Compagnie Generale des Etablissements Michelin SCA

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Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Michelin conference call. The conference call will be conducted by Marc Henry, CFO; and Florent Menegaux, COO. You are able to download the presentation from Michelin corporate website. I'll now hand over to Mr. Henry. Sir, please go ahead.

[Marc Henry, EVP & CFO]

Good afternoon and good evening. Thank you to be with us for this first quarter 2018 call. And let me first introduce the fact that in our first quarter 2018, our net sales was EUR 5.2 billion, up 1.4% at constant exchange rates.During this first quarter, of course, as expected, Passenger car and Truck market have been down slightly, as announced. OE demand was down in Passenger and Light truck, impacted by the Chinese and North American markets, while Truck was still robust. However, demand in the replacement market was weaker due to the early buying of the first quarter 2017. In the meantime, we still, of course, got a sustained growth and sustained demand in specialty tires.Due to our positive 3.4% price-mix effect, led by our disciplined price management, and due to this early buyout of 2017, our volume were down 2.3%, leading to a favorable 1.1% net impact of price-mix/volume effect in Q1, in line with our 2018 scenario. During the same time, currency were highly unfavorable at minus 7.7%, caused by, of course, the stronger euro. And as you know, during the quarter, we recommended a cash offer for Fenner PLC. We also formed a joint venture with Sumitomo Corporation of Americas, in line with our group's strategy.We also rolled out a new close-to-the-customer organization, and we confirmed our 2018 guidance, in line with our 2020 objectives.On Slide 3, let's have a bit more detail on the markets. As we said, the replacement Passenger car and Truck markets were down in Q1 2018 due to early buying in Q1 2017. Of course, if you look the -- in detail, our Passenger car/Light truck in Q1 was stable versus last year, with OE market down 3%, excluding India, Russia and South America. And replacement were stable against Q1 2017, which was up 5%, artificially lifted by early buying.The Truck market was also flattish, with an OE up strong 5%, reflecting the robust growth in the global economy, with very strong growth, as you saw it, in North America.Replacement was down 2% after an 8% surge in Q1, led again by early buying of dealers. And let's note, in particular, the North American market, which is down 7% in Tier 1 and Tier 2, is up 14% -- versus an up 14% in Q1 2017.Specialty tires were -- markets were strong, as you know it, specifically in mining and in OE, earthmover and agricultural tires. On Slide 4, you can see that our net sales have been up 1.4% at constant exchange rates, reaching EUR 5.6 billion. Of course, at real currency -- or currencies, we are at EUR 5.2 billion, down 6.3%. What is to be noticed, of course, is our price-mix, up 3.4%, out of which the mix is up 0.3%. And our volume growth are down 2.3%, minus EUR 128 million. This, we think, is a good balance between our price-mix scenario and maintaining our strong price-mix positioning in a market that has been on a negative trend, specifically in the replacement market, due to the early buyout of last year.When you look at this film over the quarters on Slide 5, you would notice that, for the group, Q1 2017 was up 7.3% in 2017. It's down minus 2.3% in 2018, which makes a plus 5% roughly versus 2016, so something like 2.5% yearly among 2 years.Of course, our price-mix is up 3.4%. Here you can see the impact of indexed raw material clauses, which, of course, were quarter-to-quarter slightly down, specifically in mining and in the truck OE, and the currency that has been impacted by the strong euro at minus 7.7%.Before we go into a bit more detail by sector, let me describe on Slide 6 the evolution of the reporting by sector versus our segments with our new organization, which is aimed at having a customer -- more customer-centric organization. So what are the main evolutions? First of all, in segment 1, which was Passenger car and Light truck tires and related distribution, this segment -- in this segment, we had van tires -- or Light truck tires that were commercial Light truck tires that are now reporting in segment 2, as you can see it.And for reporting segment 2, which was Truck tire and related distribution. The on/off-road tires and military tires are now part of the reporting segment number 3, which is that now, the new organization, we have Automotive and Related Distribution; our Road Transportation and Related Distribution, so it's a B2B on-road business for Michelin; and the Specialty Businesses, which has been added by on/off-road Truck tires.On Slide 7, you can see the impact of those parameter changes, and if -- first of all, if you look at the first reporting segment, the fact that we extract the Light truck commercial tires and bring it to the Truck tires, it's a reduction of 4.5% of turnover. You can see that the second sector is almost balanced, with the reduction of turnover of 1.9%. And of course, the Specialty sector is up 20.5%, linked to those parameters change. Once we remove those, you can see that the first sector is down 9.3%; the second sector, down 8.2%; and the third sector, up 5.5%, directly linked with, of course, the market performance of those respective sectors.If we go now to Slide 8, 9 and following, let me remember you what is our strategy and the use of cash that we are pursuing in 2018. Since our 2016 Investor Day, we have described our growth strategy as being in 4 different areas. Of course, the main one, our tire business, where we aim at growing 20% our net sales, of course, at 2016 -- at 2016 exchange rates. We aim at growing our services by a factor of 2. We aim at growing the experience business by a factor of 3. You know that it's a relatively small business, anyway. And we aim at creating a new material business to capitalize on our technical leadership in rubber design, specifically.Our recent announcement in first quarter 2018 relate to this strategy. Of course, the JV with the Sumitomo Corp. of North America, creating a very strong distribution company, unifying TBC's strength and TCi's strength, has been announced and is closed as far as we speak. It will create an extremely large wholesales and distributor in North America. We announced also a partnership with the Mobivia group through ATU in Germany. And of course, the most important, we announced our intention to acquire Fenner PLC, which, as you know, is a leading global provider of conveyor belt solution on one side, which is very well matching with our tire and service strategy; and reinforced polymer product on the other side, which is matching very well with our material future division. That's what is described on Page 10. I remind you that the Fenner AGM will be held in May 16, 2018, so quite soon. And from that, then we will, of course, continue all the administrative work to be able to acquire Fenner sometime before midyear.On Slide 11, you have a quick reminder of our Michelin and Sumitomo Corporation JV deal that was announced and that has been approved. And so the JV is up and running as of early April. This JV, I remind you, will be able to distribute 38 million of tires in Passenger car, Truck tires, agricultural tires and some slight earthmover tires as well, in more than 120 wholesale distribution centers, making it an extremely strong #2 in North America.Quickly on Page 12, our Mobivia partnership. All of this, if you go to Page 13, due to our very strong financials, is leading -- has been leading the agencies -- the rating agencies to confirm clearly our rating as of end of 2017, which is, of course, an A3 for Moody's and A- for Standard & Poor's, which is linked with, of course, our strong conservative financial policy on one side; and of course, our cash flow generation that you know has been exceptionally good in 2017. These lead us, of course, to a sustained shareholder policy that you know very well, on Page 14. And I remind you that, of course, the dividend, if approved by our Annual Shareholders Meeting, would be EUR 3.55 per share, representing a payout ratio of 36% and an increase of roughly 9% versus last year, making us having a very strong shareholder return, as you can see on the right part of the slide.Now let's move into our 2018 guidance. Of course, it's confirmed, and what is important is to describe, first of all, the markets that we will see in the following part of 2018. We will be clearly back to growth market in Q2 and the following quarters in Passenger car and Truck. And we should confirm, of course, a still buoyant growth in the Specialty business. We will see, of course, a strong demand in Passenger car stabilizing in metro markets. Still, a buoyant demand in the replacement market in China and a trend upwards in the other regions, leading the Passenger car business to be up between 1.5% and 2.5%.The Truck will be on the positive trend, although probably somewhat lower, because of freight demand being buoyant in the global economy and specifically in Europe and North America. You know that the Truck demand would be slightly dampened by the demand coming out of China, which is declining in OE and partly in the replacement market, linked to different change of flow in China last year. But the demand will still be strong in North America and Europe, lifted by favorable economic environment. And of course, mining tires will be up by 7% to 10%, with a sustained growth demand led by, of course, the global economic growth. And of course, the OE for earthmover and agricultural tires will still be steady on the positive trend. When you consider what it could be doing on a year-to-go as far as growth, if you look at these global yearly trends applied on a quarterly basis -- figures, you can see that in Passenger car, we expect for the remaining 3 quarters a growth of 3.5%, linked to, of course, the base of last year. If you compare on the right side what our sales had been last year, you can see that we will, of course, take advantage of this much bigger growth in the following quarters, leading us, of course, to be growing in line with the markets in Passenger car. In Truck, we have about the same figures, with the third and fourth quarter being positive, leading us to, of course, an increase of the volume in the second part of the year. And of course, Specialty will be up 5% to 7%.In the meantime, of course, this growth will be not only fueled by the market itself, but also by the new product launch that we will be doing, and that should be very strong in the second part of 2018, mainly, the MICHELIN Passenger car Primacy 4, the MICHELIN Alpin 6, and in commercial Light truck, MICHELIN Agilis CrossClimate, which will be an extension of the CrossClimate line into the commercial Light truck, which is an extremely -- will be an extremely popular tire because, of course, as those commercial light truck vehicle like to have an all-season tire that could, of course, be very efficient when snow comes.In the meantime, I'll remind you that in truck and bus, we will see in Europe the development of the BFGoodrich brand that has been introduced in January, and the development in India of the MICHELIN X Guard in OE with Ashok Leyland. In the meantime, we have expanding service offer in the telematics area with the growth of Sascar in Mexico, with very strong growth of demand in Europe, specifically in the EFFITRAILER offer. And of course, all of this making that we have -- we experienced a 15% growth in Truck under contract in this first quarter.On Page 19, you will see that, of course, our guidance remains unchanged, with the growth in line -- globally in line with the markets, with an operating income from recurring activities at constant exchange rates growing, of course, above 2017, and a structural free cash flow being above EUR 1.1 billion. We explained the reason for that back in February, and nothing, of course, has changed there.In Slide 20, you would see that, of course, the scenario in which we are operating is moving somewhat. Of course, the first being the currency impact, which has deepened somewhat, with a yearly figure about -- a negative EUR 350 million against last year, with -- let's notice it, a negative EUR 250 million in the first half of 2018, making, of course, the weight of currency much stronger in the first half than in the second half. You remember, of course, that the euro went down specifically in the fourth quarter -- went up, sorry, specifically in the fourth quarter of 2017.During the same time, and we will look at it on Slide 21, we will have an impact of raw material cost probably slightly negative, between 0 and minus EUR 50 million. And we will see in the next curve how things could develop during the year. This is probably a somewhat pessimist scenario, as some of you may think it, but it's linked to the fact that there is a strong global world growth. There is also a price-up in oil and Brent, which will impact, of course, carbon black, and second step, probably, butadiene rubber. Of course, you know that there has been also chemicals that have been up and steel holds as well. So this will lead us into probably 0 to minus EUR 50 million increase of raw mat cost in 2018.At the same time, of course, we confirm that our net impact of price-mix and raw material price will be positive, clearly, in the H1 and around the year. Our competitiveness plan versus inflation will be positive over the year. And of course, our effective tax rate will be reduced to 28%.Before moving into your -- the question session of this presentation, maybe let's just have a look on Slide 21 before conclusion. That describes, with the yellow curve, our scenario of raw material costs, sorry. You can see the history of 2017 of the purchasing cost in yellow, what we purchased in first quarter 2018, and then an increase that we forecast as far as now for the remaining part of the year. This increase still remains to be seen. It's clear. But we see that oil and Brent pricing being up. We see that there are some reason to see in the following quarters, of course, this price being up during the following part of the year. In blue, you would see then the impact of those scenario on our own cost. And you can see, it's also on a quarterly basis. Let's remind -- let's look at one point that is pretty of use. It's that our cost in the Q1 2018 are still up versus Q1 2017. And you can see that then, we can see a reversal in Q2 2018 versus Q2 2017, making, of course, the fact that on the first half, the equilibrium will be there. That means the raw material cost should be neutral for the first half. The second part of the year still remains to be seen, as I said. As a conclusion, let's remind that our growth and our price-mix in the first quarter have been strong, in line with our 2018 scenario, paving the way for a rebound in Q2, Q3 and Q4 to allow us, of course, to grow in line with the market, to have an operating income from recurring activity above last year at constant exchange rate and a structural free cash flow above EUR 1.1 billion. Thank you very much, and I'll now open to your questions.

[Operator]

[Operator Instructions] Your first question comes from Thomas Besson from Kepler Cheuvreux.

[Thomas Besson, Head of Automobile Sector]

It's Thomas Besson. I have 3 questions, please. The first is about the consensus. I understand your guidance and the link with ForEx. But basically, we have seen consensus [ range ] down by about EUR 100 million in recent weeks. Are you comfortable with the current level of adjusted EBIT in the consensus? That's the first question. The second is about price-mix. We've seen a relatively large sequential decline of price-mix between Q4 and Q1. You said that indexation in mining truck OE are largely behind that. Can you help us anticipate the price-mix in Q2, Q3? Is it going to stay around 3.5, or is it going to continue to 4? And last question is about your change in parameter for the 3 divisions. Would it be possible to have the full year revenues and EBIT for 2017 under the new organization, please?

[Marc Henry, EVP & CFO]

Okay. Thank you for your question, Thomas. First of all, on the consensus, let me remind you of a few things. I guess the consensus still has to adapt for the ForEx, which is at least, for the time being, a bit more negative than when it was calculated. And the EUR 350 million corresponds to a $1.24 exchange rate euro-dollar impact. I think I would like also to remind you that the price-mix -- that our management of the margin is in the long term to meet our 2020 objective, which is that we want to maintain our gross margin by unit, to maintain it, to generate volumes. And this balance between gross margin by unit and volumes still has to be kept if we want to get the volumes. So you know, it's always the same story. We can always increase the gross margin by unit but at the potential expense of volume and so forth. This is just basics, but let's make sure that this is well reflected in the consensus. And let's remind also that we are still -- we will see some depreciation being up this year versus last year because you know that we had a onetime effect last year that we will not see, of course, in 2018. So those points being said, that's where the consensus should move, I would say. Second, in terms of price-mix, of course, the sequential decline between Q4 and Q1 are strictly linked to the earthmover and OE trucks. So for example, to give you an idea, let me find the right numbers. Okay, yes. Sorry, I'm just looking for it. Anyway, in the first quarter, it was directly linked to the drop of the -- the sequential drop of earthmover in the first quarter, which will, of course, be pushed to the second one. Let's remember that in the second quarter, we had a price increase last year, so then we will have globally a reduction of price-mix versus last year in the second quarter, leading to first half net, probably of 2-something-percent, 2.5%. And then of course, we will have in the Q3 and Q4 a negative effect linked to the fact that those raw material clauses will still adjust to a lower level because of the price of the raw mat in the first half of 2018. So basically, we have the maximum price-mix versus raw mat versus -- price-mix versus last year in the first quarter. It will be reduced in the second one, going to negative in the third and fourth quarter, linked to these raw material clauses. At the end, what counts, let's remember you, is the price-mix, raw mat, and the price-mix of raw mat, of course, will be positive in the first half and in the second half. And this is managing the margins. Of course, the pricing is here to manage the margins, and the margins, of course, manage the bottom line. So that's what we need to have in mind. In terms of the new organization, we will give you all detail by midyear to be absolutely clear. So what I -- the only thing I could say at this time is that let's -- you can have the forecast of the group the way we used to be doing it, and we will give you roughly the way to make a good calculation for the sectors. But let's see that -- basically, if you look at the impact of turnover that you saw in the first sector, the second sector and the third sector, basically, the commercial Light truck replacement is roughly at the margin of the average of the first sector. So basically, you would increase slightly -- I mean, this effect would increase slightly the operating margin of the second sector. And of course, what you bring from the second sector to the third sector would negatively affect the operating results of the third sector. But basically, you can adjust through the average of each sector to get an idea of what the operating result would be sector-by-sector. But we will give you more detailed information in July in our half year results.

[Thomas Besson, Head of Automobile Sector]

Can I follow up just on your second point, please?

[Marc Henry, EVP & CFO]

Sure.

[Thomas Besson, Head of Automobile Sector]

You're assuming that raw materials are going to rise in H2, which I think all tire makers continue to assume. In your scenario, are you assuming a price hike at one point between July and December or not?

[Marc Henry, EVP & CFO]

Typically, if we see raw material being -- increasing, like it is on the scenario that we presented -- that we are presenting to you, of course, we will manage accordingly our margin to ensure that our gross margin per unit will be at our objective that I said, which is to maintain a gross margin by unit over a long period of time, to ensure our 2020 margin. So of course, that means that we might have some price adjustments or a different way to be at the margin we would like to achieve at the end of the year, of course.

[Operator]

The next question comes from Kai Alexander Mueller from Bank of America Merrill Lynch.

[Kai Alexander Mueller, Associate and Analyst]

The first one, on price-mix you mentioned earlier. Can you give us a little bit of color between the subdivisions between Passenger, Truck and Specialty? And also, how that pans out throughout the year? You mentioned, obviously, the clauses, the pricing clauses in Truck and Specialty impacting this specifically. And then secondly, on your capital allocation, you obviously have shown earlier your view on the M&A side. You've done a share buyback previously. Your balance sheet looks very healthy going into next year. What are sort of your latest thoughts on the possible share buyback, given you're only doing the EUR 75 million at the moment to offset the dilution from option plans?

[Marc Henry, EVP & CFO]

Okay. So in terms of pricing environment in Passenger, Truck and Specialty, of course, in Passenger and Truck, you see that the market -- first of all, the OE market is driven by raw material clauses, so it's just following the closing -- the cause and effect. So it's true for Passenger car, for Truck and for Specialty. It's true for mining. It's even true for aircraft. So you can see this is what we call the 30% of the Michelin business that is under index clauses. For the replacement market on those 3 large sectors, of course, you see that in Passenger car and Truck that the market is more on the negative trend towards last year. So that means that, of course, the pricing is not as supportive as when you have a market that is strongly growing. So let's say that I would say that the pricing is maintained, but there is no price war, of course. But the pricing is not on the high side, clearly so. In the Specialty however, as the market is very strong, of course, the pricing is particularly strong. As far as the capital allocation is concerned, you saw, of course, our M&A activity there. I think it's exactly in line, again, with our strategy. As far as the share buyback, of course, this is an option that is open, as we many times said. This option is open because, of course, we understand the value for our shareholders to see a share buyback. Now of course, no decision is taken. [ Hence not ], we will have announced it. But we are very much open to share buyback, as we many times said.

[Operator]

The next question comes from Raghav Gupta from Citigroup.

[Raghav Gupta-Chaudhary]

Marc Henry, I just wanted to ask a clarification to your response to Thomas' question on price-mix. You said, I think, that you're expecting the net impact of price-mix and raw materials to be positive in the first half and the second half. And clearly, your guidance is for the full year. I just want to clarify that you're saying that you expect the net impact of price-mix and raw mats will be positive both in the first half and the second half despite the negative price evolution that you're suggesting?

[Marc Henry, EVP & CFO]

Yes, definitively. If you look at Slide 20, our 2018 scenario, it says, definitively, that the net impact of price-mix versus raw mat will be positive in the first half, and of course, for the full year, clearly. So that will be very clear. That doesn't mean that the price-mix itself will be positive along each quarter of the year because raw mat will be positive. It's very positive in Q2, positive in Q3, and then we'll see in Q4, depending, of course, on how, of course, the raw material evolves. So, at the end, this balance will be positive, as I said, definitively so. Yes.

[Raghav Gupta-Chaudhary]

Okay. And I'm just wondering whether or not you'd be able to quantify how much of the FX headwind -- clearly, that was weighing on the results in the first quarter and are expected to for the quarters to come. How much of that will you be able to offset in higher prices?

[Marc Henry, EVP & CFO]

It's pretty clear. You know that in terms of exchange rate, you have 2 different types of exchange rate effects. You have the exchange rate effects that are, for example, that are in the U.S. versus euro. You know that in the U.S., of course the U.S. dollar -- all raw material price still are made in USD. So basically, we have a pure translation effect that we cannot combat. There is nothing we can do, and you know that North America, China, for example, to a lesser extent, Thailand, which are linked to this kind of -- to the USD, in those currencies, there is nothing we can do because, of course, the pricing that exists in those markets is linked to the -- as raw materials are made -- are labeled in dollar, as manpower is in dollar, of course, the pricing is in dollar. And it's just we have this exchange rate impact that we get directly. So that's for a large proportion of the exchange rate of 2018 versus 2017. Now there are few cases where, of course, you will put a price increase to offset some. For example, the ruble goes down. Of course, if the ruble goes down, we will put some price increase to compensate because if not, of course, we would have a risk of the parallel market between Russia or Ukraine going West to Poland or Germany and so on. So of course, in this case, we will compensate. Or in other way, the Turkish, if you take the Turkish currency. Of course, in Turkey, we have to put pricing up. If not, of course, tires that are bought by Turkish dealers will be sent back to Germany, for example. You understand that there are strong ties between Turkey and Germany. So in those smaller markets, of course, we will put price increases to offset. But you realize that Turkey or Russia or Argentina, for example, in South America, are smaller markets. So in those markets, of course, you will put a price increase because I'll remind you that our policy is anywhere in any currency, you need to pass on at least the price that is linked to the increase of raw material as expressed in those currencies. So we will do it in South America. We will do it in South Africa or in Turkey or in Russia if those currencies go down. But of course, those are accounting for a smaller part of the currency impact. The large one, which is U.S., which is linked to China or to other ones where we have a local production, of course, in those cases, it's not possible to make the offset. So that's -- I hope you understand my explanation here.

[Raghav Gupta-Chaudhary]

Sure, that's clear. And I guess, my second one is on -- you've always said that you benefit in an environment when raw material prices are rising. The trend for raw material prices has clearly been softening since the second quarter of last year. Have you noted the change in competitive pressure from -- in the market from competitors?

[Marc Henry, EVP & CFO]

Well, definitively, we saw that -- we see -- I mean, the pricing pressure exists all day long. But you can see that with the announcement that some competitor have been making, and some of our Tier 1 large competitor, you can guess from what they've said that, of course, the competitive pricing is a bit stronger than in other period, I would say, that we knew. So yes, the competitive price is high. Now it's not that much higher, I would say, but it's quite a strong competitive environment.

[Raghav Gupta-Chaudhary]

Okay. And then I guess the last one would be, and following on from that, the mix impact was only 0.3% in Q1, 0.4% in Q4. Is the -- and when I compare that to what you were doing in the previous quarters prior to the fourth quarter of '17, you're doing somewhat closer to 1% from mix. It's 0.9%, I think. Is part of that slowdown in mix due to competitive pressures? Or I'm just trying to understand how you expect that to evolve. Is the kind of 0.3%, 0.4% level the right level going forward?

[Marc Henry, EVP & CFO]

Well, this quarter, definitively, the mix effect is impacted by the OE/RT mix. So of course, in OE, I mean, a growing market; and RT, a negative market trend. Our mix is -- our product mix will still exist and is strong. It's eaten somewhat by the OE/RT mix. That's the main reason.

[Operator]

And our next question comes from José Asumendi from JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

It's José from JPMorgan. Just a couple questions, please. The first one, just broadly on the drop-throughs across volume, mix, currency. Has anything changed dramatically in terms of the drop-throughs you had last year and what you're seeing currently in the business? That will be the first question, drop-throughs. And I guess, the second question will be, can you confirm again, please, that -- I think I heard that the second quarter volumes will be positive overall for the group. Is this a realistic scenario? And also, did you do any price actions during Q1 to boost volumes in the second quarter? That would be very helpful.

[Marc Henry, EVP & CFO]

I would say, on a yearly basis, there is no big change between the drop-through volume. Be careful because quarter-to-quarter, it might happen that there is some inventory buildup or drawdown, so that may change a bit. But globally, on a yearly figure, 1% is still accounting for EUR 80 million, so that's no problem. So currency drop-through, I don't think so. I guess if you apply the currency mix that we give you, you should be able to find the impact on the turnover. And if you take roughly the ratio that we gave you, [ 33% ] roughly, you should get it to the currency impact. The mix, as I said, has been impacted this quarter by an OE/RT mix that is more -- I mean, a bit more difficult than what it used to be globally. Now in Q2, yes, we can confirm that the Q2 volume will be positive. Let's remember, again, what I've shown to you on Slide -- I forgot -- if you look at it on Slide 17, we know that we will have supportive replacement market for Passenger car, quite strong, and for Truck as well, leading, of course, for us to -- our capacity to grow. On top of that, I'd like to remind you that in March, we had 1 day less. We have 1 day more in April. So that means that, all in all, there are many reasons for us to grow. Of course, then it's a question for us to capture the growth of the market. And all our teams have a fighting spirit, I can tell you, to get that growth in Passenger car, in Passenger car and in Truck replacement market. For the Specialty, as I said, anyway, the growth is very strong, so there's no doubt about this.

[José Maria Asumendi, Head of the European Automotive Team]

May I just have one follow-up? On currency, and I listen with all the explanation you gave around currency, is it -- is there a reasonable assumption that you can maybe offset about 20% of the currency hit with price increases?

[Marc Henry, EVP & CFO]

I have not -- we don't have the impact like this, but there is -- well, I mean, you can make a scenario. You can look at all the small currencies. And saying that we will offset, not totally, but we will offset the raw material part in the price within those currencies. So for example, for reais, for -- I mean, for the Turkish lira, for South Africa, whatever. All those currencies [ are weak ], so probably something like in the zone of [ 19% ]. But don't have -- I have not made the calculation. So we will look at it and give you a bit more detailed number if you wish.

[Operator]

The next question comes from Martino De Ambroggi from Equita.

[Martino De Ambroggi, Analyst]

The first question is on the segment reporting changes. I know you provided some indication on the new profitability, the starting point. I was looking at the long-term targets you provided. So if this change in segments could also bring some meaningful change in the ranges that you provided for the 3 divisions in terms of return on sales?

[Marc Henry, EVP & CFO]

Definitively, in our media, we will provide all this so that you can set up your model a bit better than what we have been providing so far. But yes, definitively, we will adjust slightly. As I said, the direction is that in the first sector, it will be slightly up, roughly about the same for the second one and slightly down for the third one.

[Martino De Ambroggi, Analyst]

Okay. On your Slide #9, you are confirming that services will double in the business plan period. Could you remind us what was the starting point, where we are today, what is the profitability of this business and what is the contribution of the external growth so far and what is the organic growth?

[Marc Henry, EVP & CFO]

Okay. So back in 2016, we had a turnover of roughly EUR 1 billion. So we expect doubling it. But it's coming from, of course, mainly from telematics services that we -- that Sascar, that NexTraq. And so it's of course linked to a large proportion of outside growth, as you can see it, as you can think. We have, of course, some services that we grew through the TBC acquisition as well. And I would say -- so it's linked to the services for telematics for Truck, basically. I will remind you also that the number of truck under contract have been increasing by 15% this quarter, so this is the direction we are moving into. Now of course, as you noticed, we don't -- the services are embedded into the sector. So for example, typically, what is linked to the telematics for Truck is within the second sector. What this means, the services that are linked for Passenger cars, for example, the services that are done at Euromaster to service Passenger car tires are embedded in the first sector. And we don't cut it in pieces, but globally, I can tell you that in the growth of the first quarter, some of it is linked to the service.

[Martino De Ambroggi, Analyst]

Okay. Just do you have an idea where we are today? With or without Fenner? I don't know if -- as you prefer.

[Marc Henry, EVP & CFO]

No, no. Fenner has not been including. Yes, we were around -- I think, last year, we were around EUR 1.2 billion, and it will grow in 2018, certainly. But '18 is not made yet.

[Martino De Ambroggi, Analyst]

Okay. You need more acquisitions. And the last question on the 18-inch and above, the slide that you usually provide was not present in the Q1 presentation. Is there any change in the trend that you described in the recent past?

[Marc Henry, EVP & CFO]

No, not really. Actually, we -- I think we didn't put it in just for one reason. It's the fact that it will be really -- I would say, it will be really giving good information by midyear and not before because last year, the first quarter, the growth in 18-inch and above was exceptionally high. And so we followed the market in the first quarter, to be clear. But I would say, actually, at the midyear point, we will see. We will have a better view. But we followed the quarter in the first quarter. At the end, we described also our mix inside the Michelin brand will continue to grow because following the quarter mean that we grow above 7% in 18-inch and above in the first quarter of 2018. And our mix inside of it was, last year, in 33% of the sales of the Michelin brand. It's this quarter, 37%. So we are still continuing to grow at a pace that is not outgrowing the market but at the pace of the market for this quarter. But once again, we were absolutely outgrowing the market last year. There were some tires that were put in inventory and went out during the second quarter, and third one sometime. So we need to -- we will see, I would say, an impact that would not be polluted by this early buyout of tires last year, by midyear.

[Operator]

The next question comes from Victoria Greer from Morgan Stanley.

[Victoria Anne Greer, Vice President]

Yes, just one question, please, on volumes. Just to make sure that I'm clear on the new segment reporting. So in the press release, you're talking about minus 5 volumes for the new segment 1, and minus 4 for new segment 2. Firstly, is that correct that I compare that to the sales for new segment 1, down minus 9%; and then new segment 2, minus 8%? And then second question, can you tell us, please, versus the plus 5 in the new segment 3, what was the volume element of that, please?

[Marc Henry, EVP & CFO]

Okay. So first of all, your understanding is absolutely correct. And for the third sector, the volume impact is plus 8% in the [ first time ].

[Victoria Anne Greer, Vice President]

Okay, great. So when you say the change of business in the press release, that's what you mean? Okay, that's fine. And I was asking mostly because I was just a bit confused looking at Slide 17 when you've talked about those volumes at like -- at flat, maybe minus and 0. I just wanted to make sure I have that correct.

[Marc Henry, EVP & CFO]

You mean for the volume for the first quarter in Passenger car? Yes, yes. It's 0 to flattish volume. It is a balance between the OE and replacement market for Passenger car tires.

[Victoria Anne Greer, Vice President]

Yes. Okay. But in the revenues, it was the minus 5 and the minus 4 for segment 1 and segment 2?

[Marc Henry, EVP & CFO]

Yes, yes, absolutely. The 0 in volume for Passenger car traded for us the number that you just mentioned in volumes, yes, absolutely.

[Operator]

The next question comes from Henning Cosman with HSBC.

[Henning Cosman, Analyst]

I don't really have an extra question. I'm just trying to connect everything that you were saying. And if you don't mind, maybe you could help me because I can't really make it add up. So I think at the time of the last call, we were talking about if raw materials don't go up too much, then price-mix, raw materials net could nearly offset FX. So that taking as a starting point, and then assuming again what you're saying on Slide 17 and suggesting you're growing in line there with the markets, I'm getting to something like almost 3% volume growth for the year, which at the drop-throughs you suggested is just above EUR 200 million. And then, connecting that with your comment about consensus, where I think you suggested that still needs to come down a little bit, adjusting for where currency is now and higher D&A. I can't quite see why it would have to come down if you nearly compensate FX, and if you come out between 2% and 3% for volume. So if you could just help me understand where I'm wrong.

[Marc Henry, EVP & CFO]

Anything that I would add to your points, which are good, is the fact that let's remember that to be able to get the 3% volume, you need to manage your gross margin by unit in a way that you control it to make it, of course, stable during the years. But if you want -- you cannot increase it to a large extent. If you increase it to a large extent, you may suffer in volume. So you need to make sure that in your model, if you put your raw material flat during the year -- which might happen. This could be, for me, a very optimistic scenario, but you know, why not? I mean, you may be -- well be right, and our option may well be wrong. But at the end, let's be clear, that if you want to generate the 3%, you need also to have a pricing point that allow this, and this pricing point must be managed to guarantee the gross margin by unit. That's the way we have built our 2020 scenario. That mean that to be able to grow roughly 3% a year in a, let's say, normalized scenario, with the gross margin in the tire that is about at the level of 2016. So if you put all of this together, I think that's the way we look at our future to be able to reach our 2020 objectives.

[Henning Cosman, Analyst]

Okay, great. So maybe if I just ask it slightly differently compared to how we talked about it last time. The one element that would have changed is maybe pricing being a little bit weaker, possibly also because Bridgestone is pushing quite hard on prices. Is that fair as a summary?

[Marc Henry, EVP & CFO]

What is fair to say is that many of our competitors have been -- have been pushed somewhat on pricing. And of course, I think we -- what I would like to remind you is that we manage our pricing to guarantee our gross margin by unit to be stable. We can look at a slight increase, of course. But at the end, we want to manage it so that we have this balance of growth versus, I mean, bottom line. And this is this balance that we have in our 2020 objective that we will remain. So during -- if you look at what happened back in 2011, 2012, of course, we had the price decrease after a huge price increase. And this is just normalized. We could not have kept the 2012 point of price. If not, our volume will have shrunk quite enough -- quite largely. So it's a question of managing the price point to once again guarantee our price by unit to deliver stable gross margin. And if you look to our history after the 2012 drop-off in raw mat, you could see that after 2012, which was a bit specific, 2013, '14, '15, we managed to balance our pricing versus raw mat to generate basically the mix in average roughly along the year. And that's what we feel we'll still continue to be doing. That's I think what we need all to understand. So another way to say it is that we have a specific -- we have a specific raw mat scenario. It may or may not come. You may have a scenario. It may or may not come. But at the end, our goal in whatever scenario is to manage our gross margin per unit in a way that it will guarantee the value we are able to extract from the market with our innovation, with all our marketing action, with our price line, with our line -- tire line and so on. And we want to extract this value to allow us to grow at the speed of the market. So that is the balance that we have been successfully, I think, putting in place over the last 4 or 5 years, that we will continue to put in place.

[Operator]

The next question comes from Ashik Kurian from Jefferies.

[Ashik Kurian, Equity Analyst]

Just 3. The first one is I just wanted to get your thoughts on your growth prospects in North America. We've seen 2 of your biggest competitors come together and join their distribution businesses. I know you are pursuing the one with Sumitomo. Are you seeing any short-term disruption to your volume growth because of the distribution changeover? And also, if you have any thoughts on what the combination of Bridgestone and Goodyear distribution JV would be? The second question is, compared to what you were guiding for during the full year result, you're probably looking at EUR 100 million to EUR 200 million lower operating income from FX and probably weaker price-mix, but you've kept your free cash flow guidance the same. Was the initial target just conservative? Or is there any offsetting elements on the free cash flow? And lastly, you're still planning to grow in line with the market for the full year. I know you underperformed in Q1 largely due to tough comps. But anything in particular that will help you gain share for the remaining 9 months? I know you mentioned an effort to -- earlier. You've got volumes coming online in emerging markets in the second half. So anything that you can tell us that could drive your volume or outperformance in the remaining 9 months?

[Marc Henry, EVP & CFO]

Okay. Yes, I will just answer the question 2, and Florent will guide you through 1 and 3. For question 2, let's remember that in February, we had the scenario of FX on our bottom line of minus EUR 300 million. It's now minus EUR 250 million. So of course, this impact of currency will hit EBITDA by EUR 50 million. So when we are speaking about EUR 1.1 billion, EUR 50 million is still manageable. But of course, each time the currency impacts our bottom line, it has the tendency to [ impact ], of course, our free cash flow. So that's all that I can say at this time.

[Florent Menegaux, SEVP & COO]

Florent Menegaux speaking. On your first question about the JV from our competitors, I think it shows how relevant [ actually the JV ] is. It confirms that there was -- there's a need for consolidation in this space, and we are the first movers. We think that our venture is very compatible, so us teaming with Sumitomo in North America is an excellent move. We look forward to see how our competitors are going to be together in North America. But it shows that -- how relevant our strategy is. And definitely, we're looking forward to see what will happen in the U.S. market. Now for us, we see 0 short-term disruption to our volumes. And maybe we should -- you could see some positive outcome because this move has certainly [ will cause some ] reaction from some other distributors in North America that may be positive for us.

[Ashik Kurian, Equity Analyst]

Can I just follow up? I've got a follow-up question. ATD just announced that they're going to discontinue Goodyear tires. Can you clarify whether ATD runs Michelin tires or carries Michelin tires in the U.S.?

[Florent Menegaux, SEVP & COO]

Absolutely. ATD is a big customer of ours, and the move from Goodyear into ATD is certainly one of the positive aspect that may touch us. And we have clearly said to our existing partners in the wholesale distribution that our move was not aggressive against them. It was made to build what we think is a better retailing proposition for the future through wholesale. And especially with ATD, we have a very amicable discussion and relationship with them. As far as the share is concerned for the remainder of the year, you just have to bear in mind that we were the first mover in raising our prices last year, which led to some fill-in effects in the marketplace. So therefore, when we win market share, we have to be careful not to win market share month after month because you'll have a disruption effect. But as Marc mentioned earlier on, we see no real reasons to make -- to amend our pricing strategy. We are very much in line to our -- for our plan for this year and for our plan for the 2020. We made some technical adjustments here and there in some specific markets for some specific reasons in the nonindexed business. But for you, I don't think there is a matter of concern.

[Ashik Kurian, Equity Analyst]

Just a follow-up question. Can you -- are you now completely ruling out the Tier 2 Asian asset purchase that you previously mentioned, I mean, both for Fenner and your Sumitomo acquisition? Are you -- is that deal completely off the table now?

[Florent Menegaux, SEVP & COO]

We have seen from here, we are always looking for intelligent movements. But at this stage, we are very pleased with our capability through our joint venture now to get access to those specific tier products. And we see no reason to make moves unless there will be -- [ inflecting ] a positive. But at this stage, we never -- so at this stage, we don't see -- we are very proactive, and that remain right now.

[Marc Henry, EVP & CFO]

I guess, thank you very much to all of you for your time to be with us tonight. We hope to see you, of course, during the second quarter and at our half year conference in July. Thank you very much to all of you, and see you soon. Goodbye.

[Operator]

Ladies and gentlemen, thank you all for your participation. You may now disconnect.