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Fiat Chrysler’s SUV Push Pays Off

The 2017 Jeep Compass is displayed during the North American International Auto Show in DetroitThe 2017 Jeep Compass is displayed during the North American International Auto Show in Detroit
The 2017 Jeep Compass is displayed during the North American International Auto Show in Detroit, Mich., January 10, 2017. Mark Blinch — Reuters

Fiat Chrysler Automobiles reported an 11% rise in first-quarter operating profit on Wednesday, helped by a surprisingly strong performance in North America where a shift to sales of higher margin SUVs has started to pay off.

The world’s seventh-largest carmaker still makes about 80% of its profits in North America so improving, or at least maintaining, its margins there is a key focus for CEO Sergio Marchionne.

The company said its adjusted operating margin in the region rose to 7.3% in the quarter from 7.2% a year earlier, with net revenue unchanged at 17.1 billion euros ($18.6 billion) despite a 6% year-on-year drop in shipments.

FCA has been retooling some U.S. factories to boost output of sport-utility vehicles and trucks and discontinue production of some unprofitable sedans in a bid to strengthen its finances at a time the U.S. car market is coming off its peak.

FCA (FCAU) shares jumped more than 9%, on track for their biggest one-day gain since October 2014, with traders citing positive signals all round. Europe’s auto index was up 0.9%.

“(North America) and net debt were the main area of focus and came out better than expected, which should reassure investors regarding the ability of FCA to maintain a 7% plus level of operating margin in North America despite a tougher environment,” Barclays said in a note.

Shipments in North America dropped during the period as FCA phased out its low-margin small cars Dodge Dart and Chrysler 200 in favor of its new higher-margin Jeep Compass.

Europe Improves Too

Overall, FCA’s adjusted earnings before interest and tax (EBIT) for the January-March period rose to 1.54 billion euros ($1.7 billion), above a 1.4 billion euros consensus in a Thomson Reuters poll.

Net debt stood at 5.1 billion euros at the end of March, half a billion more than three months earlier, which the company attributed to seasonal factors. It did, however, use some of its available cash to pay off gross debt.

Profitability improved in Europe in the first quarter too, helped by strong sales of Alfa Romeo’s Giulia and Stelvio models, while margins at luxury brand Maserati nearly quadrupled on the back of strong demand for its first SUV, Levante.

Marchionne has made delivering on FCA’s 2018 turnaround plan—centered around the revamp of its Jeep, Maserati and Alfa Romeo brands—his main ambition before stepping down in early 2019.

Part of the plan is making sure FCA generates net cashflow by then, which would also make the group a more attractive merger candidate in the future.

Marchionne has repeatedly called for mergers to share the prohibitive costs of making cleaner and more technologically advanced cars, but he also stressed this month that FCA would focus on delivering its business plan first.

FCA confirmed its target to nearly halve net debt this year and increase adjusted operating profit by at least 15%, but doubts remain about its exposure to the U.S. market, weaker pricing there, recall costs, and potential fines over emissions.