Italy’s Fiat returns to Q2 profit, approves separation of auto and industrial businesses

Fiat makes profit, approves split into 2 companies

MILAN — Italian automaker Fiat, which controls Chrysler, on Wednesday pushed ahead with plans to split into two companies as it reported a return to second-quarter profit on improved sales of farm equipment and trucks.

Fiat announced its board approved the plan to separate its industrial vehicle and auto businesses into two distinct companies in order to create a global automotive company that will eventually incorporate Chrysler Group LLC. The plan was announced in April.

Fiat Group SpA, which makes cars under the Fiat, Alfa Romeo and Ferrari brands, trucks, construction and farming equipment, reported a second-quarter net profit of euro90 million ($115.6 million) compared with a loss of euro168 million in the same period last year. Net revenues were up 12.5 percent to euro14.8 billion.

“This has been an outstanding quarter for this group,” Fiat CEO Sergio Marchionne told an analyst conference call.

Marchionne, who also is CEO of Chrysler, said he expected Chrysler to post an operating profit when it reports its second quarter earnings next month.

“We made an operating profit in Q1 in Chrysler. We are goingto make another operating profit in Q2,” Marchionne said.

Fiat’s results sent shares in the company 6.74 percent higher to euro9.66 ($12.41) in Milan. But Moody’s announced that it was putting Fiat’s Ba1 credit rating under review for possible downgrade due to the demerger plans.

“The spin-off of Fiat Industrial will result in a weakening of Fiat’s business profile compared to the present combined Fiat Group to the extent that it would reduce the scale and the diversification of each of the separate entities,” Moody’s said in a statement.

It said the review would consider debt strategy and cash allocation in the new companies.

Bernstein analyst Max Warburton said the better-than-expected quarterly results should lead the way for strong reports across the European auto sector. He had expected Fiat to underperform French and German competitors, which have yet to report, but was forced to revise his assumptions.

“Missing the degree of Fiat’s progress in Q2 is probably a classic case of a European auto analyst trying (and failing) to follow global construction markets and Brazilian developments,” Warburton wrote in a note. “But Fiat beat numbers massively, largely due to a massive improvement in the operating results of CNH, the Powertrain business and a better-than-expected auto result, driven by Brazil and LCVs,” or light commercial vehicles.

Revenues at CNH construction and agriculture rose 16 percent to euro3.3 billion as higher sales in North and South America helped offset weak markets in Europe, Australia and the former Soviet Union, Fiat said. Iveco trucks saw revenues soar 18.3 percent to euro2.1 billion with deliveries up 32 percent to 34,318 vehicles amid early signs of recovery in the sector.

Fiat said in a release that recovery in the light commercial vehicle business offset a drop in passenger car sales, particularly in Italy and Germany, after incentive programs to scrap old vehicles and buy new ones in Europe were ended. In all, Fiat Group Autos reported revenues of euro7.4 billion, up 6.4 percent.

Fiat this quarter launched the Alfa Romeo Giulietta, a key model for the survival of its Alfa Romeo brand, which celebrates its 100th anniversary this year and is to be launched later in the United States. It also has been working to squeeze performance out of its engines, and this month presented the Fiat 500 with a new 2-cylinder TwinAir engine using the automaker’s MultiAir technology.

Marchionne also announced that due to labor concerns in Italy, Fiat would produce the next generation multiperson vehicles for the Fiat and Lancia brands in Serbia — not Italy as intended. Three models will replace the Fiat Multipla, Fiat Idea and Lancia Musa, all currently produced at Fiat’s Mirafiore plant in Italy. They are scheduled to go on sale in 2012.

The decision follows tense negotiations to move production of the new Panda from Poland to Pomigliano near Naples. Fiat announced earlier this month that it would go ahead with euro700 million investment in the Pomigliano plant despite opposition by one union that opposes labor concessions sought by Fiat. But the resistence to Fiat’s plans has forced the automaker to slow its planned investments in Italy, Marchionne said.

“Fiat cannot assume unnecessary risks in connection with the project” to increase manufacturing in under-utilized Italian plants, Marchionne said. “We are taking about substantial amounts of money, in excess of euro20 billion, that will be invested over a number of years and requires the certainty of implementation.”

Fiat confirmed its 2010 targets, including break-even net profit, trading profit of between euro1.1 billion and euro1.2 billion and revenues exceeding euro50 billion, but said it was likely to revise the forecasts upward based on next quarter’s earnings.

Marchionne said it would be “significantly north of the number we have left in the market.”

Fiat, meanwhile, is proceeding with the spinoff of the industrial side to create Fiat Industries SpA, comprising CNH agriculture and construction equipment, Iveco and FPT Industries and Marine activities. Fiat SpA will include Fiat Group Autos, which includes the Fiat, Alfa and Lancia brands, Maserati and 85 percent of Ferrari, as well as components businesses and other related assets.

Fiat has previously forecast that the “new” Fiat, or auto company, will have revenues of euro64 billion ($86.31 billion) by 2014, while Fiat Industrial revenues will be euro29 billion. Debt will be shared by the two companies.

The demerged company will be quoted on the Milan Stock Exchange, with each current Fiat shareholder receiving one share of each company. The spinoff, which is expected to take effect on Jan. 1, still requires approval of Fiat shareholders.

“The demerger will provide strategic and financial clarity to both businesses and enable them to strategically develop independently of each other,” Fiat said in a statement.

Based on CNH results, Warburton said the future Fiat Industrial looks to be “powering up — earlier than we expected.”

(This version CORRECTS Rewrites, adds comments from conference call, closing share price; Moody’s review, corrects debt to be split by two new companies and full reference to Chrysler Group. Conference call scheduled for 1400 GMT.)