Reuters (Paris) - Renault hunkered down to face a worsening European car market after using discounts to clear vehicle stocks, boost cash and cut debt to its lowest in 13 years by the end of 2011.
Europe's auto market, which accounted for 57 percent of Renault's 2011 deliveries, is expected to contract 3-4 percent this year as austerity measures and economic uncertainty bite into consumer spending power, the company said.
Unveiling a 40 percent drop in full-year earnings, the French carmaker pledged to maintain positive free cash flow in 2012 after more than doubling its target last year, in contrast with mounting debts and cash burn at larger domestic rival PSA Peugeot Citroen.
"Renault's free cash flow shows Peugeot the way home," Credit Suisse analysts said in a note to clients.
Renault shares rose as much as 4.8 percent to 37.94 euros and were up 3.1 percent at 1439 GMT, against a 0.8 percent drop in the 15-member Stoxx Europe autos and parts index.
PSA Peugeot Citroen on Wednesday put its profitable Gefco logistics business up for sale after net debt ballooned 170 percent to 3.36 billion euros. PSA also burned through 1.6 billion euros of cash in 2011 as the auto division swung to a 92 million euro full-year loss.
Renault's core manufacturing business held up better, with operating income falling 17 percent to 330 million euros, or 0.8 percent of sales - compared with a divisional operating margin of 1.1 percent in 2010.
It stayed in the black despite a sales slump in Europe, where Renault car sales fell 8.1 percent last year, outpacing the market's 1.4 percent decline.
"Renault's results confirmed its strength compared to its French peer, in terms of both profitability and cash generation," Barclays Capital analyst Kristina Church said.
With industrial overcapacity and a price war weighing on the European auto sector, Church said Renault had "successfully counteracted those effects" with its low-cost Entry range that includes the hot-selling Duster SUV.
The company will soon begin updating its no-frills range, sold as Renaults in Europe and Dacias elsewhere, starting with a new version of the Sandero subcompact in December, Chief Executive Carlos Ghosn said.
In a renewed upscale push from 2014, Renault will replace the ageing Espace people-mover and flopped Laguna mid-sized hatchback and may later introduce a large car sharing parts with Daimler AG's Mercedes E-Class, the CEO said.
Renault and Daimler are tentatively expanding the partnership they announced in 2010 to pool development and production of small cars and engines.
Ghosn said Renault and 43.4-percent owned Japanese affiliate Nissan were also pressing ahead with plans for a global "ultra-low cost" vehicle range, starting in India with prices as low as 2,500 euros.
Renault and Nissan expect to reach agreement to increase their combined stake in Russia's Avtovaz "in coming weeks", Ghosn also said on Thursday.
The alliance is in talks to take effective control of the Lada maker by doubling the 25 percent stake held by Renault.
The Renault chief struck a positive note for 2012, predicting an improvement in the sales mix as customers return to pricier vehicle categories with more options.
Last March's tsunami led to a shortage of diesel engines and key parts, preventing Renault from matching many customers' preferred specifications. It responded by pushing cars from its dealer stocks through aggressive price discounting.
The automaker, based in the Paris suburb of Boulogne-Billancourt, benefited from a 23 percent increase in the profit contribution from Nissan to 1.33 billion euros.
Renault, which has pledged to pass on dividends from its Nissan and Volvo stakes to its own shareholders, raised the payout to 1.16 euros this year from 0.30 in 2010.
Depending on the timing of a European market recovery in late 2012 or 2013, Ghosn said Renault's core auto business could begin contributing to the dividend payments so far driven by the minority holdings.
Renault protected its cash flow by sharply drawing down stocks of unsold vehicles in the fourth quarter to 52 days' worth of sales from 65 days. Such adjustments to working capital accounted for 58 percent of the cash flow figure.
Net debt fell for a third straight year to 299 million euros, its lowest since 1998 and a 1.14 billion euro improvement over the year that came mainly from operating cash flow.
Renault's 10.8 billion euros automotive free cash flow exceeded its 500 million euros target last year as net income fell 39 percent to 2.09 billion.
Group sales rose 9.4 percent to 42.63 billion euros in 2011.
The results beat analysts' expectations of 41.4 billion euros in sales and net income of 2.01 billion, based on the average of estimates compiled by Thomson Reuters.
The French automaker's results surpassed expectations only narrowly, but the cash flow and balance sheet were "much better than we or the consensus had expected," the Credit Suisse analysts said.
