Bold moves, positive results highlight Tavares' 1st year as PSA boss

Two symbolic events epitomize how PSA/Peugeot Citroen CEO Carlos Tavares has put Europe’s second-largest automaker back on track a year after it needed a 3 billion euro bailout to survive Europe’s long economic slump. One event shows that Tavares is a skilled financial strategist and the other highlights that he is fearless when it comes to slashing the automaker’s fixed costs.

The first big event happened March 23. That is the day PSA returned to France’s benchmark CAC-40 stock index after a two-and-a-half-year absence during which time the automaker reported billions in operating losses. Those losses ended in 2014. As of last month, PSA’s share price had risen nearly 50 percent to 16 euros from 11.30 euros on March 31, 2014, which is when the former No. 2 at Renault officially started as PSA’s chief.

The second big event will occur in the next 18 months when PSA’s top managers relocate from the automaker’s headquarters of about 50 years in the heart of Paris to the less-glamorous, less-expensive Rueil-Malmaison suburb 11km west of the city. Tavares says the move will save PSA about 50 million euros a year in real estate costs. It also will improve synergies between PSA’s three brands, he said, because Peugeot’s leaders are in the downtown location while Citroen and DS executives are in a separate building 6km away.

‘Positive effect’

Like he did when he was Renault’s chief operating officer from 2011 to 2013, Tavares took immediate steps to fix fundamental problems at PSA. The positive results from his actions were evident when the automaker reported its 2014 financial results in February.

The automobile division swung to a 63 million euro operating profit – its first in three years – from a 1.04 billion euro loss in 2013. Group operating income was 905 million euros after a loss of 364 million euros a year earlier. The automaker’s overall net loss narrowed to 555 million euros from 2.23 billion euros in 2013. Arndt Ellinghorst, an analyst at Evercore ISI, said, “It seems that Tavares continues to have a positive effect on PSA with the company making progress.” Analyst Stuart Pearson of Exane BNP Paribas Research said: “Tavares’ plan is working well so far.”

The number that Tavares says impressed him most was PSA’s operating free cash flow, which excluding one-time gains and charges was 2.18 billion euros last year after the automaker burned through 426 million euros a year earlier. Tavares didn’t expect to reach that level of free cash flow until 2016. “This is a very strong set of free cash flow numbers,” Exane BNP Paribas analyst Dominic O’Brien said. “Pursuing profitability over sales volumes is starting to reap some rewards.” Strong cash generation means more resources to invest in new technologies and products.

Tavares has set an even tougher target of having 4.2 billion euros in cumulative operating cash flow by 2017. That is more than double his previous goal, and he wants to achieve that result one year earlier than planned. PSA also entered 2015 with no debt as net cash stood at 548 million euros at the end of 2014 compared with 4.2 billion euros of net debt at the end of 2013. The liquidity came at a cost to the Peugeot family, which lost its controlling stake in the automaker last year. Following the bailout that was needed to rescue PSA, the French state, China’s Dongfeng Motor and the Peugeots each control 14.1 percent of the company, which has been building vehicles since 1890.

Work to do

Tavares would be the first to say PSA has a lot of work to do to successfully complete his Back in the Race turnaround plan. The automaker still needs to halve its model lineup, reduce overcapacity, improve its retail pricing, shrink wages and cut component costs to lift the automotive unit’s operating margin to 2 percent by 2018 and 5 percent by 2023. In addition, he needs to restructure PSA’s operations in Russia and South America.

Said ISI’s Ellinghorst: “PSA still has a long way to travel.” He pointed out that PSA’s 5 percent margin target is less ambitious than rival Renault’s goal, which is to have an operating margin of more than 5 percent at its auto division sooner than PSA - by 2017. PSA also has to prove that last year’s results can be matched or topped again and again, said analyst Sascha Gommel of Commerzbank. “PSA needs to continue to do what they did in 2014 to make sure that the positive cash flow was not a one-off in 2014 but rather a sustainable performance,” he said.

Another challenge facing PSA is increasing global sales, which rose 4.3 percent to 2.9 million last year, but that trails its record volume of 3.6 million set in 2010. Gommel said PSA has to boost its volume “because sooner or later 3 million units will not be enough to survive. They need to find a partner to achieve the volumes that the leaders in the industry sell.” Many of PSA’s rivals are three times larger, which gives them more spending power, Gommel said.

Tavares says scale is not his No. 1 concern. “Scale is important for purchasing power, but there are areas where it is a penalty rather than a benefit: agility, capability to manage the company, complexity, fixed costs, vulnerability from some crisis in the world,” he told Automotive News Europe. He added that automakers with a similar volume to PSA’s, such as Honda, have done well for decades. Tavares’ main priority is to remain focused on the execution of the Back in the Race plan and avoid any distraction. “Once the plan is fully delivered, we will embrace the future and we will study all the opportunities,” he said.

Too conservative?

The faster-than-expected start to PSA’s turnaround has caused market watchers to accuse Tavares of being too conservative with his midterm and long-term profitability targets. “Tavares is playing the under-promise, over-deliver game after years of watching [Renault-Nissan CEO] Carlos Ghosn do the opposite,” Bernstein analyst Max Warburton said.

The consensus among financial analysts is that the PSA auto unit’s margin will be 1.5 percent this year, Warburton, however, expects it to be 1.8 percent and to quickly rise to nearly 4 percent, largely because of increasing production utilization at European factories as the region continues to rebound from a long downturn. The utilization rate at PSA’s European plants rose to 79 percent in 2014 from 72 percent the year before, company figures show. Experts estimate that a utilization rate of 80 percent to

85 percent is needed for an automaker to run its plants profitably.

Tavares admits that his targets could be considered modest, but he isn’t trying to impress analysts, he is trying to motivate a workforce that felt defeated because of years of failure. It made more sense, he said, to set targets that could be surpassed to start rebuilding his team’s confidence. “We want people to decide for themselves how fast and how deep they are going to implement the turnaround,” Tavares said. “This way they are completely empowered by their own motivation and their own eagerness to bring the company to another level.”

Meanwhile, the CEO also purposely gave a pessimistic prediction of 1 percent growth for 2015 European sales while most other forecasts predict a rise of about 3 percent to 4 percent. “This was to convey the message that we are not counting on tailwinds” to help PSA achieve its goals. He said the automaker has to “fix its fundamentals without any excuses.”

China boost

While Europe remains PSA’s largest sales region, the automaker for the first time sold more vehicles in China (734,119) than in France (637,682) last year. PSA’s China volume increased by 32 percent last year and in 2015 the automaker expects its volume to exceed 850,000. By 2020, that number is forecast to reach 1.5 million vehicles a year.

China is also the main driver behind PSA’s improved profitability. The region provided 303 million euros in pro-forma auto operating profit, which is equivalent to a 7.6 percent operating margin. Without China, PSA’s consolidated auto margin was 0.17 percent (63 million euros). Tavares wants PSA’s China operations to quickly provide even more profit. “We need to move to double-digit margins,” he said, “because we have the potential to do so.” Exane BNP Paribas predicts that by 2018 PSA’s annual earnings in China will be 1.5 billion euros, a fivefold improvement on what was delivered last year.

One question Tavares won’t answer yet is what sales target he wants PSA to achieve along with all its other goals for 2018. When asked why, Tavares, gave a straightforward answer: “There is no commitment on volumes because what’s the point of selling tons of cars while you’re losing money? This is a financial turnaround plan to bring the company back to a sound foundation.” He said that he would not set a volume target until the basics are sound and PSA can grow without sacrificing profit.