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

Hello. Welcome back to all our in-presence guests, and welcome to all our remote participants. I hope you're very numerous digitally, and we are very glad to have you, and thank you for spending this time with us. Back in 2021, we presented to -- I would say the world, but it's maybe a little bit big, to all of you, our Michelin in Motion Strategy for 2030. A lot has happened since then. We went through many years of cumulative accumulated crises, we had to navigate through them with agility, and we learned a lot during this period. We have transformed at the same time to unlock our growth potential, and we have accelerated by integrating new companies. So some of you that were with us physically, you've seen some of them. And you've seen -- you still have some happy faces, which is always a good sign of integration. We are very resilient, and we are much more resilient today than we were before. Our playing field now is bigger, and we are far less dependent on a single market. Our strategy sets the destination. And of course, we adapt the journey in real time. We are creating substantial value. We have a balanced growth and as Yves in his introduction yesterday explained, we want to create value across 3 dimensions at the same time. It's for people, for the planet and for, of course, the corporation, for the profit. The -- our leadership and our differentiated assets are more recognized and better paid for. And it's increasingly better paid for. The foundation of our success relies on 4 distinctive capabilities -- I say 3 and it's 4 actually. First, the quality of our teams, they are highly engaged and talented, and they get better as we invest more in their development, and at the same time we also attract new and diverse talents. Second is our innovation, our innovation power in which we keep investing. It is recognized year after year by our customers, also by all the numerous rewards and awards we receive. Third, of course, our excellent products and services designed for our customers, and they keep setting new standards and also sometimes redefine their own markets. And it was well demonstrated by our composite, this morning, team. And fourth, of course, our Michelin brand which is widely recognized and embodies the highest standards of quality and trust. We've laid these very solid foundations, and we are now ready to accelerate. Innovation will drive everything we do. We are here at worldwide research and development center and that's what we want to demonstrate to all of you that are physically with us. We will leverage our unique mastery of composites, exploring new combination, all their potential and deep diving in new market opportunities. We will create more value with the most complex composite, the Michelin tire. Our value-driven approach is our way to go, which means that we will make the best use of our existing capabilities through our competitiveness and concentrate our efforts where it matters, meaning we will make choices. At this point I would like to share with you a film that expresses, I think, very well what Michelin does and why Michelin is so distinctive. So let's watch it together. [Presentation]

So you see this film says really who we are and what we do every day and who we are deep down. Michelin has always been much more than the product and -- the sum of its products and services, it is much more. At the very heart of Michelin, there is this core belief on human progress and innovation. This is really what drives us. At the -- our mastery of matter has been there and has been a key driving force in everything we've done in our history. Why does it matter? To re-look at what we do. If you look at the tire, what we've seen is the tire is a composite. And the Michelin tire is the ultimate composite. So why does it matter to look at the tire this way? Because if you look at the tire this way, suddenly, it broadens your horizon, your potential, the market you can reach are much -- even much bigger than what the tire markets are. The Michelin tire being the ultimate composite, we refer to all the other composite application, and there are numerous, as the polymer composite solutions, that will replace what we used to call -- sorry, high-tech materials at Michelin. And now, at the end, what Michelin is doing overall, what is our business? Michelin today is building a world-leader manufacturing, life changing composites and experiences. That's what we do. Tires, of course, is one composite, life changing our users. I now will turn to Yves, who is going to share what we have done over the past 3 years. What we intend to do, what will be our goals for 2026 and where we are at in our journey towards our Michelin ambitions by 2030. Yves, the floor is yours.

Good afternoon, and good morning for those who are joining us on the other side of the Atlantic. So as Florent mentioned, I will have the pleasure to share with you our road map towards 2030, with a milestone in 2026. But first, I would like to come back on the group achievement during the three first years of our journey towards 2030. And when we built our 2030 road map, it was end of 2020, we disclosed it at the Capital Market Day in April 2021. We were just at the [ leave ] of a series of crises. Of course, COVID-19 had already strike, but we were just starting to see some of the ripple effect, such supply chain disruptions, first waves of inflation, great resignations in some Western countries. And then in -- we were expecting that by end of 2022, the market will have recovered the 2019 level. Unfortunately, the war in Ukriane changed completely the landscape. And then we have another set of inflationary pressure. So the journey between 2020 and 2023 has been pretty bumpy. And in this context, I'm very proud to say that the Michelin team has reached most of the targets that we set for ourselves at that time. If we look on the profit side, and I will come back on that, but as well on the people and the planet, the environmental impact of our activities. So now zooming on the different aspects and starting with the profit. So in terms of growth, as I remind you, we were initially expecting that market will recover the pre-COVID level in the second half of 2022. But unfortunately, it's not this linear story, which happened, but it's much more bumpy market evolutions. And this linear pattern did not happen due mostly to supply chain disruptions and very strong inflationary pressure, partly end of 2021 till early 2023. Our sales are now far above the level they were in 2019 in value. And our non-tire activities have posted a double-digit growth over the period, although our tire volumes are lower in terms of tonnage than in 2019. We achieved our segment operating income target. In fact, we achieved it 1 year ahead. In 2022, we are already above our EUR 3.3 billion target for 2023. And in 2023, we reached a record high segment operating income at EUR 3.6 billion. Our segment operating margin landed at 12.6%, short of our ambitions. But if we correct it with the effect of inflation, because of inflation, we have to raise our prices, we were -- we will be at 13.5%. So the group has demonstrated its pricing power and its ability to manage through this very uncertain and very chaotic environment. When we zoom by segment, SR1, even without the retreatment of inflation was in 2013 (sic) [ 2023 ] above the 12% target, we land at 13.7%. SR2 was landed short of its ambitions due to low volumes and very severe underutilization of our capacities. And probably at that time, a lack of choice and focus that led us to take some decisions in the second half of 2023 and early 2024. And SR3 retreated from inflation was above the 17% target. In terms of cash flow -- free cash flow, over the period, we have generated EUR 6.4 billion of free cash flow, which was slightly above our initial target. Despite the strong inflationary pressure and the supply chain disruptions which has made our working capital very difficult to manage during this period. And above all, we were able from 2022 to reach our return on capital employed threshold, landing at 11.4% in 2023. So it means that considering a WACC between 8%, 9%, the group has generated in 2023, a substantial value. In terms of shareholder return, we have committed to improve the attractiveness of our shareholder return by raising our payout ratio, and it reached nearly 50% in 2023. If you look at the dividend paid at -- in 2023, it represents an increase of nearly 50% between the average of the dividend paid between 2016 and 2018. And given the strength of our balance sheet, we have decided, and we have announced a EUR 1 billion share buyback program over the next 3 years of which -- half of it will be implemented in 2024. Beyond the pure business and financial performance. I would like to come back on the -- our performance and our value creation in the other dimension that are people and planet. On the people side, the frequency of our labor-related accident has decreased by nearly 30% between 2019 and 2023. We went from 1.43 labor accidents per 200,000 hours -- working hours, to 1.01 in 2023. The group diversity and inclusion index, IMDI, has improved by 10 points over the period, illustrating this -- the improvement of our management's feminization as well as the other forms of diversities. We have as well improved our employee engagement by 3.5 points over the period, and we are not too far from the 85% target, which is a signature of a world-class company in this area. On the planet side -- sorry, CO2 emissions have continuously decreased over the period for all our scope and primarily Scope 1 and 2, where we have, let's say, all the levers to improve. Our manufacturing sites have overall decreased their environmental impact by 16% versus 2019, thanks, of course, to the action related to the CO2 emissions. But as well the savings in water consumptions, the reduction in volatile organic components and the reduction of waste. Last, our renewable and recycling material rate has improved by 2 points. Although in 2023, it was impacted by a very defavorable mix effect between our different businesses. SR1 having volumes being greater than the SR2 and SR3. So now let's move to merger and acquisition. And regarding the merger and acquisition, I believe it's important to look back in the past from 2018. And I would like to come back to the way the group handled its -- this activity over the period. So from Jan 2018 to May 2019, we acquired for nearly EUR 4.5 billion of different assets and I will come back on the main operations that are on that side. Between 2021 and 2023 we started to more actively manage our portfolio of activities and the group has proceeded with nearly 60 different transactions, some are -- were relatively small. But with these investments representing 60% of acquisitions. And in these figures, I do not count the divestiture of our retail activities in our joint venture in the U.S. So if I will account it, I will land nearly at EUR 900 million. So it's a sign that the group is more and more actively managing its portfolio of activities. So looking now at the way we manage all these transactions, you can see that in tire, the group has acquired in 2018 and 2019, Camso and Multistrada. The first operation was aiming to create a leader in beyond road segment and to accelerate the group presence in trucks and particularly in high-tech agricultural trucks and in solid tires. Multistrada turnaround has been exceptionally quick. The company becoming positive already in 2020, and being margin accretive for SR1 in 2022 and 2023. In retail and distribution, will -- sorry for the slide, I will focus on the main operation. In 2018, we invested $600 million in TBC JV with Sumitomo Corporation, to create the second largest tire wholesaler in the U.S. market. Since then, we have received more than EUR 500 million as a shareholder loan reimbursements and proceeds from the sales of the retail division. And we still have the second largest wholesaler in the U.S. market, plus 2 important retail franchise network in the U.S. market, Midas and Big O. In connected fleet we have merged our platform and offers, regrouping Sascar, Masternaut and Nextraq under Michelin Connected Fleet umbrella. And thanks to this acquisition and our internal mobility usage know-how, we have been able to incubate Watea, which is now a scale up with the full support of Credit Agricole, which acquired 30% -- acquired 30% of this company. Last, Symbio, which was initially acquired and created by Michelin, we -- then afterward, Faurecia joined us in 2020. And in 2023, Symbio has, on one side, open its mega hydrogen fuel cell factory nearby Lyon and has welcomed Stellantis as third shareholders on the basis of EUR 900 million enterprise value. So now looking at our activities in composite polymer solutions. The group acquired Fenner in August 2018. Since then, we have not only delivered the synergies announced at the acquisition, but the company has delivered a 9% growth over the period, including some small bolt-on M&A. For those who have attended the workshop with Maude this morning or this afternoon, you have seen that Michelin has been able to enrich complement Fenner's know-how, product and services. In health care, the Solesis subsidiary, which was a health care division of Fenner, now is a separate entity owned at 51% by a private equity company and 49% by Michelin. And we have been able to crystallize the value of this activity, which has been valorized at EUR 450 million in 2020 when Altaris step up. FCG has delivered in 2023, the performance announced at the acquisition in September, and it was for us the opportunity to gather under a single business line, all our activities in coated fabrics and technical films, mostly in Europe, but also partially in North America. We can now confirm the synergies expected, thanks to acceleration in innovation and the synergies between Michelin research and development department and FCG's team. So since 2016, when we first disclosed our ambition to grow beyond tires. We had named historically this activity, high-tech materials. So as Florent announced, this division is called now Polymer Composite Solution, which is a way to refine the name. And also, as you have understood, tires being the ultimate composite. It's also an high-tech material. We have always been clear that we want in the middle term to create a separate reporting segment when this activity will reach the 10% threshold of the IFRS norms either in sales, in assets or in net results. Since the Fenner acquisition, this activity that we named composite polymer solutions has grown by 14% annually, including acquisition, and enhance its operating margin by 4.5 points, which show that Michelin has a real parental advantage when we acquire such companies. And this margin, this level of margin is very close and similar to the margin of our SR3 profitability in 2023, while maintaining a capital intensity ratio, which is at 5%, significantly below the one -- of our three other businesses. So it shows that when you compare this data with the Michelin overall data, it shows that the composite polymer solution is clearly accretive for the group in terms of growth and profitability. So let's now turn to the future. If you remember, in 2020 instead of coming back to you with a 5-years plan, we have decided with Florent to share with you a 10-year ambition, which is a Michelin in Motion 2030, coupled with a first milestone in 2023. So now it's time to share the next milestone, which will be 2026. That -- know that we have delivered all our 2023 targets. So based on our track record, again, in a business context, which was very different from the previous periods, we are aiming to further improve the group performance. We set 3 main targets for 2026. The first one is to reach EUR 4.2 billion in segment operating income by 2026, which is an improvement of EUR 600 million versus 2023. It should match with an operating margin of 14% or 1.3 points above the one we reached in 2023. And we are expecting to generate over the period EUR 5.5 billion of free cash flow. So given the movement in working capital from 1 year to another due to inflationary pressure, supply chain disruptions. We believe that the cumulative free cash flow generation is better then to assess the group performance. And you see that it's a significant improvement compared to the free cash flow we generated between 2017 and 2019 as well as between 2021 and 2023. We do not take into account 2020, which was, let's say, an abnormal year due to the first wave of COVID. So our ambition is to set the group in a way that we will generate sustainably above EUR 2 million (sic) [ EUR 2 billion ] free cash flow from 2026. This is, of course, will -- of course, come primarily from our EBITDA generation. But with the reduction of inventory and we'll have the opportunity to come back on that, while maintaining our capital expenditure in a range between EUR 2 billion and EUR 2.4 billion. This level of CapEx can be, let's say, globally breakdown in 4 buckets. First, the recurring investments that are necessary to maintain our overall manufacturing footprint in a good shape, to improve the attractiveness of our tires factory as a good place to work, the maintenance, the economy, the ISIT investments, and that represents roughly 40% of our global CapEx. Then we have all the investments related to competitivity. The investment needed and it has been presented by Pierre-Louis in the workshop on competitivity to adjust our capacities first to the local-to-local strategy, but as well to the evolution of the product mix. Which represents roughly another 40%. And the rest is shared between the non-tire investments, nonbusiness -- non-tire businesses' investments and the sustainability and decarbonation CapEx that are roughly today representing EUR 100 million a year, including electrification of our curing presses as well as all the investments needed to reduce our water withdrawal or to industrialize renewable and recycled materials. In terms of ROCE, we confirm our ROCE target, which is to sustainably deliver a ROCE above our weighted average cost of capital with a threshold at 10.5%. I insist on the fact that this ratio, since 2020, one, is including not only the goodwill and the amortization of intangible assets coming from acquisition, but as well the impact of the companies that were consolidated by equity. We will maintain our capital allocation and our shareholder return policy aiming to distribute 50% of our group net consolidated results as a dividend, and we will, of course, execute the 3-year share buyback program that has been announced in February. So let's now dig on the way we will achieve this, particularly the segment operating income improvement. In this indicative bridge, you see that, first, we are looking to win where it matters, which is illustrated by the mix effect that we have been able to deliver over the past years, and that will probably reinforce by a better volume tuning between our original equipment and replacement volumes. The 3 other levers should have over the period, a similar impact. Even 2024 volumes will probably be negative. We expect a rebound in 2025 and 2026. Operational performance impact, the impact of announced reorganization, digitization, artificial intelligence and who's what. In the workshop, you have seen very concrete examples of applications and use case in our factories. As well as the effort we are making with our shared service center, the streamlining of our end-to-end processes should lead us to generate some improvement in terms of operational performance. The non-tire so Polymer Composite Solution, which is accretive on our SOI, as we have shown earlier in the presentation, as well as the deployment of the connected services offers -- should contribute further to the group segment operating income improvement. By achieving a 14% segment operating margin target, we expect that our first segment, automotive, should land above 14%. That the transportation segment, the SR2, should land about 10% and SR3 above 18%. Zooming on the group competitiveness. So our manufacturing competitiveness has to be looked, and Florent mentioned it, over the 3 dimensions: People, profit and planet. The main challenge from the profit standpoint that we have faced in the recent years was the global underloading of our factories, particularly in SR2, particularly in Europe, but not only. That's why we are focusing on these KPIs that we intend to improve by at least 9 points by 2026. So to went -- from 73% of capacity utilization to at least 82%. It's a consequence of the footprint decisions that have been announced, and that Pierre-Louis had shared with who have attended to the workshop earlier. Our strategy to improve our local-to-local supply chain while lowering our environmental impact and making our factories a better place to work. We are accelerating the pace of digitalization of our factories, thanks to smart robotization, vision technology and process control. If you look at our global footprint between -- since 2019, we have already transformed the global manufacturing footprint of the group and our capacities have moved closer from our customers. As you can see on the right side of -- sorry, of this slide, at the end of the period, our manufacturing capacity will even be better balanced between our different markets. This is important to improve our resilience, the resilience of our supply chain to geopolitical events. To reduce the CO2 emission of our product and material transportation, which represent nearly half of our Scope 1 and 2 CO2 emissions. Since 2019, we have been reducing our SG&A, as a percentage of our gross margin by close to 3 points, thanks to a transversal simplification program while increasing the share of our research and development spending in these SG&A. We'll continue to work on improving the group resilience on that dimension, thanks to our global service organization, the streamlining of our end-to-end processes, but without compromising on our research and development efforts. In 2023, if I look on the right side of the slide, Besides the pricing effect, we have already reduced our inventories in volume by EUR 300 million. We intend to pursue this avenue by further reducing our inventory at ISO, raw material and energy prices, of course, by at least EUR 500 million by 2026. It will be achieved through 3 main levers: Increasing our local-to-local sourcing, implementing more distinctive supply chain models to our different businesses, such direct factory shipping, make to orders and improving our operational excellence with tools such artificial intelligence, track and trace. So we believe that our unique proficiency in material combination and their application for the most tech demanding market is positioning Michelin as a company whose value creation potential is just beginning to be unlocked. This proficiency is relying on 4 main different assets. And from that standpoint, my presentation will echo Florent's introduction. First, the quality and the engagement of our teams. Second, an iconic brand, which territory is now being enhanced with our recent campaign. The excellency in terms of quality and performance of our product and services and those who are with us today have seen that here in Ladoux, which are recognized by the multiple awards that the group has received over the past year. Just looking at J.D. Power awards, we have received more awards than all our competitors in the past 5 or 10 years. And of course, our innovation leadership, which is based on our research and development leadership, our manufacturing capacity, but also the passion for innovation of our teams. With these assets, we are well equipped to address the 3 domains: Tires, services and experience and polymer composite solutions. In tires we'll continue to address the demand of the most demanding customers and consumers. The segments we are focusing on are fueled by sustainability concern. Demand for technical products able to enhance the performance of the equipment they are fitted with while improving their environmental impact. Just a -- we are addressing the [Technical Difficulty] sorry, I have to take another mic. So we are addressing the challenge of vehicle electrification, which is making the compromise between the different performance, more and more difficult to improve. In the Beyond Tire segments -- in the beyond road segment, sorry, we are helping farmers to reduce the soil compaction which is helping them to improve their yield. In all tire segments, the demand for more sustainable products, both from the CO2 emission standpoint, and particularly the 1 trigger during the usage of the product, as well the need to increase the rate of recycled and renewable material is making our value proposition unique. In connected solutions and distributions, we are combining with our unique tire quality and performance. First, our capability to understand road and vehicle usage. Our access to a large number of fleet, including 1.2 million vehicles under a connected solution contract. Our maintenance know-how, thanks to our distribution footprint, either through company-owned or franchise network, retailers, our ability to build predictive maintenance model for tires, and all these data [ contextualize ] with other data, such metrological data are used to provide insights to fleet managers or road maintenance managers. We believe that this segment is set for a double-digit growth in the coming years. In polymer composite solutions, the group is looking to grow both organically and through acquisition in business segments that are gathering a certain number of characteristics. They are exposed to business with an intrinsic GDP plus growth pattern. They are providing mission-critical components and solution for an equipment for a value, which is relatively low versus the value of the full equipment, an area where the group through its knowledge in material science is able to enhance the performance and the offers of those businesses. That lead us to the way we intend to continue to leverage merger and acquisition as a growth instruments. I have demonstrated over the past 3 years that we were able to manage M&A in a robust and rigorous manner. We have now well-established teams. And M&A now is, as I used to say internally, a collective sport at Michelin, it's not just the work of the merger and acquisition teams. We have robust operating teams, but also governance, processes, around M&A, including our Supervisory Board involvement for all material transactions. And we will continue to actively manage our portfolio of business in the same spirit that has led us to disinvest than EUR 0.5 billion over the past 3 years. And to come back on our strategy in this domain, I would like to share with you how we are contemplating merger and acquisitions. We look at the topics through 2 kind of criteria. First, business or strategic conditions and then financial criteria. The 4 strategic conditions are the following: First, the strategic fit. So as I said, we are looking at mission-critical applications for customers with demanding applications and, let's say, embedding technological challenges. The target we are looking for should have a very strong intimacy with their customers and sometimes with the customer of their customers, including the knowledge of the manufacturing process of their customers. Then Michelin should have a parental advantage for the company we are aiming for, versus their existing owners or potential owners. And I believe that there is 4 main parental advantage. Research and development synergies. And for those who are with us today, I think you have well understand the magnitude of the synergies that we can explore. We have as well a strong balance sheet. And the recent bond issuance showed that Michelin credit is well appreciated in the market. Our human and leadership model which is, I think, an element of attractiveness for the teams that are joining the group and our operational excellence. The targeted company should be, of course, value accretive, integrating, including nonfinancial criteria, such environmental impact and social equation. Our divisions now are integrating elements, including environmental impact of these activities, sustainability of the material they use or even fair wages. And last, the cultural fit. Which is probably the most difficult to appreciate, but which is essential, given the fact that we are aiming to generate revenue synergies over a long period, and that -- and for that purpose, we need to have the teams able to work together, particularly with our own research and development teams. Regarding financial criteria, we are looking at the company that will provide an accelerated growth to the group, while being segment operating income and margin accretive and delivering a higher cash conversion. The deal should be EPS accretive from year 1 and should not lead us to deteriorate the group ROCE below 10.5%, which is a threshold that we have defined already 3 years ago. So now looking beyond 2026. Let's come back to our 2030 ambition. We have redefined our non-tire growth ambition by looking at a larger scope, which include all our non-pure tire manufacturer activity, which are now representing 16% of our global sales. It includes polymer composite solution activities as well as our connected solutions, retail and distribution and lifestyle businesses. We are still aiming to grow this activity in order that they represent more than 20% of the group global revenue by 2030. That's where we refine our ambition regarding non-tire growth. But the growth is only one KPI in our strategic scorecard. And you remember that in 2021, we shared this scorecard as a way to -- and it was even before CSRD and the new regulation about sustainability as a way to expect the fact that the performance of the group should be looked not only through only financial performance but also across people and planet criteria. So you have here on this table where we were in 2019, what we achieved by end of 2023 and our 2030 ambitions. You can see 3 dimensions, people, profit and planet. We have already traveled some significant part of the route towards 2030 ambition. We are confident that some of these KPIs will probably be ahead of our ambition. Scope 1 and Scope 2 emissions will probably be better than what we expected as an example. But altogether, we consider that these targets are still relevant. Some will probably be much easier than other, but we consider that it's still reflecting the way we will appreciate the success of Michelin ambition by 2030. So having shared with you all these elements, and I would like to thank you for your attention, and I think Florent, we can now open the Q&A session.

You can applaud, it is a tough journey in front of us, exciting but tough. The mic. Very good, okay. So -- okay, okay. Let me take a pen. Okay. So we'll have Table 4, Table 8, Table 2, Table 6. 4, 8, 2, 6. And then afterwards 7. Okay. So 4.

Monica Bosio from Intesa Sanpaolo. Thanks for sharing with us the capacity utilization rate it's a consolidated figure. Can you give us any flavor as for the capacity utilization rate in SR1, is it above 82% and what about the truck business? And as for the SR1, the company has a very good track record in improving by 500 basis points. It's weight in tires above 18 inches. Can you just highlight out of the 65% tires above 18 inches, what is the weight of tires, if I may, above 19 inches. I'm just wondering if the EUR 100 million impact on the EBIT could be more?

Okay. Okay. Okay. I was just saying it's already challenging, and thank you for that but -- okay, maybe I will start with the first question on loading and then Yves if you want, on the mix or I can. So on the loading, we don't disclose the loading by segment operating income. What we can say is -- but structurally, Yves has been very clear, we had a lower loading rate in truck than in passenger car basically. So in SR2 than in SR1 and then you can figure out some math out of that. Now maybe something that -- I take your question as an opportunity to precise that while we are restructuring, we are -- we have doubled inefficiency, unfortunately. We have the ramping down. And then when we reallocate some capacities, we have the ramping up at the same time, which -- so as we have announced a major restructuring plan, we are not as efficient as if we had not made the restructuring plan. So it says that -- and it takes time because if you want to do it properly, respecting people, making sure that it's done adequately, it requires some time. So that's why in the period, we will not yet be at the optimum level. Yves, maybe on the mix.

Yes, we don't disclose the mix by [Technical Difficulty].

Your mic doesn't work.

My mic doesn't work, sorry. So we don't disclose the mix by inches, but the -- we publish the share of our volumes for the Michelin brand, original equipment and replacement above 18%. You can consider that the -- every year, we are progressing by an increment of 300 to 500 bp and that's probably slightly higher for 19-inch because the share of the market of 19-inch and above is increasing faster than the share of the market of 18-inch.

Very good. Okay, number 8.

Pierre Quemener with Stifel. Yves, just wanted to clarify the scope of the non-tire business, which should be the foundation of the SR4. It should include CPS, but also connected solutions, lifestyle and retail. That's it?

Yes, that's it. And in 2023, when we published the annual results, we showed the share of this activity in 2023, it was already 16%.

Okay. The other one is even simpler. The CAGR of plus 5% for the top line through 2030, does it include M&A?

Yes.

Very good. Number 2.

Thomas Besson, Kepler Cheuvreux. I have a few questions. To start, I know that this business is 16% under this new definition. Are you going to give us here another occasion, a new split of your reporting, SR1, SR2, SR3 and this new SR4 because I think the threshold was 8% to 10%.

We are speaking of business that are very different.

I know, I know...

SR4, what we call DB4 today, is a business which is stand-alone. It's benefiting from our R&D synergies, but it's a business which is addressing different customer segments. In the case of connected mobility, for example, it is addressing mostly fleet and mostly transportation fleet, either heavy vehicle or light vehicles. So it's not...

So it's going to stay in each of the...

In SR2 that's...

Just to give us an indication of how much you need to eventually acquire to get to 20%. You're not going to redefine...

20% is for the -- related to the 16%, it shows that the gap in '24. But then in terms of segment reporting, the 10% that Yves mentioned is just for these composite activities because the other ones are really across all other domains.

And this composite activity represents 5% of the global sales. The IFRS criteria are 10% of sales? As in 10% of the assets or 10% of the net results. When one of these criteria will be reach, we will disclose the separate segment. But you have seen already that you know it's -- it was last year, EUR 1.4 million. And its margin you can consider at is 16.5%, which was a margin of SR3.

Okay. Very clear. So my first real question. When you talk about EUR 5.5 billion accumulated free cash flow, I think it's the only target you set which is a bit below what the market expects. Can you explain us how much restructuring outflows you have assumed for '24, '25 in that EUR 5.5 billion. And what we should assume as well in terms of net interest cost and net tax cost to get to EUR 5.5 billion?

The overall restructuring cost for '24, '25 and '26 based on the announcement already done, I think we are in the range of EUR 700 million to EUR 800 million over the 3 years. So it's a significant part of that. On the tax, we generally -- when we build our strategic plan, we use the same tax rate than the one we use for our ROCE, which is 25%. It's higher than our effective tax rate, which was 20%. But we don't want to play with the tax rate just to improve the figures. And then on the interest, were looking recently at our global bond programs. We have today EUR 5.5 billion of bonds. With a, let's say, total yield cost of 1.8%. So we take that into account, plus we have the cost of transformation because we issue our bonds in Euro, but we have to transform part of this debt in dollars or in other currencies.

And last basic and simple question. Is it fair to assume that in terms of growth patterns, we are going to see your overall third division continue to outgrow the SR1, which is also itself going to outgrow the SR2. So you're going to continue to benefit automatically from divisional mix that are going to be substantiating your 14% group margin target?

Yes, the mix between the different activities can contribute to the improvement in margin. But probably, for example, the mix between original equipment and replacement can further contribute or more -- better contribute. But what is also important for us is that each division reached the targets that we have set for this division. So we should see an incremental improvement which is significant for SR2 versus 2023. And we are optimistic that with the chosen focus strategy that was shared by Benedicte in the workshop this morning, plus a better capacity utilization. We will achieve this target for SR2.

You have country mix, segment mix, product mix, OE-RT mix and we're playing all those. When we talk about making choices, that's what we mean. We want to address the markets that are ready to pay for value proposal.

And maybe to come back on the free cash flow of EUR 5.5 billion. If you look at the free cash for the past 3 years, it has been completely erratic. We were at 0 in 2022 at EUR 3 billion in 2023. So we consider that we'll probably be in the range of the average of the past years in 2024 and '25. And then from '26. And then from '26, probably when most of the restructuring part would be achieved, then we should be set on pace beyond EUR 2 billion per year.

You have finished? You say simple questions but -- number 6?

Harry Martin from Bernstein. The first one is on volumes. So you have in that growth bridge, you are assuming positive volume 2023 to 2026. This year, obviously, there's some pressures in some of your markets. So it'd be good to understand what's being assumed? Any color you can give on replacement and OE. Any color you can give by the segments that would be useful just to understand what you're assuming at the moment.

This one is tricky. So in the volume that we have -- first in the volume evolution in 2023 as well as in 2024, that was part of our choose and focus strategy. We decided and we consider that we want to win where it matters and not necessarily everywhere. So that's why we have -- we'll probably post negative volume in 2024, probably even more negative in SR2 and SR3 than in SR1. But that's part of our strategy, and it's included in what we call our value strategy. We don't want to jeopardize the value of our offers, and for those who have been with us today, you have seen both, the engagement of the teams but also the complexity of the offers that we are providing to the market. And then when this choose and focus, which is leading to re-dimensioning of our overall business will be achieved, then we believe that we will be better equipped to grow with the market.

Yes, especially the volume activity is not buoyant in the period. We think the markets will rebound a little bit more, but as you frankly mentioned, as we make choices and as we want our technologies to be paid for this may weigh down. Now on the new composite activities, the polymer composite solutions and all the service and solutions activities, we expect strong growth. But on surface that will be lower than what we have on tires.

And particularly for SR2 and SR3, which -- where there is a part of cyclicality in the original equipment, but not only construction, agriculture market are cyclical. We believe that 2024 will probably be -- we'll reach a bottom and then there will be a rebound in '25 and '26.

Okay. And then just a quick follow-up. I think we can all compute the gap between the structural free cash flow guidance and the buyback and the dividend. Is it fair to assume that the rest is all invested in M&A through the period? Or is there room to potentially return more capital or use it in another way?

When we -- first, we don't speak any more of structural free cash flow. It's posted free cash flow. So we pay a dividend of nearly EUR 900 million, and we can expect if it grew with the evolution of the net results. So let's say, over the period, it will be not too far from EUR 3 billion. You add EUR 1 billion of share buyback. So it's EUR 4 billion on a total of EUR 5.5 billion. So I think it's a decent shareholder return, allocating more than 2/3 of the free cash flow generation to shareholder return.

Okay, then 7 -- sorry. And before can we do another round of questions. So 4, 12, 5 -- sorry, sorry 4, 12, 5, 2, 13. Thank you. Sorry, you're right at the back. And 11. Good. It's okay, now. Very good.

Martino De Ambroggi, Equita. A follow-up on volumes. Am I right in assuming in your '25 and '26 guidance, a range between plus 1% and 2%, just as a rough idea and the operating leverage is typically EUR 100 million every 1 percentage point? First question.

Yes, you can take these assumptions, so it's your choice.

Obviously, I was referring to your underlying assumption.

No. Yes, we -- yes, I think it's not too far from our underlying assumptions, yes.

Okay. And that averages. We have to be careful because we are setting 3 years objective and there, you're talking about slicing it year by year, we will be -- we'll have ample time to tell you what we will do in 2025.

Okay. The second is on the inventory EUR 500 million generation, I suppose, first of all, prices of raw materials are expected to be flattish in this assumption. And EUR 500 million, you mentioned local for local, make to orders and track and trace. It's all under your control, it seems to be. And I was wondering the split of the weight of these 3 components or the fourth and the fifth component, I don't know.

First, it's not exactly that it's local to local is refining our supply chain model by business segment and by geographies. So it can be a direct factory shipping or make to order, but there is other models in some areas. We have, for example, a different way to go to market in China, that -- in North America or in Western Europe. And the third is operational excellence with AI and track and trace or other tools that has been shared during the workshop on competitivity. So that's true that these tools are in our hands. Nevertheless, we want to decrease our inventory while improving the service to customers, which is not always at a satisfactory level in all the geography and the segment, while maintaining, managing or even, if possible, decreasing our cost to serve, our logistic costs and decreasing our CO2 emission related to the transportation of our product. So it's not just a single simple equation. It's much more complex. So we have to -- we want to improve in the 4 dimensions. It's like tire performance, you have a spider chart of performance, and we want to enlarge the global area, not to increase just in 1 single dimension.

And there we assume we don't have a major crisis to manage.

Yes.

And on SR4, if you assume organic growth without any acquisition, I estimate you will arrive in 2030, around 8%, 9% of sales. Am I totally wrong in this assumption? .

This is your estimation.

Yes, but a question for you is, I remember in the past, you provided the capital allocation for M&A -- is there any...

Maybe I was not clear enough during the session about M&A, but we are selective in the way, and we apply very selective criteria when we look at the potential targets. First it has to be looked by the operational team, by the business teams. We are looking if there is a real strategic fit, if there is a cultural fit, if the company will provide us more growth. Then we have the M&A team, which is looking more at, let's say, the financials, the risk, the due diligence. So we are doing a quite comprehensive assessments of the potential target. And we can -- I can tell you how much we are going to invest in Mexico, in our factory next year. I cannot tell you what kind of M&A and when we will do which deal because, first, it's -- we have to agree with the seller. But beyond that, we have to be clear that it should be strategically making sense for the group with a good cultural fit and it should comply with our financial criteria.

We may have investigated many deals. You've only seen the 1 that went to fruition and the parameters we gave last time are still true. Our balance sheet is still strong. And we don't want to deleverage our balance sheet too quickly. And we have demonstrated our ability to manage acquisitions. So we still want to do acquisitions, but as Yves rightly said, we never said we will do stupid things to achieve a volume target.

I mean, it's a question of opportunity. It's not only something that you decide, and you buy at any price. It's a question of opportunity. And again, it should make sense, both from a strategic but as well as financial standpoint.

Thank you. Number 4.

Sanjay Bhagwani from Citi. So first one is just going back to this non-tire target. So if I understood it correctly, now that the gap to fill is much smaller, that is from 16% to greater than 20%. So my first question is, in your guidance for '26, if I understood it correctly, you are already expecting a rebound in sales in '25 and '26 for non-tire. Would that really mean that your guidance does not bake in any M&A for '26 at least?