Renault Takes the Long Road Back to Pre-Pandemic Profitability

(Bloomberg) -- Renault SA set cautious goals to gradually return to pre-pandemic earnings performance, reflecting the challenges Chief Executive Officer Luca de Meo will have turning around the struggling French carmaker.

The company is targeting an operating margin of more than 3% by 2023 and at least 5% by mid-decade, according to a statement Thursday. This compares with a 4.8% return in 2019, before the manufacturer racked up record losses in the midst of the health crisis.

De Meo, 53, faces the difficult task of rationalizing a bloated cost structure and excess production capacity while pacifying the French state, Renault’s most powerful shareholder. The CEO said the expense reductions the company laid out just before he joined from Volkswagen AG in July will be achieved ahead of schedule and set fresh objectives for four years from now while avoiding any new job cuts.

The plans “may seem to lack ambition” but are “rock-solid” and can be achieved even in the worst conditions, de Meo told analysts. Renault shares erased initial declines and were little changed as of 2 p.m. in Paris.

“We see the 2025 financial targets as conservative,” Jose Asumendi, a JPMorgan Chase & Co. analyst who rates Renault the equivalent of a buy, said in an email. He estimates the objectives could be achieved by 2022.

The earnings outlook is consistent with Renault’s view that it will take years for the auto industry to claw its way back, Deputy CEO Clotilde Delbos told Bloomberg Television. Sales may recover to pre-virus levels in 2023 in emerging markets, but it could take until 2025 for Europe, the region on which Renault is most reliant.

“The world has changed,” she said.

Margins will also be constrained by high levels of depreciation as well as investment in electric and hybrid models, she said. While the company was an early mover with regard to electrification, the bulk of its industrial assets are tied to internal combustion engine-powered vehicles.

Of the 24 models Renault plans to launch by mid-decade, half will be in larger-vehicle segments that tend to be more lucrative. At least 10 will be fully electric, including the revived Renault 5, a top-selling nameplate in France during the 1970s.

De Meo, who turned around Volkswagen’s Spanish brand Seat before taking the top job at Renault, has said a mass market EV selling for less than 20,000 euros will be a key product for the carmaker. He refused to commit to making the Renault 5 in France without guarantees on costs from unions, local governments and the state.

While de Meo has coveted the turnaround achieved by Renault’s French peer, PSA Group, his targets fall short of what his company’s archrival was achieving before Covid-19 ravaged the industry. The maker of Peugeot and Citroen cars is now on the cusp of merging with Fiat Chrysler Automobiles NV after the French government scuttled the Italian-American company’s attempt to combine with Renault.

De Meo’s strategic plan is the first Renault has delivered since the departure of Carlos Ghosn, whose arrest in Japan in 2018 triggered an unprecedented crisis within the French company and its partner Nissan Motor Co. The more than two decade-long alliance nearly unraveled after factions within Nissan waged a campaign to unseat the chairman and cooperated with prosecutors in Japan.

Read more: How a Powerful Nissan Insider Tore Apart Carlos Ghosn’s Legacy

In a bid to demonstrate cohesion within the alliance, the heads of Nissan and Mitsubishi Motors Corp. spoke during Renault’s presentation about backing the turnaround plan and closer ties between the companies.

“We need each other,” Delbos said in the interview, pointing to a goal to produce 80% of all their vehicles on three common platforms in 2025. “There is no question that the future of Renault, Nissan and Mitsubishi is within the alliance.”

Nissan and Renault made plans last year to each cut more than 14,000 jobs worldwide, though de Meo and Chairman Dominique Senard have had to tread carefully. They’ve come under considerable pressure from the state after Renault took out a 5 billion-euro government-backed loan last year.

What Bloomberg Intelligence Says

“Cash was a focus and remains a concern, with a 5 billion-euro state-backed credit facility needed to bolster industrial liquidity, which took a 7.9 billion-euro hit in the first nine months of 2020. In response, Renault is targeting a significant cut to R&D and capital spending through 2025.”

-- Michael Dean, senior auto-industry analyst

Click here to read the report

Renault’s global sales dropped 21% last year to 2.95 million vehicles, a far cry from Ghosn’s ambition for more than 5 million vehicles annually by the end of next year.

Delbos said the company’s motto is now to “under promise and over deliver” and that its margin targets should be viewed as a floor.

“Our ambition is clearly to do more,” she said.

©2021 Bloomberg L.P.