PSA Peugeot Citroen missed its operating margin target for the first half of 2006 and reduced its second-half outlook due to higher raw material prices, sending its shares to a more than two-year low. The French company, which has the second-largest market share in Europe, has now issued three profit warnings over the past 12 months.
Chief Executive Jean-Martin Folz said he was working on a plan to improve margins in 2007. "We are obviously not satisfied with these results and we are actively working on an action plan to restore profits," Folz told an analysts' meeting. He said the plan would be detailed before the Paris Auto Show in the last week of September.
Folz said PSA was perhaps being "overly cautious" because it did not want to mislead the market again after what Morgan Stanley called the fourth consecutive guidance miss in a year. He ruled out share buybacks until PSA's finances improved.
Analysts said the new outlook cut was surprising. "That they reduce the second-half forecast, despite the launch of a series of new models with a better margin, I find that serious and it leaves me speechless," said Patrice Solaro, analyst at Kepler Equities.
PSA doubled to more than 450 million euros the expected 2006 impact of higher commodity prices due to a spike in precious and non-ferrous metals such as platinum, copper and aluminium.
PSA is feeling not only the pinch from raw materials, but also the sting of a price war in Europe amid slack demand. Just over 70 percent of its car sales come in western Europe. It added that the market in Europe was likely to remain very strained "with ever-increasing competition and stable demand".
But it expected its unit sales to return to growth in western Europe in the second half on the back of new models such as the Peugeot 207, Peugeot Boxer and Citroen Relay. Outside this area, sales should rise more than 10 percent.
PSA said the consolidated operating result was 691 million euros ($873.8 million), or 2.4 percent of sales, compared to a restated 1.289 billion a year ago which was 4.4 percent.
The median forecast of 14 analysts in a Reuters poll was for an operating result of 762.5 million euros, or 2.6 percent of sales. Revenues, up 0.3 percent at 29.093 billion euros, were also short of the median expectation of 29.6 billion.
It said the first-half margin fell short of its 2.8 percent target because of the "far greater than expected impact of raw material costs" and it now expects the second-half margin to be flat where it had earlier expected a rise.
PSA had costs of 227 million euros related to the closure of the Ryton plant in Britain next year and 107 million in restructuring costs at its Faurecia parts unit.
Cost-cutting measures boosted income by 288 million, nearly half its annual savings target of 600 million. It said the automobile division's operating result fell to 227 million euros from 763 million a year ago. At Tuesday's closing prices, Peugeot Citroen shares were trading at 7.1 times expected 2007 earnings per share against a European sector average of 10.9, according to Reuters data. Peugeot shares have lagged the sector index by almost 18 percent this year. Local rival Renault reports on Thursday.
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