Renault SA (RNSDF) Q2 2016 Results - Earnings Call Transcript

| About: Renault SA (RNSDF)

Renault SA (OTC:RNSDF) Q2 2016 Earnings Conference Call July 28, 2016 2:00 AM ET

Executives

Clotilde Delbos - Chief Financial Officer

Thierry Bollore - Chief Competitive Officer

Stefan Mueller - EVP, Chief Performance Officer

Analysts

Gaetan Toulemonde - Deutsche Bank

Charles Winston - Redburn

Thomas Besson - Kepler Cheuvreux

Horst Schneider - HSBC Global Research

Jose Asumendi - JPMorgan

Fraser Hill - BofA Merrill Lynch

Mike Tyndall - Citi

Harald Hendrikse - Morgan Stanley

Unidentified Company Representative

Good morning everyone, and welcome to the first half results conference call, which is broadcast live and in replay versions on our website. The presentation slides, press release and activity pack for this call are all available on our website in the finance section.

I would like to point out the disclaimer on slide 2 of this pack regarding the information contained within this document and, in particular, about forward-looking statements. I invite all participants to read this.

Today's call is scheduled to last about one hour. The presentation will be made by Clotilde Delbos, our CFO since the end of April. She will start with a review of our operations and we will then follow up with the outlines of our financial results and the outlook. The presentation will last around 30 minutes and will be followed by a Q&A session.

For the last part, Clotilde will be joined by Stefan Mueller, our CPO; Gaspar Gascon, EVP in charge of the engineering. Thierry Bollore, our CCO, is on the call but not in the room. However, he will be available to answer your questions.

Without further ado, I will hand over to Clotilde.

Clotilde Delbos

Good morning, everyone. It's a great pleasure for me to do my first call as CFO, and especially to report such good results. As you have already seen from the headlines, the Group's financial results for the first half of 2016 mark a new record for the Renault Group. The auto margin rose to 4.7% compared to 3.2% in the first half of 2015.

Including RCI Banque's contribution, the Group's consolidated operating margin reached its highest level since we have been reporting under IFRS accounts, at 6.1% versus 4.9% a year ago. Please note that we made slight adjustments to 2015's accounts, relating mainly to IAS 12.

Automotive operating free cash flow is positive at the end of June, when it was slightly negative last year. As you know, H1 is always negatively impacted by seasonal effect of the working capital. Whilst still negative this year again, this effect was less impactful than last year. In the first half we experienced a strong acceleration of our revenue growth, thanks to supportive markets in Europe and the success of our new models; a large operating margin improvement thanks to the volume effect and a positive mix price enrichment; a strong headwind from ForEx.

In light of these results and despite the uncertainties notably related to the Brexit, we are confirming today our overall guidance for the full year.

Let me start our performance analysis with our commercial figures on slide 6. The worldwide TIV increased 2.4%, mainly driven by Europe, up 9.4%, and Asia, up 3.9%. By contrast, Eurasia, Americas and Africa Middle East markets fell 9%, 8% and 6% respectively. Our registrations grew 13.4% to 1.568 million units. This is coming from a balanced performance of our business in Europe, up 14%, and outside of Europe, up 12.5%.

On slide 7 you see that six of our top 10 markets are in Europe and that we have increased our market share in eight of these markets. The percentage of our sales in Europe represented 62% of our total business, up 1 point. In the Europe region, we increased our registration 14%, reaching a total of 969,000 units in the first half. While market dynamics explained the largest part of this improvement, our own performance brought in 32,000 additional registrations. As a result, our market share was up at 10.7%, an increase of 40 basis points.

The Group booked solid performance in France, Italy and in the UK, but lost some market share in Spain as Renault was at a high level a year ago. This performance came mainly from the success of our new cars in the C and D segments, but also from the continuing good performance of our B segment cars. Renault brand sales increased 15.6% in the first half, while Dacia sales were up 9.2%, despite the high comparison basis. The order book reflects the strong deliveries achieved in Q2, but remains at a good level.

Turning to slide 9, registration in Africa Middle East India increased 38.2% and reached 209,000 units. The region became the second largest one for the Group after Europe, thanks to a market share improvement of 1.7 points. This performance has been driven by the outstanding success of Kwid in India that achieved more than 48,000 registrations in the first half. The brand gave 2.3 points of shares in the country, that reached 3.8%. The other pillars of this performance were Iran and Morocco, up 250% and 30% respectively. The black spot of this region was Algeria, with a fall in registration of 39% in a market down 54%. You know that this market has been penalized by measures aiming at reducing imports. However, our local production allowed us to do better than the market and to gain almost 10 points of share.

In Eurasia, slide 10, the market fell by 9%, reflecting the continuing fall of Russian registrations, down 14% in the first half. This situation has been mitigated by our strong sales performance in Turkey, a 16.8% increase, and a market share up 2.4 points. Globally we managed to increase our registration in the region by 4%, thanks to a market share improvement of 1.6 points.

In the Americas region, on slide 11, the market declined 8%, driven down mainly by Brazil, of 25.1% in the first half. Argentina was up 5.9%, while Colombia decreased 12.3%. In this environment, Renault managed to increase its market share in Brazil by 30 basis points at 7.3%. In Argentina, Renault regained 1.7 points of market share as it was not longer limited by currency restriction. Sales were up 23% in the first half and our market share reached 12.3%. As, visibility remains poor for Brazil, and we foresee a market down 15% to 20% this year. However, we count on our new products and our recent entry in the pickup segment to defend our business.

Finally, concluding the regional review on slide 12, in the Asia-Pacific region registrations were up 12.8%, thanks to a strong performance in South Korea, where the SM6 is doing very well. In this country, we increased our registration by 25.9% and we gained 68 basis points of share.

In China, our sales were down 13.9% in the first half in a market up 6%. This poor performance came from the transition of our business from importing CBU to local production. In addition, despite a good reception of Kadjar, we are behind our plan in terms of sales. This reflects harder market condition and delays in our network development. We're working to fix this issue. This ends our sales update. And I will now turn to the financial review.

On slide 14, we show the full P&L of the Group. Starting with the top line, Group revenues reached €25.125 billion, an increase of almost €3 billion from last year or 13.5%. The next slide shows an operating margin improvement of more than 1 full point at 6.5%, compared to the previous period. It results primarily from the volume growth and the improvement of the mix price enrichment effect. Net income came to €1.567 billion, up €115 million compared to the first half 2015.

Let me start with the detailed financial performance review. On the next slide, number 15, we show the revenue contribution by activity. Group revenues were, for the first half, sorry. Group revenues for the first half were 13.5% above last year. We have seen an acceleration of the growth in Q2 at 14.7% versus 11.7% in Q1. The automotive business contributed for €24.078 billion, meaning an increase of 14.3%. Revenues from our captive sales financing company, RCI Banque, were down 2.2% at €1.107 billion. But as, revenue is not an indicator of choice to gauge RCI's performance.

I will start by reviewing the breakdown of revenues for the automotive activity on slide 16. Starting on the left hand side of the page, the first item, volume, shows a positive impact of 10.6 points. The gap with the registration increase came from the CKD business in Iran and in China, as well as the change in inventory that I will detail later in my presentation.

The geographical mix impact is a positive of 0.9 points, or 200 million, reflecting the strong growth in Europe, like in Q1. The third item to note is the model mix effect which had a positive impact of 0.9 points and contributed 185 million in the first half, while it was a positive of 1.9 points in the first quarter. One should see here the impact of Kwid, which dragged down our mix effect.

The fourth item is the price effect, which is positive by 3.8 points. This impact is higher than in Q1, thanks to the pricing measures taken in some emerging markets and the impact of our new models. Sales to partners contributed to a positive driver continued to be a positive driver of our revenues, impacting for 3 points in the first half, showing a slight acceleration in Q2. This came from stronger demand from parts, the first deliveries of a new LCV contracts and a higher CKD business in Iran and China. The next item, foreign exchange, impacted negatively for €1.036 billion or 4.9 points. This deterioration, compared with Q1, is mainly explained by the appreciation of the euro versus a basket of currencies, including the British pound, the Argentinian peso and the Russian ruble. The last item, named other, is minor. It represents the other activities outside the scope of new car activity. It results from some positives, like spare parts, or some negatives, like the adjustment for the wholly owned dealer business and buybacks.

I will now turn from automotive revenues to the Group operating margins variance analysis on slide 17. The first half operating margin for the Group totaled €1.541 billion, an increase of €445 million compared to last year. You can see that there was a slight adjustment of 2015 operating profit coming from an accounting change relating to IAS 12 regarding taxes. The walk down on this slide compares this year's impact to the previous period. I will start the walk down, reading left to right.

Total Monozukuri savings amounted to €6 million in the first half of 2016, compared to €236 million in H1 2015. This low level is mainly explained by R&D and also by some costs related to our product cadence. Let's focus on our Monozukuri activity. In more detail, cost reductions came from purchasing savings totaling €296 million versus €222 million, reflecting higher volume and good performance from our team. Warranty cost change was a negative 21 million after a positive of 83 million booked last year, related notably to challenging base and higher volume.

R&D in the profit and loss account increased by €153 million in the period. R&D expenses grew to prepare next generation of cars and to meet current and future emission regulations. As well, capitalization rate was significantly lower than expected. It moved from 40.9% in the first half of 2015, to 37.2% in the first half of 2016. This gap is due to some delays to pass key milestones.

Manufacturing and logistics cost increased by €116 million. This is reflecting the measures needed to meet the additional demand, the launch cost of the new products, as well as an expensive freight solution to circumvent supply constraints. Finally, G&A cost increased €64 million, which is consistent with the business development.

Let's get back to the walk down, page 19. Raw materials produced a tailwind of €164 million. Mix price enrichment impacted positively for €135 million. This strong improvement over last year resulted from price action in emerging markets, but also from our ability to price the additional content put in our new products. It is worth noting that this performance has been achieved despite the headwind from Euro 6B regulation implemented in September last year.

The next item, which includes Group volumes and sales to partners, shows a €614 million positive impact. It results primarily from the increase in units invoiced, but also from the development of our business to partners. RCI Banque, combined with the other businesses outside of the scope of new car sales, yielded a positive contribution of 22 million. I will comment more on detailed RCI's results in a minute.

During this half, currency movement produced a headwind representing €432 million, showing a higher drop through than usual. This came mainly from the absence of localization in the UK, and a relatively low one in Argentina. However, as this negative should be analyzed in light of our actions on prices.

In total, for the first half of 2016, the Group's operating margin reached €1.541 billion, or 6.1% of revenues, to be compared to 4.9% in the same period last year. This improvement confirms that our strategy is delivering on expectations and we are able to leverage our growth.

Page 20 shows the split by operating sector. The automotive division delivered €1.121 billion operating margin, or 4.7% of revenues versus 3.2% a year ago. Our financing activity was again a solid pillar of our profit pool, as RCI Banque delivered a €420 million contribution to the Group margin. This shows a slight improvement of €4 million.

The next slide, number 21, provides more detail on RCI Banque's performance. New financing in the period increased significantly to €8.9 billion versus €7.7 billion in the corresponding period last year, primarily reflecting the strong activity in Europe. Average performing assets grew 14.4%, at €31.9 billion. Net banking income stood at 4.39%, down 48 basis points, reflecting the increase of the European business, where this margin is usually lower than for international operations like in Brazil. In addition, the net banking income has been penalized by a negative ForEx impact. The cost of risk stayed stable at a record low, with 30 basis points of average performing assets versus 31 basis points last year.

Finally, costs were contained, keeping our operating expense ratio at 1.41% of average performing assets, or 9 basis points below last year. In total, the pretax return on assets reached 2.7% versus 3.1% in the first half of 2015, while return on equity reached 16.5%, stable versus last year. Now that we have covered the operating margin variance, I will continue down the P&L with the other operating income and expenses items on slide 22.

Other operating income and expenses amounted to minus €65 million versus minus €116 million a year ago. This improvement resulted from lower restructuring costs, notably for the competitiveness agreement in France. Continuing down the P&L, the next item is the net financial income and expenses on slide 23. The net charge decreased from €161 million to €67 million, largely thanks to the positive non cash impact of the mark to market evaluation of redeemable shares.

The next slide, number 24, shows the impact of associated companies in Renault's P&L. Following Nissan's results published yesterday, the contribution for the second calendar quarter of Renault's account in Renault's account came to €521 million, taking the first half year impact to €749 million. I remind you that Nissan result for the first calendar quarter has been negatively affected by a one off charge related to a airbox supplier. Renault's shares of AvtoVAZ results, which are no longer consolidated with a three months time lag, posted a negative €75 million versus a negative €87 million in the corresponding period last year. Our share in Vaz losses has been capped to the equity value of this asset in our balance sheet. Otherwise our share of loss would have been €57 million higher. Regarding AvtoVAZ recapitalization, I confirm that we intend to participate in this operation that should happen by the end of the year and should lead to a full consolidation by year end.

I will turn back to the P&L for the last time on slide 25, where the net tax charge for the first half came to €520 million versus €262 million. This higher charge results from higher taxable profit and some adjustment on deferred tax assets. Bottom line, net profit after tax came in at €1.567 billion versus €1.452 billion in the first half of 2015. After taking into account minorities, the net result per share came to €5.51 compared to €5.06 in H1 2015.

Now that I have completed the analysis of the P&L, I will turn to slide 26 on the evolution of the net automotive debt. Cash flow from operations totaled 2.179 billion, up €359 million over H1 2015. It is worth noting that, in this first half, RCI did not pay dividend to Renault as it needs to retain its profit to comply with bank regulation and solvency ratio in the context of strong asset growth. Changes in the working capital requirement impacted negatively by €129 million, when it was a negative of €419 million a year ago.

Net tangible and intangible investment came to €1.669 billion in the first half, up €216 million over the last year's level. As a result, automotive operational free cash flow came to a positive of €381 million in the period. However, our automotive net financial position decreased by 129 million. Dividends received from quoted companies totaled €390 million, while dividends paid during the first half came to €768 million. Nissan share buyback brought in €473 million. Other financial items were negative for €605 million and mainly related to negative ForEx translation impact on financial assets and liabilities, plus some financial investments.

In total, our net automotive financial position came to €2.532 billion at the end of June 2016, down from €2.661 billion at the end of December 2015. But this is an improvement of close to €1 billion compared to June 2015.

Slide 27 shows the inventory situation across the consolidated chain of both Renault's balance sheet and the independent dealer network. As you can see on the slide, we were at 60 days of business at the end of the first half, at the low end of our target range. Global inventories increased about 8% compared with a year ago. At the end of the first half they stood at 571,000 units, compared to 527,000 units at the end of June 2015. This increase was needed to respond to the market growth. Independent dealer inventories were at 371,000 units compared to 349,000 units a year ago. The Group's dealer stocks stood at 200,000 units, up 22,000 units.

This completes my review for the first half of 2016. Before concluding and taking your questions, I would now like to share with you our views for the rest of the year and the risk and opportunities that we see.

In the short term, the second half will bring its list of risk and opportunities. Of course, the first risk remains sorry. Of course the first risk that comes to my mind for the second half is the uncertainties related to the Brexit. We all know that the UK market is now back to its previous record level, and that the Brexit is reinforcing the risk of a downturn. Turkey is also a question mark. R&D brings some uncertainties as we will probably need to spend more than initially planned for meeting the new WLTP and real driving emission driving cycles. In addition, as seen in H1, it is not always easy to predict with accuracy the capitalization ratio. Last but not least, as European recovery continues to be stronger than anticipated, the difficulties in the supply chain that we have mentioned during the previous calls are still in play.

On opportunities comes the impact of our new products. In Europe, all of them have been well received and are at least in line with our ambitious targets. These positives should continue in H2, as we will have a stronger impact of the new Megane Hatch and the first one of the other versions. Later in the year will come the Scenic. Outside Europe, we're developing our market coverage. We have entered the entry segment in India and now we're covering the pickup segment with the Oroch and the Alaskan in Americas. The Captur, just launched in Russia, will allow us to be present in the crossover segment in the region. Last but not least, I would like to mention the coming launch of new Koleos in China and South Korea. All these new products should help the Group to continue its growth outside Europe, despite adverse situation in key markets.

Lastly we expect to reduce our start up cost in H2 as we have learnt from some launch issues encountered with some products, and as we are ramping up our production on common platforms.

To conclude my presentation, I want to say that we're satisfied with our first half results and look in the future with confidence. We're following the course we set with our midterm plan and have focused our energies on execution. Finally, we're confirming our guidance today for the full year.

Thanks for your attention. I will now hand the call back to the conference operator for the question and answer session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] So the first question is coming from the line of

Gaetan Toulemonde, Deutsche Bank. Please go ahead.

Gaetan Toulemonde

Yes, good morning. I have two questions. The first one is I want to better understand this currency impact on the operating result. You have, on one side, price increase in emerging market, currency negative. The net impact of currency, can we summarize it to just the British pound, as a rough number?

Clotilde Delbos

No, I don't think we can summarize the currency impact to the British pound, for several reasons. First, the British pound issue came in the second quarter, not in the full year. And as mentioned in the speech, the main impact is indeed coming from the Argentinian peso. That's the main impact.

Gaetan Toulemonde

But you increased prices in Argentina, right?

Clotilde Delbos

Yes, but the price increase is not in the same box, Gaetan. In the currency you have the direct impact. The currency is summarized in the price box. What we say usually is that we are able, in average, worldwide to pass through around 50% of the FX impact. It obviously depends country by country. For some country it's more, for some country it's less.

Gaetan Toulemonde

Okay. So when, in a work-down, when you have 430 million negative impact of currency, the true number is half of that, is that correct, because your price increase in the mix, net enrichment on the other box?

Clotilde Delbos

I wouldn't comment on the exact percentage, but it's definitely less than what you see here. You're right.

Gaetan Toulemonde

Okay. Second question on this Monozukuri, last year 200 million first half, 400 million second half, so relatively big in the second half. First half this year is neutral. Clearly there will be some headwind in the second half. Can you give us a little of an idea what you expect or what you guide us for the second half on Monozukuri?

Clotilde Delbos

Yes. On the Monozukuri, you're right, we usually have a first half which is well, last year and this year the first half is lower than what we were able to do on the full year basis. This year is going to be the same and we expect to be globally in line with what we had said in the global guidance for the three years. But I will turn over to Thierry Bollore to give you more insight on our Monozukuri reduction plans.

Thierry Bollore

Yes. Good morning, Gaetan. It's Thierry speaking. I think that H1 is a little bit lower, you are right, because of, as Clotilde explained, we wanted to have and we accepted to have some exception around the expenditure. And for that we are preparing the future for [Indiscernible]. anticipating also what's happening in terms of diesel consequences. But the second point is also very interesting, is because we have higher volumes and we have put in place all what is necessary in order to supply and to make sure that we are improving the business with happy consequences on our bottom line anyway. So all in all, and when I look at the next steps for the second part of the year, as Clotilde expressed, we are pretty much in line with what we want. We have a general increase, which is also linked to our business growth, and I would say that we felt this impact, which is nice to have, we should be very close to be on track.

Gaetan Toulemonde

Okay. On track would be pretty stable on last year, right, second half?

Thierry Bollore

Yes.

Clotilde Delbos

No. Yes, just to be clear, Gaetan, as we had said at the beginning of the five year of the three year plan, our ambition on cost reduction was 1.8 billion. We haven't changed the total ambition for the three years, meaning that definitely 2016 will be lower than previous years in what we will achieve in terms of Monozukuri. You know what we have achieved in the last past two years and I'll let you guess what you need to do in order to reach this 1.8. So you should not bet on a Monozukuri which would be higher than 350 for the full year.

Operator

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

Charles Winston

Yes. Hi. Good morning. Charles from Redburn here. I guess a couple of quick issues for me, if you don't mind. Firstly, could you split out the impact of the Euro 6B headwind within the price enrichment figure in the bridge, and perhaps give us some thoughts as to what that might be, any residual impacts in the second half? And indeed I'm being perhaps a bit cheeky here, but if you've got any thoughts for 2017 as well in terms of what regulatory cost headwinds we're looking at.

And second question, AvtoVAZ, the recapitalization. It's a pretty weak financial position. I imagine you have an idea already as to how much that's likely to be. Could you give us an update as to your thoughts as to the size of that recapitalization and what Renault's contribution would need to be? Thank you.

Clotilde Delbos

Yes, on Euro 6, no, I don't think we can give this information as obviously this is competitive information. You can, you just please note that we implemented Euro 6, it was implemented in September last year, so you didn't have any impact at all in H1 last year and you had a start of impact in H2 last year. So definitely the impact that you have in this first half is the highest that you have had in the reference period. I won't be able to give you the information because as any other competitors would have told you, we are not able to pass through totally to the customer this extra cost. And obviously I won't give you any I am not in a position to give you any information on the impact of 2017 but it will continue. There is no reason why this impact wouldn't stop.

On VAZ, yes, we are contemplating participating in the share capital increase of VAZ. I can't give you a precise number, but I can let you know that it is going to be a few hundred millions of euros.

Charles Winston

Forgive me, just to follow up, is that the total recapitalization or is that Renault's contribution figure?

Clotilde Delbos

No, that's our share.

Charles Winston

Okay. A few hundred million. Great. Thank you.

Operator

Thank you, sir. Next question is coming from the line of Thomas Besson, Kepler Cheuvreux. Please go ahead.

Thomas Besson

Yes, thank you very much. Hi. It's Tomas Besson at Kepler Cheuvreux. I'd like you to please make a comment on the evolution of the profitability by region. In previous occurrences you did not give any precise information but told us that you were a positive area. I don't think I heard you say that, so could you please comment on that topic? And second question, please, we have seen a big increase in the tax line. I know it's a detail but for your earnings per share it's quite important. Can you explain what happened there and what we should expect for the second half and 2017, please?

Clotilde Delbos

Yes. Thank you, Thomas. On the region, obviously we don't give details as we have never given any. What I can tell you is, excluding one offs, all regions are profitable and improving versus previous halves during this first half. On the tax situation, yes, it's a little complex, I must confess. Firstly, our taxable profit increased quite a lot, so that does explain part of the increase. Obviously when you earn money you have to pay tax. So our current income tax is going up during the period.

For the deferred tax part, the increase of deferred tax assets is corresponding to tax losses carried forward and it was mainly accounted for directly through equity in this half, whereas the previous halves, the deferred tax portion was mainly accounted to in P&L. You know that according to the norms, you have to define where these deferred taxes are coming from and then when you activate them you have to account for them from where are they coming from actually. It's a little complex, I'm sorry. So we have to make these analyses. And in previous quarter we have assumed that the activation was linked to previous losses that were booked in P&L, whereas this time we assumed that the losses were coming from elements directly coming from the equity. It's a little complicated, I must confess, but that's what it is. So we don't expect that it's going to be the same situation at the end of the year. But it will definitely depend on the original profit pool. But we expect the ratio in H2 to be below the one in H1.

Thomas Besson

Great. Can I ask you a quick follow up, please, on the one line that surprised me?

Clotilde Delbos

Yes.

Thomas Besson

Okay. Can you comment on the manufacturing and logistics expenses that effectively continue to be a big increase? Do you expect this to be a similar headwind in the second half or can you cope with it now?

Clotilde Delbos

I will turn to Thierry to give you some details.

Thierry Bollore

Yes. Concerning the manufacturing, we expect to be perfectly in line with our budget, frankly speaking, which means that the only upwards is really linked to the business plus that we are facing because of increased markets, and this is what we are doing. So we believe that we would be, globally speaking, slightly better than what you can see today or on the full year.

Operator

Thank you, sir. Next question is coming from the line of Horst Schneider from HSBC. Please go ahead.

Horst Schneider

Yes, good morning. Thanks for taking my question. It's Horst from HSBC. First of all, I want to know what do you expect in terms of sales momentum for H2? You say that you don't see any impact from Brexit. You have got at the same time all your new models, so I want to know if there's a chance that H2 unit sales can be higher than H1. Then also what strikes me is when I look at your China figures that we do not yet see really the success of your SUV launch sale, so I want to when do you expect the sales there to pick up more significantly. And last but not least, I want to know what is your comment on pricing and your OpEx that has got better sequentially and year on year? Thank you.

Stefan Mueller

Yes. This is Stefan speaking, Horst. Thank you very much for these questions. And I start with your first question on the sales momentum. So we don't change our guidance, which is to sell over 3 million for the full year. And we are on a good track, you said it yourself, mainly because of the introduction of all of these new models. And I'm not going to go through the list again, but just to name a couple of them, which is obviously Megane, Talisman, which we have in full availability in H2. It's Kwid in India, the pickups Oroch and Alaskan, Kaptur in Russia, etcetera, etcetera. So this for sure is going to help us and these introductions are working as we have planned. That's one element. You mentioned then Brexit and, yes, as Clotilde has already pointed out in her presentation, of course there is a question mark on the development of the market in the UK and probably also in Turkey. It is way too soon to tell. We don't have any significant impact that we can observe today as we speak, but we obviously stay alert.

With regard to your second question on China, Clotilde has mentioned it in the presentation. China, we are not yet on target. The car has been received very, very well by the press and also by our customers, which is very good. The main topics that we have to work on is the expansion of our dealer network and the expansion of the awareness of the Renault brand. So together with our joint venture partner we have obviously developed a lot of action plans and are currently implementing them. When will we see the impact? We'll see the impact in 2017, this also because we're going to launch another SUV at the end of the year. This should significantly boost our brand image.

And your last question was with regard to pricing in Europe. And I can tell you that in total, but also in detail, we have done a good job and we have increased our transaction price. In many countries we are exactly in line with what we have set out to do. And especially on the new products we have been able to improve, as planned, not only our pricing but equally important, our residual values.

Operator

Thank you, sir. Next question is coming from the line of Jose Asumendi from JPMorgan. Please go ahead.

Jose Asumendi

Thank you very much. A couple of items, please. First, could you please clarify the other move in working capital? It was up about 1 billion. Second question please. EBIT seasonality, second half versus first half for the autos division, should we expect it higher or lower in H2 versus H1? And the final item, in terms of AvtoVAZ, do you plan to fully consolidate the assets, or the result rather, at the end of the year or next year? And then timing wise, why don't we, why don't you just wait a little bit more, see six months or one year of good results and then take the call to consolidate the results in the P&L?

Thierry Bollore

Jose, excuse me, it's Thierry speaking. Could you repeat your second question? We didn't get it.

Jose Asumendi

Yes. Second question basically is seasonality of the autos operating income, if, in the second half, you expect a higher or lower operating income versus the first half?

Clotilde Delbos

Okay. Thank you very much for your questions. On your first question, relating to the change in working capital and especially the other column, what you have in this column is many things. You have the tax debt or receivable, you have the social receivable and you also have especially the, how can I say, the marginal sorry, the variable marketing expenses and the discount that we are giving and paying to our dealers. So the more business you have, there is a delay between when you have this business and when you, depending on payment terms, when you pay these discounts to your suppliers, or when you pay the related VATs to the states, or where you pay all those things, the more business you have, the bigger is this box. So this is quite natural that this box is getting high when you have a high business at the end of a semester.

On your second question, which is relating to COP, you know that we don't comment on those kind of things. Obviously we are working on having a good performance also in the second half. Stefan told you that we are expecting good volume in order to reach around 3 million of cars. We are working in order to improve our cost on a daily basis. We told you that we should be able to have better Monozukuri performance in the second half, so I'll let you guess what this should mean in terms of profitability.

Your last question regarding VAZ, technically we will consolidate VAZ when we'll have taken the control of VAZ. If, as mentioned, the share capital increase of VAZ is taking place at the end of the year, and we expect it to take place at the very end of the year, this will be the triggering event in order to push for consolidation. If it works as envisioned today, depending obviously on the approval of VAZ board and VAZ general assembly obviously, that would probably mean that at the end of the year we will consolidate the balance sheet but not the P&L, because the P&L we will only consolidate when we take control. If the control happens, let's say in December, you have nothing to book in terms of P&L in the year of 2016 and hence the impact on our P&L will be seen starting 2017.

Why do we, I understand that your last question is why do we do it now when VAZ is not making profit and not later, I don't think that's the right way of looking at the topic. We are supporting VAZ. It is one of our subsidiaries, even if we don't have the control. As soon as we have the control and as soon as we believe that VAZ needs to get some cash injection we will do it, even if it might mean that we will get some negative impact on our results.

Operator

Thank you, sir. Next question is coming from the line of Fraser Hill from Bank of America. Please go ahead.

Fraser Hill

Hi. Good morning. Just two questions left from me, and I might have just missed your wording on the Monozukuri. But could you just reconfirm what you said about Monozukuri for 2016? Was that 350 to be expected for the full year 2016, or is that to be expected in the second half?

Clotilde Delbos

No, that's the full year. You're right, that's the full year. That's what is needed in order to reach our commitment of 1.8 billion over three years, and that's around what we need to that's what we need to achieve. That being said, as we have done only 6 million in the first half, you can see the second half is 350 million or the full year it's roughly the same, right.

Fraser Hill

Sure, yes. Okay. Then on these start up costs which seem to have been something of a burden in the first half, is there any way you can quantify how much of a burden they might be and what the delta is going to be on that item in the second half versus the first half if that falls away?

Clotilde Delbos

No. I don't think we're going to give this type of detail. But definitely we have a lot less launches in the second half. So it was a certain burden in the first half and I think it was one of the, the half where we had had the most launches, so definitely it was a small burden. But now we are getting it's a three digit number though. If you take the impact, the total impact of launch cost, emergency freight, etcetera, that's what Thierry has mentioned, that's all you see in the box, manufacturing and others. Now we are really improving, launches after launches, we are improving our ability to do it in a way that pleases us, so you should see that as really decreasing in the next periods.

Fraser Hill

That was a triple digit million item of some magnitude?

Clotilde Delbos

Yes. Yes, well, it's most as Thierry mentioned, the launch cost and the impact of the improved sorry, the launch cost and the impact of the additional volume that we need in order to reach the demand is what is making the minus 115. So, if we are now in a stable cadence and the lower launch cost, that's what Thierry mentioned, it should decrease considerably.

Operator

Thank you, sir. Next question is coming from the line of Mike Tyndall from Citigroup.

Mike Tyndall

Yes, hi. It's Mike Tyndall from Citi. Two questions, if I may, the first just referring to slide 8 and your inventory number. I know it might just be an optic on the slide, but looking on that chart bottom left, it looks like your order book has dropped off quite considerably going into the end of the half. And then when I consider that your inventory levels are down year on year, it seems a slightly odd development to me given you had this huge period of launches. Is there am I missing something there in terms of the actual dynamic? And then the second question, I guess this is going to come across as a slightly cheeky question, but there's a change to the way you've treated deferred taxes. There appears to be a change with regards to capitalization and R&D. Are we seeing perhaps a bit of housekeeping with a new CFO, where there is some change to the way you're treating things that's washing through this set of results? Thanks.

Clotilde Delbos

I'm going to turn to Stefan for the first question. I will obviously take the second one.

Stefan Mueller

Yes, Mike, on the first question with regard to the order book, obviously we are monitoring, as you can imagine, we are monitoring this every week. And I can tell you that and this for us is the most important, if we look forward, the current rate of orders that we have, and this is true on a worldwide basis, is absolutely in line with what we need in order to generate the necessary invoices and registrations that we have set out to do until the end of the year. So, we are perfectly okay, and the order book, as you can see on that slide that you are referring to, is obviously fluctuating a lot, as it is always fluctuating. That is in the nature of the business. If you do an exact comparison, you can see it's declining slightly. And this has mainly to do with the fact that we were able to make improvements in logistics, deliver quickly more quickly the car than before. But order rate and outlook and coverage is perfectly okay, so we have absolutely no concern there.

Clotilde Delbos

Thank you, Stefan. So to answer your question, no, I think Renault has always applied the norms in terms of accounting, so that will not change and that hasn't changed. That has always been the case. In order to answer specifically your two questions, R&D, it's very strict norms also, so we don't play with those things, and it's really depending on the cycle and on our ability to pass the numerous milestones that we have. And as a matter of fact, we have a lot of programs launched and at the end of June, by applying the norms, we're only able to reach the capitalization level that I had mentioned.

On the taxes, same thing; we're working by the norms. And on that point specifically, first, I already gave some explanation. And the second one I did not mention is that there has been clarification in the norms in the first half. And we, by taking into account this clarification of the norms, that's how we came to those numbers. So it's a pure application of the norms and nothing else.

Operator

Thank you, sir. Next and last question is coming from the line of Victoria Greer from Morgan Stanley. Please go ahead.

Harald Hendrikse

Yes. Morning. It's actually Harald, Morgan Stanley. So three quick questions, if you don't mind. Firstly, Megane. Megane Scenic, obviously a huge product for you, especially in Europe, and particularly in the light of Mike's question on the order chart. Can you just talk a little bit more about the progression of Megane, and obviously it's going to be fully available in the second half? But I was expecting maybe for you to talk a little bit more about that. I think it's a big development for you. Secondly, on FX, can you just give us a little bit more guidance on what you expect the pound impact to be and what you can do to mitigate the impact of the pound, i.e. can you raise prices in the UK? I suspect that will be difficult. And then lastly, can you give us a little bit more idea also about CapEx and R&D going forward given the potential changes in the whole make up, technology, content and all of this sort of stuff? CapEx and R&D seems to have been reasonably constant still, but is there pressure for that to go up further?

Stefan Mueller

Harald, this is Stefan. I start with your question on Megane, and I can tell you that if I look at the most important markets where the car has been launched, we are quite happy that we have achieved our target in terms of transaction pricing and residual value, which obviously goes hand in hand. The car is very well received. If you go through some recent press comparison tests, we can see that the car has reached the position that we were that we set out to do. So this is very good. You mentioned yourself, and that's actually the case, we are still in the launch phase because we still don't have yet full availability on all variants, especially we're in the launch phase of the station wagon, which is so important in some markets. If I would go more into details I would actually reveal numbers that we don't reveal usually, so launch phase is working very well. Cars being received well. H2 obviously is going to be very important for us because there we have full availability of the car and we shall see that we achieve our full year target. But today we are online.

Clotilde Delbos

On the pound, if you refer to our reference documents of 2015, you will see that a 1% variation in the pound versus euro has an €18 million impact. That was 2015. Obviously it depends also on the volume. But you have an idea of the magnitude. You know what the average FX was last year and what you can imagine it can be for the second half and make your own calculation depending on the rate you want to retain. So that's the global FX impact. In terms of prices, maybe I can turn back again to Stefan. The question was how do we intend to mitigate this impact on the UK?

Stefan Mueller

Yes. This is obviously the question that we are discussing. And I just had a chance to be in the UK and discuss it myself with the team intensively. So obviously we have two things that we have to keep in mind. One is, as we have mentioned before, we are always going to keep the right balance between profitability and volume. That's almost self explanatory and is very, very clear. And on the other hand, we have to obviously look at what the competition is doing, so we are also not going to out price ourselves. Today, as everybody is preparing for the usual strong month of September. We have so far not seen any big movements in the pricing policy at our competitors nor on our side. And we do not intend to do anything at this point in time. We'll see how things develop and then we will react.

Clotilde Delbos

Merci, Stefan. For your last questions, as you have seen in the slides, we have always said externally that we are capping our R&D and CapEx to 9%. And there is no reason to change that 9% of turnover. Obviously as the turnover is going up, even with keeping this cap we have a lot more ability to invest in R&D and CapEx in order to prepare the future. It's basically what is at stake at the moment.

Harald Hendrikse

Okay. Perfect. Thank you very much.

Operator

We have no further questions.

Unidentified Company Representative

Okay. Thank you, everyone, for being on the call this morning. I know it's a very busy period for all you guys. If you have further questions, feel free to call the IR team at Renault. We'll be available all day. Have a good day, bye bye.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.

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