Renault Shares Tumble as Company Sees Price Pressures Rising

  • Operating profit at record in first-half but still disappoints
  • Margins at automotive division come in lower than at PSA

Renault SA shares posted the biggest decline in a year after first-half profit fell short of estimates and the carmaker said price pressures are rising in some markets.

The stock fell as much as 7.2 percent, the most since June 2016, after the French automaker warned that it was struggling to get consumers to pay for all the costs of new technology and failed to keep pace with Paris-based rival PSA Group. While Renault’s operating margin increased to 6.2 percent of sales from 6.1 percent, profitability at the maker of Peugeot and Citroen cars jumped to a record of 7.3 percent from 6.8 percent.

“There were clearly expectations of stronger operating results,” especially in automotive earnings, said Arndt Ellinghorst, a London-based analyst with Evercore ISI. Renault’s first-half operating profit rose 18 percent to 1.82 billion euros ($2.13 billion), below the 1.85 billion-euro average of three analyst estimates compiled by Bloomberg.

While the results are a first-half record for the French carmaker, Renault may not benefit in the future from price increases in some countries as customers balk at paying for extra costs for cleaner emissions, potentially weighing on profit, Chief Financial Officer Clotilde Delbos told reporters. The cost of adding enhancements to its autos, called the "price mix enrichment effect" by Renault, had a negative impact of 180 million euros in the first half, the carmaker said.

Carmakers have been preparing for stricter European regulations on emissions, and scrutiny has intensified following the Volkswagen AG cheating scandal, which prompted a decline in demand for diesel cars. French automaker PSA Group plans to import at least 55,000 gasoline engines from its Chinese plants to meet the growing demand, leading to extra costs.

“We are as affected as anybody else” by the decline of diesel, Renault’s head of performance, Stefan Mueller, told analysts, adding that 47 percent of the passenger cars the group sold as of June were equipped with diesel engines, versus 55 percent a year earlier.

Operating Leverage

At Renault, revenue climbed 17 percent to 29.54 billion euros in the first six months of the year, in line with analysts’ estimates. Net income was 2.38 billion euros, up from 1.5 billion euros.

The contribution of associated companies, mainly Nissan, came to 1.32 billion euros, compared with 678 million euros last year. The figure was boosted by the sale of Nissan’s stake in equipment manufacturer Calsonic Kansei in the first quarter, even as operating profit at the Japanese carmaker fell in the first quarter. Renault owns a 43 percent stake in Nissan, while Nissan owns 15 percent of Renault, forming a partnership that the company dubbed “the Alliance” and that recently added Mitsubishi.

“We see little upside on core sentiment, unless Nissan returns to peak valuations,” Harald Hendrickse, a London-based analyst with Morgan Stanley, said in a note. “Nissan’s first-quarter miss on U.S. incentives and higher raw materials suggests some concerns there also.”

‘Little Upside’

Renault lifted its market forecasts in Russia and Brazil earlier this month. It predicts the global car market will expand by 1.5 percent to 2.5 percent this year, with growth of 5 percent in China, 8 percent in India and 2 percent in Europe. The European market has been recovering for more than three years after slumping to a two-decade low.

The French automaker sold 1.88 million vehicles in the first half. That includes AvtoVAZ’s sales, which it consolidated in January. The CFO said the maker of Lada cars almost broke even in the first half.

Renault confirmed its 2017 financial targets, including an increase in group revenue, at constant exchange rates and beyond the impact of the consolidation of AvtoVAZ in its accounts, and higher operating profit in euros. 

The company intends to present a plan in October to increase annual revenue by 37 percent to 70 billion euros by 2022 and lift its operating margin to 7 percent of sales in five years from 6.4 percent. Timing of that announcement will roughly correspond to those of its partners, Nissan Motor Co. and Mitsubishi Motors Corp, with conferences in October or November, the CFO says.

Efficiency savings amounted to 200 million euros in the first half, compared to 6 million euros a year earlier. Last year, the company missed its own target of saving 350 million euros. “Our efforts to cut costs went back to a more traditional level, despite a continuation of our efforts to prepare the future, including to make connected vehicles,” Delbos said.

— With assistance by Sheldon Reback

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