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Peugeot Maker Assures Investors It Can Face Market Downturn

Peugeot Maker Assures Investors It Can Face Market Downturn

(Bloomberg) -- Peugeot maker PSA Group defied mounting pessimism in the car industry by raising its dividend and offering assurances to investors that it can withstand a deepening slump.

While the French carmaker expects the European auto market to shrink in 2020, it published better-than-expected profit for last year and said it has taken measures to protect the company from a decline.

“Plants are running full speed, the order book is stellar,” Chief Executive Officer Carlos Tavares said at a press conference Wednesday. “We are facing this turmoil in a more robust situation” than a few years ago.

Peugeot Maker Assures Investors It Can Face Market Downturn

PSA earnings contrast with a rapid souring of the global car industry in recent weeks, with China grappling to contain the coronavirus epidemic that has shuttered factories and hobbled supply chains across continents. The company. which plans to combine with Fiat Chrysler Automobiles NV, depends heavily on Europe for its sales, which fell 10% overall to 3.5 million vehicles last year.

Read more: Auto Sales Outlook Darkens as Industry Assesses Virus Impact

Despite the volume drop, PSA’s profit margin widened to 8.5% as Tavares focused on lowering costs and selling more expensive models. The 2019 adjusted operating income rose a better-than-expected 11% to 6.32 billion euros ($6.87 billion). Since arriving in 2014, the CEO has turned around the manufacturer by removing overhead and adding scale.

The results confirm PSA’s “best-in-class” status, Oddo BHF analyst Michael Foundoukidis wrote in a note.

The shares rose as much as 5%, making it the biggest gainer on the STOXX Europe 600 Automobiles & Parts Index.

PSA kept a target for the 2019-2021 average automotive adjusted operating margin of more than 4.5%, a level Chief Financial Officer Philippe de Rovira called a “floor” and very conservative. “Our internal target is always to improve performance, so let’s not be misled by this indicator,” he said on a call with reporters.

What Bloomberg Intelligence Says

“PSA reiterated modest guidance of a recurring auto operating margin of more than 4.5% on average for 2019-21 despite reporting 8.5% in 2019. That reflects the burden of emissions compliance and the transition to EVs from 2020.”

-- Michael Dean, automotive analyst

The results benefited from 1.5 billion euros of restructuring costs that were excluded from operating income and boosted the auto margin, Dean said. In the past, the company has reported charges for cost cutting at Opel, Vauxhall, Peugeot, Citroen and DS. Last month it unveiled job reductions at Opel.

The planned merger with Fiat Chrysler shouldn’t lead to increased restructuring costs in 2021, Tavares said, adding that the two companies are in good financial health. The CEO estimates the merger process will take 12 to 15 months, and said there’s “no reason to believe” there will be regulatory hurdles.

The French manufacturer sees the European car market shrinking 3% in 2020 and Russia declining 2%. That’s more than the 2% decline in Europe expected by the main lobby group, a forecast published before the extent of the virus epidemic became known.

Tavares said he’s “absolutely sure” PSA will meet European CO2 emission targets in 2020. He said costs of technology to deal with emissions “severely impacted” the carmaker in 2019, and that won’t be repeated this year.

Other European carmakers have so far signaled a mixed year at best. While Daimler AG has forecast an earnings rebound following several profit warnings and a dividend cut, it has also warned of more possible regulatory costs in coming months and “significant adverse effects” from the virus outbreak in China.

German luxury-car rival BMW AG is sticking to its sales growth target for China, even as it acknowledged uncertainty about when the situation will return to normal. PSA’s French rival, Renault SA, earlier this month posted its first annual loss in a decade and indicated operating margins are set to shrink.

Key Earnings Highlights

  • PSA proposes to pay a dividend of 1.23 euros a share vs. 0.78 euros.
  • Group adjusted operating income of 6.32 billion euros beating an average forecast of 6.14 billion euros of analysts surveyed by Bloomberg.
  • Automaker reports record net income of 3.2 billion euros vs. 2.83 billion euros a year earlier

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net

To contact the editors responsible for this story: Katerina Petroff at kpetroff@bloomberg.net, Tara Patel

©2020 Bloomberg L.P.