Renault Posts Unexpected Profit Growth on Labor Cutbacks

Renault SA, France’s second-biggest carmaker, reported unexpected growth in first-half profit as labor-cost reductions and higher vehicle prices more than offset slumping sales in a shrinking European auto market.

Earnings before interest, taxes and one-time items, which the automaker calls operating margin, climbed 15 percent to 583 million euros ($774 million) from 508 million euros a year earlier, the Boulogne-Billancourt, France-based company said today in a statement. Earnings were projected to fall to 397 million euro, according to the average of seven analyst estimates compiled by Bloomberg.

Renault reached a deal with unions in March to cut its French workforce 17 percent and freeze wages in exchange for not closing domestic plants for three years. Renault is pushing for more sales outside Europe to reduce reliance on its home region. Chief Executive Officer Carlos Ghosn reiterated operating-profit and free cash-flow targets today for the car division this year.

“After the better-than-expected first-half results, guidance looks achievable,” Sascha Gommel, a Frankfurt-based analyst at Commerzbank AG, said today by e-mail. “We expect a positive share-price reaction today.”

Renault jumped as much as 5.4 percent to 62.88 euros, the highest intraday price since May 20, and was trading up 2.9 percent at 9:25 a.m. in Paris. The stock has gained 51 percent this year, valuing the company at 18.2 billion euros.

Currency Effects

Currency effects reduced the operating margin by 242 million euros, while higher prices for vehicles provided a 261 million-euro boost, Renault said in an online presentation. The operating margin at the carmaking business jumped 82 percent to 211 million euros, with profit as a proportion of sales rising 0.5 percentage point to 1.1 percent of sales. On a group level, earnings widened 0.4 points to 2.9 percent of sales.

The manufacturer said in February that it was targeting a “positive” operating margin and free cash flow for the automotive operations for this year. Renault is “on track to achieve the objectives we announced for 2013,” Ghosn said in today’s statement.

Renault, Turin, Italy-based Fiat SpA and Paris-based PSA Peugeot Citroen have been hit harder by Europe’s recession than their German counterparts because the three automakers are more reliant on the French, Spanish and Italian markets, which have plunged in recent years.

Shrinking Market

First-half auto deliveries across Europe tumbled 6.7 percent from a year earlier to 6.44 million vehicles, the lowest six-month number since 1993, according to Brussels-based European Automobile Manufacturers’ Association.

The European car market is set to shrink for a sixth consecutive year in 2013, and Ghosn predicted earlier this month that the declines will continue through 2015 as unemployment saps consumer demand. Industrywide sales in the region are likely to fall in the second half of 2013, Chief Operating Officer Carlos Tavares told analysts today on a conference call. There is also a risk of slowing demand growth in emerging markets, he said.

The automaker is sticking with car-market forecasts of 2 percent growth worldwide, with the global increase held back by a 5 percent decline across Europe, including an 8 percent drop in France, Chief Financial Officer Dominique Thormann said today at a press conference in Boulogne-Billancourt.

Wage Freeze

The labor agreement enables Renault to eliminate 7,500 jobs by 2016 through attrition. Labor leaders also agreed on a wage freeze this year and to increase the average number of weekly working hours to 35 from 32. The company targets annual savings from the cuts of 500 million euros, Gerard Leclercq, head of Renault’s French operations, said in January.

The first-half operating loss including special items was 249 million euros compared with profit of 545 million euros a year earlier. One-time costs of 832 million euros included a provision of 512 million euros for the automaker’s business in Iran. Net income dropped 95 percent to 39 million euros. Revenue declined 0.9 percent to 20.4 billion euros.

The automotive unit had negative free cash flow of 31 million euros. The division had a net cash position of 732 million euros at the end of the period.

Renault is updating its model line in an effort to attract customers. Vehicles introduced in the last year include Renault’s first compact crossover, the Captur; new versions of the Renault Clio and Dacia Sandero hatchbacks and Dacia Logan sedan and wagon.

Entry-level models accounted for 40 percent of Renault’s group deliveries in the first half, and that range of vehicles gives the company a “global advantage,” Jerome Stoll, head of group sales, told journalists this month. Dacia has reached a target market share in Europe of 2 percent, and the division will continue to post sales gains, he said.

The manufacturer, which owns 43 percent of Yokohama, Japan-based Nissan Motor Co., is aiming for approval from Chinese authorities this year for a joint venture with Dongfeng Motor Group Co., the country’s third-largest carmaker.