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Peugeot Plans Recovery as Cost Cuts Enhance Brand’s Boost

February 13, 2013

Peugeot Reports First Loss in Three Years as Auto Market Plunges

Peugeot’s plan to eliminate 11,200 jobs and close a factory in the outskirts of Paris are on hold after a French court said last month that the automaker can’t cut the positions until car-component manufacturer Faurecia SA fully informs workers about the effects of the carmaker’s restructuring. Photographer: Balint Porneczi/Bloomberg

PSA Peugeot Citroen (UG), Europe’s second-biggest carmaker, laid out plans to return to profit as an upscale shift of its main brand and cooperation with General Motors Co. (GM:US) add to the effects of spending cuts.

Cars from the Peugeot division will be upgraded to differentiate them more from the company’s Citroen models, and average volume will double through the alliance with GM, Chief Executive Officer Philippe Varin said today at a Paris press conference. The CEO will be reappointed to see the strategy through, a member of the carmaker’s founding family said.

Peugeot pledged to cut its cash-consumption rate 50 percent in 2013 and reach the break-even level by 2014 after burning through 3 billion euros last year. Paris-based Peugeot plans to reduce its French automotive workforce 17 percent in the next two years as the European car market, already at almost a two-decade low, shrinks in 2013 for a sixth consecutive year.

Varin’s contract will be extended “without a doubt” when the board takes up his reappointment in May, co-Vice Chairman Jean-Philippe Peugeot said in an interview following today’s press conference. The Peugeot family, which controls the manufacturer, backs the recovery plan and understands that it may take some time to complete, he said.

“It’s not a negative to have Varin staying as CEO,” Sascha Gommel, a Frankfurt-based analyst at Commerzbank AG with a reduce recommendation on the stock, said by phone. “He’s not responsible for the problems PSA is in, and he’s trying to turn it around.”

Stock Jumps

Peugeot jumped as much as 7.3 percent to 6.40 euros, the biggest intraday gain since Jan. 7, and was trading up 6 percent at 2:55 p.m. in Paris. The stock has risen 16 percent this year, valuing the carmaker at 2.24 billion euros ($3 billion).

Liberation newspaper reported on Feb. 8 that France’s government, which won a seat on Peugeot’s board in exchange for state guarantees on debt, had recruited former aerospace executive Louis Gallois as a possible replacement for Varin. Gallois, who is now the state representative on Peugeot’s board, didn’t want the job, according to the newspaper. The prime minister’s office declined to comment on the report.

Peugeot reported a loss before interest, taxes and one-time gains or costs of 576 million euros in 2012, narrower than the 647 million-euro loss estimated on average by 17 analysts surveyed by Bloomberg. Spending was cut by 1.18 billion euros, beating a reduction target of 1 billion euros, and asset sales totaled 2 billion euros, one-third more than budgeted, Peugeot said today in a statement.

2012 Disposals

Disposals last year included a majority stake in the Gefco trucking unit and all of its Citer vehicle-rental business, as well as some real estate.

Industrywide European auto sales fell 7.8 percent in 2012, with Peugeot’s deliveries dropping 13 percent, according to the Brussels-based ACEA trade group. Peugeot predicts that the region’s market, which accounted for 62 percent of the French company’s deliveries last year, will contract by another 3 percent to 5 percent in 2013.

Peugeot has been charging more for its vehicles this year, and pricing in Europe will probably be stable throughout 2013, Chief Financial Officer Jean-Baptiste de Chatillon told analysts on a conference call.

Delivery Targets

The carmaker will work toward delivering 50 percent of its vehicles outside Europe by 2015, and it wants to raise the number of upscale vehicles from the 18 percent of total deliveries last year, CEO Varin said.

“The Peugeot brand will move toward a more modern image” as new models go on sale, Varin said. “In 2013, the positioning of our brands will be supported by a very rich range of products and 17 vehicle launches.” At the same time, Citroen won’t become a low-cost brand, the CEO said.

A new crossover, dubbed the 2008, will be presented at the Geneva Motor Show in March and enter showrooms in coming months, when Peugeot will also introduce the 208 GTI, a higher-powered version of the 208 subcompact that went on sale a year ago.

Giving the Peugeot brand a more upmarket image “is going to be difficult,” Philippe Houchois, a London-based analyst at UBS AG, said in an interview with Bloomberg Television. “It is easy to add content in cars to make it more attractive, but the time for the customer to respond to that can take years.”

The full-year net loss amounted to 5.01 billion euros because of a 3.89 billion-euro writedown on automotive assets in the second half, Peugeot said. Profit in 2011 totaled 588 million euros. Revenue fell 5.2 percent to 55.4 billion euros.

State’s Stance

The writedown prompted French Budget Minister Jerome Cahuzac to say on Feb. 8 that the state may consider buying a stake in the carmaker. Finance Minister Pierre Moscovici said today on France Inter radio that buying Peugeot is “absolutely not being considered.”

Net debt at the end of 2012 decreased 6.3 percent from a year earlier to 3.15 billion euros. The automaker had 7.3 billion in cash and 3.2 billion euros in un-drawn credit facilities.

Cooperation with Detroit-based GM, which owns the Opel and Vauxhall brands in Europe, is targeted at producing compact cars that the manufacturers plan to begin selling in 2016, the companies said in January. Peugeot, which ranks second to Volkswagen in car sales in Europe, will spearhead work on platforms, or chassis and major parts, that will be the basis for the models. The French and U.S. carmakers are also buying auto parts jointly.

Peugeot will look at reducing core platforms to two from three currently planned, Varin said today.

Court Ruling

A plan to eliminate 11,200 jobs countrywide and close a car factory in the outskirts of Paris are on hold after a French court said last month that the automaker can’t cut the positions until auto-parts division Faurecia (EO) SA, 57 percent-owned by Peugeot, fully informs workers about the effects of the carmaker’s restructuring in compliance with labor laws on strategy announcements.

Faurecia’s recurring operating profit fell 21 percent to 514 million euros last year, and the margin at that level narrowed to 3 percent from 4 percent in 2011, Peugeot said today.

“Faurecia is not for sale,” de Chatillon said at a Paris press conference. The carmaker’s next asset sales may involve about 200 million euros of property disposals, he said.

Recurring operating profit at the Banque PSA Finance car-loan unit fell 73 percent to 391 million euros, while net banking revenue increased 4.2 percent to 1.08 billion euros.

Debt Guarantees

The division won French government guarantees last year on the possible sale of as much as 7 billion euros in bonds in an effort to discourage Moody’s Investors Service from cutting the bank’s credit rating to junk. The unit has also agreed on 11.5 billion euros in refinancing from banks.

European Union regulators gave temporary approval on Feb. 11 for 1.2 billion euros of the guarantees, on condition that Peugeot file a business plan within six months outlining its recovery strategy.

The first Banque PSA Finance bonds issued under the guarantee may be sold at the end of this quarter, de Chatillon said today. New state support isn’t on the agenda, Varin said.

To contact the reporter on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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