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Fiat took full ownership of Chrysler only in January when it bought out the minority interests held by the Chrysler employee retirement health fund, VEBA. since then the uncertainties about the full combination have gone away and the company has been putting together a brand-new strategic plan to operate the two businesses in a fully integrated fashion.
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The two companies presently continue to maintain their separate corporate identities, for legal, tax and financing reasons. However a formal legal merger of the two companies could take place later, once certain bond liabilities on the Chrysler balance sheet are paid off and, what is referred to as, the “ring-fencing” of the Chrysler balance sheet no longer is an issue.
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In any case a primary listing on the New York Stock Exchange for the new top-level company, Fiat Chrysler Automobiles, or FCA, which is founded in the Netherlands and will have its head office in London, is being planned for later this year and SEC filings are being made and approvals sought for this to take place.
So while all that kind of structural and organisational work goes on in the background, on the ground the company has been getting ready to unveil its new business thinking. And it finally did so yesterday with the first day of a two day investor event laying out the much-awaited new five year strategic and investment plan for Fiat Chrysler Automobiles.
Each of the Fiat Chrysler Automobiles brand heads presented its plans for the future, with Jeep leading the charge in an aggressive plan to increase its presence world wide, and to supply some of it markets from plants in China and Brazil.
As expected Alfa Romeo is once more being resuscitated as an upscale challenger to BMW and Audi, with several new models to be built in Italy and sold in export markets again, particularly in the US where Fiat Chrysler Automobiles now has the benefit of the nationwide Chrysler sales and distribution system.
Meanwhile within North America the Chrysler and Doge brands will be rationalised somewhat to prevent them cannibalising each other sales, so they can concentrate on attacking their competitors instead.
Finally at the top end Ferrari will remain highly exclusive with annual sales of just 7, 000 units. However a good deal of its leading edge technology advantages will enable its sister company Maserati to continue its bid to become a leading luxury brand, with new models and increased market penetration. The gorgeous new Maserati Alfieri sports coupe is now authorised for production, as the halo model for the brand.
This new Fiat Chrysler Automobiles plan is certainly ambitious, and for the first time it is also meticulously detailed. With total net industrial debt currently of just under US$14 billion (Euros 10 billion) Sergio Marchionne plans to pay 90% of it off by 2018, and to do so from profits generated by, essentially, doubling the company’s operating margins from 4% to a more tenable industry average of 8%. Along the way he will increase capital expenditures and R&D rapidly as well, peaking at just over US$15 billion at (Euros 11 billion) in 2016, to develop the products that will make the difference – all to be paid for out of cash flow.
The automobile industry is all about constantly investing in regenerating product, as without it the business is so competitive a company will rapidly die. Throughout this last recession Marchionne was content to starve his European factories of new product, reckoning pragmatically that in the terrible business conditions there was no pay off, and conserving his dwindling cash reserves instead.
Now Europe is recovering again this argument immediately goes into reverse, and new models are now planned for Fiat as well, with additional versions of its successful 500 series, and the addition of new low end models as well – to be built in Turkey to continue to shave costs.
But it will be with the huge investments now committed to be made in Alfa Romeo and Maserati upon which renewed prosperity of the group’s Italian factories will now depend.
Fiat Chrysler group product volumes are planned to increase from 4.4 million units to 6.3 million units by 2018, almost a 50% increase. Consolidated revenues should then reach over US$180 billion (Euros 132 billion) by the end of the plan and the all important annual EBITDA number should double from the current level of approximately US$11 billion (Euros 8 billion) to over US$23 billion (Euros 17 billion) in 2018.
If these projections are indeed met then net income of close to US$ 7 billion (Euros 5 billion) should be earned in 2018, with EPS then at around US$5.50 (Euros 4) per share.
Capital expenditures and R&D together are expected to total some US$66 billion (Euros 48 billion) over the five year plan, peaking at just over US$15 billion (Euros 11 billion) in 2016.
Meanwhile the current level of net industrial debt, of around US$14 billion (Euros 10 billion) at the end of the just ended first quarter to March 31st, 2014, is expected to peak at just over US$15 billion (Euros 11 billion) in 2015 and then fall radically to around just US$1.4 billion (Euros 1 billion), all paid for by cash flow, by the end of the plan.
Finally existing unfunded pension liabilities are expected to be slashed from their current US$5.5 billion (Euros 4 billion) also to around US$ 1.4 billion (Euros 1 billion) by 2018, including from US$2.8 billion (Euros 2 billion) of cash contributions to the fund and the rest through changes in expected interest rates.
While Fiat Chrysler Automobiles is keeping its promise not to dilute the shareholders further, with this plan, it is also warning no dividends will be paid during the period either – a fair compromise if it puts the company back on top of its game one might think.
While this is an ambitious plan, if the products planned are really as good as they need to be, then the nature of the car business is such that the cash subsequently rolls in in what is a business both dependant on, and highly rewarding of, high volumes.
After many delays and false starts therefore, the game is on and it will be fascinating to see it develop. Just as the starting point for reference, FCA also issued its 2014 first quarter results yesterday, reporting for the first time with a 100% ownership position in Chrysler. On US$30 billion (Euros 22 billion) of revenues FCA eked out a small net profit of US$95 million (Euros 71 million) in the first quarter, excluding unusual charges incurred, mostly relating to the VEBA transaction, of US$435 million (Euros 315 million).
So basically a break-even for the first quarter, as Chrysler profits soaked up continuing losses at Fiat. But not a bad place to start from, to rebuild the company. Now all the waiting is over therefore and it is time for CEO Sergio Marchionne and his new baby Fiat Chrysler Automobiles to deliver with this plan. If he does nobody will be more pleased than his boss John Elkann, heir to the Agnelli empire.
Of course no industry demands a counter-cyclical investment plan more than the automobile industry, yet predicting the timing and duration of its business cycles remains notoriously difficult – some have even called it a complete crap-shoot.
But if Sergio Marchionne has got his timing right for this strategic investment plan, and the new products are indeed well-executed and accepted by his customers, then it could be very much a winning formula and the gamble will then pay off.
It is important that he gets it right as the company will face substantial debt maturities along the way, and rolling these over at cheap rates will remain straightforward only to the extent progress is clearly being demonstrated step by step. Having got off to something of a delayed start too, because of a fairly protracted dispute with VEBA over the final price for their shares last year, now the newly fully combined Fiat Chrysler Automobiles has to run even a bit harder to stay in front of the cycle.
For now though given Marchionne’s track record to date, shareholders are likely to give him substantial benefit of the doubt, as indeed they should.
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