Morningstar DBRS Upgrades Renault S.A.'s Issuer Rating to BBB (low) With a Stable Trend

DBRS Limited (Morningstar DBRS) upgraded Renault S.A.'s (Renault or the Company) Issuer Rating to BBB (low) from BB (high) and changed the trend on the Issuer Rating to Stable from Positive.

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrade reflects Renault's adequate business risk assessment (BRA) as a global original equipment manufacturer (OEM) of moderate scale and limited geographic diversification, albeit with a favourable market position in Europe and Latin America. Moreover, the Company's financial profile has strengthened by a continuous and meaningful improvement in earnings and cash flow generation over the past three-and-a-half years. In its press release dated November 30, 2023, Morningstar DBRS had previously indicated that a credit rating upgrade would likely occur if Renault kept ongoing operating performance essentially consistent with its then-prevailing earnings (even allowing for a slight moderation thereof, taking into account ongoing cost and investment headwinds prevalent across the auto sector). Morningstar DBRS also notes that the Company's (industrial) balance sheet has benefitted further from the sale of approximately 12.5% of the capital of Nissan Motor Co., Ltd. (Nissan; rated BBB (low) with a Stable trend), generating proceeds of roughly EUR 1.6 billion. The combination of these factors has enabled a sizable reduction in Renault's industrial indebtedness, with the Company having a solid (industrial) net cash position of EUR 4.2 billion (as calculated by Morningstar DBRS) as of June 30, 2024. In line with the above, Renault's overall financial risk assessment (FRA) has improved to levels that provide meaningful cushion even in the context of the upgraded credit rating.

CREDIT RATING DRIVERS
Consistent with the Stable trend, Morningstar DBRS expects Renault's credit rating to remain constant over the near term, with an additional positive credit rating action unlikely given the meaningful cost and investment headwinds facing the automotive industry. Morningstar DBRS notes further that Renault's credit rating is also somewhat constrained by its existing BRA. Morningstar DBRS could take a negative credit rating action if there were a sustained weakening of share in Renault's core markets and/or a significant and sustained deterioration in operating results, resulting in sizable negative free cash flow generation and leading to a material weakening in the Company's FRA.

EARNINGS OUTLOOK
Morningstar DBRS expects the Company's 2024 industrial earnings to range from essentially constant to moderately lower levels year over year (YOY). While sales volumes are forecast to slightly decline YOY with Renault also estimated to incur higher labour costs, this is projected to be substantially offset by firmer product mix and pricing effects, attained efficiency gains (including purchasing activities and raw material costs), and a net reduction in research and development expenses. As a function of the above, notwithstanding impending headwinds in Renault's core European market, Morningstar DBRS anticipates the Company to remain materially profitable this year, with the industrial operations projected to generate an operating margin in the mid-single digit range.

Over the near to medium term, Morningstar DBRS expects the Company's earnings to remain at sound levels, albeit likely moderating compared with recent years given an anticipated slowing of volume growth, assumed moderation in pricing, and ongoing cost/investment headwinds. However, Morningstar DBRS also expects that these challenges will be considerably offset by ongoing anticipated efficiency gains, with Renault's global product offensive (including several planned model launches in the higher-margin utility vehicle segments) also anticipated to somewhat mitigate uncertain regional market conditions.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates that Renault's cash flow from operations in 2024 will remain solid, albeit potentially moderating YOY in line with constant to slightly softer projected earnings. Capital expenditures (capex) are forecast to remain sizable and increase YOY, likely approaching an annual level of EUR 1.7 billion. Dividend payments (recently reinstated, with the current payout ratio being at 17.5% of consolidated net income) are estimated to approach EUR 650 million for the year (including payments to noncontrolling interests). Notwithstanding the higher capex and dividend payments, Morningstar DBRS expects Renault's 2024 gross free cash flow (i.e., before working capital items) to remain materially positive, likely exceeding EUR 2 billion.

Going forward, cash flow from operations is projected to remain solid, however likely declining somewhat over the medium term amid anticipated earnings pressure. Capex will likely persist at sizable levels for the foreseeable future and is forecast at approximately 8% of annual revenues. Morningstar DBRS assumes dividend payments will gradually rise as the Company's targeted payout level progressively increases (in a disciplined manner) up to 35%. Accordingly, Morningstar DBRS expects Renault's gross free cash flow to persist at positive levels over the near to medium term, Moreover, Renault retains additional financial flexibility as a function of its remaining holdings of Nissan's capital currently in the French trust.

CREDIT RATING RATIONALE
Renault's credit rating reflects its status as a global automotive OEM of moderate scale and limited geographic diversification, with a high exposure to Europe. Renault's BRA is nonetheless bolstered somewhat by the Renault-Nissan-Mitsubishi Alliance (the Alliance) (now restructured with Nissan's and Renault's voting rights capped at equivalent levels of 15%), although such benefits have historically been hindered by management difficulties and lacklustre integration. However, the Company's sales financing business is a source of significant and stable earnings, providing diversification benefits and playing an important role in supporting vehicle sales.

The credit rating also incorporates Renault's much improved FRA. The Company's balance sheet has been strengthened significantly, with the industrial operations having a sizable net cash position. Moreover, as of June 30, 2024, the liquidity position of the industrial operations was also solid at EUR 17.6 billion, consisting of EUR 14.4 billion in cash balances and EUR 3.3 billion in available credit lines. Morningstar DBRS also notes that Renault has additional financial flexibility stemming from the monetization of its shares in Nissan held in the French trust, which amounted to approximately 18.7% of Nissan's capital as of September 30, 2024. While increasing headwinds in the Company's core European market result in limited earnings visibility over the near term, Morningstar DBRS notes that Renault could withstand a material weakening in operating performance with credit metrics still remaining well commensurate with the upgraded credit rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The following environmental factor had a relevant effect on the credit analysis: Morningstar DBRS considered that the environmental factor related to carbon and greenhouse gas emissions represents a relevant factor as Renault is subject to a wide range of environmental compliance requirements relating to carbon dioxide, fuel efficiency, emissions control, and other factors. In the event that the Company does not comply with applicable regulations, significant penalties and reputational harm could result. Correspondingly, in 2021, Renault announced its climate strategy that outlined its aim to achieve carbon neutrality in Europe by 2040 and worldwide by 2050 by reducing its carbon emissions over the vehicle's entire lifecycle. Moreover, given its five common electric platforms covering most segments, the Renault brand could be in a position to become 100% electric by 2030 for passenger cars in Europe (depending on market demand). As a function of these objectives, Renault and the Alliance have publicly targeted EUR 23 billion in electrification investments over the 2022-26 time period. (For further details, please refer to the following commentary: "The Future is Electric: Climate Change and the Global Automotive Sector" at https://dbrs.morningstar.com/research/413419.)

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Renault, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Renault, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Renault, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 10, 2024),
https://dbrs.morningstar.com/research/441029

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024),
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: August 31, 2006

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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