Duncan Minto - Director, IR
Dominique Thormann - CFO
Patrick Pélata - COO
Thierry Huon - Exane BNP Paribas
Horst Schneider - HSBC
Kristina Church - Barclays Capital
Gaetan Toulemonde - Deutsche Bank
Max Warburton - Bernstein
Stuart Pearson - Morgan Stanley
Thomas Besson - Bank of America/Merrill Lynch
Philippe Houchois - UBS
Francois Maury - Oddo Securities
Ranjit Unnithan - JPMorgan
Charles Winston - Redburn Partners
Renault Group (RNSDF.PK) H1 2010 Earnings Call July 29, 2010 10:00 AM ET
Ladies and gentlemen, welcome to the Renault 2010 first half results conference call. Mr. Duncan Minto, Director, Investor Relations, will introduce the conference.
Welcome to Renault's first half results conference call, which is broadcast live and in replay version on our website. The presentation file, press release and activity pack for this call all are available on the website in the Finance section.
I would like to point out the disclaimer on slide 2 of this pack regarding information contained within this document and in particular about forward-looking statements. I invite all participants to see this.
Today's call is scheduled to last 90 minutes. We have two key speakers this morning. First half with Mr. Thormann, Renault's new CFO; he will take you through the highlights of financial results. And Mr. Pélata, our COO, will follow up with a review of operations.
The presentation will last around 45 minutes and it will be followed by a Q&A session. If I don't have time to take everyone's question in the session, myself and Alain Meyer will be around to take your calls later.
Without further ado, I pass the call over to Mr. Thormann.
Good morning, everyone. I would like to start by introducing myself as I took over as CFO from Thierry Moulonguet on July 1. My career at Renault started over 20 years ago in 1989, with 10 of them relevant spent at Nissan starting in 1999 in Japan, followed by Europe and most recently as Senior Vice President for Administration and Finance in North America. In my new assignment to CFO, I will continue to head RCI, our captive sales finance company, where I've been since last October.
Now that being said, I would like to take you through this morning's earnings results. Before we start, I would just say that the headlines of today's announcement, as I see them, our Group operating margin back in the black at 4%, earnings per share reaching €2.95 and a positive automotive free cash flow of €1.4 billion.
So let me start with slide 5. On this slide, you will find worldwide sales totaling 1.348 million units, a 21.7% increase compared with the first half of 2009. I would point out that in terms of geographical mix, we experienced a balanced sales growth between Europe at 21.7%-plus and outside Europe at 21.9%-plus.
Patrick Pélata will provide a detailed analysis of our operating performance in the second half of this presentation. So I will now turn to my review of the financials, starting with the profit and loss statement on page 6.
On this slide, we have the full P&L for the Group, showing a marked improved on just about every line when compared to the previous period. Starting with the top line, Group revenues reached €19,668 million, an increase of 23.1% on a consistent basis.
On the next slide, number 7, we show the revenue contribution by activity. As I have already shown you, Group revenues rose in line with global unit sales. Revenues for our captive sales financing company, RCI Banque, increased by 1.1% to €890 million in the period. However, as you all know, the revenue evolution for sales financing is not the indicator of choice to measure their performance, which I will detail in a few minutes.
So let's start by looking at the breakdown of revenues for the automotive activity on slide 8, which increased by 19.8% on a consistent basis in the second quarter. As you can see on the graph on the left-hand side of this page, revenues for the first two quarters of this year were significantly up on the previous period, with the second quarter reaching €10,136 million, just shy of the level achieved in Q2 of 2008.
On the right-hand side of the page, we show the contribution to the change in revenues for the first half. The increase in unit sales accounted for 70% of the growth in revenues, with mix/price adding a further 5%. The remaining 25% increase was split almost evenly between foreign exchange, which I will detail further when analyzing the operating margin, and the line entitled 'other activities'. This item relates to the sale of parts and components to third parties and in this half mainly to the increase in sales of powertrains and vehicles to Nissan from our Korean site and LCVs.
I will now move to slide 9 to detail the increase in operating margin. The first half operating margin for the Group totaled €780 million, an increase of €1,400 million compared to the same period one year ago, with, as you can see, the major drivers being volume and the continued efforts on cost reduction.
I will start to walk down, reading left to right. Currencies accounted for a positive €169 million due to the weakness of the euro against a wide basket of currencies. The next item shows a €774 million positive impact coming from the increase in units invoiced with a positive contribution coming from all Group regions.
Mix/price impacted negatively for €11 million, while warranty costs increased slightly by €15 million compared to the same period last year. Purchasing savings net of charges for distressed suppliers equaled €330 million. And excluding the lower support required for supplies in the first half of 2010 compared to the first half of 2009, cost reductions from purchasing alone yielded €271 million.
The cost of raw materials contributed a positive impact of €112 million. Lower steel prices and the gains on the sale of scrap material netted a figure almost twice the impact shown here, with the difference being the negative impact arising from indexed raw materials. However, steel contracts have been renewed at a higher level as of July 1. And Patrick will come back to you to discuss the negative impact expected from raw materials in the second half of the year.
Manufacturing and logistics costs rose by €81 million. The comparison based from H1 2009 was tough, as the same time last year we were befitting from partial working time in a number of our underutilized manufacturing sites. The R&D charge in the profit and loss account rose by €11 million. As you will see later on in the presentation, cash R&D expenses were down in the half year.
As you all know, the P&L chart takes into account the capitalization and depreciation impact, which was negative in this period for €111 million. The capitalization rate reached 37% compared to 45% in the first half of 2009. G&A savings yielded another €10 million, while RCI Banque had a very strong first half, increasing its contribution by €110 million. And finally, all other items yielded a positive €13 million.
In total, for the first half of 2010, the Group operating margin rose to €780 million or 4% of revenues.
On page 10, we have the split by sector. The automotive division posted a 2.2% operating margin, showing a considerable turnaround from the losses posted in the first half of 2009. However, we should not overlook the performance of our sales financing activity as RCI Banque posted a €370 million contribution to Group margin, which is an all-time high. And I would take a few moments to look at the analysis of this performance on the next slide.
Average outstanding loans grew by 3%, recording the first increase in customer outstandings since the first half of 2005. Net banking income saw a further increase over the previous period, benefiting from higher pricing. The cost of retail and dealer risk fell sharply to 49 basis points as the quality of the loan portfolio improved, especially in Spain and in France. Finally, operating expenses dropped to 1.66% of outstandings. And in total, the pretax return on assets reached a record 3.59%.
On slide 12, we show the trend of this performance over time. As you can see on the graph on the left-hand side, RCI Banque's margin has been particularly robust over the past five years and was not as negatively impacted by the crisis as the automotive division.
Despite the shrinking loan portfolio, the gross financial margin was maintained, with an important contribution coming from insurance products and automotive services. In the face of an uncertain loan environment, going forward, RCI will push further into maximizing its packaging offer of retail and wholesale services.
The graph on the right-hand side shows the evolution of cost of risk for customers and dealers. While the long term average was in the range of 60 basis points to 80 basis points, the impact of the crisis, particularly in Spain, took this indicator to just shy of 100 basis points last year.
Net charge-offs will cut in half for the first six months of the year, and accounted for €52 million of €121 million increase in RCI's operating margin.
Now that we have covered the operating margin evolution for each activity, I will continue down the P&L with other operating income and expense items on slide 13. The net charge for these items totaled €62 million in the first half of the year, a decrease of $264 million compared to the first half 2009.
The most significant difference can be seen in the impairment of capitalized assets as a significantly lower charge of €50 million for this period.
Included in the profit and loss, on asset sales for €27 million are €30 million relating to the net gain booked on the sale of a small part of our Nissan shares sold in the Aliance transaction with Daimler. Following this operation, our holding in Nissan now stand at 43.4%, down from 44.3%, and we now hold 1.55% of Daimler AG.
Continuing down the P&L, the next item is net financial income and expense on slide 14. The charge rose €65 billion compared to the same period last year, principally due to the increase in the average cost of debt despite a lower amount of debt. One of the major factors in this was the loan from the French State, which was received at the end of April 2009 and counted in interest expense for the full six months in 2010.
The accounting interest charge has also increased, as the rate on this loan increases from the base rate of 6% in function of our improving operating margin.
On the next slide, number 15, we show the impact of associated companies in Renault's P&L. While the losses from these companies in the first half of 2009 accounted for half of Renault Group's full year net loss, the first half this year swung back to a significant profit of €531 million.
On the back of Nissan's strong results published yesterday, the contribution for the quarter equaled €390 million, taking the half year impact to €460 million. Volvo's results yielded an additional €120 million, while Renault's share of AvtoVAZ's results, which is consolidated with a three-month time lag posted a negative €56 million.
The negative impact from AvtoVAZ has been considerably reduced by €126 million compared to the first half 2009 as the company continues to improve its situation due to the considerable restructuring actions and the sharp increase in sales since the launch of the scrapping incentive schemes in Russia.
I would like to point out that Renault's share in AvtoVAZ's equity and our balance sheet is valued at €61 million, down from €119 million on December 31, 2009.
I will turn back to the P&L for the last time on page 16, where the tax charge for the half came to $180 million compared to only €1 million in the first half of 2009. Tax charges were recorded in the countries in which profits were booked, and as in 2009, deferred tax assets were not recognized in France, creating a negative impact of €102 million.
Excluding the non-recognition of these deferred tax assets, the effective tax rate was 17% in the half. Bottom-line, net profit after tax came in at a positive €823 million compared to a negative €2,712 million in the first half of 2009. And after taking account of minorities, the net result per share came to €2.95 for the period.
Now that I've completed the analysis of the P&L, I will turn to slide 17 and show you the evolution of net debt. Cash flow from operations totaled €1,964 million. Changes in the working capital requirement contributed positively for €307 million despite the increase in activity.
Net tangible and intangible investments came to €851 million. Both of these items will be reviewed in more detail by Patrick during his review of operations. As a result, automotive free cash flow reached €1,420 million, ahead of our plan for the half year.
Financial investments came to a positive €195 million mainly related to cash received from the transaction with Daimler AG and the sale of treasury shares. Foreign exchange impacted net debt negatively for €364 million, including the impact of the strengthening of the Yen against the euro, as the rate moved from 133 Yen per euro on December 31, 2009 to 109 Yen per euro on June 30.
I would like to note that because of loan maturities, our exposure to Yen denominated debt decreased in the half from 252 billion Yen at the end of December 2009 to 148 billion Yen at the end of June 2010.
So in summary, net automotive financial debt decreased by €1,258 million to close the half at slightly less than €4.7 billion.
I would like to conclude on net debt by looking at slide 18, where we show its evolution over time compared to shareholders equity. While currency impacts were negative on net debt as we have seen on the previous slide, their impact has been positive on shareholders equity. The ratio of net debt to shareholders equity now stands at 23%, below the level of that seen in 1999 when Renault first took its stake in Nissan.
I would now like to turn from debt to liquidity on slide 19. Cash and cash equivalents totaled €6.3 billion at the end of the first half, up from €5.4 billion at the end of 2009. Together with the fully available undrawn credit lines, the automotive gross liquidity reserve increased from €9.5 billion at the end of 2009 to €10.4 billion at the end of the first half 2010.
RCI's liquidity has also remained strong as we can see on page 20. At €6.3 billion, RCI's liquidity reserve is sufficient to cover more than 1.5 times the total of outstanding commercial paper.
That completes my financial review for the first half of 2010, and I will now pass the call over to Patrick Pélata, our Chief Operating Officer.
Let's now review operations of the first half of the year, and refocus on three aspects, revenue growth, cost-cutting, and elements of the working capital. And then I will comment on the outlook for the second half of the year.
Revenues: Building on the momentum of the second half of last year, the global TIV clearly rallied in the first six months of the year. Supported by government incentives and economic recovery, the automotive industry grew 16.9% compared to the first half of 2009. I would note though that this doesn't quite compensate for the 16.5% decrease in the global market in the first half of 2009.
However, not all of the markets grew at the same pace as you can see on slide 24. Scrappage incentives were gradually phased out in Europe, and then Europe ended only 1.7% over the first half of 2009 with marked slowdown in the second quarter.
Euromed was down 7%, less of a drop than initially anticipated with Turkey in particular holding out rather well. The Russian market has enjoyed significant growth since March with the introduction of their scrappage scheme and over the past six months the market was stable in the region.
Asia, Africa and America regions recorded strong growth. But Renault showed strong performance, taking market share in each of our regions. Group volumes grew 21.7% in Europe with a similar increase outside Europe at 21.9%. Out of the top 15 markets, which account for 85% of our sales worldwide, 12 display market share gains compared with the first half of 2009. In some countries the gains were significant, 3.3 points in France, 6.6 in Algeria, 4.8 in Romania. South Korea gained 2.6 points and is now the Group's third largest market worldwide.
Our action plans have been effective in Italy and the U.K. and good strides were achieved in Russia and Brazil where we have high expectations. Germany was in negative territory due to high comparison base in the first half of 2009.
Whole regions contributed positively to the sales performance. Likewise, growth was generated by all three brands of the Group as shown on slide 26. Renault brand performance was up 19.9%, Dacia grew 18.2% and thanks to the success of SM3 and SM5, Renault Samsung Motors sales were up more than 60% compared with H1 2009.
In addition, although the figures are not consolidated on the slide, AvtoVAZ sales jumped 13% in the first half. The sharp decline in the first three months was more than wiped out as they took advantage of the scrapping incentives launched in March. In June, for example, Lada's sales grew by 68% in Russia in the market up 31%. If we combine the market share of Renault, Nissan and AvtoVAZ in Russia, the total stood at 36.7% in the first half of 2010.
Renault sales performance outside Europe was supported by the increased success of our lineup. Let me give you three examples.
First, the Renault Samsung Motors new SM5 model has been on the market in South Korea since the beginning of the year. And more than 48,000 orders were recorded in the first six months. This model provides the Group with a high end, highly competitive sedan mainly aimed at Asia, Russia and the Middle Eastern markets.
Fluence. Fluence and their Korean sister SM3 also had the very good start with more than 60,000 orders since the launch at the end of 2009 in Korea and later on overseas. The model will be launched in 65 countries around the globe.
Thirdly, Sandero also confirmed its international success. In Brazil, Sandero and Sandero Stepway account for more than half of our sales. In March, we doubled the capacity of our Avtoframos plant in Moscow, in order to start the production of Sandero. Logan was already the best selling foreign car in Russia and now Sandero is extending our range with a new key model.
Let's take closer look at our performance in Europe on slide 30.
With a market share of 10.8%, the Group achieved it's best European performance since 2005. As for the Renault brand, it stood at 9.22% making it the second best selling brand in Europe in the first half of 2010. With the market share increase of 1.5 points, Renault was by far the brand achieving the largest growth in Europe with Nissan coming third and Dacia fourth.
As you can see on slide 31, the Group has outperformed the European market on most segments. Small cars have been selling less or stagnating after the scrappage bonus dried up, but Renault's basically stood out on the I2 segment. Thanks to Sandero, Dacia gained 15% on this prior to the impact of Duster. Renault gained 19% thanks largely to Clio.
The out performance is even stronger on the M1 segments. Our volumes grew more than 50% when the market was only up 9%, reflecting the successful roll-out of the Megane family. On the LCV segment, while there was some recovery after a very difficult year 2009 we did twice as well as the market having restyled most of our lineup. Volumes were up 21% when the market gained only 8%.
This completes my overview of our sales performance accounting for 23% growth in revenue. Our financial performance also resulted from our efforts on the cost cutting.
Moving on to slide 32; in the first six months, cost cutting efforts conducted jointly with our suppliers generated €330 million worth of savings. If we continue on this trend we should come out ahead of our initial forecast of €400 million with an additional €100 million saved for the full year. On the whole, our fixed cost continued to decrease this bite high year revenues in the period. This proves that the work done over the past two years is structural.
With revenues up 23% G&A remains stable, fixed marketing expenses fell 7%, manufacturing fixed costs grew 13% because as Dominique said it already, last year we had many non-working days subsidized as you know by the French government, which was almost not the case in the first half of 2010. Over the past two years, our fixed costs have therefore decreased by 23%, almost four times the rate of our revenue decrease.
I would like now to take a quick look at R&D and CapEx. As you can see on slide 34, net R&D spend in the first of the year fell slightly to €778 million compared to €860 million in the previous period. I want here to restate that this is made while maintaining 100% of our forward trend and technology plan developments. The decrease in complexity in proving our productivity and sharing work with Nissan and a little bit already with Daimler.
Slide 35. We see that CapEx was very low in H1 2010 at €422 million the net CapEx to sales ratio was only 2.2%. This low figure should not be considered as the running trend due to a high investment seasonality this year. We expect the net CapEx level of spend in the second half of the year to be at least twice the level of H1.
In total, for these two items of slide 36, the cost in the first half of the year accounted to only 6.1% of growth revenues. Our full year guidance given in February was below 10% of revenue. Our new guidance is for the full year at 8%.
Let's turn to the last part of my review of H1, which is working capital requirements on slide 37. Strong production level resulted in an improved accounts payables position. As for inventories and receivables, the comparison with end December is not really relevant in view of the seasonal differences. So let's have a look at the evolution on a comparable basis.
Our receivables, slide 38, stand at €1.8 billion a stable figure compared with mid 2009, accounting for 4.5% of the revenue, down 0.8 point or 0.3 point if we leave out the AvtoVAZ receivables still in our hands in June in our books in June 2009. We are currently implementing an action plan in order to bring receivables down faster and structurally just without sending them to other banking institutions.
Slide 39. Our inventories and revenue ratio is also down 1.3 points compared to the first half of 2009. Let us look more closely at new vehicles, including inventories held by the network so as to have the full picture.
Slide 40. Increase in car inventories, especially in the network, reflects revenue growth. Our goal being to maintain inventory levels between 50 and 55 days of sales. Our efforts on inventories have bought levels sustainably down, but also significantly improved mix.
For instance, cars older than six months accounted for 24% of worldwide network plus Renault inventories at the beginning of 2009, 6% in December 2009 and only 4% in June 2010.
To sum up my review of operations in the first half of the year, let us look quickly at what was better and worse than expected. Slide 41, you can see on the plus side, the automotive market was better than foreseen, and our market share in this growing market was also stronger than expected.
RCI Banque gave a robust performance and it significantly contributed to the Group's H1 profits. Favorable exchange rates and a good purchasing performance also benefited our bottom line. On the minus side, the commercial pressure in Europe has led many competitors to give bigger discounts. And also on the minus side, there has been a negative impact of indexed raw materials.
Moving on to slide 42, let us now consider the outlook for the second half of the year. Developments for European markets are the main risks for the second half of this year. We will examine this in detail in a minute. The price of raw materials will impact us further.
With the new contracts on steel signed in June, the total impact from both indexed and non-indexed raw materials being at a headwind for roughly €300 million in H2. And our working capital requirements could rise partly because of shortened supply of payments terms in Spain, an impact we estimate at €200 million.
On the positive side, our order book is looking good, and exchange rates so far remain favorable. One of the main strengths is that markets outside Europe should continue their growth.
As you can see, there are both risks and opportunities impacting our outlook, with uncertainties on the European front, in particular in Q4. At this point in time, we will not commit to more than our initial guidance of a positive free cash flow for the full year, and I hope you will understand why with my later explanations.
As you can see on slide 43, with markets in H1 growing faster than expected, and with the favorable international outlook, we have revised our market guidance for 2010. We believe that global TIV should grow by about 8% compared to 2009.
And as you can see, the Asia/Africa/Eurasia regions should gain 15% or more. Latin America should see its market grow by more than 5%, and the Euromed region should stable over the year, and therefore gaining ground in the H2. Europe alone is expected to experience a market downturn estimated between minus 7% and minus 9%, which means minus 16% to minus 20% for the second half.
Our challenge therefore is to capitalize on growth outside Europe and build on our market share prowess in Europe.
Moving to the next slide, internationally we now have a comprehensive lineup of vehicles, perfectly suited to the needs of customers around the world. This is true not just for the entry level, with Logan and Sandero, but also for the high end with Fluence, and now with latitude LES SM5 to be launched in the H2.
In Europe, slide 45, the introduction of austerity plans and the phasing out of scrappage incentives may result in a hard landing for the second half. The market should shrink by more than 16% compared to the same period last year. We expect sales of new cars to fall below the level of second half of 2008 when the financial crisis caused European markets to collapse.
This is actually our grey scenario. There is a more optimistic one where the pull forward impact from scrapping incentives is lower, as it is combined with a significant mix shift, triggered by the crisis and dampening the scrapping incentive impact. But anyway, we have several strengths to counter the fall in the European market.
First, as you can see on slide 46 we have a sound order book that remains stable at 1.7 months of sales which allows us to remain confident on Q3 performance. Moreover, as shown on slide 47, others are moving upwards in terms of mix with Megane, Scenique and LCVs accounting for an increasing share of the portfolio. The same is true with the entry segment where the Dacia mix is being pulled up by strong sales of the new Duster.
The Megane lineup is now completely renewed with the launch of the Megane-CC this summer. Renault Wind is completing our small car range with the fun and practical Roadster, the only convertible car of its class to provide just as much luggage space regardless of the position of the roof.
We have also renewed our large-van range with the new Master in both front and rear wheel drive versions. Finally, with Duster, Dacia has a brand new category breaker in the crossover market. More than 55,000 others have been taken since the beginning of April.
Let's move on to our conclusion, slide 52. The Group's performance in H1 was ahead of the plan set out at the beginning of the year. But in an unusually, uncertain environment in H2, the Group must remain focused on its action plans and we'll monitor closely any change in the economic situation. The next three months should give more visibility on the rest of the year.
Renault's goal for 2010 remains positive free cash flow and an increased market share on our main markets. Meanwhile, our organization is setting up its next strategic plan. Carlos Ghosn will announce the plan in February 2011.
I look forward to seeing you on September 27 at our Investors Meeting and on September 30 at the Paris Motor Show. This will be your chance to see DeZir, our new concept car, a foretaste of Renault's new design identity. You will also discover the nearly final version of our first four electric vehicles to be launched from mid-2011.
I thank you for your attention, and Dominique and myself will now take your questions.
(Operator Instructions) We have a question from Mr. Thierry Huon from Exane BNP Paribas.
Thierry Huon - Exane BNP Paribas
Two questions, if I may; first one about the RCI impressive performance during the first half. Is this performance sustainable going forward or is there any reason for having this very high profitability this time?
And a second question about the price mix effect, given the fact that the mix improved quite significantly, as shown by the slide by segment, I'm a bit surprised to see that the impact on the revenues development is not stronger than the one you showed. So could you elaborate a bit on that?
I'll take your first question on RCI. A few factors which I hope will answer it. The main reason why it improved this half is what I showed you one of the slides, representing a drop in net charge-offs. So the quality of the portfolio has improved very significantly, and we are now showing 49 basis point cost of risk.
I don't expect that number or that improvement from basically ones who divide it in half. That will not be repeated. However, some of the other factors I think are still in place. First of all, RCI's portfolio is growing, and that had not happened for a number of years. So I see a positive impact just from production. And as Patrick told you on the Renault manufacturing side, RCI has also a very good order book going into the summer months for loans and leases.
So we're confident that the growth side is rather intact. And then the difference you saw that our net banking margin increased. And for now, the difference between cost of funds and placing is intact. I think that in short term, that condition should maintain. But the big drop in the cost of risk, that is something that at least to that extent cannot be reproduced going forward.
Thierry Huon - Exane BNP Paribas
Dominique, could you tell us why you had this big drop in the cost of risk? I could understand that the situation improved. That was just a really bad situation we had at the end of last year. But I don't see any reason for having this big drop, specifically in H1, well below your long-term 62 basis point you mentioned during your presentation.
But last year, we were at 1%. And what we did is just basics. We tightened the scores and we improved our collections. So by putting more resources towards collections and tightening scores, you feel the impact in the following period. So it's not a very sophisticated answer, but it's the simple truth.
I will take the second question on price mix. The first point is that Q2 was better than Q1. What you see on the results there is of course the addition of the two. The second point is there is a pressure on price that counted slightly negative. Therefore, the mix is better than what you see on the total price mix.
And there is also a pressure on the mix in each segment. People don't have as much money as they had before the crisis and obviously chose on the cars they buy. This is also why also why we feel I would say comfortable having making profits also on entry-level cars and entry segments.
Thierry Huon - Exane BNP Paribas
Could we have the split between price and mix effect for the first half?
For the first half, the effect on the price is less than 1% negative.
We have another question from Mr. Horst Schneider from HSBC.
Horst Schneider - HSBC
Maybe you can clarify one point. The first one is these payment terms in Spain. Is that a cash impact or will there be an earnings impact? And then maybe you could give more details on how much was now the negative price impact and how much was the positive mix impact. So maybe you can split its net effect that you have given in the presentation.
Then with regard to the manufacturing fixed costs, you showed in the presentation that they were up 13% year-on-year in H1. So maybe you can give also again more details why here the manufacturing fixed costs have been up. And then lastly, with the interest and visibility that you have got now on the order book, you mentioned that the order book has improved, but maybe you can tell us already something about the production plans that you have got for Q3. So to which extent will the Q3 production be sequentially down compared to Q2 and what is by now the visibility in your order book?
The first question on Spain, the payment timing is moving down to 20 days. And this is why we expect an impact of €200 million on the free cash flow. That is, of course, a one-time impact. And we try to negotiate with suppliers to get some benefit from this improvement for them.
Your second point was on the price and mix. Well, as I said, Q2 was better than Q1. Maybe you are bothered by what you have seen on one side on the revenue and what you see on the other side on the COP.
What is behind that is the fact that on the revenue, as you know, you don't have the incentives accounted on the COP. You have the impact also of the product enrichment. And we had to include during this period some significant parts of our cars in Europe moving to Euro 5, which accounts for roughly half of the product enrichment, and this is incorporated in the figure on price mix impact on COP.
Your third question was on the manufacturing fixed costs moving up 13%. The main point there is last year we had in the first half massive non-working days in the French brands. And they are subsidized by the government after what we have called internally a crisis social contract, in which the government is putting money.
We are putting solidarity between white collar and blue collars to decrease the paying for these non-working days. And the result of that is a significant subsidization from the French state, which is proportional obviously to the non-working days.
These costs are back this year. And you have to know that in our way to count the fixed costs, when in a plant we cannot decrease the number of people, which is the case in French plants so far, we count them as fixed costs. And we try obviously to still reduce these costs, but we count them as fixed costs to give more margin of maneuver to our safe people using the margin of profit.
Horst Schneider - HSBC
Can you give us maybe an absolute number for this burden that you incurred in H1 versus H1 '09?
€130 million gap. What you can also see is this is a decrease against 2008 H1 of 3%, which is not comparable, because production lines were in a kind of similar situation. So we could decrease these same fixed costs counted the same way by 3% from first half of 2008 to first half of 2010 in I would say in similar production conditions.
Your last question was on production in Q3. With what we know, Q3 is going to be the same basically as Q3 of 2009. And it's better to make a comparison against 2009 Q3 than against Q2 of 2010, because of obviously the month of August changing significantly. So basically you remember Q3 2010 equaled Q3 2009 for production.
We have a question from Kristina Church from Barclays Capital.
Kristina Church - Barclays Capital
I've got a couple of questions. Firstly, I know you've talked about pricing in the first half of the year. I was just wondering what your expectations are going into the second half of the year, as you do expect volumes to be falling much faster, especially in Europe.
And then my second question is on the LCV market. I think at one point, you said you had a target for a 5% growth in the full year. Is that still in place, or do you see that that's growing much faster than you're expecting, given that the market was up 8% in the first half and your sales up 21%?
And then finally, obviously in the first half, a lot of your operating profit delta was driven by volumes. I think in your walk-down, you said €774 million came from volumes going up. I was just wondering what levers you can see your ability to pull in the second half of the year. As volumes fall, you will obviously lose that benefit. So what else can we see at the cost level that will help you keep your profits higher in the second half?
Pricing pressure we believe on the second half will probably increase. That's one of the uncertainties we have. It's going to be very different depending on, again, the grey scenario or the pink scenario. And I just want to remind you that our guidance is built on the safe side and therefore on the grey scenario.
On the grey scenario, volumes will go down heavily in Europe, more in the range of 20% in the second half. There is a risk on pricing, and that's why we remain prudent there. On the pink scenario, the volumes would not go that much down and probably it will be quieter on this side.
On you second question, the LCVs, what we see on LCVs, LCVs were not impacted at all by scrapping incentives. And therefore, we see regular, but slow recovery. And this is I would say healthy, quite predictable. And what we also see is, thanks to what we have done on the products, we are regularly gaining market share there. We can see also the revenue per unit going up, which is good news. So I would say on LCV, there is much less uncertainty for us than there is on the passenger cars.
On the COP impact of the volumes going down, I would say the COP obviously may be heavily impacted if the pricing is at stake, especially on the Q4. But on the fixed costs, as I said, we have done a structural job. So no change there. On the cost side, we have €300 million impact on the raw materials. And for the rest, the cost reduction goes on pretty well. So it's going really to be a question of pricing at first.
On the free cash flow, you didn't raise the question, but I want to comment on it, because our guidance is on the free cash flow. And that's why we are more prudent, because on the free cash flow, if the volumes really drop in the last quarter, just to give you an order of magnitude on the payables, two weeks' cut of production in November and December would impact by roughly €1 billion, the payables.
If it is a sudden one, that means the inventory are not going to change so much, the working capital impact will be €1 billion along side, and the free cash flow impact will be €1 billion as well. And this is why we remain prudent on our guidance on the free cash flow, obviously only because we still believe there is some probability that there is a significant drop on the Q4.
But I also have to say that our analysis of what is making a difference between this grey scenario and the pink scenario where the scrapping incentive impact is dampened or decreased by a structural shift triggered by the crisis makes us think that the grey scenario is less probable with the last data we have, not what it was I would say three, four months ago.
I'll now give the floor to Mr. Gaetan Toulemonde from Deutsche Bank.
Gaetan Toulemonde - Deutsche Bank
I have two quick questions. Thank you, you gave us an idea about the production schedule for the third quarter, flat on last year. What does that mean for Europe in volume, because it's minus-16% in volume in second half? It looks like that your volume in Europe will not look that bad in the third quarter. So can you clarify that a little bit?
I'm not going to give you sales volume forecast in Europe for the third quarter. But you have seen we have an order book of 1.7 months. So July is not bad. So I would say the third quarter as of today is clear. And this is why I can give you this production figure easily. We are very comfortable with the sales in Q3 in Europe. The problem is Q4 clearly. And for that, we lack visibility today.
Gaetan Toulemonde - Deutsche Bank
I understand. But if the volumes are more or less flattish in the third quarter, to work with a minus-16% for the second half, that's underlined a massive freefall in the fourth quarter.
Yes, this is what I am saying. If I take as a reference what we call in France the (démolisseur étant), a kind of a study case of scrapping incentive, the volume should go down heavily. They actually should have started already to go down heavily. It happens somewhat this way in Germany.
But what we also see is at the same time, there is mix shift. We knew and we spoke about that many times before the crisis that this had started before the crisis slowly. What we see is the crisis has really accelerated that. And one of the effect of that is it looks like people during this last year or year-and-a-half, some of them don't delay the timing to buy their new car. They just buy a cheaper car. And this kind of gives some growth that today we cannot separate with scrapping incentive impact.
When you add the two together, it looks like today, with the figures we have, we are not in the situation for all over Europe of heavy full impact of scrapping incentive. There is a mixed effect that dampened these.
And for the moment, we don't know how to evaluate the impact of this second effect. This is why we are still uncertain about this Q4, and we don't wipe out the hypothesis that there will be a strong drop in the Q4. I think we know that much better at the end of September.
Gaetan Toulemonde - Deutsche Bank
My second question is that you have put in place last year a four days' work week for the white collars, 17,000 people, if I remember correctly. Can you do the same if the market drops significantly? How long does it take for you to put in place such a decision if you need to do it? Can you summarize a little bit the situation of what you can do in such a crisis scenario?
I would hate to do it, but we can do it.
Gaetan Toulemonde - Deutsche Bank
And it takes a long time to implement, or do you think it can be done very quickly?
It can be done very quickly. It is in the agreement. It's just an operational decision to be made.
We have a question from Mr. Max Warburton from Bernstein.
Max Warburton - Bernstein
Just two questions from my side. Mr. Pélata, the comment that the third quarter will be important in determining visibility for the full year and some of the other comments you just made on this call, are you actually going to give formal second half earnings guidance at the Q3 point? I mean is this giving us the heads-up that you'll be willing to put some harder numbers on the second half at that point?
And then the second question. You talk about this shift in the market with consumers trading down to cheaper cars. Are you absolutely confident from your analysis that this is across the industry, or is it just what Renault is seeing? Because it's not something we're hearing to the same degree from other automakers. If you look at what Volkswagen just reported in Europe and you look at Peugeot as well, it's not clear we're seeing that across the industry. Could you just give us your thoughts on the broader market?
The guidance in September, I would say if the market is going the grey scenario, we won't, because it's going to keep our guidance of just of a positive free cash flow. And we're going to do our best to deliver. I'm sure we will make this positive free cash flow anyway, but we will have to really tighten the belt quickly inside the company and cut production very quickly. If we see that others are not moving into this direction at the end of September, we may say it as we have to.
The mix question, across the industry or not? I don't have complete industry data to fully answer that. What I have is the fact that obviously the average price paid by customers in Europe today is going down quickly. It was going down already before the crisis.
What I see on each segment for Renault is that revenue went down during the crisis and is now slightly going up. I'm speaking on per car basis. And we are not yet at the level of the pre-crisis. So that means people are very prudent. They don't want to pay as much basically for the same car as they wanted to pay before the crisis.
And then what we can see with segments by market is in all markets the segment mix goes down. We made an interesting study, and you can probably do the same, which is by looking at countries that had no scrapping incentive, countries that had one and closed it and countries that are still going on, on three countries, you can see the same thing, which is the entry segments are basically back at their pre-crisis level. The upper segments are not recovered the full crisis fall, but are now up, but they're basically stabilized at a level which is significantly below the level of the pre-crisis.
And this is true obviously for Germany, but this is true also for all European countries. If you get them in these three categories, you can see that category-by-category, which is a way to eliminate the scrapping incentive impact that has troubled the view of the market for a while.
So this is why I'm really saying this mix shift existed before the crisis, has been accelerated through the crisis. And if we consider that we are somewhat in a post-crisis stabilized period, well, the mix impact is still very significant today.
Max Warburton - Bernstein
I think it was the Paris Show two years ago when you talked about this first, as you said before the crisis really, where you were talking about the option of bringing cheaper cars from Turkey into the European market and generally lowering the cost structure of the whole product range.
I don't want to preempt what you're going to say in February next year, but is that something Renault is looking at? If the new reality is there is much weaker mix, are there big changes you can make to the product that can help this business still be profitable in this more difficult scenario?
When I look at the revenue in a given segment, the revenue we have, and when I see that we have lower revenues before the crisis on the per car basis, there are two solutions. I can shout at our sales force, "Please raise the transaction price," and shout and shout and shout, or I have to say, "Okay. Customers don't want to pay the same price. So what can I put out of my car that they don't so necessarily need and they're ready to pay for and do that in a cleaver way."
And this is what we are doing now. I would say segment-by-segment on one side. This is what we had done strategically by putting the DeZir brand and the DeZir distribution model to offer something that people are basically clearly asking now, this is our duty.
So of course we try to maintain our prices. But at the same time, we are now working a lot on trying to really see what customer really do want and what they can accept not to buy in their car.
The success of DeZir basically is helping us a lot obviously in this crisis, because we see a lot of things that please customers and who we are putting in cars. And it looks like when you don't have it, well, they sit by the car and they're still happy with it.
I'll now give the floor to Mr. Stuart Pearson from Morgan Stanley.
Stuart Pearson - Morgan Stanley
Just a couple of questions. One, coming back to DeZir and the low-cost vehicle range, which I guess a few years ago, at least from a margin perspective, was not inferior to the rest of the Renault range. I wonder if you can give us any guidance or insight on to how profitable DeZir is at the moment, given its very strong volume growth, and how you expect that to move going forward, especially when the new models arrive in around two years' time.
And then secondly, we've talked a lot about Renault core. I wonder if we can just touch on associates' income. And I understand why the guidance isn't there on the core income for now. But presumably you have pretty good visibility on the associates' side. So maybe you can help us with your expectations there for the full year, particularly on AvtoVAZ where you're still consolidating losses with a lag. We should have a good view of what you will see for Q3 now, so where that number could get to for the full year, please.
The margins of DeZir are improving continuously. It looks like the crisis doesn't impact this business model. Obviously they were good before the crisis. And relatively to the rest of Renault, they're better. This is what I can tell you.
All this basically is showing that by preparing for a mix shift in Europe, we were right. And I would say, today, we'd rather see the market moving towards us, which is good news.
On AvtoVAZ, I don't know exactly what I can say about AvtoVAZ, because I am at the board of AvtoVAZ. So I am looking to Duncan there. What I read is that the CEO of AvtoVAZ, Igor Komarov, said they were making profits in the second quarter. So I am just repeating, because that I'm sure I can say. The rest I don't know.
Stuart Pearson - Morgan Stanley
Can you talk about your expectations for the Russian market for the full year and next year perhaps? Not for AvtoVAZ, just for the market.
For AvtoVAZ, it's really good news now, because they are really very much enjoying the scrapping incentive. This is also very good news for Renault. We maintain very good prices. And I would say, our margins in Russia today are excellent. But Ford has been making discounts with the Focus. So we need to look at that.
So far, we had to do that, because we had not enough production capacity which makes easy pricing decisions. Now, as you know, we are ramping up our production capacity by installing the Sandero and we should have a full capacity, and that we will see. But for the moment, this is very nice forecast for Renault.
From next year, for the markets, I don't know enough. We see a lot of positive signs in the Russian economy. And frankly, if I don't speak of 2011, but on the mid-term in general, this is a very big country. This is a country where it's extremely painful not to have a car. The cities are large. It's very cold in winter. And this is the probably the only country in the world now that has the oldest units in operation. So the need for renewal is higher.
This is basically the cause of strategic move there, which is to enjoy with Renault, with AvtoVAZ and with Nissan. The huge potential of development of this market, which we believe is not in the upper end as it was in the kind of bubble economy before the crisis, but which is in a massive growth in the $5,000, $6,000, $7,000 price up to $15,000. This is what we are prepared to do well with by improving the Togliatti plant and supply base and at the same time moving on with our plant in Moscow.
And I've to tell you that one of the priorities of our purchasing and engineering department today is to improve the supply base in Russia, improve the localization, improve the quality of AvtoVAZ supply base and enjoy the low cost and good localization that will allow us to already grow in the core of these markets.
So for 2011, I cannot exactly tell you. But for '12 and '13 and eventually '11, we are very optimistic.
We have a question from Mr. Thomas Besson from Bank of America/Merrill Lynch.
Thomas Besson - Bank of America/Merrill Lynch
Two questions if I may. Firstly, can you comment on your order book outside Europe? You've shown us a nice chart with your order book at 1.7 months for Europe. I don't know if you've mentioned anything on what you have in hand outside Europe. And secondly, have you précised what we should expect in terms of CapEx plus R&D for the full year?
CapEx plus R&D, we said 8% for the full year. We will basically spend much more in the second half than in the first half, but this was planned like that.
The order book outside of Europe is good as well. It's excellent in Korea where the main problem is to deliver the cars, because the SM3 and SM5 and Koleos are very demanded in overseas markets and the plant cannot produce enough. So we have big order books.
In Latin America, it's similar. Russia I think is the same, because we were in production shortage. So Turkey and Maghreb should be also the same, because Pitesti is in production shortage as well. I have to tell you that in the middle of a crisis, the toughest meeting of the month is production allocation.
I'll now give the floor to Mr. Philippe Houchois from UBS.
Philippe Houchois - UBS
Two questions. The first one is you've given some interesting guidance about the sensitivity to production level in Q4 in terms of working capital. Could you give us a sense, within the half year, what is the volatility of your net debt position month-by-month? Are we talking 1 billion, 2 billion, 3 billion? If you could give that guidance, it would be helpful.
Then on RCI, I'm assuming, Dominique, that you are going to be still running RCI, even though you're the CFO of the Group. Can you comment of any change in the funding capability of RCI? Is it easier now? Obviously, the bond markets have reopened? Are you looking at higher funding costs next year? Are you worried about 2011? Are you going to try to fund excess in '10, while the market is still running well?
And finally, as an incoming CFO, Dominique, do you have a new target for net debt compared to the ongoing CFO?
Let me take them in stride. The funding at RCI is much better than it was clearly during the crisis, but that's an industry issue. As you know, a lot of the securitization markets, the public ABS markets were closed and funding was very tight. I am pleased to say that we've been able to re-access, and as a matter of fact we just booked a rather large ABS transaction, securitizing German auto receivables for a bit less than €1 billion a few weeks ago. Our spreads have decreased over the period, and I am never satisfied obviously with the cost of that. But availability of funding is certainly not an issue.
We are issuing regularly, and we've maintained a rather steady amount of certificates of deposits, and we've been progressively, over the year, coming back to a more normal distribution in our funding patterns at RCI. So that is something which I expect to continue through the rest of the year.
Now does that mean we need to change our strategy? The fact of the matter is that the loan portfolio has been growing. We are seeing the same thing on the loan side as Patrick explained on the transaction prices for vehicles. We are seeing the average loan amount increase, and all of that is good for margins.
And don't forget that a big part of the earnings that I announced on RCI is the result of commission and fee-based income from automotive services and insurance products that we're selling more aggressively worldwide. So the funding pattern at RCI is not a concern.
Now in terms of the debt targets, now back to Renault and just the industrial or manufacturing indebtedness, the guidance that was given by the CEO was to drop that to below $3 billion. And we still have some work to do because we are at a little bit below 4.7 right now, and we need to do that. I think he also said that the optimum or the ideal target would be zero. So, I've taken that as my marching instructions, and clearly that's a simple one to understand.
The variation in working capital requirements over the cycle, if you exclude very deep aberrations as we witnessed at the end of 2008 or in early 2009, and if you go back to the regular or normal seasonality even in a growing year, peak to trough is somewhere between €1 billion and €1.5 billion.
I now give the floor to Mr. (Eric Hauser) from Credit Suisse.
I just had a quick one the raw material impact you're guiding to in the second half of the year of €300 million. I just wonder, if you're saying the second half impact is going to be €300 million, should this mean that the impact in the first half is likely to be €300 million as well? And if this is the case, then how are you going to make money in the first half of next year?
Next, I was wondering how you were feeling about your current net debt level. Is the level something that you're happy with or endorse it bearing in mind that you probably will see it go up towards the end of the year? Do you think you need to do something non-organically to address this?
And finally, when you think about the dollar/yen exchange rates right now, how do you think about the Nissan contribution to your earnings for the rest of 2010? Thank you very much.
So the raw material impact, so what is sure is the steel contracts because they have been signed. The rest is, we try to be on the safe side when we give this figure. What we decided is also to slightly increase prices to compensate basically half of that, which price is transferred to customers. And this has started to happen end of June, and will happen for some of the countries I guess at the end of early September.
And the rest, we will try to recover it by acceleration of our purchasing cost reduction, which is what is currently going on, as I said in the presentation. For the debt, I mean Carlos Ghosn said it several times, the reasonable level for us is €3 billion and we are not yet there. So we are going to work hard on all levels we have in mind to get there. But there is nothing urgent obviously today in the current situation. So we do it, and we take our time.
I'll take your question on the Nissan and the Dollar/Yen. I think you saw their earnings release yesterday where they reported very, very strong earnings and profits at a much lower level of Dollar/Yen exchange rate than had been the case previously. And I think you saw their guidance. So those are the numbers that we have to work with clearly. They've been able to make adjustments so that they've improved profitability considerably with a more unfavorable exchange environment.
I give the floor to Mr. Francois Maury from Oddo Securities.
Francois Maury - Oddo Securities
Two questions from my side. The first one is a follow-up on the raw material issue. You did not mention what could be the cost in 2011. And could you give us some indication about the change in the nature of the contract, and especially in the maturity of the contract.
The second question is regarding the Duster. You mentioned the order book. Could you tell us what is currently the install capacity for the Duster and how this capacity will move going forward? And could you also give us some indication about the average pricing on the Duster?
Yes, the contracts on steel, I just got the answer from Christian Vandenhende, our Head of purchasing. So we have contract for the next 6 months. So this is decided, and for the 6 months later they are indexed on iron ore price. So we should take benefit from the current significant reduction of iron ore currently happening. That's why the impact should be lower. But anyway we consider this is a structural trend, so this is why we transfer to customers at least half of that and try to recover the rest on additional purchasing cost reduction.
I've also to say that there is now a big plant inside the company on raw materials to really, completely offset what we believe is a long term trend on raw material by full scope of countermeasures that gives more leverage to our purchasing department to shift supplier of steel by giving more flexibility to the plant to shift from one supplier to another one for making this and this part. And this is deployed now all across the company and many other countermeasures that I can list there.
The production capacity of Duster is, sorry I need to recheck the figure, I don't have it with me exactly because there are three actually; there is the one that we have now, there is another one for the full, and there is another one for mid-year next year. So I need to get this figure. It's something like 140,000 from the full, and we are working to make it close to 200,000 from somewhere in the first half of next year.
I guess Duncan can give you more detailed figures later on, on the phone, because I don't know them exactly now.
Francois Maury - Oddo Securities
Okay, thank you. What about the average pricing?
It's a good one. It's more a C-segment price.
I now give the floor to Mr. Ranjit Unnithan from JPMorgan
Ranjit Unnithan - JPMorgan
I have two questions, one is on car sales. If you could start by letting me know how French car sales have progressed in July? I know incentives have come down slightly from the first half of the year, so just curious how you're seeing French sales for July after that transition.
And by the way, if you could also give us your feeling for European car sales in July versus June, and how that's evolving, that would be helpful. Looking ahead, you've had incentives gradually phased down in France. What is your sense of how French car sales are likely to evolve as we go into the back half of the year, and perhaps into 2011, with the gradual phase-down of incentives?
Some people are saying that car sales, particularly in France, have held up better than expected even with the decline in incentives. So just any thoughts there, that would be great. Second is, on the loan that you've taken from the French Government, are you planning to pay a portion of this back this year? And if you are, is available cash sufficient to do that, or do you need to finance it from somewhere else?
And last question is just a clarification. On RCI Banque, to the question whether this was sustainable, I hear you when you say that the cost of risk is not going to take another plunge down. But are you saying that the current level of earnings at RCI Banque, at the current cost of risk therefore, is sustainable? Those are my questions. Thanks.
On the market in Europe for July we basically see double digit down. You will know the answer in a few days. So on France, it’s going to be also double digit but close to one-digit as far as I have seen, but sometimes it changes in the last two days. And for Renault, it should be slightly positive.
For the Europe sales of Renault, its minus 5% or minus 6%, it’s going to be in this range, I believe. For the two other questions, I give them to Dominique.
Thank you, Patrick. For the French state loan, yes we’ve publicly stated and we’re working on that right now, our intention to reimburse a minimum of 500 million. We’re currently working the details because the loan documentation did not provide for early reimbursement in 2010. So we are currently working out the amended documentation, and I expect that to happen in the fall, in the second half.
I think I showed you that we have ample cash to deal with this and that liquidity is certainly not an issue to begin paying down the loan. The second question about the sustainability of RCI. What I said is that the improvement from last year, when at the first half RCI reported 250 million in contribution to this year's 370 million, 52 million of that swing is the result of the lower cost of risk. And that impact is not repeatable.
However, maintaining a cost of risk at these more competitive levels is certainly something that I've taken as an objective, and if all the other parameters remain equal, and once again, we're a captive of the auto industry, so depending on where volumes are in the industry, but with what I see right now, the portfolio, the quality of the incoming scores lead me to believe that we will be able to maintain a good level of net charge-offs.
And then, I think I showed you also, to give you a perspective over time that RCI, there's very little volatility in its earnings profile, so we've been able to reset it at a higher level. But the nature of its business is one that is not volatile, and I think you should see stable earnings in the future.
Ranjit Unnithan - JP Morgan
If I could have one follow-up on the first question on sales, in the transition from June to July with sort of a different incentive scheme, have you seen a step-down in your orders that is more than seasonal? Or is it sort of a seasonal movement in orders as you progress from June to July?
No, there is no significant movement down. There is a seasonal one as usual, but nothing more than that. Because time is coming for conclusion, let me just add a few words.
If I summarize what we are saying, it's basically we are confident on our Q3 sales. There are question marks on Q4, but we can commit again that our free cash flow will be positive for 2010 leading to a depth lower than at the end of 2009, and this, whatever the Q4 markets will be.
I now give the floor to Mr. Charles Winston from Redburn Partners.
Charles Winston - Redburn Partners
Hi, good morning.
I'm sorry, the conference has finished Charles. Sorry. It was the conclusion, but very sorry about that. We will be happy to speak to you in a couple of minutes. I'll give you a call.
Charles Winston - Redburn Partners
All right. Thanks, Duncan.
Cheers. So if the operator could please shut the call. Thank you, as we have come to the end of our time and the conclusion has been completed.
Ladies and gentlemen, this concludes the conference call. Thank you all for attending. You may now disconnect.
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