Ladies and gentlemen, welcome to Groupe Renault's analyst conference call. I now hand over to Clotilde Delbos, acting Chief Executive Officer. Madame, please go ahead.
Okay. Good evening, everyone. Just before leaving the floor to Clotilde, we apologize for this very short notice call, but as you may imagine, it's not a usual one for us. After a short introduction, Clotilde will answer to your questions. Clotilde, floor is yours.
Thank you, Thierry. Hi, everyone. In a context of declining markets and increasing regulatory constraints, we are revising our guidance for 2019. As you have seen in our press release, we have cut our expectation for revenues and operating profit. These revisions and a lack of visibility on the fourth quarter prevent us to guarantee a positive free cash flow for the full year. I will remind you of our revised targets. Published group revenue should decline between 3% and 4% versus close to last year level at constant exchange rate previously. Group operating margin should be around 5% versus around 6% previously. The automotive operating free cash flow should be positive in H2, while not guaranteed for the full year, versus a positive free cash flow full year previously. Besides, we are reassessing Drive the Future mid-term plan targets.
The reason for these revisions are split between revenues and costs. On the one hand, we had weaker than expected markets in September, which was key for Q3, after an already disappointing July and August. This led to lower than budgeted sales of cars and revenues, including those to partners. On the other hand, our R&D spending remained higher than our initial expectation. I want also to highlight that the purchasing performance has been limited by lower volumes. I must add that FAST Program has not yet delivered all the expected returns, and that some technical issues prevented the group to fully benefit from the Clio and New ZOE launches in Q3. These issues are in the process of being solved, and we expect a better availability in Q4.
Regarding the MTP, I am sure that you will understand that the context has changed and that a reassessment is needed. We are working on it. Basically, this is what I wanted to share with you. I am now ready to take your questions, knowing that it is not a Q3 revenue call that will take place as planned next week.
We are ready now for the questions.
Ladies and gentlemen, if you wish to ask a question, please press 0 and 1 on your telephone keypad. Please lift your handset before you ask your question. Thank you for holding until we have the first question. We have a first question from Gaetan Toulemonde from Deutsche Bank. Please go ahead.
Toulemonde speaking. I want to understand a little bit better these numbers. If I understand well, you're guiding down revenues by approximately EUR 1 billion and the operating profit by approximately EUR 600 million. Can you explain a little bit this fall through between those two numbers? Because the revenue, if I put 20% of weighting leverage, I get only a small portion of that. Can you give us a little bit the dynamic of all those numbers? Thank you. Rough number.
I'm not going to go into detail because it's a mixed bag on many things. I think on the top line, clearly there are three elements as we mentioned. First, the markets. Second, sales to partner, which is also linked to the market. The third is FX, which turned, again, worse than expected in Argentina. That's basically, I think, the reason and your assessment of the level of magnitude is correct. On the operating profit, basically you have the consequences of what I just said in terms of volume, partners and FX. The rest is linked to what I said also, i.e. lower reduction of R&D than expected. Also, even though we have been pretty good in pricing, I think we have really done a great effort that you will see next week in terms of pricing.
It's still difficult to pass on the full extra cost on regulation.
Okay, problem is that next year, any reason why we could have an improvement? I'm a little bit lost about the magnitude on the, a little bit of top line downgrade and a significant operating profit downgrade. A little bit my concern about what might happen next year. I know the budget is not done, but can you help us a little bit on that?
Well, you answer yourself. I think it's all too early. We've just taken note of what is happening on the context right now. We are in the middle of the budget process, but next year we will have the full effect of the new product, and that should really help going back in the right direction.
Okay. Last question, the dividend from RCI is definitely in the second half, is it correct?
Well, yes. A portion of it's going to be a prepayment, as we have done for last year and for the years in the past when we were able to pay a dividend. You're fully right. We will do a prepayment on the RCI dividend in the second half.
Okay. Thank you.
We have another question from Stephen Reitman from Societe Generale. Please go ahead.
Yes, good evening. Again, looking at this revised guidance for the second half of the year. Obviously, you've given guidance for the group result. If we try to deconstruct that to the automobiles and financial services and between the automobiles, AVTOVAZ in that, are there any issues that are impacting on AVTOVAZ that is specifically in that figure or is it more on the sort of the Renault figure? Anything also happening in the financial services side as well?
On AVTOVAZ, obviously the market is not helping, but it's not worse than what we had expected when we talked to you at the end of July. In my view, there is no specific impact on AVTOVAZ through these revised guidelines. Same with RCI. RCI is right on track, with what we had in mind when we talked to you at the end of July. It's really focused on the auto portion.
Okay. It's too early to think about there are any kitchen sink type elements in this guidance?
No. I was the CFO end of July. I'm still the CFO, even though I have an additional hat since Friday, but I am the CFO. No, there is nothing specific. Everything is linked to the market and to some disappointment on the results of the action plan that were launched at the end of July. There is no kitchen sink, as you said. It's really purely linked to market and ability to execute on the plan.
Understood. Thank you.
We have another question from Philippe Houchois from Jefferies. Please go ahead, sir.
Yes. Good evening. Thank you. I think, Clotilde, you mentioned higher R&D, if I understood right, and I'm just trying to understand, typically, the R&D would be kind of budgeted ahead of time. If you have a sudden increase in the R&D, what is causing it?
No, actually, it's not an increase in R&D. It's a difficulty in implementing the action plan to reduce. You see what I mean?
Okay. Yep. Mm-hmm.
When we said at the end of July, we need to reduce because the turnover has reduced. We need to adjust at the same speed what we spend on terms of R&D, and it's more difficult than expected. A portion of that is, as you said, it's long-term programs and you just can't stop them.
We had some routes to do so at the end of July, but unfortunately, some of them kind of died and we cannot implement them. That's the reason why we cannot reduce R&D as we had expected it at the end of July.
Makes sense. Okay. The other question, if I can, you're saying the H2 free cash might or might not compensate the outflow the first half. We are in mid-October. I'm just wondering, is the range of outcome, is it that free cash could be between EUR 500 million and EUR 900 million, or is it between EUR 600 million and EUR 800 million? What kind of visibility do you have on the actual free cash, I guess, on the working capital two and a half months before the end of the year?
What we said, if you look at the guidance, is that we expect the free cash flow to be positive or at least breakeven in the second half, which means that our expectation.
is to have a free cash flow maximum at -EUR 700 and as close to breakeven or positive for the full year. That's the expectation.
And it's coming from also-
Yeah. No, Yeah, sorry. Mm-hmm. Yeah.
Sorry?
I'm just trying to understand because on the outside, we always struggle to understand the volatility of working capital and because at that time, we don't have the data points. I'm just trying to understand what's the range of outcome. Is it still very wide, or do you have some visibility on what the working capital might be?
Yeah. The working capital is extremely linked to the activity of the fourth quarter because obviously your payments are linked to, in front of the payment terms, your payment are linked to the activity in the last months of the year. Same with the receivable, same with VAT. Everything in terms of working capital is linked to the activity of the fourth quarter. That's why there is such a volatility on the working capital. It's quite normal. I guess it's the same in every company. If the market is at the expected level, especially in Europe, because, that's where most of the working capital is because that's where most of the activity is where we expect it to be. We're going to be on the upper side, I would say. If this is not the case, it's going to be more difficult.
That's why you have so much volatility in terms of working capital.
Yep. Okay. Understood. Thank you very much.
We have another question from Arndt Ellinghorst from Evercore. Please go ahead.
Yes. Thank you, good evening, everyone. It's Arndt Ellinghorst from Evercore. How much of the warning on H2 are sort of the early signs of regulation in Europe kicking in from January? How much of it is already content cost related? Also you referred to pricing being more difficult.
Well, if I understand your question correctly, I understand that you're asking us if the revised guidelines is partly or fully linked to perturbation that we could see coming on the European market linked to the CAFE regulation, right?
Correct.
No, the revised guidance is not linked to that. The revised guidance is really linked to the market, mostly out of Europe, like Turkey, like Argentina, like other countries, and to R&D spend, which is not linked to the regulation. R&D and market is most what it is. We have some R&D obviously linked to what we're putting in place for the regulation and the CAFE in Europe, but it's not the major part of that.
Okay. On cash flow, just briefly, what can you do for the business to start returning a better free cash flow? Also on that point, the difference of when you walk from the P&L to the cash flow, it's quite obvious that Renault benefits quite significantly from capitalizing research and development costs. Is that something that, as a CFO, worries you that your cash earnings are just structurally below your accounting earnings?
Well yeah, indeed. I think, obviously, what we're working on is to improve the margin in order to be able to afford the R&D and CapEx that are needed to protect the future. Today, you're fully right, that is something which is difficult because we have difficult markets. We used to have at least not such a big pricing power, and we have huge R&D expenses in order to face regulation. We already had spent on EV, now we're spending on hybrid. We're preparing the future. Obviously, this is something that we are working on, and it is not new. It's not a new move. Obviously, what we can do is work on the top line, and that comes with pricing. You will see that we're making a lot of effort on that one, thanks to the new models that we have in the pipe.
We started with Clio. We told you that we would increase the price of Clio drastically. We can discuss that in the call next week, but this is being implemented, and secure the fact that we fully benefit from the alliance synergies and reduce R&D and CapEx by leveraging the alliance. The last announcement about the changes at the level of the alliance is, for me, a very good sign that we're going to be able to continue to strengthen the synergies between Renault and Nissan, which Renault and Nissan and Mitsubishi desperately needs in such a context. Working on both sides. First the top line, second the cost, and third the R&D. Actually it's three sides, the cost and the R&D.
Thanks a lot.
We have another question from Raghav Gupta from Citi. Please go ahead.
Hi, Clotilde. Good evening. A follow-up to Arndt's question, I guess. Can you just be a bit more specific on what you mean when you say in the statement by the ever-increasing regulatory costs? I might have missed it in your opening remarks, but just interested kind of how that's impacting 2019. Secondly, you've got a lower dividend clearly expected from Nissan in 2019. You're going to be at best free cash flow neutral in the core Renault business in 2019. How should we think about your dividend policy in the context of these factors? Thank you.
Just two things. On regulation, again, there is a lot of two things. It's first the cost that you have in the cars, and second R&D. R&D, we discussed at length already that the regulation forces us to improve our cars in order to meet these new emission rules. It was WLTP last year. This year, we had WLTP for LCV and Euro 6d, and next year is going to be CAFE. We have to improve considerably the emission of our engines and related investments on the cars. That's the first point. The second is we keep on putting costs in the cars that we have to price to the customers. We do our best. We've made a lot of effort, and we have improved drastically our pricing versus competition. Again, we're going to discuss that next week with Olivier Murguet on the call.
This is not necessarily enough in order to cover all these costs. That's what I meant in terms of regulation. The second one is dividend. I guess it's too early in the year to have a conclusion on what is going to be the dividend policy next year. Let's wait till the year is over, and then we can confirm our dividend policy.
I guess then a final one or a follow-up to that, perhaps. As the kind of CFO, Interim CEO, how do you think about the strength of the balance sheet at Renault?
Well, at this stage, I'm not that concerned. I think we have a lot of liquidity available thanks to our lines with our banks. We have a very low debt, and even if the free cash flow is not positive, we will be in a position, which in my view, is quite comfortable for the Renault balance sheet. I am not that concerned about the quality of the balance sheet at that time.
Credit rating agencies, et cetera, from that perspective, given the warning, given you're as close as you can be to it, you're not worried about the potential downgrade from the credit rating agencies?
Well, you always have a risk of a downgrade from rating agencies, especially if they already have a negative outlook. It might not only be linked to Renault performance. I think rating agencies are also worried about the market conditions, about the condition, especially in Europe with all the investment, just like Renault. We're targeting Renault today obviously because it's a Renault call, but you have a lot of other OEMs who have announced that they have extra R&D costs in order to cover everything we have to do in order to meet regulation and prepare the future. This is more linked to the automotive market, which is, in some cases, a concern for the rating agencies. In the case of Renault, obviously, our cash flow generation, you're right, is a topic.
The second one is that we used to have a lot of contribution from Nissan, which we don't have today. That's why we're working hand-in-hand with Nissan in order to make sure that they also improve their situation, and collectively, we're stronger in the future months.
Okay. Thank you. Thank you very much.
Ladies and gentlemen, I would like to remind you that if you wish to ask a question, please press zero and one on your telephone keypad. Thank you for holding. We have another question from Kai Mueller from Bank of America Merrill Lynch. Please go ahead.
Thank you very much for taking my question. You just mentioned earlier, the potential synergies as you work closer together, with the new Nissan CEO, in the future in order to get synergies out of the group. How much do you think can this offset some of these cost pressures that you were just mentioning, with regards to what you're starting to see today? Then also, I think, the question was raised before, really starting to see from 2020, 2021 onwards when we really need meeting those compliance terms with regards to hybrid vehicles and electric vehicles that you need to further add to your R&D over that time period. Is there a number that you can give us in terms of what you still see as possible from an alliance in addition to what you've achieved right now?
Well, I think it's definitely too early. The change in governance is in process in Nissan. You've seen the press release last week. It's going to take a few weeks or months, and we're just starting here. I think there is a goodwill on the both parts to work closer together, and to leverage on the synergies. That is taking a little time. It's not immediate. Even if you decide to do something together today, depending on what it is, but you won't see it in the P&L by clicking fingers in a few weeks or months. That's why we need desperately to work now on these synergies, on working better together so that it can secure the future.
Okay.
One more point. What is already in the pipe is still in the pipe, and we haven't stopped anything. Just to be clear, we're not putting in danger the current synergies. What we're trying to do is refuel the pipe, I would say.
Okay. Just to clarify maybe, your guidance, obviously, from the around 6 to the around 5, how much deviation from the 5 would you see? Can that mean also a 4.5, in the worst case scenario? Are you just being a bit more cautious on the number you're putting out there? Obviously, that has a big implication on your downgrade.
Well, for me, 4.5 is not around 5. 4.5 is 4.5.
Okay
you have a 20 basis point up or down or 30 basis point maximum deviation to the five in the guidance, which is exactly what we said when we said around six, a few months ago. That's what we have in mind when we say around. It's not 50 basis points below. That's too low.
Yeah. Maybe a follow-up, I know it was asked before, in terms of your free cash flow. Now, obviously, the second half flat or a positive free cash flow could mean up to minus EUR 700 for the year. If you look out into 2020, 2021, what should really make this turn much more positive on an underlying basis if you exclude the dividend payment you're receiving from your RCI Banque?
Well, I guess, if I may, I think we already answered the question. It is working on the top line, both pricing and quality of the vehicles, and working on the cost and R&D. There is no secret recipe in order to improve the margin, which then will improve the R&D. It is to work on both sides.
Okay. Perfect. Thank you very much.
Okay, we have another question from Philippe Houchois from Jefferies. Please go ahead.
Give me another chance. I was just curious about your second half production in the fourth quarter in particular. Are you planning a shift in your mix of production so that you enter 2020 with as compliant a mix of vehicles as possible? As at least one of your competitors are doing, I'm not sure what the others are doing. I'm just wondering, are you planning that? Is it affecting your profitability? Is that any part of the change of guidance today?
No, as I said before, the CAFE 2020 is to maybe some exception on R&D cost, but it's not linked to this revised guidance. We do not plan to act strangely in the fourth quarter. As I said several times, we have several levers we're working on with EV, with hybrid, with many things, but we do not intend to distort the mix at this stage.
Does that mean that if we think of 2020 in quarters, is it right to assume that you might be below compliance in the first quarter or second quarter, and then you need to overcomply in the second half?
I don't think I need to answer to that question. Anyway, it has to be looked at the yearly basis, and it's really too early. I think we discuss about 2020 in a few months. It's a little too early.
Understood. Thank you.
We have another question from Dominic O'Brien from Exane. Please go ahead.
Hey, everyone. Thanks for taking my questions. I just had some questions really on the earnings pathway from here. I think we probably all agree that the regulatory environment is not going to get any easier in any market, really globally. I'm just wondering, if you can't really pass on the costs of this regulation today, is it really ever realistic for us to assume that Renault can or does have the brand power, sorry, to continually offset the regulatory costs? I guess what I'm trying to get at here is there actually a quick fix to this, or do you think that there's a structural issue with both Renault's product and Renault's positioning in the market?
Just following on from that, does this sort of mean that the improving earnings story on Renault from here is really all about cost savings, whether that be internally, as you mentioned, or whether it be with Nissan? Finally, sorry, a bit of a cheeky question, but given the problems that you're seeing today, does this make the deal with FCA a lot more attractive than it actually appeared only a few months ago? Thank you.
Okay. I'm not sure I got your second question, so maybe you will have to reiterate it. On your first one, it's true that it's a lot easier to pass through to customers regulation costs when you're a premium brand. That's clear. As we told you also several times, the best way to pass on regulation is to do it when you do a model change. That's exactly what we're trying to do with Clio, we're going to be doing with Captur, et cetera, in the future. We are working a lot on the brand, a lot on the pricing power. A lot of effort, but you're right, the road is long before we're able to pass on, and I'm not sure any of our competitors is able to pass on the whole thing, I mean, mass market competitors. That's the real key.
That's why we're putting so much attention to our new product. You see now, you saw Clio, the new Clio, you saw for some of you, the New ZOE. We've done a huge effort to improve the quality of the car, especially on the interior, because I guess the exterior was already pretty good, in order to be able to have this pricing power, in order to be able to pass on. I think it's an industry problem where regulation is so demanding now that there is no other way but to try to pass on. It's going to be, in our view, it might create a way where customers are going to go down 1 segment, if I may, because they just can't afford paying for, especially for mass market, again, they can't afford to pay for this regulation.
Which might not be a bad news for Renault, because we're pretty strong in small segments and not as good as you know, on the C/D segment. That's the first thing. I'm going to take the last one, and I'm going to ask you, if you may, to reiterate your second question because I didn't get it. On FCA, you're asking me if it's more attractive now than it was before. I think it is as attractive. We always said it was an attractive deal because we have to share the cost of our R&D and CapEx. You're right. In the current circumstances, I think every OEM is trying to share with others, the R&D costs that they have to incur in order to be able to meet regulation and prepare for the future. It was a very attractive deal.
There is no reason why it would change, especially in the current circumstances. Can I turn back to you, Dominic, so that you tell me what was your second question, please?
Yeah, of course. Yeah. Thanks for the answers on the others. I was just asking, when we sort of think about, it sounds as though the issues of pricing and regulatory content will take a long time to resolve, both for you and for the industry. I guess if we're just thinking of Renault particularly, your earnings pathway from here, the way you grow earnings, is that really all about cost savings now then? Whether that be your own sort of improving the FAST programs or utilizing Nissan. Is that how we should think about sort of Renault's earnings story from here?
I don't think so. All the effort we're doing in terms of catching up, in terms of quality, perceived quality, attractiveness, connectivity of our cars, which comes along with improving the brand image, improving the pricing power is an integral part of our strategy. Obviously, we have to work on the cost. Our cost has increased quite a lot in the past year due to the strong growth of Renault, especially on the emerging markets. Yes, we have to work on the cost now that the markets are down, and we will do so. It's clearly a huge priority, but it's not the only one. We have also to continue working on putting on the market very attractive cars as we are able to do it and work on the brand and the pricing power.
Great. Thank you very much.
We're going to take the last question.
Yes, sir. Our last question come from Harald Hendrikse from Morgan Stanley. Please go ahead.
Hey, guys. Thanks for taking my question. Two quick questions, and I'm sorry if it's a little bit noisy, I'm on a train. Two quick questions. One, I don't know if you have already highlighted this, but could you say anything about the level of R&D capitalization? That was obviously a little bit higher in the first half. Should we expect it to remain higher in the second half, or is that going to be corrected as part of this guidance change? Secondly, as you mentioned, the Clio, obviously, the Clio was a bit of a hope for the second half of the year. Can you give us a little bit more color in terms of how that's going in terms of orders, market share, pricing, relative to your expectations? Thank you.
Thanks for your question. I think for the moment, you can take as an assumption that the capitalization ratio is going to stay relatively stable because, as explained in the past, it really depends on where we stand on the programs. The programs which are coming on stream right now, like Clio, like Captur, are in the middle of it or at the end of it. There is no drastic change in the capitalization ratio. On Clio, I think we're going to talk about it next week, but it's very successful. I guess you saw that we won a lot of matches between Clio and others. I want to mention also that we have the good and huge advantage of being 5-stars Euro NCAP, which is not the case of everybody. That is, for us, a great advantage.
The only negative side is that as I mentioned when I gave you the introduction, we have been late into delivering some models in some countries. We're not yet at the level we want in terms of deployment, but in the countries and for the version we have deployed, we're fully in line with our expectation.
Okay. Thank you, Clotilde, for your answers.
Thank you.
Sorry again for this late- and short-notice call. My team and myself will stay around for answering the further questions you may have. In any case, we'll have you on the call next week for the Q3 full details publication. Thank you very much. Goodbye.