Peugeot-Citroen Swings To Profit On Market Recovery

[Plex]

PARIS (Dow Jones)--French car maker PSA Peugeot-Citroen (UG.FR) Wednesday reported a swing back to profitability in the first half of this year due to a recovery in the automobile market, market share gains and the launch of new models.

The company hardened its outlook for the full year, saying it expects to report a recurring operating profit of "around EUR1.5 billion." In April, it had said it anticipated "significant" operating profit for the 12 months.

Peugeot-Citroen added it expects its automobile division will be close to break-even in the second half of this year following a EUR525 million operating profit in the first half, representing an operating margin of 2.5%, compared with an operating loss of EUR904 million in the first half of 2009.

It said it now expects the European automobile market to contract by 8% this year. That is slightly more optimistic than the 9% decline that the company had predicted previously.

Peugeot-Citroen posted net profit of EUR680 million in the six months ended June 30, compared with a loss of EUR962 million in the same period a year ago. For all of 2009, Peugeot-Citroen reported a loss of EUR1.16 billion.

Revenue for the group surged 21% to EUR28.39 billion, and recurring operating profit swung to EUR1.14 billion from a loss of EUR826 million a year before.

On a per-share basis, the first half generated a profit of EUR3.00, compared to a loss of EUR4.24 a year ago.

Peugeot-Citroen said a cost-reduction program introduced last year aimed at trimming overheads by EUR3.3 billion through 2012 contributed EUR854 million toward the improvement in operating profitability. A sharp recovery at automotive supplier subsidiary Faurecia SA (EO.FR) also made a significant contribution to the bottom line.

Chief Executive Philippe Varin said in a statement: "The group is now well on track to rebuilding sustainable profitability with strong first-half results driven by market share gains and the benefits of the performance plan."

Initial reaction from industry analysts was positive. "Varin is clearly delivering on his plan, in a difficult market," said Michael Tyndall, auto industry specialist at Nomura International. The market had been anticipating a good set of numbers, he said, "but their full-year guidance is 27% ahead of consensus, which should be enough to move the stock up."

Varin is driving the company to expand its sales outside the mature markets in Europe, and part of that strategy is to boost production and sales in China, where sales are growing at double-digit rates and where Peugeot-Citroen recently created a second joint-venture.

"We are now confident that we will generate half of our vehicle sales outside Europe by 2015, compared to one-third at the beginning of the current year," Varin said.

After a surge in the first half of the year, fuelled by government scrapping incentives, the European auto market is expected to fizzle in the latter part of 2010 as these artificial supports are withdrawn, and Peugeot-Citroen said it expects market conditions through year-end will be more difficult.

Industry analysts expect an escalation of the current price war as car makers vie to maintain or increase market shares.

Revenue at Peugeot-Citroen's automobile division rose 14% in the first half to EUR21.17 billion, with sales of new cars up 15% as the company's Citroen and Peugeot brands increased their European market share to 14.5% from 13.7% a year ago.

Inventories stood at 482,000 vehicles at the end of June, a level that the company described as "appropriate" given the planned factory shutdowns in August and prospects for a strong seasonal rise in U.K. sales in September.

Sales in China surged 50% in the first half to 176,000 vehicles and profitability also improved, and Chinese operations delivered a EUR97 million net profit, it said.

Net debt fell to EUR1.73 billion on June 30 from EUR1.99 billion at the end of 2009 due to EUR341 million of positive free cash flow, and Peugeot-Citroen had EUR10.4 billion of liquidity at mid-year. Gearing improved to 12.5% from 16% six months before.

Varin told reporters the company is in advanced talks with the French government to pay down EUR1 billion of the EUR3 billion emergency loan it obtained from the French state in early 2009 to ease its liquidity squeeze amid the crisis then battering the automobile industry. Chief Financial Officer Frederic Saint-Geours said the loan matures in April 2014, but the company is eager to pay it off as it is expensive, carrying a base interest rate of 6% that rises according to the company's financial performance with a ceiling of 9%.

Varin added that the company could outperform its EUR1.1 billion cost reduction objective for 2010, pointing to the EUR854 million in savings achieved in the first half through better capacity utilization, productivity gains and procurement optimization.

WSJ