Pirelli & C SpA
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Pirelli & C SpA
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Ladies and gentlemen, welcome to the Pirelli's conference call, in which the Executive Vice Chairman and CEO of Pirelli, Mr. Marco Tronchetti Provera, will present Pirelli's financial results for the first quarter 2018. I remind you that a Q&A session will follow the presentation. Moreover, a live webcast of the event and the presentation slides are available in the Investor Relations section of the Pirelli website.
Now I would like to introduce Mr. Marco Tronchetti Provera. Please go ahead, sir.
Good evening, ladies and gentleman, and thank you for joining our conference call today. Our first quarter results confirmed the soundness of our strategy. Despite multiple headwinds, mainly market slowdown, high exchange rate volatility and heavy raw material impact we recorded a solid organic growth and the profitability improvement in the quarter, we strengthened our High Value positioning with global market share increase of more than one percentage point in 18 inches and above both in the original and replacement channels.
At the same time, we reduced our exposure to standard to less than 40% of total revenues, almost 6 percentage points year-over-year. In the general slowdown of the standard market, we intensified our actions on the less profitable products in Europe, LatAm, MEAI and APAC and decreased the sales of 17 inches tires in the Original Equipment channel in favor of higher rim sizes and specialties to meet the higher demand from car makers.
These actions resulted in a top price/mix improvement, more than double versus peer's average, an increase of 7.2% versus plus 2.7% peer's average which, in turn, led to an EBIT margin before startup costs of 17.5% improving more than 1 percentage point year-on-year.
We are fully on track with our plan implementation as well we see in the next few slides and the new organization just approved by the board is aimed at ensuring greater operational effectiveness by enhancing a inter-functionality and ensuring a better operational control over execution.
We confirm our outlook for 2018 with just a few adjustments to the top line that are not affecting the delivery of our value strategy. Our expectation to outperform the market in High Value segment is confirmed with volume growth rates equal or greater than 13%.
In the standard segment, where demand is lagging, we are going away from less profitable products at a faster pace than previously indicated. In our forecast, the standard volume reduction in the 5% to 6% range, the February guidance was between 4% and 5%. This will result in a lower total volume growth, an increase of 2% to 2.5%, a touch lower than the previous guidance between 3% and 2.5%. In price/mix, improvement is confirmed in the 6.5% and 7.5% range. Industry organic top line growth is expected to be equal or above 9%, almost 10 percentage in our previous guidance. Sustained by a lower material headwind, the profitability target and cash flow are confirmed.
Let's move to the first quarter results highlights. Let's now briefly review our results. Our 5.7% organic growth was backed by the strengthening of our positioning in the High Value segment, which now accounts for approximately 64% of our 2018 first quarter net sales. The top line trend was affected by strong ForEx headwind, minus 7.3% due to the weaker U.S. dollar and the volatility of emerging market currencies as well as the already mentioned accelerated reduction in standard tires minus 10.6% in volumes and minus 5% in organic revenues.
We posted a solid profitability improvement as witnessed by the adjusted EBIT before startup costs, which reached EUR 229 million, an increase of 4.5% year-on-year, driven by the quality of our internal levers, namely price/mix and efficiencies.
In addition, improvements in financial charges management also supported by the EUR 1.2 billion capital increase underwritten by Marco Polo in June 2017, contributed to the strong increase of the net income, an increase of 87% year-on-year.
Finally, the increase of the net financial position reflects the trend of the working capital in connection with the usual seasonality of the business. Mr.Sala will give you more color on that.
Let's now move to the regional performance starting from the High Value regions that account for 78% of our group revenues in the quarter and 93% on the High Value turnover. In Europe, we strengthened our leadership of High Value, gaining more than 2 percentage points of market share in 18 inches and above, as a result of increasing demand of specialties, run flat and noise canceling, from Prestige and Premium car makers, expanding the homologation portfolio as well as the strong pull-through effect of replacements coupled with a higher penetration in the car dealer channel.
On the contrary, in the standard segment the overall market recorded a minus 5.5% drop year-on-year, and we reduced our exposure to less profitable products, making 18 inches and above our top priority in capacity. A mix improvement produced a year-on-year profitability increase of 2 percentage points with an adjusted EBIT margin in the mid-teens range.
In NAFTA, we consolidated our position in High Value. We outperformed the market in replacement channel with the success of our regional season products and increased penetration in retail channel. Strong ForEx headwind impacted profitability with an adjusted EBIT margin in the high-teens range, therefore, marginally lower than previous year.
APAC confirms its profitability as the highest among regions, in the 20s range improving year-on-year. High Value sales were the main driver of 23% organic growth. The market record a double-digit growth 13%. We gained almost 2 percentage points of market share as a result of our strength in partnership with Global, Prestige and Premium car makers as well as new contracts with the most innovative Chinese brands and a pull-through effect on a wide distribution network of over 4,000 point of sales. The reduction of standard tire sales is attributed to lower OE volumes in 17 inches in favor of bigger rims, a reduction of Aeolus brand sales with the conversion of its capacity to Pirelli standards.
Standard regions account for 22% of our sales and 7% of our High Value revenues. Here, our strategies based on improving the mix by reducing our exposure to the less profitable products.
In Latin America, we are expanding our market share in 18 inches and above and upgrading our Brazilian plants of Bahia and Campinas to High Value production as well as for the production for the local market as well as North American market. The actions in the mix are boosting profitability in the region with adjust EBIT margin in the range of high single digits.
The MEAI, despite exchange rate volatility increased our High Value sales, which now accounts for almost 60% of the regional revenues. This has been achieved through a commercial performance driven by careful channel mix management.
Finally, in Russia our focus on the most profitable segments and a very favorable market environment, allow us to grow both sales and profitability in the region with an EBIT margin reaching the mid-teens range.
Execution of our strategy is proceeding as expected. Our focus on High Value led to more than 120 new homologation during the first quarter, the development of High Value capacity by 700,000 pieces, and the growth on the distribution channels over which we exercise a better control: car dealers, Tier 1 clients and Pirelli retail. Each of the transformation programs is launching new processes and digital tools, strengthening the coordination of the various functions in our operational model and increasing Pirelli service level through distribution and the consumers.
Finally, we are accelerating the reduction of the standard segment, as already described.
Implementation of the 3 strategic pillars will be supported and announced by the new organization approved by the Board of Directors today. The new organization is specifically aimed at increasing effectiveness by promoting a greater interaction among functions and ensuring a greater operational control over execution.
Newly appointed General Manager of Operations, Mr. Casaluci who I will be pleased to introduce you during the Q&A session is entrusted with all key operational levers, from sales to marketing, from operation to supply chain organization and will work with the Executive Vice President of Technology, Mr. Boiocchi on Technology and Innovation.
The 2018 market outlook we outlined during the last call is confirmed. The 18 inches and above segment is expected to grow by 9%, outperforming the standard market 8x. The 3 High Value regions accounted for 94% of the total value market and in line with expectations. In Europe, both replacement and OE market are expected to grow by around 9%. In NAFTA, we expect high single-digit growth, many driven by replacement while the Original Equipment market is recovering after the 2017 slowdown.
In APAC, demand keeps growing around mid-teens, thanks to sustained Premium and Prestige car park expansion. This year, said car park is expected to go up by 11%. The18 inches and above market is indeed showing a resilient growth, and Pirelli aims at outperforming it in line with its mid-target growth.
Let's now go through our targets for 2018. We confirm our expectations on High Value with volume growth of at least 13%. The above-mentioned accelerated reduction of standard exposure will translate into standard volume drop between 5% and 6%, 4% and 5% in our February guidance. This will result in more contained total volume growth between 2% and 2.5%, 0.5 percentage point less than the previous guidance. Price/mix is confirmed to improve in the 6.5%, 7.5% range means the top line organic growth is due to be equal or above 9%, approximately 10% in the previous guidance, including a more prudent ForEx scenario between 5% and 4.5%, 1 percentage point lower versus previous guidance. And the impact of IFRS 15, as Mr. Sala will illustrate, top line growth will be approximately 4% versus equal or above 6% in the previous guidance.
High Value will account for more than 6% of total revenues. Adjusted EBIT, before startup costs, is confirmed to be above EUR 1 billion, supported by lower raw material headwind that will compensate for the volume and ForEx impact. IFRS 15 is for us neutral on profitability. High Value weight on adjusted EBIT before startup cost is expected to be equal or above 83%. Adjusted EBIT is confirmed to be of approximately EUR 1 billion, net of approximately EUR 40 million startup cost. Net debt and CapEx targets are in line with the previous guidance.
And now, I'll leave the floor to Mr. Sala for a detailed review of the first quarter results. Mr. Sala?
Thank you, Mr. Tronchetti, and good evening. In the first quarter 2018, sales organically increased by approximately 6%, driven by the strong performance of High Value. In this segment, we recorded another robust volume growth plus 12.8% after the record results of the first quarter 2017 plus 17.1%. The growth rate was even greater in 18 inches and above car tires, where Pirelli outgrew the market, plus 18.6% versus plus 7.9% of the market. Different performance between High Value and the 18 inches and above car segment was mainly related to the increasing demand for specialty products above 18 inches compared to the smaller sizes, including the High Value range and to the general slowdown of the Premium motorcycle market, minus 4% in first quarter 2018, due to the unfavorable weather conditions in Europe.
On the contrary, the performance for standard tires, minus 10.6% drop in volumes in first quarter 2018, discounts the slowdown in Europe, minus 5.5%; NAFTA, minus 5.5%; APAC, minus 1.6%, and the decision of Pirelli to reduce its exposure to less profitable segments. These factors along with the price increases in 2017 concurred to strongly improve the price/mix, plus 7.2% versus plus 5.5% in first quarter 2017, which was once again the best in the industry.
The negative ForEx impact, minus 7.3% versus plus 4% in first quarter '17, reflects the strengthening of the euro against the U.S. dollar and the volatility of the Chinese yuan and of currencies of emerging countries such as Brazil, Russia, Argentina and Turkey versus the euro.
Finally, just a few words on the IFRS 15 introduction. Starting from January 1, 2018, costs incur for sales promotion are now taken off the top line without any impact on EBIT for Pirelli, a current 0.6% impact will repeat in the next quarters of 2018. If the ForEx impact and the application of the new accounting standards are factored in, sales decreased by about 2%.
The quality of our top line drivers translating into profitability improvement in first quarter 2018. Adjusted EBIT before startup costs improved by 6% year-on-year with a marginal 17.5% improving by 1.1 percentage points compared to the same period of last year. The profitability increases resulted from our internal levers, namely price/mix, efficiencies and lower startup costs from EUR 15 million in first quarter 2017 to EUR 11 million in first quarter 2018, which more than offset the external headwinds, raw materials, inflation and ForEx, as well as the increase of depreciation and amortization and the other costs related to the development of High Value. In particular, the strong price/mix improvement countered the raw material headwind about 4x confirming our strong track record. Efficiency gains basically offset the cost inflation.
Net income before discontinued operations was almost twice as much as in the first quarter of 2017. This is the result of our solid operating performance, the improvement of the results from equity participations, capital gain from Mediobanca held until January 2018, lower net financial charges as a result of a lower cost of debt, 5.01% at the end of the first quarter 2018 from 5.42% of the previous year, as well as the impact of the EUR 1.2 billion capital increase underwritten by Marco Polo in June 2017 and the tax rate, 28.7%, in line with the full year 2018 target.
Excluding all the one-offs and nonrecurring items, net income adjusted amounted to EUR 113 million versus EUR 76 million in the first quarter of 2017.
We ended the first quarter with a net debt of EUR 3.9 billion. The trend reflects the usual seasonality of the working capital, in particular the cash absorption was mainly attributed to trade receivables increase linked to the summer season sell-in, to be cashed-in during the second quarter. The payment of payables also linked to investments that concentrated in the last quarter of 2017 and were paid in the first month of 2018 and the decrease of 3 payables in line with the trend of the previous years.
The cash flow before extraordinary operation was negative for EUR 726 million. Excluding the impact of the Mediobanca disposal, EUR 152 million, the net cash flow before extraordinary items and sale of stakes will be negative for EUR 878 million, in line with the absorption of EUR 882 million in the first quarter of 2017.
Pirelli's gross debt stood at EUR 4.7 billion at the end of March 2018 with an average life of 2.8 years as more than 80% of it is now due beyond 2019. Last 12-month cost of debt at 5.01% is down from 5.42%. This result has been mainly achieved through the January 2018 EUR 600 million bond issue with 1.375% coupon and maturity 2023. The June 2017 refinancing of our committed bank lines and the net positive effect of the repricing only partially offset by the yearly redemption of the EUR 600 million bond occurred in January and March 2018.
We would like to remind you that cost of debt as of end of March 2018 only partially benefited from June 2017 new funding, as it is still affected by the wash-down fee of the previous credit line, EUR 61.3 million. Starting from the second quarter 2018, the cost of debt will fully benefit from the above-mentioned refinancing. We confirm our 2018 guidance of average cost of debt below 4%.
And I'll now leave the floor to Mr. Tronchetti.
Thank you, Mr. Sala. This ends our presentation. We may now open the Q&A session.
[Operator Instructions] The first question comes from Monica Bosio of Banca IMI.
The first one is on the price/mix, which was a bit better than my expectations. I remember that during the last conference call, the group has indicated a mix, pure mix effect in the region of 5%. It's still the case? And do you still confirm a plus 5% for the only mix effect for the current year? And do you expect any difference between the quarters? And the second question is on the High Value tires growth. Should we expect a pace of growth for the rest of the year in the region of 13%? And if yes, do you expect some differences amongst countries? My question is amongst the High Value regions, which is the most challenging one? I can imagine Europe. If you can elaborate on these, it would -- I would really appreciate.
Thank you. Price/mix, the trend will be -- as it has been in the past. I mean, third and fourth quarter will be stronger. Second quarter a bit weaker. The third and fourth are affected by the winter seasonality. So we confirm our guidance, and we are quite comfortable with it. The growth in High Value is confirmed in the range of 13%, as mentioned in our plan. In the different regions, we don't see major changes compared to our plan. If not some, let's say, better performance in Europe in the first quarter that could in the next quarters be aligned with our forecast. So that's the only major change. All the rest is in line.
The next question is from Martino De Ambroggi of Equita.
My first question refers to the acceleration in the standard products reduction for capacity. If I'm not wrong, this is not the first time you mentioned such an acceleration. And you already achieved the 63% of sales in High Value products, which was the target in your 2020 guidance. So my question is, should we change? Or should you change your assumption for 2020, because you already achieved the 63% and that this could change the picture going forward for your long-term target?
For the time being, we confirm the target for 2020. What we do is to profit of any opportunity this quarter, we had demand on 18 inches and up in the factories, we switched the production faster than expected. There was a slowdown on 17 inches and below, and in a way with profit of rate increasing, our decrease in standard. But this is the quarter, we cannot say that this affects our 2020 target. Obviously, any opportunity where we can reduce the less profitable side will be captured.
Okay. So it's temporary. The second question is still a follow-up on the price/mix. If you could maybe elaborate on the pricing environment and the split between price and mix? Also taking into account starting from the second quarter, the pricing comparison -- the price comparison will become tougher. So if I remember correctly, your guidance for price/mix was 6.5%, 7.5% for the full year. So just first the split of price and mix in this quarter and pricing environment in order to meet the guidance?
As you know, we don't give the split between price and mix. Our strength is the mix and so obviously you have the answer through this. We don't see looking forward changes, because first quarter we had in Europe the effect of the previous increases in prices. Looking forward, we still have some opportunity to increase prices in countries where inflation and weakening of the currencies are allowing a price increase like in -- it's going to happen in Brazil, in Latin America and Russia. So we confirm the guidance.
Okay, very last one. LatAm profitability. It's the only region in Q1 still delivering single-digit profitability. Could you update on the medium-term perspective for LatAm stand-alone?
The LatAm had an improvement. So looking forward, we are positive on LATAM. Even if the time like of, let's say, recovery of the country is affected by the political situation. So we have some improvements. What is really our target in shorter-term is increase of mix exported to NAFTA. Thanks to the investment we made, and we are making in -- mainly in Brazil. We are now supporting the growth in NAFTA quite strongly and so the profitability of the region considering the export continues to increase -- improves, sorry.
Next question comes from Gaetan Toulemonde of Deutsche Bank.
It's Gaetan Toulemonde, Deutsche Bank speaking. I want to come back on LatAm. I want to understand a little bit better because currencies are moving all over the place, and I'm thinking about Argentinian pesos a little bit, the real in Brazil. Can you give us a little bit some color on the proportion of Brazil, which is exported to the U.S.? Where it's going to go in the coming quarters to help me to better understand the risk on the currency in LatAm? That's my first question. I have a second one afterwards, if you don't mind.
So the export is -- 20% of the production is exported, and we are planning to increase it. So that's the -- the more we improve the mix of production in Bahia and Campinas, then the more we increase the export. So we confirm the 20%, but we see a potential increase.
And is there any risk in Argentina with the currency devaluating significantly? Can you increase selling price? Or in the end Argentina is so small for you that the impact is negligible, can you remind us a little bit the sensitivity on the Argentinian pesos?
It's really negligible. The price increase now in Argentina is passing through easily. So we don't see risks on our results coming from Argentina for both reasons: price increase and there is more portion of our profitability comes from Argentina.
Okay. Last small question regarding your Premium tire volume. Are you still growing significantly faster in OE than replacement? Or there is a better equilibrium between both?
OE continues to make its shape. We are now having positive results with Asian OEMs. And so the proportion remains equal.
So is still -- the proportion equal, is that what 50-50 between OE and replacement? I remember, I think, in the past it was much more 60%-plus in OE, if I remember correctly.
No, it's much less than -- no, no, you don't remember well. It wasn't 60%. It was 45%, 55% more or less.
The next question comes from Lello Della Ragione of Intermonte.
A couple from my side. Just remaining a bit on OE and replacement. If I look at the volume growth in High Value, the difference between the organic level and the volume growth is not that different, meaning that probably if I look at the other bucket, price/mix, the price effect on this one is relatively small, if I look at the overall figure in euro. I was wondering, if you're having issue in price adjustment because if I remember correctly, this should be last quarter with the effect of the price increase that you implemented last year or is just raises the fact that OE is probably growing faster than replacement at this point in time? The other question relates, you said on your revision on the raw material guidance at EBIT level. I was just checking at your slides on the matter and I was trying to link this with the other ForEx adjustment because you in the gross amount that you mentioned, I mean, you gave the total impact and before the raw material subtotal the changes compared to the last guidance at before ForEx impact are almost the same, and it seems that the changes that you are implementing at that level are mostly related to ForEx. But if I look at your indication in terms, for instance, euro, U.S. dollar, we are moving back to the level close to the level 1.17 that you mentioned before. So I was wondering if we have to look at this in an evolving way, meaning that if the dollar returns to the level that you got it before, we will go back to EUR 95 million? Or you have some hedging that can slow down this effect?
Starting with your second question, now we see a rebalance, but we don't see -- we don't have any hedging -- a particular hedging on the dollar. The only effect we see on raw material is the one coming from oil, that's why we have these figures. But we don't see any major change on the dollar, at least, in our plan. For the first question you made on High Value. So the organic growth is 13.5% and volume is 12.18%. This effect -- this shows that the price/mix effect is positive.
Yes, but on that point -- sorry, for this follow-up. But on this point, it means that if I look at all the other price lever which is smaller than the mix as you stated before, but is it correct to assume that the price improvement are mostly related to the standard tire rather than the High Value tires in proportion or not?
This is true that there is an improvement in the reduction, the heavy reduction of standard created within standard an improvement in mix, an improvement in mix and price, and better mix means also better pricing in that case. Because the 17 inches are priced average better than the 16 or 15, which shows that we have a double effect on price and mix, improvement of mix and improvement in price.
Next question comes from Victoria Greer of Morgan Stanley.
Just a couple, please, on -- both on NAFTA. Your NAFTA organic growth was very strong. Could you talk about the drivers there? And what has got you that level of share again? The NAFTA market, in general, has been very weak. You've talked about your expectations for the Premium market, but for the overall NAFTA passenger market, do you expect it to get stronger from the weak Q1? And then secondly, staying on NAFTA, please, I wanted to ask you about the changes in the distribution framework that we've seen there so the Goodyear-Bridgestone tie up Michelin and Sumitomo. Does that have any impact for your strategy for -- around distribution in North America? Is it an opportunity, for example, maybe with American tire distributor as Goodyear withdraws?
I -- for this first question, I'll leave the floor to Mr. Casaluci. For the second question, obviously, for us, it is as you mentioned an opportunity because it leaves more room within the independent distributors and so can facilitate our growth. And obviously within the network that belongs to our competitors, we are in because no one has a mono-brand structure. So all what we see is within a multibrand strategy for players. So we keep, obviously, a share within the network that is controlled by our competitors, and we have an opportunity to increase shares with independence, but Mr. Casaluci?
Thank you, Mr. Tronchetti. Nice to meet you. Casaluci speaking, yes, we do see a strong opportunity to grow in the High Value segment to keep the growth in the North American countries. In the first quarter, we grew our market share and we do plan to do the same, thanks to the enlargement of the customer base and thanks to the introduction of new all seasonal product lines. And back to what Mr. Tronchetti said, the change in the structure and the concentration of the trade is also representing for us further opportunity to grow because with our pull-through strategy also the new joint ventures will need our products because of the natural demand of the Pirelli homologated product, and because for the independent players, it goes without saying that is a good opportunity to have a partner into the trade to support their commercial development.
Next question comes from Henning Cosman of HSBC.
I'd like to come back to the price/mix as well and maybe as a first question, a clarification, because Mr. Tronchetti you said the reduction in standard tires that's a mix and a price effect at the same time. So I was just hoping you could remind me what the difference is between price and mix there? So I thought when the ASP changes as a function of fewer small tires within standard, that's mix. But I thought you were saying the ASP changes is also price at the same time. What's the distinction exactly, please?
Mix means that if I have more 17 inches than 16 inches, this is mix. Then we have the average price of the standard. If I sell more 17 inches than 16, the average price increases also. So this is an effect that has a double positive effect, the reduction of lower-priced products and compensated by an increase of higher-priced products. I think it should be simple.
Okay. All right. And then if I can just ask about, you sort of answered this before, but if I could just ask for a little bit more granularity, as you run into these tougher price/mix comps in the coming quarters, what would have to happen in -- or what specifically within mix for you to reach the upper end of your 6.5% to 7.5% price/mix guidance? Is it mainly really driven by OE [ IT ] mix? Or how do you get to 7.5% against the tougher comp base in the coming quarters?
Competition was tough also in the first quarter, and our price/mix was good. So we always fight for the best. And then at the end of the year, we will see if we will be able to stay in the higher part of the range, in the mid or in the lower. But in the first quarter, we did prove we were able to stay in the higher end of our targets. So that's a -- quarter-by-quarter, we will be explain what has happened in the market.
Sure. I'm just being conscious that you have the comparison base, right, it's 2.3 percentage points higher in Q4, for example, than it was in Q1, that's what I was referring to.
We -- if that happen, obviously, we will stay in the higher end of the -- in the higher range of our target. And so if we replicate the performance of last year, we have more probabilities to stay in the higher part of our range.
Okay. And final question on the new organizational structure. My impression was that the previous setup was still relatively recent and the way you had the separate regions reporting into the more corporate functions. Could you just remind us what has changed in your thinking? And what's exactly triggered the new organizational structure? And how you think you're better positioned now?
The organizational structure now has one responsible for the operations that is taking care of the alignment between the market and the factory, simplifying things. So as I mentioned presenting the plan, we are accelerating the process of digitalization of the company. So we are linking more and more the market and the factories and having a single responsibility in taking care of the operation, it's easier to change what we are changing within our processes and to have a better control of all functions. In the meantime, keeping full control of innovation and R&D in the hands of Mr. Boiocchi, we guarantee the continuity of our speed, continuous acceleration in R&D, supporting the action of the responsible of the operations. So this is also supported by the creation to a direct report to me of the digital, that is a new manager coming with an experience, a deep experience in digital, and he is helping, creating the company a shorter decision-making process, which helps in implementing digitalization.
But we shouldn't perceive this as a defensive move to protect the financial mid-term targets, which would have otherwise maybe coming to under jeopardy?
This is done in order to try to improve them. It's not to sustain them. So the challenge is to deliver the best, not to protect the worst. And so as I mentioned before, we are targeting the best part of our -- of the range of profitability and the best part of the mix, and let's say, the appointment of Mr. Casaluci is made in order to get to the best.
Next question comes from Massimo Vecchio of Mediobanca.
I was impressed by the number of new homologations in the quarter. So 120 is a very high number. My question is, were you expecting this? Or this was better than your internal expectations? And also can you give some granularity on the rim size of those homologations? How much of that is electric and hybrids? And also ideally some granularity also from the geographic point of view.
I'll leave the floor to Mr. Boiocchi.
Boiocchi speaking. Yes, the number of homologation is very important. We have really push on the High Value as usual, more or less it does not exist any homologation below 18 inches. The most popular homologation we have are from 20 inches over. So really you can see how we can follow all the changes in the OE market. Talking about the electric and hybrid, this is a very booming and growing activities on which homologations starts to have an important number. We have more than 25, 30 homologation already in this field, but a lot is arriving.
Next question is from José Asumendi of JPMorgan.
José, JPMorgan. Couple of things, please -- couple of questions, please. On the bridge, on the D&A, and the other line, can you explain a bit more what is behind that figure, please? And how should we think about that category over the coming 3 quarters or 4 -- yes, 3 quarters? And then with regards to the product mix in Russia, High Value and standard, can you speak a little bit about the product positioning in Russia? Where they stand on High Value and standard? And what could be the strategy there to improve the product mix for the coming years?
Mr. Sala?
For the first question considering the D&A impact that we had in the first quarter of negative headwind of EUR 21 million and other, EUR 9 million were related to depreciation. So coming from the investment that we did in the recent years and the remaining part is related to costs for the development of the High Value. So practically all the costs that we are having in the research and development, in the factories and in the marketing activities in order to reach and to grow the presence on the point of sales in the different regions.
The next question comes from Alessandro Tortora of Mediobanca.
I've got 3 quick questions, if I may. The first one is likely -- if you can give us any update on the patent box case okay for you. The second question is just the confirmation that as of today, basically you didn't announce any price increase despite the recent, let's say, oil price increase. And the last question just, if I may, if you have a, let's say, any backup plan in the event we have, let's say, not, let's say, an unhappy negotiation of the NAFTA agreement that -- let's say, between the U.S. and the other states?
For the NAFTA agreement -- for the answer agreement, then Mr. Casaluci will answer the other question. NAFTA agreement, as you know, we supply the NAFTA market from -- directly from U.S., from Mexico and from Brazil. Brazilian participation's to the market is increasing. We supply also from Europe something. So all in all, we don't see any risk coming from the -- let's say, for the negotiation on NAFTA. And as far as we know, there are no major changes affecting our results even in the worst case scenario. And it seems a negotiation is still in a, let's say, reaching or close to an agreement that is quite balanced, but we are ready to face any surprise. Mr. Casaluci?
Yes. Thank you. As far as pricing is concerned, the price increase that we do expect for the rest of the year are mainly linked to the raw material scenario and the exchange rate scenario, mainly affecting the standard regions. While if we move into the High Value region, talking mainly about Europe, we do not expect a strong price pressure, mainly in the High Value segment, where we are focusing because the highest we go in the product range and the more the technological barrier and the limited product offering to the market is supporting us into the full implementation of the price policy.
There is another question, the one about the pattern box. The process -- the negotiation is up and running, and we expect it will come to conclusion in the next month. Pirelli, obviously, is not in control on the timing of the agreement, but we don't see any delay coming from the offices. So we expect to end the process as other already did. So we don't see a major threat coming on that side.
Next question comes from of Edoardo Spina of Exane BNP Paribas.
I also have 3 quick questions. Can I start a follow-up on the tax rate, if you can confirm for this year the guidance, how you have, I think, 28% for this year?
Yes. We confirm the 28% guidance for the full year. I take the opportunity to answer to another question I didn't answer before. The -- someone asked the improvement on price/mix in Russia, the price/mix in Russia is due to the better mix of our sales in the market, where we have improved the profitability both in the winter and in the summer season. And so we see this trend will continue in the next months. We see opportunities also improving the export from Russia.
I have 2 follow-up, if I can. On China, first, because of the changes now in Europe with import duties, there are some already in the U.S., do you expect any reaction from Chinese authorities against European or U.S. makers? I know you have local production, but it would be interesting to know your opinion. And another question is with the reference, what's happening to, actually, all the competitors? It seems that the volume are not very strong, and we understand that you have opportunity to grow more in the High Value, but would you say that the standard markets are a little bit weaker than expected in terms of markets?
Yes. You are right. The standard, mainly in Europe was decreasing in the first quarter by 5%, which is a huge number. And we have to say that in the High Value, the double-digit growth is confirmed and so we continue to see that the pull through effect we have on our marked tires is providing us the opportunity to continue our growth. So it's the business model that is functioning, a reduction in standard and increase in High Value is in line with what is happening in the market. So we are just aligned with the market way of reacting in these months. In China, about China, we don't see any reaction on -- related to the tire business. The tire business for us is not even an issue because our export in China is from China to the region. So we don't have an issue of -- in general, what we do is to have at least 80% and more on local-for-local in every region. In the case of China, we have more than 80% -- is more than 90% in the regions. So no risks on that side.
The next question comes from Ashik Kurian from Jefferies.
Just a couple of quick questions. Your market forecast for 18 inches above for the full year looks for 9% growth and is here flat. Volumes were bit weaker than in the first quarter. In Q2 so far, so April and May have volumes improved substantially in Europe and North America in line with your guidance? So that's the first question. And then second just a couple of modeling questions on the free cash flow. Your CapEx was down on absolute terms in Q1, should the trend continue? Or should we expect a ramp-up in the upcoming quarters to hit your 8% guidance? And also to hit your leverage target for the full year, you need to assume a significant working capital outflow for the full year, am I right in assuming that your guidance bakes in working capital outflow for the full year?
So for the cash flow, I'll leave the floor to Mr. Sala.
First of all, I want to remember you that our plan foresees a cash flow generation for the period 2017, 2020 of EUR 1.3 billion, out of which more than EUR 300 million were expecting in 2017 and 2018. So we closed 2017 with a net cash flow above expectation, plus EUR 200 million, do what we were able to do on restructuring costs and on cash flow, say, for working capital. And for 2018, we [ expect ] our guidance that is to generate almost EUR 200 million, including the sales of Mediobanca. So be in line with the plan for the year 2017 and 2018.
Yes. And for the CapEx, we confirm the 8% guidance for the full year. And I'll leave the floor to Mr. Casaluci on NAFTA growth.
Thank you. As far as NAFTA High Value market, we expect a high single-digit growth, mainly driven by replacement, while the OE market is recovering after the 2017 slowdown. So we can confirm our guidance.
Hold on, just so that I've got this right. You said EUR 200 million of free cash flow in '18, including the Mediobanca sale. And the Mediobanca stake was sold for around EUR 150 million. So basically on an underlying basis, you're still guiding for only EUR 50 million of free cash flow in '18, is that correct?
No, practically, as I mentioned before, we closed 2017 with a net cash flow that was above expectation plus EUR 200 million versus the expectation that was due to the savings of restructuring cost versus the plan. And certain activity that we did also with agreement with supplier on payment optimization was cash out happening in first quarter 2018. So in the first quarter 2018, we normalized the situation. For sure what we expect for 2018 is to be at minimum in line versus the guidance that we had for the strategic plan for concerning 2017 and 2018. We know that the consensus currently is almost EUR 100 million better than our cash flow, and we are confident also with this number.
Mr. Tronchetti Provera, there are no further questions registered at this time, sir.
So thank you to all people that attended, and we wait you tomorrow at the Annual General Meeting. Have a good evening.
Ladies and gentleman, thank you for joining. You may disconnect your telephone. Have a nice afternoon.