Renault Q1 Revenue Disappoints; Full-Year Guidance Reaffirmed

Revenues Rise on Volume Growth

Renault has reported that revenues from its automobile division rose 4.2% year-on-year (y/y) in the first quarter of 2008, to 10.20 billion euro, from a restated comparison of 9.70 billion euro in the first quarter of 2007. Year-earlier previously reported first-quarter revenue was 10.26 billion euro. Renault reaffirmed its earnings predictions, saying in an earnings statement that the launch of new models and continued cost discipline over the rest of the year will allow the company to weather tough market conditions in Europe. "We continue to manage in a very determined and disciplined way... toward an operating margin target of 4.5% and volume growth of 10%," a company official said.

Shares Slide Further

The reassurance did little to calm investor sentiment, however, as shares in Renault fell a further 3% on Monday, adding to recent woes which has seen Renault's stock lose almost one-third of its value since the start of the 2008.

First-quarter revenue was boosted by the earlier reported 6.5% y/y rise in Renault's global sales, reaching 638,554 vehicles (see World: 15 April 2008: Renault's Q1 Global Sales Rise 6.5%). Renault brand sales increased by 4.7% and those from its Romanian unit Dacia surged by 37% y/y in the first quarter. Renault Samsung Motors sales fell by 9% during the period. Renault managed to slightly outperform the declining European market, which fell by 2% over the quarter, with group sales slipping by 0.2% to 418,322 units. This gave the French manufacturer 8.9% market share in Europe

Buyers Opting for Smaller Models

Renault said the mix of vehicles sold over the first-quarter period favoured its smaller, more environmentally friendly models, with the Twingo, Clio, and the new stretched Modus MPV performing well. Demand is partially being attributed to the high cost of fuel across the region and the raft of new CO2-based taxation legislation in France, Italy and Spain, as consumers grapple with the punitive financial measures.

Renault Counts Cost of Dacia Strike

Renault also confirmed the cost of the Dacia strike in its first-quarter income statement. The average salary increase was 28% (excluding bonus) and the overall cost of the strike 13 million euro. On the manufacturing side, lost production at the Pitesti plant in February equated to 19,500 units in the 15-day strike, but thanks to the constitution of stocks from January to March 2008, production loss is measured at only 7,800 vehicles and Renault is instituting an action plan to recover this production loss by cancelling days off in April. Renault also said that it has attained a production commitment from Pitesti of 320 000 units. The company said it would not delay the launch of the Sandero.

Outlook and Implications

Renault will indeed require all of its management's aforementioned determination to attain its full-year guidance for 2008, despite the runaway success of Dacia. Europe's car market is set for a tough year, and those sales that are made are likely to shift towards the smaller, environmentally friendly segments which naturally attract lower margins, placing pressure on revenues and profits.

Renault has a reasonably aggressive model launch strategy in 2008, and most of its existing models are relatively young; these factors weigh in its favour. Nevertheless, the intense competition and some rather less than inspirational designs from Renault of late, will see the brand have to fight it out in its key European marketplace, with costly incentives likely to be the order of the day, placing further pressure on margins. Renault looks to have turned the corner in design terms though, with the upcoming Laguna coupé and Mégane concept regaining some of Renault's lost ground. Bringing the Mégane to market and retaining the essence of the concept will not be easy though.

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