Peugeot to take hit from Japan

The Wall Street Journal (Paris) - PSA Peugeot-Citroen said Wednesday it expects that lower production triggered by supply bottlenecks in Japan last month will have a negative impact of €150 million ($215 million) on its automobile division's first-half operating profit, but reaffirmed its overall earnings forecast for the full year.

Europe's second-largest automotive group after Germany's Volkswagen AG reported a revenue increase of 10% year-to-year in the first quarter to €15.41 billion, driven by rising demand in emerging markets.

The French car maker's revenue from its core automobile division was up 6% on an annual basis in the first three months, thanks to increased sales of pricier vehicles, a positive currency effect and other factors that more than offset a 2% decline in prices. Sales volume was up 0.8% at 921,400 vehicles.

Peugeot-Citroen said it plans to resume issuing dividends this year after a two-year break due to the economic downturn that hit the automobile industry hard. The company plans to pay a dividend of €1.1 per share.

Peugeot-Citroen still expects operating income from its automobile division in 2011 to be above the level of 2010, with a €1.1 billion contribution from its ongoing plan to enhance profitability more than offsetting the negative impact from rising raw material and other input costs. It said its Faurecia car-parts subsidiary, as well as its Gefco logistics unit and Banque PSA Finance will all post higher operating profit this year.

Free cash flow is expected to be positive in 2011 after higher research and development and capital spending totalling €3 billion.

Operating profit at the automobile division in the first half of this year should be comparable to the same period last year, excluding the impact from reduced production caused by the disasters in Japan last month. The company said output in Japan has yet to return to normal and the group is carefully tracking the situation.

Peugeot-Citroen was unable to produce some diesel engines because of a shortage of engine management systems from Hitachi Automotive Systems Ltd., but engine production is now back to normal, Chief Financial Officer Frederic Saint-Geours told analysts in a conference call.

The estimated €150 million negative impact on first-half earnings from the Japanese disruption to the supply chain "is clearly a maximum," he said. The company doesn't expect any further production cutbacks.

Peugeot-Citroen is among the first automotive companies to provide a concrete figure for the anticipated impact of the Japanese disasters on earnings.

The company said automobile markets in Europe should be stable this year. France, Italy and Spain will all be weak, but Germany should grow by 11%. Sales in China will likely rise by 10% compared to 2010, while Latin America should see growth of 4% and Russia 15%.

Like its competitors, France's largest automobile company is focusing its expansion on the faster-growing markets outside of Europe.

In the first quarter 38% of its sales volumes were outside of Europe, up from 33% in the same period a year earlier. Mr. Saint-Geours said the company is on track to reach its goal of 50% by 2015.

The addition of higher-value vehicles to the product line-up such as the high-end Peugeot 508 sedan and the Citroen DS4 and DS5 are expected to improve the product mix.

Analysts said Peugeot-Citroen's comments on the first quarter suggest the company is doing better than it expected earlier in the year, since it reaffirmed its forecasts despite the unexpected drag related to the situation in Japan.

Mr. Saint-Geours stressed that Peugeot-Citroen is prepared to shed some market share in order to maintain profit margins in contracting markets where price competition is fierce.

"Our objective is to maintain our European market share, but this is less important than to have good profitability," he said. Peugeot-Citroen increased its prices by an average of €100 per vehicle on Jan. 1 and by a further 0.5% to 0.8% on Apr. 1 to offset rising raw-material and other input costs.