Ladies and gentlemen, welcome to the H1 2019 Financial Results Conference Call of Group Renault. I'll now hand over to Mr. Thierry Huon. Sir, please go ahead.
Thank you. So good morning, everyone, and welcome to Renault's 1st half result conference call, which is broadcast live and in replay versions on our website. The presentation file, press release and activity pack for this call are all available on our website in the Finance section. I would like to point out the disclaimer on Slide 2 of this pack regarding the information contained within this document and in particular about forward looking statements. I invite all participants to read this.
Today's call is scheduled to last about 1 hour. The presentation will start with some preliminary remarks from our CEO, Thierry Bollore, regarding H1 and risks and opportunities for H2. It will be followed by our CFO, Closet Delbos, who will take you through our usual presentation about H1 performance. Presentation will last about 20 minutes and will be followed by a Q and A session. For this last part, Thierry and Clotilde will be joined by Olivier Murguet, Head of Sales and Regions.
Without further ado, I will hand over to Thierry. Yes.
Good morning, everyone. So today, I will share my assessment of 2019 first half year achievements before commenting on the outlook for the year. In the declining automotive market with series of unexpected or aggravated downturns, Groupe Renault showed true resilience and performed in line with set objectives while preparing for the future. The group sales followed the sharply declining global trend especially in regions outside Europe. In the first half of twenty nineteen, Renault sold 1,940,000 units worldwide, a decrease of 6.7% in a market which fell by 7.1%.
This led to revenues at €28,000,000,000 for an operating margin of 5.9 percent versus 6.4% last year. Because of the investments we made to prepare the future, the Automotive operating free cash flow was negative at minus €760,000,000 The first takeaway from these results is that despite all headwinds, we delivered as anticipated. We maintained our market share worldwide, a real achievement considering we had no major product launches in the past 6 months. And we did it while focusing on the quality of our sales. 2nd, AVTOVAZ performance is in line with its objective despite difficult Russian market conditions and RCI is still performing at record level.
The second takeaway is that in tough times, we make progress on our fundamentals. To boost our ability to deliver on target, we improved our pricing policy on our existing models. The price effect on our revenues increased by 1 point during H1 and we keep it up for the new models as we just started with Clio 5. As for cost control, all of our fundamentals have been activated and strengthened including better health and safety indicators, higher quality and higher modular degree, focus on hypercompetitiveness and deployment of digitalization. On top of this, our transformation program FAST by accelerating our processes and seeking efficiency in every business unit aims at reducing our fixed cost by 5% every year over the next 3 years.
All in all, during H1, we managed to lower our fixed cost by 4.7% in line with our commitment of 5% for the full year. We strengthened our financial discipline while investing in the future. To prepare for the lineup renewal, we invested more in research and development and CapEx with a 14% increase in our spendings versus last year. We also relied on the alliance to share our investments. Nucleo was produced on the Nuke brand CMFB platform, allowing us to make a real qualitative and technological leap while remaining cost effective.
We shared the investments required to build the CMF EV platform on which we'll start producing vehicles in the upcoming years. We also shared the R and D costs related to the latest generation of internal commission engines including HR10 and HR13, which equipped Nucleo and for the former Nucleo and Nu Captur for the latter. Our free cash flow, which was negative in the first half, naturally remains paramount for the company. We are putting in place a drastic plan enabling us to optimize the use of our financial resources. We will focus our investment efficiency to get back on track with our objectives of 9% R and D CapEx ratio as soon as possible.
And we will improve our inventory management. So we confirm our objective of a positive free cash flow for 2019. Moving on to our anticipation for the 2nd part of 2019. We see 3 major risks for the 2nd semester 2019. The first risk is a hard Brexit, which seems to become more likely given the recent political development in the UK.
The second risk is the impact of global trade tensions worldwide. The questioning of major trade agreement notably the ones involving Europe and China triggers lack of visibility. 3rd risk is unpredictability of environmental and safety regulations. Take for example the unexpected reduction of the incentive to renew the car fleet as decided by the French government, which impact on demand remains to be measured. As for opportunities, first, we are promising new products launches coming up our way in both emerging and mature markets: Nucleo, Nucapture, Nuzo in Europe, Arkana in Russia, Triber in India and Renault City KC in China.
2nd opportunity is a change in pricing policy, building upon our new and rich product lineup, which started with new Clio. Closely followed by new Capture, we intend to give priority to pricing over volume for the upcoming product launches. Finally, our performance programs including transformation program FAST and the digitalization of the company will also contribute to a healthier group performance on the short term and beyond. As for our guidance, in 2019, the global automotive market is expected to decline by about 3% compared to 2018. The European market is expected to be stable the Russian market to be down by 2% to 3% and Brazil market to grow by around 8%.
In this context and to prioritize the quality of our business, we anticipate revenues close to 2018. For group operating margin and automotive operational free cash flow, we confirm our previously announced yearly objectives. These guides, including of course a hard Brexit situation. In conclusion, you can expect Groupe Renault's full commitment to fight for its performance and deliver despite forecasted headwinds and risks coming up our way. It will be a tough yet necessary fight, which we take as an opportunity to accelerate, make progress and build a sustainable quality growth now and for the future.
These are the main highlights I wanted to share with you. I now leave the floor to Clotilde, who will present our H1 results in detail. We will then take your questions.
Good morning, everyone. As already mentioned by Thierry, the group's financial results for the first half of twenty nineteen showed the group's resilience in an environment turning adverse in many regions. Let's look in detail to these numbers and share the main explanations. Let me start with a brief summary of our commercial figures as released on July 16. Before reviewing the commercial performance, please note the evolution of our region reporting was now a dedicated region for China.
The other countries of the previous Asia Pacific region are now part of the Africa, Middle East, India Pacific region. This change has been made to have a better focus on China to develop the different JVs we have in the country. Let's now turn to the worldwide market, which decreased 7.1% with all regions showing a negative development. In this tough context, Groupe Renault resisted with volumes down 6.7% and maintained a market share of 4.4% with 1.900 and 4,000,000 vehicles sold. It is worth noting that the closure of the Iranian market following the American sanctions from August 2018 impacted minus 3 point 6 points.
In Europe, our registration was stable in a market down 2.5%. We gained market share in Spain, Italy, U. K. And Germany, thanks to the strong performance of our B segment cars, Clio and Captur and of Dacia. Dacia brand posted a plus 10.6% increase with the outstanding success of New Duster.
On the EV side, ZOE sales in Europe were up 44.4% to 25,000 units in H1. Our sales outside Europe followed the worldwide market's sharp decline and fell 13.9%. The group suffered in particular from the decline in the market in Turkey, minus 44.8 percent in Argentina, minus 50.2 percent and of course from the stoppage of sales in Iran 78,000 units sold in the first half of twenty eighteen. In Russia, our 2nd largest country in terms of sales, the group outperformed the market with sales down 0.9% in a market down 2.4%. This stems from the success of the new Lada, Vesta and Granta, which are the 2 most sold vehicles in the countries.
In India, our sales declined 13.8% as we are suffering from a lack of new product in a declining market. We're expecting a rebound with the launch of Triber, our new compact vehicle with unravelled flexibility for transporting up to 7 people for sub-four meters. In Brazil, the group outperformed the market recovery, which rose 10.5% with sales up 20.2%, thanks to the strong success of Quid with more than 40,000 units sold during the semester, regained almost 0.7 points of market share. In China, our sales decreased 23.7 percent in a market down 12.7%. We will launch in the 2nd semester our new affordable car named KZ and Kolios facelift.
This ends our sales update and I will now turn to the financial review. On slide 10, we show the full P and L of the group. Starting with the top line, group revenues reached €28,050,000,000 a decrease of 6.4% over the year. At constant scope and exchange rate, the decline would have been 5%. The next line shows an operating margin of at 5.9%, down 0.5 points compared to the previous period.
Due to the fall of Nissan contribution, net income came to €1,000,000,000 down €992,000,000 compared to the first half twenty eighteen. On the next slide, we show the revenue contribution by activity. Group revenues for the first half were down 6.4%. Automotive excluding AVTOVAZ contributed for almost €24,800,000,000 meaning a decrease of 7.7%. This implies a 8.8% fall in Q2 after minus 6.3% in Q1 linked with market deterioration.
AVTOVAZ contributed for €1,600,000,000 an increase of 5.4% despite a 2.4% decline in the market and a negative ForEx impact of €46,000,000 Revenues from our captive sales financing company RCI Bank were up 5.5 percent at €1,700,000,000 It is worth noting that the combined impact of Turkey and Argentina market collapse, ForEx deterioration and Iran shutdown accounts for 5.5 points. Excluding these major hits turnover would have been down only 0.9 points. I will now review the breakdown of revenues for the automotive activity excluding AVTOVAZ on slide 12. The first item volume shows a negative impact of 4.6 points stemming primarily from the registration decrease. As usual, the gap between registration growth and volume impact came from the CKD business, activities outside new car sales and the impact from inventory changes.
This last item, this half being significant, thanks to independent dealer stock reduction. The geographical mix and model mix impact are almost neutral at minus 0.1 points each. The 4th item is the price effect, which is positive one point. This impact reflects pricing action in emerging markets to offset the negative impact of the ForEx and in Europe to mitigate the regulatory costs. Sales to partner impacted negatively for 3.1 points in the first half.
This stays in line with Q1 impact and still came from a slowdown of the production for partners, the Iranian market shutdown since August 2018 and lower demand for diesel engines in Europe. The next item, foreign exchange is a negative impact of €312,000,000 or minus 1.2 points. This reflects again the weakness of the Argentinian peso in the first place and to a lesser extent the Turkish lira. The last item named others accounted positively for 0.4 points. It represents the other activities outside the scope of new car activity.
The main impact came from group's dealers inventory changes and the retreatment from sales with buyback commitments following the leasing development. Beyond this major effect, we had the usual ones on used car and spare parts. I will now turn from automotive revenues to the group operating margin by operating sector on slide 13. The automotive segment excluding AVTOVAZ delivered €981,000,000 operating margin or 4% of revenues versus 4.5 percent a year ago. This decline came mainly from the lower volume and sales to partner as we will see in the variance analysis in a minute.
AVTOVAZ contributed positively for €82,000,000 versus €105,000,000 expected as last year benefited from positive one offs amounting to €36,000,000 Adjusted for this effect, VAS would have continued to show a margin improvement going from 4.7% in the same period last year to 5.3% for H1 2019. Our financing activity continued performing at record level as RCI Bank delivered a €591,000,000 contribution to the group margin versus €594,000,000 last year. Adjusted from previously mentioned headwinds, Groupe Renault operating margin would have shown a mere 0.1 point decrease. The next slide provides more detail on the group operating margin variance. The first half operating margin for the group totaled €1,654,000,000 a decrease of €260,000,000 compared to last year.
Total monozukuri saving amounted to €385,000,000 in the first half of twenty nineteen compared to €254,000,000 in H1 twenty eighteen. In more details, cost reduction mostly stem from purchasing savings totaling €258,000,000 The intrinsic performance despite being at the same level as last year in percentage is limited by lower purchasing volume and by the carryover effect of the Turkish situation. Warranty cost change was a negative €24,000,000 due to stricter assumption for provisioning. R and D impacted positively by €208,000,000 as the capitalization ratio moved up 7.5 points and reached 54.2%. Manufacturing and logistic costs increased by €57,000,000 despite positive productivity gain for an amount of €112,000,000 in the plant.
This negative came largely from higher depreciation, energy cost and wage increase especially in emerging markets. Finally, G and A cost decreased by €23,000,000 thanks to strict expense control while investing in our transformation program fast. Let's go back to the walk down page 16. As expected, raw material produced a headwind amounting to €213,000,000 This is in line with our guidance and reflects higher steel and precious metal prices. Negatively for €95,000,000 This reflects lower price increase in some emerging markets, WLTP costs on a full base, lower diesel sales in Europe and Clio Force end of life management.
The next item, which includes group decreasing volume and sales to partner shows a €471,000,000 negative impact. RCI Bank combined with the other businesses outside of the scope of new car sales yielded a positive contribution of €56,000,000 I will comment more on in detail RCI results in a minute. This item is always a mixture of different effects like buyback and own dealer inventory changes. During this half, currency movements resulted in a positive impact of €78,000,000 This stemmed from a positive impact of the Turkish lira on our cost and globally from less adverse currency situation than last year. The next slide provides more detail on RCI Bank performance.
New financing in the period were almost flat at €10,900,000,000 versus €11,100,000,000 in H1 2018, primarily reflecting a less supportive auto market. Average performing assets continued to grow 6.9 percent and reached €46,700,000,000 Net banking income stood at 4.35 percent, down 19 basis points. This decrease came from impairments related to our start ups in the mobility services, the non repetition of positive one offs and swap valuation adjustment. The cost of risk continued to be under strict control, but increased a bit at 40 basis points when it stood at 37 basis points of average performing assets last year. Finally, costs were contained keeping our operating expense ratio stable at 1.36 percent of average performing assets.
In total, the pretax return on asset reached 2.62% versus 2.85% in the first half of twenty eighteen. RCI contribution to group's operating profit amounting to €591,000,000 down €3,000,000 over last year after a negative ForEx impact of €14,000,000 and provision booked on mobility services start up for a total of €21,000,000 Now that we have covered the operating margin variance, I will continue down the P and L with the other operating income and expenses item on slide 18. Other operating income and expenses amounted to minus €133,000,000 versus minus €180,000,000 a year ago. This decrease came primarily from lower restructuring charges related to our early retirement program in France. Continuing down the P and L, the next item is net financial income and expenses on slide 19.
The net charge increased from €121,000,000 to €184,000,000 Despite lower cost of debt in many regions, we were penalized by a strong increase in the financial charges in Argentina, Brazil and Turkey and lower dividends received from different entities. The next slide shows the impact of associated companies in Renault's P and L. Following results published yesterday, Nissan contribution for the 2nd calendar quarter in Renault's account came to €35,000,000 taking the first half year impact to minus €21,000,000 Contribution from other associates turned negative at minus €14,000,000 reflecting notably the negative results of our Chinese JVs. I will turn back to the P and L for the last time on slide 21 where the net tax charge for the first half came to €254,000,000 versus €387,000,000 This decrease came mainly from lower profits and some changes in different taxes. Bottom line, next profit after tax came at €1,000,000,000 versus €2,000,000,000 in the first half of twenty eighteen.
After taking into account minorities, the net result per share came to €3.57 compared to €7.24 in the first half of twenty eighteen. Now that I have completed the analysis of the P and L, I will turn to slide 22 on the evolution of the net automotive debt. Cash flow from operation excluding AVTOVAZ totaled £2,274,000,000 almost at the same level compared to the first half of 2018. Changes in the working capital requirement impacted negatively by €131,000,000 versus a positive of 2.12 €1,000,000 a year ago. Net tangible and intangible investment came to €2,910,000,000 in the first half, up €742,000,000 over the last year level.
This sharp increase reflect our continuing effort to prepare the future lineup including powertrain electrification, continuous modernization of the plants and the increase in leased vehicles. As a result and after taking into account a positive free cash flow from AVTOVAZ for €51,000,000 automotive operational free cash flow came to a negative of €716,000,000 in the period. You have noticed that Thierry confirmed that we will deliver activity lower than in H1 and higher dividend from RCI. In total, our net automotive financial position decreased £1,600,000,000 compared to the end of last year before IFRS 16. Dividends received from quoted companies totaled €473,000,000 while dividend paid during the first half came to €1,077,000,000 Other financial items were negative €147,000,000 and partly related to IFRS 16 application on new leases treatment, but also to the impact of ForEx and different financial investments made in the first half.
Other evolution in VAS led to a negative €132,000,000 mainly due to ForEx effect. After taking into account the negative impact of the IFRS 16 adjustment for €633,000,000 on the opening balance sheet, the group automotive net cash position amounted to €1,500,000,000 Slide 23 shows the inventory situation in Renault's balance sheet and for the independent dealer network. As you can see on the slide, while inventories decreased by 4.5% versus June 2018, we were at 65 days of business at the end of the first half, up 4 days compared to a year ago, mainly from emerging markets. About 2 days out of the 4 came from the impact of the absence of business in EI brand in the calculation. And on a forward basis, inventories are only up one day.
This completes my review for the first half of twenty nineteen. And now Thierry, Olivier and myself are ready to answer your questions.
We have one first question from Mr. Thomas Vester from Kepler Cheuvreux. Sir, please go ahead.
It's Thomas from Kepler Cheuvreux. I have two questions, please. First, on the cash flow, you've mentioned RCI dividend as potential support for the second half and your target for the year. If I remember correctly, you said you reached the necessary level of equity. Can we assume that you could pay a dividend close to 100% of net income at RCI Bank?
Or would you stay somewhere between 70% 100% of the first? And the second question, on the EBIT bridge, currency was positive. Could you explain where it comes from and what we should anticipate for the full year for the currency bucket in that EBIT bridge, please? Thank you.
Thank you, Thomas. On RCI, you're fully right. As mentioned earlier, we are now back in a territory where we can pay dividend as we started to do last year. That being said, we know that requirement from Central Bank are never decreasing, always increasing. So we will stay cautious on the amount of dividend to be paid.
2nd point, it will be paid a portion in 2019, a portion in 2020 as we have done last year. So I would not go as what you mentioned. I would stay closer to 40% to 50% for the moment and we will see at the end of the year if we can do better. On the currency, you're fully right. On the first half, we have a negative impact on the turnover because of the major impact from the Argentinian peso and lower impact from the ruble and the Turkish lira.
The positive impact on the P and L is due to the fact that the Argentinean peso impact is fully offset more than offset by the positive impact from the Turkish lira. As you know, we are exporting a lot of cars, especially Clio from Turkey to Europe. This is what where the positive impact come from. For the second half, we do expect this to turn down back to breakeven or slightly negative as the positive of the Turkish lira should fully diminished in view of the fact that the foreign exchange variation started over summer last year. So on a comp basis, we will have less impact even if the Turkish lira stays at today's level.
So it should be breakeven slightly negative for the full year all in all.
Okay. Thank you very much. If I can just do a quick follow-up on that, did you recover part of the compensation you gave to suppliers you gave to suppliers in H2 on that Turkish impact? Or is it to come?
No, not yet. What we have done is we have stopped giving compensation, let's put it that way. So this is behind us. But we still have the carryover effect of what has been given last year. We will see if the market condition allows us to recoup that in the second half.
Okay. Thank you very much.
Thank you, sir. We have another question from Mr. O'Brien Dominique from Exane. Sir, please go ahead.
Good morning, everyone. Thanks for taking my questions. I actually have three questions all on free cash flow. Firstly, could you give us a bit more detail where the main drivers of getting to the free cash flow guidance on the full year are please? Specifically, you mentioned working capital.
Could you just give us an idea of the magnitude there? And also what sort of magnitude do you expect the decline in investment spending to be? Secondly, just following up on the RCI question. Could you confirm that it was a €50,000,000 inflow in the first half of the year? And when you said that part will be paid in 2019 and part will be paid in 2020, how should we think of that as a split of the sort of 40% to 50% of net income that you mentioned?
And finally, sorry, I'm being greedy here for a third question, but I see the change in the capitalized leased assets was a big drag in the free cash flow of around €484,000,000
Sorry if it's
a bit of a naive question, but could you just remind us exactly what that line is and how you expect that to develop in the second half of the year? Thank you.
Thank you, Dominic. So on the free cash flow, clearly, we have 3 or a few elements in order to achieve the free cash flow positive for the full year. You rightly mentioned the working capital. It's true that in the first half, there is an increase in working capital, which is not usual for Renault. This is mostly due to inventories, where even though we've been quite strict on inventories and been able to put them in under control, You've noticed that we have increased or not decreased totally in line with the market decline our new vehicle inventories.
You saw that in the slide on inventories. And it's even more true for industrial inventories. So our plan is clearly to go back to the same DIO, DPO, DSOs as we had in 2018 for the end of 2019. And this should be a major improvement in the working capital providing us with a big positive for the full year. That's the first point.
In terms of investment, we estimate that we should be around in line with what we had for the second half of last year, I. E. Slightly less than what we had this year. For RCI, for modeling purposes, you can take maybe a fifty-fifty on what we intend to pay that would have the impact on H1 sorry, on the H2 2019 versus H1 2020. And yes, I do confirm that we have paid the remaining part of the 2018 fiscal year dividend over SEI in H1 2019 for an amount of €50,000,000 So basically for free cash flow, our roadmap is extremely clear.
We have already cascaded that to the whole company. Working capital back to 2018 level in terms of ratio and out ending point, maintain investment under strict control and the benefit from RCI. I would add another one, which is on the financial costs, where we have made a recapitalization of our Argentinian subsidiary and that should fully reduce our financial cost in this country, which was very heavy in the first half. So this is another layer where we're going to be using in order to reach free cash flow positive. Your second question was on leasing.
You know that we show leasing in when you have buybacks according to accounting rules, you have to account for them in the balance sheet a portion in inventory and a portion in the investment line, but that has no real impact on the free cash flow. So you have offsetting amounts in the working capital roughly, if I make it very simple.
Great. Thank you. And just the expectation for that leasing side of things for H2, do you typically see just as big an impact in H2 as H1? So is that going to be the same this time?
No, no. This year should be very, very small for the second half.
Great. Thank you very much guys.
You're right.
Thank you, sir. We have another question from Mr. Stefan Rykmann from Societe Generale. Sir, please go ahead.
Yes, good morning. I have two questions. First of all, on R and D capitalization. I think you mentioned the figure of the impact of R and D in the EBIT bridge was about EUR 208,000,000 which is about 80 basis points on the margin. Could you give us some idea of what you expect for the full year, if the kind of rates are going to be maintained?
And secondly, I have another chance obviously to look at all your figures, but just in terms of looking at your margins and really where you feel you are against benchmark, where do you feel you can improve in the next 2 or 3 years? What kind of levels do you think are really acceptable for the current business that you have? Thank you.
Thanks, Stefan. On the R and D capitalization ratio, you can assume that it's going to stay flat for the second half at that level, 54%. But remember that last year H2 was already higher than H1 last year. So the impact on the P and L is going to be lower in the second half. On the levers to reach higher margin, I will give it up to Thierry.
No, I think this is an absolutely key question. First, you know what we have committed for in our midterm plan and we stick with that commitment to get beyond 7% operational margin before the end of the midterm plan. So that's the first order of magnitude that you have to memorize. The second way is that really with all the improvements that we are putting in place and it's visible already in H1, it will be more visible in H2, I'm thinking about pricing, quality of sales. It's clear that this is the key, the major lever that we are putting in place, which means the value and the way to get paid for the value that we are putting in our vehicles and in our services.
That's the second. And clearly speaking, in terms of cost management, in terms of the way to fuel permanent progresses in terms of efficiency of the company with, of course, subsequent visible improvements in cost. We are continuously making that happen and it works. So these are the key elements.
Thank you, sir. We have another question from Mr. Gaetan Ploulement from Deutsche Bank. Sir, please go ahead.
Good morning. It's Guy Don speaking. I have three questions, but they're pretty quick. Raw material, negative EUR 200,000,000 in the first half. Can you give us a little bit of an idea for the second half?
My second question is on the FAST program. You mentioned that you have been able to save approximately 5% of your cost base. If I assume €10,000,000,000 5% on the semester give you approximately €250,000,000 When I look at the work down of the operating profit, where do I find those numbers? So that's my second question. And the third one is, you give us a little bit of an idea of the CapEx and R and D capitalized?
I mean, you reached almost 11%. The trend is 9%. Should we expect the second half to be very comparable to the first half? Should we expect that to decline next year or mostly the year after? Can you give us a little bit of an idea about the trend?
That's my 3 questions. Thank you.
Thank you, Gaetan. On raw material, I think H2 should be slightly lower. So we should stick to the guidance we gave at the beginning of the year of around €350,000,000 so down in H2 versus H1. Again, the most elements is really palladium and steel. Those are the 2 main points that are negative.
On your second question, which if I understand well is where do we see the fixed cost reduction in the walk down, right? You see it in 3 places. The first place is in the mix price enrichment where we have the fixed marketing expenses, which we have been extremely drastic on reducing in the first half. The second place obviously is Monozukuri, because you have fixed costs embedded in manufacturing, you have fixed costs embedded in R and D. And the 3rd place is G and A.
So that's where it has been spread over these three elements over the period. And that's where it's going to continue because clearly FAST is really targeting fixed costs, support function, R and D efficiency and the reduction of cycle time. So that's exactly where it is spread. In terms of what was the last question?
CapEx and R and D, almost 7%
in the first half.
Yes. And just so one last point on FAST. This reduction is done despite the fact that we have cost to implement the FAST program. So we've achieved that net of the cost implemented to reach these results. On CapEx, yes, I think we clearly have the intention to reduce our R and D and CapEx over turnover investments.
That being said, you can understand that it will take time. So it will be done in the future. I think for modeling purposes for now take as an assumption that we will have the same type of ratio for second half and that it will start decreasing through everything we're doing in terms of R and D and CapEx. Let me remind you that we're working a lot on reducing the diversity of our lineup and especially on the version of each model within this lineup. We're also continuously working on partnership, more partnership with Nissan and others and we're working on fast to reduce the cycle time.
So we have many levers in order to go back to the 9% we mentioned. And I think Thierry wants to add something on that.
I just Galton would like to add that we are clearly in a cycle at this 1st part of the year where we accumulate a very huge number of preparation in launches and this has an impact on our CapEx. And that's the reason why we this part this seasonality in the way we are spending to prepare these launches will be different in H2, and that's why we are totally confident to be back to the 9%.
But April project for next year, did this number should decline, what, pedestrian level or still above 10%?
It's too early to say. We have a lot of things in the pipe with partnerships. So it will go down, but too early to say if we're going to go back to 9% in next year. But as soon as we have a clarity on that, we can provide it.
But it's our goal and that's the reason why we are accelerating progresses in the efficiency of spending. And that's you have to know that in the FAST program, which is really delivering, we have a major accelerator, which is on engineering precisely because we have already successfully experimented that when we put the Agile methodology engineering, we boost the efficiency in a way that in fact it's a lot of money that we can spare. So we are in a very massive way accelerating that and especially on H2. So far we benefit of that for the next years.
Okay. And key question, capitalization rate of 55%, is it the limit or will still go on in the coming years?
As Thierry mentioned, it really depends on the cycle time. And we don't think that capitalization ratio will go up capitalization ratio will go up in the future. I think we're at the time where everything comes at the same time. We're launching Clio. We're launching Captu and all that.
And we strongly believe that we're not going to go above 54% in the coming years in terms of capitalization ratio.
Super. Thank you.
Thank you, sir. We have our next question from Mr. Jose Asumendi from JPMorgan. Sir, please go ahead.
Thank you. Jose Asumendi, JPMorgan. Thierry, good morning and Clotilde. A couple of questions please. On efficiency theory, can you give us some examples on this stricter pricing discipline?
Can you just maybe comment who is your benchmark? What's the price gap to the best in class? How do you basically improve pricing power? Also can you comment on maybe the need to improve those level to sales ratios in Europe? Any actions around the workforce reduction that you're thinking about?
I think those two items are very important to improve those margins going forward. And then finally, Renault FCA discussions, is this item completely frozen? There are no discussions at this point. Can you give us any update on this topic, please? Thank you so much.
Concerning our pricing power, I think first it's a pricing discipline. And I think H1 has proven that despite very difficult conditions and existing range of cars, well, our sales team worldwide was absolutely able, thanks to the dynamism of the management, to make it such that we gain one net point in terms of price impact on our P and L. So there is a lot to do in terms of management and this is absolutely continuous. It's all the more continuous that what we are bringing to our salespeople in terms of products as a content value which is at the highest level that Renault has ever done. And we have been preparing them to make it such that the pricing power is going to be visible in our accounts in from H2.
So you are going to see the impact very, very soon because it's going to be massive compared to what we have done in the past. And we have been training our salespeople to recognize not only recognize, but also to transfer that value in a price. And this is starting with Clio. And you can imagine that with all the other cars at the Renault brand coming up, it's going to be the case. So we have a strict discipline on that.
And to make it very blunt, our bench is still Volkswagen. So we want to get it up getting closer and closer compared to what the pricing Volkswagen is doing at the moment. And we want to make it such and you can check that our new Clio 5 will be at minimum at pair with 2.8 if not beyond. So that's what we want to do and that's the instructions which have been given to all our salespeople. Concerning the second question, if I understood properly, which is efficiency, right, of our global labor, I mean, we are still fueling if I talk first about the industry and I will talk about the white collar just after.
If I talk about the industry, we are permanently fueling our increased efficiency in industry. More or less, we are between 7% 8% of productivity every year, which is being seen in our P and L. So that's the permanent progress that we can do. If we look at this global KPI, which is bringing a lot of information, which is the number of cars per employee. You know that in the midterm plan, I gave instruction and objective to get to 90 as an average for the whole company.
You have to know that today at the end of H1 we are at close to 80 as the average. We have half a dozen of clients which are much beyond 100, some at 120. So it means that we know exactly what is the roadmap to make it happen. It's just a matter of implementation to the critical mass of our plan. So far, we can be even beyond the 90.
So we are totally confident with that. The beauty of the FAST program we have launched is that everybody is concerned. We had in mind at beginning the of course the white collar which are not in the industry. We have seen the industrial people extremely excited about that because they discovered that all their white collar work force and not only blue collar can improve drastically as well their efficiency in changing their method of work which is ongoing. So the whole company is taking advantage of that.
And frankly speaking, the 5% fixed cost reduction that we have committed for us is absolutely the floor. It's a minimum. It's a minimum because what we can see in terms of gaining efficiency thanks to FAST is much more in a magnitude of 20%, 30% minimum. So we believe that the impact should be much higher in terms of this global efficiency of workforce. And of course, we have put in place massive training programs.
You have to understand that we have more than 7,000 people already working in the company in agile mode. We are going to train before the end of the year 20,000 people and before the end of next year 40,000 people are going to be trained, which means activated in letting such that they are working in a different way compared to the silo type of organization. So that's what we are doing. And of course, we have an incredible change in the HR organization and processes. So far the upskilling, re killing, mobility in all directions is anticipating the needs.
So far the recycling of all this is extremely efficient. Last question is about FCA. Well, we have no talks any longer with FCA. That's extremely simple. And that's a pity because the fundamentals of the quality of the deal for us are still totally vivid.
Thank you.
Thank you. Great details. Thank you very much.
Thank you, sir. We have our next question from Mr. Philippe Houchois from Jefferies. Sir, please go ahead.
Yes. Good morning. A lot of my questions were asked already, but I'm just wondering about the quality of earnings. I mean, this year, for the first half, half of your earnings come from, I would say, no, profit profits and half is the accounting of R and D. You keep guidance.
We can see on the cash flow how working capital reverses and that helps, etcetera. But what is going to be the quality of the earnings in the second half? You have Clio coming in. Is Clio enough to really shift the ratio of earnings towards more earnings and less net capitalized R and D? Or that we my point is we've been there before, Renault, where the earnings mostly come from accounting.
And then eventually, if it doesn't work, the accounting gets now written down below the line. And I'm just trying to understand your level of confidence, what's going to drive the earnings in the second half so that we don't have the repeat of this fifty-fifty proper profit and accounting?
I think you're a little harsh because you mentioned the earnings coming from the capitalization of R and D true, but you have almost an offsetting amount of extra depreciation. So basically, it's net net zero. All the rest is real performance from the company. And you see that if you look at the cash flow from operation, which is stable for the last three half years. I mean, we have an EBITDA cash flow from operation, which is fully stable from last year H1 and even the previous year H1.
So I don't agree with your statement, that's basic. I think the quarterly earnings is not that bad versus what you say because again it's a net net wash between depreciation and capitalization of R and D. And what is going to come in the next year in the next half is volume because you know that H1 was customer pricing power. Those cars are extremely well received by the public and by the people who sold them the specialized newspaper etcetera, etcetera. So in my view in the second half quality of earnings is going to come from new launches, pricing power and what Pierre just mentioned cost efficiency.
So that's what I would answer.
Okay. If I can stay on the hard side for a moment, can I ask you about so there's no growth this year? Working capital is an outflow. It's usually not the case, but it's overall, it's a relatively modest outflow. If you look at your balance sheet, the inventory position is up €1,000,000,000 the receivables at €300,000,000 and the payables is usually a strength of the company at Renault are actually down €200,000,000 euros What's happening on working capital?
That's usually something that the French carmakers run fairly well.
Well, that's why we see that's exactly what I said before. I think on the working capital, we have done tremendous improvement in the last years. If you look at the you're right, if you look at the working capital inflow in cash flows from the last year, it's a tremendous amount. And this is continuous improvement. So we're still continuously looking for better ways of managing the working capital.
But it's true that for H1, it was a little more complicated in view of the harsh decline of the market, where we had to adapt to minus 7% in the market and you don't do that by clicking fingers. But this is now stabilizing in our view and that's why we're so confident that for the 2nd part of the year, we're going to be able to go back to DSOs, DPOs, DIOs, as I already mentioned, for this working capital to go back in a working capital, which is in line with ourselves is as basic. But again, I mean, there has been a harsh decline in Q2 and you know it takes time to adjust. Most of the decline in Russia, for example, in other That has an impact on inventory for sure. And That has an impact on inventory for sure.
And in terms of accounts receivable, it's more a mixed question between region than anything else and not a deterioration per se And we're working on it. We have a lot more sales, for example, in South Africa. We take more in the pipe, let's put it that way. So we have to adjust and fight compensating action for these flows, which are taking a little more in terms of either accounts receivable or inventory. But this is very clearly identified.
By the way, it was planned in our internal road map. H1 we are fully in line with our internal roadmap on H1 turnover. We're fully in line with our roadmap in terms of operating margin. And we're only a couple of 100 €1,000,000 below in terms of free cash flow. So this was planned.
So there is no surprise on our side, even though we were caught up by a stronger market situation than expected, but we have clear and deployed action plans in order to be back to a positive territory.
Okay. Thank you very much, Plautil.
Thank you, sir. We have another question from Mr. Haga Gupta Chaudhry from Citigroup. Sir, please go ahead.
Good morning. Thank you for taking my questions. I had a follow-up on the margin gap versus benchmark. When I look at your gross margins, they're below your French peers despite the fact that you benefit from RCI. How much of an opportunity, I guess, do you have to negotiate harder with suppliers to kind of improve your gross margin?
Secondly, you referenced regulatory enrichment as a driver of a cost headwind in the mix bucket. How should we think about that going into next year given the need to sell more EVs? Perhaps it kind of comes into a different bucket in the bridge, but I would just like to hear a little bit more about that. And then finally, I mean, purchasing synergies were a bit disappointing in the first half of twenty nineteen. Any comment you can make on how you expect that to evolve?
I'm talking particularly with reference to the rate that it's been historically. I appreciate it was at a similar level or a bit higher than the second half. But anything that you can add on that would be great. Thank you.
I'm going to take maybe the first one on EV. And so if I summarize your three questions to make sure I understand. The first one is how to improve our margin by taking more to suppliers. Is that your question?
Yes. That was in essence. When I kind of look at the gap versus some of your peers on the gross level, it appears that there is a gap. Is there an opportunity for you to perhaps negotiate harder with suppliers? That was the first one.
Okay. I will give that one to Thierry. But before I answer to the other ones, on the EV burden of what you think is going to be a burden on our margin. You know that we're probably one of the only OEMs where EV is not bleeding. We are very close to breakeven in terms of EV profitability.
So it's a drag, but not a major drag. And we strongly believe that we have all the knowledge of the industry as we are one of the leader, if not the leader in many instances. And we have a clear view with our roadmap on EV so that the development of EV sales should not be such a major drag on our profitability. So that's the first point. The second point on purchasing, I'm just going to say where we stand today and then I will give to Thierry on purchasing.
If you look at the intrinsic performance in terms of percentage of amount bought to suppliers, our performance is equal to last year. The fact that it is lower in global amount is twofold. First, there is lower volume over the year. I mean, if we decrease the sale by 7%, you can imagine that we also decreased our purchasing by the same amount. So facially in the bridge you see a lower amount.
And the second one as I mentioned already is the carryover on a price increase that we consented to a Turkish supplier last year and we did not consent anymore this year. Now on the more global split of profit between suppliers and OEMs, I will give it to Thierry.
Well, I think it's
a very key question because my view is that we have still a significant margin of maneuver in terms of progress with our supplies. I will not elaborate or comment the results of our supplies, but when you see their results, you always can question about the share value. But more practically, we know that we have cost gaps between what we pay and what we estimate should be a reasonable margin with our cost calculation of what we order. So the reality is that our system of functioning with our suppliers is being driven to something to a different paradigm. Let's put it that way, which is and we are starting doing it with some of our suppliers in a much more partnership way from innovation to lab to sales in a way that we really handle the fair share of the value from the beginning of the programs, whereas today and historically you've got a given price that we call P0 at the beginning and then productivity commitments in the contracts which are permanent negotiations which are well a fight and I can tell you how it works because I was in the other side quite a number of years.
And I know we can do it in a much more efficient manner for everybody and especially for the good sake of our performance since the P0, since the P0 and get an integral which is much more efficient for us and at the benefit in terms of worldwide volumes for some of our key partners. So this new paradigm we are putting that in place, but it's not going to be short term results. It's going to take a couple of passion years to make it happen at the level of the global portfolio of our suppliers. And you can imagine that the portfolio management which will shrink in the number of suppliers we will have with this type of approach.
All clear. Can I ask a quick follow-up on EVs? Can you share with us perhaps a target number that you're going to sell next year to kind of reach compliance in Europe? Do you have a number in mind or is that you're budgeting that you can share with us?
It's a bit early to share 2020 figures for EV. But what I can say to you in H1, we have been increasing EV sales by 40%. Again, I would say, last year it was 40% around 40%, H2 at 40%. So it's a bit early to give you a figure for 2020, but I can tell you that we will be increasing strongly again in 2020.
More or less, if my memory is good, in our initial prediction, it's between 150,000 200,000 EV that we should have in our visibility of 2020. But we will go much more in details early next year with you about that.
I guess we have time for our last question.
Sir, your mic is still open if you wish to talk.
No, I'm done. Thank you.
Okay. We have another question from Mr. Georges Galit from Goldman Sachs. Sir, please go ahead.
Thank you. Just following up on the comments around purchasing. If we look at purchasing in the bridge, it has gone from a fairly consistent €350,000,000 to around €250,000,000 in the second half of last year and the first half of this year. I understand the point about lower volumes having an impact and clearly that accounts for sort of 7% to 10%. But if we look at the overall decline, it's actually closer to around 25 percent from around 350,000,000 run rate to 250,000,000 run rate.
Is the rest of that largely attributable to the relief that you've given to the Turkish suppliers? And if that's the case, does that continue in the second half of this year? Or is it more a case that the purchasing opportunities are just diminishing given the improvements seen to date?
Well, there's not much I can say more than what I said before. We in terms of intrinsic performance, we're stable year over year. So there is no decline in the performance of the purchasing. There might be a few other minor one offs that I didn't detail, but mostly most of the impact is either volume related as we mentioned or linked to Turkish supplier. This question of Turkish supplier will not repeat in the second half because the carryover is over, I would say.
So there should be no negative impact of Turkish supplier in the second half.
Okay. Thank you. And then just secondly, sort of from a strategic perspective, As I understand it, Renault's management team did see merit in the proposed merger made by Fiat earlier this year. Are there any circumstances under which Renault might go back to Fiat with the counteroffer proposal given that strategically this would appear to make sense? Or from your perspective, is this now confined to the past?
If I understood properly your question, I would say and I will repeat that today we don't talk to FCA, 1st. 2nd, we are really making sure that we are going to support, help, make everything possible to make it such that Nissan gets back on track because first this is our top priority. The progress of the alliance is a matter of necessary condition of progress. Renault is fully equipped ready for in terms of these necessary conditions to progress. It's a reality and quite visible even more since yesterday that it's not yet the case of Nissan for obvious reasons.
That's the reason why we want to help them. So for everybody in the alliance Renault and Nissan and for the sake good sake of the alliance all necessary conditions are back on track and ready for progresses because it's an industrial story. It's between companies and the companies have to be in the same shape to make it such that everything is moving forward at maximum speed. Today, we are benefiting from all what we have done in the past to make it happen. And 100% of everything we are putting on the market today is really shared items from the alliance platform, modules, blah, blah, technologies, everything.
And it's going to be the same for Nissan. And if you listen carefully to what Nissan said yesterday, they said that they need the Alliance. The Alliance is not the reason why they are in that situation today and they need the alliance. That's exactly what they said very in a very strong manner and it's right. So that's why today we are really focusing on that and that's the reason why our attractiveness not only Renault but of course the global alliance will be more and more vivid.
And then we will see which are the next opportunities.
Okay. So, I think we are at the end of the call. So if you have further questions, the IR team will be around all day to answer these questions. Thank you very much for being on the call. Have a nice day.
Goodbye.
Ladies and gentlemen, this concludes the call. Thank you all for your participation. You may now disconnect.