Peugeot's (PEUGF) CEO Carlos Tavares on Q2 2016 Results - Earnings Call Transcript

| About: Peugeot S.A. (PEUGF)

Peugeot SA (OTCPK:PEUGF) Q2 2016 Earnings Conference Call July 27, 2016 2:30 AM ET

Executives

Carlos Tavares - CEO

Jean-Baptiste de Chatillon - CFO

Analysts

Gaetan Toulemonde - Deutsche Bank

Thomas Besson - Kepler Cheuvreux

Jose Asumendi - JPMorgan

Horst Schneider - HSBC

Charles Winston - Redburn

Fraser Hill - Bank of America Merrill Lynch

Dominic O'Brien - Exane

Operator

Welcome to the PSA Group Conference Call on the Half Year Results. This presentation will be hosted by Mr. Carlos Tavares, CEO of PSA Group and Mr. Jean-Baptiste de Chatillon, CFO and Member of the Managing Board of PSA Group. The conference call will be followed by a question and answer session. I now hand over to Mr. Carlos Tavares. Sir, please go ahead.

Carlos Tavares

Thank you. Ladies and gentlemen good morning and welcome to this PSA Group financial results announcement session. We recognize that you’re very busy people and therefore we thank you warmly for your interest in PSA. Let's get started. If we look back a couple of years from now we need to recognize beyond the numbers that's what has mostly changed in our company is the mindset of our people. I think it is important to understand and to recognize this mindset change as it's going to be the engine for the profitable growth of our company. We need to recognize that the competitive spirit is now higher much higher than before, we need to recognize that we have added business sense through this very engineering driven company. We are with the focus on meritocracy and talent management and we now all understand that cross functional work is what makes the company win and cross functional work is now the foundation of everything we do in order to remain and enhance our competitiveness.

So this mindset change is the foundation for everything we deliver to our shareholders and to our stakeholders and it is fair to recognize that in this first half of 2016 the stars aligned and we could deliver a quite robust 6.8% of operating profit margin for the automotive business. This 6.8% compares to 1% of OP margin over the last 15 years of this company and is performance aligned with what we committed to the market through the implementation of the push to pass plan.

So 6.8% is the auto operating profit margin for the Group PSA auto business for the first half of 2016 aligned with our commitments. On the turnover side you see that our growth at exchange rates is at 2.4% for this first half of 2016 slightly below the rate of growth that we embedded in our push to pass plan but perfectly aligned with our own plans on a year by year basis therefore we continue to be on track to deliver on our commitments in terms of turnover growth for the first three years of the push to pass plan.

So these are the results. I want here to emphasize that they are the consequence of basically two things, as I said mindset change in the company is the core but beyond the core we have operational excellence, operational excellence that was brought to the company by the implementation of our turnaround back in the race plan. We are continuously working on these dimensions, continuously working on using our resources in the most efficient way making sure that our customers recognize the value of our products, the value of our services and make sure that we speed up everything related to productivity being in the work with our suppliers or with our own supply chain and manufacturing organization. Therefore operational excellence remains at the core of the profitable growth of the PSA Group, on top of this operational excellence that was brought by back in the race. We are now implementing significant strategic moves as you have seen through different announcements that were made in the last couple of months and we will continue relentlessly to implement rigorously the strategic activities of the push to pass plan and the rigor and discipline in the implementation of this plan is going to be paramount for the results that we will be delivering to you in the next coming years. So I would like now to move to the numbers and ask Jean-Baptiste de Chatillon, our CFO to comment on these results Jean-Baptiste?

Jean-Baptiste de Chatillon

Good morning, ladies and gentlemen it's a pleasure to present you with the H1 financial results. First as the operating performance presented excludes the automotive exterior division from Faurecia's activity is now reported below the line on H1 2015 has been restated. That being said the H1 group performance I will comment is a combination of solid on high performance from the operations with the 6.6 group recurring operating margin up €446 million versus last year. On the structural improvement below the line allowing the group to more than double its net income group share versus H1 2015.

Let's go deeper in the analysis, first focus on the non-recurring operating expenses that stands at €207 million which is significantly lower than last year. It includes notably €167 million restructuring charge, I would have which minus 59 is for Faurecia, 100 on €7 million Faurecia auto division. These charges are mainly linked to the new social contracts signed three years ago with French unions. The new agreement, new momentum for growth has been signed this month for the three coming years, this new agreement will reinforce our agility and give us a competitive advantage to further adapt the company to our operating environment.

If we go down the P&L, the net financial expenses have been more than half in 2016 at minus €150 million. The improvement includes two one off effect. So tender offers charges of minus €93 million due to the liability management operations of the auto division on Faurecia performed in H1 2016. On also provision reversal in a H1 2016 of plus €82 million, this provision was initially booked in 2010. So net effect of these two one off is close to zero revealing in H1 one figures the structural improvement of our cost of fund built on levelized debt profile.

Regarding income taxes, the H1 charge when down at €310 million despite the improved profitability which is partly due to €106 million positive one off, but excluding this one off the average tax rate is below 30%, as we will start to use our French tax losses on the related depreciated deferred tax assets in 2016, this has already an impact in H1. Companies at equity contribute for €149 million to the group net result on our than €84 million. Our 50% share in our Chinese JVs amounts to €88 million which was €178 million in H1 2015, so 50:50 JVs that are started with Santander. Consumer finance amounts to close €80 million which was €51 million in 2015.

Net results from operations to be continued in partnership stands at €71 million down €29 million representing the bond business which is still to be integrated in our partnership with Santander in 2016 for €24 million. On Faurecia automotive exteriors activity result for €47 million. Group revenue, group revenue is down minus 0.9% at €27.8 billion hit by a strong Forex headwind, excluding this Forex effect it is up 2.4%. So main part of the Forex headwind on the automotive division revenue which are down 1.1 at 19.2 billion on up 2.5 excluding this headwind.

Faurecia revenue is up plus 0.5% at €9.5 billion on up 2.9 excluding Forex. Worldwide sales are almost stable and the group still focuses on profitable sales, China's volume decline is compensated by volumes which are up in Europe on Latin America. On the bridge, I would like first to mention that this analysis is now based on the total automotive division revenue, so volume and country mix growth of plus 4.1% mainly driven by Europe has been offset by a strong Forex headwind of 3.7% mainly from Stella [ph] and the Argentinian peso. Price effect is also up by 2.1%, as a result of our strict pricing discipline in Europe and also of the increase in pricing in Latin America to compensate to Forex depreciation, product mix is negative at minus 0.9%. Sales to partners are done by 1.6% as we have localized our automatic gearbox in China end of 2015.

Sales of vehicles to partners has started end of H1 and will start to impact significantly our top line from 2017 onward, other effect is a 1.1 negative.

So if we turn to the automotive ROI, so group recurring operating profit by activity 6.6 at group levels, the automotive division is up at €1.3 billion, a 34% improvement of auto ROI with a 6.8 recurring operating margin, last but not least for Faurecia continues to improve it's profitability with ROI amounting to €490 million up 28% representing a 5.1 operating margin. If we look at the bridge of ROI, see automotive ROI stands at 1.3 billion, that’s €328 million improvement which is driven mainly by performance, €297 million in a mitigated operating environment of plus €31 million. This operating environment is made up market demand which is a positive €256 million especially in Europe. Input costs are also positive at plus €90 million as raw materials tailwind is partially offset by wages inflation.

Forex on other elements are a strong headwind of minus €350 million coming essentially from the British pound on the Argentinian peso. Regarding our strong performance delivered, price on product enrichment is a slight negative at minus €28 million including the €6 extra cost which is a good performance driven by our discipline on pricing in all regions which limits the natural price erosion on existing cars. So product mix impact is almost neutral at minus 40 million, of course this is a big chunk of the performance which is missing here because we have no plant recently new cars but with the product momentum we have ahead of us of course this will replenish this positive effect in our performance.

Market share impact is negative at minus €129 million combined with a market growth the overall volume effect is a strong positive, production and procurement on SG&A savings we have delivered a very strong performance boosted by the usual seasonality but in six months we have to delivered the equivalent of a full year savings performance as a sum of these two columns amounts to $614 million. In H1 2015 it was 550 million, and it was already a very, very strong H1 in 2015. So you see that we go on delivering with the back in the race levers so performance in terms of cost viable on fixed cost. R&D expenses are slightly negative minus 21 million on the other effect represent minus €99 million. So very positive H1, as we are structurally improving our profitability through sustainable performance.

Recurring operating income in the PSA finance. Well as you know we started rolling out of the partnership with Santander in 2015, we have now derisk the funding of our finco which generated strong cash flow from the capital release. We have access to best in class refinancing conditions. From this month to last big part of the partnership is now operational which was Germany and Austria. In H1 2016 the penetration rate is up one point, cost of risk is down by 10bps so recurring operating income is slightly up at plus 1% but the profitability trend is very good on the full year recurring operating income will be well ahead of 2015.

[Indiscernible] revenues are slightly up 0.5%, recurring operating income is up at 490 million representing a 5.1 recurring operating margin. Free cash flow is also up at €212 million. Cash flow analysis, our cash situation improved to a net cash position almost €6 billion compared to the 4.6 at the end of 2015. So free cash flow is strongly positive in H1 at €1.8 billion plus €389 million coming from change working capital and plus €1.5 billion from the operations. So this result comes from our core performance from dividends received in H1 on the results of positive impact of seasonality in our working capital.

Restructuring cash out represents minus €314 million close to the last year impact as we are continuing to reduce cost. Change in working capital is again a positive at €389 million, it is mainly a seasonality effect in our inventories with the same performance of last year. This effect should reverse in H2, CapEx on capitalized R&D represent €1.6 billion, H1, 2015 it was €1.282 billion. On Faurecia division CapEx and R&D expenses of between 7% to 8% of the auto revenue which is the right level and we might add progressively another one point to reach new frontiers as we explain in our push to pass plan.

Dividends received from our financial arm reaches €219 million. We expect an additional €400 million in the second half. Non-free cash flow effects group in the other column are negative by €434 million. So you can now see that this performance is mainly structural driven by our strategy, our action plans on our operations.

Inventories, well they are stabilized as [indiscernible] and well balanced between group and independent dealerships. So really what we want to tell you this morning is that we feel we are really fit to face [indiscernible] when it comes up like Brexit which is mainly is the effects impact of the stella [ph] versus euro. Why do we feel that we have fit? Well from 2013 the auto division has lowered its breakeven point by 1 million cars, €1 billion fixed cost reduction over 2014 and 2015. We are adding this year an extra €200 million fixed cost gain, so a sustainable production cost savings that we are experiencing on our discipline in pricing power. This action plans are not other, we are continuing to rightsizing our fixed costs and as I just said we are well on track to reach the benchmark on the wage to revenue ratio which is at 11%. This means that we are going on delivering cost savings in 2016.

As production cost are concerned we want to reiterate in 2016 or even beat last year performance of €211 per car savings including the €6 extra cost on with the agreement we have signed with French unions we have a strong competitive advantage. So we as you can see we feel we are fit to face headwinds. We said our guidance was all weather commitment and here we are, it is all weather commitment and the outlook is of course unchanged in the operational outlook. On the guidance in terms of market outlook is not changing much with close focus in Europe and Latin America which is slightly down a minus 12%. We are confident to confirm this guidance, we have left this operational outlook with all the confidence that our agility will make it possible to deliver the sustainable performance over the first three years of the plan. Thank you.

Carlos Tavares

Thank you, Jean-Baptiste. Let's now move forward and share a few additional thoughts about the way we are managing our business and let's go back to the core. As I mentioned in the introduction the core is the deep change in the mindset of the company. I would like here to remind that we are now systematically working on across functional approach and it starts with the executive committee with a competitive spirits. We make sure that we unleash not only the individual talent but also the collective capability to work and we put some business sense in everything we do. I would like here to express my sincere and warm appreciation to each of the executive committee members with me here today and tell them that's this is the result of their leadership. So thank you to them and congratulations to them.

If we look at the numbers of free cash flow that has been generated by the company we need to recognize that since end of 2013 the cumulated free cash flow off the PSA Group is north of €7 billion and this demonstrates through this simple result of the change in the way we are managing our company. If we move forward of course we need to go back to two other main foundations of our business. One is the acceleration in the digital transformation of our company, we are getting closer and closer to our final customers by implementing different apps like [indiscernible] which have met a significant success among our customer base. We continue to work in the tools and the processes of our company to make sure that we align all the digital initiatives in our company and that we make the lead time of our products and services shorter and shorter and the resource consumption leaner and leaner.

We also want to make sure that we have inside of the company the digital tools that will enable new commerce to work efficiently and specially the new generation of new commerce in the company, this is paramount for the efficiency of the company in the future. If we go back to push to pass and through the two major business, strategic business pillars of our company, let's address first some of the initiatives of the car maker pillar and some other initiatives related to the mobility provider.

As you know to become a great car maker with the cutting edge efficiency we have decided through the push to pass plan to work on those five initiatives that you have here on this slide and I will only comment a few of them I would like to start with quality, in our company quality comes always first and this is the only thing that we never compromise with. I would like here to highlight the fact that we are progressing on the quality giving you the example of Faurecia [ph] in China which is at the fourth rank in this market, the biggest market in the world. Here remind that our PureTech petrol engine technology has been awarded for the second year in a row with the best engine in the world and also highlight the fact that we believe that quality comes from the way we assemble our cars and comes from our ability to have a right first time through rate in the industrial activities which is progressing. We want at the end of this process through to be above 95% of products that will go through the line with no rework at the end of the line.

We believe this is the best way not only to improve quality in the manufacturing system but also to reduce costs as we know that rework is an expensive activity. As you see on this graph we have been progressing significantly since 2013 and we wanted to reach by the end of the push to pass plan more than 95% are off right first time through ratio in our manufacturing activities, this will enhance quality and this will reduce cost. On the service side we have some good results in China, Citroen is number one, [indiscernible] is number three. We also believe that the recommendation rate expressed by our customers is the best measurement of success on this matter and you see that we have been progressing. We could progress even faster, we have some additional opportunities that we will tackle in the next month but you see that we are progressing and we want to get closer to our benchmark by the end of this plan. So product quality, service quality, quality first is something that we never compromise with.

If we move to the product offensive, it is fair to say that as soon as we step out of the back in the race implementation we immediately started the product offensive of the push to pass strategic growth plan. This means that number one, we never stopped investing during the turnaround of the company which I know was one of the fears that's some investors had and you see that this is -- this does not happen as we are now starting the product offensive with the Peugeot expert and the [indiscernible] jumpy as the first new products to be launched. You know that we have for the next six years 121 worldwide new car launches to implement and you see that it starts properly because on the first two years of the plan. We are already launching 21 of this new products, you see here for 2016 the eight products that we are going to launch and you see the way it is broken down between the European region, the Chinese region and the other regions so the conclusion here is that the product offensive starts now, actually it has already started a few weeks ago with our mid-size van that you see on these pictures. You can also see that in 2016 we have some very significant product pillars of our models to car model strategy. We have the new Peugeot 3008 Crossover, C Segment Crossover and the new B Segment C3 for the Citroen brand and of course those products are extremely important for our company and now we are in the process of launching this new products.

Through this product offensive the average age of our brand portfolio is going to reduce over the next coming years, and that's great news. You can see also that we are now implementing a significant number of mid-life events actually in the 2016 we are implementing no less than 22 life events to help our sales and marketing people to support the sales and profitable sales you see here many examples and the way it is broken down between the two major regions of our business and also the other regions.

This is for the product and for the models, in fact on top of this we are also implementing a significant technological offensive and here you have a first example with the EMP to the top of the range platform of the PSA Group. Not only we have best in class petrol, three cylinder petrol engines we also have the best in class these Diesel SCR as you know well and we are now on the process of implementing the plug-in hybrid petrol PSA technology that will lead to a significant number of new car launches from 2019 and upto 2021 no less than seven products using this PSA technology will be launched and we are now sizing this technology to be sure that on pure zero [ph] emission this products will be able to deliver a 60 range.

We will also launch the four wheel drive technology based on this plug-in hybrid technology and of course we are now implementing step by step the different levels of the ADAS technology and also the connectivity rolling out has now started. So this is what relates to the EMP2 platform. Let's have a look at the CMP platform which is the entry platform of our product portfolio. In the same way we are implementing our best in class three cylinder petrol engine, also our best in class Diesel SCR technology. We have started and we're now in the process of developing the ECMP evaluation which is the electric power train driven CMP platform with no less than 450 km range when it will be launched in 2019 and also the different steps of the ADAS connectivity strategy.

The important thing here is to recognize that with the CMP platform we will be able to assemble on the same line both cars with the internal combustion engine power train range being petrol or diesel but also electrically driven products with this platform. This means that we are preparing ourselves for a significant level of uncertainty on the market in terms of mix between internal combustion engine power trains and electric driven power trains. We will be able through the layout of this plot, through the engineering of this platform and through the flexibility of our manufacturing process. We'll be able to assemble on the same line those three power trains different patterns which means that we are preparing ourselves to face a significant level of uncertainty in terms of mix in the marketplace and not only we are prepared for that but you see that we are also able with this flight from to engineer and developed very different top hats like SUVs, sedans and hatchbacks.

As we move forward now to the brands we need to recognize that significant work has been achieved with great results in terms of pricing power and projection prices in the marketplace. It is fair to say that we are ahead of our plan with the Peugeot brand. You see that the plan was to be at 2.3% GAAP against our benchmark in terms of pricing. The reality in the first half of 2016 is that we are very close to our benchmark to be completely transparent.

You know that part of this is the consequence of the reduction of that transaction price of our competitor but another part which is no less than 50% is our only improvement and the confidence that our sales and marketing people have now in the quality and the competitiveness of their products therefore we need to acknowledge this great work done by the Peugeot brand that has led to a transaction price which is now almost, if not, at the benchmark level in the European market. This is a great achievement and I'm sure that many of you remember that three years ago very few people believed that this could be done and implemented. Well we are happy to share with you the fact that it's now in our pockets and we will continue of course to stay close if not at the benchmark level in our European markets.

This is for the Peugeot brand, we look at the Citroen brand not only we are now going to launch our new product offensive as you know with 12 new products over the next six years in the different markets where we operate, the first product we launch is going to be the Citroen Jumpy which is already done and the next one will be the new C3 B Segment hatchback, as you see it's a very more than car very fresh and very stylish. We are also now implementing the Citroen advance comfort technology and approach which is a 360 degree Citroen comfort approach which will not only tackle I would say the usual topics as suspension comfort and seat comfort but many other topics related to storage, related to materials, related to the quality of the air related to the acoustics at 360 advance comfort approach from Citroen as it is expected from this brand which is a people minded brand.

You can see also that in terms of pricing power we are on plan with what we have presented to you and this is of course supporting the margins of our sales with this brand. On the premium brand front with DS you know that's now all of our products are completely designed to be pure DS products. We are working very hard in implementing the network changes that we need to implement to be aligned with premium brand and you see that taking here the example of Europe we are adding no less than 10 additional stores in Europe in 2016 on the first half in terms of bringing our network to the level of the premium brands this is something that we are working on the foundation on which we are going to like the new products and make sure that the new product launches that we have in the pipe will be received by a fewer premium network which of course is a matter of consistency to make the customers recognize the premiumness of our brand.

We need also to recognize that we are also with the DS brand ahead of our pricing power plan as you see the plan was to be at 6.9% GAAP against our benchmark. The actual numbers of the first half are 4.1 so being on DS as much as on the Peugeot brands we are ahead of our plans in terms of transaction prices and pricing power and we are on plan with the Citroen brand. Those are the major highlights I wanted to share with you about the brands.

Let's now move to the regions and start with Europe. As you know we have seen some erosion of our fair market share in Europe and we have lost a few tenths of a point in market share over the first half of this year. This is something that was expected given the fact that the age of our portfolio was increasing and now this is going to be of course reversed by the product offensive that we are going to start implementing from the mid-size projects. This is something that was expected.

Nevertheless we are the second market share in this market. We have the leadership on the LCV market with 19.3% market share and we are the leaders in terms of CO2 emissions with no more than 102.3 grams per kilometer. So the products list from the PSA Group starts now and it starts in Europe and we know that we are going to be able to work in a good context as we have been able to sign an agreement with the French unions where five of our six unions in the company have signed this agreement and this five unions that have signed the agreement represent no less than 80% of our employees which is a great foundation to implement the push to pass plan in a serene and efficient way.

If we move to China, we need to recognize that we are facing challenges in China, it is the reality, the reality is that we are facing challenges in terms of profitability. We are facing challenges in terms of sales and marketing efficiency, this is a reason why we have decided with our partner Dongfeng to build and implement a 5A plus plan which somewhere relates very much to the back in the race plan in order to restore our profitability is as you see the operating profit margin of the PCA is now at 5.7%. It does not meet our expectations and we know that from a sales and marketing perspective we have not delivered the volumes we wanted to deliver and we will be supported in this recovery by a significant number of crossover launches over the next months and years. So we will focus now on the implementation of this 5A plus plan which is also an opportunity to improve our financial results moving forward.

This is the situation on the caps out front which is the partnership we have with Changan for the premium DS brand. We need to recognize that fierce after the launch of this JV we are this year on track to be breakeven and we are on track to deliver a positive free cash flow which is for a three year start-up company result which is a milestone that we would like to deliver this year to the company and to our shareholders. So we believe that with the new products which are now in preparation we are on a good trend to make this CAPSA JV a success even though we recognize that our sales and marketing efficiency in the marketplace is not where it should be. So some challenges in China and opportunities to improve the situation moving forward.

If we go to Latin America, Latin America is now implementing a significant rebound. We see that not only we are progressing in market share moving from 3.4% to 3.9% in Latin America but also that our profitability in rate and in amount is progressing in Latin America in a very depressed overall context that you know well we need here to recognize that our teams over there are doing a great job, they have to reduce significantly the fixed cost of our operations. They are now gaining share and they are gaining profit in a month end in terms of rate and I can share with you that we have already made some significant decisions in terms of product investment to continue to support this profitable growth in Latin America despite a difficult context.

If we move to your Eurasia, in Eurasia the situation in terms of sales and marketing is stable as you can see and we are moving towards delivering the commitment that we have made to you which is to be breakeven no later than in 2017 and we are getting close. We are getting close to this commitment but the red ink is decreasing, the fixed costs are still going down and we have already made a certain number of decisions we believe that very soon we'll be able to rebound as we did in Latin America. We'll be able to rebound in Eurasia and through the implementation of the product decisions we have made some of them based on the LCV business. We believe that we will be back in a profitable growth mode on this market hopefully from 2017 after we deliver the breakdown that we committed to you., that breakeven point that we committed to you.

If we move to the next region which is Middle East and Africa, this is another region with Latin America where we are gaining some share even though it's quite limited. It's also a depressed overall market with many, many problems and we see that our profit is still going up as much as our share. So we are creating value in Middle East and Africa region and we know that there is much more to come. We know that we are now putting the seeds that we need to put in the land to make sure that we will harvest the rewards of this work as you have seen through our strategic deals in Iran we have now a deal to come back to Iran with the Peugeot brand with our historical partner Iran Khodro. You know that we have signed a binding MoU with another strategic partner in Iran which [indiscernible] to introduce the Citroen brands in this market and you know that we have a third partner in Iran to import and distribute the premium DS brand.

So we are now setting the stage for sales and marketing offensive and a manufacturing offensive in this promising market. We believe that the strategic moves that have been done over the next six months will be paramount to support the profitable growth of our company in this region and of course these are not the only initiatives that we are taking, many others are under discussion and there is more to come but we need to recognize that for this first half of 2016 share is up and profit is up which is of course the best definition of value creation.

In India-Pacific the situation is stable. We are making a profit and the profit is increasing, the share is flat and we are facing some good results namely in Japan where our volumes are up and we have taken a certain number of decisions to introduce diesel technology in Japan as you know diesel technology in Japan is welcome and we therefore can value leverage our technology over there. We have also decided that we would introduce the C4 Cactus in Korea and step by step the PSA Group is learning how to meet fully the expectations of our customers in this very demanding markets like Korea and Japan. So we are now moving forward, stable share, profit is up and preparing for improving our strategy in Australia as it is written here on this slide.

If we move now and focus on the LCV products we believe this is a significant opportunity for our PSA Group, you know that we are leading the LCV market in Europe with a 19.3% market share. We believe that by using the product assets that we have invested being the compact vans, the mid-size vans or the larger vans we can do a much better job overseas and we have taken a certain number of decisions to introduce our best in class LCVs in Latin America and in Eurasia in the coming years. So we are now doing the job, making sure that we source and that we manufacture efficiently so that we can capture the rewards later on run through the implementation of our push to pass plan.

So this was for the car company, the great cutting edge efficiency car company. I would like now to give you some highlights about the mobility services provider, you know that we have six major initiatives. I'm not going to comment all of them for the sake of time just to bring to you some highlights of what we have been doing since we presented our plan in April 2016 which was not so far away.

So let's start with some initiatives in terms of hassle free mobility, we have been using our insurance proposals to enhance our penetration in the markets and our insurance penetration has been increased by 20 points in two years which is a significant move. We are using this in order to offer our customers -- how you drive opportunity or service namely here in the U.K. it has been a success. You can see that, one of the big outcomes of these proposals is that the average age of our customers for the new Citroen C1 has come down from 41 years old to 26 which is of course very promising and aligned with what we want to do with the Citroen brand and we see that by using the full digital solutions we can now have something that gives you a better vision of how the car is used and we continue to develop and deploy [indiscernible] how you drive offer to our customers across different markets.

If we move now to the aftermarket strategy which you know well, it was clearly explained during the push to pass plan presentation. We are now in the implementation phase putting solutions in face of each customer segment and you see that we are now implementing everything related to the Europe power parts everything related to the aftermarket parts you see that, this is now going live. The Euro Power [ph] repair service network is now being implemented, car service network is now being implemented and you see that in 2016 first half we already have 2300 repair shops and we are moving up in order to deliver no less than 10,000 garages by 2021. So not only we will have the network but we will have also the past portfolio and the competitive price past portfolio to support our customers, in the meanwhile the implementation of Mister-Auto as the e-commerce platform for aftermarket parts is being implemented by the first half of 2016, we already progressing and we plan that in 2016 we will move to 13 countries coming from five countries in 2015. So you see the concrete implementation of our aftermarket strategy to enlarge our customer base is now underway and we are very confident that we are going to be able to deliver the numbers that were presented in the plan.

So the next topic is all about the Mobility Solutions and the connected vehicle services. You see that the more we move forward the more we see clearly the segmentation that we need to have in terms of different mobility services to meet our customer expectations. This is visible through the initiatives that we are taking in terms of rental, in terms of B2C car sharing, in terms of B2C car peer to peer strategy. Many initiatives have been taken, you’re aware of our strategic deal with the [indiscernible] group. You’re aware of our shareholding in Koli Car, you’re aware of our shareholding in the Traveller car but many other initiatives will be taken from this morning. You know that we have taken also a share in the Autobutler Company and all of this initiatives are pieces of the puzzle that we are now assembling to fulfill the needs of the customer segmentation that we have identified.

So all of this will be presented to you in the next month, you will see that step by step by putting the right pieces of the puzzle in the right positions we will be able to build this vision of a mobility service provider and as you see we start with start-ups, we start at the early age of the start-ups to make sure that we are going to benefit from the creativity and the agility of this partnerships.

If we if we move forward we can see that of course what is the most important for us is to focus on execution. We believe that execution is paramount what matters the most is our performance in the execution and that matters more than size, as always growth will be the reward for a well done job. I would like to thank you for your attention and now we are ready to move to your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. So we have our first question from Gaetan Toulemonde, Deutsche Bank. Please go ahead.

Gaetan Toulemonde

I want to go back on the work down of the opening results which is on page 11 of your presentation. Two questions linking to that, can you give us a little bit more details on the 600 million cost savings from procurement and production and SG&A. I'm a little bit lost, it's a pretty big number and I want to get an idea what is recurrent in the future, how much has been the breakdown of that first stuff? That’s my first question.

Jean-Baptiste de Chatillon

Well Gaetan, our products and procurement is 431 and it's usual definition of gains on the purchase side, gains in product definition, on gains in our plans and it's all three of the effects are recurring effects, it's not one off effects. So it is effectively quite impressive to see that we’re delivering a gain in the first half of this level of [indiscernible] on fixed cost savings on our products and on procurement.

You know we would have a good year 0.5 billion but we are now beating on a full year basis, last year we beat this good performance that we deliver normally and we are again heading to beat his performance this year.

Gaetan Toulemonde

Okay. But can you be a little bit more precise -- again you're guiding initially for approximately 0.5 billion a year, I mean if we get 1.5% on purchasing we get approximately 150 million would you expect only a portion of that 600 million so is the rest labor cost savings, is it -- can you help us a little bit to get a better idea how it could look like for the second half knowing the seasonality and what is left over for next year in terms of structural improvements?

Carlos Tavares

Well Gaetan on products and procurement there is effectively a seasonality effect, so you cannot expect such a high figure in the second half compared with the first half. So you can expect a lower figure in the second half. Looking into 2017 of course you will have the carryover effect as it's not as I said one off but structural improvements that we’re delivering. It is a mixture of labor cost savings and especially of course you know in SG&A, also marketing efficiency. So it's all categories of fixed cost that we are trimming. So you will see the recurring impact in the second half in 2017.

Gaetan Toulemonde

My second question is on the Forex, 350 million you mentioned Argentinian pesos and British pound, I understood that the British pound would have been something like 100 million, 150 million so the rest is pretty significant. Can you help us a little bit to get a better idea of that breakdown?

Jean-Baptiste de Chatillon

Yes it's 1/3rd is a pound, it's €84 million euros out of the 315 is linked to stella.

Gaetan Toulemonde

So the rest is Argentinian pesos?

Jean-Baptiste de Chatillon

Yes for ruble, so as yen effect as some swiss franc but it is mainly Argentinian peso on the stella, the stella is one sort of a figure.

Operator

Next question is from Thomas Besson, Kepler Cheuvreux. Please go ahead.

Thomas Besson

I would like to come back to the seasonality that you’ve mentioned on the savings. I mean historically before you started turning around this company. We used to have €300 million - €400 million lower EBIT in the second half and the first. This time you’ve a high concentration of product tranches as well that may [indiscernible]. Is it reasonable to assume that it's unlikely to have more than 500 million lower auto earnings in H2 and H1 or is it something you’re not prepared to comment on?

Jean-Baptiste de Chatillon

Yes seasonality on the ROI is more or less 350 million lower in H2 versus H1, so that’s one effect. Now what will be the second half in terms of external context I cannot tell you, your guess is as good as mine. What I can tell you is that our core performance will be similar in H1 as in H2, but applied to a lower base because of the lower activity.

Thomas Besson

Sure. But my point was also on is there any extraordinary launch costs associated with multiplicity of products you're launching between September and December or is it sold already in Q2?

Carlos Tavares

Well that's a very good question that we are being asked on a regular basis and I must say that we have changed our tech with our plants quite radically and we’re now not letting anybody plan for a big launch cost, on the contrary we have a very strict view on this matter and yes there will be an impact on the second half but very well controlled on some of for [indiscernible] our new LCV has been already absorbed in Q2.

Jean-Baptiste de Chatillon

To make it simple the launch cost of the new products have now an owner in the company and not considered as a fuse which of course in terms of management is very different from what we knew previously, so by having a strong owner of this launch costs we have the ability of course to focus and to optimize what needs to be done.

Thomas Besson

The second question is o China, I would just like to get to more detail on what you said around the 5A plus and what you put on page 39 of your financial report. So we understand the margins have declined but there's also a line called autos between -- after the Dongfeng contributions that amount to €95 billion. Can you say what this is and can you confirm what the dividend is going to be for this year from DPCA please?

Carlos Tavares

What we’re now implementing in DPCA mostly is that we have used a fixed cost that we accelerate the cost reduction productivity rate because we know that we can do a better job in terms of deep sourcing in the Chinese supplier base. We have all sorts of number of initiatives to optimize the way we are running the plants in China. So it's all about fixed cost reduction, accelerating the variable cost productivity both in manufacturing and the depth of the sourcing and of course we need to implement a certain number of better practices in the way we are managing the networks. We see that some of our dealers are facing some difficulties in terms of floor plan financing which we are now tackling and of course supporting the dealers we need to turn around their own shops and their business models which is currently what we are doing.

So to make it simple the 5A plus plan is some kind of translation of the back in the race plan for our Chinese operations but of course the magnitude of each lever has been discussed with our partner and also on top of that some additional best practices that we have to implement in terms of network management.

By the way we are seeing that some positive signs are now visible on the Citroen sales in China, it's not yet visible on the Peugeot sales and on top of that we are going to launch a significant number of new SUVs in the market as you know we are now finalizing the construction, the preparation of our [indiscernible] plant for that purpose. So we have ahead of us some good opportunities to do a better job. The dividend?

Jean-Baptiste de Chatillon

The dividend will be €236 million this year, and it relates you’re your mentioning minus 43 is miscellaneous losses is a mixture of different items some of it being related to Iran but it's many small items. So it's €236 million.

Operator

Next question is from Jose Asumendi, JPMorgan. Please go ahead.

Jose Asumendi

Couple of items please, the first on page 16, I'm trying to understand this production cost savings in Europe where you’re going to go from €211 to €700, what's the best way to look at this? Is this on an analysis basis somewhere around €250 million to €300 incremental cost savings from production costs, if you could please comment that and then the second item would be the comment on sales to partners obviously significant impact you mentioned in 2017, what's the best way to think about this and where has been historically the impact of the Iran business on the profitability of the autos business? Thank you.

Jean-Baptiste de Chatillon

On the 200 to going to €700 [indiscernible] activity, so you’re seeing some of it in our bridge with the first half very good savings which are positioning us very well on track to reach those [indiscernible] usual one of the -- in terms of technical savings purchasing and you know in plants we are in a catch up mode where we are still beating each year our targets to get to the bench on all our Western Europe plans are doing an incredible job to reach this. Sales to partners, your second question, I mentioned 2017 onwards. Well you have two very strong effects which is a fact that we're going to sell cars to partner to Toyota with a K0 cars and we will start selling in '17 and '18 cars to General Motors also because we will be producing some cars that we will be selling to them, on top of that there will be an increase in sales to Ford in engine parts.

Operator

Next question is from Horst Schneider from HSBC. Please go ahead.

Horst Schneider

My first question relates to little bit to the volume's, you said that you feel no major impact from the Brexit decision in terms of volumes, maybe you could you elaborate a little bit on that what you're seeing since it's Brexit decision in the UK market and also in the rest of Europe I mean of course the fear is in the markets that we see more pronounced weakness of sales in Europe in H2 which would also affect you and in that context when you talk about breakeven point to give us a break even number in terms of -- breakeven number for 2015 only. I want to know what is your current breakeven level in terms of production volumes, I think it has declined from the 1.6 million units that you were mentioning and the last question that I have is he on cash flow, I mean I hear that again and again that you're building up a cash prize but no one knows what you want to do with this cash now, I think you're rather unwilling to buy back shares. So maybe you can elaborate a little bit on your plans how you want to make use of this net cash in the future? Thank you.

Carlos Tavares

On the Brexit side, first of all it is fair to say that at this moment in time we don't see a significant change in the marketplace that does not mean that it's not going to happen of course. And of course everybody is now waiting for somebody to make the first step in terms of pricing adjustment in that market that could have eventually an impact on the overall markets.

But of course what counts at the end of the day is the profit that we deliver and our local teams are now taking a certain number of counter measures in fact to control that situation. So in terms of Brexit what we would say is for sure a headwind but it's not something that's represents an enormous stake in our performance but it's something that of course we are managing very closely and the head of the region is on top of that problem.

If we talk about the breakeven, the breakeven is something that we have learn how to use in our company. I can tell you that we never validate business plan if we don't have the confirmation that the breakeven point of the company it's under control which means at this stage keep it stable and keep a very low breakeven point despite the fact that we are taking many initiatives to generate profitable growth within the time window of this push to pass plan.

On the cash side of course we need to recognize and I'm sure you do that we have around us a very chaotic world, it is something that nobody can challenge, it's chaos everywhere and we know at the executive committee level how much time we spend facing different crises and trying to fix things and keep control of our operations and our profitability which we have been doing reasonably successfully So chaos is the norm is an input to our cash strategy and other input is the fact that you have seen that we have taken significant strategic initiatives, Iran is an example but there is much more to come as you know through the push to pass plan.

Everything we intend to do over the next six years is in the plan and you just have to read the 30 slides from April 5th and you'll see that we are going to deliver step by step one by one everything we have put in that plan this is the commitment of the executive committee members individually and collectively so we don't want to be in trouble to fund all the strategic initiatives which will generate the growth and the profit for the next coming years and from that perspective I think this year as already mentioned that that could no less than 1.2 to our R&D and CapEx expenses to support all of those initiatives but basically this is this is the point, we don’t want to forget of course that we will be happy to pay dividends from 2016 based on the 2016 results and this is for something that is pictured in our overall cash management, I don’t know if Jean-Baptiste wants to add something?

Jean-Baptiste de Chatillon

Nothing.

Horst Schneider

Regarding the dividend the 25% payout target ratio that you have given that’s a minimum payout right? So it could be in [indiscernible] also higher than that?

Jean-Baptiste de Chatillon

We will see that on time first.

Carlos Tavares

Your expectation is clear. Thank you, Horst.

Operator

Next question is coming from the line of Charles Winston, Redburn. Please go ahead.

Charles Winston

So much of the discussion about your company tends to be around about the risks for downside, can I invite Mr. Tavares to perhaps emphasize a little bit and where could the margin in automotive go to? You have done a 6.8% which I think very few people expected. Could it in a period and in a six month period can significantly beyond that and perhaps just to invite you to discuss the potential within the company not just focusing on the downside risk in the 4% floor and my second question just relates to your expectations for the European market, at 4% you're basically implying that possibly the market you think could go into detail in the second half having done 9% growth in the first half, I except the risk from Brexit but credibly could you outline what is it that could take the European market growth down so much and if it's perhaps a little bit conservative what are your more realistic expectations for Europe in the year in the second half again the cost of debt is so low credit is very cheap, we can see that impacting car demand. Just what is in your thinking that could take Europe so bad compared to the first half? Thank you.

Carlos Tavares

First of all I would like to remind all of -- first that the 4% OP margin for the auto business is a commitment and the floor as you know well from all the discussions we had and of course the only thing we cannot anticipate both you and me is the magnitude of the chaos that will surround us all over the world and this is a something that we see every day. Hence the fact that our approach to our business is to consider that we have to deliver a continuous flow of cost savings as significant as possible, at the same time this continuous flow of savings which we call efficiency needs to be consistent with the profitable growth of the company and should not impact our ability to diversify our footprint of sales across the world and to take all the technical and technological initiatives that we need to take to be able to meet the expectations of our customers which means from one side we have a continuous flow of cost reductions and fixed cost reduction initiatives which are here somewhere to protect the company from the chaos that is surrounding us and at the same time we have the appropriate amount of cash as it was mentioned to support the funding of our profitable growth plan. So this is what we are managing.

In Europe the great point we have ahead of us is the product offensive. We have 28 new cars coming now live and it has already started and you know that this year we have the new mid-size van, the new Peugeot 3008 and the new Citroen C3. So the product offensive is on that's the big news. The big news also is that to the surprised perhaps off some of us we still have much potential to improve the efficiency of our company and this is something that the executive committee recognizes and drives every day. So we know that we need to remain reasonably prudent because what we value the most is our commitment to you and what we don't know both of you and me is what may happen in the world and that Europe is not an exception, of course consumer confidence may be impacted by events and very sad events like those we have. We have faced in the last weeks both in Germany and France so we need to be cautious on that and protect the company both on the cash side and our ability to continue to be profitable for the future.

So we want to remain reasonably prudent not to be as some may say underpromising and over delivering, this is not the point, the point here is to make sure that we deliver an all-weather commitment to you. And as you know as our mindset is becoming more and more competitive if we can do more and pay more dividends to our shareholders that will be just fine.

Operator

Next question is from Fraser Hill from Bank of America Merrill Lynch. Please go ahead.

Fraser Hill

Two questions for me like broadly relating to cost, the first is on the Sterling impact that you're likely to see down at 190 and on GBP, Euro, what sort of impact will that have in the second half of the year. I think you identified that it had about 100 million impact to profits in the first half of the year. So what will that be at this new rate basically for the second half of the year and I think you made some comments earlier that you expect to be able to offset the currency impact with cost savings. So how quickly can those savings be put through and what sort of savings or additional savings are you finding specifically to deal with that FX impact from Sterling?

Second question is really just relating to I guess a few of these other cost issues that you talk about. Euro fixed cost seems a little bit higher in the first half, I mean is that a peak on a one semester run rate or is that going to get larger in the second half and the product launches to take your point about 2016 being well managed but with 21 launches in 2017 should we expect that you know that's going to be visible in the cost items in next year's numbers? Thank you.

Carlos Tavares

On the second one of the big changes perhaps that’s -- we couldn't explain properly when we have launched the push to pass plan is the way we are strategically planning our new products. We have now a great process that combines two things that could look contradictory but that we can perfectly manage given the expertise of our planning operations now, planning organization which is from one side. We want to group the development of products which are based on the same platform, based on the same technologies and create programs where you have a family of cars for different brands on the same platform that can be developed in one single flow and when we group this development in one single flow on one specific platform for different brands.

We can significantly improve the efficiency of our upstream operations which means that the way we are spending the R&D and CapEx upstream is much more efficient when we group those new products in family programs and from the other side as the downstream we check that from the regional window the flow of new products coming to the markets is going to generate every year one new Citroen, one new Peugeot, one new DS which gives the sales and marketing people a great steady flow of new fresh product every year that they can focus on and take the best out of it which means also that we are somewhere reducing significantly the cyclicality of our business model.

So this two contradictory things are now becoming consistent in the company and this is to the merits of our planning a VP and engineering and manufacturing VPs because they are working together in a very close way, of course with the support of the brand CEOs. So all of this is something that makes -- I would say the flow of new products very steady and that somewhere counter cyclical to what we are used to in terms of automotive industry. So I would like to now handover to Jean-Baptiste for the sterling.

Jean-Baptiste de Chatillon

Well on the sterling you know our sensitivity to stella is one point of variation is €30 million impact on our ROI. So of course it is impacting our ROI but I want to explain is that when you look at the structure of our savings in H1 where we are betting our normal rhythm of savings on this normal reasonable savings would be enough to compensate the headwind of this talent. So yes we are confident that the way we are pushing our cost savings is well enough to compensate this headwind.

Operator

Next question is from Steven Heineman [ph] from Societe Generale. Please go ahead.

Unidentified Analyst

I would like to also go back to slide number 11 on the operating income analysis and also look at the guidance. You had a very strong first half 2015 with a 5% margin and you're saying that it will very hard to match that in the second half of the year, and indeed you did you had a 5% margin. I think when you came up with a push to pass plan in April and I think there was a little disappointment at first at the interpretation of what the 4% guidance for 2016 to 2018 meant and you say that this was a minimum. You also said that if you shouldn't necessarily compare to 2015 because obviously there will be significant FX headwind we would have to take into account in 2016, where we’ve seen headwind in the first half, the 315 million negative that you've seen and obviously we'll see what happens with the sterling going forward as well but you would more than compensated as we've seen with production and procurement an SG&A expense savings. So I'm just wondering to what extent have these been a surprise to you, the ability of your company to come up with these savings and production procurement and SG&A into which has given you an EBIT result of 1.3 billion which as we've seen this clearly exceeded even the highest figure in the highest number the consensus that you gathered which I think was €1.15 billion for the first half of 2015 to 2016, so I would like to say you already -- how you’re handling this?

Carlos Tavares

I think we could both organize a management seminar to answer your question. It's a very fair and very difficult one. Since I came to this company three years ago almost three years ago, there is something that I have relentlessly repeated which is I believe this company has a great potential. It has a great potential because the people are great and I believe that we are far, far from unleashing the full potential of this company. Now what we don't know both you and me is up to which point can we drive this company given the great people we have and how successful or unsuccessful are we going to be in the implementation of all of our initiatives.

What I can share with you is that PSA is a great engineering company, there is no doubt that we have great engineers. There is no doubt that we have creative people and people who are able to develop great technologies. As we all also know is that we started with some room for improvement in terms of business sense, in terms of being focused on what creates value for the company and not only what maybe eventually flashy or interesting. By putting this business sense on top of the engineering capability of our company I think we are building in our very balanced core competencies in the company and of course on top of that we put the competitive spirit, the competitive spirit means that we’ve always look for the best possible performance at one point in time taking the risk of surprising the stakeholders, but also protecting the company from the downturns.

If we always look for the best possible performance of course we may have some peaks we may surprise somewhere perhaps even in some cases we may frustrate but we also give the company and to our investors significant protection which is the fact that we have a very robust company with a very low breakeven point that is going to be able to weather significant storms. So up to which point can we go? Frankly let's be honest we don't know, we just know that we have a great plan that's we want to focus on the rigorous implementation of the plan. We don't want to be distracted, we don't want to be over enthusiastic, we just wanted to focus on the execution making sure that we continue to improve the operations by the back in the race levers and we need to recognize that in the transition between back in the race and push to pass what we are seeing now as Jean-Baptiste said is that structural benefits of what was done by back in the race and while we are benefiting from all of this the greater trends we want now to invest in the future of the profitable growth of the company.

So we just try to be to be humble, to be competitive and to make sure that we always shoot for the best, in some cases stars with align like they did in the first half in some cases the things will not be as positive but the company will be more robust in facing those terms. I think honestly this is what we can share with you but you have our commitment that the executive committee of the PSA Group will always shoot for the highest possible performance that will be reachable by our own skills and by our own energy and now we need to move to the last question of this session.

Operator

So the next question is from Dominic O'Brien from Exane. Please go ahead.

Dominic O'Brien

I just wanted to get back to the point you made on net cash and protecting the balance sheet. Have you ever considered buying back any of your negative working capital position to protect the balance sheet and defend against the scales and cyclicality that you mention and furthermore have you ever considered moving to a positive working capital position like your German peers to almost entirely reduce that volatility. It may sound like an odd move I guess operationally but from our point of view it would reduce the markets particularly around the cash flow volatility at Peugeot over the cycle and I'm sure in the financial community at least there will be something that will be welcomed. Thank you.

Jean-Baptiste de Chatillon

Well as you know we've been there for the last three years from the beginning of back in the race. We announced major improvements in the management of our working cap, we made it happen and we were told several times well that will not stand effectively, we’re demonstrating with very transverse [indiscernible] was very good coordination all around the world inside the group, all operationals are sticking to their targets on issues that we can sustain this level of working capital, of course with a major change in the market or with slowdown. We would be impacted on -- we also know that we have a seasonality on H1 to H2, we have a reversal of some of our benefits in H1 especially in the supplier side since we’re reducing manufacturing output at year-end which is quite normal compared to June because of the August step down. So yes we have a good mastering of this working cap, we don’t expect to change this discipline. We will stick to it -- it is way to show the agility of the growth to maintain this level even though inside the year we have stronger volatility.

Dominic O'Brien

Okay. So just to follow up, so to reduce the volatility in a downturn in terms of the cash flow you wouldn't consider using some of your net cash now to essentially reduce that potential volatility into the next cycle on working capital.

Carlos Tavares

The volatility is directly linked to the manufacturing output on the supplier side. So we are not looking at changing for instant payment terms of this kind of thing, so we think that we can remain within the current way we operate, with a good stability of our inventories. We are not going to change the structure of our working capital.

Carlos Tavares

Thank you, Jean-Baptiste. Well I would like to thank you all for your great questions and even more for your support. I understand that you have interest in PSA which we deeply value. We thank you for the way you are challenging our company and trying to make us better. This is exactly what we are trying to do and let's continue to focus on the push to pass strategic plan implementation. Thank you for being with us today and see you soon. Bye, bye.

Operator

Ladies and gentlemen thank you for your attendance. This call has been concluded you may now disconnect.

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