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Edited Transcript of PIA.MI earnings conference call or presentation 30-Oct-19 1:00pm GMT

Nine Months 2019 Piaggio & C SpA Earnings Call

Pontedera, Pisa Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Piaggio & C SpA earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandra Simonotto

Piaggio & C. SpA - CFO

* Raffaele Lupotto

Piaggio & C. SpA - EVP of IR

* Roberto Colaninno

Piaggio & C. SpA - Chairman & CEO

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Conference Call Participants

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* Emanuele Gallazzi

Equita SIM S.p.A., Research Division - Research Analyst

* François Robillard

Intermonte SIM S.p.A., Research Division - Research Analyst

* Massimiliano Vecchio

Unione di Banche Italiane S.p.A., Research Division - Senior Analyst

* Monica Bosio

Banca IMI SpA, Research Division - Research Analyst

* Niccolò Guido Storer

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Renato Gargiulo

Fidentiis Equities S.V.S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Piaggio First 9 Months of 2019 Financial Results Conference Call. (Operator Instructions) Mr. Raffaele Lupotto, Executive Vice President, Head of Investor Relations, is going to chair the meeting. Please go ahead, sir.

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Raffaele Lupotto, Piaggio & C. SpA - EVP of IR [2]

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Yes, hello. Thank you very much for taking the time today to follow this conference call. Here with me are Roberto Colaninno, Piaggio Chairman and Chief Executive Officer; and Alessandra Simonotto, Piaggio Group Chief Financial Officer.

All the relevant materials is available in the Investor section of our website. And at the end of the said presentation, as we said before, we are ready to answer the questions you may have.

Before starting the conference call, as usual, I need to remind you that during the conference, we can use forward-looking statements that are based on Piaggio's current expectations and projections. By their nature, forward-looking statements are subject to risks that can cause actual results to be materially different. (Operator Instructions)

And now I would like to hand over the conference to Alessandra Simonotto.

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Alessandra Simonotto, Piaggio & C. SpA - CFO [3]

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Hello, Raffaele. Hello, everybody. In order to make our call focused and productive, I will concentrate on few important points.

Let's move to Page 4 of the presentation that gives you a snapshot of the outstanding results achieved, notwithstanding the high demanding basis of comparison and the persistent weakness of one of our most important markets, India. The key point underscored in the slide is cash generation, which is, as you know, our top priority. We have been able to generate EUR 95 million of free cash flow to equity, the best result in the last 12 years despite the step-up in capital expenditure to support new initiatives.

Stronger cash generation pushed down the adjusted net debt to EUR 366 million, EUR 63 million below December 2019. This outstanding performance comes from the strong improvement of all key operating metrics. Net sales went up 10%, the highest growth rate to date with all geographies positively contributing. Operating margin rose significantly, notably with the EBITDA reaching the best absolute result since 2007 and the best percentage on sales to date. EPS grew 27%, again in the best performance of the last 11 years.

Let's move to Page 5, on which we summarize our industry's key demand trends. In a nutshell, Europe demand regained strength in Q4, while Asia lost steam and Indian demand kept sinking. The key point here is that Europe kept on posting sound demand, ending up around 9%, with the upward trend widespread among all product segments in all major countries. In our view, this picture may suggest that the long-awaited replacement cycle is finally underway. I would like to add that Piaggio Group kept the same market share of last year.

As said, India was in a different path, namely 2-wheelers' downward trend accelerated across the year, while 3-wheeler light commercial vehicles trended down, essentially behind the extremely tough comparison base as last year's demand in the passenger segment had been artificially boosted by the release of new licenses in some big cities. Excluding this one-off effect, demand ended up 40% versus 2017. This suggests that the underlying demand for this kind of vehicles is still very strong. In this context, Piaggio gained market share both in 3-wheelers and in 2-wheelers.

Let's move now to Page 6 to have an in-depth analysis of the trends by business. As said before, revenues grew in the first 9 months at the fastest pace to date, 9.8% or 8.2% at constant currency. This performance stemmed from synchronized growth in all cash-generating units and in all businesses. Clearly, looking at the gap between volumes and revenue trend, we can notice that the key driver of growth has been the stronger positive price/mix effect in all geographic areas and all business segments. This effect has been driven by our strict pricing policies, coupled with our ability to pass through costs with selective price increases, leveraging the strong appeal of our brands.

Looking on more in detail at the performance by geographic area. India revenue growth slowed down across the period, affected by the prolonged market weakness. Conversely, Asia Pacific continues to surprise at the upside, posting a strong growth both in volumes and the revenues. We also keep on drawing strength from the outstanding performance of Indonesia, Thailand and China, all with revenues surging more than 40%. Also, Vietnam, despite the heightened competitive intensity, ended with revenues on the rise.

I would like to spend more time commenting on the positive performance of 2-wheelers in EMEA and Americas. Namely, in Europe, our retail sales grew broadly in line with market demand trends. This lower trend of our selling volumes showed on the slide was driven by actions aimed at curbing dealer stock. Despite that, revenues in the area grew around 8% behind the positive contribution of all major countries, apart from the Netherlands. Lastly, EMEA and Americas light commercial vehicles kept on posting sound results, with synchronized growth of European and export sales.

Let's move now to Page 7 to look at the breakdown of the performance by product. As said before, revenue growth stemmed from all product segments. Notably, both bikes' and scooters' revenue growth had been driven by strong brands. Bikes' growth accelerated as the year progressed mainly driven by the outstanding performance of Moto Guzzi, which revenues grew more than 70%. Aprilia bikes posted good performance too, with volume and revenues on the rise. Scooters kept on benefiting from the healthy performance on Vespa and MP3, the former ending with revenues up close to 10% and the latter with revenues growing more than 15%.

Let's move now to Page 8 to have a look at the EBITDA bridge. As I said before, EBITDA ex IFRS 16 grew by 10%, reaching EUR 183 million, the best performance since 2007, with margin on sales at 15.3%, which represents an all-time peak. Notably, excluding the currency effects, the EBITDA margin would have been even higher, landing at 15.4%. This outstanding result was driven by healthy gross margins. In fact, excluding the currency effects, the present gross margin would have been 30.5%, broadly in line with last year. Notably, as you can see in the chart, the strong improvement of net sales has largely offset the negligible negative mix effect. Cash operating expenses ended up versus prior year, reflecting heightened effort to support new initiatives and upfront costs for new product development. Lastly, as you can see, IFRS 16 adoption brought a positive effect, lifting the EBITDA to EUR 188.8 million, margin on sales to 15.7%.

Moving to Slide 9. We can see that net result ex IFRS 16 surged 27.1% plus EUR 9.9 million, with margin on net sales that reached 3.8 percentage points, 0.5 percentage points above last year. On top of a positive EBITDA contribution just described, we kept on benefiting from lower financial expense, reflecting lower level of debt and lower cost of funding arising from recent initiatives to end at a lift. Lastly, as you can see, IFRS 16 has a negligible dilutive effect stemming from higher D&A and financial charges.

I will skip now Page 10 that summarized the figures that we have just discussed to move directly to Page 11 to have an in-depth analysis of cash and net debt. In my opinion, this is the most significant slide today since it specified our ability to reduce debt whilst returning value to shareholders through dividends and buybacks. In detail, operating cash flow grew versus last year primarily on the back of higher EBITDA. Working capital cash generation reached an all-time peak mainly driven by the strong containment of inventories, higher contribution of payables, while we have been able to rein in receivables. As expected, capital expenditure was significantly higher than last year, plus EUR 19 million driven by heightened focus on new product launches, but consistent with the full year target, around EUR 130 million. Lastly, change in equity was higher than last year, mainly reflecting higher dividend base.

As a result, we produced EUR 63 million of cash, which pushed down adjusted net debt ex IFRS 16 at EUR 366 million, well below September and year-end 2018. Leverage went down from 2.0x in September 2018 to 1.8x, which testifies that we are fully on track with our long-term goal to keep leverage below 2x. Lastly, including IFRS 16, the net financial position ended at EUR 405 million, also in this case, below year-end 2018 and at the same level of September 2018. Thank you.

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Raffaele Lupotto, Piaggio & C. SpA - EVP of IR [4]

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Okay. Now we are ready to answer the questions you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Bosio, Monica of Banca IMI.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [2]

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The first one is it's my usual question. In July, the company guided for a full year EBITDA, excluding IFRS 16 impact, in the range of EUR 220 million and EUR 225 million. And my perception was that the company was quite optimistic toward the higher end of this range. Is this still the case on the back of the weakness of India? Or are you a little bit more conservative?

And in terms of guidance, given the very brilliant results in net cash flow generation and in net debt, can you give us an update on the full year expected net debt? And this is the first question.

The second one is on India on one side and Europe on the other side. Can you give us an update of the Indian market trend in October? And what do you expect in terms of volumes by year-end? Or if in the next year, do you expect a slight trend or a further downside? And can you also please give us an update of the European 2-wheels market by year-end and in October?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [3]

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Okay. Hello, Monica. So the first question regarding the consensus figures and our guidance, given the first, with the strong results in the first 9 months and notably, the performance, the outstanding performance in Asia and in Europe, we are able to offset completely the weakness that we see in India. And so I'm very glad to confirm that we can reach around EUR 220 million, EUR 221 million of EBITDA. So we don't change our guidance. We gave a guidance in terms of debt, around EUR 415 million to EUR 420 million. I think that EUR 415 million are achievable this year, again thanks to the strong generation -- cash generation that we reached in the first 9 months of this year.

Going to India and then Europe. So in India, Q4 or even October will be a little bit negative even if the rate of decline in October will be lower compared to prior months. There are some good news. Essentially, retail sales are going up in September, October. But we can't take this as a new normal. So we want to be prudent. October maybe will be a little bit done. I will say that Q4, for light commercial vehicles, can be down probably in the region of mid-single digit going down. Conversely, for 2-wheelers, after maybe a still difficult October, we should resume growth in November, December. So we should end Q4 with volumes in line or even above prior year. In both cases, light commercial vehicles and 2-wheeler, given the fact there are very positive price effects, I think that Q4 can be -- or can end up -- yes, can get up compared to prior year. Clearly, that was what I was referring to, domestic market.

Export market is doing very well. We went up double digit in the first 9 months. We think that we can go up even in Q4. In this case, we can give you also -- we can be more confident concerning 2020, and we expect double-digit growth in the export market for light commercial vehicles, maybe also in 2020. So I gave you also a view on 2020.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [4]

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And so do you expect a double-digit growth...

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [5]

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In the export market, export market to India, okay?

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [6]

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In the next 4 months?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [7]

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Export market. Yes. You have seen already in the first 9 months, we went up double digits, and we can keep this growth.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [8]

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So overall, do you expect a fourth quarter year-on-year improvement?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [9]

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In terms of revenues. In terms of volumes, we want to be prudent. And so maybe we will have a small decline. Actually, it's not a double-digit decline as in Q3...

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [10]

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Yes, it's mid-single.

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [11]

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Yes, exactly. Going to Western countries, in this case, we expect -- I can give you more color on that. Volume rising mid- or high single-digit in Q4, speaking of 2-wheeler, and your question was referring to 2-wheelers, I think. And then as you probably noticed in the first 9 months, there has been a gap between sell-in and sell-out, and that has been driven by our action to curb the dealers’ network. Given the expense of the dealer stock drawdown achieved so far, we think that the delta between sell-in and sell-out could narrow significantly in Q4 and also on the back of some new product launches. So that's the reason why we are confident we can reach these very good results in Europe in Q4.

Additionally, as defined in the first 9 months' results, we should benefit from strong positive price/mix effect that should drive revenues up double digit in Q4.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [12]

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That will be okay.

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [13]

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Yes, it is, I think. I hope that I answered your questions.

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Operator [14]

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The next question comes from Gargiulo, Renato of Fidentiis.

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Renato Gargiulo, Fidentiis Equities S.V.S.A., Research Division - Analyst [15]

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Well, my first question is on cash generation. It seems that the main driver of your operating working capital improvement is on inventories, which are down more than 300 basis points year-on-year. Could you give us any more indications about the main drivers there, if it's more related to European market or elsewhere?

Then second question, on the tax rate. Could you give a guidance for the full year, including the Patent Box agreement you signed and the India cut in the corporate tax rate?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [16]

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So working capital. Again, we have been very, very strong in terms of inventories. So inventories end up just EUR 1 million above December 2018 and EUR 17 million lower than 2019. So we did extremely well. And this is, again, the result of our deliberate strategy. Receivables increased a little bit, but again, with a lower weight on sales. So I'd say we did quite well also in terms of revenues -- or sorry, receivables compared to revenues.

And again, vis-à-vis to the asked question that I answered to Monica Bosio, so we draw down a dealer network. So we don't need to push sales, giving several days of payment. And so we are able to reduce strongly receivables. So good results in terms of receivables and good results in terms of inventories. Receivables, also if you consider [the fact that our factory] has been pretty much in line with last year, also went down on percentage of sales, and so it has been a very good result. Then as usual, we achieved a good result in terms of payables. But again, payables are pretty much in line with last year if I compare it to the total consolidated purchase.

The second question is -- pardon me?

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Renato Gargiulo, Fidentiis Equities S.V.S.A., Research Division - Analyst [17]

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Go on, please.

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [18]

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Okay. And then there was your second question concerning the tax rate?

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Renato Gargiulo, Fidentiis Equities S.V.S.A., Research Division - Analyst [19]

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Yes.

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [20]

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Am I right? So in this case, Alessandra, can you...

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Alessandra Simonotto, Piaggio & C. SpA - CFO [21]

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About the tax rate, as you can see in the figures that you have read in our presentation, the tax rate adopted at the end of September is 43.5%. We are working for the end of the year for a tax rate between 42% and 43%, taking account of the Patent Box and the tax rate in India -- and tax rate in India that has changed in the last month.

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Renato Gargiulo, Fidentiis Equities S.V.S.A., Research Division - Analyst [22]

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Okay. If I may, 2 follow-ups. On net debt, isn't your guidance already including the around EUR 8 million payment following the lawsuit with a supplier? And second question, can you give us, if any, an update about the agreement with Foton, if you have any more indications about your expected production?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [23]

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Yes. So when I gave you before the guidance in terms of EBITDA, in terms of net debt, we are already including the potential negative effects linked to this judgment that you are mentioning.

Going to your second question, Foton. Probably, you've seen some pictures on what products are already on the news. Yes, everything is going on and fully on track with our expectation. And very good news, we are able to sell the first product in, I would say, at the end of next year. So I think that this is something very important because I know that a lot of analysts don't yet include the potential positive impact stemming from revenues of new products at the end of next year. So everything is on track. You will see the first products come in and to be sold in Q4 next year. And probably, we'll have some data a year later.

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Operator [24]

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The next question comes from Vecchio, Massimo of UBI Banca.

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Massimiliano Vecchio, Unione di Banche Italiane S.p.A., Research Division - Senior Analyst [25]

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Two questions from my side. The first one is a follow-up on the destocking in Europe. You already said that destocking will be lower in Q4, but still, there will be some destocking. I was wondering if you were in a position to give indications on 2020 or at least to the first half. So put it in other words, are you happy with the stock level of dealers? Or do you wish to further reduce that in 2020?

Second question is on your product lineup and future launches. If you can give some more color on what you expect to launch in terms of electric and hybrid models, ideally articulating by geography and by 2- and 3-wheelers.

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [26]

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Hi, Massimo. So in terms of a mismatch between sell-in and sell-out, yes, we think that this gap, as I was mentioning before, will go down going forward. So we have done already a lot in terms of drawdowns. So gradually going also and looking at next year, you should see a sort of a reverse trend. So at one point, you will see probably sell-in going up more than sell-out nearly in the second part of the year. But again, the gap between sell-in and sell-out will narrow strongly starting from Q4, right? Then -- yes.

And as far as the product launch, so you were talking to electric vehicles, I think. So first of all, I would like to say that we are very happy with our sales of Vespa Elettrica. So far, it has been sold mainly, we say, in Europe and U.S. For the next year, 2020, we don't expect to have a new electric 2-wheeler. So this is -- but clearly, we are working on these kind of vehicles. And probably, you'll see something new in 2021.

On the other side, and we specify our attention on these new topics and new -- on new engines, probably, you noticed that we already launched our new 3-wheeler in India. So it is called the [Apé E-City], and the product is targeting urban areas' clients. So it's a small-body, City Pax vehicle, with a battery range in the region of 100 kilometers and will be equipped also with a couple of batteries.

The other good point is that, as you probably know, for electric vehicles, there are some discounts. So -- or road taxes, GST are lower. So the total price or the road price will be pretty much aligned with the price at which we are selling our normal CNG version of the Apé Pax. So again, 3-wheeler, we are there, 2-wheeler, we are there. We are working on that. In 2021 probably, you will see other 2-wheelers coming to the market.

It is a market that is important, went up in the first 9 months of this year in Europe, around 70%, total amount of 40,000 vehicles sold. So far, in Europe, it's still mainly focused in B2B sales, okay? So it's good for a renting company.

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Operator [27]

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The next question comes from Storer, Niccolò of Kepler.

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Niccolò Guido Storer, Kepler Cheuvreux, Research Division - Equity Research Analyst [28]

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The first one is on the price/mix effect that we continue to see in Western countries, if you can elaborate a little bit on the reasons behind that and what should we expect going forward. And the second one is the -- on the GITA launch, are you including any potential revenues or margins for the year 2019 on your guidance?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [29]

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So in terms of price/mix, you're right, and probably, you have noticed also looking at the slides that we had a strong -- very strong performance with motorbikes. So revenues went up strongly quarter-after-quarter. So there has been an acceleration in revenues. So this explains a little bit of a part of the price/mix effect that we have in Europe, namely, Aprilia grew in terms of volumes and revenues and as Alessandra said before during her speech. And then clearly, you have this outstanding performance of Moto Guzzi, so with revenues that are going up more than 70% compared to last year. So this is a part of the explanation.

Then if you look at our core scooters, so for example, Vespa, in Q3, we had a positive price effect also for 2 -- these 2 vehicles in Europe. So this is the reason why you see this positive -- the positive price/mix effect.

Then there was the second question concerning GITA. So yes, so we are very glad because for GITA, the product will be sold and available starting from mid-November and will be priced at $3,350 per unit at the very beginning just for the U.S. market. The potential and the positive results of these sales are still not included in the figures that I gave you before. So it's just upside going forward.

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Niccolò Guido Storer, Kepler Cheuvreux, Research Division - Equity Research Analyst [30]

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And maybe a final one on the European scooter market. I noticed that at the end of June, the market was up 12%. Now at the end of September, we are at plus 9%. So apparently, a sharp slowdown in Q3. So can you confirm this and what you see going forward at market level? Probably, we are going to see minimized growth rates going forward or it's just a temporary slowdown?

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [31]

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Yes. I don't know. Maybe to check my data again, but according to my data, we went up 26% in scooter in Q1, around 5% in the market, I mean, in Q2. And then again, yes, it's plus 4% in Q3. Clearly, the only part that went down a little bit in terms of speed was the 50cc market that has been artificially inflated in the first part of the year by B2B sales, so sales that have been made to scooter renting companies. So that's the reason why you see -- we have seen the growth rate for 50cc scooters going down from plus 14% in Q1 to plus 6% in Q3. This is the only point. But again, if I look at the split in the first 9 months, over 50cc scooter went up 6.5% and 14%, 50cc. So we don't see a big problem there.

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Operator [32]

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The next question comes from Gallazzi, Emanuele of Equita.

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Emanuele Gallazzi, Equita SIM S.p.A., Research Division - Research Analyst [33]

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Just 2 quick questions. The first one is on the APAC area. The third quarter confirmed the strong trends seen in the first half. So I just would like to have a little bit more color on the trend on this market. The other one is on the Indian market, a quick one. If you can give us an update on Bharat VI and your expectation about the impact of this new regulation for 2020.

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Raffaele Lupotto, Piaggio & C. SpA - EVP of IR [34]

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Hello. Yes, Raffaele speaking. So again, Asia, we did well. You noticed that we have a very strong performance there. So visibility also improved strongly for this area. As you probably know, we changed a lot in the last few years. I think we changed the head of the Asia Pac activities. We changed the way we manage the dealer network, mainly in Vietnam. And we are speeding up in the opening of a new point of sales in other areas of China and Indonesia.

So the performance went very well.

There are 3 markets that are growing or outstripping really market trends. These are Thailand, Indonesia and China. So in this case, volumes and revenues are surging, speaking about more than 40% and 50% growth. Vietnam, as Alessandra was mentioning before, has a very difficult situation. So the market, first of all, is negative, around 5%. We are outstripping market trends, so our sales are above this trend. Revenues are positive. So we are -- we're very good to adapt with this difficult situation in Vietnam. So Q4, I know we see next year will be in our idea, a positive year for Asia again.

Then the last question was Bharat VI transition?

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Emanuele Gallazzi, Equita SIM S.p.A., Research Division - Research Analyst [35]

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Yes. Correct.

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Raffaele Lupotto, Piaggio & C. SpA - EVP of IR [36]

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Yes. So first of all, we have already received that and we have been the first to receive a certification from our Bharat VI CNG engine at the end of September, recently also for the LPG version, speaking about the light commercial vehicles and also for some 2-wheelers. So we expect that the transition across all products will be completed before the end of the year. In the meantime, we are generally starting production on Bharat VI vehicles, aiming at producing 100% of the Bharat VI vehicles by the beginning of next year, maybe the sectioning. I don't know if you need some -- a few more.

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Emanuele Gallazzi, Equita SIM S.p.A., Research Division - Research Analyst [37]

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No. It's fine.

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Operator [38]

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The last question comes from Robillard, François of Intermonte.

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François Robillard, Intermonte SIM S.p.A., Research Division - Research Analyst [39]

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Most of my questions have been answered already, actually. Just quickly, if you could give us an update on the North American market for 2-wheelers.

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Roberto Colaninno, Piaggio & C. SpA - Chairman & CEO [40]

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So essentially, as I wrote in the slide, as for the scooter market, it's still negative. So our performance is improving. Probably, you will notice a sort of pick-up in Q3. But again, it's very real because it's already several years that the scooter market is negative in the U.S. A good point is on the country that has been the negative trend reversed for motorbikes that end up 1% compared to last year. So this is what we can say regarding the market trend in the U.S. I mean the situation is not ramping up, okay, put in this way.

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Raffaele Lupotto, Piaggio & C. SpA - EVP of IR [41]

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So if there are no more questions -- I don't know, operator, if there are other questions?

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Operator [42]

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No, there are no questions at the moment.

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Raffaele Lupotto, Piaggio & C. SpA - EVP of IR [43]

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Okay. So I think that we can conclude the conference call now. And as usual, you know that I think from now on, you can call me if you need a further clarification information. Thank you very much for attending this conference call.