UPDATE 2-Fiat to focus on improving Chrysler margins to meet 2014 profit target

Wed Jul 30, 2014 1:31pm EDT

* Fiat Chrysler Q2 EBIT down 10 pct to 961 mln euros

* Results hit by weak Latin America, disappointing N. America

* Says Europe stabilising, but overcapacity remains (Recasts after conference call, adds analyst's comment, updates share price)

By Agnieszka Flak

MILAN, July 30 (Reuters) - Fiat plans to review its leasing and sales incentive practices in North America to boost margins in the region as it seeks to meet its global full-year targets despite persistent weakness in Latin America and further losses in Europe.

The North American operations, dominated by Chrysler, the third-largest U.S. carmaker which Fiat now fully owns, have become an increasingly important profit centre for Fiat after its business in Europe was hit by a six-year market slump and now make up more than half of the group's global sales.

But second-quarter operating profit in the region fell 18 percent despite a 7 percent rise in sales, hit by higher incentives put in place to sell older Chrysler models and a higher proportion of leasing deals, which offer lower margins than retail sales to individual customers.

Costs related to the launch of the new Jeep Cherokee and Chrysler 200 models also hit first-half earnings, but no similar costs are expected in the second half of the year.

"One of the big drivers for the improvement in the second half of the year has to be (North America) and those are the things we need to go after," Chief Financial Officer Richard Palmer told analysts in a post-results conference call.

"There is some opportunity to improve our margins in the second half of the year as we look at the commercial policy of those items," he added.

Fiat Chrysler reaffirmed all of its full-year targets earlier on Wednesday and even slightly raised its forecast for global sales to around 4.7 million vehicles, but analysts had doubts.

"We expect many to remain sceptical that it will achieve these targets, which remain back-end-loaded," said Citi analyst Philip Watkins in a note.

U.S. LISTING

Fiat is completing a merger with Chrysler to create Fiat Chrysler Automobiles as it seeks to boost the world's seventh-largest carmaker's appeal with international investors and to pave the way for a U.S. share listing for the combined entity in October this year.

Shareholders will vote on the merger at a meeting on Friday.

The full merger is part of a strategy Fiat unveiled in May, under which it plans to invest 48 billion euros ($64 billion) over five years to boost sales by 60 percent and increase net profit five-fold - all targets analysts said were highly ambitious.

Fiat Chrysler plans to focus on exports of its Maserati, Alfa Romeo and Jeep brands to make up for some of the weak demand in its traditional markets, especially Italy, and increase its exposure to the more resilient premium brand market.

Reporting second-quarter results on Wednesday, the Italian carmaker reported a 10 percent drop in earnings before interest and taxes (EBIT), including special items, to 961 million euros, weighed down by a persistently weak market in Latin America, a region that used to account for a quarter of Fiat's profits.

Analysts were expecting a poor performance in the region, because of the impact of the strong euro against local currencies and the end of a car buying incentive programme in Brazil, but the 23 percent drop in sales there was bigger than some had expected.

Nevertheless global sales rose 5 percent to 23.3 billion euros in the three months, boosted by double-digit percentage increases in Asia and the company's luxury brands, which include Ferrari and Maserati.

Chief Executive Sergio Marchionne said the European market, where the group nearly broke even in the quarter helped by sales of Fiat 500 models, the new Fiat Ducato light truck and Jeeps, was stabilising, although he warned that overcapacity and cost pressures were still hurting margins.

Net debt stood at 9.7 billion euros at the end of June, down from 10 billion at the end of March.

Shares in the company, which have risen 28 percent in the year to date, closed down 2 percent, underperforming a 1 percent fall in Milan's main market index. ($1 = 0.7475 euros) (Additional reporting by Bernie Woodall in Detroit; Editing by Greg Mahlich)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article