PSA Peugeot-Citroën announced that in 2014, the company made an operating profit of 63 million euros ($66.6 million), compared with a 1.04 billion euro loss ($1.1 billion) the previous year. The company’s overall net loss shrunk to 555 million euros ($587 million) from 2.23 billion ($2.36 billion).
While Volkswagen is still the market leader in Western European with a 25 percent market share, Peugeot-Citroën has managed to retain second position in market share at just over 11 percent. Nevertheless Peugeot-Citroën generated 2 billion euros ($2.1 billion) of cash in a year, hitting a 2014-2018 target in just one year.
“Peugeot’s 2014 results beat expectations and provide strong evidence that CEO (Carlos) Tavares’ turnaround plan (called Back in the Race) is working. We believe the automotive division can already generate over a two percent margin in 2016, which would be two years ahead of plan,” said Commerzbank analyst Sascha Gommel.
Although Tavares now presides over a company that is profitable (just) the latest results give credibility for the new CEO for his turnaround efforts and for the future of this company. In one year, Tavares has neutralized losses of 1 billion euros ($1.1 billion) in the auto division in 2013 and had suffered cumulative auto division losses of 3.5 billion euros ($3.7 Billion) since 2008.
Likely the two entities most relieved in hearing the turnaround news are the French government and Dongfeng Motor Corp. of China. They subscribed to a 3 billion euro ($3.2 billion) share issue which gave them both a 14 percent stake in Peugeot-Citroën, and diluted the Peugeot family ownership to the same amount. They presumably were smart enough to back Tavares’ recovery vision, something we wondered about when the deal was announced a year ago.
Champagne corks my not be popping in the boardroom just yet though; competitors like VW, Daimler and Renault offer cheaper vehicles in comparable categories and all have new models introductions on the horizon. Analysts like Berenberg Bank’s Adam Hull feel that Peugeot-Citroën will need to raise prices and won’t be helped by what he called a limited new model program and tough markets. “Peugeot is at the peak of the model cycle whereas the Renault, brand its closest competitor, will have the double positive of the all key mid-to-large cars being replaced within 18 months,” Hull said.
“We expect the full benefits of the cost cuts to feed through in 2015-16: we assume Autos EBIT (earnings before interest and tax) to rise to 570 million euros ($603 million) in 2015, a 1.5 percent EBIT margin, and then to 750 million euros ($794 million) in 2016 – a 2.0 percent margin,” Hull said.
Hull said it will be difficult for Peugeot-Citroën to move from being a European player selling globally to a true global player as “Back in the Race” targets. He also has some doubts about the DS brand, which seeks to raise prices by adding content and styling tweaks to select Citroën models.
“The DS strategy has helped raise prices but it remains to be seen how successful it will be once the initial design-led novelty wears off (if quality is significantly higher, residuals will be significantly higher),” Hull said.
Ultra conservative ratings agency Moody’s Investors Service was moved to raise its rating on Peugeot-Citroën investments, saying there is potential for further profit increases in the next 12 to 18 months, thanks to efficiency measures and despite an expected slowdown in sales growth in Europe this year. It likes Peugeot-Citroën’s new breakeven point of 2.1 million cars a year, excluding China, from 2.6 million, bringing it close to the goal of 2 million. But it had reservations.
“Moody’s expects additional cash restructuring costs in the next 24 months to slow down the company’s adjusted margin and cash flow improvement. Overall, Peugeot’s operating margins remain weak compared to those other rated mass-market manufacturers,” said Moody’s analyst Yasmina Serghini-Douvin.
With a soft European market, caution from the finance sector and Peugeot-Citroën in the cross-hair target of it’s competitors, it will be interesting to see if Carlos Tavares can steer the course and continue to return profitable results for the company.