Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gaily, 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 fourth quarter 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, operator. Good day, everyone, and thank you for joining us in this fourth quarter and full year conference of Tofas. Before to leave the stage to Erman Tütüncüoglu for the presentation, I would like to recall the 2018 and what kinds of problems we faced during the year. It was a very challenging and demanding year. We experienced many, many issues. After a first quarter positive and encouraging, we had a lot of economic and financial trouble to face: so political election in June, then the sharp increase of the exchange rates, the sharp increase of the interest rate, then -- and finally, a positive impact due to the incentives. These are the main factors that make this year very, very demanding and challenging. So I hope you could appreciate our results and our efforts. So waiting for the Q&A. I will invite Erman to go on with the presentation.

[Erman Tütüncüoglu, executive]

Thank you, Mr. Renzi. Welcome, everyone, and good evening from Istanbul. You know the flow of our presentation. We'll, again, start with the highlights of the period, take a peek at the Turkish automatic industry. We will review our production performance during the year. We will look at domestic market development and how Tofas fared in this environment. We will then jump up to the international market and, again, we will review Tofas performance in this market. We will continue with our financial performance for the quarter and for the full year. We will review our investments that we have undertook in 2018. And finally, close the presentation with our 2018 expectations and our guidance -- 2019 expectations, I'm sorry.

So as you know, 2018 was a major milestone for us. We have celebrated the 50th year of our foundation, and we are very happy to close the year with all-time record levels in net revenues, EBITDA and consolidated net income. To recap, we closed the year with TRY 18.6 billion net revenues, which was up by 11.5%; our EBITDA was TRY 2.5 billion, up by 24%; and finally, our net income was TRY 1.3 billion, which also showed 4% year-on-year improvement.

Looking at the headlines. On the export side, our export shipments were down by 9.9% on a yearly basis. But as you know, 2017 was the final year for our PSA contract. And when you adjust the figures with this, our like-for-like growth for the year stands at 4.9% yearly contraction. And when we dissect our performance within LCV and passenger cars, you can see that we had posted 6% like-for-like growth in the LCV segment, which was above the growth of around 3.5% in the European market. But on the passenger car side, we experienced some problems mainly due to the change in consumer preferences. As you know, the consumers in Europe are moving away from diesel engines due to environmental worries and also the preference of the consumers are changing towards SUVs from hatchback and station wagon models in the C SEGMENT. And these were the major factors that squeezed our export shipments. And also in the fourth quarter, the WLTP transition effect made an impact on all the European markets, and we have observed 8% year-on-year decline on the European market, which also made a major impact on our shipments.

Looking at the domestic markets, we have seen 52% year-on-year contraction in the fourth quarter, and the contraction figure was up to 80% in October. But thanks to the incentives offered by the government in the last 2 months of the year, the contraction levels eased to 40% level, and all in all the year was concluded with 35% contraction. Especially in the fourth quarter, we have managed to increase our market share in this environment. And thanks to appreciating Turkish Lira, our pricing curve was ahead of our cost curve, and we have increased our activity in the domestic market without sacrificing from our margins, and concluded the year with a very good market share without losing profitability, as I mentioned.

We have maintained our second position with our Fiat brand in 2018, and Fiat Egea has been crowned as the best-selling passenger car of Turkey for the third year in a row, obtaining 7.5% market share in the passenger car segment -- total passenger car segment, which marks a 90 basis point increase.

On the next page, we can see the Turkish automotive industry. And as we can see, we have -- the total production in Turkish industry was down by 8.6% to 1.55 million units in 2018 and that was mostly due to the contraction in the domestic market. As you know, 90% of our domestic sales -- more than 90% of our domestic sales are locally manufactured vehicles, which is a very high -- which is the highest amount in the sector, and therefore the contraction in the domestic markets caused our overall share in Turkish production to decline. And when we look at exports, again, there was 1% decline compared to the previous year with 1.3 million units. And since we are the only company in Turkey that is both producing passenger cars and light commercial vehicles, the WLTP transition effects, which only hit the passenger car segment, also caused our export share to decline in the fourth quarter. But overall, we are happy to report that out of 5 -- every 1 out of 5 vehicles exported from Turkey originated from our plant in Bursa.

On the next page, you can see our quarterly performance of our production. And here, the second half of the year was negatively affected by the sharp decline in the Turkish domestic market and also the absence of MCV shipments to PSA played a role here; and finally the WLTP effect on the passenger car segment. And all in all, we closed the year with 302,000 units, which marks a 21% decline. Our mix was 56% passenger cars and 44% light commercial vehicles.

Moving now to domestic markets. We closed the year at 35% decline. The decline in light commercial vehicles was higher because since those are sold to the SMEs then there is downward trend in the macro economy. The LCV segment is the first to get hit, and this was the [ lowest ] levels across the year. The light commercial vehicle segment was down by 42% and the passenger car segment was down by 32%.

Looking at the monthly performance of the markets, the decline started after June, and it gained pace in August due after the [ pastor Brunson ] case and the political instability we have experienced with United States. As you know, the Turkish lira depreciated sharply, the interest rate, which is the number one thing. This is affecting the automotive segments -- automotive sector in general in Turkey and made its impact. And in October, the contraction in the market was up to 80%, but luckily the government intervened with incentives. And following the incentives, the contraction eased down to 40% level, but still high interest rates is the major challenge this sector is facing at the moment. Roughly 80% of retail sales in the Turkish automotive segment are done via financial loans, and this effect continues to squeeze the sector despite the brief relief offered by the incentives.

On the next page, you can see our domestic sales performance. As you can see, starting from August, we have increased -- decreased our activity in the sector because especially the importers were trying to get rid of their inventories and they were holding substantial discounts starting from August, and we did not partake in these price wars and continued to focus to our profitability. But as Turkish Lira appreciated starting from mid-October, we have started to increase our presence in the domestic market again. And thanks to appreciating Turkish Lira, our price curve was once again ahead of cost curve. And with decreasing share presence of the importers, we've managed to increase our market share in November and December. From what we are observing, people are focusing -- are seeking more value for their money, and our products offer a perfect solution here. And I am happy to report that we have maintained a strong performance in January as well with strong partnership figures.

Looking at our performance among the segments. This year, we have maintained our third place in the passenger car segments with 8.6% market share, up by 10 basis points. But of course, in 2018, Linea was missing from our mix because we had stopped producing them at the end of 2017. But luckily, Egea's performance more than made up for this, and Egea concluded the year as the best-selling car of Turkey for the third year in a row with 7.5% market share, up by 90 basis points on a yearly basis. And including our premium brands, our market share was 9.1% in 2018 in the passenger car segment, up from 8.9% in 2017.

On the light commercial vehicles side, you can see there is decline in our market share; also we have protected our second place in the sector. There were a couple of reasons that caused this market share decline. Number one was the increased demand for minivans, like Mercedes Vito and Volkswagen Transporter, and those vehicles were demanded by Uber drivers and cruising companies, who were [ transferring fleet, which obviously would have formed a market share ] as you can see. Mercedes' market share was up by 2%, thanks to the success of its Vito model; and also Volkswagen enjoyed market share gains with its Transporter model. And on top of that, there was also the impact of the scrap incentive on CDV sales. As you know, the scrap incentive says that we have to buy the same scrap of vehicles that we were scrapping, and vehicle has to go older than 16 years old. But since we are the pioneers of the oldest model vehicles in Turkey with our Doblò back in early 2000s, most of the Combi model vehicles were not eligible for the scrap incentive. And due to that, after the scrap incentive, the price of low-ranked passenger car and the Combi vehicles were nearly same and that loss caused us to do some Combi model light commercial vehicle sales. And all in all, the share of the CDV segment, that holds the leading position with our Doblò and Fiorino models, declined by 4.5 percentage points during the year to 50%, and these 2 things were the major reasons why we lost market share in the LCV segment.

Our overall market share we have, again, maintained our strong position, maintaining our second place. And also we have increased our passenger car market share. The decline in LCV sales and also the rate of LCV in the overall Turkish automotive market caused us to lose some market share, but as I mentioned we are maintaining our strong position at the second place.

Looking at export markets. There was 2 sides of the coin, light commercial vehicle and passenger cars. In passenger car segment, our growth -- like-for-like growth was 6% excluding the mini cargo shipments for PSA in 2017, which was around 14,000 units, and we nearly doubled the European market growth on that segment. But on the passenger car segment, there were environmental efforts of consumers, which caused them to move away from these vehicles, and also increasing demand towards SUVs continued to squeeze our shipments in 2018, and in the fourth quarter the WLTP transition, which caused European passenger car markets to decline by 8%, also made a negative impact here. But all in all, the 4.9% like-for-like decline is a reasonable figure for our exports, considering all the hardships that we had endured throughout the year.

Looking at the European markets. The light commercial vehicle segment continued to grow on low-single-digit figures. And on the passenger cars, the WLTP effect brought down the 9 -- around 3% growth in the 9 months to a new growth in the full year. And of these markets, United Kingdom continued to be the weaker performer due to Brexit issues, and also there were some difficulties in the Italian market as well due to issues regarding political instability and this also was negative for us as you know Italy is the hub for major export markets.

Looking at our export breakdown. We observed increase to our shipments to United States and Canada with our Doblò, also among our RAM ProMaster in those markets. And also our performance in the MENA region is increasing, thanks to the strong performance we have displayed in Morocco and Egypt throughout the year. And overall, Italy, Spain, France and Germany remain the strongest portion of our exports.

Moving on to shipments. In the full year, our shipments were down by 21% and the major portion of this came from the lower domestic sales. We lost around 60,000 units on the domestic market due to the sharp contraction in the domestic demand. And also the lack of PSA -- Minicargo shipments to PSA played a role here along with declining passenger car shipments in the fourth quarter due to WLTP.

All in all, the mix of our passenger car and LCV was 62% for the passenger car in the domestic market versus 38% LCV; and 55% passenger cars versus 45% LCV in the exports market. And all in all, we were on the spot, 56% to 44% in favor of passenger cars in 2018.

On the next page, you can see the shipments by models. And starting from the exports side of the -- nearly 27,000 units we have lost in 2018, most of them come from the expiry of Minicargo contract in 2017, which is around 14,400 units. And also another point would be the decline on the Opel, Vauxhaul shipments. This was the final year of our contract, and we did not make any shipments in the fourth quarter and that was the second contributor to our decline. And also Tipo model was -- Tipo model shipments also affected negatively from the change in consumer preferences in the European markets. Of course, on the bright side, Doblò performed very good in the European markets, and also our shipments to the United States increased, thanks to increasing demand.

Looking at the domestic markets. As you can see, we have lost around 7,000 shipments due to the phase out of the Linea model. But Egea maintained its stellar performance in 2018 as well, and our CV shipments were affected -- negatively affected by the decline in demand in the domestic market.

Looking at our financial performance. The major highlight is that despite the 21% decline in our shipments, thanks to our take-or-pay contracts and also the weaker Turkish Lira against euro, the reflection on our top line was minimal and we still managed to conclude the year with 7% growth.

On the EBITDA part, we continued to benefit from the depreciating Turkish Lira in the full year, and we have concluded the year with 24% growth to TRY 2.5 billion. On the profit before tax, we have maintained last year's profitability and increased our PBT by 5% year-on-year to TRY 1.3 billion.

On the revenue side. The full year revenue was up by 7% to 8.6%. And in the fourth quarter, as you can observe here, the major decline came from the lower demand on the domestic market, but thanks to the take-or-pay contracts, our export revenues remained strong in the fourth quarter as well and in the full year we have benefited from the depreciating Turkish Lira.

I am skipping gross profit and operating profit slides because those have the same story -- more or less the same story as EBITDA.

So looking at our EBITDA margin performance, we concluded the year with 13.4% EBITDA margin, which was mostly due to the depreciation of Turkish Lira, which made a positive impact on our export margins. Of course, after a long period, we have seen 13% Turkish Lira appreciation in the fourth quarter and that made a negative impact on our export margins, but we've managed to recover it by increasing our domestic profitability and also the higher amount of pay contracts exercised in the fourth quarter due to the decline in the passenger car segment over the European markets. We managed to maintain our EBITDA margin at 12.6% (sic) [ 12.7% ] on the full year.

Looking forward, we are very adamant that we can maintain a sustainable EBITDA margin of around 11% to 11.5%, net of FX movements. And considering the expected 50% depreciation of Turkish Lira in 2019, we believe that we should maintain our EBITDA margin about -- above 11.5% in 2019 as well.

Looking at the profit before tax performance. In the full year, our PBT margin was -- remained same at 7% level, and we recorded 5% year-on-year growth to TRY 1.3 billion in the full year. But of course, in the fourth quarter, there was some decline in our PBT margin and that was due to the loan position we are carrying after excluding our -- the portion of our financial loans that are under guarantee by our take-or-pay contracts. And due to this loan position, our PBT margin dropped to 5.8% in fourth quarter. But going forward, since we will not be -- hopefully, we will not be seeing the sharp [indiscernible] in the third and fourth quarters in the upcoming period, we should, again, maintain our profit before tax margin to -- close to 7% level going forward.

And finally, on the net income level. In the fourth quarter, we did write some tax income, thanks to the default tax income, and therefore the decline in our net interest margin was not as sharp as our profit before tax margin in the fourth quarter, and we closed the year with TRY 1.3 billion of net income with 7.2% margin.

This page, I'm skipping because we have already discussed the full year FX.

And looking at our financial position. In the fourth quarter, we are seeing some quarter on quarter improvement on our net financial position, thanks to the continuation of the factoring operations in the fourth quarter. And also, there is a decline in our Tofas financial liabilities as we did some financial loan pay back in the fourth quarter. But thanks to the strong cash transaction we have maintained, our financial assets, our cash and equivalents remains at EUR 396 million in the fourth quarter, similar to the previous quarter's level.

And finally, in terms of working capital requirements, there was a decline at the end of 2018 compared to the end of 2017, and that was due to lower factoring activities due to unfavorable rates in the second half of 2018.

In terms of investments, we did not have any major investments this year, and EUR 95 million for the CapEx that we have made were mostly for maintenance purposes and it was in line with our guidance.

Looking at our expectations for 2019, we prefer to remain on the cautious side for the year, especially on the domestic market. We believe that there may be upside potential going forward, if indeed we are able to absorb the decrease in inflation rate and interest rate in the second half of the year following the elections. But judging by the performance in January as well, as we have seen 59% contraction on a yearly basis, we prefer to remain on the conservative side and guidance, and other 35% decline in the domestic market in 2019 as well, which translates into roughly 380,000 to 400,000 units. And we are targeting around 40,000 to 45,000 retail sales in the domestic market. Again, in the last 2 months, the consumers are demanding more value for their money, and thanks to that we were able to increase our market share, especially in December and January, and we expect this trend continuing the rest of the year as well. So there is an upside risk to our shared domestic retail sales.

On the export side, after concluding the 2018 with 244,000 units, we are guiding to around 200,000 to 220,000 units in 2019. Number one reason would be the absence of 12,000 shipments to Opel and Vauxhaull, which will not be present in 2019. And also on the passenger car side, we expect a shift in consumer preferences to continue to make a negative impact on the passenger car segment as well.

All in all, these figures lead absolutely that we should conclude 2019 around 235,000 to 260,000 units of production. And finally, we are expecting to make EUR 140 million of investments in 2019. This also includes the initial signings for the new generation of Doblò, which we will probably start in fourth quarter, and we are hoping to make the announcement by the end of the second quarter of this year.

So this brings us to the end of our presentation. We can now take your questions.

[Operator]

The first question is from the line of Bespalov, Vladimir with VTB Capital.

[Vladimir Bespalov, analyst]

My first question would be on your export outlook. As we talked during the previous conference call, it looks like you were much more optimistic on the export market, but this time around the guidance is pretty conservative, I would say. So maybe you could provide us some color on what is behind this? How you estimate the potential of your key markets, and do you see any upside from this level?

[Fabrizio Renzi, executive]

Thank you for your question, Vladimir. So as you said, our approach for 2019 is very conservative and prudential on the domestic side, but also on the export side. So what we are assuming as a guidance is a reduction of -- from 10% to 20% of the export volumes we shipped in 2018. I know that it has been our weak point in the past period because we -- more than once, we did not respect our guidance. So this year, we want to be very conservative, and we believe that minus 10%, minus 20% could be the right way to protect, let me say, our provision. Basically, I don’t expect big opportunity in 2019 from the European market, in particular from the Italian market. I don’t know if you had a chance to see the result of the Italian market in January. So the Italian market started the year 2019 with 7% of contraction. And in this number, you have to consider that FCA, in particular Fiat, have lost more than 20%. So it's a combination of the weak market in Italy and Europe. Also the last quarter 2018 was not good, also, in Germany and other countries. So if you had a look to the third quarter, I believe that our guidance is the right approach to the year 2019. Coming back to Fiat, we are losing position as a Fiat brand, in particular, for the preference of the customer, as Erman mentioned before, more and more in Europe, in particular, in Italy, that is the most customer. Customers are switching not only from diesel to other -- to gasoline, but they are switching from the hatchback, station wagon to SUV. In this moment, we are not ready to offer this kind of opportunity in this moment. So this is the reason why our guidance is so conservative this year. On the other side, I can mention that we have some opportunities as a -- in particular in our passenger car, Tipo. The opportunity is to continue to produce a very competitive car. We have just launched -- we are going to launch 3 new versions in order to attack the markets, but in particular a good opportunity for us to be to cover this segment in Italy and Europe that Fiat now is not covering anymore with Fiat Punto. The Fiat Punto production ended last year. So in a scenario that is not so positive for me, the good opportunity could come from this segment to be covered. And another very good point is the competitiveness of our car. So I believe that we have to continue to work in this direction to offer a car that is competitive in Italy and Europe.

[Vladimir Bespalov, analyst]

And the other question is as far as I understand your current tax percent, which you're guiding, more than covered by take-or-pay contract. So even if you sell, let's say, 10,000 or 20,000 or 30,000 more, from the cash flow perspective, this will not affect you in anyway, and then the downside risks are also limited because there are take-or-pay contracts in place. Is this the right way to look at your exports?

[Fabrizio Renzi, executive]

Yes, yes, of course. What I commented is the performance of the car, but from economic point of view, you know that we are fully covered in export. Fully means excluding the Opel contract that terminated in 2018, but for the remaining part we are fully covered also in 2019. So not big issue for the economic result. Of course, it will be not too easy to cover the 40,000 vehicle of reserved capacity for Opel, but we will try to do our best. But of course, the protection of the take-or-pay is there.

[Vladimir Bespalov, analyst]

Okay. And my last question is on your talks with FCA on the new Doblò. Maybe you could update us on the status. Is the new model approved or when it could be approved? You are planning some CapEx already. So where are you currently on this issue?

[Fabrizio Renzi, executive]

You are right. We are working on 2 projects at the same time. People friendly, of course, we are thinking to prolong, but in particular to develop some new engines for the -- also for the compliance with the regulation in Europe, so we are working on these projects. These are middle-term's projects. But we are working also on the Doblò -- on the next generation of Doblò. In this moment, there are more than one option under discussion -- under investigation. So I believe that second part of the year most probably -- Erman was too optimistic, so in the second part of the year, we can announce something. So we are working on that. We cannot disclose too much things also because in this moment there are a lot of technical things under discussion. So this is not the right table to discuss this, but we are working on that, of course.

[Operator]

Our next question is from the line of Memisoglu, Osman with Bank of America Merrill Lynch.

[Osman Memisoglu, analyst]

I have 2 questions. One in the domestic market, looking at the presentation, you talked about maintaining profitability and I see your pricing is relatively -- or at least to my estimate was stronger in the fourth quarter. So is there a benefit from trading down of the customer? Are you seeing that -- do you expect to see that in 2019? And with that maybe, I think Erman may have mentioned it, but any kind of margin guidance at the EBITDA level, at the PBT level for 2019 would be helpful. And then the second point, can you give us any color on the dividend payment, directionally or just broadly? If you can share any thoughts on that, that would be helpful.

[Fabrizio Renzi, executive]

Okay. Let me start from the last question, dividends. Of course, we cannot disclose anything because this is in the power of the Board of Directors general assembly. Of course, we are -- from technical point of view, we are ready to distribute as much as possible. So you know that this has been the policy of the company for many years. I believe there is no reason to change this policy. Of course, about the magnitude of the dividends, the Board of Directors will take into consideration that we are -- in front of us are new phase of investments. But nevertheless, I believe that the board will continue the policy adopted in the last years. Coming to the first question, the profitability. Okay, profitability is a must for us and this was more and more evident in 2018. Might be is not able to see this in the presentation, but we decided to step out of the market when the economic conditions were so penalizing that was not possible to continue to sell cars in the local market. So this is the demonstration that for us is not important to have a market share, but it is important to protect our profitability. So we will continue in this direction. Fortunately, we are a flexible company, so we are able to push or not our production. We are able to remodulate the production in real time. So we step out of the market in September, October. Then in November, due to the new favorable conditions, also due to the incentives, we come back to the market and we are among -- or we are the winner of the market in December. We will continue in this direction. We don't want to be in a market that is an unfavorable market and we will continue in this direction. So profitability is a must for us. I don't know if there was another question...

[Osman Memisoglu, analyst]

Well, specifically on trading down, which obviously your pricing point is towards the lower part of the middle, I would say probably. If you disagree, let me know. But -- so given the price increases in the market because of Turkish lira depreciation and the overall macro challenges, are you potentially -- I'm not saying you will necessarily increase your market share because maybe you go for more profitability, but is that something you're seeing already in the fourth quarter or you expect to see in 2019?

[Fabrizio Renzi, executive]

[indiscernible] Of course, the Turkish market profitability, also we take cost part, because now in December and in January, we are benefiting the lower exchange rate of Turkish lira against euro. As you said also, we are at the mid-end of the market. So now for the Turkish customers also, the value of the money becomes the first thing. Because for this reason, now we showed a remarkable performance in December and January. And we are benefiting, also good profit. But of course, until after the local direction, we will see probably March also will -- can be a historical month because the incentives will [ be ] end up. Also as you know, in Turkey, there is also crisis regarding fleet business. So our performance of January and December are also without fleet sales. That's also another important point. And so we are not in the fleet market because there is no fleet customers there, but probably March is also an important month for the fleet owners, because as you know in Turkey also the tourism is doing well. Last year, they did a good result. So also this year, starting from April and May, there will be a demand for the rental car business. But of course, in Turkey nowadays, it is not easy to judge what will be happen after the March.

[Osman Memisoglu, analyst]

That's helpful. Can I follow-up on the changes where the government passed or allowed the leasing of the commercial vehicles, but to be frank, I am not really sure what they allowed. If you can shed some light or maybe it's still not certain, but do you expect -- or what did they allow and what kind of impact do you expect, if anything, on your business or the sector?

[Fabrizio Renzi, executive]

[ Absolutely, ] they allowed. So there is no -- but also in the past, there -- some fleet owners, they found a way to rent a commercial vehicle. But still we don't see a huge demand on the light commercial vehicle fleet business. Only some governmental bodies or semigovernmental bodies are renting for their services; for example, the electricity companies, which they are sending their technicians in Turkey. These kinds of companies are more renting the light commercial vehicles. But until now, we are not seeing an important demand on the light commercial vehicle side. But overall, the fleet business is very weak. It's hard to say, because there is a lot of issues regarding important fleet companies in Turkey and also now the financing has also become a problem. What we are seeing, most of customers, the corporate ones, they are looking other alternatives, like purchasing the cars or finding a service company, so they can purchase the car and ask a service from our third company. We will see because probably -- but as I underlined, the March will be interesting month because the incentives will end up in March. So for this reason, we are waiting for some movement from the fleet side, because this will be last call for the fleet owners and this is also good month, because, as I said, it is the opening month to tourism season, but we are confident with our first quarter's local market figures.

[Operator]

The next question is from the line of Kilickiran, Hanzade from JP Morgan.

[Hanzade Kilickiran, analyst]

Considering the weak share performance, which I understand that investors mostly questioned the sustainable Tofas exports in the medium term, and if you don't mind I just want to ask a couple of question on exports to clarify this from your side as well. So basically, on Doblò exports and contracts, you said that you are going to start the new generation -- next generation. Is there any other Fiat plant competing with you on these new contracts? I mean, is there any risk to lose these contracts in the near term? And the second question is, you mentioned about the customer preference shift in Europe to SUV in the car segment, which is negatively affecting your Tipo exports basically. So in the medium term, do you see any risk on your Tipo contracts or is there any chance for you to produce something for Fiat on the SUV side? And the final question is actually for the domestic market. Do you see any upside for Turkish government to extend the tax incentives after March or introduce more incentives in order to help the manufacturers?

[Erman Tütüncüoglu, executive]

Okay. Starting from your first question, regarding the Doblò production allocation, we don't see any risk, because as you know Tofas is not only the manufacturer, but also the R&D center for the light commercial vehicles. So we are not only -- so that's also our strategic advantage that we are carrying. So for this season, we are not seeing any other possibilities for the production allocation of Doblò. Regarding SUVs, it's fact that not everybody also is entering into the SUV segment. We are seeing a lot of new B and C SUVs on the market. So that will be a mid-term action for us because, as you know, our Tipo contract is going to end in 2023. So for the next generation of the passenger car, not in the short-term, but in the midterm, sure we will work on it to see how we can also offer an SUV or something else. But of course, this is not very long-term issue, not issue of the next future years.

[Unknown Executive]

The third question was related to the eventual positive effect of the extension -- of the incentive of the local market.

[Erman Tütüncüoglu, executive]

So absolutely, we are not waiting any incentive prolongation from the governmental side, because after the local election, they should start to take serious countermeasures, so they cannot -- what I believe they cannot continue with all the incentives and with these populistic policies after the election. So for this reason, we are not waiting any prolongation regarding the incentives.

[Fabrizio Renzi, executive]

Maybe the real opportunity for the domestic markets that maybe this could happen in the second semester is to see the interest rate to be reduced a little bit. The main...

[Erman Tütüncüoglu, executive]

With the government taking countermeasures on this front.

[Fabrizio Renzi, executive]

So the main obstacle in this moment is that 80% of the cars sold are financed. And in this moment, this is the main obstacle to the full recovery of the market. But I believe that this could be an expectation for the second semester of the last quarter.

[Erman Tütüncüoglu, executive]

But of course, our guidance for 2019, the 350,000, 400,000 is the worst-case scenario for the Turkish market. We have a young population. So the demand for the new cars is still high in Turkey. So when the people see some improvement on the economic issues, they will continue to buy. So that can be the worst-case scenario for our company.

[Fabrizio Renzi, executive]

Probably in our local guidance, domestic market guidance, we have more opportunity than risk. We cannot say the same for exports.

[Hanzade Kilickiran, analyst]

And can I please also ask one more question on margins? You are now guiding a capacity utilization rate, which is very low, close to 50% in 2019. But since your exports are under take-or-pay contracts, is there any risk on your margins, because in the past you were saying that with 75%, 80% exports to 20%, 25% domestic market revenue structure, you were able to generate around 7%, 7.5% profit before tax margin. Is -- will this be still be valid if your capacity utilization rate declined to close to 50%?

[Fabrizio Renzi, executive]

Because as you know our -- the contracts, they are not only covering the missing volumes, but our contracts are based on the cost transparence. So for this reason, we don't see an issue on the margin side.

[Hanzade Kilickiran, analyst]

We should be continuing to forecast around 7% profit before tax margin on 2019 numbers as well, right?

[Fabrizio Renzi, executive]

Yes. Erman has already mentioned this. I believe that we can have 2 reference points, 11.5% in the EBITDA is the sustainable one without other effect coming from the fluctuation of the FX, et cetera. So this is sustainable. And that the level of profit before tax 7%, that is what basically we registered in 2018 and 2017, could be considered as sustainable profit before tax of this company without other extraordinary effect.

[Operator]

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

[Berna Kurbay, analyst]

I have got a few questions as well. The first one is on the domestic sales. If I am not mistaken, your wholesale shipments to dealers was around 68,000 units in 2018, whereas the retail sales were around 73,000 units. So I am assuming that the dealers had inventory to deplete, so your shipments to the dealers were lower than the retail sales last year. How do you see the dealer inventories currently? Is there still more inventory on the dealer side? How many months of inventory do they carry? That's my first question. The second question is along the same lines with the previous questions. On the Doblò contracts, can you confirm if the Doblò intellectual property rights belong to Tofas, so that any extension of that vehicle would be made, or if not made by Tofas, you would be receiving IP rights in some way? And the final question is about your investments CapEx guidance of EUR 140 million. Is this purely maintenance CapEx or does this in some way include some initiation of the new Doblò next-generation investments? And also you've mentioned that on the Tipo side -- or on the passenger car side, you may be working on some variations of Tipo to address the void Fiat is facing now as Punto is no longer produced. So what is the outlook on that in terms of the time line? Is this going to be a variation of Tipo? Is it going to be on the same platform?

[Erman Tütüncüoglu, executive]

Probably, there is a misunderstanding on the Punto side because what Fabrizio said that Fiat in 2018, they made a phase out of the Grande Punto production. So this is -- there is a...

[Fabrizio Renzi, executive]

Space to cover commercial covers.

[Erman Tütüncüoglu, executive]

So for this reason, for example, now we are going to launch Tipo's III version, which will be the entry level in order to try to keep the Grande Punto owners in the European market. So that was the opportunity for us. Regarding the Doblò investment issue, as I said also before, as you know we are not only the manufacturing company, we are also the large R&D center in Turkey, and we are mainly the R&D -- we have the main R&D competencies regarding light commercial vehicles. And as you said, we have always the IP rights. So for this reason, we don't see any allocation problem regarding the future of the Doblò. On our investment guidance, we forecasted also the starting investments regarding the R&D and the -- rest of the activities for the -- there's a new generation of Doblò. But this is only to be -- to show the guidance because still we don't have final approval of the project. Regarding local market stocks, it's true what you're saying. But with respect to 2017, at the end of 2018, we reduced not only the network inventory, but also our inventory because the financial conditions in Turkey nowadays, the management of the working capital and the stocks become a most critical issue. So we are very careful with the dealer stocks. So today, our network stocks in normal environment are lower than 1 month. So for this first cycle -- so we are very careful on the management with not only our working capital but also the working capital of our dealers, so because now for the dealers it will be a difficult year because they have the structure for 1 million market, now they should be working a market of 400,000 units. So we need to protect also our network in order to be ready for the better days.

[Berna Kurbay, analyst]

That was very clear. And also just going back to the comment on the Grande Punto. So the Tipo entry level version to address that market, this is already in the works and it's already going to be -- was planned to be launched, is that correct?

[Erman Tütüncüoglu, executive]

Yes. In March.

[Fabrizio Renzi, executive]

No, no, in Italy, they already started the commercialization. So it's already going in Italy. I don't know -- I'm not aware about the other market, but in Italy it's already there.

[Erman Tütüncüoglu, executive]

So we are also going to present at Geneva, the sport version of the hatchback. So we are also trying version differentiation to capture more wider customers.

[Fabrizio Renzi, executive]

This is a good opportunity because FCA -- this segment for FCA was always a very, very important segment of the market. Now Grande Punto is terminated, but they realize that now this part of the market is empty and there is space to compete maybe with Tipo and the price of Tipo could be interesting also in this part of the market. So it is an opportunity, we will see.

[Berna Kurbay, analyst]

And also on the domestic market, you mentioned that if all goes as expected and inflation and interest rates come down in the second half of the year, do you think that would perhaps bring back fleet companies to business, and they will maybe this time buy not just passenger cars, but also commercial vehicles, so that, that will revive interest in commercial vehicle or leasing of commercial vehicles, given that there is now no regulatory hurdle against it?

[Erman Tütüncüoglu, executive]

Actually, regarding the fleet market, we are not basing the fleet market like past years because they had a lot of issues, not because -- as you know, the fleet companies mainly are working with the financial loans. And in Turkey, now the cost of loans are very high. So for this reason, most of the fleet companies in 2018, they increased the rental periods of their cars, and some of them are still struggling with the secondhand car stocks that they had in their hands, because incentives in one sense improved, let's say, new car sales, but create problem with the secondhand sales because now the secondhand car prices in Turkey compared with incentive benefits, they lose some ground. So first of all, the fleet companies, first, they should clean their secondhand stocks. They should take under control the financial situation and after they will be in the market. So for this reason, still -- for some of the big fleet companies in Turkey, we are not baking that they will be aggressive as they did in the past.

[Operator]

We have a question from our webcast participant, [ Kantar Salim ] with [ Anees Invests ]. Given the weak demand outlook, would you consider cutting back from 3 shifts to 2 shifts production?

[Fabrizio Renzi, executive]

But for a moment, we don’t have this kind of plans, but we will see how the demand and the country will move after the local elections.

[Operator]

The next question is a follow-up question from Bespalov, Vladimir with VTB Capital.

[Vladimir Bespalov, analyst]

First, I want to ask a follow-up question on dividends. Maybe you could provide us the amount of your distributable earnings under the tax accounts? I guess, this is the key probably to the dividends as well.

[Erman Tütüncüoglu, executive]

We will continue, as Fabrizio mentioned at the beginning of the meeting, so we want to keep our policy to distribute the maximum dividends. Of course, the amount will be defined by the Board of Directors of the company, but we are not forecasting any changes on our policy.

[Vladimir Bespalov, analyst]

Okay. Okay, and then I have also a question on worldwide harmonized light vehicle test. It had an impact on your passenger car sales this year -- in 2018, but this year there will be a similar change for LCV side, I think it's in September, right? So how do you think it could affect your LCV sales, if at all?

[Erman Tütüncüoglu, executive]

But the compliance rules of the LCVs are completely different than the passenger cars. So we are not baking same impact on LCV side as the -- we size on the passenger car.

[Vladimir Bespalov, analyst]

Okay. And the last question is on CapEx. I know that you are not guiding, like for years ahead, but as I looked at your investment cycle, for example, during peak investments, say, your annual CapEx was something between EUR 300 million and EUR 400 million. So if your new projects are approved and go ahead, should we expect CapEx of the same level?

[Fabrizio Renzi, executive]

We can't forecast such amount for the 2020 and onwards.

[Operator]

We have a question from our webcast participant Uçur Özgür with QNB Finansinvest. "Can you share what was the sales volume of Punto model in Europe in 2018, if available?"

[Unknown Executive]

Özgür, we will be returning to you after the webcast. We cannot find our price [indiscernible], we are in a meeting room. So we don’t have every thing detailed unfortunately, but we will be returning to you with the answer of this one.

[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]

Okay. Thank you, operator. I would like to thank all the people that participated to this conference, showing interest for Tofas. So we will talk in 90 days in the conference call for the first quarter 2019. I wish all of you nice weekend.