Compagnie Générale des Établissements Michelin Société en commandite par actions (ML) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Michelin [indiscernible] annual results conference call. I now hand over to Mr. Florent Menegaux, CEO; and Mr. Yves Chapot, General Manager and Group CFO. Gentlemen, please go ahead.

Ladies and gentlemen, good evening. I'm very pleased to welcome you tonight for results presentation. Let me just start by expressing the challenge in the environment we have seen in 2019. We have clearly seen, in 2019, a shift in the mindset of most people around the world around several issues. The first one is the climate change. It is obvious that something is happening, and we saw that with extensive fires in California and then Australia, with storms, hurricanes and tsunamis of any kind of sort. And what is new is not that this things did not happen before, it's the frequency has increased a lot. And now it's impacting heavily everywhere. And the second thing we have observed in 2019 is that, socially, there are a lot of -- there is a lot of unrest, which means that people around the world, whether in Chile, in Hong Kong, in other places with the gilets jaunes manifestation in France, we clearly see that there is a fraction of the population that today doesn't feel at ease with the way the world is going and where we are projecting the world. So why are we starting with that? Because we think that 2019 was very acute and we had evidence that now there is a level of consciousness on these issues that has risen sharply. In this environment, of course, Michelin did not wait for 2019 to act, and we've been precursors in these events and anticipating a lot in this changing world. And we have been active in many different areas. One is, of course, pushing for the long-lasting performance and making sure that we have rules of the game for fair competition around the world based on usage rather than being based on tax burden at the borders. We have also pushed innovation, and we have our latest baby here, with Uptis, which maybe -- mean a revolution for autonomous vehicle and urban mobility of fleet activities. We have also integrated our first 0-emission plant in -- very close to Clermont-Ferrand, Les Gravanches, which is the first of its kind around the world in the tire manufacturing space. And we are also pushing our innovation in the hydrogen space. We are absolutely convinced that hydrogen is an energy of the future and hydrogen fuel cell should resolve a lot of the issue of -- related to full battery autonomy of electric cars. And at the same time, we are very active in developing biosource materials and very active in developing new kind of glue. And you have the example of a very new type of adhesive resin that not only glues but without any side effect in terms of volatile substance that the glue today emits. So why are we saying that? It's because, in this ever changing world, there is something that doesn't change in Michelin, is we are constantly innovating and constantly anticipating what will happen in the future. So in this context of markets, very turbulent, very degraded in 2019, Michelin has shown historical results. We have been able to have operating income, segment operating income in excess of EUR 3 billion, call this exactly according to what the guidance we gave last year, an increase of EUR 179 million, 1/3 of which is organic, 2/3 of which is due to acquisitions at constant exchange rate, and we have been also able to generate a cash flow -- structural cash flow of -- in excess of EUR 1.6 billion. So in this turbulent environment with shrinking markets, especially in the second half of the year, the group has improved its performance, and we have been one of a kind in our industry, making sure that we have a very rigorous steering of our operations, especially on price in this type of environment, you have to be very rigorous on how you manage your prices in this environment, and we have demonstrated that in 2019. The SOI at constant exchange rate rose by EUR 180 million, and our margin held firm at 12.5%, with a slight dilution effect due to the acquisitions, but very -- exactly where we were expecting it to be. The integration of the main acquisitions, Fenner, Camso, but also Multistrada and Masternaut, are going very nicely. We are extracting the synergies we want to extract, and the integration is in line with all our expectations. Our structural cash flow is strong. This cash flow -- and Yves will come back into the detail on it, includes the new IFRS 16 regulation, but there's still a strong progress in our cash flow this year, especially in the steering of our inventories. And that's why we are recommending a dividend -- an increase of EUR 3.85 per share, which is a nice increase, and that demonstrates our confidence in the future of Michelin in the years to come. And of course, we are continuing aligning our group to stay modern, and there is a big difference between being modern and being fashion. Michelin is not fashion, Michelin is modern, which means that we are in sync with our time, and we are constantly managing and steering operations to make sure that Michelin has a sustainable future. And without being longer, I would leave the floor to Yves, who is going to present you more details on our results.

Good evening, ladies and gentlemen. So I will walk through our 2019 performance, and of course, the 2020 guidance. So the performance starts, of course, with the markets. We have operated in 2019 in market that has been weaker-than-expected at the beginning of the year. And if you look through all our business segment, they are all characterized by a weak OE pattern. You knew already -- we knew already at the beginning of the year that the automotive original equipment market will be degradated, and it has been confirmed with the decrease of the market of 6% over the year, and it has been confirmed in Q4 despite the Chinese market started to improve in Q4. On the replacement side, the demand has been trending upward in North America, but we have also seen some signs, other signs in Europe, weak winter market, both in Europe and in Europe, for example, when, at the same time, the replacement market in China has held quite pretty firm. So overall, we estimate that the passenger car and light truck market has been decreasing by 2% over 2019. The truck market has seen a switch during the year, particularly on the original equipment, which has seen a downturn during the second half of the year. The demand has fell, with a fast drop during the Q4 in North America when the replacement market has been a little bit more resilient but not extremely well-oriented. So we estimate that the truck and bus market has been decreasing overall by 3% during 2019. As far as specialty markets are concerned, we consider that they have been already overall flat. Mining was increasing by 3%, but the momentum is showing some slowing down during the Q4. The off-road tires, off-highway transportation division, have seen a sharp decrease in the OE demand, particularly in construction and agriculture. That's a sign that we have already mentioned during our half year and third quarter presentations. And the 2 other markets that are 2 wheels and aircraft have pursued in their growth trend. In this context, the result that Florent just disclosed has been achieved thanks to our pretty well-balanced business model, both from a geographical standpoint. And you will observe that now in terms of sales, North America has an equal weight than Europe in our turnover and that our different businesses are relying on very different underlying growth drivers. Original equipment for passenger car account for 11% of our overall turnover. The market that are driven, let's say, by conceptions represent around 40% of our sales. And the B2B market that are characterized either by, let's say, manufacturing GDP through transportation or commodities, represent the other half of our sales. So our sales overall in 2019 has been growing by 9.6%. If we take out the exchange rate effect, the growth was 7.8%. And basically, 6.8% was coming from the acquisition, the acquisition made in 2019 and 2018 and 1% due to our organic growth. Our volume has been decreasing by 1.2%, but it has been compensated by a very strong price and mix effect of 2.2%. You will observe that if you look at these figures per quarter, you see that the fourth quarter, the volumes, the activity has been weaker, but we have delivered a constant price mix effect, and it has been even stronger during the second half of the year than during the first half. So how do we deliver this improvement in our segment operating income by EUR 179 million? Basically, the activities has produced a negative output of EUR 86 million, which is EUR 127 million coming from the acquisition, positive, and a negative volume effect of EUR 230 million. I just want to draw your attention on the fact that half of this volume effect is due to the underabsorption of fixed costs, and you will understand later when you will see the free cash flow and the way we manage our inventory, part of the reason why we have such effect. Regarding the price/mix raw material effect, it has been extremely positive, EUR 324 million. We consider that raw material has increased overall by EUR 120 million. On top of that, you have to add EUR 30 million of custom duties to the cost of acquisition of raw material has increased by EUR 153 million. And at the same time, we have delivered EUR 248 million of mix plus EUR 230 million -- close to EUR 230 million of price effect. And last, we have very strong competitiveness actions that have started to produce good effect during the year, EUR 61 million. The 3 main drivers are all the work we are doing on our G&A and our structural costs, the improvement of productivity in our factories and the way we manage the cost of our models and all the work done by the teams to find the best sourcing in terms of raw materials. At the same time, we have an increase in the start-up costs due to the start-up of mostly 2 of our factories, synthetic rubber factories in Indonesia and passenger car tire factories in Mexico plus the increase of amortization. So we end the year with a segment operating income over EUR 3 billion. This performance has first allow us also to deliver a strong free cash flow. The structural free cash flow where we, of course, take out the acquisition effect plus the working capital impact of our raw material, which is very tiny in 2019, so we have a structural free cash flow above EUR 1.6 billion. So it has been partly helped, of course, by the implementation of IFRS 16, but -- and if you look at the different effect, the improvement year-on-year, if you take out this IFRS 16 effect, strong work on the inventories, our inventories at the end of the year has decreased by EUR 147 million. Some is coming from the cost of raw material, but you have more than 1 million -- EUR 100 million of saving on inventories. So there is a stronger, let's say, organic effect plus the contribution of our acquisition to our free cash flow. Regarding the inventories, we have taken several actions regarding sourcing, mostly operational excellence. Walking -- I was saying earlier, a good supply chain process start with good forecast. So we have a -- put a strong pressure on the teams to try to operate with very balanced forecast. Industrial flexibility, of course, is part of it, and all the work that we are doing on our supply chain model to adapt our supply chain model to the needs of our customers. If you look overall by average, our average inventory has decreased by 0.1 point, which seems not very impressive, but our inventory at the end of the year were at 19.5%. So we have clearly taken action, particularly in the second half of the year, to monitor and better master our inventory. The plan we have started to implement already a few years ago have started to deliver results during the second half of this year. Now breaking down our operating margin of 12.5% by segment. I would just first mention that in this -- at the group level, we have a dilution effect linked to Camso and Multistrada of around 0.3 point. So our operating margin, which has decreased from 12.6% to 12.5% is including this dilution effect. Now looking per segment, you observed that SR1 has been decreasing by 0.3 points, which is entirely due to Multistrada. And if we take out the effect of the ramp-up of the factory that I mentioned, in fact, the segment has improved its performance. Regarding the second segment, it has been strongly hurt, particularly during the second half of the year, by the volume effect. And particularly, the original equipment market. The third segment is showing 18.7% operating margin. And here also, the decrease of 1.4 point is more than explained by the dilutive effect of Camso on this activity, which is close to 2 points. So in reality, if you take out the Camso effect, it means that the organic activities of our third segment has delivered better operating margin, both in volume and in percentage than in 2018. If I now zoom on each of these segments, in automotive, the group is committed to constantly innovate and bring product in the market that will satisfy our customers, both on original equipment and replacement. In 2019, the share of our sales represented by what we call the premium segment of tires above 18-inch is now 43%, it's an improvement of 4 point versus last year, and you see for the 18-, 19- and 20-inch segments, the loyalty effect on the first replacement that we have overall in the different -- in Europe. I can -- I'll just mention that this percentage is higher in less mature markets, such as China than they are in Europe. On the truck market, which is facing some challenges, we believe that on the long run, thanks to particularly the new demanding environmental standard that will be imposed to the fleet and to the OEMs on one side and the need of the customers that are more and more looking at fuel efficiency, the pricing, the risk of shortage of drivers and sometimes fitting machine tire trucks help increase the loyalty of drivers, and of course, managing as much as they can their assets, we believe that Michelin offer that are totally centered on the total cost of ownership, so providing the tire that have the best usage, the cost usage, and the innovative solutions that we are providing, both on product and services, will help us in the coming years. The SR3 market, and particularly the mining and OHT market, are of course, mostly cyclical because they are linked to commodities. But in the long run, they are tied to very strong megatrends, globalization and population growth. So in this market, Michelin is committed to continuously improve our product and services. And when I mention services, it means -- which is a system which allows the monitoring of the tires and big mining facilities or ZEN@TERRA, which is a system that we provide to farmers to monitor their tire pressure when they are either on the road or in the fields. So our commitment is to offer to this segment of the market the solutions that will help them to improve their operations and to make their operations more sustainable. Last, looking at our different segment of activities, I would like to make a zoom on our high-tech material activities that are basically addressing 2 huge transformation, the transformation of manufacturing through our JV AddUp, which is specialized in additive manufacturing or 3D printing for metallic product, and the transformation of mobility with the JV that we have announced last year regarding hydrogen fuel cells with Faurecia. These 2 ventures are really the answer we are providing to the transformation to these 2 industries. On the other side, we continue to invest in our flexible composite activities, which include the rubber goods of Fenner, but also the investment that the group is doing in order to improve the biosourcing of its raw material. Up to now the main renewable product that we are using in the tire are natural rubber, but we are making great efforts to find new solutions in order to build -- source some of the raw materials we are using beside natural rubber. And I should also mention the effort we are making in order to reuse the tires, not only collect but also recycle and reuse the tires in our new -- in the production of new tires. Camso and Fenner are integrating pretty well, and we have, today, with Fenner, very strong synergies of our -- the conveyor belt activities of Fenner with our mining offers. Regarding the advanced engineers product of Fenner that are mostly belt and seals, we are working very closely with them, and there is a lot of cross-fertilization in R&D. And the Camso has merged with our off-highway transportation division, which is now headquartered between Clermont-Ferrand and Margaux, close to Moriel, in order to form the leader in the off-highway transportation market. We are starting -- we have started in 2019 to see the emergence of synergies between these activities and the group, and we consider that at the end of 2019, we have achieved 93% of the synergies that we were looking to achieve in 2019, which is a good rate given the fact that these acquisitions were pretty recent. Regarding competitivity, you know that between 2017 and 2020, the group is looking to achieve EUR 1.2 billion of savings. And at the end of 2019, we are very close. We are on the roadmap, with EUR 891 million of gains, taking into account that if you look at this period, the inflation has the tendency to decrease versus the previous year. And looking specifically at 2019, we have achieved EUR 61 million of saving at the end of the year. This saving, I mentioned it, partially due to our manufacturing organization, and it's just a reminder to say that when we look on the long run, improvement in manufacturing are, of course, linked to our footprint, but mostly due to continuous improvement and process standardization -- the deployment of empowerment in our factories, the simplicity project in order to differentiate our product at the latest stage in the production process and digital manufacturing are also a very strong driver for our productivity improvement. Regarding our CapEx, we end the year with a CapEx of EUR 1.8 billion, which is, let's say, similar to last year, taking into account that we have around -- a bit more than EUR 120 million coming from the CapEx of the new company that we have acquired during 2018 and early 2019. The key message here is to understand that we are shifting our priority from capacity CapEx-oriented towards more productivity CapEx, and that's -- that will translate in further gain in the future of productivity in our factories. At the end of December, our net financial debt was around EUR 5.2 billion, which is an increase of close to EUR 1.5 billion versus the figure we published at the end of 2018. You have to remember that at the end of 2018, we closed the acquisition of Camso on the 18th of December 2018, so Camso was consolidated in just one line in our balance sheet. So we opened the year, and we split all the element of Camso balance sheet, so we have an increase of debt of EUR 337 million due to the Camso price purchasing allocation. If you look now at the remaining increase, which is EUR 1.1 billion, you will see that most of it is coming from noncash items and particularly, the effect of IFRS 16, which translates in an increase of our debt of more than EUR 830 million. Structural free cash flow has, of course, contributed to decrease our debt by EUR 1.6 billion. We have spent EUR 500 million in M&A plus I should have the EUR 249 million of the debt of the company we acquire. So altogether, M&A has contributed to increase our debt by EUR 771 million. And we have, of course, the effect of the dividend, EUR 676 million and of the share buyback, EUR 141 million. So overall, we have a debt of EUR 5.1 billion, which means a gearing of 39% and the net debt-to-EBITDA ratio of 1.09, which is very close to the one we have last year. In this context, and the -- our long-term rating has been confirmed at the end of last year by all the free rating agency, with A- at S&P, A3 at Moody's and A- at Fitch. So as was already mentioned by Florent, we have -- we will propose to our next shareholder meeting the payment of a dividend of EUR 3.85 per share, which represent a payout ratio of 37.6%, which is in line with the commitment we have taken, an increase of 4% versus last year, which is in line with the increase of our net results. The group net consolidated result was EUR 1.73 billion, which is EUR 9.69 per share. So that's all for 2019. And now I would like to share with you our guidance for 2020. Regarding the market, we consider that the market will remain oriented relatively downward, partially because we consider that original equipment market should not recover in 2020. So looking segment per segment. We believe that the automotive original equipment market should be down around 3% in most of the geographies. The replacement market will remain stable, of course, with the shift, both in OE and replacement between, let's say, standard versus premium tires. So we consider that 18-inch and above tire demand should remain steady at plus 10%. So we'll continue to benefit from this mix effect. But overall, we believe that consolidating original equipment and replacement, the automotive market should be flat or slightly decreasing. The truck market is characterized by, as I said, a decline that we have observed during the second half of the year. Just to remind you, at the end of June last year, the truck market was growing in North America, and it has completely flipped down during the second half. So we expect further decline, both in Europe and North America and a market that will be probably slightly growing in emerging regions. The replacement market will be up slightly, lift by the fact that there will be less new truck on the market and the freight is not, let's say, declining at the pace of the original equipment market, of course, so we consider that the replacement market will be overall slightly up in most of the regions. I just want also to remind you that we will have, in this segment, a geo mix that will be probably unfavorable as we are mostly exposed to the European and the Americans, both North, Central and South markets. As the specialties are concerned, regarding mining, what we observed is that mine would output is pretty stable, so we consider that the construction of tires in the mine will remain stable. But as the, let's say, the economy is not overall well-oriented, we consider that most of the actors will look very closely to their inventories. And we believe that we might have to deal with a decrease of inventories of a couple of week or a bit less than 1 month at the mine, which will lead to a slight decrease of the mine tires demand -- mining tires demand. Regarding off-road, although we believe that replacement market will be slightly up, we consider that both agricultural and construction market will continue in original equipment to show a downward pattern. And we believe that both 2-wheel commuting and aircraft segments will continue to grow. So overall, we bet on the specialties market demand declining by 3%, strongly pulled down by the off-highway transportation but with, let's say, a timid evolution of the mining segment. So our guidance will be based on the following scenario: we believe that the cost of raw material price and custom duty should have a positive effect on our bottom line. But at the same time, and I put apart the effect of the currency effect, at the same time, we consider that price and raw materials should be overall neutral. We have part of our business that are based on long-term contracts that are indexed. And of course, this indexation clause will apply. And in this case, the selling price will decrease. But we will -- we are betting overall on a price mix -- price raw material effect, which should be neutral. But of course, we will do our best to retain all the mix effect that we are expecting, both from the market. You observed, let's say, positive effect of between original equipment and replacement, and of course, the product mix, particularly on the SR1. Regarding the competitiveness plan, we are committed to continue to deliver what we have delivered in the previous year, which will lead us to the EUR 1.2 billion saving over 4 years, and it should translate into a positive effect through probably at least EUR 50 million in 2020. So in this context, and I'm sure that you will have a question about the small asterisk, which is on the title of this document, it's extremely difficult to assess what could be systemic or potential systemic effect of the coronavirus crisis in China. But in this context, if we put that apart, we should have our volume evolving in line with our -- with the market, so the volume will have a negative effect. And thanks to the action on the competitivity, the mix, the synergies that we are starting to extract from our acquisition, we bet on a very slight decrease of our segment operating income at constant exchange rate in 2020 versus 2019. While we will continue to deliver a very strong structural free cash flow, which will be at least EUR 1.5 billion, keeping in mind that in 2020, we'll have to be the cash out of the restructuration that we have announced during the last -- second half of 2019. So that's for the guidance for 2020. And Florent, if you want to make a conclusion?

Yes. Thank you, Yves. So what we have seen is that very much in line with the purpose of our company, we have steered our business in a very tough environment in 2019, and we project to do the same in 2020. Of course, our sector is still highly competitive. We still are -- have customers' behaviors that may change over the time. So what we need to remember, in this environment, is the capacity of Michelin to deliver very strong results in a very volatile environment, which I think is a testimony to the quality of our teams and the quality of our offers. And thanks also to the commitment of our customers, we are able to do that. So now we are open to all the questions you may have. And so we can proceed. Unfortunately, I don't see -- because I have -- I think, on the right.

A question from Thomas Besson.

Thomas Besson, Kepler Cheuvreux. Three questions, please. I'd like to start with restructuring. You've announced 3 plant shutdowns over the last 18 months. First, could you tell us if you're happy with the setup of the organization after this or whether we could believe there may be more, given that end markets continue to be complicated in 2020? And can you just help us understanding the sequence of cash outflows between 2019, '20 and '21 for the 3 plants that have been announced? That's the first question. Shall I say -- I'll give you the other ones. The second, you've mentioned pricing being sometimes complicated. I think it's been a factor for all passenger carmakers, notably in Europe. Can you tell us what are your assumptions for European passenger car pricing in 2020? Is there any chance it improves with inventories still high in most segments? And third and last question, please. On guidance, I know you always like to be cautious, but Yves you've just said, we expect a very slight decrease in operating profit. I think most companies would have said we expect flat earnings. Is that what you really mean? And then the midterm guidance, I think, when should we expect that to come out? Is that going to be in Q4? And what format is it going to be? An Investor Day or is it going to be just new target?

Thank you. So the first question about the restructuring, we are never happy with restructuring. It's always one of the most difficult decisions we have to make. However, as an industrial company, we constantly have to adapt to our environment. And sometimes, when we come to the conclusion that a site may not be in a position to readapt to new markets or whether cost of restructuring the site or transforming this site is more expensive than building a new plant, we take the conclusion that we may have to close it down. The closures have -- decisions have been made on a few sites. We never -- we don't have a plan, but we are constantly monitoring the efficiency of our industrial setup. We have very clear target in terms of competitivity that we share with you. And to achieve this competitivity, we not only have to close sites but also, as Yves mentioned it, to really put more emphasis on the productivity investments. And we have made clearly a shift last year towards putting more emphasis on productivity investment rather than new capacity buildup. Now as far as new plants, we are constantly monitoring what we do, and we will not disclose plans. But I must say also, to end up on restructuring before leaving the cash flow projection for the 3 sites to Yves, we have negotiated for the 3 sites, Dundee, Bamberg and La Roche-sur-Yon. We have really negotiated very responsible deals with the people that have been affected by those plant closures, and we have finalized the negotiation at La Roche-sur-Yon. 96% of the people involved in the site have voted for the plan we are proposing, which is a very cumbersome plan for everybody. At Dundee, already half the people concerned by the closure have already found a new job, either better paid or equal to what they had at Michelin. And we have extremely good relationship with the Scottish government, but the way we handle, how we are going to recreate new additional jobs in the place where we are living. So I must say that we handle this in a very responsible manner. As far as the cash flow projection?

Yes. Most of the negative cash flow effect is due to -- occur in 2020, because it's linked to the -- we try to offer systematically, for example, in France, a position to each employee, but we know that some people will not necessarily accept to move to another city. So whether the cost to help them to move to another Michelin site or the cost to prepare themselves to find another job, so most of these costs will occur in 2020.

As far as the pricing assumptions are concerned, we do not price according to our competition. If that were the case, we would not have seen the price gap between our main competitors increase over the past years. What we have demonstrated in 2019 in this, even though the price gap has increased, we have not lost market share, which demonstrate the power and the willingness of our customers to pay for a differentiated and -- offer of Michelin. We -- sometimes in our industry, we think it's not very mature as far as pricing is concerned, so we try to be more mature on this aspect. Now as far as what will happen during the year, I don't have a crystal ball, so I don't know. In this environment, we have said to all our teams, "This is not a time where you want to discount prices to obtain marginal shares. The only thing you do is you destroy your margin, and you don't get any additional value." So we are -- we have said that to all our teams, so it is very clear. As far as what the rest of the -- our environment will do, I don't know. As far as the guidance is concerned, of course, a very slight or slight is always a question of appreciation. And yes, of course, every -- behind every word, you may put any imagination you may have. And I'll leave now the floor to Yves, who is going to give you what it means.

No. We consider that we should have -- we should face a slight decrease in our operating margin. We are in January -- in February. And honestly, with the trend of the -- particularly the original equipment market volume during the Q4, partly in B2B, we consider that our role is to be prudent regarding 2020. We will do our best to deliver what is in our hand, but we are not mastering the market, unfortunately. And the second question is that for the midterm guidance, I would like you to be a bit patient. You'll have to wait until the 8th of December of this year.

2020.

Yes. So we'll invite you for a Capital Market Day at the end of the year to share with you the long-term group strategy and our, let's say, relatively more midterm targets.

Give me a second. I think Gaetan Toulemonde.

Gaetan Toulemonde, Deutsche Bank. I want to come back on Thomas' question on this restructuring. What is the order of magnitude of the saving we should expect this year and next year? I think this year, we should have mostly the U.K. plant payback; and next year, France and Germany. Can you give us an idea of the savings order of magnitude?

We don't disclose precise numbers. So yes, in 2020, we get the benefit of the Ballymena plant closure. Dundee benefit will come in 2021. And you're going to see the benefit of La Roche-sur-Yon and Bamberg between 2021 and 2022, 2023. That's where you look at the full benefit of this restructuring. But we don't disclose the precise amount of how much we gain per plant closure.

I have a second question regarding the volume effect. If I understood well, last year, you had 2 negative impact: number one, the volume; and number two, the destocking impact, which cost you more than EUR 200 million overall. In this current weak volume environment, should we expect a non-absorption of fixed costs on top of the negative volume? Or you consider that the decline of volume will be good enough not to make an effort on destocking on top of?

I will leave you, Yves, to answer. But some of the -- we have ended the year at an appropriate level of inventory. Like what Yves mentioned, we have really [ stayed ] there. In the second semester, our inventory down, so that we -- because we knew the year 2020 would be difficult. So if the market environment does not move too much from the assumptions we've made, I think we would have a better industrial performance versus this year.

Sorry, if I understood well, the production should not be too far away since the destocking of last year's nonrecurrent?

Yes. We are also driving our inventory down structurally. As Yves mentioned, we have this target to extract EUR 500 million out of inventory. So apart from that, which is the normal saving we would do out of the continuous progress on reducing our structural inventory, yes, your assumption is right.

Okay. Perfect. Last question. On the others, where you have depreciation increase last year where you have the start-up costs, this bucket this year should be what, small negative? Or can you help us?

Yves?

We should have less start-up costs. We'll have a bit of remaining start-up costs in Mexico and in Thailand, but we should have less start-up costs. And we will still continue to have a slight increase in the depreciation because the depreciation is not yet at the level of the CapEx. But we are nearby, let's say, closing the gap between the 2, but not yet in 2020. That's why we'll have a slight increase in depreciation.

Okay. Maybe we can take a question on the Internet.

First question from Mr. Kai Mueller from Bank of America Merrill Lynch.

The first one would be on your free cash flow. Obviously, you are quite confident also going into 2020, again, on your above EUR 1.5 billion. I'm just trying to understand a little bit, you're still guiding a CapEx level of EUR 1.8 billion despite your acquisition of Multistrada, which should give you some savings. What is that, that you're still investing so heavily in, i.e., flat year-over-year despite, obviously, that weaker volume backdrop? Is there no chance to reduce that? Or what leeway do you have on that, is the first one? Second one, on your scope. You're obviously guiding for the EBIT slightly down ex scope, ex FX, How much scope should we still expect from Multistrada and your other acquisition that should be coming in this year, which is the Masternaut? And then, as a third question, just to sort of square it up, I think it follows up from the previous ones, but you obviously target positive price mix versus raw material. You said you want to get about EUR 50 million of competitiveness savings as well. At the same time, you guide EBIT down. So following up again from Gaetan as well is, would we expect on the weaker volumes, again, a very significantly negative drop-through? Or should you normalize that to the more normal volume drop-through you've shown in the previous years?

Yes. Thank you for those questions. So I will take the first one and then Yves if you want to take #2 and #3. About the free cash flow and our level of investment. In our investment, as was rightly mentioned by Yves, we also now have the investment due to our new activities. And in those new activities, the growth is good. So we have overall reduced sharply our investment in the, I would say, the traditional perimeter. As far as further effort are concerned, we have -- we are reducing, to the minimum, any capacity investment. However, we need to factor into your computation the fact that when we make restructuring, we also have to displace production, and we had to reindustrialize production in other places. Plus, the mix effect is not for free. The mix, you also have to readapt your production capacity. And that's why the level of investment has been set at EUR 1.8 billion, which is a reduction on the historical perimeter, taking those 3 factors into consideration. But we are confident in our capacity to generate cash flow like we did in the previous years, with our structural savings we're doing, tight steering of accounts payable, accounts receivable and inventory. We are improving every year on this, and the level of investment is necessary to be able to achieve our competitivity gains and also to nurture our new businesses. As far as the scope, Yves if you want to take?

Yes. Maybe I can just add the investments in percentage of our sales has decreased in 2019. Regarding the scope, Multistrada has been acquired the 3rd of March -- or 5th of March 2019 and Masternaut at the end of May, so the scope effect will be very minimum. We don't expect a huge scope effect during the year. Regarding the different element of the margin, we expect a positive price-mix raw material effect. Competitivity should deliver, we believe, at least EUR 50 million, and we are aiming for EUR 50 million. We are relatively prudent regarding the volumes. As we said earlier, partially, the B2B original equipment markets were not very well oriented during the last quarter of the year, so there is some prudence. If I take the SR2, we mentioned market overall going between minus 2% and minus 3%. But we know that we have a geo mix, which is unfavorable. So you can guess that on SR2, our volumes will be less than this field.

And is it fair to say that, that's -- the drop-throughs, basically, if you think about how -- that you have an issue on the fixed cost absorption, we should expect some of that also in 2020 as you outlined for 2019?

It will depend of the level of inventory at the end of the year. Gaetan already asked the question. We have -- we end the year with an inventory level, which is at 19.5% of our sales. So we have made an acceleration, if I say, during the second half, but we know that we have constantly to work on the structural measures in order to improve our supply chain and have a healthier inventory level.

Next question from Gabriel Adler from Citigroup.

Just one question on working capital. You discussed the improvement that you're seeing on inventories in great detail, but there's also a clearly scope for improvement on payables. The increase in reverse factoring in 2019 was very, very modest at about EUR 5 million. Is there scope to increase your reverse factoring program started in 2020? And is this another way that you'll look to optimize working capital in the future?

You're referring to a factoring program, we hardly use factoring programs...