Half Year 2014 Renault SA Earnings Call
Jul 29, 2014 AM CEST
RNO.PA - Renault SA
Half Year 2014 Renault SA Earnings Call
Jul 29, 2014 / 05:45AM GMT
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Corporate Participants
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* Thierry Huon
Renault SA - Director of IR
* Dominique Thormann
Renault SA - CFO
* Thierry Bollore
Renault SA - Chief Competitive Officer
* Jerome Stoll
Renault SA - Chief Performance Officer
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Conference Call Participants
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* Gaetan Toulemonde
Deutsche Bank - Analyst
* Charles Winston
Redburn Partners - Analyst
* Jose Asumendi
JP Morgan - Analyst
* Kristina Church
Barclays - Analyst
* Philip Watkins
Citigroup - Analyst
* Horst Schneider
HSBC - Analyst
* Rabih Freiha
Exane BNP Paribas - Analyst
* Thomas Besson
Kepler Cheuvreux - Analyst
* Philippe Barrier
Societe Generale - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, welcome to the First Half 2014 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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Good morning everyone and welcome to Renault's First Half Results Conference Call which is broadcast live and in replay versions on our website. Presentation slides, press release and activity pack for this call are all available on our website in the finance section.
I would like to point out the disclaimer on slide 2 of this pack regarding the information contained within this document and in particular, about forward looking statements, and invite all participants to read this.
Today's call is a bit earlier than usual due to a very busy reporting day, and is scheduled to last about one hour. The presentation will be made by Dominique Thormann, our CFO. It will start with a review of our operations and we'll then follow up with the highlights of our financial results and the outlook. The presentation will last about 30 minutes and will be followed by a Q&A session. For this last part, Dominique will be joined by Thierry Bollore, our CCO, and Jerome Stoll, our CPO.
Without further ado, I will hand over to Dominique.
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Dominique Thormann, Renault SA - CFO [3]
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Good morning everyone and apologies for the early morning start to all the Europeans on the call. As you have already seen from the headlines, the Group's financial results for the first half of 2014 show that Renault managed to improve its operating margin in the auto division in a contrasted environment. This comes notably from a recovery in Europe which offset declines in most of our emerging markets. It is also the result of a very good performance on the cost side as well as expanding business with our partners.
Our automotive operating free cash flow was slightly negative in the half, due to the working capital requirement, but remains under control and in line with our full year guidance to be positive. In light of this first half result, we are confirming today our overall guidance for the full year.
Let me start our performance analysis with our commercial figures on slide 5. Our Group unit registrations grew 4.7% to 1.37 million units. While we outperformed the total industry which grew 4.1%, coming mainly from the US or China where we have no presence or a very limited one, our sales hide a contrasted situation between business in Europe and outside of Europe.
In Europe, which for once was a bright spot, our sales were up 18.1% while sales in international markets decreased by 8.9%. As a result, our non-European business represented 43% of sales, compared to 50% in the first half of 2013.
The next set of slides will give you more detail by region.
Starting with Europe on slide 6, the total industry was up 6.5%. We increased our registrations 18.1% or 119,000 units, reaching a total of 776,000 in the first half. Approximately one quarter of this performance is due to the expansion of the market, but three quarters comes from our own performance. As a result, our market share grew 1 full percentage point during the period, exceeding 10%.
We're particularly pleased with the outstanding performance achieved in France, where our share increased 2.4 percentage points despite a relatively slower recovery in that market. This performance came mainly from the success of our B-segment cars, namely Clio, the leading selling car in France and third overall in Europe, Captur, also leader of its segment in Europe, and finally, Sandero. I would also like to highlight the continuing success of Duster, which was refreshed with a phase 2.
Renault brand sales increased 13% in the first half to 582,000 while Dacia sales were up 36% to a total of 195,000 units. In the first half, Dacia was the fastest growing automotive brand in Europe. The order book improved during the first half and at the close, stood at a higher level than in the same period last year.
In the Americas region on slide 7, the market was not as good. However, we were able to increase our market share in the region by half a point and limited the decline in our registrations to 4000 units or 2.1%.
As you all know, the situation in Argentina is very challenging, with auto sales off 24% in the first half. The situation remains very volatile and unpredictable. As I explained during our first quarter conference call, our business depends in large part on the availability of foreign currency needed for us to import parts and built up units. Our allocation did not improve during the second quarter, thereby constraining our ability to supply the market.
In Brazil, despite a weakening market which was off 7.4%, we managed to increase our registrations by 8% in the first half compared to last year. As a consequence, we regained 1 point of market share in the period and achieved an all-time record share of 7%. However, in making comparisons, remember that our sales in the first half last year were depressed due to the shutdown of our plant.
The Brazilian Government's decision not to increase the IPI tax in July, as originally planned, will certainly help to limit the decline in the market, but we do not believe that that decision will be sufficient to fully reverse the downward trend seen in the first half. We forecast a market decrease of 5% for the full year.
As for our own registrations, we're counting on the launch of the new generation of Sandero this month to support our business.
As you can see on slide 8, Eurasia also suffered from a downturn in the market. After having held relatively well in the first quarter falling only 1%, total demand fell 11.3% in the second quarter, as a result of the Ukrainian crisis, currency devaluations and increases in interest rates.
Our market share in Russia and in the region remained relatively stable, but our registrations declined 8% in the period. It is worth noting that we have not yet seen the full benefit of the new Logan which was launched in March.
Visibility in this region in the second half is poor. Our assumption today is that the Russian market could be down 10% this year. As for our own registrations, we will count on the launch of the new generation Sandero in the second half in order to outperform the market and grow our share.
As concerns AvtoVAZ, Renault and Nissan finalized the transaction in June and now hold together 67% of a joint venture called Alliance Rostec Auto BV, which in turn holds a majority of AvtoVAZ. At this stage, Renault remains below the 50% threshold and will not consolidate AvtoVAZ before 2015.
Turning to slide 9, Euromed was also affected by a severe slowdown. Key markets such as Turkey or Algeria experienced double-digit declines. In this context, our registrations fell 15%. As you can see from the slide, this loss came exclusively from the market, as the Group share performance held steady. We also managed to keep our leading position in the region in key markets.
Finally, concluding the regional review on slide 10, the Asia-Pacific region also faced a mixed situation. On the one hand, despite a sequential improvement in the market during the first half, our business in India declined sharply as we focused our sales mainly on Duster, which is our most profitable model.
On the other hand, we recovered in South Korea and regained share, thanks to the success of QM3.
In Iran, the situation remained constrained by the sanctions regime. We lost 13,000 units in the first half and have no visibility at this stage on how sanctions will evolve in the second half, but we're ready to restart business, conditions permitting.
This ends our sales update and I will now turn to the financial review.
On slide 12, we show the full P&L for the Group. Starting with the top line, Group revenues reached EUR19.82 billion, a decrease of EUR621 million from last year, or 3%.
The next line shows an operating margin improvement compared to the previous period. This results primarily from our cost performance and from the growth of our business with partners. Net income stood at EUR801 million, up EUR704 million compared to the first half 2013, which had been heavily impacted by non-operating charges.
Before starting the review in more detail, you will note that we slightly changed the walkdown presentation for revenues and operating profit. We did this so as to be consistent with the structure we used when we presented our midterm plan. We believe that this structure will provide you a better insight into the way we're managing our business.
In order to make sure that you can reconcile your data with our performance reporting, you will find the walkdown of the previous bridge in the appendix.
That being said, let me now start the financial performance review on the next slide, number 13, where we show the revenue contribution by activity.
Group revenues in the first half were 3% below last year despite registrations being up 4.7%. This drop came from the automotive business which showed a 3.3% decline in the period at EUR18.739 billion. Revenues from our captive sales financing company, RCI Banque, were almost flat at EUR1.081 billion in the period, versus EUR1.058 billion in the first half 2013.
I will start by reviewing the breakdown of revenues for the automotive activity on slide 14.
Starting on the left hand side of the page, the first item, volume, shows a negative impact of 2.6 points. This decrease occurred despite a 4.7% increase in our registrations during the period. This gap is explained by an adjustment in inventories in our independent dealer network that I will detail later in my presentation.
The geographic mix is slightly positive, reflecting higher business in Europe versus emerging markets. This impact accounts for 0.5 points.
Sales to partners, representing mainly the sales of parts, components and built ups to other car manufacturers was positive by 2.6 points, highlighting the strong momentum achieved by this business. The fourth item to note is the mix effect which is almost neutral, as our sales in Europe were largely driven by the recently launched B-segment products.
The fifth item is the price effect which is positive by 0.5 points, showing no improvement in the second quarter. This was due to several reasons, starting with a lower need to increase prices in emerging markets as currencies were less adverse, competitive pricing in Brazil, incentives in Europe to support aging models and an effort to reduce the inventories of independent dealers.
The next item is foreign exchange, which is negative EUR800 million or 4.1% (sic - "4.1 points"). The major impact came from the Argentinian peso, the Russian ruble and the Brazilian real.
The last item named others is minor. It represents the other activities outside the scope of new car business, mainly spare parts, wholly owned dealer business and buy back restatements.
I will now turn from automotive revenues to the Group operating margin variance analysis on slide 15.
The first half operating margin for the Group totaled EUR729 million, an increase of EUR146 million compared to last year. The walkdown on this slide compares this year's impact to the previous period, and I will start the walkdown reading left to right.
Cost reduction activities contributed positively for EUR412 million. As we explained when presenting our midterm plan, cost reductions form a necessary foundation of our margin improvement. Total monozukuri savings amounted to EUR390 million in the first half of 2014, compared to EUR206 million in the first half of 2013. Please note that the strong contribution came partly from a seasonal effect, which is different from last year. As a consequence, our first half performance will not be repeated to the same extent in the second half.
In more detail, monozukuri cost reductions came from purchasing savings totaling EUR206 million, warranty costs were negative EUR78 million, relating notably to stricter reserve criteria used for the two year warranties.
Manufacturing and logistics cost decreased by EUR165 million, reflecting better utilization of capacity as well as the positive impact coming from our competitiveness plan in France.
R&D in the profit and loss account decreased by EUR96 million in the period, as the capitalization rate moved from 40% in the first half of 2013 to 46% in the first half 2014, in line with the product development milestones.
Finally, G&A costs decreased EUR22 million, illustrating the strong efforts deployed by the Company to limit fixed overhead costs. Raw materials produced a tail wind of EUR71 million.
Mix price and enrichment impacted negatively for EUR177 million. This deterioration resulted from product enrichment, incentive needed on some aging cars and marketing expenses. For example, in Brazil we had to manage the end of life of our local bestseller, the Sandero, in a declining market, while in Europe we managed the run-out of Twingo, which is being replaced in a competitive pricing environment. We also increased our marketing investments in the Renault brand ahead of key renewals coming next year and the year after.
Last but not least, this item was negatively affected by a rebound in our European sales, which is the most competitive and regulated market compared to other regions. Since our European business represented 57% of our volumes versus 50% a year ago, this increase in sales mechanically impacted our net price enrichment negatively.
Our pricing discipline combined with our intention to reinvest part of our cost gains in product competitiveness during the planned period remains consistent with what we told you in February.
The next item which includes Group volumes plus sales to partners shows a EUR32 million negative impact. This results from a decrease in the number of units invoiced, which was almost fully offset by an increase in sales to partners that contribute to absorbing fixed costs.
We also decided to combine RCI Banque with the other businesses outside the scope of new car sales in this presentation. Combined, they yielded a positive contribution of EUR85 million.
Last but not least, adverse currency rates caused a material negative impact of EUR213 million. We did note some easing in the second quarter as well as a positive impact coming from the Turkish lira for example.
In total, for the first half of 2014, the Group's operating margin reached EUR729 million, or 3.7% of revenues, to be compared to 2.9% in the same period last year.
Page 16 shows the split by operating sector. The automotive division posted a EUR348 million operating margin or 1.9% of revenues. The performance of our sales financing activity remained the key driver of our profit, as RCI Banque posted a EUR381 million contribution to Group margin, which is EUR9 million better than the result achieved in the first half of 2013.
The next slide, number 17, provides more detail on RCI Banque's performance. New financings in the period increased materially to EUR6 billion versus EUR5.6 billion in the corresponding period last year, reflecting the rebound in business in Europe.
Average outstanding loans grew 3.3% at EUR24.8 billion, while net banking income increased 7 basis points thanks to a good contribution coming from fee-based services. The cost of risk remained under control, showing a slight deterioration at 47 basis points of average outstandings versus 0.40% last year.
Finally, costs were contained, keeping our operating expense ratio at 1.58% of average outstanding loans or 1 basis point above last year. In total, the pre-tax return on assets reached 2.9% versus 3.2% in the first half of 2013, while the return on equity stood at 17%.
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 page 18. Last year, these items were particularly negative and included the impact of the discontinuation of our operations in Iran. This year's net charges are significantly lower at EUR265 million and are mostly the result of continuing provisions linked to the competitiveness plan in France and some further impairments of assets.
Continuing down the P&L, the next item is net financial income and expenses on slide 19. The net charge decreased from EUR139 million to EUR124 million and is mainly the reflection of the carry cost of liquidity.
The next slide, number 20, shows the impact of associated companies in Renault's P&L. Following Nissan's results published yesterday, the contribution for the second calendar quarter in Renault's accounts came to EUR374 million, taking the first tier impact to EUR789 million, up EUR23 million compared to the same period last year.
Renault's share of AvtoVAZ's results, which is consolidated with a three-month time lag, posted a negative EUR55 million versus a negative EUR10 million in the corresponding period last year. As you know from AvtoVAZ's disclosure, the Company is currently implementing a significant restructuring plan aimed at restoring its profitability.
I will turn back to the P&L for the last time on slide 21 where the net tax charge for the first half came to a negative EUR264 million, exactly the same number as in 2013. Bottom line, net profit after tax came in at EUR801 million versus EUR97 million in the first half of 2013. After taking into account minorities, the net result per share came to EUR2.75.
Now that I have completed the analysis on the P&L, I will turn to slide 22 on the evolution of net automotive debt. Cash flow from operations totaled EUR1.742 billion. Changes in the working capital requirement impacted negatively by EUR861 million. Net tangible and intangible investments came to EUR1.241 billion in the first half versus EUR1.548 billion in the last year, showing our discipline in managing our capital expenditures as well as benefits coming from synergies with Nissan. As a result, automotive operational free cash flow came to a negative EUR360 million in the period.
Dividends received from quoted companies totaled EUR243 million while dividends paid during the half came to EUR508 million. Other financial items were negative for EUR345 million including the cash payments to our joint venture in China and our increased stake in Alliance Rostec Auto BV. In total, our net automotive financial position came to EUR791 million at the end of June 2014, down from EUR1.761 billion at the end of December 2013.
Slide 23 shows the inventory situation across the consolidated chain of both Renault's balance sheet and the independent dealer network. Thanks to the strong sales volume momentum and supply chain management we were able to curb our initial inventories in -- our global inventories in the second quarter. They stood at 495,000 units at the end of June versus 527,000 units at the end of March, or a 62-day supply in line with our internal target.
At the same time we were able to reduce the gap between independent dealers and group stock resulting in a negative volume impact on our P&L bridge. The stock adjustment also explains the working capital requirement which I showed you in our automotive free cash flow during the period.
This completes my financial review for the first half of 2014. Before concluding and taking your questions, I would now like to share with you our views on the rest of the year and the risks and opportunities as we see them.
Given the circumstances, we are satisfied with our first half results which support our strategy and put us on the right footing to achieve our mid-term targets. In the short term, the second half will bring a mixed bag of risks and opportunities. The main risk identified for the rest of the year remains the downward trend and lack of visibility in our main emerging markets.
As I already mentioned in my presentation, we forecast a further decline in Brazil and Russia. We have very limited visibility on Turkey, Algeria and above all, Argentina. However, our product cadence has been strong and our recently launched vehicles have performed at or above plan. The strengths of some vehicles such as Sandero will help mitigate market headwinds in Brazil and Russia for example.
In Europe it is clear that comparisons to prior year will become more challenging in the second half as the market had already started its recovery in the fall of 2013. Overall, the main risk would be for the recovery to lose momentum throughout Europe. In Europe we will also have to manage the lifecycle of some ageing products which will be replaced next year.
But there are opportunities. Based on current rates it seems fair to assume that the headwind from foreign exchange should ease somewhat and not weigh on our profitability as much in the first half. So far, the European car markets have fared better than what we forecast and with the notable exception of France, we expect this trend to continue in the second half. This has led us to upgrade our forecast for the European market which we see up 3% to 4% this year.
Last but not least, I think we can be satisfied with our improvements in our overall competitiveness. We have indeed started to see the fruits of our efforts to contain fixed costs. This should continue in the second half of the year, albeit not at the same pace as in the first half. Given our cycle plan, R&D expenses should weigh more on our operating profit in the second half compared to the first half, while the capitalization rate should not be as high.
To conclude my presentation, I want to say that we're looking to the near future with a degree of caution but also with confidence given our results. We are following the course we set with our midterm plan and have focused our energies on execution. It is with that frame of mind that we're confirming our guidance today for the full year. Thank you for your attention. I will now hand the call back to the conference operator for the question-and-answer session.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Gaetan Toulemonde, Deutsche Bank.
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Gaetan Toulemonde, Deutsche Bank - Analyst [2]
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Dominique, good morning, it's Gaetan speaking. I understood your point on monozukuri and the seasonality impact but last year you did approximately EUR600 million, EUR200 million first half, EUR400 million in the second half. This year it's roughly EUR400 million in the first half. Can we get for the full year more than last year or it's just reversing between the two semesters?
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Thierry Bollore, Renault SA - Chief Competitive Officer [3]
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Yes. Good morning, Gaetan, it's Thierry speaking. There is a clear difference in seasonality this year compared to last year, and that's why even if we are very happy to be ahead of the course, at the end of the day our prospect is that we will be in line with our initial plan and with good confidence.
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Gaetan Toulemonde, Deutsche Bank - Analyst [4]
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Okay, and the initial plan compared to last year? I saw some comment on the screen a couple of months ago that you were expecting higher synergy, approximately 20% more than last year, in terms of synergy from the alliance. Does that mean that the portion of this incremental 20% would go to the bottom line? Is that -- can we get more than EUR600 million this year?
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Thierry Bollore, Renault SA - Chief Competitive Officer [5]
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This is not what we have in mind at the moment and it is clear that if we are working at increasing our synergies with the alliance converged functions, this will come later and not in the second part of the year.
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Gaetan Toulemonde, Deutsche Bank - Analyst [6]
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Okay. My second question and last one is regarding the inventory and reduction at the independent dealer. Is most of the work done, i.e. for the second part of the year should we have kind of a stabilization?
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Dominique Thormann, Renault SA - CFO [7]
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Well, Gaetan, I think that as you know inventory follows seasonal patterns, it follows sales and the mix, the geographic mix of our sales. So where we are at the end of June is where we wanted to be. Clearly we will -- you will typically see inventory increase in Q3. The plants shut down for a number of weeks in some countries and you have to rebuild stock going into the last quarter of the year. So I would expect to see a higher day supply at the end of September and then you'll probably see it back to a seasonal pattern at the end of the year. But at the end of June we're parked where we wanted to be.
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Gaetan Toulemonde, Deutsche Bank - Analyst [8]
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Okay, thank you.
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Operator [9]
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Charles Winston, Redburn Partners.
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Charles Winston, Redburn Partners - Analyst [10]
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Yes. Hi, good morning. Thanks for taking my two questions. The impact from FX in the first half was quite a bit less than I had been expecting, and I haven't managed to go through the detail but it looks as though the drop-through perhaps a little bit less than the initial figures you were talking about. I was wondering if you could -- given that a lot of these emerging market currencies we've seen have rallied in the past two to three months, have you got an idea as to what you think the impact from FX might be in the second half and perhaps even some early thoughts for 2015, if spot rates remained where they were?
My second question is just on the price mix enrichment figure in the profit line of the bridge. Just wondering there if again, you talked about a number of items behind that. Do you think that that minus EUR177 million is going to be a good guidance for the second half or do you think that perhaps some of the moves you've made, for instance Twingo will be launched, perhaps some of the advertising that you've been doing on the Renault brand, is that likely to ease back or is another fairly large negative the right figure to be thinking about? Thanks a lot.
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Dominique Thormann, Renault SA - CFO [11]
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Charles, hi, it's Dominique. Yes, I wish I had a crystal ball on foreign exchange like many of us; I think we'd be very rich if we knew where they were going to go. But yes, the drop-through is a bit less than what we expected. Now, there was a material improvement in the second quarter clearly compared to the first quarter. The worst of it was Q4 of last year and Q1 of this year in terms of overall impact. Now, some of this also -- it takes time to react and to rebalance things internally, so we've been able to benefit from sourcing decisions in currencies that ultimately ended up being weaker and worked in our favor.
I called out the Turkish pound as one example. I think you know that we produce quite a bit in Turkey and it's export-driven. I could also mention the pound sterling which has been certainly favorable to us as our sales have increased, that has also helped offset part of the severe headwinds in the other currencies. So it's a mixed bag. Right now I think that we're calling foreign exchange as a slight positive in the second half. I don't think that from what we see today that we'll fully recapture levels that were seen back a few years ago, but certainly the trend in the last two months is definitely more encouraging and should mitigate some of the drop-through to the operating line.
On your other question on the mix/price and enrichment bucket, I'll hand over to Jerome if you don't mind.
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Jerome Stoll, Renault SA - Chief Performance Officer [12]
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Yes, good morning everyone. So for sure I was expecting a little bit this question regarding the price. I would like to make two or three comments on this specific topic.
First of all, you have to keep in mind that in our market, despite the good evolution of your European market, the global European market is at the level of 1996. So it's still very, very low and it means that there is still a kind of price war on this specific region.
Regarding the other region, outside Europe, you will perfectly understand that some of them are dropping so far, so fast and so far in that it's obvious that the price cannot be an easy issue.
Nevertheless, the second point I wanted to stress is that we have not changed our pricing policy. I mean we want to stick to what we have been doing over the last few years. We want to stay better than the basket of our competitors and this is exactly where we are today.
Obviously because our products are ageing a little bit, like Twingo, like Sandero, especially in Brazil, or like even Megane in front of some launching of new cars from our competitors, it's clear that we have to take some action regarding this and the pricing positioning as I would say have been worsening a little bit by 1 point against the basket. But we are still all in all better than the basket, as it was our policy, and it still remains our policy.
What will be the forecast for the second half of the year? We expect from the launch of Sandero in Brazil to have a better situation. We expect from Twingo launch in the second half of the year to have a better situation, better price positioning.
So as far as the products are concerned we feel more confident that we're going to face an improvement. Nevertheless, you know that in Europe the structure of our price is a little bit with I would say higher [VME] than in other countries, and if the weight of Europe still continues to increase there will be a little bit in global amount, in the global account you will see a kind of upsetting of this good news of incoming products by the mix of region which may affect a little bit our accounts.
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Charles Winston, Redburn Partners - Analyst [13]
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Thank you very much.
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Thierry Huon, Renault SA - Director of IR [14]
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Okay, next question please?
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Operator [15]
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Jose Asumendi, JP Morgan.
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Jose Asumendi, JP Morgan - Analyst [16]
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Many thanks, good morning. A few items. The first one on monozukuri cost savings and specifically on purchasing and manufacturing as well as logistic costs. I'm struggling to understand why the second half cost savings will be lower than the first half when traditionally second half has been stronger?
Second, on AvtoVAZ, do you have a margin target or a profit that you would like to see before you consolidate the assets? I think you mentioned that before 2015 it will not be consolidated. I'm just wondering how you think about it? Is it a market trend or is it a profit level within the operations that you need to see first in order to consolidate the business?
Then finally on working capital, could you please remind us what is your full year guidance on working capital base? Thank you.
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Thierry Bollore, Renault SA - Chief Competitive Officer [17]
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For the cost -- it's Thierry speaking. In fact the real issue is that we have a real difference in seasonality as I mentioned, which means that the cost savings in the first parts last year were not as high as this year, and this is also a lot explained, not that much because of purchasing or because of manufacturing cost savings but significantly because of R&D, because we know that we are going to spend more in the second part of the year than in the first part and this is reversed compared to last year, and this is the key elements of explanation.
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Dominique Thormann, Renault SA - CFO [18]
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Yes, on AvtoVAZ the consolidation issue does not relate to their own performance. I think that you know they've announced a number of restructuring moves and the issue is relating more to the integration of their accounts into ours and this is something that is currently being -- is being worked through and we'll do that in 2015 but it is not related to their own performance metrics. I think that they've announced a number of targets in the midterm which should arrive at levels which are very close to the ones that we set forth in our own midterm plan.
On working capital, it's -- there are always the seasonal variations and fluctuations but I would expect the full year to be much less negative than in the first half so you should see something that would be closer to a balanced working capital requirement, with once again our guidance, which is to deliver a positive free cash flow for the year. So that factor will -- and as you've seen from our first half, the negative free cash flow is clearly driven by the working capital requirement that increased in the period. So that's where we can guide you on cash and working capital.
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Jose Asumendi, JP Morgan - Analyst [19]
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Thank you.
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Operator [20]
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Kristina Church, Barclays.
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Kristina Church, Barclays - Analyst [21]
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Yes. Kristina Church here. Thank you for taking my questions. I just had a follow-on question on working capital again I'm afraid. Just to come back to the seasonality effect, I understand the Q3 seasonality in terms of the summer shutdowns, but I'm just struggling to understand on slide 23 exactly why your working capital swings in opposite directions between independent dealers and the Group every quarter, so that you're drawing down in the dealers but building in the Group et cetera. If you could just talk a little bit about that phasing every quarter of the year?
Then again, further, coming back to Charles' question on the price/mix impact in the walkthrough, specifically the mix/net enrichment line, the negative EUR177 million. Is some of the impact in there the negative -- the profitability of Russia, because my understanding is European profitability is stronger than the rest of the world. You've been selling very well in Europe and that year in particular when M0 brands have been selling very well, so that -- and the mix of products has been very strong with the Captur et cetera, so just trying to understand exactly what, in terms of mix, is it geographical mix or is it really, more product? Thank you.
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Dominique Thormann, Renault SA - CFO [22]
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Kristina, the -- good morning. The working capital -- the variation, the negative variation in working capital this half year is the result of an adjustment in inventory. I think that, from the graph that you're calling out on page 23, you can see that the Group stock increased in the period of approximately 58,000 units, which was kept on -- which was built for sale in the second quarter, but that was -- that value is on our balance sheet. There's, I believe, an appendix which will show you the working capital by factor, which is between your payables, receivables.
The biggest negative factor in the working capital bridge, is inventory. So as we were working through a number of transitions -- don't forget we have significant run-outs of key models in high volume segments such as Twingo, Sandero, Logan in the non-European markets and the way that it was managed through the period was to come in at a lower level of ending balance so that we could go in to the second half of the year with a clean slate and for the launch of the new vehicles.
On your mix question, the mix we're referring to is not geographic mix it's [amazingly] a segment mix. There's been more of a shift in our sales as well as in certain markets to A and B-segments versus C and D-segments, as an example. So our own cycle plan has been reinforced by the success of cars such as Clio and Captur, but also Sandero which is very, very strong and we're managing the run-out of some of the larger cars in the coming months. So that's where the mix is coming from.
I think Jerome's got a follow-on comment for that.
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Jerome Stoll, Renault SA - Chief Performance Officer [23]
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Now, just to answer more properly your question regarding the region mix and you were referring to Russia, I would say Eurasia, which is the region where Russia represents more than 90% of the total. Eurasia, we should remain with the weight of around the 8% of our total registration volume, which is exactly the same percentage in first half and second half.
Despite the slowdown in the Russian market, we expect to perform better than market and to increase our market share again in Russia because we're going to benefit from the introduction of the Sandero and the very successful launch of Logan in the very recent period of time. So we expect to increase again our market share in Russia and therefore the weight, in terms of registration, will remain the main in the second half compared to the first half.
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Kristina Church, Barclays - Analyst [24]
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Okay, thank you.
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Operator [25]
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Philip Watkins, Citi.
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Philip Watkins, Citigroup - Analyst [26]
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Good morning. Yes, it's Philip Watkins from Citi. In terms of regional profitability, I remember there was a time recently where we had a good feeling of how it varied by region. I was wondering what you'd be prepared to say about how profitable Russia and South America are versus Europe now in terms of EBIT? I mean, are you actually still making profit in a market like Russia from an EBIT perspective and in South America, given the declines in markets? Thank you.
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Dominique Thormann, Renault SA - CFO [27]
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Yes, good morning. As you know, we don't disclose regional profitability, but the main impact in Russia came from the conversion of the ruble back to euros. Local profitability was maintained, once again, with the ebbs and flows relating to normal business practices when you manage the run-out of a vehicle -- in one of our key vehicles, because we have a very limited but very concentrated line-up in Russia compared to the incoming vehicles.
So it's remained a very profitable part of our operations and once again, most of the impact, or the negative impact, is coming from the conversion of the currency. But I think that currency is most of the driving force behind some of the emerging market profitability converted back into our accounts. But as you've seen, we've managed to improve our overall margin and that's a combination of many things but the regions do contribute to the total.
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Philip Watkins, Citigroup - Analyst [28]
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Thank you. So you could characterize it as very profitable before the impact of currencies, is that what you -- did I hear that right?
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Dominique Thormann, Renault SA - CFO [29]
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Yes.
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Philip Watkins, Citigroup - Analyst [30]
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Thank you.
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Operator [31]
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Horst Schneider, HSBC.
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Horst Schneider, HSBC - Analyst [32]
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Yes, hi, it's Horst from HSBC. First of all I want to know, regarding the production outlook for H2 if you want to have higher production increase in sales growth? I mean, we have seen in H1 that the production came down and was lower than the sales growth. So that's the first question.
Then the second question that I have is, what I still don't understand is, why the revenues per unit were so low, especially in the second quarter? It strikes me that you have got a quite negative volume impact, if I'm right and despite your increase to sales, relatively significantly in Q2. So maybe you can explain again what was the reason for the negative volume effect?
Then, thirdly, it strikes me that your R&D capitalization has moved up significantly in H1, so maybe you can comment a little bit on that and maybe let us know what is the outlook for H2 on R&D capitalization? Thank you.
------------------------------
Dominique Thormann, Renault SA - CFO [33]
------------------------------
Okay, good morning Horst. Let me take the first one -- or your second question, actually, on volume. The adjustment in Q2 is coming from inventory. I think that's what is the driver behind the lower -- if you're making a calculation of revenue in the second quarter.
I'll just hand over to Thierry Bollore on the production outlook.
------------------------------
Thierry Bollore, Renault SA - Chief Competitive Officer [34]
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Yes. Good morning, Horst. It's Thierry speaking. So our prospect is to have a slightly higher production level in H2 compared to H1.
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Horst Schneider, HSBC - Analyst [35]
------------------------------
Okay, thank you. And R&D capitalization?
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Dominique Thormann, Renault SA - CFO [36]
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Your R&D capitalization rate --
(Multiple speakers)
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Thierry Bollore, Renault SA - Chief Competitive Officer [37]
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Yes, the prospect we have for the capitalization rate is that it will be slightly lower in the second part of the year compared to the first part of the year. This is linked to our cycle plan, very simply.
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Horst Schneider, HSBC - Analyst [38]
------------------------------
Okay. Just let me come back to the sales relative to production. I mean, should I assume that H2 volumes will be smaller than in H1?
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Jerome Stoll, Renault SA - Chief Performance Officer [39]
------------------------------
Now just -- Jerome speaking -- you have to also now to keep in mind the flow of revenue which comes from sales to partner. We are increasing our sales to Nissan with -- in some regions by selling the Duster, a cross-batch of Duster. They know our name in Russia and India, for instance. We are selling more and more engines also to them and we're going to start to sell to Mercedes the Smart, the Edison, in the second half.
So it's clear that the sales to partner will increase in the second half and therefore you will have less reconciliation -- clear reconciliation between the registration and the production or the volume of sales. So we will have to be a little bit more precise, maybe, through additional talk.
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Horst Schneider, HSBC - Analyst [40]
------------------------------
Okay. But it sounds as if, then, revenues in H2 will be higher than in H1, right? For automotive?
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Dominique Thormann, Renault SA - CFO [41]
------------------------------
No, we haven't said that, Horst. I think the -- first of all, it's going to depend on foreign exchange, obviously, on the currency assumption, because had it not been for foreign exchange, the top line actually would have increased by about 1%. So it depends on the exchange rate assumption that you're going to make.
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Jerome Stoll, Renault SA - Chief Performance Officer [42]
------------------------------
But normally, yes. Normally, yes. The second half will be a little bit higher than the first half.
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Horst Schneider, HSBC - Analyst [43]
------------------------------
Okay, that's excellent. Thank you, very much.
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Operator [44]
------------------------------
Rabih Freiha, Exane.
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Rabih Freiha, Exane BNP Paribas - Analyst [45]
------------------------------
Yes. Hi, everyone. Rabih from Exane. I have two questions, please. Coming back to the improvement of price/mix you talked about earlier, I think Jerome was saying that there's a big slow-down in EMs is impacting pricing. If we think about these EMs today, you have a lot of capacity coming on stream in these EMs by 2015, around 25% increase.
At the same time, if you look at the launches, I believe Captur is mix-neutral, Twingo is mix-dilutive, the Megane won't arrive before end of next year, so how can you think of an improvement in price/mix? What are the drivers behind this, aside from the Sandero in Brazil and how should we think of the magnitude of price/mix in H2? When you talk about an improvement is it H2 versus H1 and what magnitude, please?
The second question is on the sales to partners. Big drop through obviously into EBIT, was just wondering how much of this is driven by the C-class engines in H1 and how -- what type of magnitude should we expect on this because it's quite hard to forecast? Thank you, very much.
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Dominique Thormann, Renault SA - CFO [46]
------------------------------
Rabih, let me just take the sales to partners question. There are -- you can bucket it in different ways. First of all there's the LCV business, which is sales of Citan that is manufactured by Renault, sold to Daimler and sales of vans, which is the Opal and Vauxhall brand of the Trafic, which is currently rebadged and sold to them. You then have a series of vehicles and components sold within the alliance to Nissan.
So Jerome also mentioned that there's now a version of Duster sold to Nissan under their brand for sale under the Terrano badge and we also sell to them engines and mechanical components, primarily diesel engines, in the European market. Then that business was expanded for sale to Daimler with engines also -- diesel engines -- for their own brand in the A-class and B-class cars and then more to come in future years.
In addition to all of this, there's then the Twingo Smart project which is coming into production and will be progressively on sale in the coming months, starting with Twingo and then the variance of this vehicle that will be sold to Daimler under their brands. So that business is -- that's how you should view that business in terms of the -- where it's being sourced and what types of sales we're carrying out.
On your mix/price question, I'll hand back to Jerome.
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Jerome Stoll, Renault SA - Chief Performance Officer [47]
------------------------------
In our -- the two things that I wanted to make it clearer is regarding the arrival of Sandero especially in Brazil, where we do expect in second half that the transaction condition will be better. I mean, especially [TPVA] we expect to reduce significantly our VME in Brazil, because the new product is very well accepted by the market when it was presented to the journalists just a couple of days ago.
As far as Twingo is concerned in Europe it's exactly the same thing. The Twingo II, actually, was quite [aged] and in order to sustain the production in the latest -- in the later period of time, obviously we would put some VME. We do expect that with a very attractive product, that you can see on your screen now, we have a good confidence to position this product in to better -- far better situation than the older one.
So this --
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Rabih Freiha, Exane BNP Paribas - Analyst [48]
------------------------------
So it -- sorry, go ahead.
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Jerome Stoll, Renault SA - Chief Performance Officer [49]
------------------------------
No, this (inaudible) I wanted to make, obviously on the Megane segment, on the C-segment, it will be another story because the renewal of this segment will come later in the -- in 2015 and in the following months. So during this period of time, we'll have to struggle again.
------------------------------
Rabih Freiha, Exane BNP Paribas - Analyst [50]
------------------------------
Okay, but just thinking about the improvements you talked about on price/mix. If I look at the minus EUR177 million you booked in H1 this year, how much of this, roughly, is from Twingo and when you say improvements, are you talking an improvement versus H1 or --
------------------------------
Jerome Stoll, Renault SA - Chief Performance Officer [51]
------------------------------
I am not talking about this price/mix between the different versions. I do expect that Twingo will improve in terms of turnover per unit because -- in terms of TPVA because we're going to reduce the VME.
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Rabih Freiha, Exane BNP Paribas - Analyst [52]
------------------------------
Okay, but some negative price/mix in H2, right?
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Jerome Stoll, Renault SA - Chief Performance Officer [53]
------------------------------
Likely -- depending on the ForEx, for sure, but likely.
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Rabih Freiha, Exane BNP Paribas - Analyst [54]
------------------------------
Okay, thank you.
------------------------------
Operator [55]
------------------------------
Thomas Besson, Kepler Cheuvreux.
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Thomas Besson, Kepler Cheuvreux - Analyst [56]
------------------------------
Thank you, very much. I would have two questions, please. Could you comment on the inventory situation by region, please? Can we assume that the absolute volume decline you've been able to manage has effectively been achieved as well in emerging markets? That would be the first question.
------------------------------
Dominique Thormann, Renault SA - CFO [57]
------------------------------
Thomas, there's not a significant issue, or it wasn't, it's -- the inventory situation is often times driven by transit -- shipment in transit. But in -- most of the adjustment was done globally. There isn't a particular issue that I think we can call out, right now.
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Jerome Stoll, Renault SA - Chief Performance Officer [58]
------------------------------
Two additional comments on what Dominique was saying. We are facing a slight increase in inventory in Americas because we produced some cars in Brazil which were supposed to be shipped to Argentina. Because of the situation of Argentina, we have been obliged to keep these cars in Brazil during a period of time, until we adjust the production scheme, which is currently the case. So we have definitely, at the end of June, a kind of slight over-inventory in America and maybe a little bit also in India. But basically, in the rest of the world it's mostly a structural inventory based on our activity, region by region, that you can notice.
------------------------------
Thomas Besson, Kepler Cheuvreux - Analyst [59]
------------------------------
Okay, thank you. Second question, please. I understand you are not willing, necessarily, to talk much about regional profitability but in terms of magnitude of swings, could you characterize the improvements you enjoyed in Europe first? Talk about the operating leverage of this operation and how much yield will you gain on your fixed costs in H1 2014 versus H1 2013? And in Korea, which was still, I think, probably loss making in H1 2013 and should have turned positive, I assume, in H1 2014? Thank you.
------------------------------
Dominique Thormann, Renault SA - CFO [60]
------------------------------
Yes, Thomas, we don't disclose regional profitability but I think as a -- to give you a little bit of guidance, the operating -- Europe is equivalent to all of the other regions put together. So the operating leverage in Europe is much higher than it is elsewhere. It's also the part of the world where we have the most fixed assets, so clearly this has an impact. Now, that doesn't mean that structurally the other regions, as you know, are not profitable. They indeed contribute.
You're right to call out South Korea, which is in the midst of their revival plan, which was started last year -- actually, the end of the year before that. They are currently experiencing a rebound in both sales and profitability. The new vehicles that have been launched, QM3, were sold out in a matter of minutes once they were put on sale and are being delivered. So they're coming back to a positive contribution.
I think we'd guided you last year to tell you that South Korea was aiming at breaking even at the end of 2013, which is what they accomplished and they're on the path right now to delivering, actually, everything that was said in terms of improvements of their cost base as well as manufacturing, which is starting in the plant for export. So South Korea is on its recovery path.
------------------------------
Thomas Besson, Kepler Cheuvreux - Analyst [61]
------------------------------
Great. Thank you, very much.
------------------------------
Operator [62]
------------------------------
Philippe Barrier, Societe Generale.
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Philippe Barrier, Societe Generale - Analyst [63]
------------------------------
Yes, good morning. Philippe Barrier, Societe Generale. Two, quick questions. One is regarding the situation on the plant side, the industrial side. I'd like to know if there is some [lever] to expect in the second half of the year regarding some plants which should get much higher [acquisition] rate of capacities, like Sandouville or Novo Mesto or -- as well maybe in South Korea. Could we see some lever on that side?
The second point -- second question regards Brazilian operation. Actually you gained some market share in half -- first half of the year, which should -- you should gain some market share again in second half, thanks to the Sandero. In terms of profitability, are you happy with the present situation in Brazil given the volume impact, which was positive for you?
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Thierry Bollore, Renault SA - Chief Competitive Officer [64]
------------------------------
Yes, Philippe, good morning. It's Thierry speaking. I will answer the first question concerning the evolution of utilization of capacities and it is true that you will have mainly four plants which are going to have a ramp-up, very significantly, which is Sandouville, Douai, Palencia and Novo Mesto, for obvious reasons which are linked to the new products. You know in Sandouville with the Trafic and in Douai with the new Espace. In Palencia also we will have the preparation of new products, which is the C crossover and then Novo Mesto with the Twingo.
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Jerome Stoll, Renault SA - Chief Performance Officer [65]
------------------------------
Jerome speaking. As far as Brazil is concerned, we feel that we were already very satisfied with the result of the commercial result at the end of the first semester, because we reached the highest share ever in Brazil. But we are confident that with the introduction of B52 (inaudible) of Sandero in Brazil we'll keep on going increasing our market share again in second half.
So the situation is quite good in terms of market share. Obviously, as you know, we have re-forecast a drop in the market globally for the year of minus five. So we don't know exactly what will be the impact of the IPI and you have also to consider that the economy and the financial situation of Brazil is also a little bit linked with Argentina, because Brazil is exporting cars to Argentina. So I cannot tell you more about the profitability, but basically with the local business -- the local operation of Brazil -- with the introduction of B52, I feel more confident in terms of market share, at least.
------------------------------
Philippe Barrier, Societe Generale - Analyst [66]
------------------------------
Okay, thank you.
------------------------------
Operator [67]
------------------------------
Thank you. We have no further questions.
------------------------------
Thierry Huon, Renault SA - Director of IR [68]
------------------------------
Okay. So since there are no more questions, thank you for being on the call today. I know it's going to be a very busy day for you guys, but if you have further questions, [Alan] and myself will be available to answer these questions. Have a really good day. Bye-bye.
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Operator [69]
------------------------------
Ladies and gentleman, this concludes the conference call. Thank you all for your participation.
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