Renault SA (RNO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 2020 financial results conference of Groupe Renault. I now hand over to Mr. Thierry Huon. Sir, please go ahead.

Good morning, everyone, and welcome to the Renault Third Quarter 2020 Conference Call. Broadcast live and available in replay versions on our website. First, I would like to apologize for this unusual early time for this call. But as you know, Daimler is reporting at 8 a.m. this morning. Thus, we will try to make it short and to have finished by 8. As usual, the presentation file and press release for this call are all available on our finance section of our website. 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. We have 2 speakers this morning, Clotilde Delbos, Deputy CEO and CFO; and Denis Le Vot, EVP, Region Sales and Marketing. The presentation will last about 10 minutes and will be followed by the Q&A session. If we don't have the time to take everyone's questions in this session, the IR team will be around to take your calls later. Clotilde, the floor is yours.

Thank you, Thierry, and good morning, everybody. Before commenting on the revenues, I want to share with you the main takeaways for this quarter. We saw a strong recovery in volume in Europe after the disastrous impact of the lockdown in Q2. Of course, this improvement has been helped by the governmental incentives put in place in different European countries. Conversely, apart from Eurasia, demand in emerging markets continued to decline materially. We also faced a strongly adverse currency headwind in almost all the emerging markets. So where are we standing at the end of Q3? We have a strong order book and low inventories. We are pleased by the market's response to our new hybrid technology that is helpful for meeting the CAFE regulation this year and onwards. Thanks to our strong order book, we should have had a good visibility for Q4 and the beginning of next year, but the new wave of the pandemic in Europe has reduced this visibility significantly and obliges me to keep some cautiousness about what we can say regarding our perspective. That said, and even though it is not an earning call, I would like to confirm that our fixed cost reduction plan is well on track. And from today's perspective, we record a positive automotive free cash flow for H2. Of course, in case of a new lockdown, this would be quite different. Before I hand over to Denis for a short overview of our commercial performance in the quarter, I would like to comment on our liquidity situation. At the end of the quarter, we had EUR 15.2 billion of liquidity reserves when it was EUR 16.8 billion at the end of H1. This consumption stemmed from the usual working capital seasonality and from some debt reimbursements. As the EUR 5 billion credit facility benefiting from the French state guarantee would disappear at the end of the year if not drawn down, we have partly used it to protect our other credit lines and to reinforce our safety net at competitive conditions. To date, we have drawn down EUR 3 billion of it. I will now turn over to Denis.

Thank you, Clotilde. Hello, everyone. Starting with the global automotive results. Markets are getting better in Q3, with a worldwide level at minus 4% versus 2019 and even an isolated September at plus 1%. The region mix is favorable to Renault. As you know, our main market, Europe, is at minus 5% for Q3 and even plus 3% for September. Second main market, Eurasia, is at plus 22% for Q3 and a promising September at plus 26%. Groupe Renault volume for Q3 is minus 6%, with September at plus 1%, at par with industry level. We over-performed in Europe in Q3, with a market share at 10.3%, 0.2 point higher than 2019. We did struggle to supply the booming demand in Eurasia, particularly in Turkey, but September is now okay. As for America, we decided to protect our margins with a market share below 2019 by selecting profitable channels. As you can see on the bottom of the chart, the orders in Europe are still high with a trend of plus 6% versus 2019. Orders portfolio have even grown during the Q3. This secures 1 month additional coverage versus September 2019. As a consequence, with a portfolio 60% higher than last year, we have a good industrial visibility for Q4. Still, the 2021 entry point will highly depend on the COVID pandemic situation. As announced, we are continuing our strict pricing policy with visible impact on our revenue bridge. We achieved positive impact of 5.5% in the quarter. This is pushed by new model value converted in price in the market, mainly Clio, Captur and also new ZOE; channel mix management; marketing expenses discipline; and FX compensation. This pricing versus volume policy has an immediate consequence on the inventory level at 470,000 units, dealer plus OEM, which is 22% lower than 2019 and even 14% versus H1 result. This level reduces the coverage at 65 days, 10 days lower than Q3 2019. Let's have a look on electrified sales performances. Electric vehicle are now reaching more than 10,000 registrations a month, with Renault and ZOE keeping their leading position in Europe. September E-TECH orders are now 22% of the mix of our 3 models. And LPG solution on Dacia range achieves more than 25% of the order. Q4 will highly depend on COVID evolution. Still, our distribution inventory, our pricing policy and our portfolio orders secure favorable condition for Q4. Our commercial activity will be supported by new launches on main market in Q4. For electric vehicle, Groupe Renault will enlarge its leadership position and will secure CAFE compliance with 2 important launches: Twingo EV as high-end urban electric vehicle and Dacia Spring EV as the most affordable electric vehicle in Europe. On top of this, Dacia will launch the renewal of its iconic Sandero model by the end of the year. Thank you. And I'll now pass the call back to Clotilde.

Thanks, Denis. I will start this part of the presentation with the change in third quarter revenues compared to last year on Slide 11. As you can see, group revenues decreased 8.2% to EUR 10.4 billion in the quarter. At constant exchange rates and parameter, the decrease would have been 3.2%. The contribution from the Automotive division, excluding AVTOVAZ, decreased 7.4% to EUR 8.9 billion. AVTOVAZ contribution was down 16.2% at EUR 0.7 billion in the quarter, reflecting the strong negative impact of the ruble despite the good performance of the Lada products and pricing action. At constant exchange rate and parameter, revenues would have been up 3.3%. The contribution from sales financing was down 10.1% at EUR 0.8 billion, reflecting the ForEx impact in LatAm and a significant decrease in the level of the independent dealer stock. I will begin this analysis with the review of the Automotive division on Slide 12. From the left-hand side, the first item, volume, accounted for minus 6.8 points. This is more than what we have shown for registration. This gap is explained by the impact of the inventory reduction in the quarter compared to last year. Geographic mix is almost neutral. The product mix effect was positive by 1.1 points in the quarter, reflecting the strong sales of ZOE. The price effect was positive by 5.5 points, showing further acceleration after the 2 points recorded in H1. This came from price increases implemented in the emerging markets to compensate the devaluation, but also from our deliberate more ambitious pricing, as Denis mentioned. The sales to partners item was negative 3.3 points in the quarter. While still significantly impacted by lower sales of cars and component from our partners, the trend benefited from an easier comparison basis, especially for the Rogue that we produce -- we used to produce for Nissan. The next item is foreign exchange. It showed a negative impact of 4.2 points. This is a direct consequence of the fall of the major emerging country currencies we're exposed to. And the last item, other, impacted positively for 0.3 points. It had been supported by the recovery seen in the aftersales business after the lockdown, but penalized by the impact of buyback retreatment. On the following slide, globally, our stocks went down in the quarter to 470,000 cars at the end of September when we were at 547,000 at the end of June 2020. Consequently, in number of days of backward sales, as Denis already mentioned, we stand at 65 days, a decrease of 10 days over 2019. This is a low level compared to previous years, but it reflects our willingness to keep a healthy balance between inventory and order book. I will now move to Slide 14 and comment RCI's commercial performance. In terms of activity during the quarter, average performing assets stood at EUR 45.9 billion, down 3.7%, mainly related to the impact of lower dealers' inventory to be financed by the bank. The number of new contracts underwritten by RCI Banque increased by 5.9% versus the same period in 2019, notably thanks to the increase in its penetration rate for new vehicle and its high level of business for used vehicle. New financing stayed almost stable at EUR 5.1 billion, a 2.4% increase. And this concludes my presentation. Denis and I will now take your questions, so I will hand over the call to the conference operator. Thank you for your attention.

[Operator Instructions] The first question comes from Thomas Besson from Kepler Cheuvreux.

I'll be quick because it's a very quick call. On inventories and pricing, Clotilde, can you comment on the industry dynamics? Is it fair to believe that the inventories for the industry overall are tight and that, therefore, the risk we may have had on industry pricing for Q4 could be relaxed and that therefore it's also a support for your new pricing policies?

Denis, I guess you can take that question.

Yes. I will not comment on the industry. But obviously, from the restart, the demand has been here and our inventories are low. We intend to continue that way, which is to say we have here a favorable mix between the attraction of our new product that permits to handle the pricing policy that we've had and, at the same time, to remain at what we could call not low but normal inventory level. We have 65 days coverage and this is what we intend to follow. And on the pricing, just the same, we shall follow the same policy going forward.

And I can add also that, on the pricing of the industry, we don't see for the moment any strange behavior. Denis, do you want to complement on the industry for pricing?

Yes, sorry. I thought the question was about the inventory. No, on the pricing, what we're doing, as I said, is that our products are pretty attractive, and then we leverage on this to pass 5.5 points, which is massive on the quarter. We don't see that the industry is going in the wrong direction so far, and we will not go the wrong direction ourselves, okay? Our -- the attraction, I repeat, the attraction of our products and the level of our inventory permits us to continue this policy.

Great. Another question, please, on EV credits. You've registered suggesting that you'll be above your target for that. Is it going to be a meaningful support for your liquidity position? Or how does it work? And can you help us getting a feeling of that, please?

Yes. Thanks for the question, Thomas. Indeed, as we announced since the beginning of the year, we're very comfortable on our CAFE situation. We also announced at the beginning of the year, if you remember, that we would pool with Nissan and Mitsubishi as an alliance in terms of CAFE credits. So there was a deadline, official deadline, to register before the end of October if you wanted to do a pooling, which we have done. And in view of our situation globally for the 3 companies, we're now confident indeed that we potentially could welcome other OEM within this pool and there are discussions going on. That being said, don't expect it to be a major benefit, but it will be somehow a benefit for the 3 companies if we're able to negotiate correctly with other counterparts, let's put it that way.

Next question in comes from José Asumendi from JPMorgan.

José at JPMorgan. Just one item, please. Where do we stand, please, in terms of production in the third quarter? And what does this mean roughly for payables in Q3?

Okay. In terms of production, the level of production for the third quarter was basically 5% below last year, and we expect it to be at the same level, i.e., 5% below last year for the fourth quarter. So basically, that means we would be, yes, around something like 90% of capacity worldwide. In terms of payable, we do expect, as I mentioned, a rebound in working capital, as we usually do in the last quarter, which will enable us to be positive for the full H2 in terms of working capital, hence, relying somehow on the payable. So there should be a benefit, I would say, of the payable on the fourth quarter.

Next question comes from Horst Schneider from Bank of America.

Yes. Sorry, if I maybe missed it in your introduction statements because I joined a little bit later. I have seen in some of the news that basically your gross liquidity was something like EUR 15 billion at the end of Q3. And if I look at it, right, it was something like EUR 16 billion or EUR 16.8 billion after H1. So does that imply that the free cash flow basically was negative in Q3? That's my first question.

Yes, Horst, you're fully right. Our liquidity position was at EUR 16.8 billion at the end of June and it is at EUR 15.2 billion at the end of September. So it does reflect 2 things. First, if you remember, the French OEM had negative working capital as a structural base, which means that when you have lower activity you consume working capital, which is always the case in Q3 because of the month of August, which distorts the payable and receivable activity. So as usual, for any third quarter since I have been in this company, it was a negative working capital movement, even though it was a lot smaller than what we have seen in previous years. So it was some kind of a reduced working capital negative movement, which induced some consumption of cash. The rest of the consumption of cash has been -- is linked to redemption of debt either in Renault headquarters or mostly, I would say, in the emerging market. As you may remember, as mentioned in June, we've been able to contract quite a lot of very short-term financing in order to sustain the lockdown period. So nothing to be alarmed of on the country. We still have a very good level of liquidity. And as I mentioned earlier, we foresee for H2 a positive free cash flow.

Clotilde, what is a normal level of working capital turnaround then in Q3 that you mentioned?

No, I did not mention the normal level. I said it's usually negative.

No, you said it was -- all the time, it was negative and this time it was less negative than it used to be.

Yes.

So I just wanted to get a feeling what is the usual level that you have.

Well, it depends on year-on-year. It really depends on year-on-year, but it's usually quite a few billions on the third quarter.

All right. And last one on pricing. Can you maybe split the price improvement between Europe and emerging markets? Just want to get a feeling basically what is related to the FX effect that you charge and what is related to true price improvement in Europe.

Yes, sure. On pricing, as we said, usually, and it's usually the case, we -- sorry, I used 3 times the same word, but the normal compensation is around 2/3 of the impact. So it's slightly less, but really only slightly less this time because, obviously, it's easier to pass on foreign exchange impact when the market is booming, which is not the case, especially in South America. Nevertheless, in these difficult circumstances, I think the teams have done a great job, so let's assume we have been able to pass on around 60% of the ForEx impact, the rest being linked to the pricing policy efforts and the new product coming in.

[Operator Instructions] Next question comes from Stephen Reitman from Societe Generale.

Could you comment on your EV utilization? Obviously, the -- all the support has been given by French State, Germany and in other parts of Europe of -- with the post-COVID recovery has been very helpful for the demand. How -- what capacities do you have to increase production on ZOE and on your plug-in hybrids and the like?

Yes, indeed, as you noticed, the demand level is growing, it's very high. As I mentioned before, we're having today 10,000 car a month, which are pure electric, that we have been selling. The portfolio, by the way, of our pure electric car is a little higher than the average, which is to say more than 2 months. So we have a strong demand going forward on the electric vehicle. And we have the production capacity for that. So we can produce 10,000 electric vehicle a month. This is not an issue. And then the waiting time for the client are still okay, by the way, the fact that our portfolio is high means that the waiting time for the client is okay. And we are ramping up the E-TECH technology in our factories. So as I mentioned, we are about 22% of the 3 cars, which is Megane, Clio and Captur on this technology and the ramp-up means that the clients are beginning to receive their vehicles all throughout Europe now. So if your question is about the capacity to produce, we have it.

And would you say -- could you comment then on what is the day supply or the availability, like, for example, on orders?

Could you say again? We cannot hear you very clearly.

So for example, on ZOE, obviously, your leading electric car at the moment, what are the inventory levels or what are the wait times for those -- for that vehicle in France or in Germany?

Yes. As I would say, the portfolio is a little more than the average. So the right answer to that one is a little more than 2 months. But it, of course, will depend on the city, the country and the client and the specification of the car. But as an average, you could say 2 months.

Next question comes from Pierre-Yves Quemener from MainFirst.

Pierre-Yves, MainFirst, speaking. Just one last for me on the working cap. Could you please comment how much of the cash outflow could -- of the first half would you be able to recover in the second half on a purely working capital basis if the production levels in Q3 -- in Q4 are, as expected, 5% below last year?

Well, as you know, it's extremely volatile because it depends, as we're paying our suppliers over 2 months and we have visibility for 2 months but not for 3. So we don't have visibility for the last month. So just on go in the detail of the working capital, just look at the total free cash flow, which we mentioned will be positive for H2.

We have a new question from Thomas Besson from Kepler Cheuvreux.

I just wanted to ask a question on the sales to partners. Clotilde, you mentioned Rogue as the driver for the negative development in the quarter, what can we expect in Q4 and going forward? Can you talk about the various elements that are in that bucket? And when it's eventually going to stabilize?

Yes. Thank you, Thomas. You're right. The impact on the sales to partner is still very much linked to Rogue, and it will -- I think it will continue to decrease, but slowly lower, if I may say, a lot slower than in the past in order to stabilize in the years to come to a more minimal level. You know that we're ending some contracts, notably, the one with Fiat, et cetera. And then firstly, the demand on diesel is not going to pick up anymore. So we are now currently working with other partners, trying to find new agreements with OEMs on sales to partner. But as you may guess, these take times. OEM deals take times to negotiate. And then they take times to come into stream in the turnover because usually you have a few years between the contract and the impact on your P&L. So it's going to continue to slow down and then stabilize at a low level until we've been able to contract something new.

Next question comes from Stuart Pearson from Exane BNP Paribas.

Just a couple of quick ones left from me. On the pricing side, obviously, the environment seems strong across the sector, both new and used pricing. Can you just comment on the residual value side? Have you changed your policy much on residual values during the quarter, being more optimistic in terms of the residual value guarantees you've been given in leasing? Or have you left those largely unchanged? And then just secondly, on diesel in the powertrain mix into next year really because, clearly, your hybrid seems to be selling well. You're ahead of track on CO2. Notice that you seem to be withdrawing some diesel variants in certain models, certain markets. So could we see a step change downwards in your diesel penetration next year? They are my questions.

Yes. Denis again. So to your question, number one, on the residual value, you are right. The market is asking for cars, both on new cars and second-hand cars. This is number one. And what we did at the same time is that, if you take, for instance, in Western Europe, if you take the 5 main countries, we are -- we have improved the weight of our retail sales and our fleet sales by a position to short-term rents and self-regs and demo cars. We have improved it and we are now above the market level in percentage of our sales on these channels. So this is part of the pricing policy, which is to withdraw from the channels which are more dangerous, let's say, for the residual value. So this is -- we are protecting them on all of our cars, okay? And also outside of Europe, as you could certainly notice, we've done the same, especially in Brazil. We've been withdrawing violently on the market share in order to preserve the residual value and the right channels. And to your second question, yes, the answer is yes. Hybrid is getting quickly at least in the orders that will come, you will see, in the next month in the sales is getting quickly some place that the diesel was taking. So yes, the weight of the diesel will decrease in the sales going forward.

We have a new question from Horst Schneider from Bank of America.

Yes. Thanks for this other question. I like this call, by the way, because we can ask more questions than normally. So when you -- you said on José's question that production is going to decline by 5% year-on-year in Q4. Will it be roughly the same for sales or the sales likely to decline less than that? Obviously, my question is linked to the inventory development. The second question that I have is, we have seen some, yes, quite significant developments on FX. Can you maybe remind us on the potential drop-through effect? Because we have the weak Turkish lira, which doesn't affect you on earnings. Yes, maybe some color on that would be helpful.

Yes. As per the first part of the question, the -- as I said before, we are reaching our 65-day coverage. The aim is to stay there. So our prospect here is that between the demand, the offer and the very strong, I repeat, portfolio that we're having, we're going to stay at the level of around 65 down to 60, if possible, on the inventory. So we don't expect the global inventory, except pandemia exceptional situation, of course, we don't expect the level of the inventory to grow, if that was your question.

And on the FX, as you know, Horst, it's difficult to comment because it depends on the basket mix. So for your model, I guess, analysis, just take the usual drop-through that we usually give because it really depends on which currency we're talking about. For example, in Argentina, it's not the same as in Brazil, it's not the same as in Turkey, as you mentioned. So for the moment, just take the usual drop-through, you shouldn't be that far.

Clotilde, remind me about the usual drop-through, please?

Yes. I would propose that you take that question off-line with Denis, if you mind -- if you don't mind, because we have to look for it.

Okay. I think it's time to close the call now. It's 7:59. And if you want to have time to switch to the Daimler call, we better stop now. So thank you for being on the call this morning at this earlier time. And we are still around if you need to have further comments or if you have further questions about the Q3 revenues. Have a good day. Bye.

Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.