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

Ladies and gentlemen, welcome to the Michelin 2022 First half Results Conference Call. I now hand over to Mr. Florent Menegaux, CEO; and Yves Chapot, General Manager and Group CFO. Gentlemen, please go ahead.

Good evening and good morning to all of you. Thank you for joining us for this semester results. Let me first start by just reminding us about our Michelin strategy and telling -- reminding everyone that our equity story is that Michelin's value will be driven by its growth in a time of shifting [ parties ]. I'm sure all of you have noticed that our environment is much more challenging than it was 18 months ago. So if we recap and what you see on your -- on the screen, if we recap what our strategy, our growth strategy is to expand the size of our business and the size of the value created for our shareholders in 3 areas of business. Of course, in -- with tires, like we've done for the past decades. Around the tires, it's mainly on service and solutions. And beyond tires is mainly leveraging our strong capabilities and know-how in high-tech materials. All of that, the around tires and beyond tires will extend the reach of our know-how and our capabilities in fast-growing markets and with good EBIT generation and with lower capital intensity, therefore, enhancing our value creation overall. And what you see on the right of your screen is that paradigms have shifted. Now we operate in a high inflation environment. The global GDP is under stress after a deep dive during the COVID period, with a very sharp recovery and now with a lot of uncertainties in front of us, plus many issues in the transportation, logistics and the overall upstream supply chain. And also the energy transition, we have to also accommodate. So the paradigm shifts are now impacting our activities, and we are adapting to them. While we are confident that our strategy, we think, is the right one for Michelin. So if we now move to our results for the semester. We are staying the course in a very turbulent environment, with sales up almost 19% and with an operating income of EUR 1.5 billion. We maintain our guidance for the year. And if we move into the some more details, the market environment in which we operate has overall deteriorated with a new systemic impact affecting our business. Of course, we have the rippling effect of the conflict in Ukraine and the health crisis, the COVID health crisis that is still in front of us in some part of the world. Despite that, our sales have been up almost 19%, despite also the supply chain disruptions and the fast rising inflation that is dragging down the tire markets, our tire volumes were down 2.2%, but stable if we exclude the sales in Eastern Europe and in China. Eastern Europe is our activities around Russia. We have a strong momentum in non-tire sales that are up 18% at constant exchange rates. We have very positive price/mix effect of 14%. That is reflecting our pricing policy and our determination to offset every cost inflator. And we have experienced a 5.2% positive currency effect led by the U.S. dollar. Our operating income of EUR 1.5 billion or 11.5% of sales is made of -- basically is due to our pricing management that has maintained our unit margin integrity. And this operating income is up on every reporting segment. And our operating margin reflects a 1.2% dilutive effect from the price increases introduced to offset inflation. Our free cash flow has come back to more normal frame at -- and is negative in the first semester of EUR 1.014 billion before acquisition. The EBITDA has improved to EUR 2.4 billion, but the working capital requirements have been hit by inventory replenishment and also by a price element in inventory. So it's been overall hit by inflation. We also have an usual seasonal pattern. Our cash flow for the year will be generated by the business in the second half of the year. That's for all these reasons, we have decided to maintain our 2022 guidance. With an operating income in excess of EUR 3.2 billion at constant exchange rates and with a structural free cash flow in excess of EUR 1.2 billion for the year. I now leave the mic to Yves Chapot, who is going to give you some more details about our results.

Good evening, everyone. So before zooming on the business and financial performance, let's share the overall, let's say, holistic group performance, looking at our profit, but also the people and planet dimensions.We have selected a certain number of KPIs extract from our strategic scorecard. On the people side, we have progressed in the share of non-French national within our top management, which means the top 100 senior executive within the group, it's a progress of 7 points over 2020. So we are now at 37.5% of non-French population -- within this population. Our TCIR, which is the frequency incident rate, labor accident rate has improved by 0.21 basis point over the first half of 2021, demonstrating here also the progress we are making in that domain. Sales and operating income has been already commented by Florent, and I will come back to more detail on it. We are also improving on the planet side, our CO2 emissions, Scope 1 and 2, has reached 2.6 million tons over the last 12 rolling months, which is an improvement over the figure that we reached at the end of December last year by 0.1 million tons, and we are in line with our target to decrease it by 50% by 2030. And our i-MEP, which is a composite indicator of our manufacturing impact, including CO2, water, COV and waste has also improved. It was at 92.6% at the end of December, and it reached 89.7% at the end of June 2022. The business environment has been -- was already pretty perturbated at the beginning of the year. Of course, the invasion of Ukraine by Russia has exacerbated the situation. But we should not forget that the health situation has not stabilized. I mean China has been seeing some of its cities or provinces, locked down during several weeks during the second quarter, particularly. And as I said, all the pertubation linked to supply chain and has been intensified because of the war in Ukraine. Just a few examples, transportation, shortage of truck drivers has been spread over Europe because a lot of fleets were relying on Ukrainian truck drivers. The increase of cost has spread through energy to a lot of value chain, including some raw materials that are using a lot of energy to be produced. And the labor shortage is pervasive in North America, but also in a lot of areas where we can consider that we are really in -- we have already entered into period of talent war. If we look at our markets, the global passenger car and light truck tire market has been -- on the first quarter was, let's say, in average, in the range we have initially forecasted. On the second quarter, except in June, where there was some rebound of the regional equipment market, particularly in China and the U.S., the market has trended below our expectations. Global truck tire market, including China is as trade more on the upper side of the range we have forecasted at the beginning of the year. Our sales, so EUR 13.3 billion, plus 18.7%. The main driver is also the price mix, 13.9%, of which 12.8 points are coming from pure price increase. We have implemented a free price increase over the semester, 1st of Jan, 1st of April, and in native areas, 1st of May or 1st of June. We have -- the scope effect is mostly due to the Allopneus integration. And the volume effect is primarily due to the sales loss cumulated both in Eastern Europe and in China. So if we extract -- exclude China and Eastern Europe from our figures, we are recording flat sales in volumes versus the first half of 2021. Non-tire business growing by 18%, so without currency exchange rate, which shows that says the fact that we invested in areas around and beyond tires that are intrinsically generating higher growth rate. And the currency effect is mostly due to the dollar, but basically all currencies, except Japanese yen and Turkish lira has improved over euro during the semester. Regarding the segment operating income, it has increased by EUR 109 million despite 2.2% volume less than the first half of 2021. And it's primarily due to the price mix raw material and manufacturing and logistic cost effect. We have been able, just with the price effect, to hedge all the inflators in our cost of goods sales by nearly EUR 140 million. There was also some inflators in SG&A, and you observed that the currency effect is only 10% of what was the currency effect on the sales is due to the fact that we have a large revenue base in U.S. dollar, but we have also a large cost base in U.S. dollar. On contrary, for example, in Turkish lira, which has devaluated by 47% versus the euro on average over the semester. We have mostly revenue in Turkish lira, particularly no cost in this currency. By segment, so you see first that all segments are contributing positively to the improvement in segment operating income, SL1 by EUR 52 million, SR2 by EUR 28 million and SR3 by EUR 29 million. And I just would like to highlight the progress, the recovery of the SR3 segment, which was generating 11.3% operating margin on the second half of 2021. And which is now at 13.5% during the first half of 2022. And when we look internally quarter-by-quarter, we are clearly seeing a very strong signs of recovery. Regarding the cash, so we have, as Florent already mentioned, a negative cash pattern, which is looking more, let's say, what was a traditional cash pattern before 2021. We have highlighted that last year, but maybe it's difficult to remind that in 2020, we have a really abnormal year. We started at December 2020 with a very low level of inventory, and we have been generating a positive cash flow during the first half, which has never been the case for the group over the past 20 years. So EBITDA improved by EUR 161 million, but we have increase in working capital by EUR 1.7 billion, EUR 1.2 billion is coming from inventories and on which the EUR 1.2 billion there is nearly 1/3 that is coming from the pure price effect of raw material in the value of inventories. And looking over the past 5 years, you will observe that there is always a structural gap between, let's say, the high tide and low tide cash position between EUR 1.5 billion to EUR 2.6 billion if you look at the pattern of the previous year. So it makes us confident that we are able to reach our second half cash targets. The debt, of course, has increased along with the free cash flow and the dividend payment and the gearing is at 29.9% versus 18.6% at the end of last year and 26% at the end of the first half of 2021. Our capital expenditure, so you remember in end of 2019, we have announced that we should spend around EUR 1.9 billion over the coming year, so basically 2020 and 2021 due to the COVID crisis first and then our ability to recover in 2021. We underspend over these past 2 years, nearly EUR 0.9 billion. And as we have announced in the -- during the first -- the 2021 yearly presentation, we are expecting to catch up this EUR 0.9 billion over the next 3 years. So in 2022, we should reach around EUR 2.2 billion of CapEx recognized. The CapEx cash out is slightly below because we have seasonality of CapEx, which is very strong in the second half of the year. Before moving to the full year guidance, I would like to draw your attention on 2 observations. The first one is looking at the way the group has been able to hold its cap through the different cycles. So in green, you have the market, the volumes effect over the past 14 years. You can -- we can draw two conclusions on this slide. The first one is that the group has, let's say, improved its ability to resist to the crisis. We faced nearly the same volume effect in 2019 versus 2020. In one case, our operating margin dropped to 6%, in 2020 it dropped only to 9%. And if you look at the cash generation since basically 2017, the group has constantly generated EUR 1.2 billion or EUR 1.3 billion or more of free cash flow over the period despite different, let's say, volume and market situation. The second observation I would like also to share with you is the ability of the group to successfully integrate its strategic acquisition and deliver the expected synergies. And that's true both, of course, in tires, with tires with the integration of Multistrada and Camso. Multistrada, which was a loss-making company when we acquired it in 2019, is now generating very strong profit, thanks to the move and our ability to move the production capacity towards our Tier 2 brands, which are now accounting for 70% of our total output. On the other hand, if I look around tires, we have now created Michelin connected fleet brand, which is the umbrella brand around all our services and solutions activities and Masternaut, which has been acquired at mid-2019, now is spreading over Europe, in Germany, in Spain, but also outside Europe, in South Africa or Australia. And Fenner, which is the core of our flexible composite activities, is developing its activities, both with organic and bolt-on M&A around these different activities, either conveyor belts, but also sealing and power transmission belts. Regarding the synergies, in the past 3 years, we have been always on track and even ahead of trucks. If you look at the overall synergies coming from these acquisitions. Moving now to the guidance, I would like to come back on the market scenario on which we are basing our -- which are the assumptions of our full year and second half guidance. So the market are far more uncertain and the environment is far more uncertain than 6 months ago. And we consider that overall with, let's say, the global risks linked to the supply chain, potential energy crisis in Europe, the fact that the original equipment market as for passenger car tires has not yet recovered, we have decided to lower our assumptions regarding market scenario. For passenger car and natural tires, we are now considering the market should be between minus 2% and plus 2% with probably a third quarter, which would be very favorable because in 2021 the first quarter has been very bad, particularly for the original equipment market. And the second quarter -- fourth quarter that will be more challenging because the fourth quarter was very strong, particularly in the winterized market in 2021. The truck market should be resilient, positively growing, of course, outside China with a growth rate in the range of 2% to 6%. OEM's order books are complete for the year. And the replacement market should benefit from the strongest freight demand, although comparative data on the last quarter were very high. So here also, we expect a market more favorable on Q3 and less favorable on the Q4. On the specialty side, the mining demand is still very robust. But -- and we believe that shipping difficulties should ease in the second half. I must insist on the fact that it's a real challenge to date to ship product from Europe and North America to our mining site, our mining customer sites. On the beyond road tires, we expect also a strong demand despite lingering of OEM production difficulties and sometimes of some market cooling down in some areas. With this scenario, we believe that, of course, our sales should be in line, growth in volumes should be in line with the market. We expect the cost impact of raw material prices transportation and energy costs to be strongly negative. But we expect, on the other hand, to be able to hedge and to do better than hedge these inflators, thanks to our price and mix. So having taken into account all these elements, we have decided to maintain our guidance for the full year, with a segment operating income at constant exchange rates at above EUR 3.2 billion and structural free cash flow which will be above EUR 1.2 billion. So thank you for listening to this presentation. And I think now we can open the Q&A session.

[Operator Instructions] We have a first question from Tom Narayan from RBC.

Tom Narayan, RBC. The first one is on energy rationing, nat gas specifically. My understanding is that tire business is very energy intensive. So this could be an area targeted by governments in Europe. Just curious how this would impact Michelin's plants, specifically? And are you perhaps overproducing now ahead of energy rationing in Europe? And secondly, it'd be great if you could just -- I know you kind of talked about it in the comments, but -- just maybe some more color on why you expect free cash flow to be so robust in H2, post H1's performance?

Thank you. I will first give you some elements about our situation regarding energy. So yes, you're right. As we transform materials, we consume a lot of energy. We have created a backup plan for almost every plant in Europe, where we are able to switch from gas back to coal when necessary and when we cannot switch our energy to oil. But all our plants can either switch back to oil or coal if and when required across Europe. I think there is only one small exception. So unless there is a cut in electricity, we should be able to operate despite shortages in natural gas. Now whether are we overproducing right now, the answer is no. We are not creating inventory at this stage to offset future issues on our production capabilities in the second semester. And for the free cash flow, I leave the floor to -- Yves will answer you.

So you have -- Tom, you have part of the answer in the presentation. If you look at the past, we know that we have structurally cash, as I say, a low tide and high tide cash position with an amplitude of nearly EUR 2 billion over the year. So given the fact that we had already at the end of H1, a bit more than EUR 400 million of price effect in inventory due to the raw material price increase. There is no reason that this figure will dramatically change by the end of the year. So it will enter into the, let's say, the structural free cash flow correction. So it means that in the second half, we should generate at least EUR 1.8 billion. And it's a range of what we have done, if you look in 2019 or 2020 in the average. So just for as a reminder, we have, let's say, the lower inventory position during the year -- end of the year and beginning of the year. so between December and January. In terms of cash, we have also generally a strong position because the winter season has been ordered by our distributors, winter season tires have been ordered by our distributors in September, October. So they are generally paid by the end of the year. So generally, it's -- there is a strong seasonality component in our free cash flow generation between the two semesters.

Got it. And if I just have one quick follow-up. Are you maintaining the understanding that price could offset raw materials in 2022 in SR1?

Yes.

Next question from Thomas Besson from Kepler Cheuvreux.

I have three questions with -- firstly, your SR1 performance is actually the main variance to consortium expectations today. Is it possible for you to confirm that there was no one-off in these figures that you reported? Second question, could you -- and I think that's what you've been saying, but I just want to confirm. The scenario for SR3 margin recovery over the next 18 months, is it still valid? Is it fair to assume that the 11.3% margin we've seen in H2 was the trough and that we should see over the next 18 months sequential and year-on-year margin improvement? And thirdly, I'd like to come back on the bridge to what you said about the FX tailwind was just EUR 47 million, 10% of the revenue impact. Could you guide for what you expect for the full year in terms of FX tailwind? And it also clearly highlight what allows you to be confident in having an adjusted EBIT more than 10% above H1 in H2.

Thank you, Thomas. So I will answer the -- your second question, and Yves will answer your first and third question. About SR3, yes, we are confident that we will turn back to the margins. Take into consideration the fact that SR3 is mainly indexed contracts. And we have the anniversaries of the contracts, plus we also have had very intense negotiation with all the operators in those segments, in the various activities of this segment to pass on price increases to cover energy costs and transportation as well. So with the volume that will improve as well because we will we have found ways to ship our tires differently from the way we used to do it. So therefore, we can ship more quantities we will see our margins quickly coming back to their historical levels. So we've hit the low point in the Q1 of 2022. And now we are on the recovery path.

So first, there was no one-off regarding the group performance. The only one-off was below the segment operating income. It was the impairment that we did on our assets in Russia of nearly EUR 200 million. But in SR1 performance, there is absolutely no one-off. SR1 Is probably the segment that has been the most penalized by what happened in Russia and China with SR3. On the other hand, the SR2 is we are less exposed to SR2 in these 2 regions. So that's probably the segment that was less penalized. Regarding the FX, so basically in U.S. dollar, we have a drop-through of, let's say, an average between 25% to 35%, which means that when you have U.S. dollar moving as it move by basically, I think, 10% versus the euro on the first half of the year. It has an impact on sales of 3.8% and an impact on segment operating income of nearly 30% or 1.1%. On contrary, the drop-through of the Turkish lira is nearly 85% because we have, as I said, we are basically only revenue in Turkish lira, the cost are only the logistics and, let's say, sales operations, cost sales force that we have in the country. So when you have a currency which is dropping as the Turkish lira did by 40% versus euro. Basically, you have nearly 35% of that, that is translated directly in your P&L. And for the second half, the appreciation of the U.S. dollar, particularly versus the euro, was, of course, very strong in the second quarter -- stronger in the second quarter than in the first one. We can expect that here also, I don't have a crystal ball to have a bigger ForEx effect in our segment operating income in the second half than in the first one.

Next question from Gabriel Adler from Citigroup.

It's Gabriel from Citi. My first is on inventory levels at the dealers. Have you seen signs of prebuying in the first half, particularly given the prices you've been rising? And is that one of the reasons why you've looked to downgrade your market outlook on SR1? And then my second question is just coming back to free cash flow. Could you just comment maybe a little bit further on which elements of the working capital that you expect to support the second half recovery? Because I understand the point around historical seasonality, but historically, it's really been receivables swinging back that have supported the second half recovery in cash, whereas this year, clearly, inventories are having a very negative impact in the first half. And I'm just trying to better understand why you think inventories will reverse given there's been quite a significant impact from inflation of the value of raw mats and your inventory, which is unlikely to soften in the second half. So just some comments around the working tactical elements would be really helpful.

Thank you. For your first question about dealer inventory, so the -- across all regions, we have seen the inventory replenishment happening. Now we have also seen especially in Europe and to some extent, in North America, a prebuy for competitors brand at dealers because the competition followed lately our price increases. Therefore, they are pushing a price increase by the first of July, which led to a big prebuy of competitors' brand in the dealer inventories as of end of June. As far as Michelin is concerned, especially in passenger car, we -- the inventories have been replenished, but we don't have excess inventories across dealers. Now the prebuy for Michelin brand did not happen because we have not been really in capacity to supply all the demand because of the issues we have related to production. And Yves, maybe for the...

Regarding the free cash flow and the working capital, I will repeat what I said before. We have traditionally a very strong cash generation during the last 3 months of the year. One, because of the seasonality of the sales and 2021 from that standpoint, has been a not normal year where we have a stronger H1 than H2. We believe that we are back to a normal pattern in terms of seasonality. We have, at the end of the first half, an increase of inventory of EUR 1.2 billion. As I said, part of this increase will remain, which is a price effect. But this is the price effect that we correct to calculate what is a structural free cash flow. And of course, the volume effect should decrease because as I said at the end of the year, it's probably the lowest position in terms of inventory level during the -- if you look at the full yearly cycle. And for account payable, we have generally very strong sales in September or October. November, it might depend on the winter season, but most of the winter tires are sold to distributors in September and October. And generally, they are paid at the end of the year, which explain also the fact that it's end of December is a moment where we have the lowest level of account receivable. On contrary, we acquire some raw materials at the end of the year in order to prepare the spring season at the beginning of the year. So generally, our production facility are running full at the beginning of the year, and it generates a payable that we paid during first quarter. So we don't see any major reason. This year was a bit exceptional because of the price, very strong price effect in the inventory. But we have seen such similar situation I think, 10 years ago at the beginning of the year 2010.

Next question from Michael Jacks from Bank of America.

Perhaps just the first one on raw mats. We've seen a moderation in the last 3 months in natural rubber and some of the other raw mat inputs. Should we expect perhaps to see this reflect in income statement in a normal 3- to 4-month period? Or will the higher inventory volumes that you alluded to, labors? That's the first question. And my second question is on energy cost inflation. To what extent of higher energy prices impacted the first half earnings? And do you expect higher impact for the second half? And perhaps just as an add-on to that, how much of your current energy usage is indexed to spot energy prices, referring to gas and electricity?

So with the question about how the raw materials are going to evolve in the future, we don't know. What we have seen is, as you were mentioning, a stabilization. And -- but we have been clear from the very beginning that we reassess every quarter what we do in terms of pricing versus what we see happening in raw materials. So it means that why do we do it every quarter because it's the time for us to recognize in our P&L the purchase price we see in our accounts. So we -- so far, the stabilization is good news because we don't have to push price increase immediately because of that. And what it will be in the future? Many unknowns and uncertainties. So at this stage, we are not too concerned about that. The second element is also our level of inventory in raw mat is in better shape now than it was last year's same period. So we have replenished our semi-finished and raw material inventories. So we are at good levels. So we are in, I would say, in this environment. I don't know whether I could say, in a comfortable position, but we are in a better position than what we were in the same period last year. And Yves, maybe for the other elements?

Yes. So first already in the H1, so you mentioned the 700 -- more than EUR 700 million of manufacturing and logistic costs inflation. We have very strong increase in transportation costs, both inland and shipping costs. And energy has been also a very strong driver for this. So they are the 2 main drivers behind these logistics and manufacturing cost increase. Regarding the energy, I don't want to enter into too much detail, but we have a policy which consists to hedge at the beginning of the year between 25% and 75% of our following year energy consumption in order to protect ourselves against potential increase, but also not to be completely fixed if energy price were going to decrease. We are -- and of course, we have such a range because we want to give the flexibility to position ourselves depending on our anticipation on energy prices. So I'm not going to disclose our position currently. So it means that the rest is linked to spot price. But we have a policy of hedging which, let's say, try to be consistent with our overall, let's say, risk management policy.

That's clear. And maybe I can just add one quick add-on related to energy costs. With regards to retrofitting the boilers to be able to use coal, is this the contingency plan only? Or would you potentially preemptively switch? And under either scenario, if you do switch, are there any incremental cost implications relative to gas prices, I don't know, maybe logistics costs, for instance, makes it a lot more expensive?

Yes. switching back to coal is only happening mainly in Poland, where we had the boiler that used to be on coal and that we -- for environmental reasons, we had switched to gas. And now we have to switch it back to coal. So -- but it's -- most of the other facilities is having boilers that are capable of handling either gas or oil and coal is mainly happening in Poland. And it's -- we hope is a temporary situation up until we have found a reliable source of less environmental impact source of energy.

Next question from Giulio Pescatore from BNP Paribas.

I want to follow back on energy costs. I understand you don't want to go too much into the details of your contracts. Can you just maybe give us a broad indication of what we should expect in terms of incremental costs from energy for next year based on the spot prices you see today in the market? And then the second question, moving to pricing. I was just wondering, is it more difficult for you to increase prices in an environment where raw material costs are actually going down, but you still need to offset some of the energy headwinds? And then a third question on free cash flow, going back to the winter season, how much are you actually relying on a very strong winter season to reach your guidance? Is this a major factor or it's a minor one?

So on prices, of course, there is a price elasticity in the market, but sometimes we confuse the we have a static view of the price elasticity and where we should consider a relative view of the price elasticity. So far, we have been able to pass price increases in the market, thanks to the quality of our products and services that are appreciated by the market. We have not seen yet any real impact on the demand. whether that will remain. And if we have to pass further price increases, it will depend on our relative positioning versus the rest of the market. So it's very difficult to answer definitively that question. But of course, theoretically, there would be a price at which people will not be willing to buy our tires. Where is it? It's difficult to say at this stage. And Yves, for the other questions.

Well, regarding energy cost, contract renegotiation is not -- for 2023 is not coming -- going to be done during the fall. So it's a bit too early to speak about 2023 for next year cost expectations. It will first depend on what's going to happen in 2022. And regarding free cash flow, of course, as I said, there is a seasonality effect. We are back at a normal seasonality. And maybe the main difference in 2022 versus what happened last year is really the fact that in 2021, we have a very low activity during Q3, partially compensated by relatively strong sales in Q4. But we are back, let's say, to a normal winter season, which for truck tire is mostly fleets equipping their vehicle with new tires before the winter, which is the most demanding season in terms of safety. And in the passenger car tires, of course, winter tires equipment in seasonal markets, but also more and more customers switching to all seasons and to our CrossClimate ranges.

Sorry, can I just follow up on the energy? I mean I understand that the negotiation happens in the fall, but the fall does feel closer than ever, given the energy constraint. So just based on spot prices, should we expect a very significant increase in cost next year? Or is it -- can you give us any indication to help us with the expectations for next year?

We don't know. Whether we see a very significant increase, it depends on many parameters. So at this stage, we don't know.

Next question from Martino De Ambroggi from Equita.

From Equita. The first is on the guidance again. You are revising downward market volumes and you assume to perform in line with the market. So that means, based on my estimates, you have more than EUR 100 million lower operating profit contribution from volumes. So how do you plan to offset these lower volumes? The first question. And the second, sorry, if I missed it, but in the previous call, you mentioned that the cost inflation all inclusive, was EUR 2.4 billion, increased by EUR 1 billion compared to your expectation at the beginning of the year. Is it still EUR 2.4 billion? And maybe referring to this EUR 2.4 billion, you can split a bit of energy transportation labor cost because in the previous call, you mentioned that energy was increased by EUR 500 million, transportation between EUR 300 million and EUR 400 million labor and the other EUR 100 million. So just to have a rough idea.

Okay. On the first part of your questions, your question is a testimony to our very good performance because we are -- as you said, we are able to increase our profit in volume despite this very messy environment. And despite the fact that we have issues on the volume, most of them unrelated to our core business, but due to the environment in which we operate. So thank you for asking that question. The recognition of this -- your simple question, is a good recognition of the excellent work that our teams are doing. And for the rest, I give to Yves.

Yes, if I may, but what are lower cost, higher mix? What is the -- your ability to offset this EUR 100 million or more of lower volumes contribution?

You have it in the bridge of the first half. So you don't necessarily need to multiply all the figures by 2. But the bridge of the first half is a demonstration that despite the loss of volumes, particularly due to what happened in Eastern Europe and in China, the group was able to generate -- so if I exclude exchange rate, 60 -- more than EUR 60 million operating margin than first half of 2021. As far as inflation is concerned, we are still in the range of EUR 2.4 billion. And honestly, the proportion we shared with you during previous calls for yarding, raw mat, logistics and energy is -- has not fundamentally changed. So it means that we are going to absorb in 2022 twice the inflation that we absorbed in 2021.

Okay. If I may, just if it's possible to have a rough indication of profitability divided by SR1 and SR2 for the full year?

No, we don't disclose forecast guidance per business segment.

Next question from Jose Asumendi from JPMorgan.

A couple of items, please. Can you talk a little bit around CapEx and this normalization of CapEx? And how much of that is being dedicated to capacity expansion across any region? Second, please, can you talk about mining, it sounds very promising. You mentioned robust demand and shipping difficulties. What are you tracking monitoring to see an improvement in earnings in this division in the second half of the year? And then finally, if you could maybe just-- maybe Yves just give us a bit more color with regards to volume for SR1, SR2, SR3 second half versus the first half. If you could just give us a bit more color around those 3 divisions?

Okay. On the volume, I will leave Yves to answer. On CapEx, we have low expansion in capacity and many of our investment is passed to be able to produce the tires that are successful enough so that we can have the prices in the market. We consider that in the CapEx that we are forecasting for the year, you have the inflation on those CapEx as well that we are offsetting by making arbitrations on our CapEx portfolio. But we don't give too many details about how we spend that -- those CapEx. On mining, what we track as we know the beauty of mining is that we almost can track every tire we produce and sell. So we know perfectly how many tires are on boats to be delivered to our customers, and we know that our shipping rate is increasing weeks after weeks. So we know our big issue has been not the demand, but our capability to ship the tires and now we are able to track that we have seen more tires shipped and those we trusted in sales in the second semester. And maybe Yves, on the volume?

Yes. Regarding the volume, I think you can stick to the hypothesis we took for the guidance. So by difference, what happened during the first half, you can guess what are our market expectation for the second half. We are, of course, betting on a rebound on the regional equipment market, which has been particularly penalized during the second half of 2021 with the microchips crisis. And of course, the rebound of China, where the market has been severely impacted by the lockdown during the second half. So that's basically the main hypothesis behind this volume effect.

Next question from Philipp Konig from Goldman Sachs.

I just want to come back on the price mix against the inflation. You mentioned in the guidance now that you're expecting to be slightly positive for the year. You already did over EUR 200 million in the first half. Looking out for the second half, do you expect to do the EUR 200 million maybe again in the second half? Or is that sort of maybe rather neutral effect for the second half? Any color there would be helpful. My second question is on the mix. You just pointed out that you're betting on a recovery in the original equipment, which is obviously less profitable for you. Is it fair to say that you potentially could see a negative mix effect in the second half? It was already sort of sequentially lower in the second quarter. And then lastly, it's just a very simple question on the volumes. I know you're sort of saying you want to grow in line with the markets, but do you still believe that group volumes can be up this year on a full year basis?

Okay. So on the first element of your questions. So about the mix effect, we consider that if you take all the mixes together, geo mix, product mix, segment mix, et cetera, we should be slightly positive for the year. So it means that in the second semester, it would be okay. Now when you look at the pricing, you also have to consider that we have been able to offset the overall impact of all inflators despite the fact that we have a large portion of our business that is with index contracts, those index contracts have anniversaries that are coming in the second semester. And for example, in mining, we have price increases that are happening 1st of July. So in the second semester, you will see on the index contracts, additional price increases due to the anniversaries of the contract and also all the renegotiations we have been undertaking over the past months. So that's why we are confident in our price mix scenario for the second semester. And maybe for the volume, Yves?

I already answered.

Already answered. Sorry.

Next question from Christoph Laskawi from Deutsche Bank.

But coming back to switching the energy source, potentially in a COVID scenario, are you currently already entering into contracts to secure the new energy sources? And did you face any cost related to that at all? Or could there be a risk, simply because there will be a run of several companies on oil or coal, that A prices are significantly increasing in H2, again, and there might be a potential shortage for one or the other? And then just the last point, you have said already that demand hasn't really weakened because of the pricing and you have been able to conduct the price hike as you plan to. In the current planning scenario, is there any weakening factored in for Q4 where we might see demand site a bit more because of the consumer budgets? Or are you essentially assuming situation holds that you've seen in H1?

So on the last part of your question about the demand in the fourth quarter, our assumption is that the demand in the fourth quarter would be mild but we do not, right now, anticipate drastic scenarios. Of course, many things can happen in the meantime.

Regarding the energy situation, we have, as I said earlier, we try to hedge part of our purchase. We are also, by the way, buying also energy from sustainable or renewable sources. In some countries, we have nearly 100% of the electricity we buy that is so-called green. But as Florent said, we have put in place a contingency plan in order particularly to protect the sites where -- that are today mostly relying on Eastern European gas. But the past 2 years, has been the demonstration that we have to face any kind of crisis and agility and, let's say, ability to wave this crisis is starting to become a strength within the group. So although there is a lot of cloud on the horizon, we remain relatively optimistic.

Thank you, Yves. And thank you all for your participation tonight. So this is ending our question-and-answer session. Thank you for your commitment to Michelin and we'll see you soon. Thank you.

Yes. Have a nice vacation Bye-bye.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect.