July 12, 2012 3:33 pm

Peugeot: burning cash, not petrol

French carmaker’s restructuring resolves little for investors

Having fun yet, François Hollande? Actually, politics aside, Peugeot’s restructuring announcement on Thursday was no worse – but not much better – than the rumours had suggested. Carmaking will end at the Aulnay plant near Paris in 2014, with some of this production being consolidated into the nearby Poissy facility. Work at the Rennes plant will also be cut back, as will corporate jobs across the French operations. Estimated net job losses are 6,500. Painful though this overhaul may be, it represents a necessary – although at industry-level not sufficient – step. Peugeot’s own European capacity utilisation in the first half of 2012 averaged 76 per cent; industry-wide, two-fifths of plants in Europe may be running at less than 80 per cent capacity.

For Peugeot’s investors, however, Thursday’s announcement resolves little. Faced with an 8 per cent slump in European demand in the first half of 2012, the company expects a €700m operating loss in its auto division in the first six months, as well as a group net deficit. This is slightly bleaker than the market had anticipated. And if red ink continues to flow in the auto business in the second half, albeit at a reduced rate as cost-cutting kicks in, Peugeot may battle to break even in 2012 overall. Credit Suisse, for one, now suggests a net loss at group level.

A bigger worry, though, may be liquidity. The company says cash burn is running at €200m a month – similar to the latter half of 2011 – and that it will be the end of 2014 before operating cash flow returns to break-even. Short term, this should be more than covered by disposals – including the corporate HQ – and the €1bn rights issue funds. But managing the situation for the next two years will be a challenge, and the industry may fret about any knock-on effect on product pricing discipline. Peugeot shares dipped. It is far from clear the worst is over.

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