Fiat Chrysler is closing the gap with Ford, GM on profits

Fiat Chrysler Automobiles showed Thursday that it is making progress in matching the profit margins of Detroit rivals General Motors and Ford in North America.

But FCA CEO Sergio Marchionne said the company is still far behind and cannot allow its costs to escalate — especially with contract discussions under way with the UAW.

During the second quarter, Fiat Chrysler earned a pretax profit of $1.4 billion (1.3 billion euros) in North America. That’s more than double the $650 million (595 million euros) it earned during the same period a year ago.

The automaker has been under pressure to improve its profit margins in North America because both Ford and GM generally have profit margins above 10% in the region.

FCA boosted its profit margin in North American to 7.7% during the second quarter, up from 4.9% over the same period a year ago. The automaker said its profits increased because it sold more cars and trucks, increased its average transaction prices and had gains because of currency rates.

“The most significant thing that has changed in terms of our NAFTA dynamics is that we got smart on pricing. ... We have adapted to market conditions,” Marchionne said. “We had been overly generous in some of the positions we were taking.”

Ford earned a pretax profit of $2.6 billion in North America during the second quarter with a profit margin of 11.1%. GM earned a pretax profit of $2.8 billion in North America during the second quarter with a 10% profit margin.

“There is no doubt that we are pleased with the results of our NAFTA operations,” Marchionne said. “We have undertaken efforts to remedy the shortfall between ourselves and others. We have started that process. We are not even close to competition.”

Marchionne also issued a warning for UAW President Dennis Williams, who has vowed to push for wage increases in contract discussions with both the automaker’s entry-level workers as well as workers hired before 2007.

“All of us who lived through the crisis of the last few years recognize the negative implication of a very shortsighted view of a wage progression,” Marchionne said, in reference to the idea that autoworkers who currently earn a top wage of $19.28 per hour should be able to eventually earn the $28 per hour that workers hired before 2007 earn.

The CEO, who just three months ago issued a passionate plea for rapid industry consolidation among automotive manufacturers, also backed away on Thursday.

On April 30, Marchionne published a document called “Confessions of a Capital Junkie,” in which he made the case that the automotive industry is wasting money on product development and automakers should consider mergers to cut costs. Marchionne also sent a detailed e-mail to GM CEO Mary Barra earlier this year suggesting that the two companies could save money if they combine forces and has said he has explored partnerships with other automakers.

Barra, along with many other automotive CEOs, have rejected Marchionne’s approaches.

“The validity of my argument, I believe, remains unrefuted,” Marchionne said. “I think we need to let market participants deal with this issue over time.”

Marchionne also said the company has not delayed any major programs other than the Jeep Grand Cherokee, which is now scheduled for either 2018 or 2019 — one year later than originally planned.

“We have not postponed anything else, that I can remember, of substance.”

For the quarter, Fiat Chrysler earned a profit of $364 million (333 million euros) during the second quarter despite an $88.5-million onetime charge to cover the cost of a payment to the federal government as a result of a consent agreement the automaker signed with the National Highway Traffic Safety Administration on Friday to settle recall issues.

The quarterly profit was still a 69% increase over the $215 million (197 million euros) it earned during the same period last year.

The automaker’s profit equated to 21 cents per share, beating the expectations of Wall Street analysts who expected the automaker to earn 19 cents per share for the quarter, according to the average estimate of analysts surveyed by MarketWatch.

The results prompted the company’s stock price to rise $1.06 Thursday to $15.58, in part because the company went to great lengths to explain the cost of complying with NHTSA’s consent order.

That agreement requires Fiat Chrysler to pay $70 million in a lump-sum payment within 60 days and spend another $20 million to meet the agency’s requirement, including a buyback program for about 585,000 Ram pickups and Dodge SUVs recalled in 2013.

Marchionne said Thursday that the company has already repaired 70% of those vehicles and can use the $20 million towards the buyback program.

“We do not expect to incur any material cost to this beyond the $20 million under the consent order,” Marchionne said.

With the cost of complying with NHTSA contained, the automaker said it now expects its pretax profits for the year will be equal to or more than $4.9 billion (4.5 billion euros). That is an increase in its guidance from earlier this year, when the automaker said it would earn between $4.47 million (4.1 million euros) to $4.9 billion ($4.5 billion euros.)

The company revised its guidance for the total number of cars and trucks it plans to sell globally downward to 4.8 million. Previously, the automaker said it would sell between 4.8 million and 5 million cars and trucks this year.

In addition to North America, the automaker reported improved profits in Europe, where it reported losses for several years.

Overall, analysts were impressed with the quarter.

Max Warburton, analyst for Bersntein Research, said the automaker’s results were far better than he expected.

“The show must go on, and this will help,” Warburton said. “The score today: Sergio 1, the Doubters 0.”

Contact Brent Snavely: 313-222-6512 or bsnavely@freepress.com. Follow him on Twitter @BrentSnavely.