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

Good morning, good afternoon, and good evening to all of you. Thank you for joining us for our annual presentation of our results. Yves and I are very pleased to be -- to welcome you and to tell you first that this meeting is carried under very strict compliance to our safety rules, especially in this moment where the sanitary measures are very strict. But once again, thank you for joining us. So of course, I'm sure all of you have noticed, we have spent year 2020 in very, very exceptional conditions. So in this environment, let me tell you that our group successfully protected its employees, maintained its business continuity throughout the year, while supporting vastly its host communities, starting from suppliers, customers, people and our communities surrounding us. We experienced a steep drop in markets over the year. And our segment operating income came to 1 point -- almost EUR 1.9 billion, which is a 37% decline, reflecting the COVID-19 crisis impact on our operations. In this segment operating income, actually, the drop in volume created a specific condition. I will -- and Yves will come back on this. We've been able to generate EUR 2 billion structural free cash flow, reflecting the very strict discipline on cash management during the crisis and an exceptionally low level of year-end inventories, which was a little bit unexpected, following the sustained recovery in demand in the second half of the year. The group is continuing to deploy its strategy despite the environment with the successful integration of its recent acquisitions and by expanding its business in new areas of growth. At the end, we generated EUR 625 million in net income, and we recommend to the shareholding structure a dividend of EUR 2.3 per share. During 2020, in this very exceptional period, we set very clearly and very soon -- very early last year, 2 priorities. The first one was to protect employees and associate health and safety, while ensuring the business continuity of our operations. I think we did that very successfully. And while we were doing that, we have deployed our expertise and our capabilities to support associates, customers, supplier and surrounding communities by donating more than 3 million masks, innovating and producing visors, masks, positioning cushions, air cushions and more for the medical community. At the same time, we continued to improve our competitiveness structurally, driving this competitivity measures with the strict respect of our people and our territories. So we ramped up production with Multistrada in Indonesia and León -- our León plant in Mexico. We restructured our European footprint with the closure of Dundee, La Roche-sur-Yon, and Bamberg, unfortunately. But at the same times, we did this in a most responsible manner, and we committed to revitalize and repurposing the closed site and with a very strict and exhaustive individual support for all the people implied or concerned by this plant restructuring. At the same times, we launched for, let's say, staff of people, the SIMPLY plan, which is to streamline processes and improve efficiency in our SG&A functions and continuing our improvement in industrial efficiency, which is a constant effort over the past decade, especially by speeding up our digital manufacturing effort. We created, in a social responsibility manner, an innovative and co-construction and social dialogue -- extensive social dialogue process, supported by a framework agreement. And we reaffirmed commitment to developing new high-value segment and businesses in France, which can be -- with a good example with the launch of the Parc Cataroux in France. And I'm sure we will have occasion to come back on this project later on. Now let me leave the floor to Yves, who is going to pursue our conversation.

Thank you, Florent. So before entering into the detail of our financial and business performance, we would like to share with you a broader perspective of our 2020 results, which reflect our sustainable development model. Looking at our results through 3 perspective, the first one being the people. We have progressed in terms of diversity. 28.2% of managers and supervisors are now women, which is an improvement by 0.8 point versus 2019. And the engagement rate of Michelin Group employees has improved by 2.83%. Looking now for the, let's say, shareholder perspective. Our operating margin has landed at EUR 1.9 billion, 9.2% of the sales. Of course, less than in 2019. But at the same time, the group has been able to generate EUR 2 billion of structural free cash flow. And last, I would like to comment the environmental actions that we are taking, particularly in our factories, but also beyond the factories. In -- within the 1 -- the Scope 1 and 2, we have emitted 2.5 million tonnes of CO2 in 2020, which is decreased by 16% versus 2019, which is more than the decrease of our volume, which is 14%. So we have improved the overall efficiency of our systems. And the Michelin environmental footprint have been stabilized at 48.9 points, which reflects beyond CO2 emissions the consumption of energy, the water consumption, the quantity of waste. And despite all the disruptions linked to the closure and the reopening of the factories, we have been able to stabilize this indicator. Now going through the annual results -- the financial results, I will start by the market. So in the Q4, in the second half, you will observe that passenger car and light truck markets are back in line with 2019 level. The truck tire market have been growing on the second half and particularly during the last quarter. When the specialty markets have been hit by the decline in mining, aircraft market have been already down since the end of the first quarter. And at the same times, we have observed the rebound of the 2 wheels in the agriculture market, particularly in replacement, during the second half of the year. Replacement market regarding passenger car and light truck replacement market has been down by 11% over the year when original equipment has decreased by 17%, which shows, let's say, the resilience of replacement for individual vehicles. And regarding the truck business. While the replacement market was down by 10%, the truck market has been slightly growing at a worldwide level, but it was mainly pulled by the Chinese original equipment market, which grew by 30% during the year. In this context, our sales has been down by 15%. So the main volume is obviously the volume effect, 3 point -- nearly EUR 3.4 billion at minus 14%. The second most important effect is the currency exchange rate effect, which is mostly -- which mostly happened in the second half of the year, which weighed 2.6 points on our turnover. And then we have record a positive price/mix effect of plus 1.2% or EUR 300 million over the year, with a mix effect which was positive by 0.8 points. So in 2020, we have carefully managed the price/mix material balance, enhancing the mix and reducing our cost in order to absorb as much as possible the impact of the volume decline. The impact of the volume decline has been huge, EUR 1.7 billion versus 2019, of course, linked to the sharp drop of the market during the second quarter -- mostly during the second quarter and the inability to absorb the fixed cost during that period. We have a very positive price/mix and raw material effect of 507 -- close to EUR 580 million, which has been already -- was already positive at the end of the first half of EUR 260 million. And we have been able to have also a positive price/mix effect of EUR 318 million during the second half. And of course, you see the impact the SG&A cost reduction that we have been able to implement during the year of EUR 240 million. And we are isolated in a separate line the COVID-19 measures that we took both in our factories and in different -- in our offices in order to protect our employees, the purchase of mask or for the production of hydroalcoholic gel, but also all the measure to clean the areas, particularly in the factories when at the moment of the shift change. So overall, the group operating margin has been at 9.2% with a strong performance on the second half, where this ratio was at 14.1%. Looking at the distribution of this results per segment. You will observe that although during the first half of the year, the specialties has been pretty resilient. In the second half, we have benefits from a robust upturn in the automotive and road transportation segment. Overall, if we look overall of the year, the SR1, the automotive segment has a slightly better resilience than B2B activities with a drop in operating margin of 2.8 points versus 3.7, 3.9 points for the B2B segments. As we mentioned, we have, globally, pretty well managed our free cash flow. Despite a very sharp drop of the EBITDA by EUR 1.1 billion, we have been able to more than compensate this negative -- this headwind through very decisive measures regarding our working capital, which has a positive impact of more than EUR 750 million. And of course, the measures that we have taken in order to better manage our capital expenditures which, in term of cash, has a cash impact of EUR 400 million. Coming back on the working capital, we have managed, let's say, a structural decline of our inventories in line with the plan that we have launched in 2019 in order to overall reduce our inventory by EUR 500 million by 2025. But at the same times, we have exceptionally low inventory level at the end of the year for an amount that we assess to be around EUR 400 million, which is mostly due to a much faster-than-expected recovery in the demand. So despite the crisis, Michelin is continuously investing into its future. And I would like now to zoom on 2 dimension: the durable material and the mobility electrification. Sorry. Sorry, I missed chapter on the debt. Thanks to the strong free cash flow generation, we have been able to decrease our debt by EUR 1.6 billion. And we have at the end of 2020 gearing ratio which is now at 28%. And this strong financial position has been confirmed and reaffirmed by all the rating agencies at the end of the year, which have all confirmed our rating with a stable outlook. So coming back to the area we are investing in and including during the crisis, I would like to zoom on the durable material. One of the main challenge our industry will encounter is to increase the share of sustainable material in our production. By sustainable material, we mean either reuse, like retrading; renewable, like natural rubber; or recycle material. And we have invested, particularly in 2020, in several start-ups, I mentioned Enviro and Pyrowave, where we invest during the first half in order to leverage these technologies. And one example is the factory that we are going to build in Chile in order to recycle, thanks to Enviro technology, which is based on pyrolysis, in order to recycle earthmover tire. And this factory should be operating in -- by 2023. At the same time, the Pyrowave technology will be -- will start up a demonstrator in one of our factory in France by 2023, equally. Electrification is, for us, a no-brainer. We consider that it's a main lever to make the mobility cleaner and over the years. And that's why we consider that from a tire perspective, the electric vehicles are tightening the technological challenge for tire makers, as these vehicles are contributing with some performance like range, interior noise or the weight of the battery that are pretty heavy. So in this framework, we have -- we believe that the share of EV in the total market will probably multiply by 3 by 2025 from 12% in 2020 to 30% in 2025. And we believe at Michelin that we are very well placed to sustain this increase in demand. We have an overall market share in -- on electric vehicle on the original equipment, which is 1.5x our average market share at original equipment. And we believe that our technology will benefit to us both on the original equipment and the replacement markets. And an illustration of this strength of the group is e.PRIMACY tire that we launched in 2020. And this e.PRIMACY is ensuring the -- is answering the trend toward the mobility electrification, first, by reducing the rolling resistance by 27% compared to the category average, which translate either in fuel saving of 0.2 liters per 100 kilometer or in longer autonomy, longer range by 7% for an electric vehicle. And of course, it contribute, in the case of internal combustion engine, to decrease the CO2 emission by 174 kilogram on a lifetime of a tire. Moving now to the future and particularly to 2021. I would like first to comment the hypothesis on which we have built our 2021 guidance. Since, let's say, the publication of half year results in July, we have comment that we believe that, of course, the market will recover, but it will take times and believe that we should get back to our 2019 level during the same half of 2022. So 2020 has been a very deep crisis. But we are seeing that a lot of perturbation is occurring beyond the sanitary impact, the short-term impact of the crisis in -- particularly in different supply chain such -- for example, the chips in automotive industry. So we believe it will take 2 years to recover the precrisis level. That's why our assessment is that the passenger car and light truck market should grow by a range between 6% to 10%. It will be also vary depending on the mix, the geographical mix, of this market. We expect a strong recovery in original equipment, but it's threatened by the chip shortage. On the replacement market, despite in some regions, remaining measures that are taking to limit mobility, we believe the demand will overall rebound. And we should come back to precrisis level in 2022. The truck market, you'll see also a recovery between 4% and 8%, driven mostly by North America and Europe on original equipment, while China is expecting to decline or to stabilize after a strong 2020. And we also believe that there will be a strong rebound on the replacement market driven by the freight activity in the different regions. Regarding the specialty, it's probably the segment where we expect the sharpest rebound, between 8% to 12%. Mining demand recovery being slightly penalized by a slowdown in coal extractions, but very sustained demand for iron ore. Beyond road, so agriculture construction should continue to grow and to accelerate with a strong demand recovery both at original equipment and replacement. And we believe that 2 wheels will also sustain growth when the aircraft businesses will be -- market will be, of course, impacted by the consequence of the grounding of the airlines. So based on this hypothesis, our 2021 scenario is based on volume that should grow in line with markets. Slight positive price/mix raw material effect after a very, very strong -- historically strong effect in 2020, which should have, of course, a negative impact of raw material prices and custom duties; and currency effect, which will be negative in the continuity of the second half of the year. We are also expecting to pursue our synergy extraction following that we have achieved over the past 2 years, aiming to reach 60% of the synergies we assess during the acquisition of Fenner, Camso and Multistrada by the end of 2021 and according to our plan. So based on this hypothesis and on that scenario, we believe that we should be able to generate at constant exchange rate segment operating income above EUR 2.5 billion and a structural free cash flow of around EUR 1 billion. And last, I would like to invite you to join us on April 8 for a digitally organized event, which should be our next Capital Market Days, where we will uncover our strategic plan -- our new strategic plan for the 10 years to come, along with our growth- and value-creation objective and, of course, the levels of continually improving our competitivity and the financial commitment and ESG goals for 2023 and beyond. Thank you very much. And now I hand the floor to Florent for the Q&A session.

Thank you, Yves. And just before we enter into the questions, I just wanted to, first of all, express to all our Michelin associates all my pride and all my thanks for what they did in 2020. In these exceptional circumstances, they did exceptional and they behaved exceptionally well. So thank you to all of you if you're listening. And really, Michelin is what it is because of you. And now we can open the question and -- session.

[Operator Instructions] The first question comes from Tom Narayan from RBC.

Both of mine relate to the 2021 guidance. The first on the SR3 market guidance for 2021. The 8% to 12% growth to me seems really robust, very impressive. Just wondering if you expect Michelin-specific outperformance above that level and what that could be since that's a market guidance? And then my second one is on the operating income EBIT guidance of greater than EUR 2.5 billion, if I use the margins you posted in H2 '20, that EUR 2.5 billion will be pretty conservative. I know it says above EUR 2.5 billion. But is this just conservatism? Or perhaps, are there costs that come back in 2021? I noticed, for example, selling and marketing expense was again down quite a bit in H2. Maybe this is because of the raw materials impacts that you called out.

Thank you. I will answer the first part of your questions. And the second part, I will let Yves answer. So for the SR3 growth, yes, it will be -- we anticipate it will be robust. We have many signals about this, especially when we consider that the second semester in 2020 has been slightly down in this activity. So that's why in perspective, we have all the indication at this stage that, of course, without any new systemic effect of the COVID that the specialty business should come back to a strong and robust level. Now whether Michelin will outperform, it will be the decision of our customers. And -- but we are very confident in our offerings and our product offerings and our service offerings in this segment. For the second part, I'll let Yves answer you.

So regarding our segment operating guidance at above EUR 2.5 billion, keep in mind that at the time we are issuing this guidance, there is several countries that are still in a lockdown situation where mobility is highly constrained, first. Although we have also some, let's say, promising message on the signal on the vaccination standpoint, but we see also that some supply chains -- just to mention, the automotive original equipment, semiconductor supply are -- have been really impacted by the crisis. And we believe that the markets are rebounding. That's what happened during the second half. But we are not totally out of the crisis. The crisis is still having some ripple effects. And we have built our guidance, taking into account also some opportunities and some risks and try to have a centered guidance.

Thank you. Maybe -- yes, and we like to overdeliver.

Next question from Thomas Besson from Kepler Cheuvreux.

I'll have 3, please. Firstly, on the cash guidance, can you just help us understand how conservative that may be eventually as well, knowing what you have achieved in 2020? And give us some indications around CapEx and working capital. That has been a substantial boost to your free cash flow in 2020, the first question. The second question you may tell me that you want to keep that for April, which I would understand. Basically, your balance sheet has improved faster than what we were expecting, thanks to the strong cash. Could you talk about capital allocation? I've noticed you've suggested a dividend above consensus expectations. Could you say a few words about the need to invest in start-ups or bigger companies or eventually the willingness to reward investors with a bigger dividend from here? And the last question is really very small. It's about the mention you make about coal exposure in the specialty business. I thought your order to coal was relatively small in the mining business. Can you remind us what it is as a proportion of the overall mining business, please? And whether we should expect that to handicap you in the years to come?

Okay. Thank you, Thomas. So for the third -- I will answer first on the third question, on coal. There are 2 types of coal. You have thermal coal where we are under-indexed in thermal coal, and that's the one that is declining. And then you have other coal, and that's where we have the majority of our business. And that's why we -- on this one, we don't experience the same drop as what exists on thermal coal. And I will let Yves answer for the capital allocation and the balance sheet, maybe.

Yes. So regarding the capital allocation, I think we'll have the opportunity on the 8th of April to further develop what will be our capital allocation strategy for the years to come. But you observe -- you can observe, as you have seen, that the dividend that we are going to propose to the shareholders' meeting represent around 47% of our net results outside nonrecurring items and around 63% of the net consolidated results. So it's, let's say, a small sign. And we will give better -- let's say, more information about our overall strategy on the 8th of April. Regarding the cash guidance. As we mentioned during the presentation -- so we expect to come back to the, let's say, normative CapEx level by -- in 2021. Although we have a slight impact that we had in 2020 in the other way of the supplier -- the payable of suppliers for capital expenditure. So in term of cash, it will have an effect of around 1.7 -- EUR 1.6 billion, EUR 1.7 billion in -- versus EUR 1.3 billion in 2020. And -- but the main effect is really the need to rebuild our inventory to come back to a better service level for our customers. As I mentioned, our inventories has been decreasing by EUR 550 million in 2020 beside the ForEx effect. We consider that EUR 100 million is real progress as we are updating our supply chain processes and improving the way we manage inventories and we serve our customers. But we also believe that we have not made EUR 500 million of structural progress in 2020. So we absolutely need to rebuild our inventory to come back to a better service level. And of course, in parallel, we continue to improve our supply chain. So we are not going to -- our aim is at, let's say, ISO raw material prices probably to rebuild at least EUR 300 million of inventory, knowing that we will continuously improve our supply chain processes.

And maybe on top of that as well, as we intend to grow in 2021, we will have to also -- we will experience a customer credit -- a much higher customer credit, and the net between customer credit and supplier will consume some cash. That's why we have this. But if you average the 2 years, between '20 and 2021, you will obtain the cash generation and the progress -- structural progress we have that Yves was mentioning that has been offsetting the drop in EBIT.

Next question from Gabriel Adler from Citigroup.

I'd like to come back to the operating income guidance, if possible. Because if I apply a 40% drop-through to volumes at the bottom end of your range and then include a slight positive net price/mix format, as you've guided to, then I quite easily come out with EUR 2.5 billion, and that's before any SG&A cost savings. So my question is, are there other aspects of the unit rate that I should really be thinking about here? And particularly, can you give us some sense on SG&A savings and how much your SIMPLY plan would be contributing to the integration 2021 net of any contributions?

Okay. Yves?

So we are expecting a drop-through around EUR 100 million in 2021. SG&A that hopefully -- I say hopefully because we all expect that we are able to travel, to organize motor sport events and to participate to events. So that should increase versus 2020 but still be slightly below 2019. And that basically -- and a small -- relatively small price/mix effect. Raw material have started to increase during the last part of 2020 are due to further increase, if I look at the brand or the natural rubber value as of today. And of course, we have -- you know that we have part of our business which is indexed with raw material clauses that are -- of course, that we will leverage but with generally a slight lag, which is included in the way we have built our forecast for SOI at EUR 2.5 billion.

Okay. So second question on U.S. tariffs, please. Do you expect to win any market share in the U.S. as a result of the tariffs that are being introduced on Asian target imports? And then, generally, what expectations do you have for the impact from the market there?

Sorry, can you repeat? Because your question is -- the line is not very good. So we had difficulties to understand your question.

Sure. It's on U.S. tariffs, so the impact of tariffs on Asian imports into the U.S. market.

Ah okay. Yes. So in -- yes, thank you for the question. So in 2020, the U.S. tariff led to a huge influx of Asian tires into the U.S., which explains why the market went -- the boom in the market and, of course, which also explain our relative performance against that boom. We anticipate that as soon as the tariff are implemented, this influx will diminish drastically.

Next question from Martino De Ambroggi from Equita.

The first question is a follow-up on one of the previous question concerning the profitability in the second half, particularly in current trucks. So apart from the EUR 133 million in partial unemployment benefits that you mentioned for the full year, is there anything we should be aware to adjust the return on sales recorded in the second half? Just to have an idea what is the entry speed for next year in terms of profitability for all the divisions.

Okay. I will start answering, and then Yves will complement. The -- I know it's difficult to understand, but under exceptional circumstances, we have -- the way of looking at our business has to be looked at exceptionally. So we have some exceptional low spending right now. And as the market recovers, our plants are now -- could be operating at full speed. But due to the sanitary conditions, we still have some bumps in the ramping up of our plants. And also as the market recovered, we had exceptionally low staff to produce in our plants very high levels. And now that we are putting additional shifts into our plants, of course, we will have additional input cost into industrial. That's why you have to be cautious in not extending the profitability in the second semester in a straight-line for the first semester of 2021. Maybe Yves, if you want to complement.

Yes. If I catch your question well, Martino, I believe that the partial unemployment benefit that you mentioned have mostly, let's say, impact the group during the first half of the year. And we have a very small portion during the second half.

Okay. Is there any other item we should be particularly aware of?

Not more than what -- I mean Florent has told you, our factories were running at full speed, but with a lot of constraint due to the COVID-19 sanitary measures and also with some hiccups in the restart of the factories because from time to time, we have to iterate some people because there was one -- people was a contact person or who have been himself infected. So it has disturbed a lot of the -- our operation, particularly from the summer and until the end of the year.