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CEO Carlos Tavares returns PSA’s car division to profit

PSA CEO Carlos Tavares -  returns PSA's car division to profit

PSA/Peugeot-Citroen reported a surprise surge in first-half cash flow and the first auto-division profit in three years, as its turnaround plan began to show results.

Operating cash flow jumped to €1.67 billion ($2.23 billion) in January-June from €203 million a year earlier, as new CEO Carlos Tavares slashed vehicle inventories and began stamping out supply-chain inefficiencies.

PSA reduced its net loss to €114 million ($153 million) in January-June from €471 million a year earlier, the company said in a statement.

Despite stiff currency headwinds, the auto division returned to a €7 million operating profit from a €538 million loss.

“Our recovery plan is already producing results on all fronts,” Chief Financial Officer Jean Baptiste de Chatillon told reporters on a call, adding that pricing had also improved.

Tavares has pledged to trim PSA’s model lineup by almost half, cut capacity, raise price positioning, and pare wage and component costs to lift the automotive operating margin to 2 percent in 2018 and 5 percent by 2023.

“We need to stay lucid and recognize that we are only at the beginning of our turnaround,” Tavares told analysts today.

Tavares, the former Renault second-in-command, gave an account of his efforts to press for leaner manufacturing, which frees up cash by reducing stocks of parts and vehicles.

“You look at those lines (of inventory) and ask people how you manage production,” Tavares said. “After the first step, where people tell you that you’re already optimized, in fact there are many ideas,” he said. “What we’ve seen is a very joyful implementation of new ideas that delivered great results.”

By 2016, PSA aims to cut €1 billion from stocks of parts, materials and finished vehicles through improved supply-chain management.

 

“PSA certainly surprised us this morning with a much better-than-expected first-half result,” London-based ISI Group analyst Erich Hauser said. “It looks like PSA is actually performing well ahead of plan.”

 

Revenue fell 0.4 percent to €27.62 billion in the first half as emerging-market currencies continued their slide against the euro, putting a €251 million dent in earnings.

Operating income rose €55 million to €311 million at parts subsidiary Faurecia, while the earnings contribution from sales financing arm Banque PSA Finance fell €26 million to €172 million.

PSA, which ran through about €3.4 billion in cash over the past two years, boosted operating cash flow by having 30,400 fewer cars sitting on dealer lots.

The automaker, which hasn’t issued a target for 2014 earnings, stuck to its forecast for 3 percent growth in the European car market this year. The company projected the Russian market to drop 10 percent this year and industrywide car sales in Latin America to decline 7 percent.

The company reaffirmed its goals of reporting positive operational cash flow by 2016.

“Uncertainty in emerging markets” and a sluggish recovery in French auto demand are among the “challenges and risks” in the second half, the company said.

Tavares outlined plans in April to scale back the carmaker’s lineup to 26 models by 2022 from 45 vehicles now and transform the upscale DS badge, which was originally part of the mid-market Citroen unit, into a full-fledged premium brand.

The changes to its lineup are flanked by cost-cutting moves in the past two years such as reducing the French workforce by 17 percent and disposing of the Citer vehicle-rental unit and a majority of the Gefco trucking division.

PSA sold stakes to Chinese partner Dongfeng Motor Group and the French state earlier this year as part of a €3 billion share issue. The automaker has racked up losses of €7.3 billion in two years.