Renault SA (RNO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this Q3 Sales and Revenue Conference. The presentation will be made by Thierry Pieton, Renault Group CFO, and will be followed by a Q&A session. Thierry, the floor is yours.

Thanks very much, Philippine, and a very good morning to all of you, and thank you for joining us this morning. I'm pleased to comment today our Q3 revenue and sales performance. You will see that despite the decrease in registrations in Q3 we posted revenue growth. The product offensive is starting to be reflected in our commercial and financial performance. We're continuing to improve our product mix while stabilizing the product effect -- the price effect. After being pretty stable in H1 2024 versus H1 '23, group revenue was up 1.8% in Q3 at EUR 10.7 billion. At constant exchange rates, it was up 5%. Auto revenue increased by 2.6%, had constant effects in Q3 compared to last year to reach EUR 9.3 billion. Mobility services amounted to EUR 14 million, up EUR 3 million. Mobilized Financial Services revenue was up EUR 21.6 million (sic) [ 21.6% ] at EUR 1.3 billion, mainly driven by the rise in interest rates and higher average performing assets. It increased 25.6% at constant FX. Now let's focus on the Automotive revenue. Automotive revenue stood at EUR 9.3 billion in Q3, as I mentioned, up 2.6% at constant FX with a negative ForEx impact of 3.1 points. As in previous quarters, this impact was driven by the Argentinian peso devaluation and to a lesser extent, to the Turkish lira. As you know, though, the Turkish lira has a positive impact on production cost though. So it's not all bad news. This quarter, revenue was also penalized by the Brazilian real. Brazil represented 6% of our revenue in Q3 with a 7% increase in our sales compared to last year. Thanks in part to the launch of Kardian. Volume effect was negative 3.1 points in the quarter due to lower registrations, partially offset by a less pronounced dealership destocking than last year. Volume-wise, the group registered 482,000 units in the quarter, a 5.6% decrease over Q3 '23. Both the market and our sales figures are to be put in perspective of tough comps in the third quarter of '23. Last year, sales in Europe were up 15% at group level and 25% for the Renault brand, thanks to the return to availability of electronic components. This effect was particularly pronounced in July and August where accumulated sales were down 8.7% versus last year. Sales in September, however, were very stable. In Europe, Renault Group confirmed its position on the podium with sales at 328,000 units, a 5.3% decrease that still outperformed the market's decline at 6.1 points. Group sales in Italy, Spain and the U.K. grew strongly, outperforming their respective markets and partially offsetting France and Germany lower registrations. Over the first 9 months of the year, registration stood at more than 1.6 million units, stable compared to last year. Renault brand ranked #3 in Europe and #1 in France. The brand consolidated its leadership in the European LCV market, excluding pickups, with sales up 9.9%. Renault Clio, whose sales in Europe rose by 5.6%, moved up three places to become the second best-selling model across all channels. In Europe, Dacia was #9 for passenger cars. It consolidated its position on the European passenger car retail podium, the brand's core customer base. Dacia Sandero with sales up 16.3% in the first 9 months of '24, was Europe's first best-selling model across all channels. All in all, we now have four cars among the top 10 of retail sales in Europe: Sandero, Duster, Clio and Captur. Alpine delivered a high double-digit growth year-to-date before the effect of the new launches. Alpine is off to a good start in terms of orders for its new A290 model, which will arrive in dealerships in France during the fourth quarter. Looking at electrification in Europe. Renault Group enjoyed a very strong growth in hybrid sales, which were up 52% and contributed to achieve a 30% electrified PC mix. BEV mix at group level stood at 8% year-to-date. This was down in a year of transition marked by the discontinuation of Zoe and Twingo Electric and the generation transition of Dacia Spring. As you know, Renault Group is launching a full range of competitive electric vehicles. Scenic store deployments and the launches of Renault 5, Alpine A290, the New Dacia Spring, Renault 4, and Alpine A390, will sharply increase our EV penetration in the coming quarters. For the Renault brand, electrified vehicles accounted for 47% of its PC -- excuse me, of its passenger cars in Europe, up 7.8 points compared to the same period of 2023. Renault brand was #2 in European hybrid cars with a 16% market share. Looking at the rest of the year, the negative volume effect in Q3 is expected to reverse -- thanks -- in Q4, thanks to the growing impact of the launches, but I'll come back to this later on. Now let's move to inventories on the next slide. And as I said, this lower registration level was partially offset by the positive impact of the stock evolution. We continue to apply a strict discipline to the management of our global inventories, which stood at 528,000 units in September 2024 compared to 542,000 units last September. The independent dealer stock stood at 297,000 units, down 72,000 units versus June, back to normal seasonal patterns. The total level of stock is underpinned by a sound order book that stood at around 2 months of forward sales at the end of September. Keep in mind, the forward sales anticipate a strong Q4 sales number. Let's move to our sales to partners. 2024 is a transition year for ourselves to partners with a discontinuation of several programs last year and before the production of new vehicles for our partners, starting with the new Micra for Nissan next year. As anticipated, sales to partners were down 2.1 points in Q3 versus last year. Now let's have a look at our price and mix effects. In Q3, price effect was stable. As already mentioned, we entered a phase of price stabilization. We aimed to offset negative ForEx by pricing actions, while also giving back a portion of cost reduction to our customers, mostly through content, as we had started doing in the first half. This is designed to boost competitiveness of our vehicles while protecting our margins. Product mix, as expected, keeps improving gradually. After a stable impact in the first quarter, and 2 points positive in the second quarter of '24, it reached 3.8 points in the third quarter, thanks to the ramp-up of our recent launches, and this trend will continue in the coming quarters. In Q3, Renault brand achieved a 42.4% mix on the C and above segments, up 1.6 points versus last year, thanks to Austral and Espace. And before fully benefiting from the effects of Scenic, Symbioz and Rafale launches. The geographic mix at 1.2 points negative was explained by the ramp-up of Kardian in Brazil and by weaker registrations in France and Germany over the quarter. The last item, Other, impacted positively our revenue by 5 points. This was mainly driven by the solid performance in Renault Retail Group and by a strong performance of the aftersales business. The retreatment of sales with buyback commitments also had a positive impact in this bucket. Sales with buyback commitments decreased in the third quarter '24 versus last year due to lower short-term rental sales, which were quite high last year, because of the catch-up in deliveries post logistic issues of H1 '23. Now let's comment the performance of Mobilize Financial Services. New contracts production was almost stable over the third quarter of '24. Average performing assets increased by 8.5% at EUR 56.5 billion, mostly thanks to the increase in average selling prices over the last years. All in all, Mobilize Financial Services revenues were up 21.6% to EUR 1.3 billion, mainly driven by higher interest rates and the increase in average ticket per vehicle described above. Now let's move on to the rest of the year. In the third quarter, our launches accounted for 18% of our automotive shipments compared to 5% in the first half. Even if we've already revealed all of our new vehicles for 2024 and most of the 2025 ones, our product offensive is not yet fully reflected in our performance. As you know, we continue to manage the company with conservative assumptions on volumes, but the current dynamic order intake supports our confidence in a strong Q4 volume effect. For Renault, our EV offensive is continuing with the ongoing launches of Renault 5, the New Master EV scheduled next months. On ICE & hybrid, Symbioz joined New Captur and Rafale launched in the European market. Outside of Europe, we will benefit from the first full quarter of sales of Kardian in LatAm and Renault Duster in Turkey. Last, Grand Koleos is off to a very strong start in Korea. For Dacia, the order momentum has been supported since March by the opening of orders for the new Duster. The combined orders for the previous and new generation of Duster represent a 50% increase for the model versus last year. We're looking forward to Bigster's arrival next year, it's big stuff. Now Spring has started to arrive during the month and will ramp up across the different European countries during the upcoming quarters. For Alpine, the ultra exclusive limited edition of the A110R called Ultime is an unmitigated success. The A290 will be launched in the coming weeks, and this is just the beginning of the brand, as you know. Today, we have a competitive offer both for EV and for ICE & hybrid cars, and we know that products are even more key in this challenging environment. For sure, 2024 is challenging for OEMs and suppliers, but we can rely on a solid foundation. We have strong brands with exciting product launches, as shown in the previous slide. At the end of September, the order book stood at around 2 months of sales. Our current order intake is very healthy and supports our confidence for our Q4 '24 volumes. We have a very disciplined inventory management process. We keep focusing on the most profitable channels. We are 23 points above market average on retail, reaching more than 68% of total sales on the group's five main European countries gradually improving compared to the first 2 quarters of the year. In Europe, the Renault brand continued to sell more than one out of two vehicles on the retail channel; and Dacia, 85%. This commercial discipline, our new models and the overall improvement of the quality of our cars also support a favorable evolution of our residual values. And you know that this is key as a competitiveness lever. And finally, for 2024, our industrial capacity utilization will be around 90%, 5 days, 2 shifts. All in all, this should allow us to be countercyclical in this environment. And this is why we can confirm our guidance for the full year 2024, with an operating margin above 7.5% for the full year, and a free cash flow above EUR 2.5 billion. This concludes my presentation. Thank you for your attention, and I'm now ready to answer your questions.

Thank you, Thierry. So we have a first question from Michael Jacks, Bank of America. Michael, [Operator Instructions].

We can't hear you. Can you open your mic, if it's not already done?

Okay. So maybe we will take the second question from Pushkar, HSBC. Pushkar, please could you open your mic?

A couple of questions from my side. Thanks for your comments on the retail development or expectation for retail development for the fourth quarter. If you could also maybe quality -- qualitatively talk about how this could look in 2025 based on your order book? Just on -- continuing on the topic of order book, 2 months, I understand the seasonal work in that, but just in terms of absolute orders, are you more or less at the same level as H1 or improving given that you have this strong product ramp up? And then finally, on the U.K. ZEV mandate, that's 2024. So would you be making any provisions given your low BEV share right now? Or you rely on the bank and borrow scheme within that -- within those regulations?

Sure. Thanks for the questions. Look, on the fourth quarter and 2025 order book. So the order intake continues to be very healthy. And I'd like to say that it continues to improve sequentially over the year with the launches of the new products on all the brands. The coverage is still very good with the 2 months. And I think going into 2025, as you know, we always take conservative assumptions from a volume perspective. So the last thing we want to do is push the teams to push some volume into the year and not make the most of the full renewal of the range that we're carrying out into 2025. So as usual, we'll be rolling out the cars progressively with the most profitable models first and in the most profitable markets. But that being said, it should drive some growth. I think what you should have in mind is sort of a mid- to low single-digit type of growth in the European markets and globally going into next year. So we're assuming markets more or less flat in particular in Europe in 2025. So we should slightly outperform the market with the new launches. But again, we're solving for profit and cash. We're not solving for market share. On the -- sorry, the ZEV mandate. Look, at this point, and you know it's a rolling sort of 3 years type of calculation. At this point, our calculation is that we're going to be compliant. So no provision to be booked.

Thank you, Thierry. So we now have a question from George Galliers from Goldman Sachs. George, please could you open your mic?

Yes. The first one, Thierry, was just with respect to the pricing. I know you normally try to price through some of the FX. Can you perhaps just break out how much of the pricing evolution was pricing through for FX versus the underlying pricing performance? And with respect to the underlying pricing performance, I know that on certain models such as the Clio, you are strategically reducing the pricing. Could you perhaps give us some sort of indication of how much of the underlying pricing performance is strategic versus incremental pressure within the marketplace? Also related to pricing, I just wanted to pick up on the strong residual value performance. Are you looking to price that through to your customers at this point or not? And with respect to RCI, are you also now reflecting stronger residual values in your financing offers? Or do you prefer to leave the customer with slightly higher monthly payments, but then a nice bit of positive equity at the end of the contract?

Look, so on the pricing -- first of all, hi, George. Secondly, on the pricing. Thanks for the questions. On pricing, look, as usual, we aim at offsetting FX with pricing as much as possible. So a significant portion of FX was offset. I think you have to keep in mind that a large portion of the FX impact that we've got is due to the Turkish lira, which represents good news at the profit level as well. And so as you will see towards the publication of the full year results, net foreign exchange impact at the profit level is going to be a positive in H2 as it was in H1, right? But however, we do aim to continue to cover as much as possible the pricing effect in the different markets. On the rest, what we're doing is exactly in line with what we've done in the first half. So we're making significant progress from a cost-out perspective on the new models. And so again, we'll continue to take that opportunity to return a portion of that competitiveness to the customers through pricing. And obviously, it's to adapt to market conditions. From an economic perspective, if you do the math, between adding some content and giving rebates or going to less profitable channels, the math is very, very clear, right? You're much better off taking a portion of your cost reduction and returning it in competitiveness. And so that's what we'll continue to do. And I think net-net, price ended up being basically breakeven, a very slight positive and that's exactly what we were aiming for. So we continue to have a dynamic where price/mix and cost is going to be a lift going into the second half. And then on the residuals, yes, the difference with the competition is quite significant now. So we're talking about 5 points between Renault brands and some of its closest competitors. And for the Dacia brand, we're between Citroën where we have a 4 points advantage and SKODA where we have 11 points. It's a big lever of competitiveness. And certainly, the way we manage it with Mobilize Financial Services is to try to not have an effect at the end of the contract. So we typically aim for 0 gain or loss at the return of the car when we have that exposure. And so basically to embed those residual values into the rates that the customers pay on a monthly basis. And so if you take this residual value difference, on the low end or 4%, 5% on the high end, on Dacia cars up to 11%. It's in fact, a massive lever. And we see that it continues to develop in a positive fashion. And I think it's due to everything we've done. So the first element is the commercial policy. If you want to have good residuals, then you stick to the retail channel because then you avoid having big returns of our second half vehicles from short-term rental, et cetera, et cetera. So I think that's definitely been helpful. And I think there is obviously the new model launch schedule. And there is the general quality. Quality has been improving dramatically. I think if you've seen the inside of some of the new launches that we've carried out recently, and you compare with our previous models, it's very clear that our overall quality of the build has improved. And so that's reflecting in residuals. And for us, it's a clear tailwinds and we'll try to use that as a competitiveness here.

Thank you, Thierry. So we'll try again with Michael Jacks from Bank of America. Michael? Michael, does it work? Okay. So apparently not. Thomas Besson from Kepler Cheuvreux.

I'll just take two, please. First, I'd like to continue on Sales Financing and Mobilize. Can you update us on the share of leasing overall in your European business both for the group overall and for BEVs? And explain how you plan to see the residual value risk evolve between your dealers and something else eventually as that share of BEVs increase next year? Are dealers going to be willing to continue to take that? Or how is it going to evolve? And you plan to eventually go for 2 or 3 consecutive letting on some of the BEVs in your midterm plants to ease that process. Second question, I mean, the other bucket has been a good surprise in the quarter. Can you remind us exactly where it comes from? Is it more on the used car business, on the parts and accessories? And is it a positive relative contribution to group earnings as well? That's basically, Sales Financing and Others.

Sure. So look, thanks for the questions again. Residual value risk and the mix of leasing, so there's clearly an incremental shift in terms of the mix of the financing agreements that we do towards leasing. And I think the EV development supports that. On average, if you look at what we call [Foreign Language] so the percentage of cars that go with the leasing, it's between 8 and 10 points higher on electric vehicles as part of the financing that it is in proportion than it is on the ICE vehicle. So there's a shift, right? And I think it makes complete sense as people who buy EVs tend to be conscious of the total cost of ownership of the car and when they take a leasing arrangement, it appears very clearly in the rents. So historically, a lot of that risk was carried by the dealerships in our system. And I think we need to adapt to that. So certainly, what we see coming in the coming years is a gradual increase in the portion of the exposure that we take internally, right? And I think, one, it's to respond to the request of the consumers. But secondly, the more we evolve towards EVs, the more the management of the entire life cycle of the car is important, right? So taking ownership of the residual risk for us is actually a way to ensure that we know what happens to the car in its second life, that we can control the second leasing life, the third leasing life, et cetera, et cetera. It's even a way for us to potentially redeploy some of the vehicles in our Mobility business, such as car sharing. And it's also a way at the very end of the life of the vehicle to make sure that we reinject it in our recycling future as neutral business, right? So I think we're gradually shifting towards a business model where life cycle management is becoming a key element of competitiveness. I'd like to think that the steps that we've taken with our Mobility business and with the future is neutral, it puts us in a favorable position from that perspective. Now there's the topic of the risk that you take when you take that exposure. We've always been very conservative in terms of our assumptions. As I mentioned to George, we don't bank on a system that would generate a big loss or a big gain at the end of the contract. We try to return it to the consumer. Number one, we basically based the residuals on external data. So either the actual data for the vehicles that are being returned or independent party forecast for vehicles on which we don't have enough history. And then we adjust with, again, a goal to be at a zero net result at the end of the cycle, number one. Number two, as this develops, and I think I've mentioned this in the past, we're open to building a partnership with someone, with who we could share that residual value risk, right? So if we can find a partner that has a very good credit rating, and that is willing to share the risk with us. I think that's definitely something that we're open to do. And as you know, building partnerships has become part of what we do as a business. So I think we're open to that. So more to come on that topic.

And the other question?

Yes, sorry, the other bucket, excuse me. So in the other bucket, there's three things, and I think you should view them as three ongoing good news. The first one is Renault Retail Group. So the sales through our own network have been improving quite well over the quarter, and it's something that we've seen since the beginning of the year. And so I think it's also the result of some of the work that we've done there to refocus RRG on the most performing and sort of important showrooms for us. So that's a positive, and it's incrementally positive to group's performance. The second element is after sales. So we have a good performance from after sales in the quarter. It has been pretty strong since the beginning of the year. After sales is obviously accretive to the overall margin. So that's good news. And the third element is this -- in this bucket, you also have the accounting effect of recognizing revenue on sales with buyback agreements over the life of the contract. So typically, if sales with buybacks increase, then it's a bigger negative. If not, the decrease, it becomes a positive. This quarter, it's a positive because, in fact, in our mix, sales with buybacks have gone down. To be honest, it's the reflection of the fact that we've kept the focus on the retail channel. And you saw this quarter, retail was 68%. So it's the highest it's ever been. The second element is, there's a bit of a comp thing. So in the first half of 2023, when there was the shortage of components and the logistics issues, we had favored retail customers as well in terms of deliveries. And in the third quarter of '23, when components became available again, we sort of caught up on deliveries to some of the short-term rental. So they were a bit artificially higher, I would say, in Q3 '23. So we should see a bit less of that effect in ongoing. But for this quarter, it's good news.

Thank you, Thierry. So we now have a question from José Asumendi, JPMorgan.

Maybe three questions, please. First one, can you comment on, please, on the plan to meet emission targets next year in Europe? Do you expect big changes on production when it comes to the powertrain mix or do you expect sort of a steady state move into more higher share of electrical products? Second, can you comment on the impact of the Bigster? And should we -- can we see the impact already in the first half of the year? And then three, very, very, I think, impressive model mix coming through the third quarter. Can you comment a bit on how you see that momentum going into the first half '25 with the product launches you have?

José, thanks for the questions. Look, on the powertrain mix and CAFE requirements, I think we've been -- Luca, in particular with ACAP has been pretty clear in terms of the dynamics at the industry level. So look, as you know, to make a long story short today, the EV mix is about 15% of the European market. Next year to get 95 grams, since a typical ICE vehicle makes 120 grams and above means 0, it means that you need to get to 20%, 22% of the mix, right? So two things can happen. Either naturally, the mix is going to improve through the demand of the customers. That would be great. If that's not the case, then the industry is going to have to do something to make that mix evolve. And so there's three things that you can do. One is discount EVs, which is not good for residuals, prevents you from a future investment in EVs, et cetera. So it's not a great solution. Second option is to cut volume on ICE vehicles. So the way you would do it is probably to raise prices to -- so that no demand naturally goes down. So that, EV becomes a bigger portion of the mix. To get to the EV target by just doing that, the industry would need to cut 2 million production on passenger cars and 700,000 productions on LCVs, which means basically shutting down eight plants and the suppliers that go with them. And the third lever is making a deal with people that have CAFE credits, and they're typically Tesla or the Chinese manufacturers, which is kind of counterproductive or if you think of what the European Union is trying to do, right? So look, I think everyone is going to have to use a combination of these levers to make the lift -- the mix shift. In this environment, I think we've got three things going for us. The first one is the product launches that we've got that are happening right now. So the full deployment of Scenic, which is not complete today, because Scenic is going to start, going to fleets, et cetera, as well. The rollout of Renault 5 right now, the car is setting the showrooms. The rollout of Alpine A290, on the LCV side, Master EV, we'll have the renewal of the new Dacia Spring coming as well, basically right now. Going into 2025, as you know, we'll have the Renault 4, we'll have the Alpine A390 and we'll have the rest of the range coming. So first thing is we've got a significant level of activity on EVs, and that will help change the mix. And by the way, we're already seeing our EV mix increase in the month of September. Thanks to the launch of Renault 5. Second thing we've got going for us is we've got a very effective and very competitive hybrid range. I mentioned the numbers in the presentation. But we're up 52% in terms of hybrid sales in the first 9 months. We're #2 in Europe. So only Toyota is in front of us in hybrids, and we've got a 16% market share. So that obviously helps significantly. The third thing that we've got going for us is that, on average, the range that we sell is such that we don't actually need to get to 20%, 22% in terms of mix, which I mentioned earlier, we -- our calculation is a little bit lower than that. So we've got these three advantages. That being said, the mix needs to improve towards electrification. And it's going to come with a combination of the three levers that I mentioned before. Second -- your second question was on the impact of Bigster. Bigster will come relatively towards the second half of first half -- so the first half of next year. So the impact will be relatively limited in the first half. You'll start seeing it a little bit towards the end of the semester in terms of revenue. But jokingly, I said Bigster is big stuff, but it's true for us from a profitability perspective. I look forward to seeing the car hit the showrooms because it's a car that's a little bit more expensive to produce than Duster, but it's quite significantly more expensive from a selling point perspective. It's very well placed from a competitiveness perspective. As we said during the Paris Motor Show last week, the ICE versions will start below EUR 25,000 and the hybrid version will start below EUR 30,000. That's a lot of car at that price positioning. And so it's going to be great margins, a very competitive offer for our customers. So we're excited to see it coming. And it's been -- it's a car that we showed in the first revolution Capital Market Day. And so it's -- I really look forward to seeing it. And then the first -- the last part of your question was the model mix. Again, look, if you look at the history of the model mix, it was basically flat in Q1, positive 2 points in Q2, positive 3.8 points in Q3, and it's going to be significantly above that in Q4. So that's -- you'll continue to see improvement. And we've got seven more new vehicles coming in 2025, plus the full year effect of some of the launches that we've done this year, such as Scenic, such as, obviously, Duster on the Dacia side, Bigster that I just talked about, but also Rafale. So it's going to continue to be a favorable element for our financials. And this is no surprise, right? This is the way we build the equation. So low reliance on revenue growth, on volume growth, but significant impact from a mix perspective.

Thank you, Thierry. So we now have a question from Philippe Houchois, Jefferies.