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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to Pirelli's conference call, in which the Executive Vice Chairman and CEO of Pirelli, Mr. Marco Tronchetti Provera will present Pirelli's first quarter financial results as of March 31, 2019. I'll remind you that the Q&A session would follow after the presentation. Moreover, a live webcast of the event and the presentation slides are available in the Investor Relations section of the Pirelli website. Now I would like to introduce, Mr. Marco Tronchetti Provera. Please go ahead, sir.
Good evening, ladies and gentlemen, and thank you for joining us today. Let me start with a few comments on our industry. Whereas premium car manufacturers face a difficult 2019 grappling with shift towards electric, tariff uncertainties and Brexit induced volatility, our high value business model confirms its resilience in a market environment where we assume a more cautious view for the full year compared to the beginning of this year. As for the 18 inches and above, our view on the Original Equipment trend is almost of 2%, 3% growth compared to our previous expectations, approximately 5%. And also taking into due consideration the April dynamics, during the second half, Europe is supposed to be recovering due to launches of new car models and the growth in China should also be revamped by new government incentives. In the replacement business, we confirm a double digit growth with almost homogenous [ rates ] in high value regions. We should overperform in this segment due to both the new OEMs contracts to be enforced during the coming summer, as well as the gradual improvement of our pull through impact on replacement. The Standard segment will show a negative trend, we estimate a full year at minus 1%, also due to a rather weak trend in Original Equipment, which confirms our decision to accelerate the exit from this segment and trigger productive relations projects to maximize efficiency and competitiveness. In this challenging environment, by moving cautiously we are protecting prices and continue as we improve mix, reaching in first quarter a plus 7.7% price mix, more than 3x higher than our peers. We anticipated cost cutting measures and worked hard on efficiencies to fully offset the raw materials headwind and inflation on input costs. We're the only Tier 1 player to keep the profitability stable year-over-year, as well as improving our net operating cash flow, which is the actual outcome of our business model. We're already working on next 3 years plan to be presented next November, which is addressing our right sizing in the standard market that will make us yet more structurally sustainable. [ Major ] operational improvement thanks to a leaner, digitally enabled integrated operating model, more capable of reaping the major benefits of variety without complexity costs. Continuous innovation in products and services offering capable of capturing future shifts in mobility consumption. Let us now make a short comment on Pirelli performance in first quarter 2019. We strengthened our position in the high value segment, now accounting for approximately 68% of total revenues, with a market share increase across regions. We recorded once again an outstanding price mix improvement at plus 7.7%, driven by solid performance in the replacement channel due to the pull-through effect and by the ongoing product mix improvement. We were able to protect our profitability using our internal levers, namely price mix, efficiency and our cost cutting program to offset external headwinds and the standard volume decrease. A better financial management drove a net income increase of 10%. Finally, we closed the first quarter with the net financial position at EUR 3.9 billion, or EUR 4.4 billion including the IFRS 16 impact. In a couple of slides, Mr. Sala will show you how the net cash flow before external operations improved year-on-year, the lower cash absorption then in the first quarter 2018. This is also resulting from better working capital management. [indiscernible] weakness in original equipment demand as well as in the standard business, led us to [ Three Mile ] guidance on the top line, now expected to grow between 3% and 4%. We confirm the soundness of our business model while exposure to high value is expected to reach 67% of our revenues and 85% of our profitability for the full year 2019. This will result into an adjusted EBIT margin equal or above 19% improving year-over-year. We confirm our target leverage of 2.1x standard over adjusted EBITDA without startup costs, imply a net cash flow generation before returning operations and dividends of about EUR 400 million. As a consequence of the new market scenario, we revised our CapEx estimate to EUR 400 million or 7.5% of revenues. And I now hand over to Mr. Casaluci, our General Manager, Operation. We reviewed our first quarter results and expanded our full year market expectation and the operational drivers underpinning our guidance. Later on, Mr. Sala will give you an overview of net cash flow dynamics in both the first quarter and the full year. Mr. Casaluci, please.
Thank you, Mr. Tronchetti, and good evening, ladies and gentlemen. The first quarter 2019 closed the with EUR 1.3 billion revenues, recording an organic growth of 1.2%. Our performance was driven by the increased exposure to high value and the ongoing price mix improvement, which together offset the standard volume decline and the ForEx impact. High value volumes recorded a plus 4.5% growth, discounting a weak car OE demand and the slowdown in the premium motor business. We consolidated our leadership in the car 18 inches and above by increasing our market share across regions. We grew globally by 6.7% versus the market at 5.2%. The performance was more pronounced in the replacement channel, where we keep on growing at a double digit rate, plus 12%, 2 percentage points more than the market. In the original equipment business, we mitigated the market weakness by leveraging on reach and well diversify the homologation portfolio. And we posted a plus 0.4 grow in the 18 inches and above versus a market declining by 1%, mainly in EMEA and in Asia-Pacific. In the standard business, we reduced volume by 16.6%. This trend was impacted by the decrease in demand for standard products in all the markets and by Pirelli's continued reduction of the exposure to less profitable products. The strong price mix improvement, more than 3 times the Tier 1 peers average, was the result of the implementation of Pirelli value strategy supported by higher replacement sales pushing the channel mix. Migration from standard to high value as well as a mix improvement within each single segment and price increases in emerging countries and North America to offset the exchange rates' volatility and raw material costs. ForEx was negative by 0.9%, mainly due to the volatility of emerging markets' currencies, partially mitigated by the revaluation of the US dollar. Moving to profitability, we recorded a 16.7% adjusted EBIT margin, stable year-on-year. I wish to point out that the first quarter discounts, the highest raw material impact of the year, 1/3 of the full year headwind and the strongest volume drop, while in the next quarters, we should experience a [ massive ] recovery of the regional equipment market and the low reduction in the standard business. As already mentioned, in this quarter internal levers countered the decline in standard volumes and a negative external scenario. In more detail, the improvement in the price mix covered the raw material and ForEx headwind and the drop of volumes. Our key efficiency programs are generating savings of 1.2% on sales, countering rising inflation costs and cost cutting actions mainly in South America are compensating for the increasing D&A and other costs. As already announced in February, Pirelli has adopted a new organizational structure with 5 regions instead of 6 with the aim of accelerating the implementation of the business model. Two new macro regions were [ regrouped ]. EMEA, Europe, Middle East and Africa, including Gulf countries that are markets with an increasing exposure to high value. Russia and Nordics, grouping markets that are very similar with the objective of creating production and commercial synergies particularly for winter products. Let's start from EMEA. The region closed the first quarter with an organic change in revenues of less than negative 1.6%, impacted by the fall in car production and the slowdown of the motorcycle market. In this context, we consolidated our market share in car 18 inches up, both in the original equipment through our diversified homologations portfolio, and in the replacement channel thanks to the pull through effect. In the standard segment, reduction of exposure to less profitable products continued. Profitability ranged in the mid-teens, slightly lower than in the first quarter of 2018 due to the impact of the previously mentioned slowdown in the regional equipment channel. In North America, we kept improving high value sales in particular in the replacement channel, where we recorded a market share improvement supported by the success of our specialties 18 inches and above and our regional All Season products. Profitability was in the 20s range, improving year-on-year by over 2 percentage point, as a result of the mix improvement, efficiencies actions on cost and the progressive strengthening of the US dollar. Asia-Pacific, still shows the highest adjusted EBIT margin among our regions. The 6% organic growth in high value sales was mainly due to the replacement channel, supported by the pull through effect and an ever wider distribution network with over 4,500 point of sales. Organic sales of standard tyres are down 1.5% with a fall in sales of below 17 inches rim diameters in a weak market environment for this segment. On Russia and Nordics, recorded an organic growth of 5% supported by a strategic focus on the most profitable segments with high value organic growth of 37% versus standard organic reduction of 5% and NOE market recovery. Profitability significantly improved, a double digit EBIT margin adjusted in quarter 2019 compared to a mid-single-digit level of the same period of 2018. Our South American performance is affected by the weakness of the market. Car tire market was 7% negative in the quarter and our choice to protect value. On prime price mix, we saw a market improvement roughly 20% versus fourth quarter 2018, backed by price increase implemented in Brazil and in Argentina. As of the fourth quarter, a continuing focus on mix was a progressive reduction in sales of less profitable standard segment products. Profitability, high single digit slightly improved in the first quarter 2019 due to continued efforts on cost efficiency and mix improvement. Organic sales of standard tires are down 1% with a fall in sales of below 17 inches rim diameter in a weak market environment for this segment. In February 2019, we announced the mid-term global restructuring plan to reduce the structural gap between standard capacity and production. We are starting to implement this plan in Brazil, reducing our standard capacity by 3 million tires in both the car and the motor segments by 2021, and streamlining our production footprint from 3 to 2 plants. On moto, these gradually be achieved, so the through the transfer of our high value production from Gravatai to Campinas plant. While the Standard Motor capacity will be shut down, this will allow us to better exploit the more resilient high value market which shows a stronger growth rate than the standard. Whilst have closed our premier OEMs and exploit the logistic efficiencies. At the same time, our plant in Campinas will gradually cut its cost on the capacity, partially reconverted into car high value increasing plant saturation. As a result, Brazil production footprint will be optimized with a stronger focus on high value and a specific mission for the 2 plans. Campinas producing car and moto serving South America, while Feira de Santana, 100% car supplying both the domestic and North American markets. We maintain our commitment to the country confirming the expected EUR 120 million investment in the period 2019/2021. The 2019 part of these investments is already included in our targets. The remaining path related to 2020/2021 will be included in the new plan. Regarding the impact of this rationalization, we would like to underline that Pirelli has the willingness of finding an agreement with the unions and will take all the possible actions to mitigate the social impact at the Gravatai plant, which today employs around 900 people. The cost of the restructuring operation is already accounted in 2018 and 2019 and covered by the Patent Box benefits. The efficiencies stemming from the restructuring operation will start in 2022. Our global restructuring plan will be illustrated with a new business plan in November this year. Let's now move to the market outlook for 2019. Based on recent trends, we are keeping a more prudent outlook in original equipment. For the car 18 inches and above, we now project to grow between 2% and 3% from the 5% estimated initially. The milder outlook reflects a lower demand in Europe and Asia Pacific for the full year while a positive outlook is conferment for the North American market. We expect that the recent weakness of the market in Europe and Asia Pacific will continue in the second quarter. For the second half of the year, trends should improve but at a lower rate than our initial expectations. Europe should regain momentum supported by new models coming into the market and China could benefit from government stimulus, currently under discussion. Overall, second half of the year will have an easier comparison with the last year figures. In replacement, we confirm the soundness of the demand driven by [ car park ] moving towards higher rents. Replacement is expected to grow double digit around 10%, within all high value regions accounting for 95% of 18 inches global demand. Having discussed the market scenario, let's now talk about what we expect for Pirelli. For the high value, we foresee a grow of over 9% in volumes outperforming the market in both channels. In the original equipment, we will leverage our homologations and the new supply contracts in North America and Asia Pacific becoming effective in the second half of the year. In replacement, we will benefit from the pull through effect. For the stand that in a weaker market context we are farther reducing our exposure to the less profitable products bringing our full year volumes down by 11%. All in all, total volumes are expected to decrease by 1% versus our prior guidance of flat plus 1%. We confirmed a price mix improvement from 5% to 5.5% , still driven the migration to high value, the micro mix improvement within each signal segment as well as price increases mostly in emerging markets. ForEx expectations remain unchanged. We forecast an adjusted EBIT margin equal or above 19%, supported by the effectiveness of our initial internal levers which will contrast the external headwinds in particular. We confirm the usual drop through of top line drivers, approximately volume at 40%, price mix at 65% and ForEx at 15%. Efficiencies are expected to exceed inflation by EUR 10 million . The implementation of the cost cutting measures will allow us to save EUR 50 million in 2019. The impact of lower volume sales will be mitigated by a more contained raw material headwind, now expected to be around a negative EUR 85 million, 76% of which relates to ForEx. As is shown on Slide 21, the major driver of our revision has been butadiene.
I now leave the floor to Mr. Sala.
Thank you, Mr. Casaluci, and good evening, ladies and gentlemen, we closed the first quarter with a net income of EUR 101 million or 7.7% of sales. The year-over-year improvement was driven by a positive contribution from financial income and charges, mainly driven by lower hedging costs and ForEx losses versus first quarter 2018. While cost of debt is substantially flat year-over-year, already discounting in first quarter 2018, the net impact of one-off transactions like the repricing of the bank loan award, EUR 3 billion and the exercise of the make-whole option to early redeem our bond, originally due in 2019. It is worth to underline that the financial income and expenses in the first quarter of 2019 include the impact of the introduction of the IFRS 16 accounting principle on leases, which determined an increase of financial charges by EUR 7 million. On net income, let me remind you, the positive one-off effect related to the Brazilian fiscal credits, which will be accounted in the second quarter of the year, for an amount of approximately EUR 107 million, broken down as positive impact on the reported operating result EBIT of around EUR 80 million. Positive impact on financial income of about EUR 82 million and negative fiscal impact of around EUR 55 million. We ended the first quarter with a net debt of EUR 3.9 billion excluding the impact of the IFRS 16. As usual, the net cash flow trend of the period is affected by the business seasonality, also in conjunction with the summer selling season whose receivables are collected in the second quarter. This year, the net cash flow before extraordinary operations and equity transactions amounted to minus EUR 700 million, EUR 162 million less than last year. And this improvement is attributable to the operating cash flow with EUR 124 million less in terms of cash absorption and the remaining EUR 38 million linked to lower financial expenses and non-recurring restructuring charges. Focusing on working capital dynamics, we benefited from the continuous improvement of payment conditions with suppliers and the start of recovery actions on receivables and inventories. More specifically, on trade receivables, we are realigning the payment terms with the main dealers in Brazil which had temporarily been extended to the end of 2018 due to difficult market conditions. On inventories, we reduced stock on volumes by 2%, with an 11% decline in standard products in line with the recovery plan announced earlier on this year, and with a 5% increase on high value products to guarantee a better service level to final customer. The stock mix improvement and ForEx impact brought about a slight increase of the value of the stocks. For the full year 2019, we confirm our commitment to generate a net cash flow before extraordinary operations and dividends of EUR 400 million. This results will be achieved through the operating performance improvement, a tight control of the working capital normalized and no longer subject to swings as previously. Over the year, we are taking actions on stock to reduce the incidence of sales of around 20% based on a new revenues guidance versus almost 22% in 2018 and lower investments, EUR 400 million versus EUR 430 million previously indicated and EUR 463 million in 2018. According to the usual seasonality of the business, the higher cash flow generation will be recorded in the last quarter of the year. Pirelli's gross debt amounted to EUR 5.6 billion at the end of March 2019 with an average life of 2.8 years as more than 60% of it is [ now ] due beyond 2022. These figures include IFRS 16 impact. During first quarter 2019, Pirelli took advantage of the better conditions granted by the [ BIM ] market versus the bond market and refinanced part of the 2020 bank debt through a new loan for an amount of EUR 600 million thus contributing to extend the maturity profile without impairing the overall cost of debt. In addition to that, we wish to highlight the option of extending our main committed bank lines worth approximately EUR 3 billion for up to 2 years. These lines as showed in the Slide 16 are expiring in 2020 and 2022. They can be extended at our sole discretion and at current economic terms until 2022 and 2024 respectively. This cost of debt on an annual basis the last 12 months stands at 3.06% from the nominal 2.95% of December 2018 and 3.37% excluding the accounting effect of repricing who's impact of approximately EUR 30 million is being amortized during the life of the facility. And now I leave the floor back to Mr. Tronchetti.
Thank you, Mr. Sala. This ends our presentation and we may open the Q&A session.
[Operator Instructions] The first question is from Thomas Besson with Kepler Cheuvreux.
I have few quick questions please. Firstly, can you give us a breakdown of what you call high value between the new premium and what's not the new premium because basically the high value of volume growth decelerated to 4.5. But we see clearly that the new premium remains a steady dynamic. Can you help us understanding how that shapes in terms of proportion within high value please so that we can model for the future? The first question.
Mr. Casaluci.
Yes. So to the high value segments, we have basically 2 categories of products, the 18 inches up car products, which is what is called usually the super premium and out of these, there are all the non-18 inches up products including special technologies like the Run-flat tires, the Seal-Inside tires, so extended mobility solution and the moto tires. Basically link it to the radial technology. So we have for the time being 2 different behavior the 18 inches up segment is growing at a faster speed. We mentioned a market at 5.2% in the first quarter while Pirelli performance was at 6.7% while the non-18 inches up product that are part of the high value. So for example, as I mentioned before, extended mobility solution on 17 or 16 inches, growing at the lower speed because there is a switch from the 6 and 17 inches up to the 18 inches. So we have 2 different speed and behavior, we have in the first quarter 2018 particularly the in motor business towards performing in terms of market below the expectation mainly in North America and in Asia Pacific.
Sorry, it was not clear enough but not my question. My question was what is the breakdown between super premium on your premium and the rest please within high value in terms of percentage of revenues?
One second. Go ahead. We have questions and so we'll give you later.
Okay. Sure. My second question is about CapEx. I mean you were projecting EUR 430 million CapEx, you are now talking about EUR 400 million. Can you explain what has changed and why you're [ decelerating ] your CapEx result please?
In our plan, we had an increase in volumes that partially is covered by more efficiency we are making in our plants, partially is also due to the lower demand we expect. So we have reduced the investment because of it.
Okay, very clear. Last one, please. Your depreciation jumped year-on-year from EUR 70 million to EUR 97 million. Can you explain what is the impact of IFRS 16 and what is the impact of previous CapEx or why did it jump so much and what should we expect as a year-on-year change for the full year, please?
Before answering to this question, I have the answer to the previous question is 91 and 9. 91 18 inches and above and 9 is the rest.
For all concerned, the depreciation -- the reduction of the investment of EUR 30 million will impact internal depreciation reduction only for EUR 2 million, EUR 3 million because it's a reduction that is coming during the year and the average life for our machineries are in the region of 15 years. So this is the impact. For all concerned, the global amount of depreciation, we don't see major variances versus what is the normal growth that we had in the recent year that is in the region of EUR 20 million, EUR 25 million per year.
Can you explain the EUR 27 million jump in Q1 please?
Yes. I can explain this because this is coming from the impact of the IFRS 16 because the IFRS 16 we give in 2019 in our number, any impact on EBITDA in terms of growth of around EUR 90 million, that is mostly compensated from an impact of growth in terms of depreciation because there is the use of right of the leases according to the change of the principle. Then we will have an impact of EUR 24 million -- around EUR 24 million in terms of growth of financial charges and the impact on their financial position was -- you saw practically the impact already in the first quarter, that was EUR 464 million, we expect for the full year around EUR 480 million. So this is coming from the impact of the IFRS 16, it's not coming from the normal trend of the business.
The next question is from Martino De Ambroggi with Equita.
The first question is on the price mix drop through, because in Q1 it was 62% which is lower of the -- if I remember correctly, the 65%, 67%, because I remember in the previous call you mentioned it could have been similar for the full year 2018. So could you elaborate on what's the reason for a lower drop through in spite of a stronger price mix of which maybe a big portion comes from price effect?
Yes. This has been affected by a higher component on the price mainly linked to the emerging markets where we increased the price following the ForEx impact and following the exit strategy from the standard.
Okay. But for the rest of the year, do you confirm the -- what I remember 67% or it's part of the revision to be taken into account?
No, we confirm 65%.
Occasionally, so it's 65%. And the second question is on the net working capital. In the first quarter, we saw a small recovery, so how this recovery is progressing? Because last year I remember you had EUR 180 million of negative considered temporary effect, EUR 100 million of higher inventories and EUR 80 million deferred payment again to the dealers. So what's the expectation for the full year in terms of net working capital recovery and if it's in line with your plan, the Q1, because I remember in the previous call you mentioned Q1 would have shown -- already shown the significant recovery in this trend?
As you mentioned, last year we had an increase of working capital and other, that was in the region of EUR 388 million, after which we gave already the target that we will have a target to recover this year, EUR 200 million for the -- not anymore impact of the factoring reduction that happened in 2018 because the level of the effect was normalized during 2018, and then we had to [ grow ] in 2018 that we are currently normalizing. First one, the increase of the payment terms versus the dealers in Brazil temporarily down at the end of 2018, that we are currently reducing and we already reduced it in the first quarter. And then a progressive reduction of the stocks in which we are continuously taking action. In the first quarter, we'll use this stock by 2%, in particular by 11% on the standard and the reduction on the stock on this standard will continue during the year and during the following quarter. Also we are in line versus the target that we have -- to have a positive impact of the working capital versus last year.
So basically, you confirm everything you forecast one quarter ago more or less?
Yes.
Okay. And the last question is on the guidance that adjusted EBITDA level trying to summarize there is likely lower sales and the EBITDA margin probably in excess of 19%. My question is, if you are confident to achieve the same adjusted EBIT in absolute value or a light reduction is inevitable, just trying to summarize the change in the sales and adjusted EBIT margin?
[indiscernible] is yes.
Okay. So in absolute value, no changes. Okay.
Yes. Right.
The next question is from Monica Bosio with Banca IMI.
The first one is -- first of all thanks for giving us the expected growth of new premium both for original equipment and after-market. This is a consolidated guide answer. I was wondering if you can give us some indication for the New Premium segment by year end in the original equipment and in after market in Europe, EMEA and in Asia. What is your expectation. I can imagine that these could be lower than the consolidated guidance. The second question if you can give us an indication of the current aftermarket pull-through and what would you expect by year end? And the very last is more a general question until the high value New Premium plus specialties continues to keep a high single digit growth rate in the range of plus 9% . Everything should be fine. I was just wondering if you have a level in mind in terms of growth ROIC in case of slow down. There could be an issue in term of profitability. I know that is more general but just flavor could be useful.
So I start answering the last question and then in detail. Mr. Casaluci will provide you the answers. So we see a replacement market in which the double digit growth continues. The pull through effect continues to be in the range of 80%. And so that is making us more and more efficient in the market. And so we don't see problems in volumes in replacement market. In original equipment, we have already contracts for the second half of the year both in US and Asia-Pacific with new clients or for new models whereby we feel comfortable that the only original volumes lower growth. Our position is strengthened by contracts already in our hands. So that's right. Also in Europe there are some new models but anyhow considering the weakness of the market we don't count on the market recover in the second half but we count more on what we consider the new clients we have in our portfolio. So that's why we confirm the profitability and the targets we have set. Mr. Casaluci, please.
Thank you, Mr. Tronchetti. So starting from the market environment as we said, we reduced our guidance on the original equipment market in the super premium segment from a 5% growth down to a 2% ,3% growth. This is due to a first quarter reduction in car production, basically in Asia Pacific and in Europe. But we are confident that mainly starting from the third quarter, the market will recover both in Asia-Pacific, mainly in China and in Europe. This is due first to a comparison with last year, where we had the reduction of the market in Europe because of the change on seasonality linked to the WLTP effect, and in China because of the slowdown of the [ characteristics ], and they started mainly to have effect in the fourth quarter. So we are confident into a market with 2 different speed. Basically, flat in the first half and with a growth of 5%, 6% in the second half. All in all, we forecasted 2% 3% growth on the super premium segment. While the replacement, the growth is stable and solid on a double digit, roughly 10% more or less in all the 3 high value regions. And we don't see volatility or changes in this base of growth. So we forecasted 10% stable growth in all the high value regions.
And for each quarter or less?
Sorry.
And for each quarter, so there should not be very significant change in the growth rate of the replacement in the different quarters.
Yes. Stable.
We see a stable growth in the quarters. While moving into the pull through effect, today our pull through is on average 83%, and the more we go into the high end and the higher the pull through rate is, of course. For example in the [ prestige ] today higher than the 90% in the pull through rate and this is a focus to continuously to improve year-after-year up to 3 percentage point of the pull through rate in the replacement market.
The next question is from Kai Mueller with Bank of America Merrill Lynch.
The first one is on volumes. You've, obviously, now downgraded your standard volume guidance again and have been cutting more aggressively than I think we've all been anticipating when we're basically seeing 2 years back. What has really changed? Is it really that the market is becoming so unattractive because can you give us a little bit of color of how unprofitable those volumes are that you're taking out because, obviously, it's not supporting your top line anymore but your earnings are coming, in -- you said, your earnings are coming filled in at the same level, is the first question. Then the second question, some of your competitors have mentioned that especially in Europe and also in other regions where OE production was weaker, some of these OE tires have been finding their way into the replacement market. Is that something you would participate in as well and can you give us a bit of color of to what extent that might actually support your margins currently and near term in terms of the split between replacement margins that you generate there versus the OE business? And then, lastly, can you just remind us again, obviously you mentioned Q1 the weak cash flow. Are you gaining it back into Q4? What exactly those drivers again that basically all of your cash flow generated in the fourth quarter? Can you just give us a bit of color again on your payment terms and your cyclicality on that cash flow profile? Just so we get a better understanding of that.
Sorry, but I think you're at different numbers because you now mentioned the cash flow reduction in first quarter. We have seen an improvement compared to the first quarter of last year. You mentioned an erosion in our profitability guidance. I think the only [ period ] it's confirming its profitability. So I really think could be that we explained wrongly the numbers, but the numbers are numbers and you have them in front of you because we already have -- so you should have already in your hands our press release. Sorry, I think, could be that we have been…
Yes, I need to clarify. On the cash flow. I just mean that your working capital as always -- obviously, it's raining working capital in Q1 and then you get it back in Q4. I'm not talking on the year-on-year effect, I'm just talking about the seasonality within the year.
Yes. In the first quarter, Mr. Sala was very clear in comparing quarter-to-quarter, also mentioning the extraordinary items did plus, that was made in 2018, thanks to the sale of Mediobanca shares. So he may -- he gave you the breakdown showing that the operation they were in terms of cash flow performing better in the first quarter 2019 compared to first quarter 2018. The figure was roughly EUR 100 million better in the first quarter.
Yes, and on the profitability, I completely see your point in terms of the margin progression, which is compared to your peers absolutely impressive. What I just wanted to understand is the volumes you're taking out on the standard volumes. How profitable are those or are they not profitable at all at the moment and that's why you've taken a decision?
No. We are reducing standard's double digit this year. At the beginning of -- in the first quarter, we did it also last year because of a market in which if you look to the figures, there is a reduction of the standard volumes over 3% in the market in the global market. We see this phenomenon going on. And also there is pressure on volumes coming from Asia. That's why we decided years ago to reduce our position in [ China ] and we are accelerating this reduction and we are also improving our efficiencies in order to cut the fixed cost and. be able to deliver the profitability we are delivering. Decreasing a business that is much less profitable than the high value or the 18 inches and above. So it is a strategy we have set years ago and we are accelerating now. I think we did it properly because we increased the speed of reduction of standard last year and the figures of the market are showing that our decision was right because the market is becoming weaker and weaker in the standard business.
The next question is from Sascha Gommel with Credit Suisse.
The first one would actually be on your payables across the sector you have among the highest level of payable days. So I was just wondering if you can explain all that why is this the case? And also maybe give a little bit of a regional split where your payment terms are so long or where they're longer compared to other regions? My second question would be on your restructuring charges in '19. I was wondering how much in total for the group you're anticipating for 2019 and how much of that then will be Brazil? And yes, those would be my 2 questions.
So in terms of payables, we historically, as you mentioned, are in the best position versus the peers. And if you consider the situation over the last 5 years, we remain in the region in particular during the year at 25%, 27% reach, at the end of year also 50% . This is coming from a strong attention that we have now our purchasing department, which each buyer is incentivated to increase and to work on payment terms versus the previous year. And so we can say that for all concerned, raw material for all concerned investment, for all concerned also the spare parts, we are in a good position and we continue to try to improve this element in order to be efficient in the working capital management. But it's not only in the payables that you are -- as the best in the working capital management because also in term of receivables, we are in term of wait on sales around 12%, and this is also coming from the same culture that we have internally in our company in which all the manager are incentivated mostly on the financial parameters. They have before to respect the financial parameter and then to do business. And in term of stocks, last year, we had this increase in terms of working capital that currently we are addressing in order to reduce, in particular, for all concerned, they grow in terms of stock or standard. The volume of stocks, we already reduced in the first quarter by 11%. We want to continue to reduce in the following part of the year. But for sure, internal working capital, we continue to have historically a working capital generally that is in the region of 5% versus the sales and this is our master in term of management of the company.
Okay. Can I quickly follow up on the cash flow question? Can you explain to me why you have such a huge seasonality in the first quarter versus kind of the year end level? Is there an explanation why there's this big swing in Q1 versus Q4?
We have difference seasonality aspects. The first one is on the level of the receivable because in the region in which there are seasonal markets like Europe and Russia. In the first quarter, normally, we are selling -- we begin to sell the summer tires that are collected mostly in the second quarter. Then we are preparing the stock for the winter season, that is starting in term of sailing activities in the third quarter and is finally collecting in the last quarter of the year. So also in this case, there is a [ growth ] working capital in the first quarter and a reduction, strong reduction in the last quarter of the year. For all concerned payables, there is also -- in this case a seasonality that is coming from different elements. One of the elements is coming also from the investments that are mostly concentrated, let me say, at the end of the year, when the factory are closed also for the year-end period, the investment of maintenance, the investment coming from the closure of the factory and the payments are done in the first part of the year. These are the major elements that we have in term of seasonality.
All right. And the restructuring question, please?
For all concerned restructuring costs, our guidance for the full year remain the same EUR 50 million. The most part of it is dedicated to the action that we announced yesterday for the restructuring activity in South America and Brazil.
The next question is from Henning Cosman with HSBC.
The first question is on Europe please, one of your competitors Nokian have said that relatively tough pricing environment in Europe specifically is mainly geared towards large tires. I was interested to hear your comment on that. If you can confirm that? And also we've seen a very untypically weak replacement market in Europe specifically in Germany, I believe Michelin has said Q1 was down 10%. And replacement in Germany very unusual, if you could please also comment on that? If you can confirm that that you've seen that? Also if you can already see a reversal of that trend in April and May and what you're expecting there? That's my first question, please.
I think we have a different business model compared to Nokian. So as you know, our replacement market is mainly related to the pull through effect of the 18 inches and above, we have in the original equipment which is the market where the price discipline is quite effective. Nokian is only in the replacement market without original equipment. So I think we cannot compare their pros and cons and ours.
And just on the level of the replacement market in Germany, you would say the same thing applies because yours is more related to the pull through.
Yes.
Yes, Casaluci speaking, the tough environment in the German market is mainly due to a delay in the sellout of the summer tires because of the weather conditions. We don't see a structural issue on the German market. Nevertheless, if we focus on the 18 inches up, the market is growing double digit also in Germany.
Okay. Next question is on the savings level, please. You're guiding again for the savings in Brazil and I believe -- I don't know if it's too early to say if you want to comment ahead of your new financial plan already. But I'd be curious to just conceptually understand, if you are expecting more savings again of a similar magnitude in Brazil next year as you will be continuing to reduce your standard exposure? Is that the right way to think about it or will that stop in 2019?
Savings in Brazil are going on and the outcome of the action of restructuring will be in the next year. It's something we are not seeing this year. What we see this year is an improvement in the mix in Brazil and efficiencies, which come from 2022 from the restructuring of Gravatai and Campinas. But the real effect we have in Brazil is efficiencies internally and a strong increase in high value still is more portion of the market but profitable.
So we're still expecting a positive bucket in the EBIT bridge in 2020 over 2019, correct?
Yes.
Okay, great. And then my last question is also on -- it's also on cash flow for the year and working capital. Maybe another way to ask it is, your target level of net working capital of sales by year end. You're thinking about a target level of about 20%, is that a good way to model this according as to how you think about it?
No, we historically didn't touch in any -- last year, 20% of a weight on net working capital and sales will remain historically in the average in the region of 5%. What we have in our plan for all conservatives this year is not to have any more the impact of EUR 200 million that we had last year for the normalization of the factory and the impact coming from EUR 80 million of growth from this stock growth and from the receivable in South America. So practically, our assumption for -- of the working capital is to grow in a region that is in the region of EUR 40 million, EUR 50 million. Remaining in any case in below 55 on sales for all concerned. And this will be the most important improvement to help us to reach, starting from the EUR 40 million of net cash flow last year, the target of EUR 400 million because we have this important improvement in the working capital management. Then we will have an improvement of CapEx versus last year, EUR 400 million versus ERU460 million. And then we will have improving financial charges. And these can all pass also to compensate the lower impact coming from the financial activities. So our EUR 400 million of cash flow is coming from the improvement of EBITDA, the improvement of the working capital and lower cap. So the real elements of cash flow of a company.
Sorry, I think I said this wrong. I meant, 20% inventories or sales, not working capital as a whole.
Sorry. Sorry. Yes. Our target is to move down from almost 22% of last year in term of weight of stock on sales to around 20%.
Okay. Great. It was my mistake I said it wrong.
The next question is from Gaetan Toulemonde with Deutsche Bank.
Only one small question on my side. When we look at your revenues to businesses, standard and premium tires. If we project ourself by the next 5 years, you're going to do what? 90% premium? What is the limit? Because you might need a certain level of standard tire just to cover the fixed cost base. That's why I'm a little bit lost. What is the limit by next 3 to 5 years?
What do you mean saying what is the limit. So we have --
Okay. I'll phrase it a little bit differently. When I look at your breakdown of revenues today, your [ DCO ] was 67% premium compared to 64% last year and is growing at the rate of e percentage point per annum. Is there a limit? Or you see yourself in 5 years’ time 100% premium, 0 standard tire, what is the limit of a minimum volume of standard tire you may need. Because it's helped to cover the fixed cost base. I hope that my question is clear.
That's very clear. Sorry. Sorry. We continue to trend. I don't see for the next 5 years going down to 0, some standard and there is some standard that is in a range of profitability that is around the double digits. So we don't see these as an issue. We will continue to grow definitely in 18 inches and above and decreased it in the [indiscernible] . In volumes, as you know, now we have a bit more than 50% that is coming from the high value. And looking forward, I see this number continue to grow but I will not imagine for the next 5 years to go down to 0. We see that Latin America rationale, which some of this will remain. And as we have been showing in the last couple of years, we are able to balance the fixed cost reduction and increasing profitability. So that our action to cut standard goes always in line with a reduction on fixed cost. That's the action we -- and that is what is happening in Brazil, that is what is happening in all the regions.
Okay. A small detailed additional question, the breakdown of your premium tires volume, which in OEM replacement, is it approximately 50/50?
More or less.
The next question is from [indiscernible] with Morgan Stanley.
I just have one question for you. For your guidance, I just wanted to get a bit more clarity because I know you've alluded to this in previous questions. But the guidance for revenues obviously has come down and that EBIT's maintained/slightly up, I just wondered with efficiency guidance confirmed, price mix guidance confirmed, volumes taken down a bit, what is the kind of driver of the -- if the margin guidance being maintained like, what are the levers that you have here? Because say that the market doesn't improve that much by Q3. I would just like to get an idea of what are the levels that you can control just to make the EBIT, right?
As you can see in Slide 13, we have split our results comparing the guidance given in February with the guidance we are giving today. Volumes were expected to grow between 1% and 0%. Now we expect volumes to go down with a reduction of 1%. We see a net value -- volumes growth over 9%. The previous guidance was in range of 11%. Standard volumes, we see a decrease between -- around minus 11, the previous guidance was between 9 and 10 the reduction. Price mix, we confirmed the price mix, we gave as a guidance in February between 5% and 5.5% improvement. ForEx, we confirmed the negative effect between 0.5% and 1%. Efficiency, we confirm EUR 70 million of efficiencies. Input costs, we confirm a negative impact of [ EUR 60 million ]. Cost cutting, we confirmed GBP 50 million of cost cutting. Raw materials impact, we reduced this from EUR 100 million to EUR 85 million. This is I think that's pretty wanted to have. Is that so?
Sorry, I did see that. I just wondered how you're meeting the guidance, the margins given that your volumes, sorry, your volumes and your net sales guidance is slightly lower. I just wanted to know what is the driver of the margin guidance being confirmed just like on the lower operating leverage or whatever you would like.
'19 equaling over 19% is the EBIT margin in absolute value aligned. So the number will remain aligned to consensus and what we have reduced is the top line. But this is balanced by the raw material headwind that is below the one we gave before. We go down from EUR 100 million raw material headwind to EUR 85 million raw material headwind. I think this is the number that balance the figures in order to understand better why we confirm the profitability in 19% and above.
Okay. That's clear. So it's just the raw mat kind of pressure easing.
Right.
The next question is from [ Gianluca Bertucco ] with Intermodal.
I have just one. Recently, we have seen that 2 of your major competitors are become more interested in the high value market, given the very attractive margin and growth rates of this segment. They've also said that they plan to increase capacity for this segment mainly in Europe. That is your most important region. How do you see the market reacting once this additional capacity will be available?
I think that we are already gave last time but the announced increase in volumes are in line with the expected growth of the market and what is protecting our position is the effort and the success we have in getting the homologation in original equipment. So the business model we have set with this 80% and more of pull-through effect gives us comfort looking forward. And the fact that we continue to lead the homologation in the segment of 18 inches and above gives us a portfolio even for the following years that is granting a double digit growth in the replacement market due to this effect. So we don't see any change coming from any announcement of our competitors.
Mr. Tronchetti Provera, there are no more questions registered at this time.
So thank you to all of you for attending our conference call. And I hope to see some of you tomorrow in our AGM. Have a good evening.
Ladies and gentlemen, thank you for joining, the conference is now over. You may disconnect your telephones.