UPDATE: Renault Reaffirms Cash Flow Target As Profit Surges

Car maker Renault SA (RNO.FR) Thursday reaffirmed its full-year earnings guidance for free cash flow of more than EUR500 million, as it reported a jump in first-half net profit and revenue.

Renault attributed the improvement--revenue rose 7.3% on the back of a 1.9% increase in vehicle sales--to a variety of factors unrelated to operations. These include contributions from affiliated companies, reduced financing costs, a revaluation of assets, and a much reduced tax burden.

The company said it took a hit estimated at EUR150 million due to the Japanese earthquake and tsunami that disrupted its supply chain and caused it to lose sales. The lingering effects of the Japanese events are expected to cost a further EUR50 million in the second half of the year, Chief Financial Officer Dominique Thormann told a group of journalists.

First-half net profit rose 56% to EUR1.22 billion, while operating profit rose by EUR54 million to EUR772 million. Revenue rose 7.3% to EUR21.10 billion, and the company's automotive operations generated EUR121 million of free cash. Operating margin for the first half was 3% of revenue compared to 4% in the first half of 2010.

Financing costs fell sharply in the first half to EUR81 million from EUR246 million a year before, partly thanks to the early repayment of a costly EUR3 billion state loan offered by the government to during the financial crisis to ease a liquidity scqueeze. The re-evaluation of assets contributed EUR80 million to the positive swing in Renault's bottom line.

Russian affiliate AvtoVAZ (AVAZ.RS), in which Renault has a 25% stake, made a positive contribution of EUR37 million, compared to a loss of EUR56 million a year before.

CFO Thormann said rising raw material costs weighed for EUR313 million in the first half, and said this trend is likely to continue in the second half. This is a deterioration from the EUR450 million to EUR500 million extra raw material costs that the company had budgeted for this year, he said. However, Renault managed to offset EUR279 million through cost savings.

Renault has come in for criticism for the low level of profitability of its automotive division, and in the first half this core segment reported operating profit of EUR221 million, or 1.1% of revenues, down EUR189 million from a year before.

Apart from the extra raw materials costs, Renault took a hit of EUR102 million from unfavorable currency movements, and a mix/price distortion of its vehicle sales due to supply disruptions that it estimated at EUR91 million.

-By David Pearson, Dow Jones Newswires; +331 4017 1740, david.pearson@dowjones.com

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