobs. Company incentives for those retirements would be 4,000 to 38,000 euros ($4,500 to $42,500).

Both plants currently work on Maserati models.

The Maserati premium brand, which is reported separately from the EMEA region, also had a tough first quarter. Operating profit fell 87 percent to 11 million euros ($12.3 million), with a 2.3 percent margin. Shipments dropped 41 percent to 5,500, the lowest quarterly figure since the third quarter of 2013.

No new models until 2020

The three main EMEA-based brands of FCA — Fiat, Alfa Romeo and Maserati — have launched no new models since the Stelvio was unveiled at the Los Angeles Auto Show in November 2016. No launch is scheduled for this year, while a new battery electric Fiat 500 is expected to start production in 2020.

As far as Alfa Romeo is concerned, FCA’s 2018-22 business plan, presented last June, envisioned the launch of seven new or refreshed models. In Geneva, Alfa showed a concept version of a compact crossover, the Tonale. No schedule has been given for the possible launch of a production version.

IHS Markit analyst Ian Fletcher expects Alfa sales in the countries that are members of the European Union and European Free Trade Association will drop 17 percent to 68,900 vehicles this year, then slightly recover in 2020 to 74,500 on the back of the expected launch of the Tonale. “That model would be key,” Fletcher said.