The French Automotive Industry Bailout: PSA and Renault Report 2008 Financial Results

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Comments: 2

February 14, 2009

Earlier this week, the French government announced it will make available 6 billion in loans ($7.8 billion) to both Renault and PSA Peugeot-Citroen to sustain them during the economic downturn. The loans will last five years and be conditional on a halt to layoffs, the prohibiting of significant restructuring and factory closures in France during the duration of the loans. The lines of credit will be at an interest rate of 6.0% and is expect to exclude the government from taking an equity stake in the companies.  As with the rest of Europe, sales are weak in France.  In the month of January, vehicle sales in France fell 7.9% compared to last year.  Sales were off about 15.0% in November and December.  Western Europe as a whole saw sales decline 25% in January.

This past week, PSA Peugeot-Citroen and Renault have also reported their full-year 2008 financial results, further highlighting the catastrophic problems in the global industry as global demand has collapsed in the last three months of 2008 due to the economic crisis.

PSA Peugeot-Citroen

PSA Peugeot-Citroen (PSA) announced a consolidated operating loss for the year of 367 billion compared to a €1.1 billion profit in 2007 (Figure 1). In the first half of the year the company’s operating income was €1.0 billion, however, in the second part of the year the company experienced an operating loss of €1.4 billion.  Revenue dropped 7.4% for the year with a 15.7% drop in the last half.

Figure 1: 2008 Consolidated Financial Results

The company’s Automobile Division revenue totaled €41.6 billion in 2008, down 8.5% from the previous year. The division’s worldwide sales declined 4.9% to 3,260,388 vehicles.  It maintained its market share at 5% worldwide and 13.8% in Western Europe. In the 4th quarter, market share for the Group even reached 14.1%, an increase of 0.5% compared with the same quarter in 2007.

The Automotive Division had an operating loss of €685 million for 2008, compared with a profit of €510 million in 2007 (Figure 2). In the first half of the year the division posted   €633 million in recurring operating income.  The sales collapse and production cuts in the 4th Quarter resulted in a €858 million recurring operating loss in the second half.

Figure 2: 2008 Financial Results by Division

Of concern was the adverse change in the company’s cash position at the close of the year.   The company burned through approximately €3 billion attributed to inventory control and new product launches.  At the end of 2007, PSA had €5.1 billion of cash on hand.  At the close of 2008, that dropped to €2 billion (Figure 3).  With the global market still in a state of collapse, the company is dangerously low of cash.  However, the company does have access to a €6 billion line of credit. Figure 3: PSA 2008 Cash Flow Summary

The company plans to concentrate on reducing inventory and minimizing its cash burn.  All things being equal the company plans to return to profitability in 2010.  It intends to maintain investment and expenditure on product research and development at approximately 3.5 billion.  The company also plan to tap into the French government’s €3 billion loan in addition to its previously established line of credit to improve its cash position and working capital.

Renault

Renault’s performance was no better.  For 2008, the company posted a net income of €599 million ($774 million), down 78% from the previous year.  Revenue fell 7%, from €41 billion to €38 billion as sales fell 4.1% for the year (Figure 4).  Much like the rest of the industry, the 4th Quarter was rough.  Operating margin contracted 2.7% to €212 million, in 2008 compared with €1.4 billion and 3.3% in 2007.

Figure 4: Renault 2008 Consolidated Financial Results Summary

The Automobile Group saw a 30% drop in revenues in the 4th Quarter and 7.0% for all of 2008.  The 4th Quarter revenue drop accounted for the total decrease in revenue for the year compared to last (Figure 5).  In a deteriorating environment, the operating margin of the Automobile Group declined by €1.2 billion to a negative €275 million.

 

Figure 5: Automotive Group Revenue Summary

Renault’s reported cash flow was a negative €3.0 billion.  As of the end of the year, Renault had €1.1 billion in cash on hand, which was down from €3.8 billion from a year ago.

The company also plans to take action to control working capital requirement, by reducing inventories by a further €800 million to one billion.  Additional steps will be taken to reduce fixed costs and salaries.  Investments are expected to drop 20% and new plants in India and Morocco are on hold. It also will strengthen its alliance with Nissan, which has its own set of problems.

Conclusion:

The economic calamity has turned the auto industry upside down.  The news headlines late last year were filled with stories about General Motors and Chrysler requesting a bailout by the US government and all the hoopla surrounding the circus at the congressional hearings.  The latest bailout slipped under the radar screen, as government aid to the auto industry is becoming the status quo. In addition to the French bailing out their auto industry last week, the Italian government announced stimulus package to improve demand for automobiles. This is on top of automakers discussion with Spain to help the industry, including a €10 billion euro credit line to the companies’ financial operations. The British government has also announced a £2.5 billion ($3.25 billion) line of credit for its local auto operations.  (See below for list of countries and aid to their respective auto industry.)

For the past few months I have been very consistent in saying most of the auto companies including the supply chain will be wards of the state in short order if the economic conditions continue.  The auto business just cannot cut its structural costs quick enough under the current circumstance.  With the credit market still frozen the government is the only sources of funds as the cash flow goes negative at these companies.  The balance sheets for the most part at the companies are irrelevant except for cash on hand during an economic crisis such as they are facing.  After reviewing the cash positions of these companies as they report their 2008 results,  the burn has been horrific during the last three months of the year.  Besides Toyota and Honda most did not have a healthy cash position to begin with.

Additional Resources:
PSA 2008 Financial results press release

PSA 2008 presentation (slides)

PSA 2008 Annual Report

Renault 2008 Financial results press release

Renault 2008 Financial results analysts conference

Renault 2008 Earnings Report


Automotive New Summary of Government Action to Save the Automotive Industry by Country

• BRAZIL -- Said in November it had instructed state-run bank Banco do Brasil to make available a total of 4 billion reals ($1.72 billion) so that automakers' financing units could increase lending and spur sales.

• BRITAIN -- Announced last month it would guarantee up to 2.3 billion pounds ($3.29 billion) of loans to the car industry. The government said it would guarantee up to 1.3 billion pounds of auto industry loans from the European Investment Bank and guarantee a further 1 billion pounds of loans to back investments that are not eligible for support from the European lender.

• CANADA -- Unveiled an aid package on Dec. 20 that provided C$4 billion ($3.28 billion) in emergency loans to the Canadian arms of General Motors and Chrysler to keep them operating while they restructure. The automakers have a deadline of Feb. 20 to come up with a comprehensive plan that would allow them to get government aid.

• CHINA -- Unveiled measures on Jan. 14, which included cutting in half, to 5 percent, the sales tax on purchases of cars with engine sizes below 1.6 litres and one-off cash subsidies totalling 5 billion yuan ($731.1 million) to owners of high-emission vehicles who trade them in for cleaner ones.

• FRANCE -- Prime Minister Francois Fillon said on Jan. 20 France may pump up to 6 billion euros of aid into the industry, but warned that automakers would have to safeguard French jobs in return.

• GERMANY -- Unveiled a 1.5 billion euro aid package on Jan. 13. The package forms part of a 50 billion euro stimulus package of investments, tax relief and support for companies. The measures include incentives worth 2,500 euros for new car purchases.

• ITALY -- Announced a stimulus package for cars on Friday which includes a payment of as much as 1,500 euros for trading in an old car to buy a new one. Italian car sales are expected to fall 17 percent in 2009, after a 13 percent drop in 2008,

• PORTUGAL: -- Announced on Dec. 3 a 200 million euro credit line for auto and car parts exporters.

• SWEDEN -- Said on Jan. 22 it had given the National Debt Office the authority to grant emergency loans to the industry.

• UNITED STATES -- Announced on Dec. 19 a $17.4 billion lifeline to Detroit carmakers. The bailout funds will come from the $700 billion Troubled Asset Relief (TARP) program. GM will receive $13.4 billion and Chrysler $4 billion. Ford Motor Co. said it did not need a loan. Loans will be called in if the automakers cannot prove they are viable by March 31.

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Comments
Sun Feb 15, 2009 9:58 am
Name: Ernie Hayman | Comment: It is interesting/ironic that the French bailout is predicated on Job protection and the American auto bailout encourages job loss ("The business plan").

Fri Mar 06, 2009 10:36 amThe protection clause has since been dropped by the French government.

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