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No Progress Expected On Peugeot-Citroen Losses

Weak Demand, Big Discounts Continue To Plague The Company

“Peugeot-Citroen may be forced to undertake further cost-saving measures in order to achieve its target”

Financially troubled Peugeot-Citroen, which has pledged to break-even by  the end of 2014, will make no progress this year in attacking its chronic losses and will generate red ink at the same level in 2013 as it managed last year, according to ratings agency Moody’s Investors Services.

Moody’s made the prediction in its statement cutting Peugeot-Citroen’s credit rating again to four notches below investment grade.

The company might be forced to take on even more unpalatable factory closures, spending cuts and asset sales. If its condition worsens, the French government could take a stake in the company.

Peugeot-Citroen reported a massive net loss of €5.01 billion for 2012, compared with a net profit of €588 million in 2011. The automotive division reported an operating loss of €1.5 billion for 2012. Moody’s said it expects the operating loss to reach €1.5 billion again in 2013, and this could worsen if European sales weaken further or pricing pressure intensifies.

Earlier this year another agency, Fitch Ratings, had reckoned Peugeot-Citroen would show some improvement in 2013, forecasting an improved profit margin of minus 3.4 per cent compared with minus 3.9 per cent in 2012.

Moody’s verdict must have shaken Peugeot-Citroen investors.

“We have downgraded (Peugeot-Citroen) ratings in response to its worse-than-anticipated financial performance in 2012, particularly due to great-than-expected losses in its automobile division, negative free cash flow from industrial operations and ongoing challenges to restructure its automotive operations,” said Falk Frey, Moody’s senior vice president.

High discounting
Peugeot-Citroen continues to experience problems at its automotive operations from high discounting in the small and medium sized car segments, Frey said.

“Unless Western European market demand recovers strongly in 2014, Peugeot-Citroen may be forced to undertake further cost-saving measures beyond the announced restructuring plan in order to achieve its target of break-even operating cash flow by year-end 2014,” Frey said.

Peugeot-Citroen has announced a factory closure programme and last year sold assets worth €2 billion and announced a €1 billion rights issue.

The French government has already intervened to back a loan of €7 billion to Peugeot-Citroen’s bank, and some investors are wondering if the government might acquire shares in the company if more help is needed. Others hope that new models this year like the Peugeot 2008, 308 and Citroen C4 might boost the bottom line. Peugeot-Citroen’s alliance partner GM Europe has distanced itself from reports that it might merge or somehow combine with the French company.

Quality up
As part of its recovery plan Peugeot-Citroen has said it plans to move the Peugeot brand upmarket with what it called “two to three steps up in quality and perceived quality”, according to design director Gilles Vidal.

Meanwhile, Peugeot-Citroen market share in Western Europe slid to 11.9 per cent in 2012 from 12.6 per cent in 2011.

Moody’s doesn’t sound as though this is likely to improve any time soon.

“Moody’s does not anticipate a material improvement in the operating performance of the automotive division in 2013 and, as a result, expects that it will again record a recurring operating loss of around €1.5 billion for the year. This expectation is exposed to further downside risk, if market demand in Western Europe declines by more than the currently anticipated five per cent of pricing pressure increases any further,” Frey said.

 Neil Winton – April 15, 2013

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