Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Mital, 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 third quarter and 9 months 2018 financial results.

At this time, I would like to turn the conference over to Mr. Cengiz Eroldu; CEO; Mr. Fabrizio Renzi, CFO; Mr. Erman Tütüncüoglu, Investor Relations Manager; Mr. Dogu Özden, Financial Planning and Controlling Director; and Mr. Devran Aydin, Accounting Manager.

Mr. Renzi, you may now proceed.

[Fabrizio Renzi, executive]

Thank you. Good afternoon, everybody, and welcome to the Tofas conference call. In the last quarter, we experienced a very challenging period in Turkey and in the domestic markets. But today, we are proud to present to you how resilient, how strong is our company.

So I give the stage to Erman for the presentation, and then I will be available for the Q&A.

[Erman Tütüncüoglu, executive]

Thank you, Mr. Renzi. So starting with our agenda, you are all familiar with the flow of our presentation. Again, we will start with the highlights of the quarter, take a look at Turkish automotive industry. We will look at our production figures, the developments in the domestic market. Then we will look at Tofas' domestic market performance, the developments in our export markets, and again, Tofas' performance here. We will take a look at our third quarter financial performance, talk about our investments that have taken place so far in 2018 and conclude the presentation with our expectations for 2018.

So starting with the highlights. As you all know, we are celebrating the 50th year of our foundation in 2018. And in this historic place in our history, we are very proud and happy to close the period with, again, another record readings for 9 months, where we reached TRY 13.8 billion net revenues with 11% annual increase, TRY 1.9 billion of EBITDA, which is a 39% increase, and TRY 1 billion of net consolidated profits, which is again up by 17% year-on-year, marking the highest 9-month readings in our 50-year history.

Looking at our export volumes. After adjudging the PSA contract that was expired in 2017, our export volumes were in line with the same period of the previous year. And that was despite the difficulties in the passenger car segment in Europe, in general, as the consumers changed their preferences from C SEGMENT, hatchback and station wagons to SUVs. And also, the switch from -- the move-away from diesel engines also affected performance of the sector in general and also the performance of FCA, which has more of a presence in this segment. But all in all, despite everything, we therefore managed to catch the performance of the previous year.

Looking at the domestic market. As you all know, following the past [ debroncement ] case in August, there was a short devaluation in Turkish lira, followed by a spike in interest rates as well. And in this environment, the automotive sector contracted by 51% year-on-year in third quarter, bringing the 9-month '18 figures to 26% year-on-year contraction.

In the remainder of the year, we expect high interest rates and also higher prices due to TL depreciation to continue to squeeze the sector. All in all, we expect 2018 to be concluded with a decline of around 35% year-on-year, which also includes the positive impact of the new taxation on the sector that will be in effect until the end of 2018.

And also, going forward, starting from 2019, we believe that being a local producer will create new opportunities for us in the domestic market, as more consumers reached our brands in this new environment of higher prices and higher interest rates.

And finally, I would once again mention the success of Fiat Egea, which has been the best-selling car in Turkey in 2016 and '17, which maintained its market share of 6.6% in 9 months, and once again, repeating its strong performance.

When it comes to the Turkish automotive industry, the production -- total production in 9 months was down by around 5% to 1.17 million units, and the main reason behind this decline was, obviously, the sharp decline in domestic demand. And in this environment, Tofas continued to constitute 20% of the industry's production, with a production figure of 237,000 units.

In terms of exports, the export volumes of the industry was down by 1.2% to 972,000 units. And again, Tofas continued to produce 1 out of every 5 vehicles exported from Turkey from its plant in Bursa.

Moving now to next page, you can see our quarterly and cumulative production figures. And here, as we can see, our production was down by 15.6% year-on-year to 237,000 units. The major reason behind this decline was again the weak domestic market, especially in the third quarter, and also the missing MCV production for the PSA, which we stopped -- which our contract had expired in 2017. And all in all, our 9-month production mix was for 55% passenger cars and 45% light commercial vehicles.

Looking at the domestic market. As you can remember at the beginning of the year, the sector place was expecting a market size of around 1 million units. And following the market volatility in the second quarter during the election period, the sector posted a 20% year-on-year decline. And in the third quarter, following the Duncan case in the United States and after seeing the highest Turkish lira devaluation on a quarterly basis, which nearly amounted to 30%, the markets also contracted very sharply by 51% year-on-year.

All in all, as of 9 months '18, the total sales in the sector was down by 26% to 460,000 units, while light commercial vehicle sales had a higher contraction due to the fact that the SME's buying compare are more sensitive to macroeconomical conditions.

Moving now to next page, you can see the monthly growth figures of the sector. And here, as you can see, starting from May, there's an accelerated decline in the sector due to higher interest rates, which is automotive sector is not sensitive to, and also higher share prices due to depreciating Turkish lira.

In this environment, Tofas has lost some market share, especially in the third quarter. And as you can see here, our retail sales volume declined higher than the market. But especially in the third quarter, most of our competitors have garage sales, like they deployed at very low prices. And obviously, there was a cutthroat competition in the sector. But as we always say, we are not part of these price wars, and we once again continue to focus on our profitability. And despite losing some market share, we've maintained our profitability as is evident from our financial performance.

In the next page, you can see the domestic market share of the passenger cars for our market. Here, as you can see for the Fiat brands, our market share was 7.8% this -- in the 9 months compared to 8.9% in the same period of previous year; whereas for our premium brands, including Alfa Romeo and Jeep, was 8.3% compared to 9.2% in the previous year.

We maintained our place in third spot, but the reason behind this market share loss was mainly the absence of Linea model that we have stopped producing in 2017. And although Fiat Egea maintained its strong performance, there was 1% -- nearly 1% market share loss for us, due to the absence of Linea.

Looking at the light commercial vehicle markets, again, we've maintained our second place. And the problem in the sector was same as we have discussed with you in the second quarter. So the CDV segment, the car-derived vehicle segment, which constitutes of Doblo and Fiorino for us, the rate of this CDV segment declined by 4 percentage points in 9 months to 50%, whereas the consumers' preference moves towards minivan and pickup models, which we are not very strong at. Therefore, all in all, although we've maintained our leadership in the CDV segment by a large share margin, our overall share in the LCV was down due to the decline in the CDV segment.

As for our total market share, as you can remember at the end of June, we were in the second position. And as I've explained earlier, we were not part of the price wars in the third quarter. Therefore, we moved back to fourth position as of 9 months '18, but by a narrow margin. Hence, we are very happy that we protected our profitability in this harsh environment.

Looking then to exports. As you can see, our performance in passenger cars were down by 12.5% in 9 months. And the major reason behind this was, again, the change in consumer preferences and the changing sector conditions in Europe in general. The switch from C SEGMENT of the hatchbacks, station wagons to SUVs, the consumers moving away from diesel engines to other alternatives were, in general, the conditions affecting the market.

And according to a report by [ asera ], the diesel engine sales in Europe in the first half was down by 16%. And considering the strong presence of the FCA group with a diesel portfolio and also lack of solutions in the SUV segment with FCA -- with Fiat brands, there was some decline in our export volume as well.

But the good thing is that like with our performance in the light commercial vehicle, which we are very happy about, as you can see, we have a growth of 1.8%, but the base year of 9 months '17 of our exports also includes around 10,000 units of Minicargos that we use to sell to PSA, and our contract has ended in 2017. So when you adjust the 2017 figure with the 10,000 vehicles we have sold, we come to a growth -- real growth of 15% in 9 months, which is much higher than the 3.4% growth witnessed in the European markets in the 9 months.

All in all, our strong performance in light commercial vehicles was tempered by the performance on passenger car, and with -- close to 9 months, with a total contraction of 6.6% in our export volumes.

Looking at our monthly performance. As you can see, as the base year effect we previously talked about, so it turned into our favor. In August and September, we posted some growth. But looking at the market conditions in Europe, we have a more conservative stance here, and we expect to conclude the rest of the year more or less in line with our export volume of fourth quarter 2017.

Looking at the European markets. As you can see, the passenger car market was up by 2.3%, and the European LCV market was up by 3.4% in the quarter. The U.K. market continued to be the most problematic market as it did in the previous year, due to the Brexit issue. While in Italy, which is the major market for us, there was some decline in the month, too, due to the elections and the uncertainties that came in its aftermath.

Our export market breakdown on the next page. As you can see, Italy continues to be our major market, with a share of 38%, followed by Spain, France and Germany.

Looking at our shipment figures. In this page, as you can see in the 9 months, our shipments were down by 16.6% and there was another 27% decline in the third quarter, amounting to 61,400 units. And the major reason for this deceleration -- by the way, as you can see, there's a gap of around 40,000 units between our 9-month 2018 and 9-month 2017 results. So roughly 12,000 of this stems from the weakness in the domestic market, while the rest is due to the absence of Minicargo shipments to the PSA group in 2018.

In terms of the breakdown between passenger car and LCVs, in the domestic market, as we have previously mentioned, LCV segment contracted faster than the PC segment due to its sensitivity to economic conditions. And therefore, our mix was 59% passenger cars and 41% LCV. But in the export markets, it was more evenly distributed relatively, with 55% share of passenger cars versus 45% LCVs. And all in all, our total shipment breakdown was 56% passenger cars and 44% LCVs.

Here in this page, you can see the breakdown of our shipments by model. Starting with the exports, as you can see in the table, our export -- total export volumes was down by 13,700 units, and the major part of this decline is attributable to the lack of 10,500 PSA shipments that we did in 2017, which was missing. There was decline in Tipo sales due to the reason I have mentioned earlier. But our performance in Doblo and Minicargo models were quite strong, with the exclusion of shipments to Opel, Vauxhaul, which will expire by the end of this year, as you all know.

And in the domestic markets, as we can see, all our growth figures in red due to the 26% decline we have seen in the market. And also, there's 5,000 negative contribution from Linea, which we stopped producing in 2017.

Looking at our financial highlights. All in all, our shipments were down by 17% in 9 months. But thanks to Turkish lira depreciation, our -- especially our export revenues remained resilient and more than made up for the contraction in the domestic market. And our consolidated net revenues was up by 11%, despite the contraction in our shipments. Our EBITDA was up by 39%, and the profit before tax, which is the main indicator for our profitability, again remained very strong, which made a 28% year-on-year growth.

In terms of revenues, as I mentioned, there's 11.5% growth in the 9 months and 14% growth in the third quarter. And here, favorable FX rates, strong euro versus Turkish lira, in other words -- more than offset the weak domestic markets.

I will speak -- skip the gross profits and operating profit pages because, more or less, the story behind them is the same with our EBITDA.

So as you can see, our EBITDA remained to be very strong, displaying 39% growth in 9 months and another 67% growth in the third quarter and hitting EBITDA -- all-time record EBITDA margin of 16.7%. Of course, this is a one-off situation due to Turkish lira depreciation, and it's not a sustainable thing, as you can -- as you all know.

And going forward, net of Turkish lira devaluation or appreciation, we believe that this company can maintain a sustainable EBITDA margin of 11% to 11.5%, and we should continue to be -- we should maintain our profitability going forward also.

Looking at profit before tax, which is the main indicator, because during a sharp depreciation, especially a depreciation as sharp as 30% in the third quarter, which is the highest amount in recent memory, which also exceeded most of the annual depreciation figures of the last decade, although what we've lost -- what we get on the operational front, we have lost on the low EBIT line, which makes up for each other.

And looking our profit before tax margins, we maintained our profitability above 7% levels. And despite the harsh conditions in the domestic markets, we still manage to post a 40 basis point improvement over the second quarter, thanks to our focus to our profitability.

And the other things that I would mention on this page is the continuous increase from 5.6% to above 7% levels in our profit before tax, which is also attributable to the value optimization program that we have started at the beginning of 2017 and which will end by the end of 2018. This is the major reason behind the continuous increase on our profit before tax levels, which is again -- once again, the major indicator for our profitability.

Looking at net profits. Again, we've established a 17% year-on-year growth to TRY 1 billion. And the reason behind the slight decline in net margin is higher effective tax rates in the third quarter.

In this chart, you can see the cumulative figures that we have spoken before, so I'm skipping this page, too.

At our balance sheet, the major items that I would like to point out is the decrease in our cash and cash equivalents, because this quarter we did not do any factoring operations as we did in the previous quarters, and that was the major reason behind the decline in our cash and cash equivalents. I will talk about this in more detail in the upcoming pages.

The other more notable items are inventory and trade receivables, the increase in them. Since most of our inventories and trade receivables are euro denominated, the increase in those items are due to a Turkish lira depreciation again.

And looking at our liabilities, there is an increase in our short-term financial loans that was due to the EUR 110 million of existing bank loans we have taken in the third quarter. And the increase in our long-term financial liabilities is again, once more, due to the euro-denominated debt that we are carrying in our balance sheet.

Looking at our financial position. As I mentioned 2 slides back, this is -- there is an increase to EUR 245 million from EUR 95 million in the same period of the previous year. Normally, we do some factoring here for our trade receivables that's very favorable, very smart. But due to the economic conditions, those favorable rates were not present this quarter. Therefore, we did not do any factoring operations, and this is the major reason why there's an increase in our net financial position. If you compare our 2017 performance with our 2018 September performance, you can see that the whole difference is due to the absence of EUR 166 million of factoring we did in 9 months 2017.

The same story is also true for our working capital. There's a decline in our euro trade payables, which is due to depreciating TPL. But on the other hand, since we did not do any factoring this quarter, our trade receivables remained stable compared to previous period, despite the lack of economic activity in the third quarter.

Looking at our investments. Our total investments in the 9 months is EUR 65 million and our expectation for the whole year is between EUR 90 million to EUR 100 million. So we should close the year close to our current guidance.

Before we talk about our expectations 2018, I would like to make some remarks on the new taxation scheme that was announced yesterday. So for passenger cars with a pretax price less than TRY 70,000, the special consumption tax was reduced from 45% to 30%. As for cars with a pretax price of TRY 70,000 to TRY 120,000, it was reduced to 35% from 50%. So all in all, if you look at retail prices, that should translate into around 10% deduction in retail prices.

And so for other pretax price cuts on other engines, there were no changes. The good news is that nearly all of the models that we are selling in the domestic markets falls into the scope of this new taxation scheme, all of our, again, models will benefit from this new taxation. There are some cars, Alfa Romeo and Jeep and the cars that we are selling which is out of scope, but their weight in our product portfolio is quite low, so you can think that nearly all of our passenger car sales in the domestic market will fall into this new scheme.

Looking at light commercial vehicles. Again, there was some new taxation that applied. So for combi model LCVs, the special consumption tax was reduced from 15% to 5%, and VAT was not changed. And this translates into roughly 9% decrease in the retail prices. So for cargo vehicles, cargo model vehicles, the special consumption was maintained at 4%, whereas the VAT was reduced by 17 percentage points to only 1%. So this drop will translate into a 15% decline in retail prices.

And if you look from Tofas' share perspective, around 70%, that's 7-0, of our LCV sales are combi, around 17% are -- falls into the scope of cargo and the other LCV, which we mean like Ducato, Fullback and Pratico models that we sell, had a weight of around 13% in our product mix.

So following this new taxation scheme, we've also made some revisions to our expectations for 2018. Our domestic light -- our expectations for light vehicle sales for 2018 is between 600,000 and 650,000 units. And this amount also takes into consideration the new taxation. And in this environment, we have reduced in line with the reduction in the domestic market, we have also reduced our retail sales expectation to 60,000 to 70,000 units expected from the previous 90,000 to 95,000.

And for exports, we have made a very -- as you can remember in the second quarter presentation, we said that we would mostly aim for the lower end of our previous guidance of 270,000 to 290,000. So we've reduced our expectation to expect from between 260,000 and 270,000 units. And in line with those reductions, we have also increased our expected production volume to 310,000 to 330,000 units, which roughly translates into a capacity utilization rate of 70% for the full year.

And also looking at our investments. We've also -- due to the current economic conditions in the market, we have postponed unnecessary investments, like structural investments in our factory, and thus reduced our net CapEx forecast expectation for 2018 to a figure between EUR 90 million to EUR 110 million.

So this final page concludes our presentation. We can start the Q&A session.

[Operator]

First question comes from the line of Bespalov Vladimir of VTB Capital.

[Vladimir Bespalov, analyst]

Congratulations on your anniversary. My first question is definitely on margins. The question that I have is, as Erman mentioned, this margin is not sustainable. But to me, when I look at it, it doesn't even make much sense in terms of estimating the company's cash flow generating ability, which always is the case for the EBITDA. Maybe -- I understand that this is driven by FX things, but maybe you could walk us a little bit through how you book your revenues, how you book your costs and how this is associated with cash flows. Because there was a pretty significant cash outflow during the quarter, so if you could provide more color on this so that we understand. And the -- like as a follow-up to this, if we assume that the lira is stable, let's say, or stronger in the fourth quarter, does this mean that we will see in the next quarter financials margins going down quite significantly?

[Fabrizio Renzi, executive]

Okay. Fabrizio Renzi speaking. First of all, let me once again remark that this EBITDA is not a sustainable EBITDA, because the sustainable level for us is around 11.5%. As we mentioned before, the major effect come from the FX and, in particular, the sharp devaluation that we observed in the third quarter. Take into consideration that what happened in the third quarter is a devaluation of around or above 30% in 3 months. But if you want, the major effect was in a few days in August. When this happened, the reaction, or if you want, the effect on the revenue and the effect on the cost has a different timing. So this different timing, the revenue and the costs, react or register the devaluation, make this effect on the EBITDA. So let me say, more sharp is the increase and more we have these effect on the EBITDA. On the other side, on the FX below -- the FX effect below the EBIT compensated positive effect that we have in EBITDA. So the right way to look at our results, as we mentioned several time also in the last meeting, is the profit before tax. As you can see, the real performance, if you want to measure our real performance, you need to move to the profit before tax, where you can see that 7.4%, 7.6%, it's above the previous quarter, the previous year. But when there is a sharp devaluation, the EBITDA is not the right way to measure our performance, if you want. So please, move to the profit before tax. This 04% more that we can observe, compared to the previous quarter, is the effect of our real performance, our cost reduction project, our optimization project. And this is the way we are following our improvement in the period and in the coming period.

[Vladimir Bespalov, analyst]

Okay. And on the fourth quarter, if we see stronger lira, which is the case now, so -- and then if we look at EBITDA, can it go down quite significantly, the margin, I mean?

[Fabrizio Renzi, executive]

Quite significantly, no. But the most important thing is how sharp is the increase or the decrease, in my view. So if the depreciation of the devaluation will continue, but in a linear way, we will come back to our usual EBITDA, okay? I don't see the possibility to have a margin below this 11.5%. That is the sustainable one. Sustainable one means without big impact of the devaluation.

[Vladimir Bespalov, analyst]

Okay. My second question would be on the outlook for the Italian market, which is the most important. Probably, you discussed this with the FCA. How do you see the outlook for this quarter and, maybe even more important, for the next year? Do you see any threats coming from that part or any risks related to this market?

[Fabrizio Renzi, executive]

First of all, let me come back to the result of the first 9 months that, for me, are not so bad. Most probably, Erman was a little bit more pessimistic than me. But if we observe the first 9 months, and we exclude the effect of the MCV for PSA, we are there. So on total, we commented a drop of 6.6%. But if we go into detail, and if you want, you can have a look to the Page 19, without the effect of the MCV PSA, we are there. So we are 2% less. So let me say, in the first 9 months, this ratio was not so bad, generally speaking. Maybe we can observe a decline in Tipo, but an improvement and increase in Doblo. But overall, it's not bad at all, the performance in the first 9 months. So this is the reason why in our guidance we are forecasting a last quarter similar to the previous year, and this drive us to the 260k that is our guidance for the export. For the next year -- okay, usually, when we speak about export, my view is flat estimation. Because this year, the European market is growing a little bit, to 3%. In Italy, we are experiencing -- we are facing some problem, political problem mainly. But generally speaking, the European market is flat. So next year, might be we will see some recovery in Italy, might be we're able to see some recovery in Great Britain. But overall, I expect the expectation is for a flat export for Tofas.

[Vladimir Bespalov, analyst]

That is clear. And one more question that I have on the latest changes of -- on taxation issues. My question is, would you be required to lower prices following these cuts in taxes or this will go like to your margins in fourth quarter?

[Cengiz Eroldu, executive]

No. We will -- Cengiz Eroldu is speaking. So we will apply the, let's say, tax rates. And we are not keeping -- we are not targeting to keep this tax reduction on our side. So we will reflect to the customer.

[Operator]

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

[Muneeba Kayani, analyst]

Muneeba from Morgan Stanley. Wanted to understand, given the consumer preference changes that you've talked about in Europe, are you thinking about investments in an SUV version of the Tipo, as well as kind of moving away from diesel engines? That's my first question. And secondly, if you could talk a bit about the dividends. Clearly, large FX impact in the earnings so far, given the lira moves. What are your options could you be using possibly reserves to pay out dividends? Or should we just be thinking about it from the tax financials?

[Fabrizio Renzi, executive]

Okay. Let me start from the second question. Our dividend policy remain the same. So technically, at Tofas, we are ready to remunerate the shareholder as much as possible. But so far, we didn't receive any specific instruction. And as you know, this will be discussed during the board and the general assembly. But we are ready to distribute as much as possible. The distribution is based not on the result that we are analyzing today. That is the IFRS result, but will come from the statutory and fiscal result. But technically, we are ready to continue with our policy to maximize the dividend. Let me introduce 2 additional topics that might be -- is important to highlight for the 2019. First of all, in the second part of the year, we are going to restart investment for the product for the next generation of Doblo. So most probably, in the second part of the 2019, we will have new financial needs. And on top of that, we have to be careful because the interest of the -- to finance the next products -- projects will be -- might be more expensive than in the past. So this is the reason why I believe that the Board of Directors and the general assembly has also to take into consideration this part. About the SUV, okay, generally speaking, so I don't have any information about the SUV. You also -- you asked exactly one specific model. I'm not able to comment any news about the future of the SUV. But generally speaking, what I can say is that the FCA and the new top management of FCA is reviewing a little bit the plan that was presented in the Capital Market Day in June. So what does it mean? This doesn't mean that all the previous plan now is canceled, but FCA is reconsidering some position about, for example, the diesel engine and the future of the diesel and is reconsidering also the possibility to develop other model, like the one that you are mentioning, so if it is possible to develop a SUV. And more than this, I cannot say in this moment.

[Operator]

The next question comes from the line of Mr. Demirtas Cemal with Ata Invest.

[Cemal Demirtas, analyst]

My question -- my first question is related to your balance sheets. When I look at your equity -- total equity number, we see a decline because of some production loss from your cash flow risk, and it looks like it's very significant. And when we look at your profitability, we see income in the income statement. But when we look at the overall balance sheet effect, the current changes are having a -- so currency effect looks very much negative. Could you further elaborate these details?

[Fabrizio Renzi, executive]

Okay. The explanation of the equity reduction is technical and is linked to the hedge account that we apply on the financial liability. So I don't know if you had a chance to comment in the previous meeting, that on our financial debts on our loan, we apply a cash flow hedge that generates a negative impact on the equity. I don't know if, Devran, you want to add something to that on your current explanation.

[Devran Aydin, executive]

It's -- since our investment loans are hedged, under hedge accounting principle, when the FX rate goes up, we account our FX loss under the equity. So this is the main reason behind that.

[Cemal Demirtas, analyst]

So is there a critical currency level that could technically have some further pressure on your equity level? Or does it balance it out at certain level? How much could it go down if Turkish lira depreciates furthermore?

[Cengiz Eroldu, executive]

But I think Cemal Bey, so what we had in the last months was one of the peak points. So of course, there is no limits. If the euro will be TRY 100, then we can have also a negative equity as a result. But also with only this kind of variation, maybe we are showing a strong balance sheet. So the impact on the Tofas balance sheet of this kind of sharp -- is a sharp devaluation, is very limited. And also, we improved in total our profit and losses. So this is also showing how Tofas is a defensive share in the Turkish market.

[Fabrizio Renzi, executive]

Let me add something. So the number we are seeing, TRY 2.9 billion, is the amount at the end of September, with an exchange rate of 6.9. So basically, today, we are at different exchange rate. So if you want, this effect is partially now recovered. And we will see by the end of year, this number, that of course is -- it depend from the impact of the exchange rate on the cash accounting technicality.

[Cemal Demirtas, analyst]

My second question is related to the outlook for 2019. How -- do you need to -- do we need to take some action on the cost sides for 2019? Because we experienced in the past, you had more difficult times, and you passed through very successfully, as I remember from old times. And how do you see the outlook for 2019? And how comparable with the previous down markets from your previous experience?

[Cengiz Eroldu, executive]

But actually, for the next year, it is important, the level of the local market. As you know, in the Turkish market, we are the most local company. So 90% of our sales in the Turkish market are from our local production. So for this reason -- and after also the incentives declared yesterday afternoon, so this can change a little bit the picture in 2019 also. Because although they said that the incentives will be valid until the year-end, but our expectation is the continuity of these incentives until a certain level of market. As you know, in March, we will have also local elections. So what we believe is that this kind of incentives can continue also next year. But of course, for the local market to reach the precrisis yearly volumes, it will take some couple of years. As you said in the past also, we experienced such a period in 2001 and in 2009, and the comeback was more than 2 years after. So this kind -- we should also be ready also, this kind of lower market also next year, compared this year. From the cost perspective, it's also delicate issue because Tofas is not a short-term-looking company. So also, we should protect our competencies, but we will find the right size of the company for the coming year. I see most important, the survival of the network because now also, our -- in Turkey, the dealer network is in a certain level of difficulty because their business also now is going down. So on the one hand, you should be careful with our costs. But also from other hand, you should protect our network, and this will be the important challenge for the next year.

[Operator]

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

[Osman Memisoglu, analyst]

My questions are mostly related to cash flow. One is on CapEx cycle, and one is on working capital trend. Going forward, how should we expect -- you talked about factoring. But is that going to be available in the fourth quarter or parts of '19 -- 2019, assuming rates stay around here? And then going back to CapEx, can you give us any idea on next year's CapEx, maybe even following year? I'm trying to have the, I guess, the latest version of your CapEx cycle, maybe some color on CapEx for the new Doblo, those kind of things.

[Cengiz Eroldu, executive]

First of all, regarding the working capital, part of the factoring, we can say that we have some small increase on our CBU inventories, but it's now between incentives in the local market. I think we will fix this kinds of inventory level in November and December. So because for us, our important part of the value, also the coverage day of our inventory on the direct material side. So our inventory days are unchanged only, of course, we are seeing an increase on inventory in Turkish lira terms. But when you see in euro terms compared with June 2018, in fact, we had a decrease, and this is also normal. We have the same inventory days. But of course, we have the impact of the -- of our stocks' currency. So also, we will see some, let's say, benefits in the last quarter from our stock currencies. So this also will improve, I believe, also in the last quarter, the company financial numbers. So I don't see a problem -- particular problem on the inventory side. In the meantime, also, we are not pushing so much inventory on the dealers. Because also, now they are very a little bit about their businesses. So not everybody is looking for the working capital issue. So also, we are -- as I said before, also, in one hand, we're also trying to protect our network and protect also them from the high stock problems, so because we are much more robust than them. But we will -- I don't see -- as I said, I don't see any issue on the working capital side.

[Fabrizio Renzi, executive]

Yes. I don't see any problem. So the cash generation continue to be very positive for me. So also, if we have a look to the number of the first 3 quarter, if we exclude the dividend payment and if we exclude the also the repayment and the fact that we closed the position of the factoring, the cash generation is very positive. So apart this particular attention of the inventory, to reduce the inventory, I don't see particular problem in term of cash generation.

[Cengiz Eroldu, executive]

Regarding the investments, of course, we have 2 type of investments mainly. One, first part, we can say the structural investments. That is we have a certain level of plant, and we should -- we continue to invest on the plant side. And in the meantime, we are also investing to solve our costs and quality problems. And also, we are investing on the efficiency side. The other chapter are the product investments. The chapter one, next year, we will try to spend only the must issues because now the value of the money is important also. So we will try to postpone the structural investment in order to benefit from the high interest rate in Turkey. But of course, from -- when you see the product side, we will continue to invest. So next year, hopefully, we will start to see the new-generation Doblo investments, as Fabrizio said, at the second half of the year. But of course, this is -- as you know, the first year investments at the half year are not huge amounts. So I can talk about TRY 40 million, TRY 50 million mainly based on the R&D -- in the studies. So for this season also in next year, we are not forecasting huge investments.

[Osman Memisoglu, analyst]

Is there a total figure broadly, roughly for the Doblo investment?

[Cengiz Eroldu, executive]

But not -- this is not defined yet, because we are working on the different item that is different versions, different content. But as you know, a certain brand-new car investment requires minimum of EUR 500 million.

[Osman Memisoglu, analyst]

And coming back to the working capital, if I may just for one moment, do you see any issues with your suppliers? How are their financial health, you think, particularly when funding is really challenging? And also would that cause any risks to the working capital, i.e., maybe you need to lower your payable days to support them?

[Cengiz Eroldu, executive]

That's important point, what you said. Now also starting from September, we are following closely our supplies -- supply chain. And not only our first year, but also we should be careful with the second year's suppliers now. Because as you know, there's a different level of suppliers in this business. So until now, we are not facing a bit important problems. Regarding the payments, of course, if the -- we are looking case-by-case. In some cases, we are also making some down payments. So because the suppliers are important...

[Fabrizio Renzi, executive]

Value.

[Cengiz Eroldu, executive]

Value for us. So for the sustainability of business, we should also protect not only the dealers, also the suppliers. So we are very cautious about it. And we -- hopefully, we are not seeing a problem for the next year.

[Operator]

Our next question comes from the line of Kilickiran Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

I have questions about this investment in 2019 as well, the new-generation Doblo. So I just wonder if there's any chance of an electrical vehicle inclusion to this investment? And is there any cost advantage in Turkey to produce the electric vehicles versus Italy, for example? I mean, can you please guide us? I mean, give us some opinion. And the second question is that I was looking into FCA results. Actually, they report quite good numbers versus the expectations, and they had a very good momentum in the U.S. with the RAM brand. And during this renewal process, do you think that you may have a chance to get higher volume for RAM? And the final question is that they were expecting to get rid of the inventory in the fourth quarter as well. So could that be a good sign for your exports in 2019?

[Cengiz Eroldu, executive]

Starting from the -- you asked Doblo, if there will be Doblo electrical car, right?

[Hanzade Kilickiran, analyst]

Yes, electric version of the Doblo. I mean, is there any cost advantage of Turkey, I mean, in this particular product? Because I don't have the data, so I don't know if it is reasonable to produce a EV car in Turkey or in Europe. Maybe, I mean, that's not option, but I try to understand. And second, I understand that you already agreed something. So is there any -- I mean, do you see some sort of upside from the NAFTA region, particularly for RAM brand?

[Cengiz Eroldu, executive]

But first of all, so now, still, we are working on Doblo project, and we are not -- we didn't conclude the agreement and the content, and the structure of 2 project is still open issue between us and FCA. But looking the compliance condition in the -- it's still an open issue between us and FCA. But looking the compliance condition in the Western European market, of course, the presence of Doblo electrical version will be very important and will be very helpful to fight in the European markets. So we are working, but there will be a probability that Doblo will have the electrical version. But as I said, not defined finally yet. Regarding the production of electrical vehicles in Turkey or somewhere else, I don't see any advantage for a moment, because, as you know, on the electrical cars, the big portion of the cost is coming from batteries and the electric engine. So unfortunately, those 2 important elements are not produced in Turkey yet. So of course, in the future, if in Turkey, we will see -- so we know that last year or at the beginning of this year, Zorlu Group made a declaration of a battery plant in Turkey, but I don't heard after that declaration any news about if they started to build the plant or still everything is on the paper for a moment. But of course, if the -- so Doblo will continue to produce in Turkey. And also, there's a better version. It is better from the logistic point of view to continue to produce in Turkey. But I don't see any advantage of producing an electrical car in Turkey or in Europe.

[Hanzade Kilickiran, analyst]

Okay. And do you see any opportunity for the U.S. market or NAFTA region on RAM brand?

[Cengiz Eroldu, executive]

But as you know, so our export to NAFTA region is limited. So yearly, we are exporting around 15,000 to 20,000 per year. Of course, the RAM brand is a brand which is also trying to enlarge its area of control. So also not only on the NAFTA, but we can see also some RAM cars in the South American markets. So we are also expecting improvement on the Doblo NAFTA figures or the Doblo RAM figures, but I don't think we are going to double our export volumes.

[Hanzade Kilickiran, analyst]

And the final question is about export guidance. I know that you mentioned like that it will be reasonable to assume something flat exports in 2019, and FCA was giving a guidance that they can get rid of the inventory in the fourth quarter this year. So I mean, is it reasonable to assume at least a flat export volume guidance in 20 -- I mean, flat volume estimate for 2019 minimum? Or we can put something on top of that?

[Cengiz Eroldu, executive]

We can't take it because also flat means that we are recovering 15,000, 20,000 of Doblo GM now, because as you know also, 2018 was the last year of Doblo Opel agreement. So until now, if I'm not wrong, we produce around 15,000 of cars end of September. So to keep flat means that we are also -- we will try to cover also Doblo Opel volumes next year.

[Fabrizio Renzi, executive]

Yes. On top of that, the Italian market is the only one that is negative in 2018 for political reason. You know the new government appointed and the discussion that is going on with the European community. But it's not impossible to assume that maybe next year, the Italian market will recover something, because this year is 3 points less, but there is space for some recovery in the next year. So could be, could be. The assumption is not absurd.

[Operator]

We have a follow-up question from the line of Mr. Bespalov Vladimir with VTB Capital.

[Vladimir Bespalov, analyst]

My question is on domestic pricing. How much of the lira of depreciation has been reflected in your domestic prices so far? And do you see like scope for further increases here? And the other thing is, could you share maybe what is the share of local content in your production costs? And what is the share of FX denominated costs?

[Cengiz Eroldu, executive]

But reflection of the exchange rate is changing every month in Turkey nowadays, as you know. But what can I say? Until now, we increase our prices, around 40% overall. So nowadays, also Turkish lira euro level are there. So we can say that until now, we recovered all the exchange rate in our prices, not only us, also the market. So also in Turkey, the average market price increase was around, let's say, 40%. But until now -- so after August, the important part of the transaction are coming from the cars on the company stocks. So new produced cars with the new price list are very limited still in the Turkish market. So for this reason, I think also for November and December, I personally waiting that also still some important portion of the sales will continue to be existing inventories. And the production -- because also the flexibility from production to serve, let's say, from at the end of October to markets for the November and December, it's not easy for all players. From this perspective, we are much more flexible than all others. As you know, we are the only locally passenger car and light commercial vehicle producers in the Turkish market. So our response will be much more quicker than the others. But of course, it will depend also on the inventory levels of the other players in the market. So from the cost recovery point of view, I can say we and also market is okay. So as average, all the players, we can say that they reflect it in their prices the impact of exchange rates. Regarding our cost structure, what we are purchasing in the -- in Turkey is around 50% of our costs. But of course, don't forget that also in -- Turkey is not the country of any raw materials. So also local suppliers, they are obliged to purchase their raw materials from abroad. From this perspective, the real localization percentage in Turkey is lower than 50%.

[Operator]

The next question comes from the line of Kurbay Berna with BGC Partners.

[Berna Kurbay, analyst]

I have 2 questions. The first one is about the profit before tax margin. You mentioned that, that would be the more relevant metric to measure performance with. And in the last quarter, it was 7.6%. And in the first 9 months of this year, you've achieved 7.3%. I was wondering if you view this as a sustainable level somewhere around 7.5%, would it be sustainable going forward? Also taking into account, the fact that you're probably receiving more on the take-or-pay agreement without production this year, and that will go down perhaps going forward. That's the first question. And the second question is about the remarks that you've made about the inventory level at the dealers. As far as I understand from the numbers, and it has become very clear with your comments, your retail sales actually are higher than your wholesale shipments to the dealers, apparently in an effort not to overwhelm them. So where do you see the dealer inventory at this point? How many months of coverage do you think they have? And assuming that these tax cuts help, would it be possible to see higher production for the domestic market on your end for next year?

[Cengiz Eroldu, executive]

But your question is mostly directed for this year, so how we are going to end this year? But I understood from the local market wholesale business, you are right. So until the end of the September, our wholesale figures were very low and were very limited. And mainly, the retail sales were coming from the network stocks. But with the new taxation scheme and when I compare the network stocks, they have the half month's stock now. Because at the end of September in our network, the total stock level will be around a maximum, less than 4,000 cars.

[Fabrizio Renzi, executive]

3,000.

[Cengiz Eroldu, executive]

So this means that now with the now incentives, we will continue with wholesale to the dealers, because they don't have a stock. So they use their stock during the August and September and October also. But in the meantime, also October was a weak month, like September. So also, we will see a couple of days the market results, but we'll be at the level of September figures. So for this reason, this also will help our performance at the second -- last quarter because our wholesale performance will increase in local market, compared to the third quarter. PBT, your question regarding the PBT.

[Fabrizio Renzi, executive]

The sustainability of the result that we reach...

[Cengiz Eroldu, executive]

But as of now...

[Fabrizio Renzi, executive]

7.6.

[Cengiz Eroldu, executive]

To give a precise figure is not easy. Of course, it's a company management. So every year, we are trying to improve our numbers, meaning our PBT numbers. So something below 7%, I believe, is the -- should be our common target.

[Fabrizio Renzi, executive]

Let me add that we didn't mention before, but we continue with our cost optimization project. That is going very well. So also, this year, like in 2017, a target that we are going to achieve is a saving on the material that is about EUR 200 per car. So this is a target achieved in 2017 and that we are going to achieve this year. In term of cost efficiency project, let me mention also another item. So we are going to increase continuous the efficiency in the plant, if you consider that we are maintaining the same daily production without replacing the turnover. With -- so with the reduction of the headcount, normal turnover. So both of these projects will give us the opportunity to maintain a high level of profitability before tax. As Cengiz said, we cannot guarantee 7.6, but we are there. For next year, you mentioned the duration of the contract with Opel and the impact on the take-or-pay, but we will see. Of course, we have in mind some action in order to compensate the reduction of the take-or-pay. And so we will see in 2019, but we are confident that we will be able to recover also this negative impact.

[Berna Kurbay, analyst]

If I heard correctly, you said that you're targeting something below 7% or around 7%. Cengiz Bey, I think I missed that part.

[Fabrizio Renzi, executive]

What is it you've said?

[Cengiz Eroldu, executive]

Above 7%, I said.

[Berna Kurbay, analyst]

Above 7%, okay.

[Fabrizio Renzi, executive]

For this year, of course.

[Cengiz Eroldu, executive]

Yes. But as you know, when we are talking with the investors, we are always -- as a company culture, also, we are not so aggressive. So we always want to stay at the conservative side. But every time also, we are improving our numbers. You are following us, I don't know how many years.

[Berna Kurbay, analyst]

Yes, that's very true.

[Fabrizio Renzi, executive]

So we are working on that.

[Cengiz Eroldu, executive]

Don't worry.

[Berna Kurbay, analyst]

No, I'm not worrying at all. And just on the dealer issue that you mentioned, so you're -- the difficulties on the dealer level that you were referring to before was what you observed in the third quarter, which is why you lowered shipments to the dealers. But at this point, as of the end of October, you're saying that the dealer inventory levels are already low enough that you will now be accelerating your wholesale shipments, given the tax cuts. So...

[Cengiz Eroldu, executive]

Because as I said, they have half a months of all stocks to cover November sales.

[Operator]

Ladies and gentlemen, 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]

Thank you. So dear all, thank you very much for your attention, for your timing. We appreciate also the -- your question and interest that you're showing on our company. And so I thank all of you. Good evening, and see you. Keep in touch for the next meeting in January.