Global Insight Perspective | |
Significance | A lower contribution from alliance partner Nissan pulled down Renault's net profits last year, whilst relatively slow global sales growth also reduced income. Notwithstanding these factors, Renault still managed to beat its own forecast for improvements to its operating margin. |
Implications | Operating margin is a key barometer of health in the notoriously profit-squeezed automotive industry, and to date, Renault is on track to meet the goal it set itself with regards to achieving a 6% margin by 2009 as part of its Commitment 2009 plan. |
Outlook | Renault remains confident that it will achieve further operating margin improvements in 2008, assisted by a 10% global sales growth although tough macro-economic conditions may affect the latter. |
Net Profits Fall...
France's second-largest vehicle manufacturer Renault has announced reduced profits for the full-year 2007 compared to 2006. 2007 net income stood at 2.73 billion euro (US$3.99 billion), which is a 7.6% decrease on the 2.96 billion euro it posted a year ago, as a result of lower equity contributions from its Japanese alliance partner Nissan and Swedish truck-maker Volvo. In 2007, Nissan contributed 1.29 billion euro to Renault, and Volvo 352 million euro, down from 1.87 billion euro from Nissan in 2006 and 384 million euro from Volvo.
The results were announced on the same day that French rival PSA Peugeot-Citroën announced sharply improved profits for 2007, compared to 2006, brought about by cost-cutting measures and efficiency gains (see France: 13 February 2008: PSA Peugeot-Citroën Reports Soaring 2007 Net Profit After Cost-Cutting Efforts).
...As Operating Margin Exceeds Target
On the upside, Renault's operating margin increased to 3.3% of revenues up from 2.6% a year ago, which is better than Renault's target of 3%, which it set this time last year. Interestingly, it also betters PSA's improved operating margin of 2.9% for the full-year 2007. Operating margin is seen as a critical barometer of health in the automotive industry where average profitability is far lower than in many other industrial sectors. Renault attributed these gains to continued cost reductions, growth in international operations and the competitiveness of its light commercial vehicle (LCV) range.
Group revenues amounted to 40.68 billion euro, a 1.8% improvement on 2006, enabled by a 1.6% increase in revenues from its core carmaking business to 38.68 billion euro. Renault revamped much of its line-up last year, refreshing or replacing key models such as the Clio, Twingo and Laguna passenger cars and the Kangoo LCV, whilst also entering new segments of the market for the first time with brand new launches such as the Logan van, Sandero, Grand Modus and Clio estate.
The revenue contribution from Renault's core France and Europe regions fell by 2.6%, however, as its volumes in this key part of the world, which accounts for 65% of Renault's business, fell by 4.1% in 2007 compared to 2006. This was offset to a certain degree by a 3.1% increase in contribution from other regions of the world. Capacity increases abroad and partnerships in strategic emerging markets such as India, Morocco and Russia form the cornerstone of Renault's planned expansion into new high-growth markets, with the low-cost Romanian-built Logan car underpinning this overseas growth. Taking into account the negative impact of rising raw material costs, purchasing savings within the automotive division amounted to 390 million euro, Renault said. Manufacturing and logistical costs declined by 137 million euro and general and administrative expenses were cut by 44 million euro.
The remaining 2.003 billion of revenue came up from Renault's sales financing division, which saw sales grow by 4.8% year-on-year.
On Track to Meet Commitment 2009 Goals
In the two years between 2005 and 2007, Renault's warranty expenses fell by one quarter and the number of problems reported within the first three months of car ownership have halved, suggesting that the build quality of Renault's vehicles is improving. The share of "fully satisfied customers" rose by 6.3% during these two years, representing an additional 700,000 individual customers, Renault said.
"Profitability has been improved by wide-ranging efforts to boost productivity and cut costs across the entire company," the French carmaker's statement read. "The profitability of the Logan program advanced considerably in 2007. The company is on track to meet its 6% operating margin commitment in 2009."
At the Annual General Meeting of Shareholders, Renault says it will propose a dividend payment of 3.8 euro per share in 2008 on 2007 earnings, compared with a payment of 3.10 euro in 2007 on 2006 earnings. That proposal is in line with the announcement of steadily increasing dividends under Renault Commitment 2009.
Outlook and Implications
As Carlos Ghosn, the president of Renault has been keen to point out, 2007 was a year of consolidation for the French brand as many of its key models were replaced. The first half of the year was marked by lower sales in the run-out of the old models and in the run-up to the launch of their replacements, whilst the second half of 2007 brought a faster sales pace (see France: 4 January 2008: Renault Manages 2.2% Global Sales Growth in 2007, Driven by Increases Outside Europe). This "cleaning of the house" as Ghosn termed it, was supposed to be laying the foundations for the real volume growth to come in 2008 and 2009. Although for the time being, Ghosn is sticking by his prediction of a 10% increase in 2008 volumes versus 2007, he has acknowledged that "a less favorable macro-economic environment" could in fact make this target difficult to achieve (see France: 8 February 2008: Weak European Demand Could Hamper Renault Growth, Says Ghosn). Another cloud on the horizon could be weaker-than-expected demand for the new Laguna, production of which could be scaled back as a result. Environmental concerns are encouraging the purchase of smaller and more fuel efficient vehicles, which is depressing the D-segment in which the Laguna operates, Ghosn noted. On the flipside, this could mean better-than-expected sales of Renault's small car range, including the Twingo, Clio and Logan.
As a result of concerns about the operating environment in Western Europe, Renault now seems to be banking on even more aggressive growth in markets like Brazil and Russia in 2008. Yet more new models will also bring incremental volumes—Renault has nine new model launches this year, including the Koleos, which is its first foray into the competitive European sports-utility vehicle (SUV) sector (see France: 12 February 2008: Renault Launches Korean-Built Koleos Crossover SUV in Europe). Despite the launch of its first SUV, the company is wisely trying to exploit its position as a relatively low-emission manufacturer, pointing out its objective of making environmentally friendly mobility a feasible option for all customers. "Renault is currently working on a wide range of clean and affordable technologies, such as eco2, downsizing and zero-emission vehicles using fuel cells or electrical power," it says.
Other factors which could slow progress next year is currency volatility, which Ghosn has already admitted could have a negative impact on earnings in 2008. However, Renault is standing by its operating margin target of 4.5% for the full year, which is en route to the culmination of Renault's four-year recovery plan in 2009, by which time it says that operating margin will stand at 6%. This target does not look so unrealistic when taking into account that modest sales growth in 2007 allowed Renault to exceed its operating margin target for 2007, therefore a 10% increase in 2008 volumes, if achieved, in conjunction with further cost-cutting should allow for good margin growth in 2008.