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Earnings Transcript for MGDDF - Q3 Fiscal Year 2017

Executives: Valerie Magloire - Head of IR Marc Henry - Group CFO Matthieu Dewavrin - IR Humber de Feydeau - IR
Analysts: Thomas Besson - Kepler Cheuvreux Kai Mueller - Bank of America Merrill Lynch Gaetan Toulemonde - Deutsche Bank Henning Cosman - HSBC Victoria Greer - Morgan Stanley Lucile Leroux - Goldman Sachs Edoardo Spina - Exane BNP Paribas
Operator: Ladies and gentlemen, welcome to the Michelin 2017 Third Quarter Results Conference Call. I now hand over to Valerie Magloire, Head of Investor Relations. Madame, please go ahead.
Valerie Magloire: Thank you. Good evening everyone. I'm here with Marc Henry, Group CFO, Matthieu Dewavrin, and Humbert de Feydeau, Investor Relations. The four of us would like to welcome you to Michelin's third quarter 2017 net sales conference call. Presentation was made available on group website together with the press release, I hope you could all access to our materials. For your information, we'd like to end this call around 6
Marc Henry: Thank you, Valerie. Good evening everyone. First, we start with our key messages on Slide 2. We see net sales reach 5 billion in the third quarter, up 3%. Thanks to strong contribution in price mix which was up 5% year-on-year. We operated in market environment in line with the second quarter and shaped by OE demand trending upwards in most segments, replacing demand down slightly in mature regions and sustained rebound in mining tire demand. Volumes are up 1% in Q3 and 2.8% year-to-date linked to of course dealer pre-buy in Q1 and the rebound in mining tire sales for the period. Faster improvement in price mix in Q3 to reach a positive $0.05 led to a total 2.6% year-to-date. Thanks to the implementation of all announced price increases, the favorable mix effect primarily led by the 21% growth in volume in the premium 18 and above segment. Currency effect was a negative 3.7% in Q3 and neutral year-to-date. Lastly, we confirmed our 2017 guidance in line with the 2020 objectives. On Slide 3, let's have a look on the market trends and the constructed growth markets experienced in Q3. Worldwide passenger car market was up 2.6%, 3% as a rounded figure, showing a plus 3% in both OE and RT to be highlighted. Distribution inventories are back to the startup levels in mature markets. Replacement demand remained sustained in new markets especially in China, and OE segment slowed down in North American. The OE segment slowed down deep in North America with a 9% contraction in the third quarter, leading to a 3% decline as of September. The worldwide truck market grew 3.7% year-to-date or 4% rounded gaining 12% in OE and 2% in replacement. To highlight, the worldwide total market has slowed down in Q2 on the back of Q1 pre-buy and its regaining momentum in Q3 in a favorable global economy. In Q3, OE turned increasingly positive notably in North America and China, both up 23%. Replacement demand growth slightly, slowed down in Q3, as China notably the world largest market is down 3%. Specialties market are now expected to increase 8% to 10% over the full year as mining tire markets continue to rebound, as inventory drawdown bottomed out and mining production recovers. Agricultural tires enjoyed a sharp unexpected upturn in OE since the end of the second quarter, and sale back in the third quarter after expanding in the first half on early dealer buying ahead of price increases. Demand in two-wheel and aircraft tires continued to grow. Worldwide markets by region are detailed in appendices that you can consult. Slide 4, let's have a look at the net sale bridge that you are familiar with. Let's say for the first nine months of 2017 to pay 6.4 billion, a 6% compared to the 15.5 billion as of September '16, that attributable to the following factor. Volume impact, that is to say growth, added 424 million, reflecting a 2.8% growth in sales tonnage. External growth, reflecting favorable impact of change in scope of consolidation contributed to 19 million following the first nine months consolidation of Levorin, a Brazilian two-wheel tire maker and NexTraq, a U.S. telematics solution provider. As a result, total business growth for the Group organic and external added 3.4% to net sales at September end. A positive price mix impact amounted 2.6% or 404 million over the nine months with the price effect showing the positive 1.8%, affecting both price increase in the recent business and contractual adjustments following application of raw material indexation clauses. The mix effect added 0.5%, thanks to the still highly positive product mix and the favorable impact of the rebound in mining business, which was somewhat dampened by the unfavorable impact of the relative growth rates of OE and replacement tire sale. Finally, there is a neutral currency effect for the first nine months 2017 combined a positive impact in the first half, fully offset by euro rise in Q3 against the Group's main operating currencies. Slide 5 is showing quarterly year-on-year changes for 2016 and 2017. Volume was slightly up in Q3 as we said. As you remember Q1 strong growth driven by pre-buy ahead of price increases and Q2 stable in a high level of inventory at distribution. Price mix is increasingly contributing from the high core, from the first quarter at minus 0.1% to a second quarter plus 2.8% and in third quarter plus 5%, showing Michelin's determination to implement price rises. Both volume and price mix are contributing to net sales as guided, mainly due to volumes in the first half and primarily price mix in the second half. The neutral currency effect for the first nine months of 2017 combined a positive impact in the first half fully offset by the euro rise in Q3 against the Group's main operating currencies. Following a four year price adjustment on the back of a cheaper raw material cost, as announced, the price only effect advanced rapidly over the period at the time of rising raw mats from negative 1% in the first quarter to a positive 2.2% in the second quarter, and a positive 4.4% third quarter. The acceleration reflects a price increase which had been announced, implemented and remained firm in the replacement business, and of course contractual adjustment following the application of raw material causes. Remember that in Q1, contractual adjustments were still negative. As for detailed net sales division, in the passenger car division as one, given an unfavorable currency effect, net sales stood at 9.2 billion for the first nine months, up 4.9% from 8.9 billion in the year before. Volumes were up 2.2% for the first nine month, following the sharp increase in the first quarter. The positive price effect reflected the impact of price increases at the time of rising raw mat costs and the impact of indexation closes in OE business which had been positive since July. The mix effect remained extremely favorable. Thanks to the success of Michelin CrossClimate+, Michelin Pilot Sport 4S lines which in particular helped to drive strong growth in sales of 18 inch and larger tires, Michelin branded tires. I will elaborate in a minute. For the truck division, taking into account the unfavorable currency effect as well, nine-months net sales amounted to 4.6 billion at 3.7% from the €4.4 billion reported in the year-earlier period. Volumes edged back a slight 1.1%, reflecting the priority focus on raising prices and improving margins in the third quarter, in line with the target of achieving operating margin in recurring activities of 9% to 13% by 2020. The more favorable price effect stemmed from the price increases implemented to offset rising raw materials costs and of course the application of raw materials indexation clauses. Lastly, in the specialty business, net sales stood at 2.5 billion in the first nine months of 2017, up 18.4% from 2.1 billion the year before. This steep increase was attributable to first the robust 14.6% growth in volumes related to the continued rebound in demand for the Group’s mining tires and the clear upturn in earthmover and agricultural tire sales in OE. Second of course indexation clauses which were still resulting in price cuts in the first half as you remember. Let’s summarize on Slight 8, the quarterly volumes changes for each business, passenger car sales -- passenger car tire volume, as said, is roughly in line with the market on the back dealer inventory going back to normal. Tractor volumes reflect the priority focus on restoring profitability. Rebound in specialty continued with the strong demand in mining as well as in OE earthmover and ag. Slide 9 aims at showing some of the drivers for the Group sustained product mix impact. Our premium strategy has been successful and it is delivering continues market share gains. As you can see, group 18-inch and above unit sales showed solid double-digit growth and amply outpace, the 18-inch and above segment in the worldwide market. That was made possible thanks to customers who value the Michelin brand and its product performance. The price premium of around 10% compared to premium competitors, the force of innovation sought by premium manufacturers, and a continuous growth while made possible of course by new industrial capabilities. It’s made possible thanks to the leading position Michelin holds as premium OEMs and prestige vehicles. Thanks to the long-term technology partnership with Porsche and AMG for example. Speaking after setting the lap time at the Nurburgring, Lars Kern, Porsche test driver, said the pure performance of the new GP2 RS can hardly be expressed in words. However, without the perfect harmony and balance between the chassis and the tire such fast time would not have been possible. And this is of course not to mention all the prestigious brand or models we operate such Corvette, Ferrari, Mustang, Audi, Lexus, Infinity, Cadillac, Tesla or Bugatti. Bear in mind that premium sector goes beyond German OEMs not to be in the largest premium market in the world, I mean the U.S. Primacy 4 shown on Slide 11 is another example of our group innovation leadership. Primacy 4 shows prior safety with outstanding wet breaking performances when new and still when worm without compromising tire longevity. Thanks to our last generation of high performance rubber compound. It is number one in longevity and lasts 18,000 kilometers longer than its competitors on average. It benefits from its superior value until it is worn out, as experienced by TUV SUD and DEKRA test centers. Let’s now review our 2017 guidance which we confirm with updates regarding the scenario. Our group guidance for the full year is confirmed of course with volume guidance and change with a commitment to grow in line with the market and operating income from recurring activities excluding foreign exchange. Our ambition is to be above 2016 still with a neutral effect on price mix of raw material for the non-index business. Structural free cash flow guidance remains unchanged at more than 900 million. The guidance is based on market outlook in the final month of 2017 shade by the following assumptions. Passenger car markets are expected to gradually move back in line with their long-term trends. Q4 demand could be in line with Q3 of course outlook is regardless of winter weather condition which may vary. Demand should continue to expand in truck OE while truck replacement demand in second half should suffer from the slower demand in China, held back by the robust OE market and by the impact of initial regulation of vehicles. And remember, China is the largest truck tire market worldwide and we still have a focused position there. Demand for OE earthmover and ag segments is expected to continue to increase and of course sales of mining tire which have been rebounding since late 2016 should also continue to enjoy strong growth. On Slide 14, we show the updated scenario based on September data, as regards to the financial environment impact and operating income from recurring activities will be as follows. Raw material, we maintain unchanged the full year impact at negative 800 million or slightly below with about 450 million negative in the second half adding to the minus €331 million in the first half. Following the sharp changes over the last summer, exchange rates are now expected to have a negative 110 million to 120 million negative affect over the year, that is to say, the negative 150 million for H2. If you look at Slide 18 in appendices, you'll access data allowing for FX model, net sales by currency, changes in currency and clues regarding net sales to EBIT drop-through. These drop-through vary depending on the cost base between 25% to 30% when there's a manufacturing cost base in the currency we talk about, between 80% and 85% where business is in this currency is fully imports, and some specific situation for Brazilian reais and Thai baht, as Brazil to a lesser extent and Thailand to a stronger extent are export base for the Group. And with regard to driving the performance of the Group, the second half, the Group will continue to manage prices and whole unit margins firm. As a result, changes in price mix and raw mat costs are expected to have a net positive impact on our pricing profit as announced in the second half. And our 2017 competitiveness plan should slightly exceed inflation in the second half as expected. And before taking your questions, I'd like to highlight as mentioned on Slide 15 that Michelin has been voted the second most trusted company in the world in the international ranking Global 2,000 Top Regarded Companies published by Forbes in October 2017. And that the Group's reputation ranks high worldwide adding to our brand momentum. Thank you for your attention. Together with the team, we would now happy to answer any of your questions.
Operator: [Operator Instructions] The first question is from Thomas Besson from Kepler Cheuvreux. Sir, please go ahead.
Thomas Besson: I had two questions please. The first one is on pricing for the coming quarters. You highlighted that you had been prepared to lose some share in the truck business to have solid margins. Can you confirm that Michelin's philosophy is unchanged and that you're going to maintain prices where they are, if you cannot raise them in the coming quarters? That's the first question. And the second, on the truck business again, your volumes were down about 3% in the third quarter and you referred to the willingness to bring margins to the 9% and 13% margin by 2020. Is that to say that it's not going to happen in H2? Or can we anticipate that you're going to be back between 9% and 13% already in the second half of the year? Thank you.
Marc Henry: Thank you, Thomas. First of all our philosophy is unchanged I can confirm that. And I can also confirm that our objectives or guidance for the truck business is to be in the 9% to 13% range in H2.
Operator: The next question is from Kai Mueller from Bank of America Merrill Lynch. Sir, please go ahead.
Kai Mueller: Thank you very much for your time. Just three questions if I may. The first one, you've shown obviously your premium end segment is growing very fast overall. Obviously, we've seen the passenger business still just in low single digit growth 1%, you just outlined there in the volumes. What are you doing about the lower and profitability tires? Are you trying actively get out of it and focus mainly on the fast growing? Or you sort of dragging along, so if you just outlined little bit your strategy around that? And the second point you mentioned, obviously, the growth in agri, in mining et cetera should continue into next quarter. It's been flat before, obviously you know your comps are getting tough into Q4 and then possibly into next year. Can you give us a little bit of color in terms of inventory level we're seeing at the moment in the mining segment in particular? Has they been restocking or are we just no more run rate level? And possibly if you can already give some color in terms of orders going into the next year, and in terms of raw material as well. Obviously you are compensating for that big headwind that you had 800 million this year. The big effect is obviously how you can keep those prices up where they are. Have you seen any of your peers especially on the Tier 1 side, starting to cut prices maybe not quite as vocally or at least sort of trying to give discounts where possible given we have seen the raw materials rolling over?
Marc Henry: Thank you. First of all I think definitively you saw the success we have in our passenger car business in the premium segment in the 18-inch and above that's very clear. What's happening in the lower segments of course first of all those lower segments are decreasing. Mainly the 14 and 16 inch are clearly decreasing and I would say 16, is on the verge of declining. It's still probably the majority of the market today and 17 is of course keep growing. So I would say that now globally, if you assume that our market share is about constant, what that means -- and as we are gaining in 18-inch and above of course we are losing some in the lower tiers, but in the lower seats diameter. But let's remember that the premium market is same, is much larger in the 18 inch and above and then it goes down to when you go to the 14 inch, which that means is that a share of market in the premium is not that lower -- I mean is lower, but not that lower because also the market is lower. Globally of course at the end our share in the smaller seat size diameter is smaller due to the fact that specifically is a market itself in the premium, in the higher price of tires let's say is smaller. I hope it's clear. The second point about the growth for the subsector, the mining, we see a lot of supply chain I would say pension even though we are growing at the speed you see. You do imagine that the speed of the growth of the mining sector is above one of the subsector. So today we see a very strong growth continuing, we see supply chain globally for the makers being on this intention. So, we do not see at least in 2018 any risk in this domain because inventory levels are not high, higher. People are still someone is talking due to this supply chain pension. And as I may times said, large mine operators are about consuming other entire at their rate of consumption, but their consumptions has increase a bit but not so much. But as increase is the medium and smaller size business, mining business, operators we’d say, that’s very clear and also some mining subcontractors which have also remount the business. So, definitely we see strong growth for 2018 in this business without any inventory levels being high, that’s for the mining sector. As far as OE, it’s very strong right now, we still have I would say some questions about the volume continuing to such a level in 2018 probably not because in that case I think that many of the fundamentals are not there in the ag business. But in the mining sector and globally in the earthmover sector, we will see the strong growth in 2018. And for raw material, I don’t think that Tier 1 plays are starting to decrease their pricing. Some have not increased as much as we did as we many time said it. So that’s a fact that we do not see them starting to decrease and for the lower tier players some of decrease but is also talks about increasing it again. So, I would say today it’s more on a flat flattening environment. And for 2018, we do expect some price increase of raw mat, but we have to see of course it's still just a direction that’s not a value.
Valerie Magloire: Coming back just a minute on your questions regarding growth for mining and ag, I suggest that you have a look at Slide 23 in appendices where you will see what is our expected CAGR for agriculture and mining tires based on present situation. So, CAGR of 1.5% for agriculture tires and a 6.5% for mining tires, and you understand from Mark’s comment that it is very much frontend loaded. For sure...
Marc Henry: Those in 17 and 18 after that 19 and 20 is very low as of today.
Operator: The next question is from Gaetan Toulemonde from Deutsche Bank. Sir, please go ahead.
Gaetan Toulemonde: Yes. Good news is that most of my question raised and I have only one left over. And I want you to better understand on the pricing side. On the raw material side, if I look at 2018 and if I look at one of your slide page 29, 30, 31 something like that. It gives me the impression that raw material will be lower next year than this year, and at the same time, the indexation clause should work in full in 2018. So, is it correct to assume those two assumption lower raw material next year mostly in H2, if raw material stay at the current level? And the second thing is that indexation clause working in full next year, so therefore positive pricing on the indexation clause and positive impact on raw materials?
Marc Henry: Let’s say this way. For raw mats, it's stay at a level of where they are today. Of course for H1, they will be below what they’ve been. And for H2, probably very similar, okay. That’s the first thing that set the level of today. Now, second in term of the indexation clause, if I take for example the one of that are, they're clear for mining that are always made in January and July just to give you an idea. First half of 2017 price, we're down in the area of 3% to 4%. At the end of the first half -- in the beginning of the second half, we had a price increase that was in the order of magnitude of 6 to 7%. And you know that as the natural rubber went through a bump, the first half of 2018, we will have a price decrease of about 3% to 3.5%, but still the price point will be above the first half of 2017. So, you need to look at it this way. If you compare -- if you think about the margin of mining tires, the price point will be above what it was in the first half of 2016, and the raw mat will be somewhat below. So at the end, you can, I would say forecast or think about the margin unit that is above in the first half of 2018 versus what it was in the first half of 2017. So, it’s a bit complex, but that’s the way it works. I hope that was clear.
Gaetan Toulemonde: Okay, let me go back to another point, not clear. Raw material next year, you see raw material positive in the first half, not much on the second half, that’s what you said. We thought that the raw material would be positive in the second half, is that correct? So, it's come quicker in your P&L than I thought. Is it correct?
Marc Henry: Yes, yes you can say it this way.
Operator: The next question is from Henning Cosman from HSBC. Sir, please go ahead.
Henning Cosman: Just quickly on the volumes maybe seeing that we’re well into the full quarter already now. Could you maybe give us a bit more color where you see your volume for Michelin now when you stay in line with the market? Are we talking 2.1%, 2.2% at the order of magnitude? And then related to that, I understand that and that's probably the second quarter already. I understand that mining will still continue to be supportive into 2018 and the third chapter overall, but still the volume growth that’s for the Group that we’ve seen now since the capital market day where mill and the 2% area, while your target for 20% growth in the core tire business of 20% implies probably more 23.5% depending on how much mix is in that number. So do you see a risk that you get into trouble growing out of your things, heavy cost structure that the volume growth that’s below the 20% number that you were originally indicating? Can you quickly conceptualize it a little bit against the volume run rate that I would have thought has implied by the 20% target? That’s the second question. And then thirdly, I think in the last conference call you gave us a bit of a qualitative indication how you feel about consensus at the time and now I assume it's already come down into the third quarter. Yet, I think for currency consensus is probably not quite as low as you are yet, as well as obviously needing a very high drop-through rate to get to the FX impact on EBIT that you require in terms of getting to your new guidance. So, if you could, maybe indicate how you feel about consensus now except for currency that I think needs to come down a bit more to reflect your number.
Marc Henry: Okay for volume in Q4, the trend that you mentioned, you can take this one or slightly above something like that. This would lead us into growth that is probably in line with the growth of the consensus as of today that we've published so I think the growth of the consensus as published today is in line with our assumptions, certainly so. Now of course…
Henning Cosman: The volume growth here?
Marc Henry: Yes, yes, volume growth. Now does it link to 2020 target? You rightly said that we expected something around three to 3.5, so this year is probably a particular one, because we've increased our price points, probably slightly above some of our competition so it has put of course some tension in volumes, remember that it does quite some good on the margin, so at the end the EBIT I think the EBIT target is certainly not under jeopardy as far as I can tell because the fact that of course you've a balance between price and volume and let's remember that pricing is always more efficient to get EBIT and volumes of course there is a factor of three basically, because of course pricing is a 100% drop-through. Now, so, that's what I would say as far as we are right now and there's still a lot of -- there's still three years to run.
Valerie Magloire: Maybe we could mention as well that in our outlook for EBIT until 2020, we didn't factor in any improvement in the gross margin for tire. So, on the price mix versus raw material, there was no assumption of a major additional contribution over the period. The idea is to maintain gross margin for tire flat.
Marc Henry: But you know as you've seen it, when you look at the 1% growth FX year-on-year…
Valerie Magloire: That's volume…
Marc Henry: That's a volume effect, a volume effect in absolute value is actually growing, it used to be in the 70 million is no more in the 85 million something range. So it'll continue to -- that's another way to head to of course reach the target. Now, in terms of the consensus I would say when you look at the consensus that is on our website, as of today, I would say we're -- we think it's a very reasonable one and that we're quite aligned with those assumptions. Most probably, yes, that's the only thing I had to say. But we've given you in the slide 18, a way to be a bit more precise, to reach the assumption of currency impact in our EBITDA. The currency impact in our -- Slide 19 sorry, the currency impact in net sales is pretty easy and that’s what we have been doing. For EBIT, there is a drop-through to be calculated. And we used to give you an average drop-through between we said 35 and 40. Now we give it buying currencies that will help you to get a bit of sense of what it could be. But at the end I would say all in all we are -- I think that the concern here is well tune was our own hypothesis.
Henning Cosman: Okay. Sorry, just to clarify. I mean the consensus number on currency on your webpage today is minus 0.4% on revenue. So even at 50% average drop-through, that doesn't get me to your guidance. So you would probably agree that, that needs to come down a little bit, yes?
Marc Henry: The currency is a bit -- yes, the currency is a bit -- well, when I say I'm fine with the consensus in detail by detail it's not exactly is the point. I mean I'm fine with the bottom line and most of the numbers, but yes you are right the currency impact is slightly -- it's still at the level we expect it to be.
Operator: The next question is from Victoria Greer from Morgan Stanley. Madame, please go ahead.
Victoria Greer: Just two please. And first, if you could just talk us through the contributions from Levorin the quarter and also NexTraq and what was the contribution for each in the quarter and which divisions are you going to report those end? And then secondly can I ask about price mix in passenger please. When I look at passenger up 0.5% in terms of total revenue year-over-year, volume is plus 1 obviously you will have some negative from FX there but doesn’t look really it's just price mix has been much better in Q3 than it was in Q2, so am I missing something there, can you talk through those price mix dynamics for passenger please.
Marc Henry: Yes, okay. For the contribution of Levorin and NexTraq, we probably shift in the turnover and that says, but we don’t give data for the bottom line. But it will be a positive 1.
Victoria Greer: Just sales for the quarter, what was the mix between Levorin and NexTraq?
Marc Henry: I think it's something like two-third Levorin and one-third NexTraq I think, roughly that. By my memory, I don’t have the number in front of me by memory of that.
Victoria Greer: And which divisions do they end up in?
Marc Henry: NexTraq in truck in the second sector, and Levorin of course in the specialty division so the third one. Now for the price mix, when you look at let's say -- how should I answer that? For the third quarter, if I look to the -- if you take -- do you like the way to answer the question. If you look at the price mix of the Group is 5%, that’s of two is one that is higher than average. And let’s take roughly one point above the Group average. And passenger would be one point below the Group average. So, roughly the price mix of passenger car in Q3 is roughly 4%.
Victoria Greer: Okay. So, it’s a little bit from Q2, okay. Yes, that make sense thank you.
Marc Henry: Next question please.
Operator: Your next question is from Martino De Ambroggi from Equita. Sir, please go ahead.
Q - : Hi, good evening everybody. One question on the 18 inches and the above, very simple question, but I don’t know if you can share with us this figure, if you can provide us a rough indication of what the weight on sales for this portion of the business? And even more difficult a competitor of yours and also disclosed a profitability by segment, obviously I’m not asking you the profitability. But just to know if you are far from that or any qualitative comment would be appreciated? And on this specialty business side, you mentioned the mining is strong also next year. Ag, maybe not it is right now, but could you -- could we assume the high end of 17%, 24% range for next year due to the mining forecast you've been mined? And the ag, you mentioned very strong now. I don’t know if you can share with us quantitative figure about this segment of the business?
Marc Henry: Okay. For the weight of 18 inch, globally, the weight of the total passenger car -- on the total passenger car market of the 18-inch and above is 14%, 14% for the total market. For Michelin, in passenger car of course, our weight is 28% of our sales. So, basically our mix is twice better than the market. Okay.
Martino De Ambroggi: Okay.
Marc Henry: What that make, if you look at market in 2016, we estimated has being from 200 million tires, so that gives you an idea.
Martino De Ambroggi: Okay. Thank you.
Marc Henry: And...
Valerie Magloire: 18-inch.
Marc Henry: Yes, 18-inch and above of course, of course. And as far as the information given by are nice competitor -- Italian competitor you’re mentioning, I would say this is nearly the margin of increasing largely and probably it’s a same kind of order of magnitude for sure. What I would add is that when you look at our price firms versus this particular competitor, for the data that we are getting from our own market intelligence, we are roughly it should take hereof not something finer, we’re roughly 10% and above in most cases. So, I think we -- that’s why we’re driving also very good of course very, very good margins in this segment.
Martino De Ambroggi: Okay.
Marc Henry: Now in terms of SR3 profitability, as we said we would -- we are going into the somewhere close to the mid-point in 2017 and we’ll be somewhere above in 2018. Be careful of the fact that in, we did know the asset at the upper top for sure in 2018 because let’s remember that to be on the higher side you need to have a lot of things going in the right direction. For example, today the dollar, euro exchange rate is negative to the profitability of this segment because of the high level of sales done in dollars specifically in mining and earthmover tires even into some extent in ag and also in aircraft. So, the subsector has a high mix of the euro dollar exchange rate effect. So but still it will grow, you will see a definitive increase of operating results in 2017 average than in 2018.
Martino De Ambroggi: Okay. On ag specifically some market data?
Marc Henry: Well on ag, as I said there is a replacement market is I would say sluggish, they’re all flat. It was of course filled by tire and not the first quarter, but after that you know the market is on a low trend and it will change by something around flattish in replacement market. OE of course is very strong right now. I would say Q3 is around a double digit growth, but the only point that I was mentioning in the presentation is the fact that this growth is kind of a technical rebound linked to probably quite low inventory at dealerships. When you look at [EMAT] for example you know tractors that get the place. In Europe, it’s just starting. We are just starting to see an increase and it's not so clear in North America. So, we see for the time being and I maybe wrong more as a technical rebound than a long-term rebound because one thing that is unfortunate for farmers is a fact that cereal pricing is still quite low. We saw as a kind of a short search back in Q2, but that’s not being confirmed yet. And you know that Russian for examples crops have been extremely good in 2017. So, it will not help to reduce zero inventory so for the time being we see it as a technical rebound both at the long-term trend to this level. But you know I maybe wrong, but it’s always very difficult to make those kind of assumption in OE. It's very volatile.
Operator: The next question is from Lucile Leroux from Goldman Sachs. Madam, please go ahead.
Lucile Leroux: Yes, hello, thank you for taking my question. I just have two questions. First one would be to comeback on the price mix on the SR3. I think you mentioned that you had potentially a price effect of 7% in the second half. So when I take the volume number, I get the price mix and FX for Q3 was around 1% to 2%. I would wondering if you could give some color on what drove down the overall mix inside this division? And the second one is on the guidance on the operating income, I think on Slide 13 you announced that it is higher or equal to 2016 while my understanding is that it was strictly above 2016 before. So I was just wondering whether you could give a little bit of color on the change. Thank you.
Marc Henry: Okay, sorry that's -- I mean, I think that's a mistake, it's strictly above, yes. I confirm that point. Thank you Lucile, to have remark that there is -- there was no message there, absolutely no message there to be very clear. I'm very-very clear. Sorry for that mistake I don't know how it's…
Valerie Magloire: We'll update.
Marc Henry: Yes, we'll update that because you're right. We put strictly above and should not have been -- yes, I'm sorry. Now if you look at the price in the sub division, there's a strange effect that I've commented sometimes is a fact that when you look at the price mix, it's a fact that the price was up, but the mix is down. It's sound strange because it's -- because of earthmover and mining, because actually the highest price point -- price mix is done with the price of each individual division, it's a fact that aircraft and two wheels have a higher price points per kilogram because if we do it per ton or per kilogram higher price points than earthmover. At the end of course when you look at the margin it's another story but on price points the fact that earthmover overgrew two wheels and aircraft for example, creates a negative mix. I know it's a bit strange for you but it's a fact we could explain to you with some basic data so that you can understand, so actually as you said as you rightly said the price mix of the subsector is rightly be small, but there's a big price positive and relatively big mix, not offsetting completely but balancing quite totally, so your point is well taken. At the end don't fret about the margin. It's going in the right direction.
Lucile Leroux: So, do, shall we expect the same in Q4, than that this would be this kind of magnitude in terms of price mix?
Marc Henry: Yes. For subsector very difficult. Subsector, the pricing is extremely stable because of most of the activity not all, but most of the activity let's say 65 is done on raw material clauses which have been set first on Jan, first of July. So that's why it's pretty -- it will be pretty stable.
Operator: The next question is from Edoardo Spina from Exane BNP Paribas. Sir, please go ahead.
Edoardo Spina: I wanted to reference your answer to Gaetan about OE indexation clauses. Thank you for the numbers you gave us for the prices. But if I understood well there were sequential price changes I think, so if I look at the price increase this quarter I think you say 4.4%. So I think about 230 million. Can you tell us roughly how much was it from OE indexation? How much from non-index business?
Marc Henry: In third quarter, I would say -- okay, globally on the index, it's roughly, it's a small 100 million. And in the non-index is large 100 million. Again, it's the somewhat above 200 million.
Edoardo Spina: Here maybe one quick reference because you mentioned the fresh difference with the Italian competitor and 10% almost. I think that is makes a lot of sense. Can I ask how that reflects on profitability if we can assume that goes around the bottom line of profitability? They disclosed something around 25% for that high-end of the premium, maybe not all of it but should we make that proportion.
Marc Henry: Our passenger car tire business was in the first quarter had profitability of roughly 13%, right. So, you can imagine that you know that the 18 inch and above, we said its 28% of the total. And probably those 28% of the total does more than 50% of the total as [SL1], that’s a way to give you an idea. It will be not more than 50, but let's say roughly 50 or -- I don’t have the number in front of me, but just to give you that its of course much better than the rest. And it pulls a lot of profitability that’s very clear. So, let's say 30% of the volume pulls probably 50% of the profitability roughly something like that. Again, I don’t have the numbers in front of me, but I would bet it goes to something like that.
Edoardo Spina: And just a follow-up on this to confirm, you said 28 is around 30% of the volume that is a volume not the revenue.
Marc Henry: The volume absolutely, of course, as a revenue its more than that, yes.
Operator: We have no other question over the phone.
Marc Henry: Well, then, thank you very much to have been with us today. We are happy to join with you later with our IR team. And of course, we see us for the full year results in February.
Valerie Magloire: February the 12th.
Marc Henry: Thank you, Valerie. And thank you all of you. Goodbye.
Valerie Magloire: Thank you for your time, thanks.
Operator: Ladies and gentlemen, thank you for your participation. You may now disconnect.