Renault: getting out of the ostrich policy

As if to mark his difference and/or to highlight what might have opposed her to Thierry Bolloré (Renault's former CEO, recently laid off), Clotilde Delbos (appointed to replace him) began her interim period at the head office of the Renault group with a "profit warning": no, the return to positive cash flow in the second half of the year will not offset the €700 million negative cash flow of the first half; no, revenue will not be constant but will fall by 3 to 4% and the operating margin will be 5% rather than 6% as announced in July; no, the 2022 plan will not be implemented and it is urgent to redefine it so that everyone knows where he is going.

 

She did not just talk to the analysts. She also spoke on Tuesday in a video for employees to tell them that the "Drive the Future" plan had to be taken up again because the market has changed over the past two years and that "unfortunately, the situation did not improve during the summer" and requires that the strategy be adjusted to "get Renault back on track".
Highlighting the cash flow problem linked to unfavourable revenue trends in a context where relatively high levels of R&D spending have been maintained, she added: "we will have to make choices".

 

This speech, in which she also pleaded for more transparency and honesty in the company, clearly showed her predecessor as having made the choice to put his head in the sand and as having forced him to come and sing with her before the press and analysts in July the air of "everything is fine".
Analysts were surprised and disappointed and the stock plunged mainly because, in view of recent sales trends, they thought that profits would suffer relatively little and that dividends over the 2019 financial year could remain at the level of those paid in 2018.
Thus, Oddo BHF, an equity broker, states: "We have difficulty understanding how a drift at this relatively limited stage of sales can have such an impact on operational profit".  
Philippe Houchois of Jefferies, writes in a note: "We expect a significant reduction in the dividends and believe that Renault may need to sell assets, perhaps even Nissan shares, to defend its balance sheet".

 

This is not the case, but we can understand this astonishment because it is true that when we look at sales in volume for the first nine months of the year, Renault is not doing any worse than the world market: while the market has fallen by 6.1%, Renault's sales are down by 6%.
The same is true in Europe, where Renault is evolving like the market (-1%), despite a decline in sales in France (-2.9% or 15,500 vehicles) that is more marked than that of total registrations (-0.1%).
The decline is essentially due to the situation in Argentina, where Renault falls like the market by 45% and loses almost 30,000 sales, and in Turkey, where Renault is also following the market downward (- 40% and 25,000 lost sales).
Since Clio 5 is off to a good start and the effect of the Captur renewal is to come, we could have expected a strong fourth quarter with a slight catch-up in terms of sales and profits.

 

If that's obviously not what C. Delbos is predicting, this is probably because the volumes realized were not at equal profitability.
N. Bourassi de La Tribune thus refers to Renault's "partly failed range strategy" and the need in which it has put the manufacturer to "push registrations".
By indicating, at the conference for analysts held after the "profit warning" that Renault will try in the coming months to implement a "better pricing policy" that "will result in higher prices and fewer discounts", C. Delbos seems to indicate that this is where the problem lies: in the face of competition and, in particular, PSA, in France in particular, the sales of Kadjar, Scenic, Talisman, Espace and Mégane involve very high "commercial costs" and, as we indicated during the Autoactu conference on used vehicles, competition between new vehicles and recent second-hand vehicles is very strong for many models. 
To take an example, in November 2018, Renault sold 1662 Captur, 403 Kadjar, 801 Mégane, 632 Scenic and 95 Talisman to individuals. In the same month, the registrations of vehicles less than 1 year old of the same models were 1587, 504, 808, 715 and 110 units respectively. At the same time, PSA sold 2862 new 2008 Peugeot cars and 2567 3008 to private individuals, while the number of vehicles registered for the same models was 1380 and 1574.

 

Very clearly, as happened in the United States for Nissan, Renault volumes, in France at least, have been achieved for many months by using and abusing the usual "tactical sales" that erode profitability.
Thus, in the first nine months of 2019, the combination of "demonstration vehicles" and "short-term rental sales" accounted for 29.64% of Renault's registrations, compared with only 24.56% and 25.22% for Peugeot and Citroën.
Even Dacia, which sold 84.24% of its vehicles to individuals in 2017, sold only 76.46% in the first nine months of this year.
The new models do indeed represent an opportunity to go back up the slope and regain some of that lost pricing power. Competition with PSA's equivalent models will nevertheless remain very fierce and the sale of Clio 4s and old Captur cars registered in recent months will continue for many months to come to weigh on the ability of new vehicle salespeople to resist discount requests.

 

It is very likely that, just as she did not think it would be appropriate to try to solve the cash flow problem by not paying suppliers, C. Delbos did not think about the problem of the range soluble in discounts.
She has clearly decided, with the support of J.-D. Senard, to take the company out of the ostrich policy. In rethinking the plan, she will have to build on these findings and propose to address the underlying issues.
As well as the priorities to be set for the company in terms of R&D, those concerning the range and commercial policy will be crucial.

 

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Translated with www.DeepL.com/Translator, corrections by Géry Deffontaines