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Earnings Transcript for ML.PA - Q4 Fiscal Year 2017

Executives: Jean-Dominique Senard - Chief Executive Officer Marc Henry - Chief Financial Officer Florent Menegaux - Chief Operating Officer Yves Chapot - Executive Vice President, Automotive Business Lines
Analysts: Kai Mueller - Bank of America/Merrill Lynch Gaetan Toulemonde - Deutsche Bank Henning Cosman - HSBC Lucile Leroux - Goldman Sachs
Jean-Dominique Senard: Thank you for being all here for these 2017 annual results. We are very happy to hold this meeting this evening, because we are happy to report a very successful year. It’s a successful year. We have delivered what we had in mind to deliver and we made it in market circumstances, with not the easiest in the period. So we are very proud and happy to show the major figures of Michelin for the year, as you can see them here on this schedule. It’s another year of progress and we are totally in line with the 2020 objectives and expected scenario. As you can see, volumes were up 2.6% compared to 2.1% in 2016 and the price mix was strongly up, plus 3.2% compared to minus 1.8% last year. Operating income from recurring activities reached a high level of €2.742 billion, actually up €145 million at constant exchange rates. The structural free cash flow is high, €1.5 billion. As we will see in the disclosure later on, some events have helped create this high level of cash flow, but the yearly performance is extremely good and much higher than what we had expected at the end of last year. I think if we look at the major takeaways of this year, obviously, the strong structural free cash flow we will come back on that later on is one of these takeaways and the high level of operating income which has shown that we were able to offset more than €700 million increase in raw material costs and nearly €100 million in negative currency effect. This is a really very strong performance from the teams of the group everywhere in the world. As you obviously can understand, we have been determined as we have told you before. It was a real strategy to offset this very large increase in raw material costs and it has resulted as expected in the neutral impact versus raw materials headwinds on what we call the non-index businesses. We said we would do it, we did it. We also have very positive news from our mix of products. We have sustained market share gains in the 18 inches bus tires as we will see in the figures year-after-year. We will come back on details on that. We have a very strong price position. Also good news, the challenge of our competitiveness plan has been a success and we exceeded €300 million gains in this competitiveness plan, more than offsetting the cost of inflation. We were of course as I said in very highly competitive markets, especially in Europe obviously, which have clearly waits on the dealership operations in this area of the world. Another big feature of the year is clearly what’s happened in the specialty businesses. The operating income is up more than 30% and we experienced very strong growth in every division of this segment. It was well anticipated. So, we were able to serve the markets and the results are there. The net income is at a historic high and as a consequence of all what I have just said, we would propose at the general assembly a dividend of €3.55 per share, which presents a payout of 36% of the consolidated net income of course excluding the non-recurring items. I won’t stay too long on this slide, clearly it shows the evolution of our free cash flow, not only we will go into further details about that the figure of 2017, but obviously despite some one-offs that are incurred in this figure we achieved a tremendous figure this year. And we are very proud of that. If you look at the price effect which obviously was the major challenge of the year, we had a very strong price effect throughout the year especially of course after the first quarter, but it was still strong in the fourth quarter as we had announced. It was led by our price increases and clearly the application of indexation clauses, which as you will see will still leave for 2017 is slightly negative impact but will be positive of course in the coming months. I was mentioning the mix of our products, simple figures here to show that year-after-year we are improving our market share and just for 2017 the worldwide markets for growth in 18 inches and larger tires was 14% and we achieved 19%. We have no longer any capacity issues as in the past we still had to run off to new capacities to be able to deliver the market. Now we have them and we are delivering you can be sure. Also during the year and at the beginning of this year we went on with our new partnerships and acquisitions to support our growth and clearly our value creation strategy. As you can see a few examples there in the tire business you all are aware about the agreements and the partnership that we disclosed at the beginning of this year with TBC Corporation, which makes us a very, very strong player in the distribution sector in North America. And also because we just disclosed the news a few minutes ago, our new partnership with Mobivia globally and a specific shareholding of 20% in ATU in Germany which as you know is present in Germany, Switzerland, Austria and important distribution network and we are very happy to have been able to announce today this global Mobivia partnership. We also as you know we are present in service markets. We increased our presence with the acquisition of NexTraq in United States. And this was a brilliant acquisition. It’s going on very well. We improved our position in Great Britain with truck tires distribution sector in the Southeast of the country and also in digital smart drive company. Also in experiences you remember, we continually created a strong basis for future progress with BookaTable, Robert Parker and Le Fooding, which comes nicely, increase our ability, our technological skills in this domain to achieve our mission in the future. And also in materials as you know which is one of the major future vector of growth for the company, we improved or increased up our stake holding in SIPH in Africa having larger access to natural rubber. We also invested in the technological company, Lehigh, with clearly is in the wake of circular economy. The company where we transform used tires into rubber powder that can be recycled in new production. So we are talking about crumbed rubber. These are the sort of examples of what we have done in 2017 and there is really improving technological skill in all these domains. The dividend increase is in line with group gains. As you know we are very keen in moving steadily strongly that steadily and I think this figure shows that we have been proving correct for the past 7 years, at least. And we remain committed to this payout ratio beyond 35% of consolidated net income. When it comes to 2018, guidance and we’ll come back on that a bit later on. You would be surprised if we expect our volumes to be in growth in line with the markets. We still increase operating income from recurring activities at constant exchange rates, every year – every year, we deliver progress and we commit to that. We also commit for strong structural free cash flow. Having said as as introduction, I would like to give the word to Marc Henry, CFO who will go in more details, of course, and I’ll come back later on and then answer any of your questions. Thank you very much.
Marc Henry: Thank you, Dominique. Good evening to all of you. Let’s have a review of our markets that we experienced during 2017 and I would say that if you look first of all to the yearly growth, with 3% growth in passenger car and 4% growth in truck, we are on a high positive end of our markets in passenger car and truck and of course specialty tires with a 10% growth is quite strong. That means that markets were supportive during 2017. Now, of course quarter-on-quarter have been different and as you know, the first quarter was pulled – volumes were pulled by very strong pre-buy by dealers in front of price increases. In the fourth quarter, however, if you look to what has happened for passenger car, for Europe, we returned to long-term trends. North America has been stable in the replacement market and the OE market has been decreasing at a faster pace, coming from a very high point. However, China is still experiencing a very strong growth at 8% in the replacement, it’s extremely good and of course it’s one of the key markets for us knowing our positioning over there. South America and Eastern Europe of course grew again. For truck, the last part of the year has been driven by a very strong demand in OE, which has been pretty big specifically led by China in relation with the change of regulation. China market was up 30% and it’s the first market in the world. So that it has pulled of course a lot the OE markets this year and the replacement markets were down in the fourth quarter dampened somewhat by these very strong OE volumes. And the specialty – in the specialty as expected mining tires is up 15%. Earthmover tire were also very strong in OE up 25% and ag also has been extremely strong since the second quarter in OE up 10%.So globally, the specialty tires were pulled by mining and OE in GC and agriculture, the rest has been growing on around 4%, 5% per year. Our performance has been as said by Dominique good this year really with when you look turnover reaching close to €22 billion, up 5% from €21 billion. You can see that the organic growth has been up to 2.6% reaching €543 million, added to that external growth which has been linked by the acquisition of NexTraq and also Levorinan in South America, the two-wheel producer, bringing another 0.5% of growth. That makes the total group growth up 3.1% and price mix which has been extremely good as mentioned already with price mix of 3.2% reaching €668 million, with a mix of 0.7 meaning that the average price points has been up 2.5% a year. Currency impact as we will see it has been of course negative in the second half of the year, that’s what you can see in the quarter-on-quarter effect, you see the film, I would say of the year, of course, a very strong first quarter prior to price increases, relatively stable second quarter to digest, I would say all the volumes that have been taken by the distribution probably still some digestion in Q3 and in Q4, where volume grew again at a good speed. In the same time, you can see that the price mix has been very strong in the second half of the year exactly as we anticipated and we guided the market. With the implementation of price increases, either at the beginning of the second quarter or at the end of the second quarter meaning that of course everything was up for the second part of the year. During the same time, currency went down, no specific news of course. The global operating result before – on our recurring activities is up €145 million reaching €2.8 billion at constant exchange rate. This is a very good increase of course led by volume, up €207 million. This €207 million gives you roughly the famous €18 million point of growth that you would see year-on-year and you see that it’s increasing year-after-year. The second very big of course element of performance is our price increase that led to this €668 price mix effect over the raw mat of minus €738 million, out of which the minus €70 million, that is the difference has been mainly linked to the index business, the famous index business, which is the OE business and the mining business, which have indexation closes, that reacts but basically 6 months after the increase of the raw materials and so creating some differences. But as you can see not only we have been able as expected to of course reach the equilibrium for the replacement market, which is a non-index business, but the index business itself has only been negative by €57 million. The other good news is of course the competitiveness plan versus inflation, competitive plan reaching above €300 million probably the first time, €350 million and completely offsetting the inflation by over €36 million, that’s very good. And this led us to the €2.8 billion, out of which of course currency impacts close to €100 million reduced our operating results as reported to €2.742 billion. When we look at bit more in detail, our assertive pricing policy, as announced, is split between the index business and the non-index business. So you can see that basically in the second half all the price increases have been implemented. So, the non-index business was very quickly recalibrated. Of course, for the indexed part, the second half only compensated for half of what was reduced during the first half and due to the impacts of those closes, the first half of 2018 would recoup actually all what has been missing in this part, actually more than that, but it will be recuperating this part. Looking at the three sectors, what is to say for the first sector, first of all, it’s an evolution of net sales of 3% reaching €12.1 billion and operating income quasi-stable, actually the growth that this division has expected is completely compensating of course raw material cost and most of the exchange rate effects. For the second sectors with here again a 3% increase in net sales reaching close to €6 million and operating income that is somewhat reducing by 14%. Here in that case, the price repositioning has allowed to fully offset raw material cost, but some one-offs have been had to be put into account in the second half of the year. That’s why this numbers is somewhat lower than what we used to have last year. For the subsector, of course, remarkable growth over 16% in volumes allowing the net sales to reach close to €3 billion, 18% growth and more than 30% of operating income increase operating margin reaching above 20%. Volumes are quite interesting to see also by division. What has happened is the comment I made for the group is fully valid for passenger car tires. You can see that after the very, very strong Q1 some digestion in Q2 and starting and finishing in Q3, then Q4 being quite strong in growth noting that this growth in Q4 was also above Q4 last year that was pretty big 5%. So you can see that the volumes of last part of the year were good and of course the winter campaign has been in Europe quite good for us. I made the comment on the truck tire, probably in truck tires the volumes have been a bit low specifically because this division has very strongly implemented price increases which have not been fully followed by our competition. That’s why the volumes are per se somewhat disappointing and the specialty tires of course grew on an equal, I would say rates over the year notes that even the fourth quarter growth is pretty big knowing that the growth had already started to be back in the mining sector in the fourth quarter of 2016. One point off a very strong performance and that is very remarkable is the fact that in 18 inch and above tires, of course, as Dominique said, we overgrew the market by 6 points, but if you look even in 19 inch, you can see that we overgrew the market by 18 points, which mean that the market recognized and our customers recognized, the power of Michelin lineup in this premium segment and the value of course, the performance of our products in this area, it’s extremely important. As you know, these tires are the tires of the future in OE for the new vehicles and have potentially new vehicles and the future vehicles, which mean that it drives after that some replacement markets. So, this performance is extremely strong of course today, but also for the future. I know, there are quite interesting performance for Michelin and just to give you a flavor of what our technology and our innovation leadership gives is what the Michelin CrossClimate offers as a performance compared to its competition. First of all, CrossClimate is a real commercial success of the first sector, but on top of that, it’s a real technical success that allowed to avoid what we say is planned obsolescence by some other type of sales, where the performance really drops a lot between new and warm pattern. And I would say, there was another line Michelin that was said, safe when new, safe when worn. It’s also true for the CrossClimate. It’s excellent also in traction when new and when worn. And that’s typically one message that the group wants to bring to the market that with the Michelin tire, not only you have strong life, but during the whole period of the life, the performance and adherence of our tires is of course maintained. In truck, also we have a lot of innovation that will be implemented in 2018 to drive of course return for growth and the first one the MICHELIN X Multi Energy is the line that is the most popular in the truck tire markets, so-called regional lines and it will be a very strong, I would say, focus of 2018 re-launching those lines, same thing in Europe launching BFGoodrich. We have also in India a very interesting market that is opening to us the second OEM in India, Ashok Leyland wants to put out as you know a major trucks, the upper level trucks demonstrating a very, very good performance in terms of fuel efficiency of the combination of truck and tires compared to its competitors. So, again, it’s a first sign that technology is also very interesting for, I would say, new countries. And as we many times said on service activity is developing very nicely in Brazil and in the rest of the world. Specialty of course has not been waiting, not only specialty has been able to follow and is growth – and get actually growth above its own market. But on top of that, a few specifically linked to those tires, to those application services, the acquisition of Teleflow and PTG, which are allowing us to control inflation with a control inflation systems on vehicles allowing the tire to be – to develop more traction in specific grounds and of course the specific also services that we developed in the mining system called MEMS, that’s a way to monitor the tire and the mine all the way long – on the lifelong. Back to more financials, our competitiveness plan 2017-2020 is delivering what it was supposed to deliver, so above €300 million a year to reach €1.2 billion in gains over the 4 years. This is very good, because not only we were able to offset of course fully offset inflation by €36 million, you can see that all the three major area participated to these gains, SG&A by €110 million, raw material €51 million and manufacturing logistics €153 million. This is as we announced it the first year where this plant is offsetting fully inflation and it’s – it’s of course our goal for 2018 and the followings. Our investment are of course to create value very clearly in a hope I guess you saw that year-after-year not only of course we want to continue to develop our presence in the growing market like premium passenger car, North America and Asia typically, you saw that also we are increasing our capacity utilization of our capacity in the specialty business. On top of that, we will continue to invest in digital services, very strongly in dealerships as we already have done and we mentioned the deal that we have done with TBC and with ATU and of course in the high-tech material division that we want, definitively to grow in the future. For our internal investments, CapEx of course we should be able to reach in 2018 as scheduled some value between €1.7 billion and €1.8 billion for the year. Maybe little come back off the free cash flow, as mentioned by Dominique, €1.5 billion is extremely good. Of course, there are a few points that pushed this performance up. And the first thing is clearly the good working capital management. Inventory have been well managed during the year receivables as well and we have the strong increase of payment terms of about 6 days during the year, so that’s really the fundamental part of it on top of that of course EBITDA evolutions, but we had also some specific items. So, I want just to mention a few – one of specific to 2017 that have no impact on 2018, which is famous 3% tax, that the French authorities reimbursed us, and a few other ones, amounts up to around €18 million. The second is that we had you remember we had a very strong growth in the fourth quarter last year, which was mainly in November-December timeframe. So, this created very positive and strong receivable cash in the first part of 2017 of roughly €200 million which will not of course happen in 2018. And also a positive working capital effect linked to some contractual payments in 2017 that were made early 2018 due to the fact that 31 December was a Sunday and which amounts about €140 million. This €140 million which is a plus this year will be a negative €140 million next year making of course a €280 million difference between 2017 and 2018. If you summarize all-in-all outside those specific one-off, the performance is around €1.2 billion and which is of course extremely good. I won’t comment much on all of this just to remind you that we did this very large JV with Sumitomo Corporation, which we created the second largest distributor. Also in North America, it’s extremely important for us to have a strong market access in North America. And I would say in the same spirit, the partnership with Mobivia to have a strong market access in Germany, which as you know is the largest market in Europe. I’ll sustain shareholder return policy of course has been well explained and we are exactly in line with that – with of course fact that we propose a dividend of €355 per share representing a payout ratio of 36% to the general assembly. We will have another share buyback program of roughly €75 million to offset dilution from share-based compensation. And at the same time you can see the total shareholder return at the end of 2017 that is basically up €332, it had you invested and reinvested in Michelin shares end of 2011, while the CAC 40 moved only €202. So I think it shows the performance of the company that is of course linked to the confidence that our results are bringing to all our shareholders. A few words, a details on guidance, market guidance probably passenger car being in the – in 2017 was more on the high side, it will go on a bit slightly lower side specifically because the OE demand may not be as strong in mature markets, even though it will be still buoyant in China, truck would be back to normal trends from 01% due to the fact that the demand was pulled a lot by a China OE domestic markets, which was over growing link to a new regulations and of course the replacement markets. So OE should be on the lower trend in 2018, while replacement market will be lifted by a more favorable economic environment. And specialty, we’ll see grow probably at a lower is slightly lower rates than this year, but we still grow at 5% to 7% rate with of course led by mining and OE, both in earthmover and in agricultural tires. Jean-Dominique commented the guidance?
Jean-Dominique Senard: So, I won’t make more comments on it, but I would just take sometime about the scenario that we will see. First of all, let’s remember that we have a currency impact that will be approximately negative €300 million based on January 2018 rates and it’s pretty easy to understand, because basically if you remember the first quarter of the year, at the end of the quarter three, the balance was around zero for exchange rates effects. So the €100 million negative is only linked to the fourth quarter, if you imagine that we continue that trend for the following four quarters, you would have 3 times 100, so €300 million, it’s pretty easy to get. Second point, we might see and we say we might see some raw material costs rising again in second half. This is not a forecast really it’s an assumption that we take which is a conservative one as you may imagine. Today, they are rather flattish, but we see some potential trends for some inflation linked to the positioning of the brand that is on the high side today linked to the fact that of course carbon black is directly linked from this Brent price, from the fact that butadiene also has some link with the Brent price even though we have not seen it yet. So, this may create negative impact that will be fully of course and only seen in the second part of the year, we said 50 to 100 I would say who knows that’s just one hypothesis to be cautious that this could will happen in second part of the year. Of course, the net impact of price mix versus raw mat will be extremely positive in 2018, most of it coming from the first half of the year. If you assume everything will be stable, everything would come from the first part, so that the second part of the year would be mostly stable. Another point that is very important to mention for 2018 is of course the impact of the U.S. tax reform on the effective tax rates. We plan our new effective tax rate to be reduced to 28% and this of course on the long-term view. Finally, of course, as I said already, the competitiveness plan gains versus inflation would be positive as this year. All of this is of course to be clearly on the road to our 2020 objectives. Thank you very much.
Jean-Dominique Senard: Thank you very much, Marc. I think it’s well detailed and we are more than happy to come to your questions now, but just before we get to the questions, I would just like to remind you that last week we announced specific events linked to the governance of this company. As you understand, it will be suggested to the general assembly in May that Florent Menegaux, COO of the company today, Senior Executive Manager would be appointed as a General Managing Partner of the group. In the same time, it will be suggested also to the General Assembly to the elect Yves Chapot, who is Head as you know today of all the passenger car-related business in the group as a Managing Partner. Both of them are here. You know them of course and they have all my confidence as you can imagine for the future. But also I want to tell you that I will remain CEO of this company until May of next year just a few months before I would leave Florent Menegaux take over my position. So, I just wanted to mention that and tell you that I am very, very confident in this new scheme of management and I am personally extremely happy to see these gentlemen moving up to the senior positions. Thank you very much for that. I will now turn to your questions with the help of the team here and more than happy to try it. So, there is a question in the room and then I will go to the line.
Operator: [Operator Instructions]
Unidentified Analyst: [Technical Difficulty] Like NexTraq in the U.S., it’s been quite some time I think since you have undertaken such an activity?
Jean-Dominique Senard: In North America, well, I guess, the answer is sometime ago, because the last major acquisition in the United States was…
Marc Henry: TCi, probably.
Jean-Dominique Senard: TCi probably.
Marc Henry: It was 20 years ago something like that, if I am not mistaken?
Jean-Dominique Senard: Sorry, I am not certainly precise, but it’s been a long time ago, yes, certainly. On the line please.
Operator: First question from Mr. Martino De Ambroggi from Equita, sir, please go ahead.
Martino De Ambroggi: Yes, thank you. Martino De Ambroggi from Equita. The first question is on the pricing environment, how it is today and how do you plan to react or to move going forward? And the second part of the question relates to the balance between price mix and raw materials for the current year. I clearly understand Marc mentioning the assumption on higher raw materials in the second half of this year, but assuming they stay where they are today, maybe the balance price mix raw materials is to be able to offset the entire or almost entire ForEx effect?
Jean-Dominique Senard: Okay. Just for the second part of your questions, I mean, clearly again and again, it’s just an assumption. I mean, we are just on the cautious assumptions, because we think that there are some good reasons for raw materials to see some uptick by the end of the year. Again, we can be wrong, it’s just an assumption, but we are working on that sort of assumption. And then of course if it does not happen, you are absolutely right, we will have an even more positive impact in the criteria of price mix materials. Yes, will it offset totally the foreign exchange impact? First, it remains to be seen if the foreign exchange impact will be as big as we see today, it’s just an assumption, but its calculation, but it’s not wrong. If that happens, we should get closer to that and your market is quite relevance, but is remains to be seen while we are here running with assumption, but clearly if we don’t have any raw material price increase during the year, we will have a stronger impact in the – in the raw material price mix effect. The pricing environment is that of a very, very competitive environment. I would perhaps let Florent or Yves mention, Florent would you like to take the lead on this description?
Florent Menegaux: The environment is very strong different regions of the world. So if we take Asia, the pricing environment has somewhat stabilized, in North America as well, in Europe it’s still very competitive as Dominique mentioned. If you take by product lines, you will see in passenger car, we have sign that it just stabilized somewhat and in truck it is still very competitive due to the imbalance structure of the production worldwide. So it’s still a very competitive environment.
Martino De Ambroggi: Thank you.
Jean-Dominique Senard: But you have seen we have done the job if I may say. So in terms of bringing our prices to protect our margins during the year and has been tough that we made it.
Unidentified Analyst: Thank you. If I may it just follow-up – I’ll follow-up on the truck if I may. Marc mentioned one-off items in the second half the return on sales was 8.1%. Are you still confident for the current year to achieve at least the low end of the 9%, 13% range of return on sales?
Marc Henry: Yes, that’s the goal. Yes, clearly, we are still in that sort of direction. If we are slightly lower this year, it’s mainly due to the fact that’s clearly we have protected our margins and we made a priority focus on that you can understand. So of course, it’s been a bit tough on the market for us, which we made rather good performance globally and also because the impact of the distribution situation in Europe on the truck business has been more acute than in other businesses. So achieved just the level of performance, but we haven’t changed our mind for the coming year, certainly not.
Unidentified Analyst: Okay. Thank you. Perhaps in the room now and then I’ll be back on the line.
Unidentified Analyst: Hi. It’s [indiscernible]. I have three questions, please. First, can we talk a bit about capital allocation? Your net debt and your net pension deficit both declined. So you are increasing the dividend with your cash generation despite the two deals you have already announced, your balance sheet is getting stronger and stronger. Shall we assume that you are still looking at potential sizable acquisitions or could we have actually considered that another buyback is a possibility for 2019 eventually an alternative to acquisitions? Second question on specialty your volume growth managed to accelerate in Q4 despite some more difficult comp base. Can you elaborate on that and explain how that works and how much higher the margins can go in 2018 as you recover part of the raw materials that we are lost? And lastly, on the passenger car business, can you update us on where Michelin – what the 18 inches and above business represent in terms of your total business in 2017, because we understand you’re growing faster in the market.
Jean-Dominique Senard: Okay.
Unidentified Analyst: But where is it today in terms of the proportion you’re seeing? Thank you.
Jean-Dominique Senard: Okay. I’ll answer the first question then I’ll ask Marc to on some specialty and the ease on the passenger car business. But capital allocation is clearly relevant questions we – we are quite proud to tell you the truth to sit on such sound situation today regarding our balance sheet I haven’t changed my mind there in this respect, I have always said that the priority would be clearly to grow the company with organically or through acquisitions and you know the four major avenues that we are looking at, three of them are major of course, which are services, raw material technology and passenger car. So, the answer to your question is very clear, we are still with different subject in our radar screen, if you see what I mean. And as you have seen some of them have occurred, but these things take some time and when they occur well, we are going ahead. It is clearly the priority compared to the other one okay. And we will I hope deliver on that. On the second point, specialty perhaps, Marc, you would like to explain why we were so strong in the fourth quarter?
Marc Henry: What is important in specialty right now is to be able to deliver that there is customer wants, so that means that we accelerated our ability to deliver all tires both in earthmover and in agricultural players. That means that we have been able to hire people, train, put them in front of machines and of course deliver good quality tires. So, that is what has been done and of course we are still on that trend for the full year. Let’s remember also that trees do not go to the sky so that’s why you saw that from a market that grew average of 10%. We estimated it could grow 6%. We will definitively grow above market, so make your bet yourself, but we will grow above market probably a bit like what we did in 2016, 2017 – sorry, so that’s our goal on top of that. As you rightly said, we will have an impact linked to the raw material clauses, because the net margin on the specialty tires will be much higher in the first half of 2018 versus 2017 let’s remember that in the first half of 2017 we decreased our price due to the raw material clauses, we increased them in the second half and be careful due to the raw material clauses, we will sequentially decrease again into the first half of 2018, but the margin per unit will be – the gross margin per unit will be of course above what it was in the first half of 2017. So at the end you will have in 2018 for specialty volume effect above 6% and the margin effect that I am sure you know how to calculate.
Jean-Dominique Senard: Okay. Thank you, Marc. On the passenger car business, Yves, you would like to take the point?
Yves Chapot: Yes, our rough estimation is that the 18-inch and above represent around 50% of the worldwide market and our whole sales is around close to one-third. And what I can have is that, the vast majority of the new fitments we are getting at original equipments are with 18-inch and above.
Jean-Dominique Senard: Yes, clearly. And it was the case some time ago where we were not able to deliver even in the OE market, which was strongly asking for our tires. Now, it is the story is over we are now really delivering so that helps wonderfully our business. Okay, is that alright? Okay, yes.
Unidentified Analyst: [indiscernible]. My first question is for Mr. Dominique. Michelin is very well known for the good balance between the clients, workers and shareholders. Mr. Senard is highly respected among its peers for the quality of the social dialogues he has been created within the company. I know that you are not going to run the company in the coming days, but we have to wait for 1 year, but I was wondering what about you, what – could you share with us your view on this issue? And my second question is some borrowing it’s about ForEx, you give us usually the sensitivity of the different currencies on the operating profit and if I am not mistaken if we applied these sensitivities we arrived to approximately €230 million. So I was wondering if there was any change in the sensitivity or if I am wrong, would you like to discuss with the boring one?
Jean-Dominique Senard: If you take the upper range you will get to 300.
Unidentified Analyst: So we should assume its conservative?
Jean-Dominique Senard: Yes, I mean, if you – but the 300 is basically what I said is for you basically three quarters where you will see minus 900. So roughly, that’s what it is.
Unidentified Analyst: Okay.
Jean-Dominique Senard: The range is here, if you take the upper part of the range and you will make it.
Florent Menegaux: Yes, okay. So the first part of your question, first of all, a reminder is this is a nomination subject to the vote, the assembly. So, up until then, I still remain in my current position. Now, what you should know is I have been working very closely with Jean-Dominique for many, many years now and I am totally aligned with what he is doing and I am actually following many, many prescriptions. So, if I am elected and if I am proceeding by May 2019, I can assure you that Michelin will pursue in the direction that Jean-Dominique said.
Jean-Dominique Senard: Thank you, Florent. This is great news. I feel relieved. Thank you. On the line please.
Operator: Next question from Mr. Kai Mueller from Bank of America/Merrill Lynch. Sir, please go ahead.
Kai Mueller: Thank you very much for your time. Two questions if I may. The first one is we have heard obviously the Sumitomo deal the JV structure you did in North America in terms of taking the distribution out of your operating business into a JV. You have invested also in ATU again a distribution like approach a can you just outline sort of if there are more deals of that type that we should be seeing going forward and is there more sort of revenues that you’re currently consolidating in your SR1 division that could potentially come out, because you’re joining in with someone else. It’s a first question. And the second point is on your price point. You obviously alluded to pricing has been strong in Q4, can you just sort of elaborate how you seeing the pricing develop into Q1 and Q2 are you just keeping the levels where you’re at and understand first ones to raise and by last ones to drop them. Can you just give us a little bit of a guide timeline in terms of also what you have seen in the markets in terms of pricing, especially on SR1?
Jean-Dominique Senard: Perhaps, I will answer first on the second question. Well, yes you made the right diagnosis about how we manage prices in the last part of the year. And clearly, as we speak today, there maybe some cases where we might have to make some punctual adjustments, but as we speak, I don’t see many of them. We remain strong in our belief that protecting our margin is just essential notably because if our assumption is correct and we will see some incremental raw material increases by the end of the year, we should be very careful in changing our prices. So this is not what we have in mind today. And then we will be pragmatic along the line, but very determined to protect our margin throughout 2018, is absolutely essential to understand that. The rest is more day-to-day business, but direction is clear. So perhaps on the second the first question by the way about the Sumitomo deal may be one of you would like to pick up and mentioned that as you can imagine although we haven’t spoken too much about it, this issue about access to market is basic strategic aspect of Michelin, we will never let operations change in a way where we would not be able to access the market and maybe you would like to develop that?
Florent Menegaux: Yes, so as a strategy, we just want to secure our market access, whether they are in direct or indirect. So indirect through wholesale these type of activities or direct through e-retail or retail points. As you know, the market is transforming a lot. So for us, it is crucial that we have, we secured our indirect market access in many of the geographies, so Asia, North America, South America, Europe. So, this is absolutely crucial. So every time, we have an opportunity to secure this, we will do it. And as you know also wholesale is heavily involved into e-retail and e-retail will continue to grow and therefore there is an intimate relationship between now us securing a market access indirectly through wholesale and our e-retail activities. Now as far as retail is concerned, our preference is to rule it through franchise and that’s why we are developing through Tyre Plus and Euromaster in Europe, Tyre Plus around the world and our aim is to have franchise in excess of 5,000 point of sales within the next few years.
Jean-Dominique Senard: So I think that makes very clear in terms of our strategies. There will be other type of deals as a matter of fact as we speak to have nothing on the picture, but the priority of making sure we can secure access to the market is just absolute and the beauty of that by the way is that we can prove very quickly that in this growing digital environment we can be very strong, because of ground operations in service. And when we mix the digital aspect of that as Florent just mentioned with brick-and-mortar, we can be the kings in this market if we do it well. So, if you consider the sort of frets that everybody had in mind with the idea of companies like ours losing ground, because access to the market was becoming like impossible with new competitors coming with the digital skills, but if you consider that frets, bear in mind that this fret is going away and such a move that we did with TBC in North America proves exactly what I mean and we are serious about that. So, in the coming years and I hope that will happen and I am sure it will, there will be no issue about our skills to remain secure than our market everywhere in the world. I can tell you, because what we are acquiring today in terms of skills of geographic, I would say, footprint and mixture about technology and highest level of services is just exactly what we need. Thank you for the question in the way maybe be back into room.
Gaetan Toulemonde: Okay. Good evening. It’s Gaetan Toulemonde, Deutsche Bank. Few questions very quickly. When you give us one-third of your volume in the passenger tire coming from 18-inches and above, what is the breakdown between OE and replacement, is it still a majority today of OE and still a small portion replacement?
Jean-Dominique Senard: Okay. So, around one-fourth OE and the 75% replacement.
Gaetan Toulemonde: So you are much more replacement than OE synergies?
Jean-Dominique Senard: Yes overall, but it was mentioning the 19-inches, 18-inches and above.
Florent Menegaux: 18 inches and above, it’s around 50-50.
Jean-Dominique Senard: That’s it.
Florent Menegaux: Overall, it is 25-75 in 18 inches.
Jean-Dominique Senard: Okay, does it make sense?
Gaetan Toulemonde: Okay. Second question on the truck side, can you tell us a little bit how you want to improve, how you will improve the profitability, volumes have been weak, pricing is still higher than your competitors, is it a cost issue?
Jean-Dominique Senard: The cost issue is a permanent issue, yes, absolutely. So, we are – and we have done a lot in the domain and we will continue. It’s clearly one of the highest priority of these new businesses in the new organization that we called them business line to improve in the coming years significantly the cost base of this business. So, everybody is on board to get it done. As an everlasting process as you know and we know that we have some job to do, but we will do it always in the way we did it in the past focusing all our teams in understanding the competitive issues and finding the ways to bring them where it needs to be brought. There are other aspect maybe you would like to invest in these circumstances, but I can tell you yes, the answer is we still have some job to do.
Florent Menegaux: Absolutely. And what happens in truck tires is that the level of expectation of profitability is very difficult from different part of the world and also from a competitive environment. So there are – truck is extremely competitive, so it’s not only question of cost, it’s also a question of expected profitability and from the overall market environment and this is structurally due to the imbalance in the structure of the market, there is way, way too much capacity is some part of the world versus the requirement of this part of the world.
Jean-Dominique Senard: Yes, there are two aspects that I would like to add to that. First clearly, when we look at that business in Europe today, the imbalance that Florent is mentioning is very, very hot. In other words, it’s very acute, is nicely. There is tremendous amount of imports from tires coming from the rest of the world at the level, which shows has been just unknown in the past and that creates obviously some imbalance in the stock to the market, will that lasts for years, I am not absolutely sure. At some point and I recognized that I have been wrong so far, so at some point there will be some restructuring in the overcapacity that comes from the rest of the world. If that happens, it will shape the market differently. And second aspect I would like to add is that what we see today in countries like China and notably India is very interesting. Quickly, Marc, mentioned as innovation spots, the agreements we settled with Ashok Leyland in India, well I don’t want you to see that just as a small event, it’s the first time I ever see a top management of one of the most performing company in the truck business in India change completely, it’s approach to environment, energy efficiency and all the rest and the large agreement that we have signed with Ashok Leyland is the perfect illustration of what I say. If that changes at that level in India you can imagine what that means for India in the coming 10 years and China where our market share in truck, because of our premium situation is extremely small. Now, perhaps you would see that as a dream, but I don’t see that dream, and I’m absolutely show that all we have invested for years and years and technology is going to pay off and the example of India is running quickly and mind you if it turns around everyone is going to follow. And then we are – with our products, our technology and we haven’t done that for nothing, we are just waiting for the sweet spot, it will happen one day and I can tell you it’s turning now. All that has to do with the global situation of environment problems in our societies in the world, they are more acute in India and China then anywhere and everybody every player is not taking note of that and changing his attitude. I’m just mentioning that because, I’m hope that in 2 or 3 years time we will look that that is quite normal situation, you will see our presence in these countries in truck just grow massively, because of either as I just said. it’s just early days, but early birds, I mean I can tell you it’s just amazing. The change of mindset that’s happening today is for me the best signal that we were right to do. So maybe we still have few years, months to wait, but my god, tell you I am sure we haven’t done that for nothing, it’s just amazing. Sorry, just it’s a personal comment, but I want to share what we think.
Gaetan Toulemonde: One more detail, regarding Truck Europe, is it the division, which is exporting significantly to North America and therefore the division, which is the most sensitive to the U.S. dollar, is it correct?
Jean-Dominique Senard: It is correct that our European division is exported to North America, yes. And so it is clearly impacted by the ForEx.
Florent Menegaux: Okay. But be careful, most of the ForEx impact is just a translation issue, nothing – not to Michelin to also the issue that you mentioned. It’s true, but most of the impact of exchange rate is just a translation issue, I would say 80%.
Jean-Dominique Senard: Yes, clearly, but there is still a competitiveness issue, which is obvious.
Gaetan Toulemonde: Last question, you have announced or you started the reorganization of the group?
Jean-Dominique Senard: Right.
Gaetan Toulemonde: If I look at today, you have competitive plan of exceeding the inflation cost of approximately €50 million?
Jean-Dominique Senard: Right.
Gaetan Toulemonde: Thanks to that program. Could we expect an acceleration of the net impact was going to remain I know that you have a target €50 million by 2020, but can we expect a little bit more in the coming years beyond that?
Jean-Dominique Senard: Well, honestly, yes, I mean if we don’t deliver that – that means that we will fail and I can tell you we are not expecting to fail. This new organization is now in place. The good news is that so far we survived, but we are still there and happy to be there and everybody is working very hard and started very well. One of the reasons why I will remain very, very busy this year is that I will take charge on the organization and make sure that what we have implemented will be I would say robust and I have all confidence that it will be and it should be delivered and you are absolutely right it’s part of the game if we are so optimistic, I would say in the way we are able to cover the cost – inflation cost as notably because of this new organization, which clearly will impact our G&A in the coming years. Absolutely clearly, I remind you we have taken off one lever of responsibility and we have created a tremendously more dry company. We can already see that for decisions that were made in January within the new organization, it’s just fascinating. The decisions were made so rapidly even the people that mentioned these examples are surprised how that was possible in this company. So I am telling you this thing is really major.
Gaetan Toulemonde: Can you help us to square it or it’s too early?
Jean-Dominique Senard: Okay. Yes, there is a question on the line and then we will come back into room. Yes, on the line.
Operator: Next question from Mr. Henning Cosman from HSBC, sir, please go ahead.
Henning Cosman: Hi, good afternoon. Thank you very much. First question, very simple, maybe a bit cheeky, could I tempt you to say whether you are happy with consensus where it stands currently, which implies about €3 billion EBIT for 2018? Second question, I was hoping to see a chart similar to what you have provided us in the past, where you are indicating as an indexed level where purchase cost and P&L cost of raw material is. I don’t know if you have that information available or if you could make it available. Obviously, what I am getting to is I am assuming that the P&L cost of raw material, as I think you have indicated will be a lot lower in the first half of 2018 compared to ‘17, which in turn then implies that you are expecting a very significant acceleration in the second half of ‘18, so I am just trying to understand that a little bit more. The reference point would be €122 million, that’s your indexed level for H1 ‘17, if you were able to talk along these reference points at all? And the third question, just a clarification, I think Marc has quoted on Bloomberg to say that you are not anticipating any price increases at this point, consistent with your scenarios. So again, as a reference point to the minus €50 million to €100 million raw material headwind, I think Jean-Dominique said, if the raw materials don’t rise in the second half as you are anticipating, then your net benefit would be higher. If I could just clarify, if they don’t increase, can you please confirm that you are not expecting that you have to reduce prices? Thank you.
Jean-Dominique Senard: So, there are quite a few questions in your question. I am afraid I won’t be able to help you on your spreadsheet tonight, but this is obviously your good try by the way. But anyway, on these questions about what Marc said on Bloomberg, you maybe direct there.
Marc Henry: Because clearly, what I said is of course the first half of the year, there would be new price increase of course. I said also that if there is a rise in raw mat, there will be no price increase for the index business. Of course for the non-index business, we will manage as we have been able to do it our margin per tire to ensure of course that it stays at least at the level that we have experienced in the past. So I think for the non-index business I mean the replacement one we will manage our margins of course.
Jean-Dominique Senard: Right. Of course, it’s just as simple as that. I mean don’t make it complicated for us. I mean, we will increase our prices if needed I can tell you. We will protect our margins. If it’s not needed we will not. It’s as clear as that. And I think that’s exactly what Marc mentioned, then that’s all. Than I also mentioned something just before I said that if the raw material prices did not increase during the year while the prospect that we have in our minds today of an impact of raw material price mix effect will be of course higher, because then we will take advantage and the benefits of these flats raw material prices that’s as simple as that. So, I leave you make your calculations but it’s as simple as that, let me just say we can, maybe you like that.
Marc Henry: And of course if price of raw material would go up you would – the margin in the index business will be reduced for some time as we saw it in the first part of 2017. So, that’s why this is – the question is in front of us depending on the scenario of course format, the index business, but which is roughly 30% of our business we react differently as the other one.
Jean-Dominique Senard: It will react differently, because there is a time lag that’s all, but I think that’s clear. Would you like to add something else, Florent on that point?
Florent Menegaux: Yes. On the first part of your question about the consensus of €3 billion you just have to take into consideration the assumption we made on the priority which would have an impact of course?
Jean-Dominique Senard: So I was going to clearly mention that we don’t like to comment on consensus, but provided that you figure out appropriately the impact of foreign exchange and raw material during the year, well then there is nothing special to mention there. I hope that helps maybe a question in the room now [indiscernible].
Unidentified Analyst: I had two questions. The first of these is can we go into greater depth on the subject of raw materials, which is important for your results. And we saw that there were in fact considerable variations in the price of butadiene in the first semester 2017. Why is that as compared to oil prices and as far as natural rubber is concerned we have had some serious crises in the past, do you think that the situation is still linked to natural variations which can significantly upset prices and thus lead to surprises? Finally, can you tell us what is the percentage of your activity which is indexed that is to say where you cannot carryover the increase in raw material prices? And secondly, how is the competition evolving in the Chinese market we are used to treating competition with our major Western competitors like Goodyear, Bridgestone, etcetera, but today we see a strong growth of the Chinese manufacturers. So can we see something comparable in the Chinese Automobile sector that is to say could they become world level competitors in the tire business as well and how do you deal with that?
Jean-Dominique Senard: The question is last question when I look at the first part of your question, yes, butadiene is the connected that has, it’s not the first time it has often been the case, because it’s all a matter of supply and demand. And so there are some actors in the market and when they have supply crisis when the butadiene goes up, if they don’t have, it goes down. I mean, it is clearly globally be connected from the market the oil price. And as you can see here on this chart, you have got the perfect example of this volatility. So we just have to live with that and work in our research department to see whether we can create at some point bio-butadiene, which will create another supply avenue. It’s not for tomorrow morning, but it may happen and we are working hard on that I can tell you. Natural rubber, well yes, of course, these ups and downs can happen. Generally speaking, when we have some hikes, they are globally explained by increase in demand in tire business in some area of the world. We have seen that with increased demand for truck tires in United States at some point last year or the year before and there was a direct impact with the price enrollment in the natural rubber. I would say that globally on this part except for climatic issues that happens sometimes notably in winter, the trend is linked globally to the increase in growth, the worldwide growth. This is the reason why by the way we are cautious about the end of 2018, because if things goes the way they go there will be some growth worldwide. At some point, it translates into supply and demand. So I mean that’s one of the reasons why we think it could happen. The percentage of our index business, Marc, could you be quite precise on that as precise as possible?
Marc Henry: I mean the percentage of index, yes, it’s about 30% of our turnover that is index, which is OE and mining basically this is very stable part of the business group. And as you noted, the indexation closes roughly in average we are at 6 months after the facts and guaranteed that’s over 18 months period, of course, we recouped all the margin that we need to have on the given business. It’s a very good method of course to get this being done, because discussion with OEM can be sharp and difficult and of course and I would not get these results, I can tell you.
Jean-Dominique Senard: So I think that’s clear, I mean 30% and 6 months lag, which makes our life a bit difficult sometimes to explain the figures, because if raw materials go up and down all the time then you have to follow the lag, I mean that’s it, so sometimes a bit curious, but that’s the way. At the end of the day we recoup everything that’s very important. Perhaps a word on Chinese market, Yves, you are a great specialist of the Chinese market, you have lived 6 years in China. So, you can answer that certainly.
Yves Chapot: Okay. First we are doing very well in China, we have very strong operations we are increasing our capacity – our capacity locally. Second, the Chinese industry is scattered between lot of players, a lot are allocated in one province in Shandong Province. What we understand is that some of these players are not doing very well, but at the same time, there is some let’s say important Chinese companies that are doing their job. So it’s – it’s a very scattered industry, we don’t know exactly how many of them, we knew at least 40, more than 40 players and for sure that’s an industry to rebound and Jean-Dominique previous comment, that at one stage is probably going to restructure and concentrate.
Jean-Dominique Senard: Yes, the over capacity created by the Chinese producers is huge, notably in truck and clearly Europe is today preferred this nation, but not only. So I think that’s clear there you’ll see some players growing in technology and strengths. I know that will disappear. Is that bad news or good news? It’s probably more good news and bad news, because it that creates some stability in the market in the world and some rationale and appropriate production levels. Well, then it would be good for the global markets. I see it that way. I think we are close till the end, but maybe another question.
Marc Henry: One last maybe.
Jean-Dominique Senard: One last questions, yes, on the line then. Okay.
Operator: We have a question from Lucile Leroux from Goldman Sachs. Madam, please go ahead.
Lucile Leroux: Yes, hello. Thank you for taking my question. I have just a few last – I wanted to check with you my understanding of your FX drop-through? I think it has been quite volatile in last year and if I understand correctly the drop-through per the different currency we could get back to a more normalized level of 33%. So I wanted first to check this with you. Secondly, I think that in the past you have given maybe some color on what would be the impact of the raw material versus the price mix on the full year? So, I was wondering whether you could give us there is a bit more color on the magnitude of this impact. And finally, I was looking also at the sequence that you are looking at for the indexation and the non-index business for H1 versus H2?
Marc Henry: Okay. So the drop-through, yes 33%, you can take that if we are close to €300 million. On the impacts of raw mat, price mix versus raw mat you understood that as Dominique told you that if raw mat were stable end of the year than the price mix versus raw mat would be close to the exchange rate effect. And of course this effect will only happen in the first half, so I guess with all of that you will have your answer. And the last point of course, the index business as I said is modified every 6 months, not of course every January and July, but globally you have a 6 months lag and the 6 months lag is creating this differential in margin on quarter-to-quarter, but at the end as I said if you recoup fully the margin on the 18 months to 2 years period. For the non-index business, it is our duty of course and we have been proving to you to the market that we are doing it is our duty of course to put on the pricing evolution to manage and the level of gross margin per unit that we want to achieve and of course that to achieve our 2020 objective, we said that our gross margin per unit should remain stable.
Jean-Dominique Senard: Well, that was the perfect answer from the CFO. Thank you very much for that. Thank you for being there. And see you soon. Thanks. Bye-bye.