UPDATE 2-Renault lifts core profit despite European troubles

Fri Jul 26, 2013 3:41am EDT

* Renault H1 core auto operating margin rises to 2.9 pct from 2.5 pct

* Renault says pricing helped offset slump, forex headwinds

* Better Place bankruptcy hit Renault bottom line (Updates with analyst comments, share surge)

By Laurence Frost

PARIS, July 26 (Reuters) - French carmaker Renault said on Friday it had increased first-half profitability at its core manufacturing division despite falling sales, riding out Europe's sustained market slump with new models and a firm hand on costs.

While the bottom line was weakened by lost business in sanctions-hit Iran, incurring a 512 million euro ($678 million) charge, operating profit before one-off expenses rose 15 percent to 583 million. Revenue fell 0.9 percent to 20.44 billion.

Renault shares rose after the company reaffirmed full-year goals including a positive auto division operating margin and cash flow.

"We're on track to achieve the objectives we announced for 2013," Chief Executive Carlos Ghosn said in a statement.

A collapse in European car demand has led to crippling price wars and excess capacity, wiping out manufacturers' profits and in some cases threatening their survival.

Unlike struggling domestic rival PSA Peugeot Citroen , Renault is shielded from the worst of the crisis by its 43.4 percent stake in Nissan, as well as a timely push into low-cost cars and emerging markets.

Renault shares rose as much as 5.4 percent to 62.88 euros and were up 4 percent as of 0717GMT.

"There's been a great deal of uncertainty in the market about whether Renault would confirm its full-year guidance," London-based Citi analyst Philip Watkins said in a note.

Watkins credited tight discipline on pricing and costs for what he described as "surprisingly strong results from Renault".

Net income dropped to 39 million euros from 734 million, weighed down by 832 million in charges, but the auto division's operating margin rose to 2.9 percent from 2.5 percent.

The group's main Renault brand, challenged in recent years by cheaper offerings including its own no-frills Dacia cars, is fighting back to lift pricing with new models such as the latest Clio subcompact and Captur mini-SUV.

The effort helped offset a "difficult environment" in Europe and exchange-rate headwinds in Latin America, Chief Financial Officer Dominique Thormann said.

"We've been able to compensate by raising prices," he said.

Auto division earnings almost doubled to 211 million euros, or 1.1 percent of sales, from 116 million and a 0.6 percent margin. Divisional cash-burn was also reduced to 31 million euros from negative cash flow of 207 million a year earlier.

U.S.-led sanctions led to a 47 percent plunge in Iranian sales - to 28,000 semi-assembled vehicles - and were tightened further in June, prompting the 512 million euro writedown.

"This provision corresponds to the value of our assets (in Iran), essentially cash that we can no longer repatriate," the CFO said. Renault has no manufacturing facilities in the country.

Profit took another dent from the bankruptcy of Better Place, an electric-car infrastructure startup that had ordered 100,000 of the French automaker's Fluence battery cars.

Renault took an 85 million euro charge to compensate suppliers to the Fluence programme - which also claimed an unspecified share of the additional 142 million in writedowns announced for three underperforming vehicles. ($1 = 0.7555 euros) (Additional reporting by Gilles Guillaume; Editing by James Regan and David Cowell)

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