Renault SA (RNO) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining us despite the short notice. So we are pleased to host this call this morning with Thierry Pieton, the Group CFO; and Laurent David, VP Group Control. Thierry will begin with a short intro just before in the Q&A session. And I remind you that this call is dedicated to the upgrade of the guidance we just announced and related to our full-year results we will release on July 27. Thank you so much. And Thierry, the floor is yours.

Thanks very much, Philippine, and a very good morning to all of you. Thanks for joining. Listen, Renault Group announced this morning an upgrade to its financial guidance for 2023. So what we now expect for the full year is an operating margin between 7% and 8% versus an initial guidance of above 6%. And the free cash flow of the Automotive division above EUR 2.5 billion versus an initial guidance of above EUR 2 billion. This upgrade for 2023 will be reflected in our H1 results, which are expected to be with an operating margin above 7% and a free cash flow around EUR 1.5 billion. This is including EUR 600 million of dividends from Mobilized Financial Services. This upgrade is explained by the quality of our sales, which benefits from a mix price and enrichment effect that's even more favorable than what we anticipated, especially with our new launches and the continuous effect of our value over volume policy, and also by a more limited increase in variable costs. I remind you that our level of profitability also includes until the deconsolidation of Horse, a positive effect from the cessation of amortization of these assets held for sale. The one-off impact was already computed in the initial 6% guidance. Our H1 results would this way beat new records in terms of performance and cash generation. 2.5 years after the launch of Renaulution, we're operating the fastest turnaround in the automotive industry. Performance, innovation, sustainability, boldness and agility, here are the keywords of our transformation, and we're not going to stop there. We will aim to continue to catch up with our best competitors, both from the traditional OEM side and the pure EV players. For this, first, we start to benefit from an unprecedented product offensive, which will allow us to further improve the group's performance in the years to come. From now to 2025, we will have 18 new launches in all brands, starting with this past -- this year, 12 launches in 2024 and 5 in 2025. Secondly, we're leading a unique transformation to become the next generation automotive company. To give you an update on all our ongoing projects: first of all, with Ampere, as scheduled, we expect the carve-out to be completed in H2. This process, I can tell you, is already paying off as we've already identified a 40% cost reduction on a car-by-car basis by 2027. We'll continue to target the most favorable window for an IPO, and this window would be most probably in H1 of 2024. The feedback received so far from investors comforts us in our view that the creation of a fully dedicated BEV and Software champion is necessary and confirms the appetite for this investment opportunity. On the side of Horse, in a couple of days, the carve-out of Horse will be completed. In the second half, Geely and Renault Group will combine their assets in ICE and hybrid powertrains. And as already announced, Aramco has announced its intention to become a stakeholder in this company. On the side of power, after the launch of Austral end of last year and the ongoing launch of Espace, we revealed at the Salon du Bourget Air Show last week the third vehicle of the family Rafale, a coupe SUV, which will deliver the highest marginal profit in the group. Dacia, supported by its successful new brand identity has introduced a range of updates to its range, including an Extreme trim level, which is performing very well. On the Alpine side, Alpine welcomed a few days ago a group of investors in Alpine Racing Ltd. This transaction values our Formula One chassis business around $900 million. The brand is moving fast, with an all-electric lineup of 7 models, which we revealed last Monday. Finally, on the Alliance, we're working on the finalization of the agreements, and closing is expected as early as Q4. I am now available to answer your questions. Thanks very much.

We just received a written question. Could you please comment on the order intake at Renault Group level?

So overall, it remains a European market that's relatively challenging. We're still at market levels that are significantly below 2019. In this environment, we continue to see a pretty healthy order intake, in particular driven by the launch of our new models, which I mentioned a few seconds ago. Austral is performing very well. Mégane is continuing to deliver. We have sustained good performance from Arkana and for Jogger on the Dacia range. At the end of June, although I'm waiting for, obviously, the final figures, we should have an order book that will remain at a record level between 3 and 4 months, which is roughly double the typical level that we've got on an ongoing basis. So I would say that it's still a situation where we are going to remain at an order book level that's significantly above normal levels well into 2024 despite a market level that remains constrained, but healthy intake.

Thank you, Thierry. And another question related to the main drivers to reach your new guidance on operating margin and on free cash flow.

As I mentioned, there's a couple of things. The first and most importantly, it's really a very strong improvement in price, mix and enrichment. And so what we see is an even stronger performance than what we had expected coming into the year. If you recall, in the first quarter, we had a combined price and mix effect of around 15%. We're going to see something similar into the second quarter, and pricing will continue to be strong in the full year, but mix is getting stronger and stronger. This mix improvement is more and more driven by the launch of the new products, in particular with Austral, and I'm sure Espace will continue to drive this progress into the rest of the year. It should be noted that we don't talk about it a lot, but we're actually going to have CLIO facelift coming out in September, which is going to continue to drive the performance. So that's the key factor. And I'd like to say that we also remain very, very faithful to our value-over-volume policy. We remain fully committed to the retail channel as our key priority. You will see that in our H1 numbers. We were very, very, let's say, healthy from a channel mix perspective. Our sort of fleet levels are still very, very low. So we continue to benefit from a super healthy portfolio. The demand in the new products is sustained, and it's also towards the upper trim levels. If I take the example of Austral, we remain in a situation where the upper trim levels represent a bigger portion of our sales. The Alpine version of Austral is still more than half of the sales that we're doing. And we have more than the 2/3 of our sales that are done in full hybrid. So not only is the car successful in itself, but within the car, the trim level is very, very good. Second element of our performance that explains the upgrade is we see some slight variability -- favorability, sorry, in terms of variable cost. We had forecast improvement in raw material towards the second part of the year. That's still, to a large extent, ahead of us. However, the headwinds that we had foreseen on variable costs entering in the year is there but to a lesser extent somewhat than what we had anticipated. So these 2 things combined explain the upgrade of the performance. And clearly, those are factors that we're going to continue to see in the rest of the year and going into 2024.

Thank you, Thierry. Another question, where do you see the top line both for H1 and for the full year?

So I think for H1, what you should expect is something that's relatively similar to what we showed in the first quarter. So volume continues to be up with the situation and components that has become a little bit more fluid and with the gradual execution in our order book. So revenue continues to be up. And as I said, there will be a continued strong tailwind coming from price and mix helping with the revenue number. We expect to continue to see strong performance in the second half, but with comparables that start being a little bit higher versus second half of 2022. In terms of absolute volume, what we anticipate is a volume that's roughly similar in the second half versus the first half.

Another question regarding Horse. Can you elaborate, please, on the impact of reduced amortization from the deconsolidation of Horse, please?

Sure. So technically, when you classify a part of your business and assets held for sale, you have to suspend the amortization of the fixed assets, which means that we get some upside coming from this sort of noncash charge. This upside had been anticipated in the guidance that we gave at the beginning of the year. So the 6% of profit that we had disclosed to all of you. We'll give you the full details on this impact once the H1 closing is complete. What I can tell you, though, is that the improvement in the profit between H2 of 2022 and H1 of 2023 is there regardless of the Horse accounting impact. So there's operational improvement. It's not the Horse deconsolidation, which is driving this.

There's another interesting question. Is this performance sustainable? Is this a peak earnings or not?

Look, as I said, what's driving the performance improvements now is the cumulative effect of all the actions that we've taken in the first part of the plan. So cost reduction, pricing actions on a -- I would say, a pretty stable range combined with all the new cars that we're launching now. And on this product offensive, it's really only the beginning. So as I mentioned, we're in the process of launching Espace. I think Espace is well received to start with. I think everyone understands that it's a car that will be -- from a financial perspective are even more attractive than Austral, which is already a very attractive car. So that's positive. We'll have CLIO facelift come out in September. And in 2024, this is when we'll have the biggest portion of our product offensive with cars that we very much look forward to. So on the Renault range, we will have Rafale, which I've mentioned in the introduction. Same family as Espace and Austral and even better margins given the price points. We will have Renault 5 come out early in the year -- sorry, in the third quarter. We will have a full electric SCÉNIC come early in the year as well. We also see the launch of renewal in the Dacia range with a new Duster, which is always a big event for us. So look, we're only at the beginning of this, and clearly, what we anticipate is continued improvement through this year and through '24 and '25, in line with the plan that we had announced when we did the Capital Market Day back in November. So we see this as sustainable, absolutely.

Thank you, Thierry. Another question regarding your level of inventories. What is your outlook for H1?

Yes. So if you recall, at the end of the first quarter, we had higher inventories than in December, primarily driven by the fact that business is increasing on one hand and also due to the logistics situation that makes it challenging to get their cars to the final customers. We will see total inventories go down at the end of the second quarter versus March, but our logistics remains a challenge. So we're still in a situation where we have a pretty significant inventory in transit between our factories and the end customer pickup point. What I can tell you is if I look at the dealer inventory, it's very, very healthy. So there's no aging whatsoever. So it's not a situation where there's cars on the compounds by any stretch of the imagination. The percentage of the cars that actually have a name, a final customer name attached to them is still very, very high. So it's not cars that have been ordered with the network -- by the network without having a final order. So it's a very, very healthy inventory. As the downstream logistics situation abates, we should continue to see improvement. So inventory levels going down in the second half of the year.

Thank you, Thierry. Another question regarding new launches. Please could you elaborate on the 18 new launches expected between now and '25?

Look, I think I just did that. So again, 1 this year, Espace. 15 in -- sorry, 12 in 2024 and 5 in 2025. And again, the big ones in 2024 will be: Mégane SCÉNIC, fully electric; Renault 5 fully electric; the new Rafale in the Renault brand, which will be the top end of the range; we'll have the Alpine version of the Renault 5 coming as well in 2025; and we'll have new Duster. In addition to this, we'll have some product activity outside of Europe, in particular in Latin America. And this will continue through 2025. So we're pretty excited about these new products. It's -- as you heard, those are pretty iconic nameplates that we're renewing, and the clinical tests that we've done before the launches of these vehicles are very, very positive. We're not banking on massive increases in revenue coming from these, okay? So don't get me wrong. We haven't built '24 and '25 on massive increases in volume. We remain very prudent from a volume perspective, sort of single-digit market growth, in particular in Europe. However, these are vehicles that come with significantly better marginal profit and overall financials than the vehicles that they replace. So we'll continue to see the upside in the price mix enrichment element of our walk across from a profit perspective.

Thank you, Thierry. Another question regarding our costs. What to expect in terms of cost, notably raw mats. And could you elaborate on H1 and H2, please?

Sure. So from a raw material perspective, as you know, between sort of the hedging contracts that we've got on some of the raw materials plus the contractual arrangements, it takes a little bit of time before good news on the markets translates into the income statement. So what we will see is still a relatively significant headwind in the first half although a little bit lower than what we expected, as I mentioned. In particular, driven by carryover on raw material but also on things like logistics and energy and wage inflation. And we will see the raw material side of this equation start to improve in the second half and start to become a tailwind actually towards the end of the second half. We'll continue, however, to have pressure coming from the logistics situation and from energy costs that have gone down versus the peak levels but remain at a relatively high level. So what we call input costs or raw material plus labor plus logistics plus energy, pretty significant headwinds into H1 gradually becoming better into H2.

Thank you. And we have another question regarding suppliers, where do we stand regarding the negotiations with suppliers over inflation?

Yes. So look, we had -- as I had mentioned on the call at the end of Q1 and at the end of '22, actually, I think the team did a very good job of working with suppliers to try to avoid sort of renegotiating all the contracts at the end of '22 when the long-term evolution of raw material and energy cost was uncertain. So I think all the work that was done by the team end of '22, avoided putting into the run rate large cost increases. Going into 2023, as you all saw, raw material started to improve. So now we're finalizing sort of the compensations for the increases that have taken place over the last year or so with the suppliers. We are doing some compensations. I'd like to say that we've seen things written around levels of compensations that are given by automotive OEMs that would be in sort of 80% or 90% range. We're not at all at that level. So we're significantly below. These negotiations are coming to an end. I think we'll pretty much be -- I'd like to say 80% or 90% done at the end of H1, which is basically now. And so the bulk of that effect is going to be in H1, and we'll see less of that going into the second half of the year.

Thank you, Thierry. I think that now we have no more question. So thank you for your attention. And the IR team is, of course, available to answer all your question you may have.

Thank you very much to all of you, and I look forward to speaking to you on July 27. Thanks very much, and have a good day.