Interim 2012 Renault SA Earnings Conference Call
Jul 27, 2012 AM CEST
RNO.PA - Renault SA
Interim 2012 Renault SA Earnings Conference Call
Jul 27, 2012 / 06:00AM GMT
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Corporate Participants
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* Thierry Huon
Renault SA - Director of IR
* Dominique Thormann
Renault SA - CFO
* Carlos Tavares
Renault SA - COO
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Conference Call Participants
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* Laura Lembke
Morgan Stanley - Analyst
* Charles Winston
Redburn Partners - Analyst
* Horst Schneider
HSBC - Analyst
* Gaetan Toulemonde
Deutsche Bank - Analyst
* Thomas Besson
CA Cheuvreux - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, welcome to the first-half 2012 financial results conference call. I now hand over to Mr. Huon. Sir, please go ahead.
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Thierry Huon, Renault SA - Director of IR [2]
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Yes, good morning. everyone. Welcome to this -- Renault's first-half results conference call, which is broadcast live and in replay on our website. 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 two of this pack regarding the information contained within this document and, in particular, about forward-looking statements. I invite all participants to read this.
Today's meeting is scheduled to last about 60 minutes. We have two key speakers this morning. First up will be Dominique Thormann, CFO. He will take you through the highlights of the financial results. And then Carlos Tavares, our COO, will follow up with a review of the operations and the outlook. The presentation will last around 30 minutes and will be followed by a Q&A section.
Without further ado, I will hand over to Dominique.
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Dominique Thormann, Renault SA - CFO [3]
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Thank you, Thierry. Good morning, everyone. As you will have already seen from the headlines, the Group's financial results for the first half of 2012 show that Renault has managed to maintain a positive operating margin in the Auto division, despite a tougher-than-expected European market.
As a result of an expected increase in the working-capital requirement, our free cash flow was slightly negative in the period, but remained under control, leaving us on track at the end of the first half to achieve a positive Automotive operational free cash flow for the full year.
In order to analyze our first-half performance I would like to briefly comment the commercial figures on slide five, that Carlos will detail later on.
Our Group unit sales declined 3.3% to 1.3m units. The slight decrease hides a contrasted situation between Europe and our international business outside Europe. In Europe our sales were down 14.9%, while sales on international markets increased by 14.3%. Sales outside of Europe now represent 47% of our total business.
On slide six we have the full P&L for the Group, which shows a deterioration compared to the previous period. This should not, however, come as a surprise, given the environment. Starting with the top line, Group revenues reached EUR20,935m, a decrease of 0.8% over last year.
On the next slide, number seven, we show the revenue contribution by activity. Revenues from our captive sales financing Company, RCI Banque, decreased by 11.9% -- increased by 11.9% to EUR1,072m in the period. However, as you all know, measuring revenues for sales financing is not the indicator of choice in terms of their performance, which I will detail in a few minutes.
I will start by looking at the breakdown of revenues for the Automotive activity on slide eight, which decreased by 1.4% in the period to EUR19,863m. It is worth noting that the second-quarter revenues increased 6.8% after the 8.6% decline experienced in Q1.
If we look in detail and starting on the left-hand side of this page the first item is foreign exchange, which was almost neutral at plus EUR5m. The positive and negative impacts from a basket of numerous currencies cancelled each other out.
The second item, volume, shows a negative impact of 2.7 points. This confirms that our business in Q2 was much better than in Q1, when lower volumes accounted for an 8.9% decline. However, invoices in Q2 were slightly higher than registrations, leading to an increase in independent dealer stock.
Negative geographical mix accounts for a minus 1.1 points, reflecting primarily the weak business in France and the expansion outside of Europe, where we have lower revenues per unit than the average for the Group.
The fourth item to note is the mix effect. The increase in net revenue per unit due to product, version and option mix impacted for 1.9 points of the total change in revenues. This number results from the strong mix improvement in the entry segment with Duster.
The fifth item is the price effect, which is positive at 0.2 points, slightly worse than the 0.6 points recorded in Q1. While not impressive, the slight improvement in the first-half 2012 versus first-half 2011 reflects the strong effort deployed by the Company to offset tough pricing pressure on the European market.
Sales to partners, representing mainly the sales of parts, components and build-ups to other car manufacturers, was a negative 0.9 points, mirroring weak demand for -- from our partners.
The last item named Others represents the other activities outside of the new-car activity, mainly spare parts, wholly-owned dealers and buyback restatements.
I will now turn from Automotive revenues to the Group operating margin variance. The first-half operating margin for the Group totaled EUR482m, a decrease of EUR148m compared to the same period one year ago. As you can see, major negative impacts come again from market factors such as volume and mix and mix/price. The walk-down on this slide compares this year's impact to the previous period. I will start reading left to right.
As already seen for revenue, currencies had a marginal impact in the first half. The next item shows EUR176m negative impact coming from the decrease of units invoiced, including the geographical mix.
Mix/price impacted negatively for EUR211m, as the increase in average revenues per unit did not compensate the net price reduction experienced during the period. This item also includes our underperformance in the pricing of additional content in vehicles to the end customer, in part due to the lower model cadence in Europe and the competitive landscape.
The cost of raw materials caused a negative impact of EUR72m. This impact is in line with our initial guidance in February.
For the next part of the walk-down we have grouped four items, which together form the major part of our Monozukuri cost-reduction efforts announced during the strategic plan, Renault 2016 Drive the Change.
Purchasing savings equaled EUR344m. Warranty costs increased by EUR26m compared to the same period last year. Manufacturing and logistics costs increased by EUR72m. This deterioration came mainly from the cost of the Tangiers plant, which had limited production during the first half but carried running costs. As a reminder, this factory was not in production last year and therefore has no basis of comparison. A similar amount is expected to be charged in the second half.
The R&D charge in the profit and loss account decreased by EUR23m with a capitalization rate of 45% versus 41% in the first half of 2011.
Total Monozukuri savings amounted to a positive EUR269m or EUR197m net of raw materials.
G&A costs decreased EUR59m, proof of the strong efforts deployed by the Company to limit fixed costs. RCI Banque had another strong half despite a slight increase in the cost of risk, as I will explain later. As a consequence, its contribution decreased marginally by EUR13m. Finally, all other items yielded a negative EUR8m.
In total, for the first half of 2012 the Group's operating margin reached EUR482m or 2.3% of revenues, to be compared to 3% in the same period last year.
On page 10 we show the split by sector. The Automotive division posted an EUR87m operating margin, corresponding to 0.4% of revenues. This is 0.7 points below last year's performance. However, we should not overlook the performance of our sales-financing activity, as RCI Banque posted a EUR395m contribution to the Group margin, which is very near the all-time high achieved in the first half of 2011.
I would like to take a few moments to look at the analysis of this performance on the next slide. New financings for the period stayed flat at EUR5.6b. RCI's penetration rate continued to increase by 70 basis points to 34.3%, offsetting the lower volumes. Average outstanding loans rose 8.4% to EUR24.2b, in line with the growth registered last year. And net banking income remained at a strong 5.31%. This moderate decrease of 20 basis points stemmed from a lower financial margin that had reached a record level last year.
The cost of risk stayed at a good level at 0.44% of average outstandings. This increase of 30 basis points, which we had guided to, reflects primarily the absence of a positive one-off release of wholesale provisions on the same period last year. Retail charge-offs were very much in line with last year's performance. Finally, strict cost management helped operating expenses drop to 1.54% of average outstanding loans. In total, the pre-tax return on assets reached 3.35% versus 3.76% in the first half of 2011.
Now that we have covered the operating margin variance, I will continue down the P&L with the other operating income and expense items on slide 12. While the sum of these items posted a net positive result in the first half of 2011 of EUR142m, the same period this year shows a positive result of EUR37m.
The first item is a charge of EUR45m which relates to restructuring decisions being implemented in some of the Group's European subsidiaries.
The second item in this table relates to the impairment of assets both tangible and intangible, amounting to a charge of EUR38m. I remind you that in the first half of 2011 we had some impairment reversals that explain the positive number posted in the period.
The next item in the table is the gain -- the capital gain on the sale of lands and buildings mainly in France for EUR29m.
Finally, we booked a positive EUR91m, mainly due to a retroactive change in duties paid into the Brazilian government on CKD activity for past years.
Continuing down the P&L, the next item is net financial income and expenses on slide 13. The net expense increased from EUR81m to EUR127m resulting from the cost -- the carrying cost of keeping a high level of liquidity, which I will show you in a few slides, and partly from a write-down on our investment in the FMEA fund created during the crisis in 2009.
The next slide, number 14, shows the impact of associated companies in Renault's P&L. On the back of Nissan's strong results that came -- that were published this week, the contribution for the second calendar quarter came to EUR334m, taking the first half to EUR564m, up EUR123m compared to the same period last year.
Volvo's results yielded an additional EUR68m. Renault's share in AVTOVAZ's results, which is consolidated with a three-month time-lag, posted a EUR4m contribution, a decrease of EUR33m compared to last year.
I will now turn back to the P&L for the last time on slide 15, where the net tax charge for the first half came to a negative EUR236m compared to a positive EUR5m in the first half of 2011. The increase came from two major items. First, we recognized less deferred-tax assets than in the first half of 2011. And second, the success of our international operations led to a higher current tax charge paid in almost all countries where we have operations.
Bottom line, net profit after tax came to a positive EUR786m. After taking account of minorities, the net result per share came to EUR2.74.
Now that I've completed the analysis of the P&L I will turn to slide 16 on the evolution of net Automotive debt. Cash flow from operations totaled EUR1,782m. Changes in the working capital requirement impacted negatively for EUR444m. I will review this item in further detail in a few moments. Net tangible and intangible investments came to EUR1,538m. As a result, Automotive operational free cash flow came to a negative EUR200m in the period.
Dividends received from quoted companies totaled EUR272m. While dividends paid during the first half came to EUR346m, reflecting the application of our dividend policy of distributing each year's dividends received from associates during the previous period.
Other financial items were negative for EUR245m, including a capital injection in our affiliate in India which is now ramping up production.
In summary, net Automotive financial debt increased EUR519m to EUR818m versus the EUR299m at the end of last year. The ratio of net debt to shareholders' equity now stands at 3.3%.
Slide 17 shows the change in the working capital requirement recorded in the first half at minus EUR444m. Trade payables remained positive in the period due to the low comparison base at the end of December 2011, as we had cut production in December due to the low expectations for Europe in Q1 of 2012.
Inventories rose in line with the normal seasonal variance, as did receivables. Other working capital was slightly negative, impacting EUR78m off a difficult comparison base in 2011.
As in 2011, the full-year target of positive Automotive operational free cash flow will be dependent on the continued tight management of working capital. Slide 18 shows the inventory situation across the consolidated chain of both Renault's balance sheet and independent dealer network.
While inventories have been reduced at the Group's level, in Q2 we experienced an increase at the dealer level. However, it is worth noting that our sales mix outside -- as our sales mix outside of Europe expands, this increases the level of natural stock due to the longer supply chain.
At the end of June, inventory outside of Europe represented 50% of the total stock. The stock rotation figure, expressing the total inventory level at the end of June divided by the sales in the previous quarter, stands at 61 days, down from 69 days at the end of the first quarter. While this is still on the high side, dealer inventories should decrease over the summer months, which is what initial figures for July are showing us.
I would now like to move to the Automotive liquidity reserve slide, page 19. Cash and cash equivalents totaled EUR7.4b at the end of the first half, in line with the end of last year which stood at EUR7.6b. Together with the fully-available, undrawn credit lines, the Automotive gross liquidity reserve stands at EUR11.1b at the end of the first-half 2012.
Despite volatile market conditions, we raised almost EUR1b of new, midterm funding in the period, thereby completing the bulk of our 2012 refinancing plan. The main public issues were two bonds raised in the period amounting to nearly EUR600m in the euro and in the yen markets.
RCI's liquidity position has also remained strong, as we can see on slide 20. In financial markets suffering from the growing concerns of sovereign debt issues, RCI Banque raised about EUR3b of new funding with a maturity greater than one year. At the end of June 2012, RCI Banque has a liquidity reserve enabling us in a stress scenario to continue the production of new loans to customers for more than one year, without any access to the capital markets.
In the meantime we have also continued to develop ZESTO, our online, retail, savings account, which has exceeded initial projections. At the end of the period under review, ZESTO had collected almost EUR500m in deposits, which was our full-year objective, forcing us to raise our target for December 2012 which now stands at EUR750m. Beyond the success in France we intend to expand this source of funding outside of our boundaries in early 2013.
That completes my financial review for the first half of 2012. I will now pass the floor to Carlos Tavares for the operational review and outlook. Thank you very much for your attention.
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Carlos Tavares, Renault SA - COO [4]
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Thank you, Dominique. Good morning, ladies and gentlemen and welcome.
Let me start with the sales. As you know, for the first half our sales were down by 3%. This is the net balance of a very different situation.
While in Europe our sales were down by almost 15% to protect profitability, we had three profitable share increase in Eurasia, Euromed-Africa and the Americas. So three regions demonstrated profitable growth.
And we see also on this breakdown that we still have a significant opportunity in Asia-Pacific, where we have limited growth below the TIV. This means that, moving forward, we will have to recognize that having 0.6% market share in Asia Pacific represents our largest opportunity, as we have in this region 50% of the worldwide TIV.
I would like also to highlight that our share growth in Brazil and Russia is quite profitable. And therefore, having Eurasia, Americas and Euromed-Africa regions pulling the Company is a positive factor that compensates, at least partially, for the lack of performance of our operations in Europe.
If we look at the breakdown you see that the growth outside of Western Europe has been significant at 14.3%, while Europe was down, as I said, 14.9%. Not yet a full compensation but getting closer, as the total net balance is minus 3%.
As you see, the Americas and Eurasia had quite significant growth above 20%. Euromed-Africa close to 8% and a limited growth in Asia-Pacific, which represents, moving forward for the next years, significant opportunity for the Company as we believe we have already today and in the pipeline some very significant products.
If we move to the next one we'll see that this change of sales mix, moving sales outside of Europe, has been a continuous progress over the last years, moving from 11% of our sales outside of Europe in 1999 up to 47% in the first half of 2012.
This trend will continue. And we can forecast that by 2013 more than 50% of our sales will be made outside of Western Europe. And this is, of course, a factor that gives robustness to the business model of the Company.
In terms of ranking of our top-10 markets in sales, there has been significant changes. You can see here a comparison between 2012 H1 and 2010. You see that we have now in the top 10 six markets outside of Europe. We have now Brazil as the number-two market of Renault. Russia number three. Argentina number five. Algeria number six. So we see a significant change in the ranking of our top markets. We are still struggling in Korea, where we have an ongoing revival plan for our Company over there.
But this change of mix is an important one, needs to be highlighted, even though we still have Germany as our fourth market, Spain as our tenth market, Italy seventh, and, of course, France remains by far the number one market of the Company.
If we look at now region by region we can see that in Europe we had two major factors that related to the reduced -- reduction of sales. First, market-related factors like the TIV decrease. And market mix penalty, coming from the reduction of some of the South European markets. And we see that we also have some challenges in terms of performance, which count for one-third of this sales reduction. Our market share in Europe it's -- is still at 9.3%. We were down 0.8 points. Market share in France at 24.7 points with a reduction of half a point. We are still with the Renault brand the leaders in the French market. And you can also see that the order book is quite low. Not at an historical low, but quite low compared to what we have seen in the last five years.
In the Americas this is a story of sustainable, profitable growth. We see that we have been growing our share significantly in the first half with more than 1 point of share increase moving from 5.7% to 6.8%, thanks to the success of our entry car sales. And namely the Duster, which has been a highly successful car in this market.
We have, as you see, outpaced many of our competitors. And we are now in the top two of the segment with the Duster and still growing through the increase of our capacities in our plant in Curitiba, which will be implemented by the end of this year.
If we move to Eurasia, also a story of profitable market share growth, moving up from 5.8% in 2011 to 6.8% in the first half. Here also we have a significant performance coming from our entry car range and also from Duster. We believe that the market this year is in line to achieve 3m car. And we expect it to continue like this for the second half.
We are also facing some success in the introduction of upper-segment products like the Renault Fluence, which has been quite successful in increasing its market share in the segment from 4% to 6% in the combination of Fluence and Megane.
Another important factor for Eurasia is the fact that we have now decided to increase the opening hours of our plant in Moscow, Avtoframos, from 5,000 hours to 6,000 hours of work in the year. This will be implemented from September and will give us an increase of -- significant increase of capacity with a very limited investment, as you may imagine. And this will give us the capability to continue to grow profitably our share in this market.
We will also continue to implement vigorously a network density increase plan moving east. And we will have an increase moving from 140 dealers to 160 dealers by the end of this year, with a target of 20 -- 220 dealers in the midterm. So we increase the density of the network. We increase the opening hours of our plant in Moscow. And we are facing a profitable market share growth in this country.
Moving to Euromed-Africa, we have in this region a significant share also growing, moving up from 15% in 2011 up to 15.7% in 2012 with two significant leadership countries. 28% market share in Algeria. Close to 38% market share in Morocco and still growing, fully leveraging the entry car range and also the introduction of Lodgy in this market.
We are now implementing the capacity increase of Tangiers with the different steps that were already presented. And we are moving forward, as it was decided. And, in addition to this, to fully leverage the sourcing from Tangiers, we are now preparing and we will soon start implementing a market share growth plan for Africa.
So this is the situation in sales. I would like now to move to some of the risks and opportunities that we are facing for the second half of 2012. Starting with the risks, which will not surprise you, first of all the situation in Europe. As you will see later on, we have revised our forecasts down in terms of TIV. And this remains for our Company still the major risk, moving forward.
Second point is eventual risk of slowing of growth pace in some emerging markets. That could come from Latin America. We believe that for Russia it's going to be fine for this calendar year. But Latin America can be one of the risky regions in terms of keeping the growth base that we have experienced in the last year.
Third risk is the supplier base. And mostly the supplier base in France, where some of our partners are in a very difficult financial situation. And in some cases we are vulnerable to the supply of those suppliers. If something happens there it could impact our own manufacturing base and then have consequences on our sales. So those are the three major risks that we are facing.
We also have opportunities on the right-hand side here. And I will give you a little bit more details one by one. To make it simple, it's all about new products, pricing policy and discipline. And fixed cost and Monozukuri cost reduction.
I will start with the entry range, as we are now deploying the introduction of Lodgy, the introduction of our small LCV, Dokker. And we will present at the Paris Motor Show the new generation of the pillars of the entry range that you know well; the Sandero, the Stepway and the Logan. These three new versions of these three successful cars will be presented at the Paris Motor Show and will be introduced by the end of this year.
So we are now seeing mostly the deployment of Lodgy and Dokker and preparing for the introduction of the second generation of very successful entry car programs.
We have already also decided to reinforce the discipline in managing the business model of mostly our smart-buy brand Dacia by keeping a very tight control and setting new guidelines for the variable expenses and fixed marketing expenses in order the protect the business model and the profitability of this entry range of cars that has represented a big part of our profits.
So we are now, in summary, in the process of deploying and renewing the strategy here, keeping the same direction of profitable growth. Most probably we will deliver this year 1m car sales on the entry car range.
The second opportunity is product. You see here that in 2012 we have a significant product plan. And everything has been introduced as planned. And I will give you a little bit more details later on.
You can also see that the plan for 2013 is also quite strong. So we can say that we are now entering a period of product renewable -- renewal which I believe is quite promising, given what I have seen, and given the improvements that we have done.
I would like just to share with you the fact that Clio IV is a turning point for the Company, in the sense where this car represents the increase of focus of the whole Company in product attractiveness. I would like also to share with you that the first [clinic] test results we had with Clio IV are extremely rewarding. Very -- giving us a lot of confidence for the launch of this car which will be, as you know, implemented from the Paris Motor Show.
We have also decided, as you know, to introduce the Zoe in the market in 2012. Clio IV will go first, given the excellent clinic test results that we have achieved and given the huge importance of this car for our European sales.
And we will launch after Clio the Renault Zoe. The first deliveries to the customers will be made in 2012, as announced. And the customers will be in a position to make their orders from the Paris Motor Show.
I would like to tell you also, to share with you the fact that at this stage Renault is already the leader of the European market in terms of electric vehicle sales. We have more than 50% of market share in Europe. We are number two in the world, just behind our partner, Nissan. Therefore, our strategy is now showing concrete results. And demonstrating Renault's leadership in terms of zero-emission vehicle technology.
I would like also to mention that we are introducing this year a new generation of petrol engines, the H Generation, which will give us, in terms of B- and C-segment cars, very competitive CO2 emissions.
I'll give you two examples. The Clio IV ENERGY DCI 90 will emit only 99 grams and the Megane C-segment car with the ENERGY DCI 115 engine will emit only 119 grams. This is a very important factor, because combined with the expertise we have already on diesel engines we will be in a very competitive position to support or to enjoy all the tax benefits that more and more are appearing in the European market to support clean vehicles.
It is also something we can see through the interest and the sales we are making to Daimler and to Nissan. The competitiveness of our diesel and petrol engines is now a fact. Not only a fact in the market, but also recognized by our partners who are buying those engines from us.
Moving to the next topic, already highlighted by Dominique, we have now all the cylinders firing on the Monozukuri cost reduction activities. For the first half we are on track to deliver on what we have announced, which is a EUR500m Monozukuri cost reduction for the year. I am confident that this will be delivered and, as Dominique mentioned, possibly we'll have some better news in terms of raw material costs for the second half, so this is something which is on track.
For the CapEx and R&D, you see that in the first half the rate was slightly higher than we had in 2011. I think this is in line with the cap that we have announced of 9% and that cap will be respected through the full year. And, at the same time, it also demonstrates that we are protecting the mid-term and the long-term sustainable growth of the Company by going through this storm without penalizing the future of the Company and making the appropriate investments, even though we want to continue to be frugal and we want to be ingenious in the way we are using our assets starting with the manufacturing assets. So we will keep on moving in this direction, protecting the cap of 9% possibly slightly above 8% for the full year.
If I continue with the TIV outlook, we have updated this outlook by moving our forecast in Europe from minus 3% to minus 6% and our forecast for France from minus 7% to minus 10%. This is our updated forecast; we expect it to stay there. And, of course, we recognize that the worldwide TIV is still growing at the pace of 4% to 5% so the total TIV is still a growth model; we just need to be in a position to better enjoy it by catching some of the opportunities that I have already highlighted in Asia-Pacific.
As a summary, I think the Company in this first half has demonstrated a good resilience; a very good commitment from all the employees who understand that, despite the fact that we are keeping the boat afloat, they understand that we still need to make a lot of efforts to improve the competitiveness of this Company. Of course, we continue to be vulnerable to the European situation and we expect that the markets will not go below the levels that I have just expressed. So, providing that this deterioration does not increase, we expect to be slightly above 2011 sales for this year, or close to it.
We also continue to believe that we are on track to achieve what we have committed to the market, which is a positive free cash flow for this full year. Of course, I don't try here to tell you that things are easy. I'm not telling you that this is a given but I can tell you that the commitment of the Company and the commitment of the top management is very, very high to deliver this performance.
This is what I wanted to share with you. I would like to thank you for your attention and move back to Thierry Huon for the Q&A.
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Questions and Answers
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Thierry Huon, Renault SA - Director of IR [1]
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Thank you. I think now the Q&A is open with the first on the list.
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Operator [2]
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(Operator Instructions). Thank you for holding until we have the first question.
We have a question from Laura Lembke from Morgan Stanley. Please go ahead.
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Laura Lembke, Morgan Stanley - Analyst [3]
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Yes, good morning. It's Laura Lembke from Morgan Stanley. I have three questions, please. The first one is just a clarification on your inventory move. If I understood you correctly you said that the 60,000-unit increase at the independent dealer level basically 50% of that total inventory that you have is outside of Europe so I was just wondering if you could explain a little bit how the inventory has moved both outside of Europe and internationally between Q2 and Q1, just to get a little bit of a feel here.
The second question would be on your order book and the trends you are seeing across the different regions in Q2. How much visibility do you have now, going forward, and also how have orders developed on a sequential basis, month on month, in the quarter here?
And then my last question would be on the French stimulus that has been announced this week. How does this alter your prospects on the EVs and how does it also impact basically the ramp-up that you're looking to do in the electric vehicle business and what that may mean for the economics overall of your EV project? Thank you very much.
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Dominique Thormann, Renault SA - CFO [4]
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Okay, Laura, I'll -- this is Dominique, I'll take the inventory question and pass over to Carlos for your two follow-up questions.
Basically, as I showed you, our sales are -- 47% were outside of Europe, 53% inside of Europe. Our stock situation is -- pretty much reflects how our sales have been moving so, currently, the inventory is actually skewed a little bit more towards the international side because we have a longer supply chain and there are some countries that have rather lengthy customs and barriers which we have to go through, Algeria for example. Right now, at the end of the half, we were parked at a little bit less than 50% of stock in Europe, a little bit over 50% outside of Europe. And I'll hand over to Carlos for your question on the orders.
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Carlos Tavares, Renault SA - COO [5]
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The order book for Europe is in the range of 1.4 months, 1.5 months of sales. This is the current situation outside of Europe. As I said, for Eurasia, Americas and Euromed the situation is good, nothing that could be of concern. We see that in Russia everything we produce we sell. We see that we are still growing a share in a very significant manner in Brazil and our position in Euromed is quite strong, so on that area nothing that is specifically worrying. But, of course, we still are very vulnerable to the European situation and we expect to see what will happen next in France which is, for us, still a very important market as 25% of our sales are made in France.
And I will therefore comment about your question on the program that was announced by the French government this week. We believe that it's a quite good support program for green cars, specifically for zero emission vehicles, and I would like just to reinforce here that we are the only global OEM who has three EV cars on sale, three completely different cars; the Kangoo's models EV, the Fluence C-segment sedan, and the Twizy and very soon the Zoe. So having these three vehicles already on sale, we are in a very good position to capture any opportunity that could come from this kind of support program, so this support program is expected to help us accelerate the sales of EV.
One of the factors I would like to share with you on EV also, because sometime we are challenged on the fact are you growing sales quickly enough or not. I would like to tell you that I have given very strict instructions on no discounting, or very limited discounting, on EV for a very simple question; it's because we have no competition. There is no reason to make discounts where you don't have any competitors. We believe the French plan is supportive of this.
Of course, there is an expectation to see if, in terms of TIV impact, there will be a significant one. I think it's too soon to make any comment on that; we'll see in a few months. But at least on the zero emission part where we have already a significant offer, I think this is a program that is going to help. It's going to help not only by the incentives which are going to be given directly to the final customer, but it's also helpful because it's going to accelerate the density of charging units across the country, and this is a very positive factor to reduce the autonomy range anxiety that you know exists in the mind of a few customers.
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Laura Lembke, Morgan Stanley - Analyst [6]
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Thank you. Can I just ask a follow-up question regarding the inventory again? What I don't understand is you basically reduced the inventory at the OEM level by 80,000 units but this was largely offset by the 60,000-unit increase at the dealer level so, essentially, what happened is the situation from Q1 has been reversed. So what I would like to just understand is whether basically the increase we've seen at the independent dealers is that mainly just driven by the fact that you've transferred a lot of cars for the international business now to the dealers or this is actually a sign that the inventory in Europe is not decreasing or actually increasing.
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Dominique Thormann, Renault SA - CFO [7]
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No, it's the former because if you look at the split of what's on our books, so the manufacturer's inventory, it's just about identical to the percentage at the dealer level. So if you take total Europe stock it's exactly 50% on our books, 50% outside of Europe, and if you take the -- what's on the dealers' side, it's 47% on the dealers' side, 53% outside of Europe. So, we have, in total, a balance between the percentage of European and non-European stock, be it on the manufacturer's side or on the independent dealers' side.
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Laura Lembke, Morgan Stanley - Analyst [8]
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Okay, thank you very much. Thanks.
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Operator [9]
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We have a question from Charles Winston from Redburn Partners. Please go ahead.
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Charles Winston, Redburn Partners - Analyst [10]
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Hi there, good morning. Just two questions from me. I was just wondering if you could comment as to how you see the pricing environment in Europe now and your expectations for the second half? Obviously, many people are expecting the pricing to get tougher and perhaps your expectations as to how you'll be able to resist that as well as you did in the first half.
And then, just secondly, just getting back to that issue of inventory, could you perhaps give us some feel or picture as to how the new model launches you're planning in the second half might impact the inventory and working capital position? Because, I imagine that there will be a degree of inventory build ahead of launches, for instance, and whether that will present a bit of a headwind to your expectations for working capital management in the period. Thanks a lot.
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Dominique Thormann, Renault SA - CFO [11]
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Okay, I'll start maybe with the inventory and then hand back over to Carlos for pricing, if you don't mind.
First of all, the launch of the vehicles is towards the back end of the year so you will have an inventory build-up to launch in Q3. We haven't seen that yet. There's a seasonal factor also, at least in the European market, because of the summer shutdown so there's naturally a bit more of inventory as you close out June going into the July and August selling period where -- and the factory shutdown starting, basically, now. So that's the normal seasonal pattern that you're going to see.
What I showed you on the slide also is an important factor is that total inventory, in terms of the number of days on hand, went down quarter -- at the end of Q1 we were at 69 days and we ended up at 61 days at the end of Q2, but that number still has to come down. I said in my remarks that it was still on the high side. What we try to do is to manage inventory within a band of 50 days to 60 days, at 61 days were clearly on the high side, and we would like that number to come down. As the July and August selling period will empty some of the existing on-ground stock - here I'm speaking primarily of Europe which is half of the total - and that needs to happen as we will ramp up production particularly for Cleo launch in the last part of the year.
I hope that clarifies and I'll hand over to Carlos for the pricing question.
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Carlos Tavares, Renault SA - COO [12]
------------------------------
Thank you, Dominique. For the pricing, as you know most of you, we have a very specific focus on the net pricing in the five biggest countries in Europe where the fight is the toughest. And we have been implementing a net pricing increase plan to overcome both Citroen and Peugeot. At the moment where I'm talking to you we have already overcome Citroen. Our net pricing, which is the transaction price value adjusted after all the discounting and correcting from the equipment content, our net pricing is already in the G5 in Europe above Citroen, excluding the DS series. This is something which is done.
We are now moving to get closer and hopefully to overcome Peugeot. Our current plan is to make sure that this job will be done before the end of first quarter 2013. And, as you may imagine, while I'm telling you this, I'm trying to do it in a more speedy manner but, as you may imagine also, it's not an easy task. We are moving now to catch up with Peugeot. By doing this, we will get slightly closer, possibly, to Volkswagen which remains our mid-term and long-term goal in terms of net pricing value adjusted. It's a huge task.
I would like also to share with you that I'm not completely satisfied with the way we are managing the enrichment. I think we also have to improve the way we value the content that we put in the car and possibly we are not optimal there, which gives us some room of improvement and another area for hard work beyond the discipline that we are now implementing in our sales and marketing world for the European markets. So, that's the current situation I would like to share with you.
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Charles Winston, Redburn Partners - Analyst [13]
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Sorry, could I just follow up just to confirm? Given the plans that you've just set out, just to confirm, those plans are not being knocked back a little bit or impeded given the environment we're seeing; the environment isn't making that plan more difficult.
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Carlos Tavares, Renault SA - COO [14]
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No, they are not impeded at all because we are working on, of course, relative terms. The concern that we may have both is that, in some cases, if we overtake somebody, we need to know if it is because we increased our net pricing and it benefits our P&L or if it is because the other guys are discounting like hell. It's a combination of both because some of our competitors are in disarray and they may have some desperate moves.
So, the answer to your question is that I believe it's a combination of both. I want to see my P&L net pricing improvement, which is part of the reason why we are overtaking people like Citroen and a few others, so we need to keep that in mind. We know that even our German competitors are increasing their C&I and therefore they are coming closer to us even though they are still, by far, ahead of us. So the answer to your question is, no, nothing is impeding us from moving forward but the caution we need to have, both of us, is that only part of that can impact the P&L if our competitors are increasing their discounting on their side.
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Charles Winston, Redburn Partners - Analyst [15]
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Okay. Thank you.
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Operator [16]
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We have a question from Horst Schneider from HSBC. Please go ahead.
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Horst Schneider, HSBC - Analyst [17]
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Yes, good morning. It's Horst, here, from HSBC. I have got a few questions. I would like to understand, given your free cash flow guidance, what could be the potential level of the current operating margin in automotive in 2012. H1, I would say, was quite successful since you have generated here a positive operating margin. I want to understand with regarding to your free cash flow guidance to which extent the positive free cash flow that you expect for H2 is driven by working capital changes, CapEx reductions or rather improvement in earnings.
And regarding the earnings, I want to know if you expect any more significant currency effects in H2 and if you could imagine acceleration of the cost cuts coming from the Monozukuri program.
And the last question that I have relates more to the electric vehicle programs. If I look at the selling price of Twizy, which is at around EUR7,000 and now the subsidy of the French government of EUR7,000 as well, basically the customers in France get the Twizy for free so I want to know if -- what are your production capacities on the Twizy on an annualized basis. Thank you.
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Dominique Thormann, Renault SA - CFO [18]
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Yes, good morning, Horst. Dominique. I'll take the first part of your questions. Our guidance on free cash flow is unchanged from what we said at the beginning of the year and that is to be positive. Clearly, that will require an improvement or some reversal in the working capital requirement in the second half. That is a given. And, as I explained also in my remarks, there's a seasonal pattern to our working capital which is negative in the first half.
The improvement's going to come from a combination of everything. As Carlos mentioned in his remarks, we're not compromising our capital -- our CapEx plan which had been decided and is being implemented per plan. So there's no -- nothing particular that we're going to do on CapEx other than the normal strict management of a periodic review of what we're spending, how quickly we're spending and where we're spending, but this is normal management. You're going to have a combination of an improvement in working capital and obviously earnings, which will drive the free cash flow in the second half so that we deliver our objective of being positive on the full year.
Currency is pretty much flat. Everything that we're seeing from a basket of 20 or 25 currencies is we have pluses and minuses but the balance of everything, both at the revenue line as well as at the profit line, is neutral right now and that is still going on as -- in July as we speak. It's pretty much unpredictable but at least this year it's been less of a headwind than last year.
And then I'll hand over to Carlos for your follow-up.
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Horst Schneider, HSBC - Analyst [19]
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Okay.
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Carlos Tavares, Renault SA - COO [20]
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I'll take the Monozukuri and the Twizy question. On the Monozukuri first, I think there are positive factors and negative factors so that there is a balance there to be appreciated. The most important point is that we believe that we will deliver the EUR500m that we have announced at the beginning of this year.
On the positive side, we see that the negotiations on raw materials are moving reasonably well and all the work done in the Company is now much more cross-functional than it was before in terms of cost reduction, which means that we are moving away from a very awkward situation that we had a few months late -- earlier where most of the functions were meeting their objectives. But, in combination, the total result on the total delivered cost was not good for the Company which was not, of course, acceptable --.
So we revised completely the way we break down the objectives by function in order to ensure that the computation of all those local objectives delivered a total -- delivered cost reduction that we are looking for. So this has been done from an organizational standpoint and from a coordination and a project management standpoint. We have now the plant managers and the program directors reporting directly to the EC on a quarterly basis the progress that they are making on the TDC. And I must say that this has given a very good dynamic to the Company, much more solidarity and less silo-ed management. This is on the positive side.
On the negative side, what we see is that managing the enrichment is still a headache. We have, of course, regulation impacts. For instance, things that are related to CO2 improvement through powertrain are, generally speaking, quite costly. But, at the same time, there are markets where, if you don't ensure the competitiveness of your CO2 emissions --take the example of the Netherlands, if you are not competitive there you just don't sell cars so it's quite difficult to make the selection of what is the good enrichment and what is the fat. And in that process I'm not completely happy with the way we are operating so we are going to revisit that process and see if we can do better decisions through the process.
So, that's the situation; some upside, some downside. I would like just to let you know that we will keep the EUR500m. Please don't get excited. I think we still have a lot of work to do.
On the Twizy side, the incentives on this kind of particular mobility device are not the same as for the conventional car so while up to now Kangoo and Fluence could benefit from a EUR5,000 incentive, for the Twizy it was only EUR2,000, so the customer will still have to pay something for the car. We have a very significant capacity in Valladolid in Spain for this product. We are not at all in difficulty for the production. We could have shifts. We could increase the opening hours, so there is no visible bottleneck in terms of manufacturing capacity for Twizy. I hope you are right and I hope we will have to build it much more because it's a quite profitable car.
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Horst Schneider, HSBC - Analyst [21]
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Could you please remind me how high is the subsidy now for a car like the Twizy?
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Carlos Tavares, Renault SA - COO [22]
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Up to the new plan it was EUR2,000. I will have to check what is the new number, if any, with the new plan. This is not clear in my mind. I will have to check it.
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Horst Schneider, HSBC - Analyst [23]
------------------------------
All right. Thank you.
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Operator [24]
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We have a question from Gaetan Toulemonde from Deutsche Bank. Please go ahead.
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Gaetan Toulemonde, Deutsche Bank - Analyst [25]
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Yes, good morning. It's Gaetan Toulemonde, Deutsche Bank, speaking. I've got two questions. The first one is I'm pretty pleased to see the growth rate outside of Europe. Can you help us out to get an idea about the profitability to put that much more in perspective with the Europe situation? That's the first question.
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Dominique Thormann, Renault SA - CFO [26]
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Gaetan, hi, it's Dominique. We don't split by region but what we can tell you is that, first of all, profitability outside of Europe has been steadily increasing in the last two, three years. Currently, we have -- if I take our two main growth areas which are in the Russian market and Brazil, for example, or the Americas, both of those are achieving above Group average results. I think, as Carlos pointed out, the one area that we're not satisfied with, right now, is Korea, which we're working on to -- you know that we have a plan to fix that. It's not easy to just say inside of Europe, outside of Europe, because within all of those areas you have very contrasted situations. But, clearly, Brazil, Russia and North Africa would be engines of growth. Korea is still an issue. And then in Europe you've got a very contrasted patchwork situation with certain countries underperforming the average of the Group. That's what I can tell you on regional splits.
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Gaetan Toulemonde, Deutsche Bank - Analyst [27]
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Okay. [I don't know] if that helps me that much.
Regarding Samsung, is the situation under control. I've seen that Nissan is going to produce cars in Samsung but I remembered that you gave us a guidance to break even at some point next year. Is it still a target?
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Carlos Tavares, Renault SA - COO [28]
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Yes, Gaetan, a few comments on that. The revival plan is now being implemented, I would say, quite successfully with one specific point that I will highlight. In terms of fixed cost reduction, there is more than 25% fixed cost reduction of the Company. In terms of variable cost, the visibility for this year is a 10% variable cost reduction. We have successfully connected the local Korean dealers in support of our cost reduction activities. We have, I would say, educated our engineers not to be picky in using the Korean technology for our cars as long as that technology is used in the cars of our Korean competitors.
So I think the business focus, the business [mind] has been significantly improved. Where we still have challenges, it's in the sales and marketing area. We still need to improve the efficiency of our network and the operators. While we see that by the second half of this year, we'll have a certain number of minor changes that will refresh the cars that we have in production.
What I can tell you for 2012 is that, at the local level, the free cash flow of this Company will be positive. This was a must and it is on track to be delivered. We will expect to be breakeven by the next year. It's going to be a challenge; it's not done. But we have a certain number of decisions as you have seen, not only to help the team short term but also to give them some perspective mid-term because, as you know well, in this kind of situation mental strength is also something that we need to take to care of and giving them some visibility on the mid-term also will help to move forward. So that's the situation; it's still quite tough situation. It's still one of the things that we have in red in our radar screen but I think it's moving in the right direction.
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Gaetan Toulemonde, Deutsche Bank - Analyst [29]
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Okay, that's very clear. Still on this international operation, I understand a little bit why you're not a little bit more specific but in countries like Brazil and country like Russia, do you pay normal tax rate or do you still have some loss carried forward which limit the tax rate in those countries?
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Dominique Thormann, Renault SA - CFO [30]
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No, we have -- we pay normal tax rates. The Brazilian issue that I referred to were duty rates that were from prior years but it had nothing to do with current taxes. We're fully tax compliant in those countries.
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Gaetan Toulemonde, Deutsche Bank - Analyst [31]
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Okay. Last question, regarding the Duster, which is doing extremely well, I remembered that you had a target of selling 300,000 units this year. Is it still the number or you can increase that a little bit because I know that in some countries the waiting list is very long?
And with the initial launch of the Dokker and the Lodgy, do you get the perception that the margin are comparable to the Duster or not? That's my last question. Thank you.
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Carlos Tavares, Renault SA - COO [32]
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Gaetan, I've had time to answer your question. Between you and me, I think that we will be very close to that number but you need to know that, internally, I do not push on the sales because I don't want to destroy the business model. You need to know that we are very, very picky when we introduce, for instance, in Tangier an additional shift. We really wait until the last minute to make sure that there is the demand so I think your number is correct. We will not be very far from that, or very close to it. But, at the same time, we don't want to push the metal through the pipe. We want the markets to pull so we will let the guys continue to do the job that they have been doing.
As I said during my presentation, we have made the guides on the distribution cost, which means variable marketing expenses, fixed marketing expenses and dealer margin. We have made those guides even tougher than what they were before because we recognize that, beyond the fact that this car brings great value, it is very important that to keep those costs of distribution down as they have been so far.
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Gaetan Toulemonde, Deutsche Bank - Analyst [33]
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Okay. And Dokker and Lodgy are --.
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Thierry Huon, Renault SA - Director of IR [34]
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Sorry, Gaetan, but we are running out of time so if you could stop there it would be appreciated. So I think since we are running out of time, we'll let only one more questions. Operator, please give us the next question.
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Operator [35]
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We have a question from Thomas Besson from Cheuvreux. Please go ahead.
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Thomas Besson, CA Cheuvreux - Analyst [36]
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Yes, thank you very much. Just a quick question on a topic we haven't addressed yet. Can you comment on the RCI Banque outlook for the next 12 months, 18 months? You've managed to keep results at pretty impressive levels. Given the evolution of your refinancing rate and expected deterioration in the cost of risk, do you believe that we can expect the RCI Banque contribution to remain relatively aligned with 2011 level or is that too ambitious?
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Dominique Thormann, Renault SA - CFO [37]
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It's what I've been tasked to do, Thomas, so I think we'll be able to get there. I think I told you I'd given guidance that we'd written in a higher level of risk for this year. This was -- and the number that we're printing today is actually a little bit better than what I thought so, on that side, we're still okay. We've been able to offset lower volumes by higher penetration rates, which means that we've kept our production at a relatively constant rate, as you saw from our chart.
And the other thing that's working very well are services where we have -- in addition to using our balance sheet for financing customers, we have a very high level of associated services, debtors insurance and other insurance products which are working better this year. So, yes, I think that we'll be able to deliver a comparable performance in 2012.
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Thomas Besson, CA Cheuvreux - Analyst [38]
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Thank you very much. Can I just ask a quick follow-up here and that would be your view on the impact of customer deposits as a contribution to your refinancing needs for RCI Banque on two, three years given the success you've had so far?
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Dominique Thormann, Renault SA - CFO [39]
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I think we can reach 10% of our balance sheet.
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Thomas Besson, CA Cheuvreux - Analyst [40]
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Great. Thank you very much.
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Thierry Huon, Renault SA - Director of IR [41]
------------------------------
I'm afraid that we have to stop here. Thank you very much for being here today and if you have following questions please feel free to call the IR team whenever you want. Have a good day. Bye.
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Operator [42]
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Ladies and gentlemen, this concludes the conference call. Thank you all for attending. You may now disconnect.
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