Peugeot Reports First Profit in Three Years on Cost Cuts

PSA Peugeot Citroen, Europe’s second-largest carmaker, reported better-than-expected profit in the first half as cost cuts and new models helped it return to the black after three years of losses.

Peugeot rose the most in more than five months in Paris trading after reporting operating income of 477 million euros ($640 million) before one-time gains and charges, compared with a deficit of 100 million euros a year earlier. The figure beat the 358 million-euro average of eight analyst estimates compiled by Bloomberg.

The French company, which hadn’t been profitable since the first half of 2011, has teamed up with Chinese manufacturer Dongfeng Motor Corp. to expand outside Europe, where demand is gradually recovering from a two-decade low. Peugeot’s effort to end losses, which stemmed from a reliance on Europe’s saturated car market, included closing a factory near Paris last year and focusing on more profitable new vehicles.

“It’s a major boost for the credibility of their turnaround plan,” Jose Asumendi, a London-based analyst at JPMorgan Chase & Co. with an overweight recommendation on the shares, said by phone. “This stock is going to go back on the radar of many portfolio managers.”

Peugeot jumped as much as 8.5 percent, the steepest intraday gain since Feb. 19, and was trading up 5.9 percent at 11.22 euros at 9:43 a.m. The stock has surged 44 percent this year, valuing the carmaker at 8.8 billion euros.

‘Rigorous Control’

The manufacturer, which ran through about 3.4 billion euros in cash over the past two years, generated operating cash flow of 1.67 billion euros in the first half as it reduced the number of cars sitting on dealer lots by 30,400 vehicles, the Paris-based company said today in a statement. “Rigorous control” of inventory helped improve working capital by 1 billion euros, Chief Financial Officer Jean-Baptiste de Chatillon told journalists on a conference call.

The company stuck to a forecast for 3 percent car-market growth Europe, where demand reached a two-decade low in 2013 following a six-year contraction.

“We have of course what we consider as a very unstable situation in Europe,” Chief Executive Officer Carlos Tavares told analysts on a call. “The slight rebound that we’re seeing is still very fragile, so we remain cautious.” Peugeot hasn’t published a target for 2014 earnings.

Russian Contraction

“Uncertainty in emerging markets” and a sluggish recovery in French auto demand are among “challenges and risks” in the second half, Peugeot said. The company is predicting that the Russian market will drop 10 percent this year and industrywide car sales in Latin America will fall 7 percent.

The company reaffirmed goals of reporting positive operational cash flow by 2016 and generating automotive operating profit of 2 percent of sales by 2018.

The turnaround project is being financed in part by a stock sale earlier this year that brought in Dongfeng and the French state as investors with 14 percent stakes apiece, matching the holding of the founding Peugeot family.

Tavares outlined plans in April to scale back the carmaker’s lineup to 26 models by 2022 from 45 vehicles now and transform the upscale DS badge, which was originally part of the mid-market Citroen unit, into a full-fledged premium brand. The strategy also includes further expansion in China, where Peugeot already operates three factories jointly with Dongfeng.

Wage Costs

The changes to its lineup are flanked by moves to cut spending in the past two years such as reducing the French workforce by 17 percent and disposing of the Citer vehicle-rental unit and a majority of the Gefco trucking division. Wage costs will decline to less than 14.5 percent of revenue in 2014 from 15.1 percent last year, Peugeot said in an online presentation.

First-half revenue slipped to 27.6 billion euros from 27.7 billion euros because of foreign-exchange effects. Deliveries in the period rose for the first time in three years, buoyed by demand for the Peugeot 308 hatchback, the reigning European Car of the Year.

The automotive unit reported first-half earnings of 7 million euros compared with an operating loss of 538 million euros a year earlier. Savings in production costs and other expenses amounted to 254 million euros, while capacity use rose to 84 percent in the period from 72 percent in all of 2013. The profit was the division’s first since 2010 as the company stepped up efforts to limit discounts, the CFO said.

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