Earnings Call: Q4 2017

Feb 16, 2018

Renault Alaskan. New Renault Mégane R.S.. Connected, autonomous, and electric. Good morning, everyone, and welcome to the Renault Results 2017 Result Presentation and Conference Call, which is being broadcast live and will be available on our website on replay. 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, and invite all participants to read this. Today's meeting is scheduled to last about 1 hour and 15 minutes. As usual, we have two key speakers this morning. First up will be Clotilde Delbos, our CFO. She will take you through the highlights of the financial results. Carlos Ghosn, Renault Chairman and CEO, will share his view on the key achievement of 2017 and the outlook for 2018. These presentations will last about 30 minutes and will be followed by a Q&A session. Clotilde? Good morning, everyone. I am pleased this morning to report new record financial results for the group. Our revenues were up 14.7% at almost EUR 59 billion, and our operating margin reached 6.6%, up 20 basis points. These numbers include a positive contribution from AvtoVAZ, with a group operating profit of EUR 55 million. Our operational free cash flow amounted to EUR 945 million. I would like to start on slide 5 with a quick summary of our commercial results, which were released on January 15th. Group registration increased 8.5% to 3.76 million units, including Lada sales for 336,000 units. Excluding Lada, the increase would have been 7.6%. This performance was achieved in the context of a continuing supportive European market of 3.3% and better than expected recovery in some emerging markets. All regions posted positive results in terms of registration. The Europe region booked an additional 101,000 cars. This increase reflects the lasting success of Renault B-segment cars, notably Clio, and the indisputable Dacia performance. The AMI region added 41,000 units, largely on the success of our business in Iran and despite a sales drop in a highly competitive Indian market. In Eurasia, registrations were up 88,000 units, including Lada. The region benefited from the recovery of the Russian market and the success of the recently launched products. In Americas, registration grew 35,000 units thanks to the recovery in the Brazilian market and a still booming demand in Argentina. It is worth noting that despite a strong order flow, Kwid has not really contributed yet to this performance. Last but not least, the Asia-Pacific region booked 29,000 additional registrations driven by the performance in China, where we doubled our sales. Despite lower sales in South Korea, as Renault Samsung Motors suffered from the lack of new models in a fiercely competitive market. Let's turn now to slide 6, which shows the group revenues. In total, group revenues reached EUR 58,770 million, an increase of 14.7%, a new record. Revenues for the automotive, excluding VAZ division, increased by 9.3% in the period to EUR 53,530 million. As you can see on the slide, growth rate in H2 was lower than in H1. This is explained by a tough H2 2016 comparison basis for the volume impact and a much stronger headwind from currency in H2 2017. Revenues from AvtoVAZ, net of eliminations and consolidated for the first time, reached EUR 2,727 million. Revenues from our captive sales finance company, RCI Bank, increased by 11.8% to EUR 2,513 million in the period. The automotive revenue variance analysis is shown on slide 7. The first item is volume, showing a positive impact of 3.3 points. This is below our 7.6% registration increase, but as you know, our new car business typically represents about 2/3 of our automotive revenues. In addition, beyond the slight negative impact from inventory changes, part of our growth derived from our CKD business in Iran and China, which are not captured in the volume effect. The geographical mix impact is a slight negative of 0.1 points. The third item to note is the model mix, which was a positive 0.7 points. This result from the positive impact of our new models in Europe, like Scenic and Koleos, as well as the launch of Captur in Russia and Latin America. The first item is the price effect, which is a positive by 1.5 points. Sales to partners continued to be a significant driver. During the period, this item contributed 2.6 points or almost EUR 1.3 billion. This is the impact of our growth in Iran and China, but more importantly, Micra production ramp-up in France. The next item, foreign exchange, impacted negatively by EUR 346 million and largely reflect the very negative trend in Q4 with a sharp devaluation of the Argentinian peso and the US dollar. The last item, others, was a positive of 2 points. This represent other activities outside the scope of new car activity, mainly used cars, spare parts, our wholly-owned dealer business, and buyback restatements. I'll now turn from automotive revenues to the group operating profit by activity. In 2017, the automotive operating profit, excluding VAZ, grew 15.2% to EUR 2,749,000,000. We continued to improve our automotive margin in the second half, achieving 5.5% versus 4.8% in the first half. On the full year, the automotive operating margin came to 5.1%, a 0.2 improvement. After AvtoVAZ published its fiscal year results yesterday, we are pleased to report that it has contributed positively EUR 55 million to the group's operating profit. RCI Bank delivered a EUR 1.05 billion contribution to group earnings, an improvement of 17.2%. In total, for 2017, the group's operating profit showed a EUR 572 million improvement at EUR 3.854 billion, giving a group consolidated operating margin of 6.6% compared with 6.4% in 2016. Without AvtoVAZ consolidation, the operating margin would have reached 6.8% or 40 basis points improvement. Let's see this more in detail. Cost reduction activities contributed positively for EUR 538 million. Our Monozukuri activities yielded EUR 663 million savings, while G&A costs increased by EUR 125 million. Looking at cost reduction in more detail on slide 10, excluding the raw material impact, saving from purchasing continued to increase and reached EUR 731 million versus EUR 656 million in 2016. Warranty costs impacted positively by EUR 75 million after the negative impact of EUR 101 million seen in 2016. R&D had a negative impact of EUR 100 million. This impact does not reflect the entire effort of the group in R&D as the capitalization rate increased from 35.7% in 2016 to 40.3% this year. Manufacturing and logistic costs had a negative contribution of EUR 43 million, while less negative than last year, thanks to productivity gain. This headwind was mainly related to higher depreciation and to the cost of digitalization implementation in the plant and supply chain function. G&A impacted negatively for EUR 125 million. This is partly explained by the digitalization efforts, expense in region to support growth, and higher impact of the profit sharing. Turning back to the operating profit walk down on slide 11. As expected, raw material were a strong negative of EUR 394 million versus a positive in 2016. Mixed net price enrichment impacted negatively by EUR 230 million versus a positive impact of EUR 115 million in 2016. It shows a better performance in H2 than in H1. This stemmed from price increases in Turkey and Argentina for offsetting weaker currencies and less negative impact from enrichment on new models as we had fewer launches in the last 12 months. Volume and sales to partner delivered a positive EUR 493 million, reflecting primarily the increase of our registration and CKDs. RCI Bank and other businesses accounted for plus EUR 413 million. This result from the positive EUR 157 million impact from RCI contribution, but also from spare part business, dealers, buyback retreatment, and insurance proceeds. Currency was a negative amounting to EUR 303 million and reflect primarily the negative impact of the Argentinian peso and the British pound, but also balance sheet revaluation. As I said in my preliminary remark, AvtoVAZ, which appears in this bridge for the first time, contributed positively for EUR 55 million and lifted the group's operating profit to EUR 3.854 billion. Continuing on through the P&L with the other operating income and expenses item on slide 12. These items amounted to a negative of EUR 48 million versus a positive EUR 1 million last year. As you can see from the slide, there was no exceptional item this year as we had the usual positives and negatives. Continuing down the P&L, the next item is net financial income and expenses. The net charge increased EUR 181 million at EUR 504 million, despite a lower cost of debt. This is essentially the impact of consolidating AvtoVAZ net financial expenses and the redeemable shares revaluation. The next slide, number 14, shows the impact of associated companies in Renault's P&L, and this is essentially made of Nissan's contribution. Nissan contributed EUR 2,791 million to our 2017 results. This was EUR 1,050 million more than the previous year. This exceptional contribution came from the capital gain on Calsonic Kansei disposal and the impact of the tax reform recently voted in the U.S., which impacted for EUR 1,021 million. I will turn back to the P&L on slide 15, where the next tax charge for 2017 came to EUR 891 million compared with over EUR 1 billion in 2016. This change came mainly from non-repetition of 2016 adjustments on deferred taxes. Please note that our tax rate is now back to a more normal level compared to last year. Bottom line, net profit after tax increased EUR 1,667 million at EUR 5,210 million. Excluding non-recurring items mentioned for Nissan, net profit have been EUR 4,189 million. After taking into account minorities, the net result per share came to EUR 18.87 versus EUR 12.57 in 2016. Excluding Nissan non-recurring item, EPS would have been EUR 15.10. Now that I have completed the P&L analysis, I will turn to slide 16, which shows the change in net automotive cash. Cash flow from the operation totaled EUR 4,327 million, in line with last year, as it was penalized by an increase of tax paid and lower warranty provisioning than consumption. Change in the working capital requirements impacted positively by EUR 447 million, despite an increase in inventory. Net tangible and intangible investments came to EUR 3,891 million. This is almost EUR 300 million higher than in 2016. This expected increase is mainly explained by higher capitalized R&D. After a EUR 62 million positive contribution from AvtoVAZ, automotive operational free cash flow came to a positive of EUR 945 million. Regarding dividend flows, dividend received from listed companies in the period totaled EUR 761 million, while dividend paid during the year amounted to EUR 996 million. The shares bought from the French state in the context of its stakes reduction and to be offered to employees, led to a cash out of EUR 121 million, while some value adjustment on AvtoVAZ balance sheet items led to a positive of EUR 86 million. In summary, net automotive cash, including AvtoVAZ, increased by EUR 512 million at EUR 2,928 million. Note that the opening balance sheet has been restated at EUR 2,416 million following the adjustment of the purchase price allocation on AvtoVAZ for minus EUR 304 million. Slide 17 shows you the status of our inventories at the end of the year, excluding AvtoVAZ. Inventories increased over last year in line with our registration at +8.7%. Global stock represented 57 days of supply at the end of the year versus 59 days at the end of 2016. This level is still at the low end of our comfort zone. 2017 was another record year for RCI Bank. For the first time in its history, our captive passed the EUR 1 billion mark in operating profit. The 17.2% increase in profit reflects the significant growth in average performing assets that grew by 18.9% at nearly EUR 40 billion. More in detail, net banking income stood at 4.11%, down 30 basis points, reflecting the higher weight of the European business, where margin are usually lower than in emerging markets, as well as lower margin in South America. Net banking income was also impacted by higher distribution costs and a gradual increase in residual value provisioning, reflecting the ongoing weakness in the British used car market. The cost of risk reached a record low of 11 basis points of average performing assets versus 31 basis points in the previous year, confirming RCI Bank's robust risk policy. The improvement in the economic environment led to a drop in doubtful assets in the customer portfolio, as well as impairment reversal in dealers outstanding. Operating expenses amounted to 1.32% of average performing assets, down seven basis points compared to last year. With a cost income ratio of 32.1%, RCI Bank demonstrates its ability to control cost while supporting strategic projects and business growth. Bottom line, the pre-tax return on asset reached 2.72% versus 2.74% in 2016, and return on equity reached 18.6% versus 18.2% last year. The review of RCI performance completes my presentation, and I now give the floor to our CEO, Mr. Carlos Ghosn, for a review of 2017 key achievements and the presentation of group's perspective. Good morning, ladies and gentlemen. Today I will highlight 2017 key achievements before commenting on the outlook for 2018. We, as you know, had set two key goals as part of Drive the Change: to deliver annual revenue of EUR 50 billion and to lift profitability to a minimum of 5% operating margin measured in 2017. We exceeded both these objectives already in 2016, and as you just heard, we did even better in 2017. During this year, we reached new record in sales, revenues, operating profit, net income. Given those record results, the board will propose to the annual general shareholder meeting an increase in our full year dividend to EUR 3.55 per share versus EUR 3.15 per share in 2016. In 2017, we launched our new strategic plan, Drive the Future. Building on the solid foundation of Drive the Change, we have set very clear objectives by the end of the plan to exceed EUR 70 billion in annual revenues and achieve a core operating profit margin of at least 7%. We intend to grow worldwide, particularly outside Europe, where we plan to double our unit sales and triple our profit. We will do so while maintaining financial discipline with an objective of a positive free cash flow every year of the plan, supported by a total cumulative savings target of EUR 4.2 billion. A few weeks before Group Renault announced Drive the Future, last fall, the Renault Nissan Mitsubishi Alliance unveiled its strategic plan. Alliance 2022 is designed to boost the growth and performance of each member company. With the forecast of 14 million total unit sales, our objective is to lift the annualized synergies to more than EUR 10 billion by the end of the plan, and to invest in competitive technology bricks with the focus on electric, autonomous, connected vehicles, and mobility services. We have embarked on the new six-year plan from a solid and sound position. As part of Drive the Future, we have announced plans to launch 21 new vehicles and complete 13 geographical extensions by 2022. Among these new models, we have just launched new Duster, which is off to an excellent start. The Alpine A110, which was elected most beautiful car of the year in January. To support our growth worldwide, we adapted the features of Kwid to fit the markets of Brazil and Argentina. We also designed Captur to meet the expectation of customers in Latin America and India. Finally, we adapted our one-ton pickup, Alaskan, to the European market. We achieved sales record across the group. We grew in volume and market share in all regions, as you've seen it. We rebalanced our regional mix. Half of our sales were made outside Europe. We sold more than 100,000 units in 12 countries, including Brazil, Russia, Turkey, South Korea, India, Iran, and Argentina. In Europe, we achieved our best ever annual unit sales. Renault remained the number two brand in the region. AvtoVAZ in Russia returned to operating profit a year after its consolidation within Group Renault. In 2017, Lada achieved its highest market share in six years at 20.5%, and was the number one brand in Russia with 17% growth, outperforming the Russian market by five points. In 2017, market share of all Alliance brands, Lada, Renault, Nissan, Datsun, totaled 34% in Russia, which will represent, with the recovery of the Russian market, a significant growth opportunity as we launch new models in the upcoming years. In 2017, we strengthened our leadership in the electric vehicle market. Our worldwide sales were up 38% versus 2016. Our best seller, the Zoe, is the number one electric vehicle sold in Europe, offering the best autonomy at the best level of price for the fifth year running. Despite growing competition, more than 90,000 Zoe have been sold so far. Last year, Renault, Nissan and Dongfeng formed eGT New Energy Automotive, a joint venture designed to manufacture competitive and affordable electric vehicles for the Chinese market. The Alliance synergies were another major contributor to Group Renault's performance in 2017. Beyond our purchasing performance, I will point out a few key highlights in cross-manufacturing. Our CMF-A platform on which we produce Renault Kwid benefited from the addition of Datsun redi-GO in 2017. In our Renault plant in Flins, Nissan Micra production was launched last year and contributed to further synergies. Renault benefited from Nissan one-ton pickup platform in Spain and Mexico to launch Alaskan in Europe and Latin America. The next step will be the production of this model for Daimler, Nissan and Renault in the Renault plant in Córdoba, Argentina. Another key benefit from the Alliance is obviously the access to a larger pool of R&D beyond the amount spent by Renault in 2017 of almost EUR 3 billion, allowing us to make no shortcuts on our industry current and future technological and product challenges. Another achievement from 2017 was the launch of the Renault Nissan Mitsubishi light commercial vehicle business. By leveraging each company expertise in different segments of the LCV market, Nissan and Mitsubishi in pickups, Renault in vans, this new business puts us in a leadership position. In 2017, all three companies offer 18 LCV models and achieve 77% market coverage. We strengthen further our presence with the Renault Brilliance Jinbei Automotive deal at the end of 2017. With this deal, our market coverage reaches a total of 91% with a total of 23 models. Brilliance is a leader in the Chinese LCV market with expertise in MPVs and medium vans. We will benefit from their extensive dealer network and knowledge of local customer needs. Together, we will lead an offensive in the Chinese LCV market, which has, as you know, top 3 million units per year. Let me mention our outlook for 2018. 2018, as you already seen in some of our statistics, will be a year of moderate growth. From one side, we have opportunities. Let's mention three of them. The first is obviously the launch of the new Duster. We are confident that this renewal will propel it into a top-selling position as it has been in the past. Second are the Alliance initiatives, as announced in our Alliance 2022 plan, additional cost savings and synergies will be coming from the extension of our common platform to more segments and to common technological bricks, and also from Mitsubishi joining us. Third is the ongoing recovery in emerging market, particularly in countries where we have been building our presence for many years and kept investing despite crisis such as Brazil or Russia, where we will produce a new C crossover models to be launched globally in 2019. From the risk side, the first one is obviously raw materials. We expect pricing headwinds throughout the year. The second is uncertainty around forex exchange rate, particularly due to a surging euro. Finally, the volatility in mature markets due to stock market instability, rising interest rates, changing environmental and safety regulation, consumer behavior will be particularly difficult to predict. Moving on to our guidance for 2018, we expect the global market to grow by 2.5%, which should be another record year for the industry. The European market is expected to increase by 1%, with a 1% increase also for France. The Russian market is expected to grow close to 10%. China and Brazil will grow more than 5%, and India at 6%. Within this context, obviously including AvtoVAZ, which is now totally consolidated in Renault, we aim to increase group revenues at constant exchange rates and perimeter, maintain the group operating margin above 6%, generate a positive operational free cash flow. Now, I am ready for your questions. Thank you, Mr. Ghosn. I propose that you are going to take some questions from the room, and then we are going to have some from the call. Who is going to be the first? Thomas, as usual. Can we have a mic, please? Sorry, George, on the other side. Thank you. Thank you. Good morning, Thomas. I have three questions, please. I start with the emerging market business and the presentation you made us in October on the shift of profitability into a more balanced element. Can you give us an indication on where you were already in 2017, share of profits from emerging markets? Are we already making a decent step forward the 50% share of earnings by 2021, 2022? Second question would be on the dividend. Historically, with that level of net earnings, you paid, I think, EUR 3.90 of dividend. Can you explain why you are not increasing the dividend? Is there any plan to return cash another way? For instance, given the valuation, is there any intention to buy back shares? Lastly, and sorry to be the one to ask you the question, Mr. Ghosn, there has been a lot of speculation over the last couple of days or week on your intention, the plan of the government, the relationship between Renault and the government on one side, Renault and Nissan on the other one. Can you help us understanding that with your words in terms of what you intend to do yourself for the integration of the Alliance so that we have a clearer picture? Thank you very much. Okay. The first question is profitability in emerging markets. We have different category of emerging markets, just to be very clear. If you take, for example, North Africa, North Africa is already very profitable for us. When we are talking about a surge in profitability, we are not mentioning this kind of country where things are going very well. We have already very high profitability. We were particularly mentioning when we are talking about emerging market, frankly, China is not anymore an emerging market. It is an emerged market in a certain way. China, for the moment, is contributing very little to our profitability. This is number one. This is the first and most important opportunity for growth of profit. Our volume are still extremely limited, even though we have a very satisfactory year. That is number one. China is going to be a big boost in term of profitability. Frankly, we have our own internal benchmark. We know how much money Nissan is making China. We know how much money Mitsubishi is doing in China. There is no reason for us not to follow the path. This is number one. Second, frankly, you didn't see yet the potential of profit in Russia. We mentioned the fact that our forecast for Russia is that the market will grow by 10%. We were very pleased to see that in January, the market was up 31%. 31%. One month doesn't make the year, but it's a very good start. Frankly, there is no reason for this recovery not be very strong. With the recovery of volume, as you know, we're the biggest player. A lot of competition exited Russia, and it's going to be very difficult to come back, or it's going to take a lot of time to come back. This is going to be a very important engine for profit that for the moment did not count. Third, Brazil. Brazil also has decreased significantly for the last years and the decrease on profitability. So practically, our profitability in Brazil has been very marginal, even though we held much better than our competition. We are counting Brazil at +5, +6%. Again, January was a good surprise. +23%. With all the political problems, with all the uncertainty in Brazil. I'm mainly counting particularly on China, Brazil, Russia. You didn't see it yet in our bottom line. I'm not counting India, I'm not counting the others. This will come, but when I'm telling you that you should see as an additional engine coming from emerging market, I'm just mentioning these three, because in these three we have already invested, we are present, and we have references, which are our colleagues in the Alliance or our own past performance. The big surprise for us is the speed at which Nicolas Maure and his team have recovered in Russia, and particularly AvtoVAZ. AvtoVAZ, which was considered as a risk for Renault, you're going to see it now as a huge opportunity because this is the most localized brand in Russia, which is going to help also Renault and the other brands, and this is where we see the opportunity. This is for your first question. Your second question was about? Dividend. Why the dividend is not high? High. Somebody mentioned yesterday that, I think three years ago, the dividend was at EUR 1.9. Exactly. We are at 3.55. We have also to take in consideration, you know what I mean, if we boost the dividend more than that, we're going to need also to be careful on our cost because then the appetite on increased everything else in the company. We have to find a balance between return to shareholders and other element of cost. I consider that this is the maximum we can offer to maintain a solid and sustainable profitability of the company without unleashing too much, I would say, appetite for inflationary pressure, particularly when it comes to compensation. Obviously, our intention is not to The situation of cash is reasonable. We have practically EUR 3 billion of cash. We're generating a good free cash flow. We have increased as much as we can without jeopardizing the balance we're trying to manage inside the company. That's for the dividend. And- The yield is interesting, huh? Yeah. The yield would be around 4.3%. I just wanted to add exactly. What we committed to at the midterm plan time was to go from an internal core business payout from 7% to 15% between 2016 and 2022. Here we are going to be around 11% already. I think it is a major effort already. Yeah. Now the third question, we can write a book about it. If you can be more specific, I can answer specifically. I am not going to go into any kind of overall description of what is going on. Let us say that obviously there were some, I would say, preconceived ideas existing on the market. We try to kill them because they do not correspond to the reality. As you know, these days, thrillers are more interesting than a boring description of facts. One of the thrillers is the fact that there is a governance issue in Renault. Then that there was a battle at the top for COO position. Then the guy who lost left the company. Then we had a board member who is leaving because he does not agree on the strategy. The whole story is absolutely surprising. First, it does not correspond to the fact. We had to push people who have been practically making decisions based on personal situation or private situation to explain that frankly, this whole thing is just a romance. There is nothing from it. There are discussions at important points in the life of a company. It is normal, but there is absolutely no debate, conflict, exchanges, et cetera. The story around Thierry Desmarest and the story around Müller is frankly absolutely not based on fact. One of the reasons for which we did not announce Müller before is because when we announce the departure of Müller, we need to announce who is going to replace him. If we announce who is going to replace him, you are going to try to unveil the whole governance that we were waiting to announce at the board. That is for number one. Now for the French state. The French state, as you know, supported a new mandate for me. They had two worries, and they said it very clearly. The first one is you say they want to make sure that there is a good succession plan in Renault. They want some sign that we were taking this seriously. The second one, they want to make sure that the Alliance is not going to fizzle at a certain point in time, that they worry about the eternity or the irreversibility of the Alliance. Right. We said, as you know, the decision that we made yesterday, which is, we are going to nominate a COO. Thierry Bolloré has been nominated by me because this is a nomination by the CEO. It is not a nomination by the board. But I wanted the board to be involved in it to make sure that they feel involved into this decision. The board have, they don't nominate, but they have agreed on this nomination, which is a very important step. Thierry Bolloré will have the responsibility of all the operations of Renault, which means he will be in charge to deliver on the budget that we have decided, obviously, with my support, and within the mid-term plan that I have announced for the company. This is very clear. There is a clear number two in the company, so there is no worry about if something happens to you, what's going on. That means we have a number two guy, he's in charge of the operation, he knows the company very well. He has very clear reporting. That's done. Now, people say, "Okay, what about succession?" Succession is not my decision. Succession is a board decision. I nominate a COO, the board nominate a CEO. This is the way it works in companies. So when people ask me the question about how about the next CEO of Renault, I say, "Don't ask me the question. You got to ask the board." Obviously, as Chairman of the Board, I have responsibility in it, but it's a collective responsibility. For me, there is no doubt on it. It's very clear. We have a very solid plan. At the end of the day, you know very well that choices are made by facts, not by people. At the end of the day, what make leadership is the performance. It's track record of performance make leadership. So that's it. The sustainability in leadership position is made by also the performance delivered and the contribution to the performance. Nothing else prevails in our industry. In the relationship with the State, we all agree on the fact that we will take the steps necessary to make sure that the Alliance is irreversible. Pérenne. I've been told by Mrs. Blair yesterday that you cannot use perennial in English because in English perennials is used in horticulture. No. No. So we use pérenne in French, which is irreversible in English. But it's the same thing. That means nobody wants this to fizzle out. We want to make sure that this will continue to produce results, because it has delivered good result for all the companies. We're today the number one automaker. We are intending not only to maintain this position, but to grow this position. None of these companies is playing conservative. No. Renault is going to continue to grow. We have many, many opportunity to grow. Nissan is going to continue to grow, and Mitsubishi is growing. Three of them. So we want to maintain this leadership, we want to maintain this gap based on the performance, and we need the Alliance to fuel this performance. Alliance as the turbocharger of the performance of each company. We all agree on the pérennité/irreversibility of the Alliance. Now, the question is, how do you do that? Then this is where we're going to have a lot of discussion about what's the best way to do it, where you continue to converge, you continue to develop synergies, you continue to act as one company, but at the same time, you benefit from the agility of different companies' operation, autonomous in their decisions on the market, autonomous with their own brand, but not autonomous in term of selecting the technologies, selecting the platforms, negotiating at the level of purchasing, because these are very important element for our performance. Madam Charlotte Depotte was telling me that, what is the amount of purchase a year at the level of the Alliance today? Between Renault and Nissan, it's more or less $110 billion, without considering Mitsubishi. Okay. And you add what for Mitsubishi? About 10 billion, maybe? Around 12 billion, yes. Okay. When you have a EUR 122 billion purchasing bill, you better manage it well. 1%, half a percent, 2% can make a big difference. This is where the Alliance plays a role. That means when we see the cost of the technology that we need to develop in terms of automotive, autonomous, in terms of electric, et cetera, you can't duplicate. You can't afford to duplicate. This is where the Alliance plays a role. Hopefully, this answers some of your question. Maybe not. Are you okay? Thank you. Okay. Thank you. George, you have some questions? Okay. You were raising your hand, so. Yes. A question on emerging market, a follow-up, and maybe a focus on China in particular. I know that the current situation, you're starting from a low point, doubling volumes. Obviously, there's a lot of challenges ahead in terms of EVs. I was wondering how you intend to address the situation in China. Will the JV you just set up be enough to meet the new requirements starting in 2019? Beyond that, you said we're not yet at the level of profitability that others such as Nissan are making in China. What's the roadmap? What does it mean, or what does it mean in terms of product range you need to have, distribution network you need to have to be at the optimal level in terms of profitability? A second question on RCI. Very stunning results. I am just wondering, where do we go from now? Is this sustainable? We are above 18% ROE for a certain number of years. There might be some bricks ahead with interest rates moving, et cetera. So what is the roadmap for RCI, and how does RCI contribute to the midterm plan in, let us say, more accurate terms? Thank you. Okay. We have the head of RCI with us, Monsieur de Fici. We have the head of China with us, Monsieur Provost, so I am going to let them also answer, but let me make a couple of comments before they answer to your specific question. Number one, about China. China, we are the only car company for which China is pure opportunity and there is no risk. There is no risk because we got nothing. If I was the CEO of Volkswagen or of Toyota or of Nissan, I see China as maybe a risk opportunity because I am selling millions of cars there. Renault, we are selling, frankly, not even 100,000 cars. Peanuts. For us, China is pure opportunity. Okay? We are intending to benefit all of them, electric cars, LCVs, passenger car, and we will let Mr. Provost tell you what is coming. So for us, pure opportunity, we are counting practically zero in our results or epsilon in our results. It is pure opportunity. So no matter what happen is good, so we can be disappointed by the fact that we are not progressing very fast. But anyhow, it is just a plus business. This is concerning China. Then, for RCI, I think last time I met you, somebody asked me, I say, "Why you are being so conservative?" That mean you always boost the RCI result while other try to boost the automaker result. Okay? Maybe first because it is the CFO present the result, and he is responsible of RCI, so he is always very proud to show you how well RCI is doing. But also because we want you to see the very conservative view of our profitability in auto, not playing with finance to boost the auto profitability. We started with a very solid base by optimizing the profitability of RCI. So when you look at the profit of the auto, it is real. There is no artificial stuff. There is no things going from one side to the other. We all know that if you do not sell auto, you do not make money in RCI. But I am going to let Mr. Defici tell you exactly about the perspective. Mr. Provost, maybe? Yes. For China, the first step was to start the operation in DRAC. We launched successfully the two first SUVs, Kadjar and Koleos. We doubled the sales. Moreover, we already reached 87% of localization, thanks to the Alliance. In terms of quality, we already got a lot of awards, which is encouraging for the future. We released our DRAC midterm plan, which is the contribution to Drive the Future for China passenger vehicles, 400,000 cars, nine localized models, of which three EVs. To answer your question, we have the plan. We have also the visibility to cope with the regulation in terms of electric cars. In terms of dealership, we reached 200 dealership end of last year as planned. Our midterm plan is to have a minimum of 400 dealers by 2022. The last part of the growth plan in China is about LCV. As said by our CEO, we started the operation. It is a year to start the operation, and then we will develop and release the midterm plan for the JV on LCV later on. That is the situation of China. Yeah. I think what is important in China also, there is practically no competition in LCV. Chinese competition, which is good for us because then we are going to bring, obviously reinforce, Jinbei, reinforce the existing with our own knowledge, and also introduce the strength of Renault products in China. This is also a very promising route. Mr. Defici. Morning. As for RCI, first of all, the results that we have achieved in 2017 are the results of what has been done in the last years, because the results of the portfolio that we have generated in the past is coming today. I think that when we look forward for the next incoming years, we do consider that the profitability that we have been able to generate will continue. First of all, because there is a very strong integration with all the Alliance brands. We have been able to reach a 42% penetration rate overall in all the countries with all the brands, and this is something that we will continue to do. There is a strong cooperation with all the brands in all the regions, and this is a value that has been created all over the years. Second consideration is that the portfolio that we have built up and the new productions have been done with good margins and very limited cost of risk. Of course, we are in a situation in which today the low interest rates and the liquidity available make the portfolio with better performance in terms of risk, but the quality of the portfolio that we have built up will last in the incoming years. Third component is that we have invested a lot on a strategy on used car vehicle financing. We have reached an exceptional results in 2017 with more than 300 vehicles financed. We were below 200,000 just a few years ago. This strategy will continue, and the quality also the portfolio for the used car financing is positive today and will remain positive in the incoming years. Most important part is that together with good margins, we have been able to build up a portfolio with very limited level of cost. In terms of benchmarking for cost income ratio, for cost ratio, we are today among the best captives in the market. That means that also in the future, we will take benefit of the cost structure that we have built up. Being able to invest at the same time, we have been able to have a very lean structure that will continue also in the future. When we look at the long-term plan that we have presented, we have said that we will be above 16% return on equity, and we are confident to maintain that level. Maybe one more question from the room before moving to the call. Pierre Eva? Thank you. Pierre Eva Cameron. First, I would have three follow-ups, if I may. Regarding the outlook for 2018, you mentioned that the operating margin should be above 6%. We had 6.6 last year. Does that imply that 2019 could be below 2017 in terms of margin? Well, look. We said our goal is at the end of the plan 7%, or minimum 7%. 2018, we know exactly what kind of performance we're going to deliver ourself. What we don't know is what's going to be the extent of the raw material increase, what's going to be the impact of exchange rate. We have put some impact, but frankly, we don't know. Let's not forget also, what's going to be the impact of the introduction of the WLTP, which is going to hit all the European car makers, or all the car makers in Europe, starting September. Because you see that our forecast for the year for Europe is +1%, but January was much better than that. January was more than 6%. Because in our forecast, we are predicting that the first 8 months of the year are going to be much better than the last 4 months of the year for the market in general, because we don't know how fast the homologation following the new rules are going to be given, and who's going to be able to supply the market with the adequate technology, and who will not be able to do it. So there is a lot of uncertainty coming from how WLTP is going to be implemented by the authorities, what's going to be the foreign exchange impact, and what's going to be the raw materials. This uncertainty make us a little bit telling you we're confident that we will have strong enough performance to be able to deliver, no matter what happens in these elements, no matter what reasonably can happen in these elements, to be above 6%. Now, we can be anywhere, between six to seven. If we have a very favorable conditions, we can be That's why I'm not telling you we're going to be below, I'm not going to tell you we're going to be above. I frankly don't know. It's going to depend a lot on factors which are independent of our will. Obviously, if the European market perform at +6% this year versus 1%, it's a different story. It's a completely different story. I don't know where the euro is going to be versus we are very sensitive to the pound, we are very sensitive to the Argentinian peso, we are very sensitive to the ruble. Ruble. That is why we are being cautious. Risk cautious does not mean we are cautious towards our own performance. We feel very strong about our own performance in 2018, but we are a little bit careful with the environment around us. Okay. So cautiously optimistic for 2018. I have got a second question, if I may. A follow-up on Russia as well. VAZ reported yesterday its specific numbers, good improvement for the full year. But if I made the calculation right, Q4 was back in red territories at the operating level for VAZ in 2017. I struggle to understand why, because revenues were significantly up even in Q4. Ruble was not much unfavorable than it was in Q3. Pricing is better, so why back in red territories again, and how things will play out in 2018? Thanks. Okay. Let us go to the Russian pope here. Monsieur Maure. Monsieur Maure. I am more a tsar than a pope, I hope. No, you are right. The Q4 of 2017 was impacted by one-offs or provisions that we made. We started, in fact, as soon as 2016 to clean up the, let us say, the heritage from the previous time. We can say that now, the situation of VAZ is extremely clean, and there might be even opportunity to reverse some impairments in the quarters to come. I am very optimistic that we can again renew a positive operating margin in 2018. Of course, as Mr. Ghosn said, for the whole Renault, we are also exposed to FX fluctuations, we are also exposed to raw materials, but there is an opportunity that the market is even more than 10% growth in Russia. I am very serene. Thank you. We will move to the call. Then Gaetan will come back to you. Do we have questions from the call, please? We have a first question from Dominic O'Brien from Exane. Sir, the floor is yours. Good morning. Thanks for taking my questions. I just wanted to touch on your comments on making the Alliance irreversible. From an outsider's point of view, it looks like it is already quite irreversible in its current form. It seems you have targets for quite a high level of platform commonality by 2020. You have already merged four significant operating functions in 2014. My question is really, does the Alliance agreement have to extend beyond industrial cooperation for it to be irreversible? Second question, unfortunately, sorry, sticking with the Alliance. You said, I think on this call last year, that the shareholder structure of the Alliance will not change so long as the French government is a shareholder of Renault. Can I just ask if this message has changed since then, or has a better understanding with the French government improved that relationship? Thank you. Okay. On the first question, which was? Which was, aren't the Alliance already irreversible? Well, frankly, that's what I think. It's not sufficient. You need the market to be convinced that it's irreversible. For the moment, we still have a lot of questions, what's the next step, et cetera. Some shareholders of Renault are worried that maybe when some people will not be active anymore, this Alliance is going to fizzle. I'm convinced it's irreversible, but we want to make sure that everybody's convinced it's irreversible, and we will take additional steps to make sure that this is not only shared by some expert and some people involved inside the Alliance, but the whole market. It's obvious that today there is some kind of discount on the shares coming from the fact about what if this will not continue to grow, what if this, et cetera. Anyway, this is transmitted to us by some shareholders, not only by the French state, by even other shareholders, at the level of the Alliance. When I say we're going to make it irreversible, we're going to make it irreversible for everybody, not only for some people, and part of it, who think that it's already irreversible. The second question was about the change? Yeah. The change in structure, depending on the participation of the French state. For any massive significant change in the structure to happen, you have two basic conditions: that the French state needs to agree on it, and the Japanese state needs to agree on it. Because if one of them does not agree, for tax reason, for stock market reason, because, for example, if Nissan, for example, in any move is delisted from Tokyo Stock Exchange, it is no-go. Because you have to reimburse every single Japanese shareholders, in this case. So you need the approval or even tax reason from the French state and from Japanese state. Okay? This is basic condition. That is why what I am saying is let us see first, before even envisioning any next step, about what are the basic conditions required by the Japanese government and by the French government. Okay? Then when these basic conditions are being fulfilled, then any future step will be made. This being said, we are not sitting waiting because operationally we are moving ahead. And you are going to see that there will be additional convergence between the company to come. We are not finished. There are a lot of things we can do operationally to boost the synergy, and we are going to do them. Now, if you want something much more, including more financial and legal structure, we need these two entities to agree. Because if any one of the two does not agree, it is a no-go. Okay? So that is what I mentioned by saying, we need to make sure that the conditions for additional step into the Alliance are reunited by having an agreement from these two entities. All right? Thank you very much. And for the moment, I do not see how the Japanese side is going to accept further steps with the French state as a major shareholder of the entity. I do not see it. So that is it. That is the discussion. The discussion is going to be around what are the potential, what are the possibilities for all of this to happen to preserve the basic conditions from both parties. Okay. We are going to take the- Thank you very much. Next question from the call within the line. Next question comes from Michael Tyndall, Citigroup. Please go ahead. Yeah. Hi there, Mike Tindall. Thanks for taking my questions. Just a couple, if I may. Firstly, I guess if we go back to the EBIT walk and we look at RCI and other, it seems as if the contribution from other has grown substantially throughout the year. I realize there is a lot of things in there, but can we get some sense as to where that is going to in 2018? Will we continue to see a very strong contribution from other? That is the first question. Then the second question, sorry to come back to the Alliance, but if we think about, I guess, the way of looking at it in terms of money left on the table, as it stands today, everything is on a win-win basis. Do you have any sense of the opportunity that might exist if it was just simply a net positive basis? I hope that makes sense. Thanks. Okay. Thank you for the question. On the RCI and others, what do you have in there? You have RCI, you have spare parts, you have used car sale, you have the result of our dealership network, and you have all the others, like consolidation, buyback, restatement. In the case of 2017, you also had the proceed on insurance we had following our H1 crisis from suppliers who had a fire in the plant, if you may remember. That is what we had in 2017. In 2018, obviously, as we forecast a slower growth, this should be also a slower growth for these activities, like spare parts and used car business. We do not foresee, obviously, any exceptional non-recurring item like we had in 2017. Basically for 2018, you should expect a lower amount on that box than what you had this year. On your second question, you said Alliance is based on win-win. It is true. You cannot make decisions on a win-lose. You cannot. The company is going to lose. You can be criticized by saying, "Hey, how are we making decision against the interest of the company you are in charge of?" You cannot. Okay? You say, "Oh, yeah, but now you are not anymore in charge of Nissan, so you can make a win-lose where Nissan lose and Renault wins." Okay? Because now you are not CEO, so I am not responsible of Nissan, so you can say, "Okay, you can do it now." But I cannot because if I do it, yes, I can do it short term, but I can guarantee you that mid, long term, there is no more Alliance. The win-win, I know, is a kind of limitation, maybe in volume, maybe in time, but it is safe. If we have been able to do this for 19 years and developing synergies, massive synergies, and we still have more to do still with the win-win. We are not dry of ideas. We are not dry of potential. We have still many things to be done for the years to come. I am confident that with the win-win, we can continue to progress. Now, if all of this one day becomes one single entity, then there is no more problems to make more aggressive decision in certain case. But for the moment, for the sake of maintaining this Alliance, making it productive, maintaining the good spirit, we are going to need to advance always based on a win-win. In a certain way, finding the win-win is a good discipline. Even inside Renault, if we make a decision, a win-lose, I can tell you, on the long term, this is bad. There is always a win-win, but we just need to find it. We need to really approach the opportunity in a way where you can identify the win, even for people who apparently lose. Back in the room. Thank you. Gaetan. Gaëtan Toulemonde, Deutsche Bank. I want to come back a little bit to your, I don't know if it works, on your guidance for 2018. There are some numbers you know the answer. Raw material, you have probably some visibility for 2018. Can you help us a little bit to get an idea about the magnitude of the increase? In terms of capitalization of R&D, you probably have an idea for this year, too. Pricing in Europe, is it improving? Is it stabilizing? That is roughly first question, and the second one is very simple, is that regulation cost increase by 2020, 2021 in Europe. Can you remind us a little bit the additional cost going to represent for Renault, rough number? Okay. On raw materials, Madam, you are on the forefront of the pricing of raw material. Yes. As it was mentioned before, we estimate that raw material will keep on increasing in 2018. I think the figure is a little bit less than EUR 400 million. Well, I think for now you should take as an assumption it is going to be the same as this year. Yeah. That is more or less the same. If you have good news, I will let you know. We know that we are on an increasing trend, but we are obviously working on that with our suppliers. For the other elements, what I can say on FX, basically, as you have seen, we had a good first H1, relatively at least in turnover, and it really turned backwards, I would say, in the second half. If we take current spot exchange rate today, it is going to be even worse than what it is today in terms of FX headwind. Obviously, in front of raw material and FX headwinds, the duty of the commercial team is to try to price that in the price of the car to try to offset most of it, which we have been able in the past in terms of FX up to roughly 75%, raw material being really linked to what competitors do. You are referring to the pricing in Europe. It is really going to be depend on how bad is the headwind, how the competitors react, and how, linked to what Mr. Ghosn said, with all the perturbation linked to homologation, how is this offer going to be dealt with by the competitors and accepted by the customers. In terms of R&D, we expect our capitalization rate to slightly go up again. However, as was announced in the MTP, the years 2017 and 2018 and 2019 are years where we invest massively in terms of R&D in order to prepare the future, the lineup, and the new technologies. All in all, we should have a headwind from R&D, even though it is slightly offset by capitalization rates. The cycle of products makes it, the R&D capitalization depend on the cycle of the products. Yeah. And we know well our cycle of products. But if you come back to pricing in Europe, obviously, it's competitive, but it's not wild. It is competitive. We think in term of pricing, we are more in an effort to try to be more pricing, I would say, disciplined than go for price liberality. So we see opportunities in Europe where we're going to be able to be much more disciplined on pricing. This is clearly an opportunity for Renault. So this is not something which particularly worrying for the moment. Now, the question you're asking about how the consumers are reacting in front of everything coming on regulation. It's very interesting. Consumers are running out of diesel car. What you're seeing today in term of percentage of dieselization is artificial. Why? Because if you go to the retail and you go to specific customers, the percentage of request on gasoline is much bigger than what we are selling. The problem is that the industry is not able to follow instantly the shift between diesel and gasoline. And this is something which is going to stay with us. Now, to make it more complicated, different in function of the segments. If you are into the D segment, for example, the shift from diesel to gasoline is less visible. When you go to the lower segment, it's obvious. And we have to look at it category by category, fleet versus retail, because you may have big shifts when you consider that. This is something which is interesting, is today, I'll ask you one question. The car which is the most sold in retail in Europe. The number one cars most sold in retail, forget fleet, forget the registration, forget anything else, is today the Sandero, the number one car most sold in Europe. So again, and that's one of the beauty of Dacia, is we're trying to focus mainly on retail. So there are a lot of shifts taking place in Europe. We're going to need to manage it very carefully. I think we're very well equipped for that. But that's why there is some uncertainty on what's going to happen for a very critical period going between September 2018 and ending in March, April 2019. This is the period where you're going to have a lot of uncertainty. It may end up being much better than we think. But that's why we are a little bit prudent. Okay, maybe one last question from the call. The last question comes from José Asumendi, J.P. Morgan. The floor is yours. Thank you very much, Jose, J.P. Morgan. Just a couple of points, please. The first one on enrichment in Europe. When I look at the negative impact you've had on price mix enrichment in 2017, it looks to me like in the second half, that balance has definitely narrowed in the second half versus the first half. The first question is, has anything changed in the last six months? Are you managing enrichment? Can you remind us a little bit, what are the bigger drivers behind enrichment in 2017? Second question with regards to pricing in Europe. Just a simple question. When do you plan to pull out from the scrappage campaign in Germany? I think that would be a big benefit from you to improve pricing power in Germany. Do you think the French government will implement a scrappage plan for pre-Euro 5 diesel vehicles in France? Thank you very much. Okay. Yeah. Thank you, Jose. On your first question on enrichment in Europe and globally, you're fully right. The second half has been a lot less negative than the first half was. Many reason for that. First, there has been less introduction of new model in the second half. Second, you know that we have been hit in the first quarters of the year by the Euro 6b introduction in LCV. This is now behind us, so you don't have this additional cost anymore compared to the previous year. We also have been able to increase prices in Argentina and in Turkey in order to face the foreign exchange rate. Clearly, you're fully right. We've been working a lot on that part in order to have a reduced impact. Yeah. Mr. Coscas, for European. No, on the pricing situation in the European countries that you mentioned, obviously, in Germany, we participate to some programs like Other Brands. However, our pricing situation in Germany is during the year, slightly above market average. That is obviously a good point. At the moment for France, we do not have any information on any specific program. Okay, we have time for a very last question. Steven, I think you have one question. Thank you. This is a question to you, Mr. Ghosn. With the new structures at Renault, with a COO active as well, how do you see your role evolving? You have talked about expectancy. We should see more evidence of convergence in the Alliance. Do you think that should actually be more visible, actually, to the public as well? Yeah. Well, first, Thierry Bolloré is here. He has been covering all the COC area, which mean all the, what we call the Monozukuri. That mean the industrial area and the research and the development. Starting Monday, he will become the head of the operation, which mean practically all the members of the executive committee will report to him. Okay? So it is a clear delegation for managing the operation, optimizing the bottom line of the company, et cetera. My role, as it has been defined yesterday with the board, will be obviously to make sure that the strategy that we have decided and the budget that we have decided is being implemented. So I will support him into making sure that we are delivering what we said we will be delivering, both on the short term and on the midterm, and taking the right steps to do that. But my particular role is also to make sure that the three companies working well together between Renault, Nissan, and Mitsubishi. Also taking steps in term of organization in order to deliver more synergies. You will see in the next few weeks, new initiatives to reinforce the synergies. It will be visible to the public, so it's not going to be something hidden in a corner. It will be visible. This obviously has nothing to do with ensuring the pérennité de l'Alliance or reversibility, which is a step which will be of different nature, which we have committed to do within this next term. Okay? So I'll be concentrating on the synergies. I'll be concentrating into making sure that the relationship between the three companies are smooth and they are delivering, that they are productive, and that the evolution of organization or the evolution of any structure will go into the direction of the irreversibility of the Alliance. So on top of this, obviously, as you know, I'm Chairman of the Board of Nissan and of Mitsubishi, supporting the CEO into delivering on their own performance. Thank you, Mr. Ghosn. So this is the end of this presentation. For those we did not have time to take the questions, our team is fully available today to answer those questions. Have a good day.