Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am [ Yota ], your Chorus Call operator. Welcome, and thank you for joining the Tofas Türk Otomobil Fabrikasi A.S. Conference Call and Live Webcast to present and discuss the first quarter 2018 financial results and key performance indicators.

At this time, I would like to turn the conference over to Cengiz Eroldu, CEO; Fabrizio Renzi, CFO; Erman Tütüncüoglu, Investor Relations Manager; Dogu Özden, Head of Financial Planning and Controlling. Gentlemen, you may now proceed.

[Cengiz Eroldu, executive]

Good afternoon, everyone. I'm Erman Tütüncüoglu, Head of Investor Relations. And before we start our presentation, I would like to leave the floor to our new CFO, Mr. Fabrizio Renzi, for an introduction. Please go ahead, Mr. Renzi.

[Fabrizio Renzi, executive]

Good afternoon to everybody. My name is Fabrizio Renzi, I'm Italian, 52 years old. I wish to give you some additional information about myself. I worked -- before joining Tofas, I worked for Fiat for 20 years. I covered many positions during this period. I started my experience as an Industrial Controller in Italy in different location out of Italy. In 2007, I was appointed CFO in Sevel, that is a joint venture between FCA and Peugeot-Citroen Groups, that is manufacturing a successful product, commercial vehicle. In 2011, I was appointed Industrial Controller for the EMEA region and I was in charge for the FCA plant around the EMEA region. My last position in 2014 was CFO of FCA Serbia. FCA Serbia is a joint venture established in 2008 with the local government and is manufacturing, in this moment, the model 500L. I will be brief. I'm honored and it's a privilege to join Tofas as to be a member of this successful business story. So it's -- that's all for the moment. I hope to have a great and excellent corporation with all of you. And from now, I'm fully available with my team to answer your question. That's all. Please, Erman?

[Erman Tütüncüoglu, executive]

Thank you, Mr. Renzi. So we will start with the presentation. I will go over the presentation, then we will have the Q&A session.

So starting the presentation, our agenda has not changed over the quarter. We will start with the highlights of the first quarter, have a brief look at the Turkish automotive industry and our production figures. Then we will be looking at the domestic market and export market developments, go over our financial performance, our investments and conclude the presentation with our expectations for the year.

So starting with the highlights. As you can -- you have seen last night, we have made a very strong start to the year, and we have reached all-time high reading for the first quarter with TRY 4.4 billion net revenues, up by 8% annually, TRY 520 million EBITDA, up by 20% and TRY 325 million of consolidated net profit, up by 24% on an annual basis.

In the first quarter, our export volumes were well in line with our expectations and our guidance, this is the first point that we would like to make. And while we have seen around 10% year-on-year decline in export volumes, this was mainly stemming from the high base year effect. And we would like to underline that we are well within that road to our guidance, which was 270,000, 290,000 units.

Looking at the domestic markets, Fiat Egea, the best-selling passenger car in 2016 and 2017, maintained its strong position in the market with 6% market share. And also other development in the quarter was the debut of our Tipo S-Design, the brand-new sports model for our Tipo family in 2018 Geneva Motor Show. Also, we have launched Fiat My Road Companion Connect application in April for our Egea models, which is the first remote access platforms in this class. This platform will be extended to our CDV models by June.

So on the next slide, let's look at what happened in Turkish automotive industry in the first quarter. As you can see that production remains flat compared to the previous year with 425,000 units. Our share in Turkish production remains at 20%. There was a decline, and that was mostly due to the high base year effect of the exports model, especially hatchback and station wagon body types and also the production break of 2 weeks at the beginning of January due to [ bank ] accountings. On the export side, the Turkish market -- Turkish exports grew by 3% year-on-year, and we are proud to say that 1 out of every 5 vehicles exported from Turkey was originated from our factory.

On this next slide, you can see our quarterly production figures. As I've mentioned earlier, our production is down by 10% year-on-year to 84,000 units. As the strong base year effect of 2017's first quarter, where FCA's pipelines were filled with the newly launched Tipo hatchback and station wagon models, is the main reason behind this decline, followed by the production halt at the beginning of January, which was 6 days longer compared to the production halt in 2017. As of year-to-date of the production mix is 56% passenger cars and 44% commercial vehicles.

On this next page, we are looking at the domestic market in the first quarter, what has happened in the market. And in passengers cars, the demands remained strong compared to the previous years with 5.5% annual increase to 122,000 units. But of course, this was not the case for the LCV segment, which was -- we believe that it was mostly due to the declining consumer confidence on the back of depreciating Turkish lira. Because, as you know, this LCV segment is mostly attached to SMEs and this environment -- market environment, we believe that led those SMEs to postpone their investment this year, leading to 10% decline in the first quarter. So all in all, the first quarter domestic market was up by 1.5%.

On the next slide, you can see the monthly sales figures for the whole sector. And as you can see, the volumes were -- retail volumes were flattish. But considering that most of the growth last year came between July and October, we still believe that the market prudent in line with our guidance of 930,000 units to 950,000 units for this year.

Our next slide, you can see Tofas domestic sales on a monthly basis. Our sales declined by 3.7% year-on-year, reaching 18,300 units, and this is retail sales in March as of -- year-to-date March 2018 and now through [indiscernible] our performance.

So in terms of passenger cars, our Fiat brand maintained its fourth position with 7.4% market share. But what I would like to underline here is that our Linea -- we have stopped the production of our Linea model at the end of 2017 and in the first quarter, we were selling from our inventories, which led to a decline of around 1,000 units for the model. But instead of this, we have maintained our market share very close to previous year, thanks to the success of our Egea brand. And containing to premium brands of total market share at Tofas in the passenger car segment was 7.9%, around 10 basis points lower than the previous year. And our 91% of our domestic sales volume came from locally manufactured vehicles, which remains to be the highest ratio in Turkey. And as I've mentioned at the beginning of the presentation, our Egea brand continues its successful run with 6.1% market share in the passenger car segment.

Moving on to next slide, you can see our performance in light commercial vehicles segment. Again, our market share is similar to the previous years. We are maintaining our leadership in the car drive vehicle segment, which consist of Fiorino and Doblo models. But this market share could be higher. It did not suffer availability issues for the Ducato model, which is an MCV as you know. But regardless, our market share performance kept up the same performance of 2017.

And on Page 11, you can see the combined market share for light vehicles. And as our market share is down by 60 basis points, as you can see here. And the reason for that is the 10% decline in the domestic market for the LCV segment, where we have a very strong position. But we have maintained our third position in the market with our Fiat brand. And including our premium brands, our market share was realized at 11.5% in first quarter.

Now we will take a look at -- a close look -- closer look at our exports. So let's start with the [ promoted ] figures. As we can see, in the passenger car segment, there was nearly 19% decline, and this was due to last year's high base year for filling up FCA's pipeline, which led to this decrease. On light commercial vehicles, we have to 3.7% growth, which was not enough to cover up for the decline in the passenger car segment. And all in all, the first quarter's volumes were down by 11% on a yearly basis.

Looking at the market performance. In January, you can see the effect of the production halt that took in January, which was 6 days longer compared to previous year. In February, the strong base year effect continued. But starting from March, as you can see, it started to dissipate. And especially starting from August, we should see stronger growth figures when this base year effect reverses. And we would like to once more underline that our 1Q '18 export volume was in line with our expectations.

Looking at the European markets. As you can see, United Kingdom remains to be the problematic market amongst the major European markets, which declined both in terms of passenger cars and LCVs. There was a very slight single-digit decline in Italy passenger car market, but that's probably due to the elections that took place there. But other than that, we are happy to see that the markets that FCA has put halts are continuing to grow, which bodes well for the remaining of the year. As our export markets breakdown. As you can see, in the first quarter, Italy remains our -- as our major market followed by Spain and France.

Moving on to the next slide. You can see our total shipment figures in the first quarter. Our total shipments was down by 10% to 18,300 units. And again, the high base year effect in exports was the major culprit here. I would also like to point out that our domestic shipments remained around 1,000 lower than our retail sales and that was due to the fact that the price increases due to Turkish devaluation have affected on a higher scale to 2018 models. And therefore, 2017 models were on a higher demand, which have very cheaper price [ tags ] in the sector generally, and that was the difference between the 1,000 difference between our shipments and our retail sales.

As on the next slide, you can see the shipments by business. And we remain to be more passenger-car oriented with focus on share in the domestic markets and 60% share in the export markets for a total of 59% of passenger car share and 41% LCV share in terms of shipments.

Here on this slide, you can see the shipments by model. And here we can clearly see that the major reason behind the decline is the high base year of the hatchback and station wagons models, which were down by 6,500 units on a yearly basis. There is again some decline in shipments to Opel, but this was expected by us because, as you know, this is our final year with -- for our agreement with Opel and since our volumes are covered for the take-or-pay contracts, we will not be witnessing any negative effect in our P&L in 2018. And also, I would like to point out that, as you can see -- as you can remember, last year was our final year for minicargo shipments to the PSA group. But once we've stopped shipping to the PSA group, there was a vacuum in the market and Fiat was there in order to fill in that procurement, increase its market share, which nearly made up for the loss of shipments to the PSA model.

Looking to domestic markets, as I mentioned earlier, the Linea -- we have stopped producing Linea last year and we are -- we continue to sell from our inventories in the first quarter and around 1,000 units of shortage there. But as you can see, that has been more than made up with the stellar performance of Egea Sedan. And hatchback and station wagons of Egea, as you know, recent -- in the last quarter, there was an increase in the demands towards SUV model and that has been stealing from hatchback peak segment sales in the market and we are below slightly negative affected by that. And in terms of light commercial vehicles, our sales volume was down due to the contraction in the market in general. All in all, we have realized 80,000 shipments in the quarter.

So let's look at our financial performance for the first quarter. As we have mentioned, our volumes were down by 10%. But thanks to the depreciating Turkish lira and the rate of exports in our sales, our revenues remained resilient showing 8% annual growth. And again, thanks to depreciating Turkish lira, it reflected positively to our profitability and our EBITDA grew by 20% whereas our profit before tax grew by 39%. And in addition to depreciating Turkish lira, the continued effect of our value optimization program where we aim to reduce our costs, continue to play a pivotal role here.

I mean, I will go over those slide faster because you all know the numbers. And in terms of revenues, our revenues are up by 8%. Again, thanks to bank FX rates and favorable FX rates, which more than offset lower shipments volumes. In terms of gross profits, our margin was up by 80 basis points in the quarter to 11.1% with TRY 492 million of gross profit. And our operating profit was, once again, up by 75 basis points to 7.5% margin at TRY 332 million. Again, this being 20% growth.

Our EBITDA margin was up by 1.1 percentage points as our profit before tax was up by 39% to 7.2% profit before tax margin. However, this strong growth in the profit before tax was not fully reflected in net profits because of deferred tax income lower compared to the fourth quarter. But regardless, our net income grew by 24% year-on-year, reaching TRY 325 million, also beating the consensus estimate. Here, you can see the items that we have talked about, where our revenues continue to grow and our profitabilities continue to expand.

Here, you can see our balance sheet -- assets part of our balance sheet. The noteworthy item here is cash and equivalents, as you remember on 21st of March, we have distributed a gross cash dividend of TRY 800 million, and that's the major reason behind the decline in our cash and cash equivalents. And also, our trade receivables is kept the same level to compare to the end of the year despite the Turkish lira depreciation and some of our -- most of our trade receivables are euro-denominated and regardless of that we have maintained the same level

Moving on to our liabilities. You can see a decline in our short-term financial liabilities and -- that was due to the EUR 135 million of Eximbank loans that we have closed in the quarter. And our equity again was down due to the dividend distribution.

Looking at our financial position. Again, the dividend distribution and closure of the Eximbank loans are the main items here as well. But regardless of those cash outflows, the strong cash generated in the quarter continue to keep our financial position resilient and our net financial position was minus EUR 54 million, a very negligible amount compared to our size and EUR 210 million of this amount was factoring.

And looking at our working capital. Again, our net working capital remains stable compared to the year-end and decrease in the net working capital compared to the year-end also contributed to our cash generation.

As looking at investments. We have concluded first quarter with EUR 22 million of investments. But of course, this somewhat make things small to you, but these are only the amounts that we have invoiced at the moment and there is still a considerable amount in our pipeline, and we are not changing of our full year guidance for our investment, which stood at EUR 150 million and EUR 170 million.

And finally, you can see our year-end expectations. We are not making any adjustments to our expectations. We still believe that the market will conclude around 930,000 units to 950,000 units, which spells a single-digit contraction in the domestic market. We aim to sell around 110,000 units to 120,000 units of cars in the domestic market and 270,000 units to 290,000 units of vehicles in the export market, which should bring us to a production volume of 370,000 units and 390,000 units.

So this is the end of our presentation. Now we can move on to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from the line of Kilickiran, Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

This is Hanzade from JPMorgan. I have a follow-up question on EBITDA margin. Is it possible, I mean, you realized that your exports are declining because of the inventory, I mean, the previous inventory levels in FCA. But does it mean that you may also receive some pay revenues from FCA, which may end up in -- with higher EBITDA margin?

[Cengiz Eroldu, executive]

Actually not. This is Cengiz. Because on the missing volumes of export is coming from the commercial vehicles on the Tipo Egea family sales. We are in line with our, let's say, planned figures at the beginning of the project. So for this reason, I don't see any different impact between 2017 and 2018 on the EBITDA margin.

[Hanzade Kilickiran, analyst]

So I mean, I just want to be sure about this. I mean, your export contracts are fully, I mean, in line with the existing size on the light commercial vehicle side. But on the passenger car, you are already exceeding your contract size, so that's the reason there is no pay revenue on the passenger car side, right?

[Cengiz Eroldu, executive]

Right.

[Operator]

The next question comes from the line of Bespalov, Vladimir with VTB Capital.

[Vladimir Bespalov, analyst]

My first question would be on the export side and the trends that you see. There was a pretty good improvement in February and March. And the volumes in February and March [indiscernible], for example, may suggest that you could well exceed the guidance that you are providing for the full year. So could you elaborate a little bit what do you see as the trends in April? Probably you have a good picture in May and do you think that the guidance you are providing is fairly conservative and there is some room for outperforming on this guidance?

[Fabrizio Renzi, executive]

Okay, Renzi speaking. I believe that in this moment, we don't have ground to improve our guidance. So for the moment, in particular for exports, we can confirm our guidance. But in this moment, having a look to the trend of the European markets in the first quarter, we want to be prudent. And for the moment, we don't see ground to improve our guidance on exports. So the European market remains stable in the first quarter with some improvement in some country. But also some reduction and some drop in other markets, like U.K. and Italy. So in this moment, we prefer to be prudent also because we don't want to repeat the mistake made last year when our guidance was a little bit optimistic.

[Vladimir Bespalov, analyst]

Probably you know the picture for April and have a good visibility for May, what do you see for these 2 months?

[Cengiz Eroldu, executive]

I mean, as you can see, the higher base year effect will still be in effect in the second quarter although at a way lower rate compared to the first quarter. But we can say that our export volumes are going in line with our projections. And the growth will come especially after August because that's when the base year effect is reversed in our favor.

[Vladimir Bespalov, analyst]

And my second question is on margins. Your EBITDA margin is again somewhat above the, like, sustainable margin that you were guiding previously, which is, as far as I remember, somewhere around 11%. Was there something special in this quarter that's helped you achieve this higher margin? Or just this is the new reality and this is the result of those cost savings? So how should we look at the EBITDA margin going forward?

[Cengiz Eroldu, executive]

But actually, our cost savings program is continuing. You are also seeing on the expense side on our financials. All the general expenses are at the 2017 level, also in 2018. But from other angles, I should say there is help coming from the exchange rate increase. As you know, Tofas is today nearly 80% exporting company. So I should say, also, the exchange rate also improved positively our margins.

[Vladimir Bespalov, analyst]

And given the volatility of the exchange rate and the depreciation of the Turkish lira in April, what would you expect for the second quarter if we assume that the rates -- the exchange rates will stabilize at the current levels?

[Cengiz Eroldu, executive]

But in Turkey nowadays, it is not easy to make a forecast of the currency. As you know, we will have also the unstated elections at the end of the June. What I see personally until the elections, the tension in the Turkish market will continue from the also currency side. I think our trend also can continue if the exchange rate will be at that level.

[Vladimir Bespalov, analyst]

And my last question. Maybe you could give us some update on the overseas project that you have been considering for a while. So are you any closer to signing any deal? What is the current studies? Are you still discussing it with FCA? So could you give some update on that?

[Cengiz Eroldu, executive]

But actually, also at the past meetings, we always said that we were studying on the different issues, different projects. But for a moment, we don't have anything to disclose because in automotive industry, it's not easy to make this kind of moves.

[Operator]

The next question comes from the line of Kayani, Muneeba with Morgan Stanley.

[Muneeba Kayani, analyst]

This is Muneeba from Morgan Stanley. On -- what are inventory levels now across the chain -- channel in Europe? And have they come down significantly? It's my first question. And then secondly on the domestic guidance, with the collections coming up, do you -- are there risks to the downside for the domestic market volumes for the rest of the year?

[Fabrizio Renzi, executive]

Renzi speaking. About the stock, you know the strong activity performance by Fiat at the end of the last year. So now we can say that the stock is stabilized and we are at the level of 2 months that could be considered normal compared to the big, big data we reached in 2017 that was around 4 days -- 4 months, sorry. So about the stock, this is the situation. So these are good situations, stabilized. About the impact on the local market, I give the stage to Cengiz Eroldu.

[Cengiz Eroldu, executive]

Yes, regarding the local market, of course, as a industrial company working in Turkey we are happy with the anticipation of elections because in this way, we can have better second half in 2018. Until the election, we are not making big changes. So let's say, this trend will continue. So the market will be, let's say, more or less at the level of 2017. But after the election, if the -- so according the result of the election, of course, so we can have better second semester. So overall, our expectation is positive for the second half.

[Operator]

The next question comes from the line of Memisoglu, Osman with Bank of America Merrill Lynch.

[Osman Memisoglu, analyst]

I have a question on your CapEx and outlook for next year and potentially for 2020. And in particular, regarding minicargo. Are you planning to -- because that contract ends, I believe, at the end of '20. So we are towards the middle of '18 now. Are you planning to make new investments for a new vehicle? And in general, how do you see CapEx progressing? I'm asking this because you're dividends were quite strong at least versus my expectations. I'm trying to get a feel for cash flow. And then on a different topic, you mentioned in the past your fleet market performance in Europe was not really as high as expected. If you could give us an update how do you see in the first 3 months, 4 months so far or maybe you have some more visibility? Do you see the improvements that you are -- you were planning? Are they taking place? Or is it still a very challenging market in Europe from that perspective?

[Fabrizio Renzi, executive]

Okay, thank you, Osman. First of all, regarding the minicargo project, the end of the contract is 2021, not 2020. So we have 1 more year. But this year, I think, will be important year for also our future decisions. So we will -- we are looking mainly for the future of our light commercial vehicle product range because also, the Doblo contract will end at the same year.

[Osman Memisoglu, analyst]

At the end of '21?

[Cengiz Eroldu, executive]

Yes. Not only the minicargo, both of them. But for this year, we are working on the issue. And we will see how we will end up, but the issue is not only the minicargo or Doblo, the total light commercial vehicle range in the future.

[Osman Memisoglu, analyst]

Can I interject Cengiz? The Ducato, which is currently being produced, I believe, by Sevel still, but it's ending in 2019. Is there a decision on that? Or is it a potential for Tofas?

[Cengiz Eroldu, executive]

No, this is not a potential for Tofas because, as you know, Ducato is a mid-sized light commercial vehicle and are also [ paint shop ] . So physically, it's not feasible for these kind of cars. Technically, it's possible, of course, but you need to stop the plant for 1 year in order to make the adjustment for this. It's not the option for us. What was the other question now? I didn't...

[Osman Memisoglu, analyst]

No worries. The fleet market performance.

[Cengiz Eroldu, executive]

Fleet market, with respect last year, they are doing better. But in Europe, there is another issue that, also in Turkey, we are facing the same. So there's some passage from the see hatchback segments to see SUV segments also. So this is also, you can see, on the European reports. So both -- so nearly all markets in Europe, also in Turkey, we are seeing also this kind of trend.

[Osman Memisoglu, analyst]

So need to get an SUV contract from FCA?

[Cengiz Eroldu, executive]

Yes, we need an SUV. Thank you.

[Operator]

Next question from the line of Kilickiran, Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

Cengiz bey, I just want to make a follow-up on the minicargo contracts that Osman asked. And I remember that a minicargo was not supposed to be renewed after 2021 on a take-or-pay contract side. I mean, there were some discussions in the past that Tofas will continue to produce, but it will completely depend on the European market demand. What's -- Is this right? Or am I remembering completely in the wrong [ peri ]?

[Cengiz Eroldu, executive]

But not wrong [ peri ], but we don't have still decision on the subject. Because as I said, so our issue for the future is not only the Fiorino but also the Doblo because both cars contractually will be end in 2021. So for this reason, we want to see altogether this range and see how we can go to the future. So for the continuity of minicargo up to 2021, so still, we don't have such a decision because we can have different options on the subject.

[Hanzade Kilickiran, analyst]

Yes, sure. On a technical basis, can you produce a passenger car on the minicargo platform?

[Cengiz Eroldu, executive]

No, because the existing minicargo platform is old one. So in the, let's say, best solution because the Egea Tipo platform is the last platform that we did. So in the future, the convenience for us will be to continue to build the light commercial vehicles on the existing Egea Tipo platform. So on this stage, we can have only 1 the base platform inside the plants, which is the optimum situation.

[Hanzade Kilickiran, analyst]

And I have a technical detail question for, say, for actually, it's about this FX sources in the P&L. We don't see much change actually in your short FX position. But that was a big deviation in the recording of the FX losses and the FX gains versus last year first quarter even though we have a higher euro depreciation. Is it possible to explain what makes this fluctuation on the FX losses in the first quarter of this year and also fixed income, actually?

[Cengiz Eroldu, executive]

But Hanzade [indiscernible] you are asking directly from the report or are...?

[Hanzade Kilickiran, analyst]

Yes, when I look at your disclosures and look at the details of the other income -- other operating income and the financial income and expenses, you have some operating-related FX losses and gains and also financial expenses related FX losses and gains. This is nearly halved on a gross value versus last year first quarter. But actually, we have higher currency depreciation this year. So I'm trying to understand what actual drives this FX losses and gains, what are they related to?

[Cengiz Eroldu, executive]

But as you know, it's operative -- sorry, in our disclosure according the accounting principles, the FX loss and gains regarding export and import operations are not reclassified into the financial gain and losses. So inside the operative results -- so all the export and import transaction exchange rates, we are seeing that. So in absolute terms, in 2018, they are lower, but there's a difference. So 1 year we have TRY 56 million in 2017 and in 2018, we have TRY 70 million. So the net figures are more or less at the same level and into 2018 slightly higher.

[Fabrizio Renzi, executive]

I do know if one explanation could be that, basically, in the first quarter 2018, the exchange rate remain stable in the -- rate is stable in the first 2 months, only a sharp increase in March.

[Cengiz Eroldu, executive]

[indiscernible]

[Fabrizio Renzi, executive]

And this could affect a little bit the exchange rate effect on receivable and payables. So if I remember well...

[Hanzade Kilickiran, analyst]

Yes, that's what I would like to hear, actually. Those are all related to the payables and receivables. So you are looking into the average rate rather than the end periods, okay.

[Fabrizio Renzi, executive]

Yes. So most probably, January and February was not so sharp the increase while in March, we start to see a significant increase of the valuation.

[Operator]

We have another question from the line of Kurbay, Berna with BGC Partners.

[Berna Kurbay, analyst]

I have got a few. First, on the domestic market, are you seeing any impact from the recently introduced scrap incentives? I know that you didn't really expect much of an impact to begin with. But I was wondering if this is actually happening in practice at the moment. And I also would like to learn if you're planning on selling more Lineas going forward, maybe the ones from inventory as you did in the first quarter. And again, on the domestic markets, I was wondering if you could share with us the split between passenger cars and light commercial vehicles that go into your guidance of 930,000 units to 950,000 units, given that in the first quarter, we've seen a contraction in LCVs and an increase in passenger cars. And finally, on the exports side, in terms of your capacity utilization and our thinking going forward, you had 16,000 units of minicargo contract ending with PSA last year and there is going to be 40,000 units of Doblo that's expiring in the Opel Vauxhall contract this year. So we're talking about over 50,000 of capacity to be freed on the LCV side. Assuming that's your -- I mean, I understand that you're currently working on your LCV strategy going forward, but what should we think in terms of your exports in 2019, unless there is an overseas contract? I mean, should we expect a major drop in exports volumes? Or our passenger car export is going to, more or less, compensate for it or maybe more Doblo exports elsewhere?

[Cengiz Eroldu, executive]

Berna, thank you for your questions. First of all, regarding this -- the scrap incentives, as you know, still we are waiting from the -- approval from parliament. But probably, due to the elections, now nobody is thinking about the -- this kind of issues. And our expectation is after the election you can see this new low. But also, the rumors that we are hearing that for the passenger cars will be around TRY 5,000, TRY 6,000. So if will be in this size, the impact on the market will be limited.

[Berna Kurbay, analyst]

I thought this was actually published in the official gazette, but are you talking about further regulatory legislation to enable it in practice?

[Cengiz Eroldu, executive]

No, no, but needed cabinet decision not signed yet. Second, the Linea stocks are not material that we are carrying at the end up to March, so will not affect our market share or our future sales. You asked also how we are going to fulfill the capacity usage due to the Opel and the PSA missing volumes. But actually in the last years, the Opel volumes, as you know, we have financial volumes and physical volumes. So the physical volumes of Opel, also in 2017, if I'm not wrong, was around 13,000, 12,000 something so according the reserve capacity, physical volumes were low. So for this reason, physical impact will be lower than the, of course, reserve capacity impact. Sure, we will have some missing profits. But from production side, I don't think we will have important problems. So in 2018 also, are -- we are targeting to compensate losses coming from PSA. So because our also guidance is in line with 2017 production volumes, so for this reason, we are not waiting an important impact from production point of view of those missing volumes in 2019.

[Berna Kurbay, analyst]

And from a financial perspective, because you're getting paid for the shortfall missing the actual deliveries...

[Cengiz Eroldu, executive]

Yes, from a financial perspective, we only can make -- can -- let's say, can manage better the company. This is the only way for 2019. So we can act better in the local markets. So of course, the pay volumes of Opel in 2019 will be missing.

[Berna Kurbay, analyst]

So does that mean you can perhaps become more aggressive in terms of market share in Turkey?

[Cengiz Eroldu, executive]

But without forgetting the profitability of course.

[Berna Kurbay, analyst]

And just last question that I had in terms of your guidance for the domestic market this year, is -- what's the split between passenger cars and LCVs, please?

[Fabrizio Renzi, executive]

It's nearly 50%. But also keep in mind that the contraction in the first quarter was due to the political background, which made a negative impact on consumer confidence in tandem with FX rates. So once directions are over, the second half of the year would be time that the postponed investments for SMEs in the first half starts to initiate. So therefore, we are not changing our guidance at this stage.

[Cengiz Eroldu, executive]

But the other issue that I can underline, our market share at CDV segment. So we are at 42% of market share. So also, this is where we are very strong part of the market. That part, also, respect 2017 is shrinking, but we will try to improve our market share because, as you know, also is important from -- for the profitability of Tofas the presence on CDV market.

[Operator]

We have another follow-up question from the line of Memisoglu, Osman with Bank of America Merrill Lynch.

[Osman Memisoglu, analyst]

Cengiz bey, when you said CDV market share, I remember the regulation issues on the sector and particularly, the restrictions on the leasing side of these vehicles, we've discussed in the past, on and off, do you have any latest info or how your sentiment on obviously, not sometime between now and the elections but maybe after the elections, would there be an opportunity -- upside opportunity there, if -- would they go and ease these restrictions?

[Cengiz Eroldu, executive]

Osman, I don't think so because we pushed several times this issue in Ankara. But also last -- as a last release, still is not opening the door for the renting of light commercial vehicles in the Turkish market. But as Tofas, in order to reinforce our position, as you know, last year, we launched 1.4 gasoline Fiorino which have very competitive prices, and the car is doing well. And the -- at the end of the March, we launch also 1.4 gasoline Doblo. So -- because as you know, the Turkish market starting from 1st of January enters into the 6B regulation rules, that all the markets also face, increase on the diesel engines. As you know, until now, the -- on the light commercial market, the main -- not the main, the only engine was diesel. But now, we are increasing our penetration on the gasoline side. So also this is an important competitive advantage for us into the light commercial vehicle market.

[Operator]

Excuse me, there are no further questions at this time. I will now turn the conference over to Mr. Renzi for any closing comments.

[Fabrizio Renzi, executive]

Okay. Dear all, I wish to thank you for participating. I hope you have appreciated the presentation, the performance, the explanation. So I thank you for joining this -- attending this call conference, and I hope you will continue to follow Tofas in the coming months. And I hope you will attend our next conference call that will take place in July. And for the moment, that's all from my side. I wish you a nice weekend, a nice evening and keep in touch.

[Cengiz Eroldu, executive]

Thank you all.