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

Ladies and gentlemen, welcome to the Michelin First Quarter 2024 Sales Conference Call. I will now hand you over to Mr. Yves Chapot, General Manager and Group CFO. Please go-ahead gentlemen.

Thank you. Good evening, ladies and gentlemen. Good afternoon for those who are listening us from North America. So I'm very pleased to have the privilege to present you our sales performance for the first quarter of 2024. And I will jump directly on the market evolutions as the selling market developed slightly driven by Replacement demand, that you will see that in detail. The truck tire market distorted by Asian imports into North America ahead of expected tariff hikes. Passenger car markets, so on the Slide 3 grew by 2%. They were basically flat at Original Equipment with a contrasted situation between China market who grew by 4%, North America by 6% with replenishment of vehicles at inventory -- dealers inventory during the quarter, and with basically a flat European market. And a dropping market in Asia out of China, particularly Japan and Korea. On the other hand, the Replacement market for passenger car tires grew by 3% here, also led by China plus 6%, U.S., North America plus 8%. With in the North American data there is some selling effect import due to the reduction of the custom duties from tires imported from Thailand. The truck and bus market grew by 2% with negative Original Equipment minus 7%. So 2% so its without -- excluding China and again excluding China, we decreased by 7%, mostly driven by Europe and North America, both markets decreased by 16% over the quarter and it was anticipated as, particularly in the U.S., there was implementation of new regulation that lead to anticipated purchase in the first half of 2023. And on the Replacement market grew by 4%, mostly driven by South America plus 8%, Europe, U.S. plus 18%. And here clearly, we know that the U.S. administration is going to implement tariffs for truck tires imported from Southeast Asia. This regulation will probably be decided during the second quarter, but with a retroactive effect on April 1. So that's why there was a surge in the selling market in imports in the U.S. market for truck tire in the first quarter. And the European market was down by 4%. Specialties markets show more mixed trends. Construction, Agriculture Original Equipment and 2-wheels were down. The Aircraft tire market is still progressing when the Mining market, although the demand is favorably pulled by the extractions. Mining companies are reducing slightly their inventories which lead to a market which is slightly negative on the quarter. And the market is flat in polymer composite solutions, belts -- conveyor belts and other categories. Now moving to our sales bridge. So our sales were down 4.6% including currency exchange rate which is strongly negative at minus 1.9%. So excluding exchange rate, our sales are down by 2.7%. With the scope effect, positive scope effect which is mostly due to FCG integration. Volume effect minus 4.1% anticipated on our side driven by our value driven strategy, we have selective segment approach and most of this volume drop was well managed by our team. We have a price effect which is negative at 0.9% which is mostly and uniquely the effect of the raw material and energy prices adjustments that are on our indexed business and it has been overly compensated by a 1.6% mix effect, knowing that this mix effect we consider that we do not have yet the full benefits of the mix effect due to the fact that we still have an OE, Original Equipment, Replacement mix which is not the one that we are aiming for. Non-tire business outside the FCG integration were flat with very high comparison for first half in the first quarter of 2023, and of course, the currency that I already comment. Looking now at the sales by business segment, the volume decline is mostly in Truck and Specialty which reflect the soft overall demand and our selective market approach. On the other hand, you see that on the SR1, the volume effect is less impactful. So SR1 sales decreased by 2.4%. Our volume are down in 18-inch and minus segment, but we are having a strong growth in 18-inch and above which now represents 63% of Michelin sales, Michelin brand sales, Original Equipment and Replacement up 5 points year-on-year. We have in this segment of favorable mix which is overcompensating. The negative price impact from indexation clauses particularly for Original Equipment, and this is a segment which is the most penalized by the forex. The Truck segment, the transportation segment have seen a sales decreasing by 6% including 5.8% of volumes illustrated -- supported by a very selective market approach, which impacting our volume on lower value segments including non-Michelin branded product. And our mix and pricing effect, both favorable with improved OE contract. On the SR3, you see a decrease of 7.6%. Our mining volume were penalized by a strong 2023 reference and a slight customer destocking. The Beyond Road segments are focusing on the most value creating business segments. And we have as you know this segment is the most exposed to indexed business is probably the most penalized by the negative price effect, but are fully compensated by the mix between the different businesses. And our polymer composite solutions sales are up 11% including the FCG integration. So before now coming to the guidance, I would like to draw your attention on several elements. The first one is related to our portfolio of activity. Each of these activities are driven by underlying economic trends that are somehow independent from each other. So I always remind that if you look at 2023 yearly figures, our pure exposure to Original Equipment for automotive for passenger car tires represent 10% of the group sales, when we have 36% of our sales that are linked to Replacement of 4-wheels or 2-wheels vehicles and driven mostly by consumptions, mileage driven, used car market. The pure transportation tire market which is mostly related to GDP and PMI represents 20% of our overall sales. The Specialty segments that can be correlated more to drivers such of course GDP, but also public spending and commodity prices and construction represent 18% of our global sales. And we have 5% linked to polymer composite solutions. And 11% in fleet services, retail distribution and lifestyle, so more service kind of activities. The second element that we wanted to share with you is related to our strategy. We clearly prioritize value over volume in a market which is characterized by overcapacity, we focus on segment where we can create value on our 3-dimension people, profit and planet for the benefits of all our stakeholders. It leads us to be selective both for Original Equipment and Replacement, whatever the business segment. At Original Equipment, we rely on our innovation potential, our strong brand leadership to partner with OEMs and to leverage this presence on our loyalty at the Replacement market. And of course, we are focusing on Replacement segment that are accretive in terms of value, reinforcing our leadership by increasing our market share on these value accretive segments, enhancing of course our partners performance, and valorizing our technologies and offers. So all of these strategies should lead us to improve our value creation for both our customers and the group and shareholders. Third, in 2023, we have announced at the end of the year the breakdown of several activities in Europe and North America, in Ardmore for passenger car tires, in Karlsruhe / Homburg for truck tires in Europe, and the closure of our Trier, steel cord factory in Germany. We have completed this plan in 2024 by the announcement of the closure of our truck tire activity in Poland, in China and the associated semi-finished components steel cord activities in Shanghai. In parallel, the group is investing in mostly in improving its capacities in passenger car tire. Last year we already announced the increase of capacity in Shanghai, in our Shanghai factory, in Bridgewater, in Leon in Mexico. In Shenyang we will along with the decrease of our capacity in truck tire, we are increasing our capacity in Shenyang, as well as Olsztyn in Poland, which means that the 2 projects of the 2 truck tire capacity closure in Poland and in China are done with practically no social effect as we are transferring our employees from one activity to another. And of course, last year we have announced the improvement of our capacity in Junction City in USA to grow our capacity to build agricultural trucks for very high-power tractors. So altogether this project has [ lead ] the group to fast reinforce its local to local strategy. Improve our value driven production mix as we particularly for passenger car tire, we decrease the share of our capacity in 17-inch and above and increase our capacity in 18-inch and above. Lower our [ environmental ] impact and improve the retention of the talent in the factory that are impacted by these transformations when we switch people from one activity to another. So basically, it lead us to remove around 7% of the group global capacity in passenger car and light truck below 18-inch. And around 15% of our global truck tire production in the world. Last, I would like to remind you that over the past year the group has been able to waive on different crisis and structurally improve its segment operating income in its free cash flow. I would say despite the fluctuation of the volumes and we have structurally lead the group to progress both in operating margin and in cash flow generation. So moving now to the guidance, so our market assumptions have been unchanged versus what we share for the full year 2023 disclosure. Also, Q1 was particularly for the market, as I said earlier, artificially boosted by some anticipation, particularly in the truck tire selling market in North America. And the PC, the passenger car market should be in the range slightly lower than our 2023 actual market for the year to go. So basically, a year to go passenger car market should be slightly lower than last year. We estimate that the combination of OE and RT in truck tire should lead us to be, let's say in the range of 2023, but with complete reverse mixed effect between Original Equipment and Replacement. Particularly in the area where we play mostly the Americas and Europe. And in Specialties, we consider that in mining there is still some fundamental demand, positively oriented, with some customer inventory reduction impacted by the selling demand in a context a little bit also polluted by the Red Sea crisis and some disruptions in the supply chain. Beyond Road tires will grow slightly in Replacement, but with a sharp decrease in Original Equipment for agriculture and construction, as it was anticipating. And the 2-wheel market, which was probably the one which was far to be destocked at the end of 2023, should have further destocking in H1 and recover, let's say normal market growth in the second half of the year. And we also believe that aircraft tires will continue to grow. But let's say on a more normalized pattern after a very strong 2023 growth. So given this hypothesis, our guidance remains unchanged for the full year. So we believe that volume should be between 0% and minus 2%. And with, let's say, a stronger negative Q1, and which would gradually ease along the year. We back on a slight positive impact on our operating performance net of inflation. We have unchanged in the CapEx hypothesis and it lead us to reaffirm our segment operating income guidance, which will be above EUR 3.5 billion at constant exchange rate, and free cash flow generation before acquisition, above EUR 1.5 billion. So that's all for my presentation, and I'm here to answer your question in the coming half an hour.

[Operator Instructions] The first question comes from Michael Jacks of Bank of America.

I just have a few short ones, if I may. Firstly, the prices of key raw material inputs, such as natural rubber and butadiene have continued to rise since you last reported and set your full year guidance. Should we be considering raw material headwinds for H2? Or do you have hedges in place to mitigate that? And linked to that, would rising raw material prices potentially have a negative impact on free cash flow, as was the case in the second half of 2022? My third question is on the pre-buy effect in North America. Has this resulted in an overstocked situation again, and could this continue to weigh on selling volumes for the coming quarters? And one final one, if I may, just on non-tire. We've become accustomed to non-tire being a high growth segment after a flat Q1. How should we consider the growth prospects for the coming quarters?

So regarding raw material, our hypothesis for the full year, it should still have, let's say, slightly positive effect versus last year. And at this stage we are absolutely not concerned about the effect on the free cash flow. Although you are right, there was a still, let's say uptrend on some raw material, but we are absolutely not in the order of magnitude that we have experienced in 2021 and 2022. So at this stage, with the current hypothesis we have, we don't see a huge impact in terms of free cash flow by the end of the year. There will be some impact due to, as I mentioned earlier, the Red Sea crisis. For some activities, the one that are heavily relying on intercontinental flows, are slightly impacted because it impacts the quality of inventory. And then it's up to us to manage the overall inventory. But that's true that for these activities, we have an increasing share of inventory that are on the sea versus inventory that are close to our customers. Pre-buy in North America, yes, it's impacting the selling market, but it's mostly impacting importers first and not necessarily partially for truck tires, we are not addressing ultimately the same end users and the same fleet than the importers that are importing budget tires. It does not necessarily impact our own, let's say, downstream value chain. As the non-tire business is concerned, don't forget that non-tire business is post double digit growth for several semesters in a row, at least 4 semesters in a row. In 2020 -- first quarter of 2024, we knew that there was a slight decrease in the [ heavy ] conveyor belt market, but we can see that the [ other ] markets are more resilient and there might be also some destocking effect as well in this segment, but we are not too concerned by this 1 quarter. And as I said, so far, first quarter of 2023 were at record high volumes for these activities.

The next question, sir, is from Martino De Ambroggi of Equita.

The first question is on prices in Q1, focusing on the minus 0.9%. I imagine this is entirely due to Original Equipment. So my question is how the aftermarket behaved in the 3 divisions in terms of prices? And on the full year guidance, I know it's very early in the year, but assuming forex remaining where they are today, what is your best estimate in terms of forex impact at EBITDA level?

Okay, so you're right to say that the negative price effect, which is in the range of EUR 100 million for the quarter, is mostly driven by OE, but I would say by indexed businesses, either OE on some Replacement businesses, particularly in SR2 and SR3, fleet -- some fleet businesses, or some mining businesses, so when we address directly end users on basis of a long-term contract. So it's practically the entire price effect that we are seeing. In fact, it's even slightly bigger than the entire price effect that you see because our teams has been able to renegotiate some contract and in order to improve the profitability of some contracts on the -- in the truck segment. Regarding the forex impact, it's very early because currencies are moving every day. For the time being, we expect an overall negative effect in the range of around EUR 100 million for the full year. But based on the currencies, the currencies at the level they were at the end of March.

And if I may have a very quick question on the 18-inches and above, which are 63% of the Michelin branded volumes, could you translate this figure in amount of sales? Just to have an idea, what is the percentage of the car division represented by 18-inches and above?

You have roughly -- we speak in volume, not in value, but roughly that the overall passenger car businesses, both Original Equipment and RT represents a little bit less than 50% of our global sales. Michelin brand represents around 85%. So you can guess it by yourself.

Yes, it's 80% of the branded -- Michelin branded sales, more or less.

Michelin brand represents 85% of the overall SR1 volumes.

Yes. And my assumption is on sales, the Michelin branded 18-inches and above are probably more than 80% of the sales of the Michelin branded.

Yes, that's your assumption. But as I said, we don't enter into a subsegment reporting, but just to give you the fact that what is most important, I think, is to say that every quarter or every semester, we are incrementally improving the share of this segment in our global sales by an average between 3 points to 5 points for the first quarter of 2023, so it was 5 points versus first quarter of 2023.

The next question, sir, is from Jose Asumendi of JPMorgan.

2 questions, please. Can you talk a little bit around the volume trend in SR3 between the remaining quarters of the year and the subdivisions within SR3? How do you see those negative comps to improve, maybe also impacted by the base effect on a year-on-year basis? And then can you comment on the expected restructuring cash outflows in 2024?

So for SR3, in fact, first you have to keep in mind that in the mining business we had a very strong -- we still have a very strong volumes in the first quarter of 2023, in the first half of 2023. So when we compare '24 with '23, we should have sort of reverse situation between the first half and second half, particularly for mining. We also believe that the destocking for 2-wheels will probably end during before, during the summer, so it will have a favorable effect on the second half. And we also believe that at one stage, the construction and agro tire business will reach a bottom, partially for Original Equipment. So we believe that. And it's true for SR3, but also for the other segment, we should have a gradual Q2 will probably still be negative, and then Q3 and Q4 will move toward flat volumes, if I can. It's the assumption that we have at this stage of the year. Your second question was about the cash flow of the restructuration. In fact, we have already -- so first, what I must add is that the restauration that were announced during the first 4 months, both in China, Poland, will not have a massive effect in terms of cash or restructuration. There will be some write-off, but something limited in the range to EUR 50 million to EUR 60 million, EUR 70 million, and very limited impact on the free cash flow. So the free cash flow is mostly driven by the restructuration announced in 2023. We have -- this is what we have announced already. We know that over the next 2 years to 3 years we'll have to be around EUR 500 million of cash-out. We have not yet fully concluded the negotiation with our partners in Germany, but we can say that there will be probably 40% of these amounts in 2024 and [ 60% ] in 2025.

The next question is from Christoph Laskawi of Deutsche Bank.

Those will be on volumes and one on mix. So a competitor of yours is indicating quite a decent uptick sequentially in Q2, partially from the calendar effect, obviously, but also on an underlying basis. You already commented on SR3. Could you comment a bit on the sequential phasing for SR1 and SR2? And then second question would be on the OE and RT mix. You highlighted that you think there's more to come. Should we expect then an uptick in that already or a decent uptick already in Q2 or more in the second half of the year?

So I might start by the last question. As I said, both for the 2 first segments, we should expect, let's say, a gradual phasing of this OE and RT crossing market, crossing each other during the year, with probably the full magnitude of this positive mix effect on the second half, but gradually improving in Q2, in Q3 and in Q4. Regarding the Replacement Market segmentation and sequential improvement, that's true that in the first quarter, we have partially in the western world the impact of Easter vacation. There was more weekends in March 2024 than in March 2023, but there was also 1 day more in February this year than last year. So of course, there is some impact of the number of working days. That's true. But beyond the question of the working days, we believe that the market will gradually improve during the year. As I said, we expect Q2 to still be negative. And then to have probably a neutral, either H2 or Q4, which would lead us in the range of volume that we share with you, which is between we should end at the end of the year, between 0% and minus 2%. And you can consider at this stage that we are probably around the middle of the range. But honestly, we are in April. It's still very early to predict, particularly in activity where we know that we have a strong seasonality over the summer and the fall.

The next question is from Ross MacDonald of Morgan Stanley.

3 questions from me. Firstly, on mix, this quarter sounds quite upbeat on mix with all 3 segments seeing positive mix effects. So I'm just curious, on your guidance for EUR 100 million of sustainable benefit in the EBIT bridge from mix, is it possible to be more accurate about the specific numbers around that for 2024? Are we tracking towards a much higher outcome this year than EUR 100 million in your view? Secondly, just to follow up on Jose's question on SR3, just to better understand the drawdown that we're seeing in mining inventories. Do I understand your comments correctly that there could be some restock in the second half of this year that may coincide with contractual price ups? So both price ups and potential volume growth in SR3 in the second half? And then final question just on SR2 volumes on the capacity reduction. Do I understand that at minus 15% on the SR2 volume takeout, is that bringing the Michelin Group to an appropriate level going forward? Or do you think there's potential for further capacity reductions in that sector going forward?

Okay, so on the last question, I will not -- I'm sorry, but I will not answer your question as we don't have the habit to share about this kind of information publicly. Regarding the mix, so the EUR 100 million yearly mix effect we mentioned in the past was mostly the product mix effect in SR1. So we have a 1.6% mix effect on the first quarter. We know that we have a drop-through effect between 50% to 75% depending on the activities. But beyond the product mix in SR1, there is the OE, RT mix in all the business segments. There is also some mix effect between business lines. And on top of that there is business mix between the regions, countries. And you can bet that this year our overall mix effect on our EBIT bridge will -- should be higher than the pure passenger car tire product mix effect that we mentioned in the past.

And then just on SR3, in terms of the probability of restocking and contractual price ups in the second half, is that something we should be modeling?

No, we are not expecting a restocking in the mining companies. We know that the mines today are sitting with an inventory which is probably slightly above 6 months of consumption overall, with the normative, which is generally in the range of 5 months. But it's also influenced, of course, it's influenced on their own cash targets, but it's also influenced by the reliability of the supply chain. And for the time being, we are not anticipating any change in their policy beyond what we have seen for during this first quarter.

[Operator Instructions] The next question comes from Sanjay Bhagwani of Citibank.

I have got 3 quick ones. The first one is on the volume development. I think you have already commented quite a lot on the overall development for the market. Can you please provide some color on should we expect the gap between the Michelin volume growth versus the market volume growth? Does it narrow down as we progress into the year, or this remains the same? My second question is a follow-up to the mix effect to Ross's question. So thinking of the changing dynamics here between the segments given SR3 volumes have been weaker, and that essentially means that the higher margin businesses is weaker than expected. Does it change anything on the mix drop-through overall? So last year, the mix drop-through was somewhere around 52%. So does it change anything or it stays at somewhere around 50%? And then my final question is on the profitability in H1 versus H2. If you could comment a little bit about here on if the trend is likely to continue as it was last year, that is H2 better than H1 driven by better sales. That will be very helpful.

Okay. Yes. Thank you, Sanjay. So basically, first, starting with your last question, the last of your 3 questions. For the time being, we are including the effect of the currency. We are expecting pretty balanced segment of operating income between the 2 half of the year. But that's the hypothesis we have at that stage. So we are not expecting today a strong, a very different distribution of our profitability between the 2 half. On the volume development and our overall volumes versus the market there is part of this volume development that are driven by our teams, as they are focusing on the segments where we believe that we can really create value both for our customers and our shareholders, and for the company, of course. So that can explain part of the gap between the market and our own volumes. But we also believe that as we are trying to position the group on the faster growing segments, this gap might narrow down in the future. Regarding the mix, as I mentioned, we have generally a mixed drop-through which is between 55% to 70%. Last year we were at 50% or 55%. So you can consider that this hypothesis is accurate for your model.

The next question, sir, is from Michael Aspinall of Jefferies.

Just a couple from me. You were very successful in increasing prices in the Replacement market last year with raw materials. With raws a small positive this year. Are you seeing some pressure on the pricing in Replacement markets yet? Or that's flat at the moment? And the second question, I saw an announcement that you're rolling out the living wage across your operations, which is of course a great initiative. Can you talk to the phasing of that? And do you expect to offset any higher costs with efficiencies or price?

So this activity, this initiative started a few years ago. It's an initiative that we launched in 2020, 2021. And the communication we did last week was just to say that we have achieved what we wanted to achieve so that by year -- this year 100% of Michelin employees are within the living wage standard defined by the NGO with whom we [ are ] working and audited by this NGO. And of course, including in our overall strategy and our value approach strategy of course. Regarding the price pressure in the Replacement, as I said, we have been able, because most of the price effect, negative price effect that you have seen on the first quarter were driven by the raw material [ causes ] adjustments on the index business. It means that we have been able to hold on, on our prices on the Replacement market. In a market which is again characterized by work capacity, huge inflows, sometimes of budget tires for Asia. But we believe that the quality of our products, the overall outstanding performance of our product, and the quality of the teams that are delivering and servicing our customers fully justify our price position.

There's a kind of comment that most of the price impact is from the index clauses imply that there's a little bit of a price impact on non-index prices?

No, because you can see that the amount, I mentioned for the non-index, the index impact is higher than the price effect that you are seeing in our bridge.

Okay, so you've got positive price elsewhere.

Yes, particularly in some segment of the market, such the truck tires, for example, in Original Equipment.

[Operator Instructions] Mr. Chapot, there are no questions registered, sir.

Okay. So I thank you very much for your attention. It was a pleasure to share this information with you and it gave me the opportunity to thank you and to welcome you for, of course, our shareholders meeting on 17th of May, but for the most on our Capital Market Day, which will be held on the 28th of May in Clermont-Ferrand. So you are all welcome to attend to these meetings. Thank you very much and looking [ forward ] to meeting you in person during these next meetings. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's Michelin conference call. Thank you for your participation. You may now disconnect.