FCA Posts Q3 Profit; Ferrari Spin-Off Plans Outlined

Fiat Chrysler CEO Sergio Marchionne defends plans to spin off Ferrari to raise capital in support of the automaker’s 5-year growth plan during a conference call with analysts to discuss third-quarter results.

FCA says it will issue a public offering of its interest in Ferrari equal to 10% of the Italian automaker’s outstanding shares in addition to a distribution of the remaining shares to FCA shareholders.

“We’re doing the right thing by giving (Ferrari) a proper and unique place in capital markets to be valued as a luxury automaker,” he says. “It’s the best way to guarantee the least amount of dilution.”

Marchionne adds the decision is the right move for both FCA and Ferrari, noting both automakers must pursue separate paths.

“The board supports management’s determination that this transaction represents FCA’s best course of action to support the long-term success of the group while at the same time substantially strengthening FCA’s capital base,” he says.

In addition to the Ferrari offering, FCA says it will sell a $2.5 billion mandatory convertible bond issue and up to 100 million shares. In addition to funding product plans, the revenue is expected to make a dent in the €11 billion ($14 billion) in debt the automaker is carrying in Q3.

The announcement comes on the heels of the departure of longtime Ferrari CEO Luca Cordero di Montezemolo, who reportedly resigned due to disagreements with Marchionne on the future of the supercar maker, including the decision to sell more than 7,500 units per year.

Marchionne, who took over as CEO of Ferrari, says he plans to retain the automaker’s exclusivity.

“I only made assumptions to increase (output) from current levels up 10,000 (units),” he says. “We have to be respectful of exclusivity of the brand. Our customer base is unique and needs to be preserved. We can’t flood the market.”

Marchionne says volume in the U.S., Ferrari’s largest market, is not going to increase substantially, but notes there has been an increase in the customer base that wants access to the brand.

“Customers of Ferrari should not worry,” he says. “This is a supply-base equation.”

Ferrari revenues in Q3 were up 24% to €884 million ($1.1 billion), with 1,610 cars shipped. Operating profit was €89 million ($113.5 million), including €15 million ($19.1 million) in compensation costs related to di Montezemolo.

FCA’s Q3 revenues were up 14% to €23.6 billion ($29.3 billion) on worldwide shipments of 1.1 million units, a 10% increase vs. year-ago.

Most of the gain was driven by North America, which posted €13.1 billion ($16.7 billion) in revenues on 633,000 deliveries. U.S. market share for the quarter was 12.3% and 14.9% in Canada.

North American earnings were tempered by a number of recall campaigns that Marchionne says are unpredictable.

“It’s impossible to predict what the future will hold (on recalls). We may be at the peak but I can’t call that,” he says. “The industry may have overshot the mark in terms of recall activity. We may have become hypersensitive. We have to see where it ultimately stabilizes.”

While NAFTA had a strong quarter, the South American region performed poorly, with revenue down 12% to €2.2 billion ($2.8 billion). Shipments in the region were 202,000, a decrease of 14%, which FCA says is a reflection of poor business conditions in key markets.

In Asia-Pacific FCA shipped 55,000 vehicles, a 22% hike vs. prior-year. Revenues were up 30% to €1.6 billion ($2 billion) due to higher volumes and better mix.

European shipments rose 3% to 218,000 units, generating revenues of €4.1 billion ($5.2 billion). Strong mix accounted for much of the growth, with the Fiat 500 and Jeep lineups performing well.

“The group’s third-quarter results demonstrate a solid performance in the face of challenging market conditions, particularly in Latin America,” Marchionne says. “And we are on track to deliver on our full-year targets for 2014.”

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