ANALYSIS: Renault results disappoint, but highlight value of cost-cutting

By Dave Leggett | 12 February 2010

Renault's full-year 2009 financial results illustrate both the firm's competitive weakness and its success in cost-cutting according to an analyst speaking to just-auto.

Creative Global Investments analyst Sabine Blümel said that although the Renault Group net loss narrowed in the second half of last year, the results were 'worse than consensus'.

"The auto division was close to break-even in the second half as stringent cost cuts and efficiency gains accompanied a recovery in sales," she said.

"But mix and price remain a worry,"  Blümel added.

Renault reported a 2009 net loss of EUR3.13bn or EUR-12.13 per share, worse than a consensus estimate of EUR-2.6bn or EUR -10/share.

The 2009 net loss was  almost equally split between Renault's own operations (EUR -1.51bn) and associates (EUR -1.56bn of which Nissan accounted for EUR -902m, Volvo for EUR -301m and Avtovaz for EUR -370m).

Group net loss narrowed sharply in 2H09 (to EUR -393m), from EUR -2.73bn in 1H09: while associates even contributed a EUR 23m profit in 2H09 (entirely due to Nissan's sharp recovery to a EUR 309m profit contribution).

Renault's own operations incurred a EUR 416m 2H09 net loss.

Blümel noted that Renault's auto division close to break-even in the second half. The auto division's full year EUR -902m operating loss was the result of a  EUR -869m loss in the first half and a performance close to break-even (EUR -33m) in 2H09.

"Renault has been a main beneficiary of the many government incentive programmes in Europe and thus enjoyed a strong rebound in European sales in the second half," Blümel said.

The second half produced some fair winds for Renault's automotive operations as sales and production picked up.

"The division's operating performance improved EUR 726m from a dismal second half of 2008, as unit sales jumped 13.8% on the year, production was ramped up again and management continued with stringent cost cutting measures including accelerated synergies from the Nissan alliance," says Blümel.

She says that the break-even situation at Renault Auto compares favourably with PSA's second half loss of EUR 353m.

"We attribute this to Renault's superior cost management and strategic advantage of being part of a global alliance," maintains Blümel.

But mix and price remain a worry. In their analysis of the EUR 726m y-o-y improvement in operating performance in 2H09, management attribute EUR 0.5bn  to higher volumes, EUR 103m to lower manufacturing costs and EUR 387m to lower purchasing costs, EUR 224m of which were lower raw material costs.

"Although mix and prices improved somewhat in the second half, we believe that this could prove just a temporary blip after several years of steep margin erosion. Renault reported an accumulated EUR 1bn margin deterioration from price and mix in the three pre-crisis years 2005-2007 and a an EUR 0.8bn erosion in 2008," says Blümel.

Despite a rebound in activity, Renault reduced its working capital requirement by another EUR 1.26bn in 2H09, after EUR 1.66bn in 1H09 and greatly reduced net capital expenditure in 2H09 and the full year.

While an EUR 0.9bn cut in inventory was the main driver in working capital requirement reduction in 1H09, an EUR 640m reduction in receivables was the driving force in 2H09, reflecting efficiency gains in general working capital management. Blümel notes that Renault's management are confident that efficiency gains in managing working capital and reduced fixed costs are sustainable and can be even improved going forward.

Management expect economic conditions to remain tough and uncertain in 2010, and expect European car demand to fall by 10% as government incentive programmes are being phased out, as well as a moderate recovery in the LCV market. Both estimates have been in line with consensus, but the Italian government's decision this week not to renew incentives points towards a steeper decline in the European car market in 2010.

FRANCE: Renault posts full year losses but is cash positive