Renault’s Profit Warning Sets Off Tremors Across Auto Industry

(Bloomberg) -- Renault SA set a gloomy tone for the European automotive sector by slashing its outlook for revenue and profit, saying weakening economies are weighing on car sales and tougher rules on emissions have increased costs.

Renault’s Profit Warning Sets Off Tremors Across Auto Industry

The French carmaker’s shares on Friday fell the most since the arrest last year of former boss Carlos Ghosn. Renault reduced its financial guidance for 2019, citing deteriorating results in markets including Turkey and Argentina, and spending on research and development.

The darkening of prospects lay bare a carmaker that is ill-prepared for a downturn in the sector. Interim Chief Executive Officer Clotilde Delbos, who took over a week ago in a management shakeup, has called for a strategy review and told the staff the company needs to “make some choices” on spending. Relations are strained with struggling partner Nissan Motor Co. and analysts are raising concerns about its balance sheet and dividend.

“This profit warning comes at a time of major instability at Renault and its partner Nissan,” Evercore ISI analyst Arndt Ellinghorst wrote in a note. “Investor worries will more likely intensify.”

Standard & Poor’s on Friday put Nissan ratings on a negative watch, saying the global auto industry could face a challenging business environment for the next one or two years, with sales remaining sluggish in major markets like North America and China.

European Decline

Car sales have also been weak in Europe, with the European Automobile Manufacturers Association saying this week the decline in the nine months through September was 1.6% to 12.1 million.

Renault issued the revised guidance on Thursday ahead of a board meeting Friday and quarterly sales scheduled to be published next week. Revenue will decline by 3% to 4% this year, after it previously forecast sales would be close to last year’s level. Group operating margin will be around 5%, below previous estimates for 6%.

The company said third-quarter sales fell and cash flow should be positive in second half of the year, but may not be for the whole of the year. The grimmer outlook raised the specter that more radical surgery may be needed.

“We assume a significant cut to the dividend and believe Renault may need to consider selling assets including Nissan shares to defend its balance sheet,” Jefferies analyst Philippe Houchois wrote in a note.

The shares fell 12.4% to 48 euros at 11:08 a.m. in Paris, after dropping as much as 14.9% earlier. The rest of the European auto sector followed, with the Stoxx Europe 600 Automobiles & Parts Index dropping 2.7%.

Daimler AG and Peugeot-maker PSA Group are scheduled to report next week, with Volkswagen AG, the world’s biggest automaker, later this month.

Renault already took a hit in the first half of 2019 from poor results at Nissan. With a 43% stake in the Japanese company, the French carmaker has long depended on dividends to bolster earnings. Nissan is forecasting its worst operating profit in a decade, hurt by an aging product lineup and a slide in vehicle sales in the U.S. and Europe.

Nissan also replaced its CEO and one key question is whether the new management will take more drastic measures to improve profitability.

Renault’s Delbos on Tuesday told employees measures were needed to get the carmaker back on track. The new management team is reassessing the “Drive the Future” mid-term targets unveiled in 2017, she said in a video.

©2019 Bloomberg L.P.

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