Peugeot's (PEUGF) CEO Maxime Picat on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: Peugeot S.A. (PEUGF)

Peugeot SA (OTCPK:PEUGF) Q2 2014 Earnings Conference Call July 30, 2014 2:30 AM ET

Executives

Carlos Tavares – Chairman

Jean-Baptiste de Chatillon – EVP, Finance

Maxime Picat – CEO, Peugot Brand

Gregoire Olivier – EVP, Asia

Analysts

Thomas Besson – Kepler Cheuvreux

George James – Natixis

Rabih Freiha – Exane BNP Paribas

Philip Watkins – Citi

Laura Lembke – Morgan Stanley

Kristina Church – Barclays

Horst Schneider – HSBC

Erich Hauser – ISI

Unidentified Company Representative

Good morning, ladies and gentlemen, and thank you for joining us this morning. Welcome to the PSA Peugeot Citroen’s Conference Call on 2014 First-Half Results. Joining me today are Mr. Carlos Tavares, Chairman of the Managing Board, and Mr. Jean-Baptiste de Chatillon, CFO and Member of the Managing Board. As usual you can follow the webcast and download the charts from our website.

Let me now hand you over to Mr. Tavares. Carlos Tavares.

Carlos Tavares

Good morning ladies and gentlemen, and welcome. I’m delighted to be here with you today and share our results for the first half of this 2014 year. But before we hand over to Jean-Baptiste for the formal presentation, I would like to share with you two thoughts as important things I would like you to understand.

First one is, to recognize that we are now at a turnaround of our company. As you are going to see we have stopped the cash burn and that we are seeing some limited profits coming through our operations. This is good news. It’s recognition that our Back in the Race turnaround plan is delivering its first results.

And I would like to pay a tribute today to all of our employees and our management for these results. I would like also to express our strong appreciation to our unions for their constructive dialogue. Of course, I would like also to express my warm thanks to all the executive committee members who are sitting here with me today and are delivering a very impressive leadership in the company.

And last but not least, I would like to express also my warm thanks to the supervisory board members and all our shareholders for their trust and their support.

This being said, I think we need to stay lucid and recognize that we are only at the beginning of our turnaround. Even though we appreciate these results as an encouragement to go further and to stay focused and that show high determination in the implementation of our turnaround actions.

I think this is an important thing we need to recognize. And therefore, I would like to share these two comments with you before we go through the numbers. Let me now hand over to Jean-Baptiste for the formal presentation. Thank you.

Jean-Baptiste de Chatillon

Thank you, Carlos. Good morning. I’m glad to comment today results, which really shows that we’re back in the race. Let’s start with the financial results.

Revenues at €27.6 billion almost stable, recurring operating income for the group, is positive at plus €477 million an improvement of €577 million. Non-recurring operating income represents minus €100 million including restructuring charges of which additional provision for the automotive business in-line with our new social contract for €208 million and also one-off revenues related mainly to disposal of some real-estate.

So, net financial result is a negative at minus €344 million, in fact it is fairly stable year-on-year if you take into account that we had a plus last year with the sale of the BNP shares for €89 million.

Income taxes minus €183 million, share in net earnings of companies of equity represent €108 million mainly the result of our share in our Chinese joint venture, DPCA. Consolidated net income is slightly negative this semester at minus €42 million.

Group revenues slide 5, automotive revenues represent €18.61 billion quite stable versus last year. But the best way to look at it is the pro forma revenues including our part of revenues from our Chinese JVs which is a growth of €193 million versus 2013.

Faurecia revenues are up slightly up slightly up, and Banque PSA Finance revenues are down minus 4.5%.

For the auto division slide 6, we see that H1 2014 revenues are slightly down minus 0.9%. Of course it’s negative impact of FOREX minus 3.8% which is compensated by the positive effects of price on product mix respectively plus 1% and plus 3.5%.

Slide 7, automotive division represents plus €7 million which is a strong improvement of plus €545 million, but there again, the best way to look at it is the pro-forma ROI of the whole automotive division including our share of Chinese JVs, which represents plus €128 million compared with last year, now which is €128 million in H1 2014, an improvement of €576 million.

Faurecia continues to develop with recurring operating income reaching €311 million and Banque PSA Finance recurring operating income is reduced to €172 million.

Let’s look at the auto-recurring operating income. The improvement is clearly not coming from operating environment, minus €333 million effectively, so market demand is still down even though Europe is slightly up. And the FOREX is a strong negative with minus €251 million. But this negative operating environment is more than compensated by a strong positive performance of plus €878 million all component of performance are positive in H1.

First product mix, with C4 Picasso, 308, 2008 all the cars we’ve launched at the back end of last year are now at true steam and this creates a very good momentum in product mix.

Price on product enrichment, that this concept is normally structurally a negative since it reflects the price erosion of the car launched in the previous years. Here it is positive mainly because we have compensated the FOREX, the negative impact of FOREX putting up our prices. But even if we take out this effect of FOREX, we have a much more controlled situation in terms of price erosions, which reflects our strong pricing policy and our price discipline.

Market share is a slight negative on country mix is a positive due to the European market being up.

Production and procurement, we have a strong positive of plus €254 million which reflects the performance of our European manufacturing especially performance of our European manufacturing sites but also all our cost reduction actions, SG&A, R&D, everything, all the cost alignments are an improvement compared with last year.

If we move to slide 9, Banque PSA Finance, where revenues declined by 2.4% to €848 in the first quarter notably due to lack of competitiveness of our cost offend, but penetration rate is maintained at a good level at 27.3%, on cost of risk is kept low at 0.5%.

We have signed a partnership with Banco Santander, which will help restoring our competitiveness by the end of 2015. Faurecia, revenues are slightly up despite negative exchange rate impacts, but growth is strong in Europe on Asia.

Let’s move to the cash flow analysis, slide 11. Our net financial position is positive to €224 million by the end of June 14, as compared to minus €4.181 billion at the end of ‘13, which represents €4.5 billion improvement, which of course includes you see on the right hand, so €2.9 billion impact of the Wright issue and a positive €1.514 billion free cash flow.

Excluding restructuring minus €283 million on exceptional items related to net asset disposal plus €130 million. The operational free cash flow reaches €1.667 billion. So, first driver of this performance is cash flow, at €1.459 billion, it compares with €894 million last year, so the main driver is effectively the structural improvement of the performance of our operations.

So, second driver is a change in working capital. Change in working capital reflects the seasonality of our business but also structural improvement of our working cap requirements. You see that other changes in working capital requirement plus €547 million, this is mainly due to tax and social debts that will be repaid in the second half so that will reverse during the second half of the year.

If we take a look at the optimization of our working cap, on slide 12, you will see that our inventories are effectively going down. Well, speed is a characteristic of our plan back in the race and you see that we try to reach our target as soon as possible and we think we will target below €3.8 billion by the end of 2014 for the automotive division.

All managers have beaten their own target at the end of June, showing their commitment to their plan on finding ways to improve structurally the working cap of the automotive division.

Inventories, slide 14, our inventories at the end of June are down to 406,000 units. Independent dealers inventories are almost flat in spite of the demo cars needed with four major launches in Europe at the end of the first semester, 308 Station Wagon, C4 Cactus, C1 on 108. So you will see in Europe, because of those launches, we have invoiced more cars than we have registered with end-customers that is why our sales are growing above market growth but our market share is stable in Europe.

CapEx and R&D slide 14, well, in terms of CapEx and R&D, we are on track with our plan back in the race, we keep in the range of 7% to 8% turnover of the turnover and we are enhancing the efficiency of these expenses.

Let’s have a look at our debt maturity profile, slide 15, just to remind you our situation of repayments. We have nearly €4 billion to repay in the automotive division between ‘14 and ‘16. Of course this will help us to reduce significantly our financial cost. We are targeting to divide by two compared with 2013, the net financial cost of the automotive activity by 2016. This will of course be facilitated by those repayments.

Well, thank you very much for your attention.

Carlos Tavares

Okay. Thank you, Jean-Baptiste. Let’s now go through certain number of additional information to give you a full perspective of our business and I would like to start with sales. Just to highlight the fact that as it was mentioned by Jean-Baptiste we’re able to increase our sales by 5.5% worldwide. And this is the result of two major engines, an European engine with 11.7% sales increase and a Chinese engine with 27.7% increase which is quite impressive step forward.

As you can see overseas on international sales, beyond Europe, we had a slight decrease of 3% despite the strong performance of China. And it comes basically from Latin America and Eurasia where our major focus was to reduce the red ink we have in those regions and make sure that we set the floor for a rebound moving forward. This is something that is absolutely paramount for us and therefore the focus was we’re using the red ink in Latin America and Eurasia.

And in Middle East and Africa, we also have a loss in terms of sales, reduction of sales, mostly related to the fact that the local currencies were weak are getting weaker. And therefore we had to increase the pricing to protect our margins and we had consequence on the sales.

So, overall two major engines, Europe up 12%, China up 28% driving a worldwide sales increase of 5.5%.

If we move to our major objectives of our turnaround plan, not to comment them because you already know the content of the Back in the Race turnaround plan, just to tell you that within this half year results, we have some evidence that the profit culture of the company is improving. And that our people are getting a sense of how they need to drive the business in order to ensure overall results.

The optimization of our inventory is one of the examples but not the only one. All the actions taken in terms of improving the net pricing are also another example. And last but not least, the understanding that accelerating the productivity in our European plans is going to be more room of maneuver in our European sales is also a third example.

So, what I would like to highlight here is the fact that step-by-step, the profit culture of our people is now improving which I think is a major factor for the future.

If we move to the pricing, I would like to state that we are moving forward. I would say mostly with the Peugeot brand, with through this first half of the year closing somewhere part of the gap yet limited part of the gap against our benchmark.

And now we are setting both the plans the discipline and the processes that give us a better control in terms of pricing. And it was highlighted by Jean-Baptiste that discipline in pricing management is absolutely paramount in the mature markets in which we are operating. And this is something that we are now doing with three brand CEOs who are in-charge and leading the pack.

If we move to the product and sales and marketing activity, I would say that we had a very intense period and we will continue to have a very intense period moving forward. From left to right, first on the premium brand, we launched the DS 5LS, stylish sedan in China, in March 2014. We revealed the first cross-over for the premium brand in China, the DS 6Wild and the Refined crossover, which will be launching September 2014, so very soon.

And we are so refreshed with the DS 3, with a new light signature that you can see here by the way. And of course we were blessed by the 300,000 sales of this car worldwide.

On the Peugeot side, we have now strong and robust success of our Peugeot 2008 crossover. It is our most global car nowadays and we’ll continue to reinforce the fact that this is a global crossover so addressing many, many markets. We launched the Peugeot 108 in June, and we also revealed the new Peugeot 508 without forgetting the 408 in China which is also a very stylish sedan that will bring I’m sure significant profitable growth in China.

Last but not least, for Citroen we launched the C4 Cactus in June, this is Citroen C1 also in June. And we now see that the C4 Picasso as an MPV is performing quite well for tourisms. First, it’s the first sales in the segment, first market share in the segment, it’s first ranking. And secondly because the mix of equipment of very, very high. And therefore, it’s a good lever for our profitability.

If we move to some other events, I would like to state that the C4 Cactus is a very refined representation of the positioning of the Citroen brand, which owns the comfort and useful innovation and also conceptual and design innovation. This is very well represented by the C4 Cactus.

As you know, as I said, the C4 Picasso is now leading the pack in its segment in Europe and this is a very good reward for the product and engineering people who created this car, the Peugeot 308 was awarded Car of the Year in Geneva this year. And that the SW version, the station wagon version is now getting a very good result in terms of orders since it has been launched.

We also are now preparing to launch the premium crossover in China, we did the S6. And finally two important information that we’d like to share with you, first, the fact that at this moment the age, the average age for portfolio for the three brands is 3.4 years.

It is very important to notice this because it means that moving forward and specifically moving into 2015, we are moving into this business year with a very young portfolio which of course is a good lever for implementing good business in terms of net pricing and also in terms of volume.

I would like also to state that in Europe, our Automotive Group PSA is now leading the pack in terms of emissions as we have 111 grams per kilometer CO2 average emissions for our portfolio, which is the best result that you can find in the automotive world in Europe so we are leading the pack in terms of environmental matters. And those two things are I think things we should be sharing with you.

If we move now quickly through the different regions and moving to Europe, just to highlight that we maintained our 12.1% market share, the second automotive group in this region that the 308 is the first in its C segment in France that the 2008 is the second in its segment in Europe that we were awarded on our THP engine recognizing the performance of our Power Train engineering. And that we are still the leading group in terms of LCV sales with no less than 21.2% of market share.

If you move to China and Southeast Asia, as you know, we have announced that we upgraded our sales objective for this year, shooting for 700,000 units in this market for 2014.

We kick-off the construction of our fourth plant in this market in Chengdu in order to be able to deliver in 2016 no less than 1 million cars per year manufacturing capacity in order to support the sales growth. And we have also set an R&D JV with our partner Dongfeng. This is for our JV with Dongfeng called the PCA.

Regarding the JV with Chang’an that we call CAPSA, where we support the premium brand where we support the premium brand DS, we have also continued to work on our network to grow the number of our dealers reaching 60 dealers by the end of H1 2014. We have two significant launches as it was mentioned. And we overcame the 10,000 sales for DS in this market.

So, this is of course high potential moving forward. As I said, this is the second engine of the company, first one being Europe. And now we are blessed with a second engine which is going to support the profitable growth and the turnaround of the company.

If I move to Latin America and Eurasia, these are the regions where we are still making red ink but I would like to share with you the fact that we are reducing sharply this amount of losses and that the turnaround plans that we have in those regions are now delivering also some results.

And because now we are moving to the final point of the right-sizing of our operations, we are also preparing for the rebound and deciding what are the investments which are relevant to support the rebound of our operations and to bring back those operations to a profitable situation as soon as possible. I would like to highlight that our market share in Latin America is at 4.6% and in Eurasia and specifically in Russia at 2%.

So, this is for these two regions where we are working in reducing the amount of losses. If I move to India-Pacific and Middle East-Africa, just to mention that in India-Pacific, the opportunities are still there. As you see, our amount of sales in this region is very limited with around 10,000 sales on the first half of the year.

I would like to state here that we are introducing new products like the Peugeot 2008 launch in February in Japan, introducing also the Citroen brand in South Korea and also the Peugeot 308 and the C4 Picasso. These are some of the examples of product introduction that hopefully will give a smart potential in this region.

In Middle East-Africa, as I stated this is a profitable region, where the potential is still quite high. We are now preparing for the re-launch of our operations in Iran as soon as the international regulations will allow that. We want to be ready and we want to be in a rolling start as soon as the environment is positive and we have the appropriate framework to move forward.

So far things are quite positive but of course we didn’t get yet the external environment and regulatory environment that allows us to start complete the operations.

We also have an agreement in Nigeria with Pan-Nigeria to assembly locally some cars, and this is the first example of our conquest plan for Africa that we have now prepared and that we are starting to implement.

If I move to some other matters related to cost, to tell you that in terms of fixed cost, we are now reducing our fixed cost, it’s quite visible on the first half. Hopefully it will be even more visible at the end of the year.

In terms of total labor costs, we see now that the needle is moving with the forecast that we will be this year below 14.5% of cost against the turnover coming from 15.1%. And this is calculated with a rather conservative number for the turnover.

So the needle is moving and we expect in the next half year and next years to see it moving even faster to achieve the objective that you have set for ourselves which is no more than 12.5% of labor cost to turnover to be compared with an average in the industry of 13.5% and a benchmark of 11%.

In terms of manufacturing capacity utilization rate, the rebound in Europe has improved significantly the situation. As you can see in the first half, we achieved an 84% utilization ratio compared to 72% for Europe in 2013.

This is of course a significant lever to improve the productivity in our plants, but I would like to state here that the amount of productivity that we are seeing in our manufacturing operations goes far beyond the impact of the activity meaning, the impact of volume which means that many other things are now being implemented in terms of enhancing the efficiency of our manufacturing plants in Europe which is a very positive thing of course for our profitability.

I would like also to state here that we are on track to deliver the €600 of product cost reduction by the end of 2014, as it was committed in the previous presentations. This commitment will be delivered this year. And as you know, beyond this commitment we have already announced that the Back in the Race turnaround plan will bring us €500 cost reduction for the period going from 2015 to 2018.

This is what I wanted to share with you. And to conclude, the last point would be to give you some perspective of the balance between opportunities and risks for the rest of this year of 2014.

First, I would like to tell you that we remain extremely focused in the reverse of our Back in the Race plan. But of course we consider that this result for the first half are an encouragement for our people. But they don’t represent of course the end game of our turnaround plan we still have many things to do to restore our profitability. And this is what we want to do as to stay very focused, very lucid on the challenges that we still we have around.

So, moving forward in terms of opportunities, we see this result as an opportunity to boost even more the motivation and the energy of our people to move forward with implementation of our turnaround plan. Secondly, we believe that we still have room of maneuver in terms of pricing by having even better marketing communications and even better discipline the way we manage our products.

And we have two parts of this pricing policy. One is to take the advantage of a great new product to make sure that when we introduce great new products, we hold on to a lower level of incentives. And secondly, making sure that with higher level of discipline, we limit the erosion of the pricing for the existing products so the older products of the range.

Third opportunity is sales in China. Things are moving fast and strong. We are finding solutions in terms of manufacturing capacity to support our sales. And you will see that our results in terms of customer service in China are absolutely great.

We are number one and number three in that market which means that people are doing the right things to make the customer happy. And as you know this is a strong lever to improve the business.

In terms of risks, we have of course what we consider as being a very unstable situation in Europe we consider that the slight rebound that we are seeing is still very fragile. And therefore, we remain very cautious in terms of surfing on this European growth, as long as it’s, its fine. But we consider it’s very fragile moving forward.

In terms of order rate risks, what is also a risk for us is the fact that within Europe, the French market is growing less than the other markets which means that for us we don’t benefit as much as we would like from the European rebound because of course a significant part of our profits is made in France.

The third factor of course is the factor related to the currencies and the instability of some of our emerging markets starting with Argentina. Of course we see that the currency’s impact, the weak currency’s impact for emerging market operations is damaging some way our profitability.

The fact that also in terms of regulations, it is very difficult to pass through the consumer the cost of Euro 6. And as you know, the build off materials to deliver on those regulations is a significant one. So this is a risk.

And last but not least, we see that within our network of suppliers, we have some tension in some cases where in a policy that is single supplier for one part that could represent that one point in time a risk for the operations of the company. And as you know we need to manage it in a very fluid way moving forward.

So those are some of the opportunities and risks I would like to share with you.

And finally in terms of outlook, we didn’t change our guidance except for Russia where we see that the prospects are a little bit more, gloomy with minus 10% on the market moving forward.

And I would like to conclude this telling you as I stated in the introduction that we consider these results as an encouragement to move faster and stronger in the implementation of our turnaround plan. But we remain reasonably lucid on the fact that we still have many, many challenges ahead. And we need not conclude by far all the work we intend to do. Thank you very much for your attention.

I think we move now for the Q&A.

Question-and-Answer Session

Unidentified Company Representative

As we move now into the Q&A section of our call, can I please ask you to limit yourself just to two questions. And please tell us your name and affiliation. So let’s start with a question. So, we have the first question here on the left. Okay.

Thomas Besson – Kepler Cheuvreux

Good morning. It’s Thomas Besson, Kepler Cheuvreux. I’m here, sorry. So, two questions please. First, on China and the royalty system, can you just remind us exactly how this system works, when it started and how it impacts your EBIT bridge, we can see that in the EBIT bridge, that’s question on China?

Second, simple but I think it affects the understanding of performance both operationally and cash flow Renault and Peugeot included. Can you remind us exactly what happened in the first half at Peugeot to explain the big difference in terms of what’s effectively reduced, sold, how it impacts the operating performance in H1 in the free cash flow?

And intuitively, how we should think about the second half where some of the non-repeatable items won’t be there again if I understand correctly? Thank you very much.

Carlos Tavares

Okay, thank you for your two questions. First of all, regarding the Chinese operations, I would like to Jean-Baptiste give you a little bit more information. But I would like just to share with you the fact that they way we build our profitability is somewhere a competitive advantage and therefore we don’t want to disclose too much about it because it’s a mechanism that I think is at the foundation of our profitability.

Therefore it’s a combination of profit on parts that we deliver to our partner of royalties and on profit that is made locally. But as it has been shown, you have the earnings that are at €108 million that represent the profitability of our Chinese operations. So it’s a combination of those three factors, profit on parts that we ship to China, royalties and profitability of our JV.

Secondly, for the inventory and for the free cash flow, what we have seen from this first half is that we have the great potential to streamline the way we were managing our inventories. And this is not rocket science. It is, very simple knowing what are the numbers that we should be achieving for a company of this size and going through all the lines of inventory in the company. And there are approximately 15 to 20 lines that you need to look at.

And if you look at those lines and you ask people how do you manage a reduction after the first step when people tell you that you’re already optimized blah, blah, blah. In fact there are many, many ideas that we can put on the table. And what we have seen in this first half is that people were very empathetic to new ideas were keen to implement those ideas.

So, I would say that in inventory what we have seen was a very joyful implementation of some new ideas that delivered great results in terms of reducing the inventory. I don’t think we are over, but of course we have captured the low hanging fruits on that matter.

And for the inventory as you saw, the total inventory of cars was reduced. And the mix between the network and OEM was not significantly changed and mostly changed because of the launch of the new products that we are currently launching in the market.

So those are the two major factors, I don’t know if Jean-Baptiste wants to add something else.

Jean-Baptiste de Chatillon

Just maybe a word about seasonality to remind you that on the EBIT, we have always a lower second half because of the holidays of August and December so that has to be taken into account. And also, we have a specific seasonality on the free cash flow because dividends are taken into account in the first half and of course not in the second one.

The level of manufacturing output being lower in the second half because of August and December so there is also some impact on the cash flow. So, we have always a seasonality but as it was just explained, so changes in the inventories, normally it should have been negative in the first half because we are normally growing stocks compared within the previous year to face the stoppage of the manufacturing sites in August.

There, it is a reduction. And this has been done, through all across the company, all type of stocks. And it has been achieved on a very structural way. And it is repeatable effectively every month which frees some capacity for the group to use up this cash for investment on cash security.

Unidentified Company Representative

We take the second question here, on the left side. Please George, go ahead.

George James – Natixis

Thank you. George James, Natixis, two questions. The first question relates to the pricing issues and the quality of sales. If you could maybe shed some light on to express the quality of sales in terms of sales channel, with individual fleet sales and like just to have an idea of how this particular item has been improved in the first half?

And when you talk about pricing discipline, what kind of incentives do your dealers have to really go for the most profitable products instead of just selling what they have at hand. So do you have a system really to implement this pricing strategy within the dealer networks? So, this was the first set of questions.

And second has to do, if the Banco Santander deal, if you could maybe give more color and more specifically on how it will be split between the new JVs coming on-stream and the portfolio that you would be buying, that Santander would be buying from BPF because I guess that could have an impact on the cash up-streaming which could maybe take place earlier than expected?

Carlos Tavares

Thank you very much for your two questions. As you may recognize, the way we manage strategically our pricing is also something we would consider as a competitive advantage moving forward. Nevertheless, we would like to answer your question.

And we have been doing significant efforts to move out of some toxic but that we had in the company. And frankly we could have done more volume but probably with more toxic business that we want to get rid of. So, as Peugeot is leading the pack in this matter, I would like to ask our brand CEO Maxime Picat to give you a more detailed answer on this matter. Maxime?

Maxime Picat

First of all, about your question on we just show on the half year results that we have an nice improvement but a small improvement on our European market share. But in fact if we look at retail, we had almost 1 point of improvement of market share which clearly shows the fact that we are with our newest range of cars and the latest launches through our 2008.

And H2 really gained market share and the most profitable channel. At the very same time, we’re slowing down on non-profitable B2B business but also on LC on short-term rental cars because part of all the action we took to improve our inventories are also second hand inventories. And to do so you have to be really cautious about the volumes of short-term rental cars that you’re selling.

And as Carlos Tavares said, the pricing management is really something which is key to our competitivity. But you have to know you mentioned the fact that there was a question for managing the dealership and incentive but many, many tools that we’re using about the product, about the way that we’re building our ranges so ways that we are marketing it and communicate it.

And we are clearly triggering every, single levers that are in our hands to step-to-step, country by country, car-by-car, improving the pricing power. And we can see that we are on the line of the Back in the Race target that we have decided and presented to you some months ago. Thank you very much.

Carlos Tavares

Thank you, Maxime. So, for the Santander question, Jean-Baptiste is going to…

Jean-Baptiste de Chatillon

Yes. Just to remind you, that we have effectively signed our agreement with Santander and we are now executing the principles that we explain which is to set-up new bonds in several countries partnering 50-50 into capital of those new bonds.

So we are in the usual procedure of asking as regulators to allow us to create those bonds. And it takes some time, that’s why we have to wait until 2015 and to see the full benefit of the – to regain competitiveness.

If we were to accelerate with Santander with purchasing of portfolios, we would keep you updated. There is already some mix of purchasing of portfolios for instance for the dealership portfolios, it is planned that why we create those new structure all the dealer’s talk is being taken directly by Santander. So, we are implementing, we are on track with our project.

Unidentified Company Representative

So, we are going to take the next question from the call, please go ahead.

Operator

We have a question from Rabih Freiha from Exane. Please go ahead.

Rabih Freiha – Exane BNP Paribas

Yes, hello everyone. Rabih from Exane. I have two elements I would like to discuss with you. First on your operating profit bridge, if I look at the operating profit bridge in H1, if I look at the swings specifically and if we assume that we divide those into four big categories, volumes, FX, product mix and savings, which swings do you see getting better in H2 versus H1?

And pending an external shock, is it fair to say that PSA has become a positive-margin company with continuously progressing margins sequentially in H2 and into 2018?

And my second question relates to China, when I look at the details in your earnings report, the margin of DPCA improved by around 50 bps to 7% in H1. How do you see the margin progressing at DPCA given the costs that you’ll have related to the new plant you just announced? And is it fair to maintain a 7% margin in H2 and in ‘15? Thank you

Carlos Tavares

Okay. Thank you for your two questions. Let’s start with the first one, on the step chart. Jean-Baptiste?

Jean-Baptiste de Chatillon

Yes, well, I think the answer after taking into account what I said about seasonality at H2 is always lower. There is no specific lever that should be mentioned because all the levels of Back in the Race are being activated. And you see they are all bearing fruits in H1 and they will go on bearing fruits in the second half.

So, we will improve slightly on progressively margins because of cost reduction on pricing policy so that’s not saying specific to mention on the second half, we will go on as quickly as we can, improving and deploying on Back in the Race levels.

Carlos Tavares

Thank you, Jean-Baptiste. For the second question about China, I would like to ask Gregoire Olivier, the Head of our Chinese operations and Southeast Asian operations to answer your question. Please Olivier – Gregoire?

Gregoire Olivier

So, as you said our margin for the first half for DPCA was around 7%. This margin will keep increasing as the volume of cars sold by DPCA increases, especially since in 2015, 2016, we will have very high utilization rate of our existing plants, probably close to 120% next year after next. So, it will help the margin go up.

And your second question about the cost of the Chengdu plant that we’re going to build, impacting the margin, the cost of the plant is capitalized so there will be no margin impact for the first two years. And then, as you know DPCA signed an investment agreement with prevent of Sichuan and the city of Chengdu, and there will be some subsidies which will offset the cost of the plant when we’ll start to amortize it in 2017 and beyond.

Carlos Tavares

Thank you Gregoire, I think that another point that we could add is the fact that the timing with which we trigger the new plant is paramount to avoid any significant burden in terms of depreciation per unit.

And this is something that Gregoire Olivier has been working very hard on with his partners from Dongfeng which is to make sure that when the new plant pops up, you are exactly at the limit of the utilization rate of the previous ones. And you can immediately have a very significant ramp-up in the new ones so that you don’t get caught in a lower utilization rate for the new plant coming in.

And this planning, the planning of the timing at which you bring up the new plants based on your forecast of growth is of course paramount in terms of delivering results with our penalty as your question was understating. Thank you very much. Let’s move to the next one.

Unidentified Company Representative

So, the next question from the call please.

Operator

We have a question from Philip Watkins from Citi. Please go ahead.

Philip Watkins – Citi

Hello, good morning and thank you for taking my questions. I just had two. Just very specifically on the free cash flow and the change in working capital, I can fully understand the other change in working capital will reverse. On the rest, the other €500 million or so positive, how much of that do you think will reverse in the second half?

And then just if I can just perhaps talk about Asia, it doesn’t seem to be affecting you right now, but you hear about regulatory worries about spare parts pricing for some of your, some competitors at the slightly higher end. What are you thinking about the regulatory environment in China related to pricing right now? Thank you.

Carlos Tavares

Thank you for the two questions. Let’s start with the first one about free cash flow, Jean-Baptiste.

Jean-Baptiste de Chatillon

Well, as you know, thank you for your question. As you know, we’re not guiding on free cash flow for the total year. But of course we are targeting to keep as much as we can of these good results in the first half, some of it naturally and structurally reversed.

I said for instance, €547 million tax on, the social debt are being reversed in the second half. But of course we will keep at our plans in terms of inventories and in terms of payables and in terms of receivables. So we are aiming to keep as much as we can. It will be a clear positive on the total year.

Carlos Tavares

Thank you, Jean-Baptiste. Regarding the question about parts that you mentioned yes, we are aware of certain number of communications that have been made in terms of putting pressure on the pricing of the box. I would like to recognize that in those rankings, PSA is not in a bad position, we’re not the target of those communications.

Even though of course, this put pressure on the profitability of the Chinese automotive operations of all the OEMs not specifically ours. Therefore, the warning is that we need to work more in reducing the cost of our sourcing of those parts making sure that we protect our margins if they were to be any regulations on that matter.

And we can use all the things we have learned in our other markets like Europe where we have different tiers of spare parts, there are different ways and different proposals to the market that can be done in terms of maintenance, contracts, etcetera to protect the overall profitability of the after-sales business.

But we are aware of what you were understating and we are now going to work on the what could be our turnaround, our counter measure if that pressure was to increase.

Unidentified Company Representative

Okay, thank you. We’ll take the next question also from the call please?

Operator

We have a question from Laura Lembke from Morgan Stanley. Please go ahead.

Laura Lembke – Morgan Stanley

Yes, good morning. I also have two questions. The first one is on working capital. I think you mentioned in the Back in the Race plan that you’re looking for €1 billion total improvement within the next three years, but you’ve essentially achieved that.

Having looked at the business in detail how much more scope do you think there is for ongoing working capital improvements within the next three years, that’s my first question?

And then the second one, coming back to Dongfeng, I had a look at your unit growth, which was basically up 28% in H1, but your revenues only grew by 18%. So I’m just wondering if this is a reflection of a weaker mix or actually price pressure. Thank you.

Carlos Tavares

Thank you for your two questions. I would like to answer the first one and Jean-Baptiste will take the second one. On the first one, I would be arrogant if I was to tell you that at any point in time, we are finished, we are over. Of course progress is never over.

What we have seen through this first effort that we have done to use our working capital is that it is very healthy to challenge our organization in terms of reducing the amount of cash that we are using to run our operations. I would give you just one example.

When you start asking the after-sales people how they are going to reduce the amount of stock they have in parts, of course the first reaction is very human, very normal. They would tell you yes, but what’s out to be the service rate to the dealers, which is fair. Of course we don’t want in any way to deteriorate the service rates in parts to our dealers.

But once you dig in, and you start looking at it, you see that there is a huge discrepancy between the high rotating parts and the low rotating parts. And what you discover is that while you are delivering the service with high rotating parts, you have a significant chunk of lower rotation parts, while still there to use your cash which of course is not what we should do.

Therefore we discovered that the way we manage the inventory needs to be refined and sophisticated in a way that reduces the amount of stock we have on low rotation parts. And eventually even increase the stock for the high rotation parts and overall, reducing the amount of cash that is trapped in the sales, after sales operation.

So, my point is, answering to your question and telling you that there is no more room for improvement would be arrogant. This is not what is needed for this industry. And reversely, we also need to recognize that there are some low hanging fruits. Therefore, if those fruits are there, it would be unwise not to grasp those fruits immediately as the company is rushing to turnaround its operations.

So, what we have done is that those low hanging fruits are now captured. We are going to continue to work in a very deep way and making sure that not only we reduce the cash that we are using but that reduction is going also to be a lever to improve the business and the way we are making business. And I give you the example of after sales, but there are many other things we can say about new cars or even used cars about the impact that some pressure on the working capital delivers a healthier business model in some other areas of our automotive business.

So, is there any more things to go after? Of course there is. And this is what we have said. As soon as we reach the objective that was mentioned by Jean-Baptiste, I think in 2016, if we reach it earlier, we will come back to you and say, well, now that this objective is reached, this is the next step that we are going to do. But of course, as competitors, as we are – we recognize that progress is never ended. Jean-Baptiste?

Jean-Baptiste de Chatillon

Also maybe to add to your working cap, it’s €1 billion in inventories, our target. But we are also improving and we have some improvements already in this first half in terms of selling some of our receivables. It was an increase of around €300 million extra sales of receivables which has participated in the improvement of our working cap in this first half.

Carlos Tavares

I’ll let (inaudible) comment.

Unidentified Company Representative

On China you’re right. Our price per unit in Euro went down but our price per unit in RMB was more or less stable, because in the first half of 2014 we sold more 3008, it was a good mix with price. We started to sell 2008 which is also increasing improving the mix. But we also sold more 301 and C-Eliza which are in the entry C segment. So overall the mix effect was flat and most of the decrease of our average unit price in Euro comes from the fact that RMB was much lower in Euro in the first half 2014 compared to 2013. So, it’s conversion rate effect.

Unidentified Company Representative

Thank you. So, can we have the next question please from the call?

Operator

Question from Kristina Church from Barclays, please go ahead.

Kristina Church – Barclays

Yes, Kristina Church here. Thank you for taking my question. I just have the one question and it relates a little bit more, longer term structurally to obviously you’ve had great success on the pricing side of things recently.

What do you think, do you think that that’s going to continue when you do start to cut down on your products that you offer, given that a lot of your competitors are actually going into more niches and finding that those niches can be more profitable? What’s your thinking in terms of the huge amount of products you’re planning to downsize, what that will do to profitability, particularly pricing? Thank you.

Carlos Tavares

Thank you for your question. First of all, I would like just to highlight an important fact for our understanding. When we say that we weren’t more compact range of products in fact what we are seeing is that we want to have a more global line-up that gives us the ability to improve the efficiency of the upstream. But of our company which is creating new products, great products developing those cars and then making sure that those cars are global. This is where we see the efficiency of a more compact line-up.

From a sales and marketing perspective, in fact the level of coverage of the markets in terms of having an offer segment by segment is going to slightly increase against the current situation. So there is no impact, there is even a small improvement in terms of market coverage.

So we don’t foresee any impact in terms of potential of sales growth linked to this core model strategy where we make more global cars and less regional cars in order to improve the efficiency of the upstream part of our company. So, that’s one point that we need to understand.

And of course you know from the competition, were the companies who have implemented successfully this kind of strategy, point number one.

Point number two, in terms of pricing strategy, I think we should share with you in a very humble way that we are just at the beginning of the process. It is extremely difficult to make sure that our customers and the markets recognize the value of our products and the value of our brands.

It is not a short-term direction, it’s something that work relentlessly with high level of focus and dedication for many, many years. It needs an improvement in our marketing skills. It needs an improvement in our discipline. It needs of course to leverage fully the great products that we are creating day by day.

And of course our level of demand towards the upstream part of our company, designed engineering is higher and higher to make sure that each time we bring a new car to the market, this is an opportunity to step-up the net pricing of our product. And then step-by-step using the attractiveness of the new products, we can climb in that scale.

Of course giving our people the ability to focus on the lower number of cars gives us as a company a higher probability to deliver great product to the market because all of the talent of our people will be funneled in a limited number of products.

This is the overall direction but I would like to make it very clear that this leads sometime to be implemented. And the results that we have been seeing are an encouragement but by no means represent a significant step forward at this stage.

Unidentified Company Representative

Thank you. We’re going to take the a last questions. And the next one on the call please?

Operator

Question from Horst Schneider from HSBC. Please go ahead.

Horst Schneider – HSBC

Yes, thanks for taking my question. It’s Horst from HSBC. Basically I want to be a little bit more specific. But first of all I want to ask why haven’t you specified the guidance for 2014? Is it because you still have got a great part of uncertainty for H2 and you are unable to be more precise?

And second, I want to ask what we should think about the unit sales development in H2 versus H1. I mean, seasonally, normally H2 is weaker than H1 in terms of unit sales, but you have got product launches like the C1, 108 or C Cactus, and especially the C Cactus is a complete new model.

So, I want to ask if it’s reasonable to assume that H2 unit sales will be globally at least as high as it was in H1. And the last question that I have is on currencies. It would be great if you could specify to which extent you expect the currency burden to be reduced in H2. Thank you.

Carlos Tavares

Thank you for your two questions. I will ask Jean-Baptiste to give you his answer about volumes. I would like to address your question about guidance. There are two different dimensions to the answer. The first dimension is that we want to be absolutely rigorous in the way we communicate with investor community by delivering always on our commitments. Therefore, being a new head of this company, I wanted to make sure that at any point in time, we will bring what we have committed.

There is another dimension which is the fact that in terms of management, this company has suffered a lot in the last years. And what is important is not to put more pressure in the organization. Additional pressure in this organization would not work because of the very difficult years of crisis, emotional crises the company went through.

Therefore, we need to inspire people, we need to bring them altogether all along and make sure that they have joy and pleasure in delivering results and demonstrating their own skills. This is the reason why I decided not to put more pressure from our external commitments to this organization. And reversely try to bring them all along a more joyful recovery mode which I think is what we are now collectively creating.

So, I don’t think it would be productive for the company therefore for our investors to give tight guidance to the company for 2014. But of course, you know us. And know that we are competitors and that we will always try to do better than what we say. As you know all of our guidance is mentioned at the latest which is what we are now trying to do.

We’ll see, you see that the environment is very, very volatile and very uncertain being from one side the currencies, from the other side, the uncertainty in Europe. Everybody is always questioning the growth in China.

The volatility of the market would not make a strong guidance in 2014 wise. Reason why? We prefer to make a more mid-term guidance and then try to do better if we can. And if the circumstances and the opportunities that are on the table can be captured by the company. This is the spirit in which we are giving our guidance. Jean-Baptiste.

Jean-Baptiste de Chatillon

Yes, well, in terms of unique sales for the second quarter, well, the same policy will be applied as the one we applied in H1 where we have also many very good launches. Since our focus is on pricing properly new products, especially those few products are there, excellent products, it’s very important to protect their value for their whole lives. So it’s very worthwhile to protect.

And also, we’re not heading towards specifically high volume but we want to keep the same policy in the second half. Of course the launches of our new cars, is very positive but we don’t foresee the change the policy that we applied in H1. So unit sales could be depending as the markets that we are not guessing could be in the same range as last year.

On the currency burden, on the FOREX we will, we had a new deterioration on H1, so you can see on our bridge. And I think this will not improve in the second half. Nevertheless, we have some improvement on the pound, on the British pound which is very helpful for us. So that might mitigate as deterioration on the second half.

Unidentified Company Representative

Thank you. Do we have last question here in the room, so the last question on the call please.

Operator

We have a question from Erich Hauser, ISI. Please go ahead.

Erich Hauser – ISI

Good morning gentlemen. Thank you for taking my question and congratulations on a very strong set of numbers. I would like to understand the improvement in working capital a bit better. I know you’ve already alluded somewhat to it, but if I look at note 14 it looks that the Banque’s exposure to your own dealers has expanded from €5.6 billion to €6.3 billion, which is actually the highest level of dealer exposure I have for the Banque since 2008.

Now I wonder if the Banque could essentially further increase its exposure to its dealers and therefore provide further cash inflows to your industrial balance sheet. For example, Renault’s dealer exposure in RCI Banque is €7.3 billion, which is still a good €1 billion higher than yours.

And then if we move on to note 19 and note 22.2, I know you mentioned factoring earlier, but it looks like factoring has contributed about an additional €400 million in cash inflows over the last six months on top of what you’ve mentioned before, the receivables you’ve been able to sell from the French government.

So should I consider this increase in factoring and sale of receivables as a one-off in nature or do you believe you could improve your receivable system further? And quite generally, this factoring activity to my mind seems very obvious and straightforward.

So I was just wondering what has happened that PSA has suddenly decided that it wants to use factoring more aggressively and that it wants to lever the Banque’s balance sheet a bit more. Is this perhaps some best practice that Mr. Tavares has brought to Peugeot? Thank you.

Carlos Tavares

Thank you for your questions. Jean-Baptiste?

Jean-Baptiste de Chatillon

Yes. Sales of receivables, so basically you’re right, I said around €300 million is, if you take FOREX on the whole, so whole group removed from €940 million at the end of December ‘13 to €1,353,000 at the end of June. So basically it’s a bit above €400 million improvement.

The answer to the question is it all do we have more potential to do this? Well, we’re getting near as a full potential. We started with zero two years and half ago. And I think we’re reaching now as a peak of capacity of this sale of the consolidated receivables.

On 2014 and Banque’s Finance refinancing our dealers, it’s not a matter of the capacity of our Banque to finance dealers. It could be an issue but you see our cost of risk remains very low. The question is how many cars do we need as a company to face as sales we want to achieve in the second half, so that’s the driver of our policy?

And we think we have an adequate level to meet this demand. And of course we like to have the cars near the clients, if possible in our dealerships. And this is not constrained by Banque’s Finance at that stage. So, there is no extra potential that we look forward to. But we wanted to keep this kind of proportion in our new car stock, new car inventory.

Carlos Tavares

Okay, thank you Jean-Baptiste. I think this was the last question and answer. I would like to conclude the session by expressing to you all our warm thanks and the appreciation of all the executive committee members of this company for your support and for your great questions. See you next time. Thank you.

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