Renault SA (OTC:RNSDF) Q4 2013 Earnings Conference Call February 13, 2014 1:45 AM ET
Thierry Huon - Director, Investor Relations
Carlos Ghosn - Chief Executive Officer
Dominique Thormann - Chief Financial Officer
Stefan Mueller - Executive Vice President and Chairman, Europe Region
Thomas Besson - Kepler Cheuvreux
Max Warburton - Bernstein
Charles Winston - Redburn Partners
Jose Asumendi - JPMorgan
Francois Maury - Oddo Securities
Philippe Barrier - Société Générale
Rabih Freiha - Exane
Gaetan Toulemonde - Deutsche Bank
Kristina Church - Barclays
Thierry Huon - Director, Investor Relations
Good morning, everyone. Sorry for the short delay, but welcome to Renault’s Fiscal Year 2013 Results Presentation and Conference Call. This call is broadcast live and a replay version is 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 Page 2 of this pack regarding the information contained with this document, in particular about forward-looking statements and invite all participants to read this. Today’s meeting is scheduled to last about 90 minutes. We have two key speakers this morning. First up will be Dominique Thormann, our CFO. He will take you through the headlines of our financial results and then Carlos Ghosn, Renault’s CEO, will present the second part of our strategic plan. The presentations will last around 40 minutes and will be followed by a Q&A session. Dominique, the floor is yours.
Dominique Thormann - Chief Financial Officer
Thank you, Thierry. Good morning everyone. I am pleased this morning to tell you that we achieved our 2013 targets despite a tough environment in Europe. We grew our volumes. The auto division achieved a positive automotive free cash flow and we generated a positive operating profit.
Before going to the financial results in detail, I would like to start with a quick summary of our commercial results on Slide 5, which we released on January 21. Our Group sales increased 79,000 units or 3.1% to 2.63 million units. As you know, this year four out of our five regions contributed positively to this performance, only Asia-Pacific declined due to Iran. Excluding the special situation, all regions would have shown positive growth. In Europe, our sales were up 2.4% or 31,000 units while sales on international markets increased 3.8% or 48,000 units. Once again, it is worth noting that without Iran, our international business would have increased 9.7%.
Let’s turn now to Slide 6 with the Group revenues. In total, Group revenues reached €40,932 million, an increase of 0.5% from last year. Please note that we had some minor adjustments to our 2012 accounts as a result of accounting method changes. You will find a table with related numbers at the end of the pack. Revenues for the automotive business increased by 0.4% in the period to €38,775 million versus €38,612 million in 2012. Revenues from our captive sales financing company, RCI Banque increased by 2.3% to €2,157 million in the period.
Let’s look in detail at the automotive revenue variance analysis on Slide 7. Starting on the left hand side of the page, the first item is foreign exchange, which was a strong headwind at minus €1,585 million driven by the weakness of the Argentinean peso, Brazilian real, the Iranian real and to a lesser extent the Russian ruble. In total, adverse foreign exchange rates caused a negative impact of 4.1 points. The second item, volume of new vehicles sold came in at a positive 1.6 points. Geographic mix accounts for plus 0.7 points, reflecting primarily the positive development of our business in France and more globally a better balanced contribution from Europe and international operations than in previous years. This was particularly true in the second half as this item was flat in the first half of 2013. The fourth item to note is the mix effect, which is almost neutral. It was the result of the success of our B-segment cars, but also the slowdown of our C-segment range particularly before the introduction of the face-lifted version of the Mégane family.
The fifth item is the price effect which is positive by 1.3 points. This is lower than the two point improvement we showed you in the first half and is due to the deconsolidation of our business in Iran, which explained a big part of the price increase in the first half. Sales to partners impacted positively by 1.1 points reflecting the increase in shipments of powertrain and the ramp up of Citan deliveries to Mercedes. The last item named others, represents the activities outside of the new car business mainly spare parts, our wholly owned dealers and buyback restatements, the impact is marginally negative at 0.1 points.
I will now turn from automotive revenues to the group operating profit by activity. In 2013 the automotive operating profit came to €495 million meaning that we were profitable by €284 million in the second half after earning €211 million in the first half. RCI Banque posted a €747 million contribution in line with last year’s €748 million. In total for 2013, the group operating profits stood at €1,242 million, an improvement of €460 million compared to 2012.
Slide 9 shows the main variances which explain this increase. I will start to walk down reading left to right. As already seen for revenues, currencies had a negative impact of €619 million, once again the main culprits were the same currencies as on the revenue line. The next slide shows a €112 million positive impact coming from the increase in units invoiced. Mix, price and enrichments contributed €276 million. This achievement results from our efforts to defend our pricing in Europe as well as price increases to offset currency declines in emerging countries. The impact of our – the impact of the cost of raw materials is a positive €86 million.
For the next part of the walk down we have grouped four items which together form the major part of our cost reduction efforts. Purchasing savings totaled €600 million, split evenly in the first and second halves. Warranty costs increased by €63 million, while manufacturing and logistics costs impacted by €41 million, the improvement over the first half comes to €68 million and shows the first positive impact of our competitiveness programs which were deployed throughout the year.
The R&D charge in the profit and loss account decreased €50 million also reflecting discipline in this field. The capitalization rate stayed stable at 40.8% versus 41% in 2012. It is worth noting that the depreciation charge remains higher than the amount of capitalized R&D. Total savings for the amounted to €628 million. G&A costs also decreased by €18 million as a result of strict expense controls. Other items yielded a negative €80 million, while RCI Banque increased its contribution by €30 million. I will detail RCI Banque later in my presentation.
Continuing on through the P&L with the operating income and expense items on Slide 10, this year shows an unusual negative result of €1,276 million. The first item in this table is the impact of our decision regarding Iran taken in the first half that I already commented in my presentation in July. In total we booked a provision of €514 million. The second item relates to the impairment of assets both tangible and intangible amounting to a charge of €488 million. As you know we run impairment tests on a regular basis and some of our programs required some adjustments in book values. The next item is the charge of €423 million to cover part of the costs of our competitiveness plans implemented in France and to a lesser extent in Spain. The costs in 2013 is higher in France than we had suggested previously as more people signed up for the agreement. The total costs of the plan in France through 2016 will probably exceed our initial estimates, but they will be offset by additional savings as well.
Next, the disposal of assets contributed positively by €153 million. Lastly other miscellaneous items impacted negatively for €4 million. After taking into account these expenses, our EBIT is negative at minus €34 million versus €183 million in 2012 as you can see on Slide 11. Continuing down the P&L the next item is net financial income and expenses. The net charge was lower than last year by €39 million at €282 million despite the higher carry cost of liquidity. Non-cash items had a positive impact of €50 million mainly coming from lower provisioning for distressed suppliers.
The next Slide #12 shows the impact of associated companies in Renault’s P&L. Nissan contributed €1,498 million to our 2013 results. This was €285 million more than last year. Renault’s share of AVTOVAZ results, which is consolidated with a three-month time lag came to a negative €34 million, a deterioration of €220 million compared to last year when AVTOVAZ benefited from a one-off gain coming from positive changes in its long-term debt conditions. In total, the contribution from associated companies fell €31 million compared to 2012. As a reminder part of this variance is also due to the absence of a contribution from Volvo, which was no longer consolidated starting in September 2012.
I will turn back to the P&L on Slide 13 with a net tax charge for 2013 came to €433 million compared to €549 million last year. Bottom line net profit after tax came in at a positive €695 million versus €1,712 million in 2012 that included the capital gain on the disposal of the Volvo shares. After taking into account minorities the net result per share came to €2.15.
Now that I have completed the analysis of the P&L, I will turn to Slide 14 on the change in that automotive debt. Cash flow from operations totaled €2,914 million. Changes in working capital require – in the working capital requirement impacted positively for €790 million. Net tangible and intangible investments came to €2,877 million, flat versus last year. As a result automotive operational free cash flow came to a positive €827 million. Regarding dividend flows, dividends received from quoted companies in the period totaled €432 million, while dividends paid during the period amounted to €537 million. Other financial items came to a negative €493 million including the cash payments made for our increased stake in Alliance Rostec Auto, which is the joint venture we established to carry the investment in AVTOVAZ. And the impact of the deconsolidation of our business in Iran where we had positive cash balances. In summary, net automotive cash increased by €229 million and came to €1,761 million versus €1,532 million at the end of last year.
Slide 15 shows you the status of our inventories at the end of the year. The number of cars has decreased 15,000 units since the end of Q3. In number of days, we came in at 63, a decrease of 12 days versus Q3 and two days lower than last year.
I would now like to move on to the automotive liquidity reserve on Slide 16. Cash and cash equivalents totaled €10.7 billion at the end of December, up €0.6 billion compared to the end of last year. Together with the fully available undrawn credit lines, the automotive gross liquidity reserve stands at €14.1 billion at the end of 2013. I would now like to take a few moments to give you a bit more detail on RCI Banque’s performance on Slide 17. RCI Banque’s new financings increased by 5.5%. Thanks to the continued international development of RCI notably with a consolidation of the Turkish and Russian subsidiaries. The rise in penetration rate our new vehicles financed and finally an increase in pre-owned vehicle financing contracts of 6% in 2013. However, average outstanding loans were flat in the period as the conversion in euros was negatively impacted by the weakening of the Argentinean peso and Brazilian real.
The cost of risks stayed fully under control at 42 basis points of outstandings in line with last year. Operating expenses were down slightly at 1.56% of average outstanding loans. In total, the pretax return on assets reached 3.07% versus 3.22% last year giving a benchmark return on equity of 20%. RCI’s liquidity position has also remained strong, as we can see on Slide 18 with €7,500 million of liquidity reserves at the end of 2013, up €600 million over the prior year. RCI Banque’s dependence on the capital market was significantly reduced with the successful retail online banking activity that you can see on Slide 19.
Total deposits taken in 2013 represented 52% of RCI’s funding requirements. Following the successful launch in France of Zesto savings plan in 2012, RCI Banque launched a similar savings program in Germany at the end of December total deposits amounted to €4.3 billion of which €3 million from Germany. RCI Banque’s retail deposit taking should represent 20% to 25% of total outstandings by 2015.
That completes my financial review for 2013. I will now pass the floor to Mr. Carlos Ghosn. Thank you very much for your attention.
Carlos Ghosn - Chief Executive Officer
Good morning ladies and gentlemen, the 2013 financial results that Dominique Thormann has presented to you mark the midpoint of our six-year plan which is Renault 2016 drive the change. During my presentation I will take time to comment on the past three years before unveiling the main goals and action plan we have set for the next three years. In 2011, Renault’s priority were to restore growth in unit sales while generating free cash flow. As you know our two metrics were to reach 3 million units sales while obtaining a cumulative €2 billion in free cash. In business terms, this meant transforming Renault from a regional to a more global player, 50% of our sales are now generated outside Europe.
In Europe our sales are supported by a product offensive with cars that so far have well attracted customers. These cars, three cars particularly symbolize this renewal. The first one, to embody our new designs strategy and open the way for a full transformation of the line-up is Clio. It is connected vehicle via Airlink, recognized today as being among the best multimedia systems in the world. Clio is also best in class in CO2. Next is Captur, the second pillar of our B segment renewal we launched it in April 2013 and it quickly became the number one selling cross over in France and segment leader in Europe. And last but not least ZOE, which is our flagship even though sales are still below planned, it is a leading selling EV in Europe and achieves the highest customer satisfaction rate of any car in the Renault range.
The impact these vehicles have had on our performance in B segment is significant Renault has recaptured first place in segment share in Europe and turning a profit. We have also seen notable improvement in third party assessments of the brand’s image in France, Spain, Italy, Germany and Turkey. At the same time we expanded the M0 range of products to a total of six vehicles. This highly integrated and competitive platform allowed us to sell over 1 million units in 2013. In 111 countries around the world M0 products are now assembled in eight manufacturing sites.
Duster has become a global success. It is a number one selling Renault model world wide, number one SUV in Russia, number two in India and Brazil and Argentina. Duster is a driving force behind the M0 vehicles which have become the highest contributors to our profitability. In light commercial vehicles we have also been busy renewing our line-up with the success of Master. Renault is also number one in European LCV market and Kangoo EV is the leading selling all-electric LCV. Through our partnership with Daimler, we also started producing and delivering the Citan LCV for the Mercedes brand. All of this product activity has made Renault a more global player. The M0 platform has been a key driver in meeting customer requirements in emerging markets. As a result sales outside Europe increased substantially from 37% of our total in 2010 to 50% today. Five emerging markets now rank in the top ten markets of Renault with Brazil coming in second place, Russia in third. In addition with the exception of Algeria were already one in every four cars sold is a Renault, we gained market share in every emerging markets since 2011.
In India, where we re-launched our operations in 2012 leveraging Nissan’s presence, we achieved 2.2% market share. However, notwithstanding these advances, little did we know when these cars were planned that Europe was on the verge of an even sharper downturn than in 2008 with the debt crisis leading to post-war lows in automotive sales in many companies. Retail sales dried up affecting the entire automotive value chain as policymakers struggled to contain the crisis. We had forecast an increase of 6% in European total industry volume during the plan period. After an 8% drop between 2008 and 2010, the market actually dropped another 10% reaching a 20-year low. This caused a 16 points gap, which added to the collapse of the Iranian market for us could not be offset by our strong momentum in emerging market. As a consequence, our objective of selling 3 million vehicles in 2013 was not met. However, thanks to the effort of the entire company.
We maintained a strong cost and financial discipline and surpassed our cumulative automotive operational cash flow commitment of €2 billion. The past, our objective turned out to be quite different from what we planned, but because we maintained focus on our priority and we acted on them we were able to withstand a particularly trying environment. It is with these lesson learns and strengthened by this achievement that Renault is looking to the future with renewed confidence. In the next three years in the field of vehicle and product development, we will implement the Alliance CMF modular platform design strategy which has already been launched by Nissan. This approach will allow us to address the main product challenges of the next several years by giving us the benefits of scale that we could not have given our own size. Thanks to the Alliance. We will be able to sustain this high level of product and technology development while maintaining the CapEx and R&D ratio below the 9% cap on revenues that we introduced in 2011.
As the cost of regulatory features and technology increase, platform consolidation and scale become inescapable. Through the alliance with Nissan, our modular CMF design strategy will give us two platforms with 3 million units. The CMF, C-D and the CMF B platforms will count among the industry top five global platforms by units produced. 80% of our future launches in the same timeframe will be produced on these platforms. Through this strategy, we are expecting saving of at least 30% in development cost and 20% to 30% in procurement costs. Two-thirds of the value of a vehicle will come from standardized modules, which is double the level achieved today. With the increase of our sales outside Europe to 50% today, our parts and components souring is being adapted to better match our production footprint. By 2016, we are aiming for 80% local sourcing. Maximizing locally-sourced vehicle content is also the only effective way to permanently balance cost and revenue by currency thereby avoiding unnecessary foreign exchange risks.
In the case of Europe, cost efficiencies will come from a better utilization of our capacity. Through a combination of higher Renault volumes coming from our product plan and the allocation of production for the Alliance as well as for partners, the utilization rate of Renault plans will reach over 100% based on a standard to shift better. This reinforces our commitment to honor the terms of the competitiveness agreement signed in France, which calls for 700 and 10,000 units of local production in 2017. A strong product plan and a disciplined pricing policy are tied together. In the past three years, as we were renewing our product lineup, we focused a lot of attention on pricing, where Renault was selling at a discount to both the price leader as well as against a basket of competitors in the mass market in 2011. We have closed the gap to the leader by more than half and now trade at a premium to the basket, as you can see on this chart, maintaining that discipline will be all the more important as we continue on our product offensive.
Pricing is not only about visual or transaction price it’s also about channel mix, fleet mix, sales finance and associated services. At the end of the day, pricing is what determines the quality and depth of the revenue line. There is no problem as a car company that good products would not solve an efficient, profitable and global product plan remains today the key driver of growth and market expansion. Competitive products are what support our dealers and the entire automotive value chain through sales finance and associated services. The product offensive that started successfully in the first half of the plan will accelerate in the second half. Not only we will be renewing core models in our lineup, but we will also be significantly expanding our market coverage to better compete internationally. It is clear that will be done by leveraging as much as possible the scale of the alliance.
Building on the success of the M0 range, we are going to launch an additional vehicle in 2015 in order to address entry vehicles demand in emerging market. Our aim is to offer a modern vehicle priced at around €5,000 with the focus on India and South America. It will be based on a new alliance CMF-A platform developed at RNTBCI in Chennai, India. In the A segment in Europe, we will launch new Twingo at the end of this year. It will be produced in Slovenia on the innovative platform developed with our partner, Daimler.
Starting in 2015, our C and D segments vehicles will be entirely renewed also using a CMF platform. In Europe, they will be produced in our plants in Douai and Palencia. The CMF platform approach allows us, as an example, to develop the next generation Megane on a 3 million unit platform compared to 700,000 on the current platform or the new D sedan on the same 3 million unit platform compared with 160,000 units for Laguna today. We will successively launch the replacement of Espace, Megane, Scenic and a new D sedan. In crossovers, we are going to extend our range following the success of Captur in the B segment with our first foray into the C and D segments, these vehicles are being designed with China in mind.
Lastly, in addition to renewing the traffic van for Europe, we are going to broaden our light commercial vehicle range with two new pickups, also a first for Renault, in order to better cover global demand. In particular, affordable and rugged pickups represent a growing opportunity, especially in South America and in Africa. So how does this translate into business objectives for the next three years of our plan? We have set ourselves two key objective, which will measure growth and profit. Let’s start with the growth in order to capture all aspects of our business including vehicle sales, associated services, sales to partners we have decided to focus on optimizing our top line. Our target is to generate €50 billion in consolidated revenues by the end of the plan period, which we will measure in 2017. This target assumes our current scope of consolidation and was calculated using a foreign exchange rate consensus forecast available early January 2014.
Clearly, any significant changes in currency rates, up or down could affect our turnover, which is consolidated in euros. Of course, we will not lose focus on our core automotive business and the importance of obtaining competitive market share. Growth will be primarily driven by vehicle sales, which should reach 3.3 million units globally by 2017. Strengthening our brand remains a priority and we will continue to build on the achievements of the first part of the plan. The product plan, innovation and quality are all intended to reinforce our brand.
Beyond the extension of our range, we also aim to improve the appeal and competitiveness of our car by introducing innovations that are useful, desirable and affordable. Autonomous and connected vehicles represent a huge business opportunity that will come to the markets step by step before full completion by 2020. Airlink is a good first step of what connected multimedia systems represent. We intend to maintain our dealership in environmental responsibility. On the one hand, we will continue the development of a competitive offer of electric vehicles. On the other hand, for internal combustion engine, Renault will stay among the leaders in CO2 performance. At the end of the day, what matters in terms of product competitiveness, what customers say about our vehicles, customer satisfaction and overall opinion are the drivers of share and profitability.
Our renewed sales and marketing team is fully engaged in supporting three simple goals, sustain Renault as the leading French automotive brand in the world, move and sustain Renault up to the number two brand in Europe, sustain the Dacia brand as the undisputed leader in its category. As you know, growth without profit is unsustainable in the auto industry. During the next three years, we will maintain the fiscal discipline that we have demonstrated in the last three years. Our cumulative automotive free cash flow commitment proved to be the right metric to manage the company with particularly as we were going through the European crisis. Now, that our balance sheet has been restored, which we had committed to doing in 2011, we are targeting a sustainable consolidated operating profit margin of at least 5% at the plan completion. However, we will not lose the focus on free cash flow and we will hold ourselves to generating a positive automotive free cash flow each year of the plan.
As you can see from this chart growth alone will not take us to our objective reaching more than 5% will require a significant contribution from the cost side of the equation. Our cost reduction activities will continue to drive our competitiveness with the contribution of at least €600 million per year. But we must also be pragmatic and recognize that there are events that are unpredictable such as adverse movement in the prices of the raw material, our currency rates, which could have a negative impact in our profit, while other events are more predictable such as regulatory costs, vehicle enrichment costs. We know today that our ability to pass them on is limited.
We know that if we want to reach a sustainable 5%, we have obviously to plan for much more. We also keep in mind that one of the key byproducts of sustaining a competitive automotive profit margin is returning to an investment grade rating. Every plan set out its own objectives such as the ones I have just described, but every plan period is also time spent preparing for the future. Just as we spent time preparing to launch the products and technology that will come to market in the next three years, so too will we be preparing the products and technology to be launched beyond 2016.
Most significantly we will be preparing our entry in China. China is Renault’s new frontier and perhaps it’s biggest ever. After obtaining all the necessary approval, we signed an agreement to create a joint venture with Dongfeng last December. Leveraging off of Nissan’s experience we immediately began construction of an industrial facility in Wuhan which will have a capacity of 150,000 units by 2016 as a first step. The product plan has already been determined and will focus on crossovers mainly in the C&D segment in the first stage. We are encouraged by the initial reactions of our customer clinics on these products. Given the scale of our project and is important to Renault global competitiveness, China will receive our undivided attention.
At the end of last month we announced a project to further integrate selective key functions in the lines. Once this project is approved following works council consultation, purchasing, HR and large parts of engineering, manufacturing and supply chain will be placed under single Alliance leadership. The objective of this change is about increasing synergies and efficiencies for both companies. As you know from the very first days of its foundation the Alliance has always been about synergies and improving the performance of each company. By taking this additional step, we have visibility to reach a minimum of €4.3 billion in synergies in 2016. More than ever the Alliance is making Renault’s plan more robust. This project will allow us to avoid significant cost and investments that you would otherwise have to spend to extend our range and fuel our growth. It will also allow us to reduce costs through more commonality and give us the benefits of greater scale.
We are a €2.6 million car company starting to benefit from an €8.3 million scale. Our objective for the second half of our plans are ambitious, yet to realistic. They are ambitious because they require a high level of discipline and focus on execution with a strong commitment from every corner of the company to deliver a level of sustainable performance that was never done in our past. But they are realistic because we have already made most of the necessary decisions and investments. The action plan needed to accomplish our goal for the next three years are identified and already started.
Renault has a clear and focused strategy today’s automotive world is concentrating around few high volume and competitive players through the alliance with Nissan and AVTOVAZ, Renault is one of those. I know some of you have questioned the speed of our progress and I understand the difficulty in comparing us to others. The Alliance is unique in its longevity in the industry there is no comparable model. It is the only comprehensive global alliance to have lasted. This doesn’t mean that we have reached the full extent of our potential far from it, but it is by pragmatically and carefully planning next steps that we will extract more from the alliance.
Our guidance for 2014, which is the first year of the plan, is consistent with the objectives I have just laid out. We are forecasting European market to stabilize, but still at the low level. At the same time, growth in emerging markets will still be driven by China, but is more uncertain elsewhere. We aim to increase registrations and group revenues, improve our operating margin, including that of the automotive division and achieve a positive operational free cash flow.
Furthermore, I propose to the Board of Directors that we maintain our dividend at €1.72 this year. This means that we are going beyond passing through the dividend received from associate as we had committed for the first part of the plan since the fall of the yen would have meant reducing this year our dividend which is paid in euros. In the future and subject to the generation of sufficient cash, from now on our dividend policy will aim to offer returns to our shareholders in line with those of our peers. Thank you for your attention. We are now available for your questions.
Question-and Answer Session
Thank you, Mr. Ghosn. And now we will open the Q&A session. So we will start with Thomas.
Thomas Besson - Kepler Cheuvreux
Thank you. Hi. Thomas Besson, Kepler Cheuvreux. I have three questions please. First, I mean, you have made several comments about changes in the industry and Renault Nissan being one of the three, four, five companies that will have several platforms above 2 million, 3 million units. Can you give us your view about how the smaller players are going to evolve and be eventually captured into one of these bigger organizations? Shall I give all questions?
But frankly, I don’t spend too much time worrying about what these guys are going to do. I think that we have already enough on our plate, but I would suspect that a lot of them going to have to hook to big player. That’s what’s going to happen, which means it’s going to be very – maybe the hooking is going to be on a lot of things. For example, you can imagine a smaller company joining the alliance or getting the technology from the alliance where they cannot afford to develop it, which by the way is something that you start to see in Japan, where some of the small Japanese players are starting to go to Toyota or go to Nissan in order to get electric trains, platforms, cars coming from the product plan of one company.
So, you are going to see more and more of these, but I would personally think that you are going to see more alliances one way or the others, contracts hooking from the small players to the larger one, because I am going to tell you, that means the big change in the auto industry is the fact that now the biggest one are the most competitive. Well, it was not the case 10 years ago. The largest car manufacturers were not the most competitive. Now, between the larger, you have the most competitive, which is a big threat for the smaller players. So, if you – and when we see the – in our negotiation of the contract for the cars coming on C, D for Renault, when you have a platform of 3 million cars, well, the negotiation with your suppliers and the cost of the investment is completely different. And we can see it, we can measure it. So we can imagine how difficult it’s going to be for the smaller player, particularly those who don’t enjoy a high price premium to allow them to compensate for the lack of competitiveness. My opinion is they are going to have to hook up one way or the other and you are going to see a lot of innovative cooperation between carmakers coming.
Okay. And this is driven also by technology, that’s not – this is not an industry of commodity. Electrification of power train, autonomous driving, connectivities, the multiplication of the safety features into the car, all of this is going to be driving for more investments, more technology and you are going to have to have also more localization if you want to compete. I can give you the example of Russia. That is an interesting example. In Russia, Renault is a leading brand after Lada, where we have – we are very profitable. We have grown in a market which was down. What’s the simple reason for this? Yes, we can say our product is pleasing, but this is the same product that we are selling somewhere else, Duster, Sandero, Logan. The big difference is we are much more localized, much, much more localized. So, when the ruble goes down we suffer, but we suffer much less than our competitors, which give us a big advantage. But if you want to localize, you need to have the volume. So, if you can’t have the volume by itself, you’re going to have to hook to with somebody else. So, it’s a kind of circle where you have to somehow get a minimum level of scale if you want to be successful. If you can’t get it by yourself, you’re going to hook with somebody else.
Thomas Besson - Kepler Cheuvreux
Okay, second question please. Can you elaborate a bit more on cash redeployment for Renault and Nissan? I mean you’re targeting a substantial increase of your operating profit. That should more or less double, or a bit more between ‘13 and ‘17. You’ve paid a bit of your free cash flow now in dividend. What do you mean by paying something in line with peers? Does that mean a 3% dividend yield, 4% dividend yield?
Yes, well, as you know, our plan €50 billion in 2017, 5% operating margin makes operating profit at €2.5 billion. This is obviously without AVTOVAZ. But, you know that AVTOVAZ should be consolidated at this time and objective of AVTOVAZ are very clear 20% market share in Russia and 6% operating margin. So, AVTOVAZ, when Bo Andersson will complete the turnaround of AVTOVAZ should be a positive addition to Renault. So, there will be at least €2.5 billion of operating profit, but we can say today is first we’re stopping the pass-through policy. We think we today have a reasonably good balance sheet in order to go beyond passing through and the second element is the first reference is what our European peers are doing. Obviously the European peers the situation is very different from one to the others, but what we are committing today is to say it will be at least comparable to the European peers. That’s what we can say today so, we are eliminating the passing through. There will be a payment of dividend from core business and will be at least at the level of the average European peer. Now the European peer you have very different situation so, that’s why for the moment we just say comparable to the European peers.
Thomas Besson - Kepler Cheuvreux
Okay. Last question for me, please. On a specific segment where you used to make a lot of money, LCVs, what is your expectations of the recovery of that segment in Europe and globally and is it fair to say that this is one segment where you should materially improve your operating profit in the next two to three years?
There are two hopes for LCVs. Even though, we are being a little bit conservative in our plan for LCVs. The first one is a recovery of the European market. As you know, this plan has been build with European market stable so, I admit the fact that it’s a little bit conservative, okay, but you never know with Europe, we prefer to be conservative because there are still a lot of problems ahead that have not been solved, but we are very sensitive to the European operation because it’s still about 45% or 50% of our sales so, we can see immediately when Europe start to go up or easy for us not only in terms of volume, but even in terms of profit. But we said okay, though you consider that Europe is stable. LCV in Europe, we’re not counting, we are number one – we are the number one brand. We’re not counting on a big growth of LCV. We are newly renewing our product line up, but I don’t think this is not where the opportunity will come. The opportunity will come from the fact that we are mainly a European LCV company while we have a lot of opportunity with LCV outside Europe and this is where I am expecting much more growth both into the emerging market and also with Nissan. As you know, we’re going to come with two pickup trucks. One of them will use the platform of Nissan of the one-time pickup truck. The other one will be based on an M0 platform. And we think pickup truck will be one area of expansion, very – in a certain way at our reach, this is not the kind of premium market, this is the market which is totally compatible with our existing customer base.
Max Warburton - Bernstein
Thank you. It’s Max Warburton of Bernstein. Two questions please, one for Dominique. Dominique, just on FX this year in your budget, what is the like the year-on-year impact of FX in the operating profit walk? And then the question Mr. Ghosn, Mr. Ghosn, you’re probably the most highly regarded CEO when it comes to relations with the Chinese government. The relationship with Dongfeng has been incredibly fruitful and they seem to feel that you have – you’ve done more of the most to build the industry there. When we look at this deal with PSA that’s supposedly imminent, is this deal, e.g. them investing in PSA, is it good for Renault and what advice would you have to them as they make the step?
Okay Max, I’ll take the foreign exchange. We wrote in a negative assumption so, we wrote it in as a headwind as a matter of fact we showed you the chart, we wrote it in as a headwind for the full plan period. We did this not knowing that the current turbulence in the market is something that’s – that was on top of our assumption, but if you look at the impact because of sourcing, which is now moving more towards the where we’re localizing production. We’re reducing the impact so far roughly if we take a 1,000 hit at the top-line, a third of that only falls through to the profit line as a rough guide. So, we wrote in a negative number for 2014 in our assumptions.
Max Warburton - Bernstein
How much, that I can tell you, but the order of magnitude is bigger in 2013, it’s the biggest that we’d suffer recently, but don’t forget that we have currencies and raw materials often act in opposite directions so, two years ago we had a €500 million and some odd million hit to raw materials whereas foreign exchange was positive by few million. This year, it’s the reverse so, order of magnitude is not going to be very much different, but hoping you plan for the worse and hope it doesn’t happen. But this year, €600 million, hopefully a little bit less than that.
In fact if I can add something, I don’t think the impact on us is €600 million, a €600 million minus the pricing that was driven by the collapse of the currencies just to be fair. So, part of the pricing and the mix which is positive. It’s not due to our own effort. It’s due to the fact that when the ruble collapse, well obviously gives an opportunity to add 1%, 2%, or 3% of the price of your cars. Even though, our pricing has been more conservative than our competitors because of our localization. So, I mean, the impact on our bottom-line is apparently €600 million, but in that it’s not because some of the pricing we have to admit is driven by the collapse of the currency. Now, on your questions about Dongfeng, yes, I mean, we have been working with Dongfeng for more than 11 years and I think I’m not worried about whatever will happen because I know that Dongfeng has a long tradition of compartmenting their relationship with different carmakers. When we started the relationship through the contract that Nissan signed with Dongfeng in 2013, a lot of people were worried about the strong relationship existing between Dongfeng and Honda. And, as you know the relationship between Honda and Nissan, I’d say it’s little bit comparable to the relationship between Renault and PSA.
Frankly, I don’t think this has been a handicap for Nissan. Nissan developed very well, have grown very well. I don’t think ever we have seen any passing through of information or strategy whatever between Honda and Nissan so, we’re pretty confident that the Dongfeng team has a long tradition of putting compartments between their relationships and I don’t consider it a good news, I don’t consider it a bad news, I just think for us it’s not relevant, I don’t expect any good news, I don’t expect any bad news coming out from it at the beginning and obviously this will depend on what will be coming in the next – in the next years.
Okay, thank you. We’re going to take a question from the call now.
We have a question from Charles Winston from Redburn Partners. Sir, please go ahead.
Charles Winston - Redburn Partners
Yes, hi, good morning. Thanks for taking my questions. Two quick ones from me. Can I just go back to the comments Mr. Ghosn made just about pricing in emerging market. Could you perhaps fresh out some of the actions you’ve taken so far given that the recent EM currency crisis, and perhaps what we might expect in terms of pricing overall, perhaps also touching on the pricing environment in Europe at the same time. And then just secondly, quick points of clarification, I think in the presentation you talked about Monozukuri gains being at least €600 million per year throughout the period of the plan. Any idea on cadence of that? In other words, should that be accelerating as we come forward to the end of the period, as new models start going onto the CMS platforms or should that be €600 million fairly flat and does that figure include any cost savings that you’ve arranged with the talks with the unions in France and Spain? In other words, is the – that local labor restructuring included in the Monozukuri targets, or is it separate? Thank you very much.
So the first question was…
Price emerging markets, the measures we have taken.
Well, obviously, it’s market-by-market, I mean, the situation is very different wherever you are in Russia, wherever you are in Argentina or wherever you are in India because our own situation is not the same, our level of localization is not the same. So, the pricing opportunity are not decided centrally, there are less at the level of the region – every region decides. The regions commit to a profit and when they see that the currency is collapsing and it’s hitting their bottom-line, they need to find the right balance between increasing the price and the volume of their sales. They’ve done it pretty well. Obviously, some regions have been more successful than the others. I think the champion has been our Russian team, which has a record year in terms of profit and Russia today is in terms of margin, the highest margin country for us and in terms of total profit, the second largest – the second largest most profitable market after France.
And obviously Argentina is another case, India is a third case. But I can tell you that, I mean, everybody knows that when the currency collapse you have to increase price. The only question is when, how, how much, on what product and this we leave it to the region. We don’t interfere with the region because we are afraid that will make mistakes. These are very sensitive decisions to be made product-by-product, segment-by-segment, I would say from time-to-time even customer – mix – channel mix by channel mix. The second question?
The second question was about our expectations in terms of acceleration of Monozukuri coming from the common platforms.
Yes, well, yeah, we’re putting €600 million obviously it’s a conservative number. It should accelerate with the renewal of the product line up because it’s easier, because we have new platform that’s for sure. On top of this, the accord de competitivite in France and in Spain should also help us. We have been a little bit prudent because, as you know into the total delivery cost, what we call the efforts done by our competitiveness, we are including a lot of elements including enrichment, including regulation, including competitive action. That’s why when you’re talking about €600 million. We’re talking about some kind of net where so the – that the total amount is much higher than this. But from this amount, you have to extract some of the regulation cost that cannot price or the competitive enrichment that you cannot price. But, I agree with you that it should go up particularly with everything we have been preparing for which mean new platforms, accord de competitivite higher level of utilization of capacity. Let me just open a parenthesis about higher utilization of capacity, yes, we’ll be at 100% capacity utilization by the end of the plan because of everything what I explain.
This doesn’t mean that it’s, okay because we still need many plans to produce 710,000 cars in France, while some of our competitors can do this volume with one plant. So, I would say that from a situation where we have a lot of plants under-utilized, we’re moving to a second best which is a lot of plans fully utilized, but we are still below the level which consist or say if you have to reorganize all of this, would you need all of this? Certainly not, okay. But again, we are realistic people, we are very pragmatic. We knew what can be done and what cannot be done. So, we are moving up from one step to the other taking consideration what can be done in the present environment.
Okay, thank you. We’re going to take another question from the call.
We have another question from Jose Asumendi from JPMorgan. Sir, please go ahead.
Jose Asumendi - JPMorgan
Good morning. I have three items please. The first one, could you please explain what could be the expenses for the implementation of the competitive plan in 2014 and the cost savings derived from it and the second one on the 2016 target. The 3.3 million units you mentioned, is this including China or excluding it and how should we think about the development of Brazil over the next three years? And then finally, I’m just interested to understand in your planning what is the minimum operating margin that you are targeting for the autos division in the mid-term and should we just think about it – this as 2013 is the lowest level you have achieved and we should see a recovery over the next years? Thank you.
Okay. So, why don’t start with – a few of the – your financial ones. On the competitiveness plan, as you know, according to accounting rules, we reserve our accounts as people signup for the plan. So, there was an initial assumption because the plan is open until 2016 so, there was an initial assumption made of the number of people and the profile of the people because it’s driven by individual age and individual situation. So, we have a reserve at the end of the plan which – at the end of the year 2013, which is in line with the number of people who signed up. We had more in 2013 and we initially assume so, there is more in 2013 accounts. That said, the plan to be designed to be frontloaded so, that’s relatively good news. The guidance that we gave is that the plan should contribute compared to a do nothing scenario should improve our competitiveness by €500 million. And as we go forward, we’ll give you more guidance as 2014 becomes clear, but that’s the best number we can use right now.
As for the two other questions, you have one question on the 3.3 million units that the CEO referenced in his speech and asking whether that includes or excludes China. So, the China as you know, the industrial operations we’re going to be spend in 2014 and 2015 building a plan today, we are very small sales in China and in 2016, there will be some sales coming out of the factory in China that will be producing cost. But it’s not the major driver of the increase in sales in the plan period. Then I think you had a question on the operating profit margin. We’re guiding to a 5% operating – consolidated operating profit margin that is being driven by the automotive side of the business. I think you saw that in our accounts at 3% this year, the automotive side is 1.3% and the RCI is really pretty much stable compared to last. So, I’m not saying that RCI won’t improve, it will. I’ve been test by the CEO to make that number go up, but the main drivers fairly going to be the automotive margin.
Okay. Thank you. Francois, in the room.
Francois Maury - Oddo Securities
Francois Maury, Oddo Securities. Today is the most dynamic and profitable market in the worldwide China and U.S. So, you’re not presenting these two markets. You have announced something in China. Should we expect something to come into U.S. and should we – in fact, should something happen with Mitsubishi? So, could you be more specific on this agreement?
Yes. Well, you know, I don’t think frankly is very reasonable for Renault to envision anything in the U.S. in the foreseeable future. Because one of the sickness of the past as we had too much planning and not enough occupying the market. Okay, we’ve been to Russia very quickly, but for many years we didn’t do anything with Russia. We’ve been to Brazil very quickly. We didn’t do anything with Brazil. It took us 8, 9 years to start to make profit in Brazil. We have been to India, we took a bath, we have to comeback with Nissan, why because this story of going to a market, putting a flag, but then there is no troop to occupy the land doesn’t work. So, we have to be cautious or – United States for me is out of the picture because obviously we can plan it, yes, we can have great plan.
We’ll have lot of agreement, but as long as we don’t have a strategy to get the market share and make it profit and really get a return on our investments. We’re not going to do it. We have plenty of opportunity in the United States, we just refusing them because now we need to concentrate on China. We are not going to go to China to sell 150,000 cars. We – China, the first step is get our global market share in China. We have today 3% market share in China. Hopefully, we are going – 3% market share globally. Hopefully, we’re going to 3.5%. Obviously, our presence is not on the total market that’s why you’re so small. In fact, on the market where we are present we are in much higher – we have a much higher market share, which means that China is more a 600,000, 700,000 cars a year potential then 150,000. But this means in order to deliver that, we need to build plans, bring cars, make sure we are concentrated on it.
And if we open another front, I’m afraid that we’re going to fall into some of the weakness of the past that we rush to establish our presence and then there is not enough focus. There is not enough focus in order to get the best out of the market. The story of Brazil is interesting. Renault went to Brazil in 1997, okay. From 1997 to 2008, practically, we didn’t make any money, for 10 years. And we practically didn’t progress in terms of market share. The market share progression started immediately after when we came with the decent product line-up, we started to do decent work in terms of localization, we started to build the brand and today is one of the most dynamic market, Russia, we were one of the first one to go to Russia, I think we went our first agreement with the Moscow Mayor was in 1997 or 1998. But, for many years nothing happen, so, we have to dynamite and put a little bit of dynamic, create a relationship with AVTOVAZ, build Avtoframos, bring the car, localize and this requires a lot of energy. This requires a lot of focus.
So, my only point is, yes, there are lot of opportunities in United States, but now we’re going to concentrate on China. There will be plenty of time when we will get out market share in China and get the kind of profit that the other car makers are getting, which is probably 10% plus operating margin. When we get there, then we can think to other market, but I just wanted to know that it’s not because we don’t have ideas, we don’t have plans, we don’t have opportunities, but because before going into a new opportunity, we just want to make sure that we can get the return and we can do a good job into increasing the presence of the brand and get the profit out it it.
I’m going to take a question from the room. Philippe?
Philippe Barrier - Société Générale
Yes, thank you. Philippe Barrier, Société Générale. Three questions if I may. First question regarding the second part of your mid-term plan, you sum up the situation that Europe will be the bulk of profit – of gaining profit in the second half of the plan. That means that in Europe, actually, you can get a margin which is normalized in line with margin you can get at international markets. It means that Europe will go from very low margins to something in line with group target at the end of the plan and so the main improvement will come from this area. Second question regarding the entry price vehicle, you see some risk on the margins in the entry vehicles given the competition and the difficulties we can get on emerging market, the competition and demand going down. And third question, regarding AVTOVAZ. Actually, you are going to the overall 50% of the GV, higher reach consider company given the despite very low earnings are coming in, or loss, were released by AVTOVAZ in 2014?
Okay. Can I just try to clarify your first question, we don’t give regional breakdowns in terms of profitability and so I just want to understand what’s behind your…
Philippe Barrier - Société Générale
That question is that the progress should come from Europe over the next three years in that – we know that, actually international operations are quite profitable and I assume that Europe is at low point so, I would say given the restructuring and reorganization you are going to make in Europe, is this – bulk of progress should come from Europe.
Yes, yes, that will be progress in Europe, but let’s not forget that in our plan Europe is stable. We told you from the beginning what is in our plan is in 2017, the market in Europe is equal to the market in 2013, that’s our report. It’s a conservative one, but you consider we have been little bit more bullish on the emerging market because frankly we don’t think that this volatility and uncertainty on the emerging market will stay for a long-term. So, somehow if you take the present situation we’d say, present situation we are bullish on the emerging market conservative on Europe. In six months, maybe this will change or become more reasonable on emerging market maybe something else on Europe so, this is the assumption of the plan so, yes that would be a recovery of margins in Europe hopefully because as you know with the decrease of the European market, we all suffered in terms of margin, but I mean, I would not qualify the improvement in profit has mainly coming from Europe, it’s not true. The growth in Russia is very important for us, growth in Brazil is important for us. The Chinese operation will have no impact practically on this part of this part of the plan. It will have an impact for probably the next plan of Renault. But, we have plenty of other also opportunity, North Africa, Eastern Europe. We have plenty of opportunity that we want to put at profit.
Philippe Barrier - Société Générale
It was a question about don’t we think that the M0 profitability could be attacked by our competition?
Look, it will be for the moment has not been, I mean, Logan has been out for now many years. And then after Logan, we brought the Sandero. We brought the Duster. Now we have the A platform coming, while so far there is some competition to the M0, but none of them has been really matching our own performance. Because M0 is not the car, it’s a system. So you have to reproduce the whole system. I agree there is a possibility. For the moment, it did not materialize, it may. We don’t see it. I don’t think it may happen, but we don’t see. So we are not thinking that M0 profit is going to go down, but we are also not thinking but we are going to continue to increase the margin on the car of M0 even though I can tell you Duster has been a great surprise for us. I mean Duster has beaten all the forecasts that we thought from the beginning and the new A platform coming out from India the clinics are very strong. We really think this is going to be another very successful car into the M0 platform machine.
Last question was about AVTOVAZ consolidation.
Yes, the consolidation of AVTOVAZ. So first of all, well, there are a number of condition precedents. We have a number of milestones to go through in 2014 because we have not acquired all the necessary shares yet. So this is a process that was planned. So we are going through the milestones. There then needs to be a number of – a bit of work on the AVTOVAZ side. They need to produce IFRS compliant accounts, compliant to the Renault standards. All of this is work in progress currently. And when we get there and when we can demonstrate control then obviously then the accounting world will allow us to look at consolidation. In any event this is an accounting consolidation, but this is without recourse to – I mean the cash will not flow from one company to the other. So this is without recourse to Renault.
Yes, the situation of AVTOVAZ today is not very good because as you know the market in Russia collapsed in 2013. It has been a surprise for many people and it doesn’t look good at the beginning of this year. And at the moment where AVTOVAZ is investing a lot not only to renew its own plan, but also to build capacity for Renault and Nissan. The only thing I would like you to keep in mind is we hired Bo Andersson. Bo is, in my opinion one of the best person to manage AVTOVAZ first because as you know he has somebody who knows the industry very well. He has taken plenty of jobs in the past where he has delivered a lot of results. And second, he knows Russia very well. He turned around GAZ, when you look at the numbers of GAZ, its impressive what has been done. So I think we have here an opportunity to transform really AVTOVAZ not only into a very profitable operation that will be consolidated by Renault, but also into a base for production and sourcing for the line. So we are counting a lot on Bo and his team. I just want you to take into consideration. For me Russia yesterday is a risk, but I see a big opportunity with the new management team that we put in place.
Okay, thank you. Next question from the call?
We have a question from Rabih Freiha from Exane. Please go ahead.
Rabih Freiha - Exane
Yes, good morning. Rabih from Exane. I have two questions please. The first one I have two questions please. The first one, if you could give us a bit more detail on the working cap gain that we saw, the €790 million. If I have not mistaken, the guidance was for flat working capital, what has changed between the last time you said that guidance end of October and the last few months of the year. And also, how should we think of the dealer inventories in ’14 given the number of freeze-outs you have on the Renault core side and the market weakness and emerging markets. My second question is regarding the more than 5% operating margin target for 2017, you are qualifying this target as ambitious and realistic. When we look at market expectations today, the market is expecting a margin very close to 2017 target and 2015 already, do you think these expectations are as unrealistic and why if not? Thank you.
Well, yes, while Dominique Thormann is preparing to answer your first question, I can answer the 5%. We said at least 2017, why we took 2017 because I mean there are a lot of things coming in ‘14, ‘15, ‘16 as you would be fair that the measures of 2016 have an impact on our objectives. So if you take the year 2016 as a reference part of what we will be doing in this plan will not be captured in our objective. So we wanted really to have a full year impacted by all the measures that we are taking, that’s why we took 2017. And I would say the minimum of 5%, which means obviously we are planning for much more. I don’t think, so if you say, is the 5% conservative or is it – it’s going to depend a lot on the environment. It’s going to depend on a lot of factors. It doesn’t depend on us. It means is the European markets going to be flat or is going to go up or is it going to go down? That’s a big factor for us. Are the emerging markets go out of this volatility and problem at the end of 2014 or in the middle of 2014 or is it going to last? Are the exchange rate continue to be volatile or not? I think there are a lot of questions independently of us. Obviously, we are planning for much more than 5%, it’s clear, both in term of growth price and cost, but there are so much uncertainty around us that we had the choice of giving no numbers or giving numbers that takes in consideration all the volatility around us. So, I mean, if you say – if you think that Europe is going to grow that the volatility on the emerging market is going to stop, that the emerging market is going to resume their growth, then, yes I can tell you assuming that in 2016 we can reach to the 5% is reasonable, okay. But assuming that all of this happens, which obviously we are not sure and let’s not forget that for us we are considering Europe as flat for the next years.
Yes. Rabih, on the – on your question on working capital, first of all, what we are aiming to deliver was free cash flow and we did that even without the contribution of working capital. So, we just did better. I mean it’s that simple. We learned a lot these last three years. We have taken a lot of cash out of the system. We were totally inefficient on the receivables side. We weren’t getting paid very quickly. We were not very good in our supply chain. We had intermediate stocks. We had – we just did a lot better in managing our business. So I think it was something that a great lesson learned in the 2011-13 period, which we are going to carryover into 2000 – into the next period. And the dealer inventory, you have seasonal patterns, depending on when vehicles get launched. January was very strong and the dealer inventory is sold out. I mean, the dealer sold out of that inventory that was in transit or that had already been delivered. So, I am comfortable with the 63 days I have given you guidance that we would bring that number down towards the end of the year. We are going to come into a seasonal pattern. Q1 is always a little bit higher as you go into the spring selling seasons. So, I think this is business as usual and we just manage this very, very tightly on a month-by-month basis.
Okay. Thank you, Dominique. Gaetan?
Gaetan Toulemonde - Deutsche Bank
Good morning. Gaetan from Deutsche Bank. I have two questions. The first one, I want to go back to Dominique on this pre-retirement scheme in France, because you booked €400 million, which is a big number. So, can you give us an idea, how many people are signed up out of the 7,500 people, which is what was prepared in the plan? And what are the magnitude of the savings we can expect in 2014 coming from that? Can you summarize that a little bit?
Okay. So, it’s the plan – the 7,500 people is a net number. So, it’s more going out and then there is in future years we are going to be hiring against that number. So, it’s I think 8250 was the number that we initially gave you. It’s just more people signed up in 2013 than were expected. Now, how many people sign up in 2014 and ‘15 is still an open question mark and as where we cannot make an overall assessment and reserve our accounts based on an assumption, you have to actually physically have people signed up before you can reserve your accounts. So because more people ended in 2013, it doesn’t mean that you will have even more in 2014 and ‘15. That’s something that we don’t know. But the order of magnitude what we guided to is that the plan is designed to deliver compared to a do nothing scenario, which is an unrealistic assumption, but you have to have a user baseline, it’s design to deliver 500 million in improved operating contribution by the end of the plan on a full year basis.
Gaetan Toulemonde - Deutsche Bank
…in terms of saving for 2014-15, out of what has been €400 million is a big number.
That’s – it’s a big number, but it’s a number that is commensurate with the number of – with the number of people. If the plan gets done earlier, so be it, but roughly the cost against the €500 million, it was somewhere around €450 million in terms of overall reserves, so order of magnitude now, if more people sign up, but you get a bigger benefit at the end, it’s not that number, we don’t know today.
Gaetan Toulemonde - Deutsche Bank
Okay. I am not sure I fully understood. Anyway, Mr. Ghosn, I have a second question.
I will take you offline.
Gaetan Toulemonde - Deutsche Bank
Okay, perfect. Thank you. I am pretty slow. Mr. Ghosn, I have a question for you on these synergies where Nissan, we moved to a pretty big number €4.3 billion. First question, is it 50-50 between Renault and Nissan because since Nissan is two times bigger than Renault in theory it should be bigger for Nissan. And can you help us to get an idea what could be the P&L impact because there is a lot of cost avoidance, is this number more cost avoidance, can you summarize that a little bit?
Yes, look, let me give you based on the past. The past doesn’t mean the future, but it’s a good indication of what may happen. Today the cost reduction is 40% of the synergies, cost reduction, which means the 60% are cost avoidance, investment reduction and investment avoidance because let’s not forget this is a cash flow impact. The synergy we calculate them on cash flow because we are interested also into reducing investments. But based on the last years this is controller number, 40% of the synergies are cost reduction, and frankly there is no reason to think it’s going to be different in the future even though there is no guarantee, but let’s take 40%. Now, so when you project €4.3 billion of synergies, which by the way are all planned that this is not the black box where we are starting to work about how we are going to make the €4.3 billion, the €4.3 billion are identified, and the planning is for more than €4.3 billion because you will probably hear internally different numbers. Yes, we are planning for much more, but we want to put in the bank for the moment €4.3 billion. If you take 40% of €4.3 billion you are going to get something like €1.6 billion to €1.7 billion. The repartition so far between Renault and Nissan has been 45% for Renault, 55% for Nissan.
And why Renault benefits relatively more because obviously Renault being a smaller scale than Nissan. The impact on Renault is much bigger. For example when you come to a CMF platform and you are changing from a 700,000 platform to a 3 million platform I would say the jump in performance is much bigger for Renault than for Nissan because Nissan had platforms that were not at 3 million, but I would say the jump for Nissan is more. So, 45-55 is a historic number, should not change even though the size of the two companies are different. So bottom line I would say 40% in cost reduction and repartition 45-55.
Okay, thank you. I guess that we have time for one more question. So we will take it from the call.
We have a question from Kristina Church from Barclays. Madam, please go ahead.
Kristina Church - Barclays
Oh, yes, thank you. My first question is just returning to a question asked earlier on pricing, could you just give a little bit more detail on European pricing at the moment, and where you see that standing currently and going forward in 2014. And then my other question, with regarding FX in terms of your hedging policy is there any change that you can do there to mitigate some of the impacts of the FX or anything else that we should expect to see slightly different in 2014? Thank you.
Okay. Well for the European pricing, in fact the best will be to talk to the head of the region in Europe, Stefan Mueller, who is going to be telling you exactly what is the situation and what’s our situation on pricing, Stefan?
Yes. Thank you very much Mr. Ghosn. So, as Mr. Ghosn has already explained in his speech we dramatically improved our position in terms of pricing in the last years. That means that today in pricing on average in Europe we are only about 5% below the leader and we are 3% more expensive than the basket. Now in terms of pricing position for the future and strategy it’s as Mr. Ghosn has already explained for us very, very clear we are going to maintain and improve this position. Why, well it’s relatively easy because we are going to be able to price with every new product that is coming in on a much higher level that is true for all the products that we will be seeing coming in the next two to three years. And we are reasonably optimistic that this is possible because we have seen it now with Clio and Captur. We have been very successful in exactly doing that.
If I may add something because we talked about all the new products and the renewal, which are going well, there are also points of vulnerability in Europe, which is the end of life of Megane that means we are in the last two years of Megane. At the moment, our main competitors have launched their new products. As you know, there is a new Golf, there is a new Peugeot, etcetera. So, one of reasons for which we are a little bit prudent is because the M1 is going to be challenge for us in 2014 and 2015. And hopefully, when we will come with the new products, with the new design, attractiveness, competitiveness, because it’s going to be based on a 3 million platform things are going to change. This is one of the reasons for which we are a little bit prudent and we need to build much more profit and cost reduction in order to sustain the movement that we mentioned. Can you answer?
Yes, Kristina, yes hi. On foreign exchange, it’s an endless debate in the auto industry. But I think the – we have not changed our policy, I think in the CEO speech, you heard that the only effective way of really protecting against currency fluctuations is balancing revenues and expenses in the same currency, which means having an optimized localization rate where we manufacture or where we sell actually. So, the cost of hedging some of these very, very volatile currencies in Argentina, for example, is just astronomic and you are just transferring the risk, you also end up having to take a counterparty risk, because somebody has got to be the other side of your hedge contract. So, I mean, hedging Argentina is just totally impossible right now and it’s just uneconomical. So, no, we have not changed our policy.
Yes. Well, if I can just add something about foreign exchange risk and localization, they are obviously linked. At the same time, as you know localization is a question of scale, it’s not a question of know-how, but if you are a small car manufacturer and you want to localize, no supplier is going to take really in consideration a few thousand cars locally, they don’t care. The investment is too big. The part of the tooling is too high. The pricing will not be competitive. So they don’t do it. So, in order to localize you are going to have to have the volume. So, the scale is important even for localization. As we know localization is at the base of competitiveness in emerging market and the emerging market are going to be the engine of the growth of the industry, come back to the first question you ask, scale is going to be of essence, particularly when it is benefiting some of the most competitive players in the industry, because it’s playing at the level of the investments, it’s playing at the level of the cost, it’s playing at the level of the localization and when you add all of this, if somebody has 8 million to 9 million cars and the other one has third of this volume, it’s a completely unbalanced competition.
Thierry Huon - Director, Investor Relations
Okay, thank you, Mr. Ghosn. I am afraid that due to time constraint, we have to stop now this Q&A session. So, thank you for joining us today. Of course, Alain and myself, will be available full day for all questions which have not been addressed this morning. Thank you very much. Have a good day.
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