Renault SA

PAR:RNO

Q3-2022 Earnings Call

[Philippine de Schonen, executive]

Ladies and gentlemen, good morning, everyone. We are pleased to welcome you to Q3 2022 Revenue Conference. This conference will be host by Thierry Pieton, our Group CFO, and will be followed by a Q&A session.

Thierry, the floor is yours.

[Thierry Piéton, executive]

Thank you very much, Philippine, and good morning, everyone. This morning, I'm happy to report that Renault Group continues to deliver. Q3 is yet another illustration of the successful journey that we've started 2 years ago.

While our value-focused commercial policy is yielding increased benefit, these are now further boosted by the effect of the renewal of the range with the successes of Renault Arkana, of Dacia Jogger and the promising start of Renault Megane E-tech, to name only a few. And now our eyes are all on those.

All this led to a revenue growth of more than 20% versus Q3 of 2021, thanks in large part to the best pricing effect that we've ever recorded and despite an environment that remains challenging.

Indeed, in addition to the semiconductor crisis in Q3, the industry had to face tensions in energy supply, in logistics as well as a tough macroeconomic environment. In this context, group registered 481,000 units in the quarter. Excluding the impact of Russia on Q3 2021, this represents a 2.4% decrease.

Renault brand still the most impacted by supplier situation sold 321,000 vehicles, down 4.8%. Dacia recorded 4.5% growth with 145,000 units, proving the success of its value for money positioning in the context of inflation. Dacia has once again one of the only brands in Europe to experience growth.

Alpine sales, supported by the launch of limited editions around its iconic A110 have increased by 18%. By region, group sales were roughly in line with the market in Europe at minus 3.6%. International sales, which represent 37% of our volumes were flat.

Let's take a look at the Renault brand launches on Slide 5. Renault is clearly making it come back on the C segment. As you know, it's a strategic segment for us and represents a major profitability lever for the coming years. Arkana continue to be a success with more than 100,000 cars sold since its launch.

Since the beginning of 2022, we had 60,000 orders with a retail mix of 60% and 60% of E-tech powertrain. Megane E-tech performed very well with 37,000 orders at the end of September, since its launch in Q2 and continues to be strong in October. Here again, the highest equipment and the most powerful powertrain versions are favored by respectively, 75% and 85% of our clients.

Orders just opened on our C-SUV Austral. Although, it's very early, Austral is getting great feedback from the journalists who run test drives in Spain. Its 200-horsepower, 1.2-liter 3-cylinder engine is one of the most efficient hybrid engines in the world with 41% energy efficiency and 102 grams of CO2 per kilometer. 102 grams, this is 14% less than the best competition.

Austral will also feature the OpenR display and Google automotive services environment, first launched on Megane E-tech, which our customers have already come to love. We expect to sell Austral at a transaction price of 25% higher than Kadjar, which it replaces. It will deliver multiple times the margin per unit.

If we focus on the Dacia brand, Dacia Spring, the most affordable European EV continues its momentum with about 5,000 orders per month in average since the beginning of the year. The vehicle is now #1 electric vehicle for retail in France, #3 in Europe. Dacia Jogger is leading the brand C segments offensive with more than 65,000 orders registered in 9 months. More than half of them being LPG and 7-seat versions.

I'd also like to highlight the long-standing success of Sandero, which remains the best-selling vehicle for retail in Europe, and Duster, which comes in, in second place. and has reached 2 million sales since its launch. The new Dacia brand identity launched in the third quarter, boosted orders in September, which are, for the first time, higher than in 2019.

Last but not least, Alpine. As mentioned earlier, the A110 sales continue to expand. In a similar fashion to the Jogger [indiscernible] addition in H1, the first 110 R's for Radicale were sold in less than 2 hours. To directly address the question that you will have, at the end of Q3, I confirm that our order book is still at a record level. In fact, it's stable in volume compared to its level at the end of June.

Slide 6 illustrates some of the key results of our commercial policy and product offensive. C and above segments now represent 41% of our passenger car sales worldwide in Q3. For the Renault brand in Europe, C segment mix rose 10 points compared to last year, reaching 36%. This is consistent with our Renaulution ambition to increase our presence in the most profitable segments. As you know, C segment margins are double in value compared to B segment.

As already mentioned, our new model launches also come with richer trim levels. High-end versions represent over 75% of Arkana, Megane E-tech and Spring sales. We continue to religiously improve our channel mix. In Q3, retail accounted for 56% of Renault brands total sales in our top 5 European countries, up 7 points from a year ago and actually up 3 points versus H1. This is the best mix for at least 5 years.

Dacia remains more than ever focused on retail with a mix of around 85%. Dacia and Renault are respectively #2 and #4 passenger cars in retail in our top 5 countries at the end of August. Finally, after a first quarter posting a net pricing effect of 5.6 points and a second quarter at 8.4 points, we recorded 12.8 points in Q3, which is our best performance ever.

Slide 7 shows the E-tech performance over time. As you know, our ambition is to be a 100% EV in 2030 for Renault brand passenger cars in Europe with an intermediate milestone at 65% of electrified sales by 2025. With hybrid and BEV sales representing 38% of our volumes in Europe after 9 months, up 12 points versus 2021. We're perfectly on track to reach this objective and significantly ahead of the market, which stood at 28%.

It was even stronger in Q3 as our electrified mix reached 42%, an increase of 13 points versus the same period in 2021. By the way, pure EV sales represent 18% out of that percentage.

Let's now see the contribution of our different segments to Q3 revenue compared to last year, on Slide 9. Just as a reminder, the revenue of continuing operations presented on this slide no longer includes the Russian automotive activities, and 2021 has been adjusted accordingly.

The impact of this adjustment on revenue was minus EUR 0.9 billion for Q3 2021. Group revenue was up 20.5% in Q3 at EUR 9.8 billion, while Automotive revenue stood at EUR 9 billion, up 21.7%.

The Mobility Services contribution amounted to EUR 9 million versus EUR 6 million a year ago. Mobilize Financial Services revenue increased by 8.4% compared to 2021 Q3. I'll now continue the analysis with a review of the Automotive revenue on Slide 10.

Reading from the left-hand side of the slide, as mentioned, Q3 2021 has been adjusted from Russian activities. On the Automotive revenue, it represented minus EUR 867 million. The Forex impact was a positive 1 point, mainly thanks to the Brazilian real, which more than offset Turkish lira and Argentinian peso devaluation.

Volume impacted by 12.5 points with a lower level of inventory drawdown in the network due to a lower year-over-year impact of the component's crisis. As you will see further in the presentation, however, dealer stock levels remain very low.

Geographic mix was negative 1 point. Product mix contributed 1.7 points, mostly driven by the strong start of Megane E-tech. This level is slightly lower than in the first half of the year, because Arkana, having been in the market for more than a year is therefore in the comparables. Product mix will continue to improve in Q4 and into '23, in particular with the launch of Austral.

The price effect was once again the strongest positive in the quarter with plus 12.8 points. It reflects our continued actions to improve the quality of our sales and the pricing of our vehicles, but also the optimization of our discounts as well as actions to mitigate cost inflation and Forex impacts. Again, this effect was the strongest ever.

The impact of sales to partners was negative 2.3 points. As in the first half, it's due to the decrease in production of diesel engines and vehicles for our partners, notably linked to the end of production in Q4 '21 of Opel Movano and Fiat Talento.

The last item, others, showed a negative contribution of 3 points, due to lower contribution of our own network sales following the sale of branches and the drop of used vehicle sales, which have become increasingly scarce on the market.

If you turn to Slide 11, Global inventory stood at 421,000 units versus 340,000 units a year ago. Independent dealer stock at 184,000 units remains very, very low. Group stock at 237,000 units reflects higher production levels in the summer to prepare for the Q4 demand.

I'll now comment on Mobilize Financial Services' commercial performance. New contract volumes decreased by 11.9%, reflecting the power at the lower level of registrations and market conditions in Russia in particular.

However, thanks to the group's pricing policy, new financing have increased in value by 1.9% over the quarter. The average performing assets follow this trend with a 1.4% increase at EUR 45 billion. Mobilize Financial Services revenues were up 8.4% to EUR 823 million.

On the following page, as regards to our guidance, I'd like to reaffirm the guidance that we gave you at the end of July with an operating margin above 5% and an optimate free cash flow above EUR 1.5 billion.

Now, we look forward to seeing you on November 8 for our Capital Market Day. It will be a great opportunity for us to showcase the in-depth transformation that we started 2 years ago with the arrival of Luca and to present the Chapter 2 of the Renaulution plan dedicated to the metamorphosis of Renault Group. We'll also present new midterm financial guidelines.

This concludes my presentation, and I'm now ready to answer your questions. Thank you.

[Philippine de Schonen, executive]

Thank you, Thierry. So we now have the first question from Pierre-Yves Quemener of Stifel. Pierre-Yves, could you open your mic, please?

[Pierre-Yves Quemener, analyst]

Sure, you hear me?

[Thierry Piéton, executive]

Yes.

[Pierre-Yves Quemener, analyst]

Well, this is the Renault story with investors, I guess the typical pushback we have is that we are heading into a recession next year. And that your robust pricing means tailwind, you have enjoy should not only sales to '23, but reverse, I guess my question is twofolds. How -- first, would you address the kind of pushback? And two, how should we think about the direction and the size of the price mix component into '23 and '24?

[Thierry Piéton, executive]

Yes. So look, first, I think it's important to understand where the pricing improvements have come from for us, okay?

So there is -- the first component, which was just aligning our pricing policy to the competition and not going after the least profitable channels. So what we did there is very clearly, we took model by model in our range. And we looked at the gap that we had versus the competition, and we took action to close that gap.

If you look at where we were on Clio, for example, we were 11% lower than the competition 2 years ago, 7% a year ago, and we're about 2% lower today. If you look at Captur, same figures, about 8% lower than competition 2 years ago, 4% a year ago, about in line with competition today.

Same thing on the Dacia brands. We looked at the positioning of Dacia, generally speaking, we were roughly 25% below the competition back in 2019. We went down to about 18% at the end of '21. And now we're at 15%, which is roughly where we want to be. We want to maintain an advantage for the consumer, so that the offering is very clear, but we don't want to leave any money on the table, right? This alignment is not something that we need to go back on. So it's here to stay, right?

Second item is, we reviewed our discount policy with the network, whereas we used to be remunerating the network on volume, we're now remunerating on quality and on margins, right? This is not going to go backwards.

Third item, we, frankly, reduce the amount of sales that we're doing to lease -- the least profitable channels. Now at the group level, we're at about 70% in total in Europe on the retail channel, okay? And the reason we're able to do this is at the same time, we focus the business on the high-quality sales channels, we took over $2 billion of fixed cost out of the system. So we no longer have the incentive or the obligation to go after the least profitable sales. And we just have to stick to where we're going. We're not going to go backwards.

At the same time, we took the $2 billion of fixed cost out, we removed about 1 million units of production capacity. So what we plan on doing in the future is to stick to that policy in a religious fashion. If the demand were to go down, obviously, we'll continue to adapt the production capacity. Our goal is to always be at the level of the demand minus 1 car, so that we don't have the incentive to go get the least profitable cars.

I think more importantly, as you can see in the communication here, as we're launching the new cars, there is a shift that's going to operate between the pure pricing actions and discount actions, et cetera, which we're going to continue to push towards the benefit that's coming from the new models. So I'm not going to come back on all the success of the new vehicles. But as you can tell, in some of the figures that I mentioned, all the new launches that we've done recently are ahead of the plan that we have set to ourselves, right?

So for us, going into the fourth quarter and in particular, going into 2023, it's no longer a question of just pure pricing actions. It's a question of getting the full benefit of the new models that we're launching. In '23, we'll have the full first year effect of Megane E-tech. We'll have the full first year effect of Austral. We'll have Austral 7-seater coming out. Arkana continues to perform. So all these cars are going to be what's driving the boost in profitability over 2023.

One last thing is, as I mentioned in the discussion, we still have a record level of orders portfolio. So we do sensitivity analysis and stress tests. If the demand were to remain very, very low, so say, 20% below last year, it would still take us well into mid-'23 before we get back to an order book coverage, which is our target of about 2 months, right? So we think between the strong order book short-term, and very high product activity that we've got going on. We think we have a really good opportunity to be contracyclical.

[Pierre-Yves Quemener, analyst]

That means that the mix component for the product side should be very positive into the next year and '24?

[Thierry Piéton, executive]

Absolutely. I think we'll have a similar equation of price plus productivity offset the cost inflation and mix, but mix becomes a massive lever of our profitability into '23. And it will remain that way in '24 and '25 as well.

[Philippine de Schonen, executive]

We now have a question from Horst Schneider, Bank of America.

[Horst Schneider, analyst]

I want to come back on this trade-off between inventories and pricing because inventories actually have gone up a bit, right, in Q3 versus Q2. So could you maybe provide more color to what extent then Q4 is really stronger?

And in that context, can you keep up the fast-track program, given that now the inventories are up that much. So if the shortage is easing, you have to cut back on the fast-track program could that imply and also for 2023 that we see a negative price impact from that, which could more than compensate then also the positive product mix effect?

And the last one is on this pricing again. I mean you have not changed the earnings guidance; I think you never do that in a Q3 call. So could you maybe make some qualitative statements to what extent how the earnings guidance is more cautious than it maybe was at the end of Q2?

[Thierry Piéton, executive]

So thanks, Horst, and nice picture in the background as well. Oddly familiar. Yes, I was going to say. All right.

Hey, look, so on the inventory levels, I think the way to look at it is it's a lower decrease of inventory compared to what we had last year. So if you look at the inventory of the dealers at the end of September, it's still significantly lower than what it was at the end of June. But it's -- but the drop between June and September is about 90,000 vehicles lower than what it was last year because last year was the peak of the electronic components first impact, right?

So we're drawing down less on dealer inventory. However, we remain at a dealer inventory level that's very, very low. And in terms of coverage, it remains in line with the end of June.

When you look at the OEM side of inventory, so the inventory that we carry on our books, the increase comes from the fact that we've had higher production. I think we've gotten better at managing the electronic components crisis by taking some risks on incomplete and things like that.

We do see strong demand for Q4, and the backlog is high. I think what we anticipate from sort of sales growth in Q4 is roughly similar to what you're seeing here for Q3. So we built up some inventory at the end of September to prepare for that, right. And so that's really the dynamic. And so yes, strong Q4 ahead.

Then from a guidance perspective, I would say no massive change in terms of the situation. I think as time goes by; it confirms the guidance that we had laid out at the time. We have a Q3 that's very much in line with the -- that's the goals that we had set to ourselves.

Pricing is in line and volume came in pretty strong, thanks to the production actions that we took. So for us, it's a confirmation of the plan that we had set to ourselves.

[Horst Schneider, analyst]

But since pricing is stronger than in Q2 or H1, usually the margin should increase in H2 versus H1, right?

[Thierry Piéton, executive]

But you're right. But at the same time, though, it's the same on the cost side because we do have -- we worked, and the purchasing team did a fantastic job with our suppliers to try to mitigate an impact of the cost inflation as much as possible.

And in fact, we did push towards the end of the year, some of that phenomenon by negotiating. And so you do have in a similar fashion that you have an increase in price. You do have a catch-up on the raw material price.

We had given a guidance on raw material, which was a split of roughly 40-60 between first half and second half, and it's just about right, right? So you still have a big significant peak in costs towards the second half of the year. But we continue to cover our cost with pricing, no problem.

[Philippine de Schonen, executive]

We now have a question from George Galliers, Goldman Sachs.

[Thierry Piéton, executive]

George, your mic is off. We can't hear you, sorry. The mic is off, I think. Maybe we can come back to him afterwards.

[Philippine de Schonen, executive]

Yes. Thomas Besson from Kepler Cheuvreux. Thomas, do you want to ask your question, and then we will go back to George?

[Thomas Besson, analyst]

Sure. Yes. Seem to have an issue like -- so it's Thomas from Kepler Cheuvreux. I have 2 questions as well, please.

You've mentioned several times your order intake and the fact it could take up to nearly the middle of next year to go through it. Could you give us an idea of the magnitude of that order intake? Is it now 4, 5 months, 6 months? And can you talk mostly also about the incremental order intake? I think investors are concerned that, yes, automakers have large order intakes, but there seems to be much fewer people coming to order new cars now. Can you comment on that?

And the second question, I mean, Financial Services were quite strong in Q3. Can you comment about the average amount financed now of Mobilize Financial services, and discuss the share of leasing and the potential risk we could see from residual values, if they were to start pulling? Is it still continue clearly a U.K. issue or is it a rising risk for the group?

[Thierry Piéton, executive]

That sounds like 3 questions to me. So on the first part, on the order intake, so it's -- as I said, in terms of value, it's stable versus the end of June. The way we calculate the coverage is based on forward-looking sales. And we have a view of Q4, which is larger in value than Q3. And therefore, you kind of have a mechanical effect on the coverage in months.

We were at 4.1 months at the end of June, and we're roughly 3.5 months at the end of September with a very strong quarter ahead of us. So still very, very healthy. And again, the kind of rule of thumb that we work with is to have 2 months of stock in the dealers and 2 months of order book. And so here, we're very, very significantly above that.

In terms of intake, I think the intake remains low in absolute value because the market is still depressed versus 2019. What we do see is an improvement in the month of September. I mentioned Dacia -- Dacia was actually for the first time in September above in terms of sales where we were in 2019. So it's higher than the pre-COVID situation, which is encouraging for us.

I would say, in addition to that, the content of the orders is what matters. And what we're seeing is a high level of content towards electrified vehicles. People who buy electrified vehicles typically go for the higher trim levels. So we see a very healthy level of trim. So for us, I would say the dynamic is pretty strong. And again, it's carried to a large extent by the new products that we've launched in the last year or so.

On the financial services side, you're right. The activity is pretty strong. And the impact of the pricing, the policy that we're having on the new vehicle side is having a direct impact on Mobilize Financial Services, right? So we've got sort of around 18%, 19% of average vehicle financing amount increase on a year-over-year basis, which is good news for the future and the buildup of the portfolio of MFS as well.

From a residual risk perspective, so it's still -- for us, we have a relatively limited amount of exposure. It's still mostly a U.K. [ PC ] type of exposure. So we're talking slightly above EUR 2 billion on top of my head, full exposure. We've always had a very prudent approach towards calculating the residual value of the vehicle. So we don't see that as a major risk going forward.

[Philippine de Schonen, executive]

We now have a question from Richard Carlson, Credit Suisse. Richard, the floor is yours.

[Richard Carlson, analyst]

Was George in front of me, though?

[Philippine de Schonen, executive]

I think no, George, is not here.

[Richard Carlson, analyst]

Okay. Sure. So question, inflation rates on -- or interest rates on your customers, are you starting to see any impact from the higher financing cost, maybe to what degree can mobilize help with that? And I guess really at what point does financing get locked in by our customer? Is it as of the time that order gets placed? Or is it when they take delivery?

And then my second question was just with your inventory levels. Is Austral already in that? Are you already building Austral vehicles? And is that already a meaningful piece of the inventory?

[Thierry Piéton, executive]

Yes. So on financing costs, I think clearly, it's going to impact -- it's going to impact Mobilize Financial Services and the business overall. Just in terms of financial policy, our captive financing has always been financed in a way that privileges the security of the financing on the midterm.

And therefore, we have quite a significant amount of deposits. And deposits are less prone to the interest rate fluctuation, number one. And we also have a financing that's more skewed towards fixed rate. So there's not direct correlation between increase in interest rates and the financing cost of RCI, MFS, there is a lag in time. And we try to hedge the positions when we do have variable cost -- variable interest rates.

However, there will be increases and we'll have to pass a portion of the increases to the customers. And that will be part of the price increases that will have to do in 2023. We're used to doing this. I would say though that -- what we see at the same time is residual values that continue to improve. So for the customer, since the customer essentially pays a combination of the interest rate, but also the difference between the new car value and the resale value, there's kind of a buffer effect between the increase in rates and the increase of the residuals. So that should help a little bit with the external pricing in a way. So that's how I would frame it.

Sorry, second part of your question. Yes, there is a limited number of Austral at the end of September of inventory -- in inventory. The startup of sales for Austral is fiscal week 42, so it's basically now. So the shipments are only just starting.

[Philippine de Schonen, executive]

We now have a question from Barclays, Henning Cosman. So Henning, the floor is yours.

[Henning Cosman, analyst]

I wanted to come back to the inventory situation and some moving parts related to that. I think it's not often that we've seen such a large discrepancy between retail and wholesale side. So I was just wondering, how you see that developing into Q4, the wholesale volume and revenue component, of course, was driven by the wholesale exceeding the retail? Do you see that reversing in Q4 with inventories potentially coming down?

And is that even necessary to support the free cash flow guidance. If you could remind us, if you're budgeting quite a large working capital inflow to support the underlying free cash flow in the second half year? The volume effect related to potentially reversal retail versus wholesale.

[Thierry Piéton, executive]

Henning, thanks for the question. So look on the inventory at the end of September, there's 2 components, right? So there's the dealer side where I think, clearly, it's a non-repeat of what happened in the previous year. So going into Q4, I think you shouldn't see that type of movement anymore.

The electronic components crisis really hit hard in the third quarter of last year. And what you're seeing is the non-repeat of that primarily, okay? So I think things should normalize at the end of Q4 with the dealer inventory, which shouldn't be very different from the level that we had at the end of '21.

From an OEM inventory, so the part that we carry on our books. As I said, we did -- at the end of Q3, build up some incomplete inventory to prepare for the Q4 demand. We're not talking hundreds of thousands of cars, but a few 10 thousands, let's say, or tens of thousands. And it's important for us because it can boost the customer satisfaction part of the business without being a massive negative impact on our financials.

At the end of Q4, you should have much less of that. And we'll -- the goal that we have is to reduce the amount of incomplete to the maximum level possible. But again, it will be a balance between the guidance that we've given and the financial inflow and the wish to protect our customers and to be able to keep delays at a reasonable level. So we'll have to manage that based on the inflow of components that we see towards the second part of the year.

So on working capital, we should see a positive in Q4 because volume is higher than last year, but we're not talking billions, right? We're talking a few hundreds of millions. We were negative EUR 275 million in H1. Net-net over the year we'll be slightly positive.

[Henning Cosman, analyst]

And just to confirm, this incomplete, they are counted in the inventory level that you're showing in the presentation, right?

[Thierry Piéton, executive]

Yes, yes. We don't record revenue on incomplete sales. So what we do is we build the car, maybe it's missing a component. We keep it in inventory. It's not recorded as a sale. And then when we get the missing part, we complete the car, we ship it, and then it becomes a sale, right? So it would be inventory at the end of Q3 and hopefully all gone to customers during Q4.

[Philippine de Schonen, executive]

We now have a question from José Asumendi, JPMorgan. José, could you open your mic?

[Jose Asumendi, analyst]

Can you please comment on your -- the balance between pricing and maybe raw material inflation? I saw in the first half; how do you see that going into the second half? Pricing is very strong. But I think raw material around EUR 300 million in the first half. How do you see this balance in pricing and inflation portfolio in group?

[Thierry Piéton, executive]

So Page 2?

[Jose Asumendi, analyst]

Yes. Portfolio, yes.

[Thierry Piéton, executive]

Yes. Sound quality is not great. Look, I think -- so first, as we had said at the beginning of the year, pricing and productivity will more than offset inflation very clearly. It was the case in a very strong fashion in the first half of the year. It's still the case in the second half of the year, okay? So we're still covering inflation in H2 stand-alone versus last year.

We -- the balance of the two is better in H1 versus H2 because we had anticipated price increases in the first half, seeing the tide coming in on the inflation side. And as I mentioned previously, on the flip side, we had tried to manage the inflation as much as possible during the first half. So in the second half, you've got a rise of inflation that's quite significantly above first half.

Again, if you look at the split of the inflation between H1 and H2, it's about 40-60, right? 40% in H1. 60% in H2. And really no big surprise. It's more or less what we were seeing in the first half, and it's panning out the way we anticipated.

For -- going into 2023, what we're seeing is being able to continue to manage that in a similar fashion. So you got to have in mind, there's about a 3-month lag between the moment the inflation happens and the moment we feel it in the P&L because of the hedging contracts, because of the contracts with the suppliers, et cetera, et cetera. And there's 3 to 4 months of order backlog. So it's quite let's say, transparent for us to be able to see what's going to happen for the coming semester. And we have a pretty clear view that we're going to be able to continue to offset that into 2023.

And then, as I mentioned previously, the new product activity is going to help. This year, we essentially have 7 months of Megane E-tech really, and really less than 5 months at full speed given the rollout of the launch that we've done. And we will have very little activity on Austral at the end of the day in 2022. These 2 cars will have a full year impact on 2023. And both of them have, again, unit margins that are multiple times the cars that they replace, right? So for us, that's really the game. Regardless of what happens from pure pricing, et cetera, we're talking a few points, which we'll manage, obviously, but this is the game changer for us, very clearly.

[Unknown Executive]

Okay. So now we have a question from RBC, Narayan. Tom, could you open your mic, please?

[Gautam Narayan, analyst]

It's Tom Narayan, RBC. The first one, you kind of just answered it, but maybe a follow-up to it. The 3-month lag between price inflation and the impact on the P&L. Just wondering, if you could comment specifically on the price concessions to suppliers' part. Volvo Trucks yesterday reported a bigger price concession than they were expecting. Just trying to understand that dynamic better how that's contracted?

And secondly, I just took a look at lithium prices and they're at stratospheric levels right now. In the event, the battery price escalates to $200, even $300 a kilowatt hour. What would you do as a company given the European CO2 regulations? I know it's a fantastic car, but I don't know if consumers will be willing to pay EUR 60,000 or EUR 70,000 for Megane E-tech?

[Thierry Piéton, executive]

Okay. Thanks for the questions. Look, on the supplier concessions, for us, Renault comes first, right? So we're pushing back on the suppliers as hard as we can. And look, I think the purchasing team has done a fantastic job of managing that level of pressure. And I think you saw that in the numbers of H1, and they're going to continue to do so.

I would say in the industry, although, our performance is improving, there are still people that have deeper pockets than us, right? So we actively encourage the suppliers to go talk to people that are maybe doing double-digit margins because maybe they'll be more open than we are to that type of discussion.

The third element that I would say is we obviously have very close relationships with the suppliers, and we don't want any of them to have financial trouble, et cetera, that would cause disruption in the industry overall. So we work with them. And our purchasing team, it's not only a negotiation and a challenge. It's also working together to find productivity actions.

I'll give you the example of energy, right. So we were lucky enough to look at energy as a productivity opportunity very early on about 18 months ago before energy was even a problem, before it was on anyone's radar screen. We put a system in place where we can monitor energy consumption at a very detailed equipment level in our plants, okay? Thanks to this, our energy consumption will be down -- was down 10% in the first half, will be down 12% to 13% this year. And we've got a road map to being down 30% by 2025 and 40% in France, right?

So what we're going to do is if customers have problems and want -- and come to us to have a discussion on, can you pay for my energy increase, the first discussion we're going to have is, well, look at what we've done, can we help you do the same and try to help them out. And so look, that's the way we're managing it today. And as I said, Renault's pockets come first.

Now on raw material. So first, the overall raw material situation, I would say you're absolutely right, lithium is the main headache that we've got today. The rest of raw material seem to be on a slightly decreasing trend. We've seen prices go down sort of mid-single digit now. What we -- when we look at a macro level, 2023. We're talking net-net, a slight increase in our raw material costs. We're talking a few tens of millions. So nothing close to what we've experienced this year.

But with everything but lithium going down and lithium going up, right? And so there is an effect on the price of the battery. Look, so first on Megane E-tech, it would take a very, very, very high lithium price increase for Megane to become a EUR 60,000 or EUR 70,000 car. So we're not at that level of pricing yet.

But the reality is today, it's a very attractive car. People want it because it's got good performance. It's got good range. It's got an attractive connectivity environment. And our order book is very, very strong. So at this point, we don't see a change in the dynamics of that car. Obviously, we'll have to manage it if prices continue to increase. Fabrice, you want to add specific -- something specific on Megane?

[Fabrice Cambolive, executive]

No. I would like to say that in this very volatile environment, our advantage now is to bet on 2 pillars. On one hand, EV with Megane, and on the other end, Austral. We've also very efficient consumption, but without this price raw material increase problem.

[Thierry Piéton, executive]

Thanks, Fabrice.

[Unknown Executive]

So we now have a question from Daniel Roeska, Bernstein. Daniel, could you open your mic, please?

[Daniel Roeska, analyst]

Maybe first, you just emphatically promised that you would lower production of demand goes off. Could I just ask operationally, how fast can you adjust capacity? So can you lower capacity 10% by a quarter? What's kind of the lead time to adjust that production footprint?

And could you comment on the content mix in the cars currently. So not the segment mix, but really what's the average uplift from options and trim on the base price right now for Renault and Dacia? And how you think about that content mix going into next year? Is it that where the key risk for you sits that people pressure from leasing, pressure from household income, still buy a nice car, but don't buy the sunroof for the big Nav or other options in there?

[Thierry Piéton, executive]

Yes. So from a capacity management perspective, I think the first thing I'd like to say is we're running at about 100% capacity today. So it's not like we're -- we have a lot of spare capacity. Typically, we could take short-term actions within a few weeks to make a change in shift and shift pattern in the plants. It takes something like 3 months to 3.5 months. And obviously, if we were to take a more drastic action, it would take a lot longer than that, right? But we can adjust capacity in quite a significant fashion with a sort of 13, 14 weeks type of lead time, yes.

On the options and trim, if you look at the pricing bucket this quarter, at a very high level, it's roughly 60% pure price, 20% discount management and 20% trim level, right? So that gives you an idea of the magnitude, right? But hey, look, I think for what it's worth, I think there is a sort of tendency towards electrification, right? And so people want to go for these cars for many reasons. I think we've seen that evolve over the last 2 years. And our view is that it's going to continue to do so. And again, typically, these vehicles come structurally with a higher trim mix.

[Philippine de Schonen, executive]

We now have a question from Tim Rokossa, Deutsche Bank. Tim, the floor is yours.

[Tim Rokossa, analyst]

I have 2 questions, please. The first one, I feel like, we're dancing around this a little bit. You kind of answered it, but not really. You were very clear on your order backlog question that, that is basically unchanged. Is the pricing on this order backlog also unchanged, in particularly for the new orders that you take on board? Or do you see some softening on that side?

And then as a second question, when we think about you being so successful to push it to the retail channel, which is obviously great to see and finally, an OEM who really understands this. What do you think is the mix for retail penetration levels for the group? And maybe specifically for Dacia and Renault Dacia, obviously, we know, but for Renault?

And do you see more reluctance in the retail channel right now to put orders in, or more reluctance in the commercial channel?

[Thierry Piéton, executive]

Okay. So the pricing on the order backlog continues to be very strong. And I think what you should expect in terms of the pricing effect in Q4 is similar to what we had in Q3, right? So no material change for the moment.

On the retail channel, I'll maybe give the mic to Fabrice for a moment, but I'll -- but look, I think we're at a good level now. I don't think there's a view that we should increase it massively further beyond where we're at today. Fabrice, do you want to comment?

[Fabrice Cambolive, executive]

No, I would say that now the point is to be balanced segment by segment, channel by channel and market by market and to have a level of profitability, which is all around -- all above the channels. But now my point is to limit deviation country by country, more a qualitative job.

[Thierry Piéton, executive]

And on Dacia, we're structurally very retail, but Denis or Xavier, do you want to comment?

[Xavier Martinet, executive]

Yes. So good morning, everyone. So Dacia remains quite on same, let's say, structure of sales for months or even for years, I mean 87% retail right now in Western Europe. We continue to have extremely high retail mix with still extremely high trim mix. And so we were keeping on taking 70% of Stepway orders on Sandero. We were still at 60%, 70% of, let's say, per trim on the Dacia. So we continue to have this. We don't see any slowdown.

As you might know, we've launched up and go program, which is, let's say, highlighting the highest stream of our vehicles on many markets and the number of orders we're getting from this program is higher than ever. So we don't see any change at all in the recent months.

[Thierry Piéton, executive]

Thanks, Xavier. And maybe back to the question from Daniel before on the risk of the trim level going down. Again, in a high inflation type of environment, Dacia has a super attractive value proposition as well. So it's also great to have it in the portfolio in this type of environment.

[Philippine de Schonen, executive]

So we now have a question from Stephen Reitman, Societe Generale. Stephen, could you open your mic, please?

[Stephen Reitman, analyst]

I have 2 questions. First, a technical one. First of all, could you remind us on the revenue contribution from Renault Russia for all of 2021, just to help us to get an idea about the full year 2022?

And second question is, could you comment on the kind of like the build rates you have on certain products? Because obviously, you've given us some order figures your backlog figures, for example, the 37,000 I think, on the Megane E-tech. How many then we building a month just to get an idea about -- and really -- maybe you can give us some idea of book-to-bill. How many are you booking compared to what your build rate is and I would like to get an idea on that, please.

[Thierry Piéton, executive]

So on the impact of Russia, on a full year basis, the impact is EUR 4.5 billion. right? And so in the -- and in the third quarter, it was roughly EUR 860 million. So that's what you would adjust for.

On the build rate, I typically don't go into the volume discussions on the cars, I would say that we're getting to a level on Megane, which is pretty stable now because we've rolled it in the key countries. But the dynamic for us, it's still -- we're still in a demand exceeds supply type of situation very clearly. So if we get more components, we'll build more. And if we can build more, we can sell more. No question about it.

[Philippine de Schonen, executive]

And we'll take a last question from Philippe Houchois, Jefferies. Philippe? Philippe, could you open your mic, please.

[Thierry Piéton, executive]

Phillipe? Sorry, we can't hear you.

[Philippine de Schonen, executive]

Okay. So if Phillipe has no question, or he is not able to ask his question, we'll have a following -- a follow-up call.

So this is the end of this Q&A session. Thank you so much, and we are all available to answer your offline questions, if you have any.

[Thierry Piéton, executive]

Thanks very much, everyone, for attending this morning. I look forward to speaking to you on the 8th of November with the team. Thanks very much, and have a good day.