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January 28, 2015 12:20 PM, EST

Fiat Chrysler Quarterly Profit Rises on Ram, Jeep Demand

Craig Warga/Bloomberg News

Fiat Chrysler Automobiles reported profit that missed analysts’ estimates as costs for recalling faulty vehicles blunted the benefits from a stronger dollar and sales of Ram pickups and Jeep SUVs in the U.S.

Warranty- and recall-related costs totaled about 650 million euros ($740 million) last year, dragging North America profit margins to 4% in the fourth quarter from 4.7% a year earlier. That took the air out of the London-based company reporting its first profit in Europe since 2007.

Earnings before interest and taxes and excluding one-time items rose 14% to 1.08 billion euros ($1.23 billion), missing the 1.11 billion-euro average of five analyst estimates compiled by Bloomberg News.

CEO Sergio Marchionne said the industry is adjusting to the “new state of affairs” that emerged with last year’s record recalls in the U.S. and predicted those repair costs will come down.

“The machine will continue to make progress and we should see black numbers across all regions,” Marchionne said on a conference call to discuss 2014 results. “We’ve laid a foundation for a set of objectives in 2015, a very clear milestone toward our 2016 and 2018 objectives.”

European operations were profitable for the first time since 2007, and Marchionne predicted a “significant” recovery there this year.

The company is targeting adjusted earnings before interest and taxes to rise this year to between 4.1 billion euros and 4.5 billion euros from 3.65 billion euros last year, when profit in Latin America dropped 64% amid slumping demand in Argentina and Brazil.

“Latin America could remain an issue,” said Vincenzo Longo, a strategist at IG Markets in Milan. The guidance for 2015 is “not too aggressive.”

The company forecast net industrial debt this year to be in the range of 7.5 billion euros to 8 billion euros. That could mean a rise from 7.65 billion euros in debt at the end of the quarter.

Marchionne is seeking to fund a 48 billion-euro investment program aimed at boosting sales 52% to 7 million cars in 2018. To help funding the expansion of Jeep, Alfa Romeo and Maserati into global brands, Fiat Chrysler plans to spin off Ferrari later this year.

The automaker generates more than half its sales and profit from North America, mostly from the U.S. The dollar’s gain versus the euro enhances the margin coming from U.S.-made SUVs and trucks when Fiat Chrysler converts the currency into euros. Foreign exchange fluctuations yielded a gain of 1.3 billion euros for the company’s liquidity last year.

Falling gasoline prices have helped increase demand for large vehicles in the U.S., where consumers bought more trucks than cars throughout 2014. That’s something that hadn’t happened in a decade and bolstered deliveries of Ram pickups.

Even with revenue in North America jumping 15%, profit margins slipped because of the costs of repairs. Those margins should improve this year, Chief Financial Officer Richard Palmer said on the call.

Fiat Chrysler targets sales of 4.8 million to 5 million autos in 2015, up from 4.6 million last year. The growth is backed by plans to bring 20 new models to the market by 2016. Vehicle sales rose 256,000 last year led by the Jeep brand’s increase of 285,000.

The expansion will be partially financed by the spinoff of Ferrari, which will help raise about $4.7 billion. Fiat Chrysler will list 10% of Ferrari and distribute its remaining holding to the company’s investors. The automaker, created last year by the merger of Fiat SpA with its U.S. unit, plans to complete Ferrari’s initial public offering by June.