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

Ladies and gentlemen, good evening. Good morning for those of you that are in different time zone. Yves Chapot and myself are very happy to present our Michelin 2024 Annual Results. Before we enter into more details about the performance in the past year, I just wanted to re-zoom on our Michelin in Motion Strategy 2030, because we are really deploying it. If you look at what is on your screen, on the left side is the basis, the foundation of what we are building on: highly engaged team, a recognized and very powerful brand, a very strong innovation leadership, and unique R&D and industrial capabilities, and excellent market-defining products and services. With this foundation, we can not only excel in tires, but we can also expand the reach of Michelin offerings into services and experiences and in the polymer composite solutions. So if we come back on tires, we are addressing all mobility usages through better products. One example of that is today, 65% of our passenger car Michelin sales are on 18-inch-plus seat diameters. If I now zoom in services and experiences, we are leveraging our customer intimacy for enhanced consumer experience, and we are turning the usage data into unique insights for fleets. And you should know that every day, 1.6 billion kilometers are created with real-life usage data. And if we look at polymer composite solutions, we are leveraging our unique mastery of materials to differentiate on mission-critical applications for growing and diversified B2B markets. The latest example of that is in conveyor belts. We are, right now, selling our power save line and that line is saving 40% of energy consumption. These are a few examples of our Michelin in Motion Strategy 2030 deployment. Now let's go back to 2024. If we were to summarize it, it's in the title. We have been winning where we think it matters. If we look at the different segments, if we look at segment 1, we have been growing sales in 18-inch-plus and in all season and winter segment. And we have the latest new generation of Alpine tire -- Alpine 7 that has been launched, and we are continuing developing our share in -- with the cross-climate range. And we are reinforcing our technological edge, especially on AI and data management. And 1 example of that is the partnership we have initiated with Brembo, who is a leading force in braking systems for our cars. If we look at the segment 2, our operating margin is still under well development, a good development, and it has been improving sharply in 2024, and we are on our journey to meet our target objective by 2026 and, of course, our ambitions for 2030. Our industrial adaptation in terms of footprint is well on track and sometimes in advance. If we look -- if we zoom in on segment 3, in mining, we have been gaining volumes in 63-inch. And we're also gaining in most of our core markets, gaining volumes and share in North America, South America, China, Eastern Asia. And in Beyond Road, we are now focusing on the restructuring of our activities into the segments where we really want to be successful. And that's why we have decided to exit the Compact Line Bias segment. And you've seen the announcement of the forecasted sale of that activity to an Indian company, named CEAT. All of that translates into our 3P metric in terms of people, our engagement rate still, progress, and we are now reaching 84% -- almost 85% engagement rate, which is really in the top league in terms of engagement. In terms of profit, we have solid results with a EUR 3.4 billion segment operating income and strong cash flow generation of EUR 2.2 billion. And we are, at the same time, pursuing our effort to have less impact in the planet. And we have now, in our product, a 31% renewable and recycled content in all our offering on average. That -- for 2024, we have decided that we will propose to our shareholders a EUR 1.38 dividend per share, which corresponds to a 52% payout ratio. So we are -- what we have said, we are in the 50% ballpark payout ratio. And for 2025, our guidance is very simple. In the, I would say, exciting environment we operate in, we are proposing to progress in terms of segment operating income, and we also want to deliver a strong cash flow in excess of EUR 1.7 billion without -- excluding acquisition. So before moving into the question sessions, I leave the floor to Yves, who is going to give you more details.

So good evening, ladies and gentlemen. To enter a little bit in detail, I would like to share with you an assessment of our performance at 360 degree, starting with our environmental action plan. It deploys mainly on 3 areas: first, our climate plan, which has been enhanced, and we have more ambition than what we declared in the past towards 2030 and it has been validated by the SBTi. In 2024, concretely, our CO2 emission Scope 1 and 2, so coming either from the production of energy or the purchase of energy, has decreased by 13% versus 2023. When we look at the resources, our water withdrawal has decreased by 7.7% overall. And as mentioned by Florent, the rate of renewable and recycled rate has increased by 3 points versus 2023 from 28% to 31%. Last, in terms of biodiversity, our main stake in our industry is natural rubber. And at the end of the year 2024, 98% of the natural rubber we purchased is assessed deforestation-free according to the EDR, the European regulation that has been postponed by 1 year, but that will have that reinforce from January 2026. All these indicators are, of course, embedded in our new sustainability report that will be published with our EURD early April according to the European CSRD. Looking now at our performance in terms of people. First, I will rebound on Florent's comment about engagement. Our engagement rate at 84.7% increased by 1 -- 1.2 points versus '23, which is probably one of the largest improvement we'll recall in the recent years. At the same time, concrete proof of this engagement is at 57% of our employees subscribed to our shareholder plan, which is 4 points above 2022 and which is one of the highest rate in the market. Another element which is very important for us is the fact that versus 2021, in 2024, 17% of the managers -- we have 17% more managers versus 2021 that have begun their career as manufacturing operators. And last but not least, we have announced early 2024 that we're looking to implement living wage threshold for all our employees across the group. And this engagement has been certified by a fair wage network at the beginning of 2024. So now moving to, let's say, more the profit performance, let's first speak about the market. In 2024, the market we're in the selling market that we are publishing were pretty distorted by inflows of budget tires, both in passenger car and light trucks and truck tires. Some of these inflows were made in anticipation of either potential tariff, like truck tire in the first half of the year in North America, in the U.S. coming from Thailand. Or in the second half, the prospect of the implementation of the UDR, the Deforestation Regulation in Europe, pushed some Asian producer to anticipate and push tires towards their distributors ahead of the implementation of this regulation. So that has modified a little bit the profile of the market. And at the same time, all across the different segments, so in passenger car, in truck but as well in the specialties market. From the second half of the year, we have seen most of the original equipment market dropping. And overall, passenger car tire market has grew by 2% over 2024 with original equipment at minus 2% and replacement at plus 4%, and the drop of original equipment is mainly concentrated on the second half of the year. In truck tires, the market grew by 1% with OE down by 7%. This figure for truck tire excludes China market and replacement increasing by 3%. The Chinese market itself has decreased by 5%, which is important given the size of the market and the capacity installed in this country. The mining market has slightly decreased, not because of the consumption, but because of most of the mining operators have reduced their inventories. And we consider, at the end of the year, they have been, let's say, at a more normative level than at the beginning of the year. In the specialties, we have seen a very sharp drop in agriculture and construction, particularly in the original equipment replacement where, let's say, more stable or slightly growing, particularly in mature markets. OE for agriculture has been down by 20%. In construction, it's minus 15%. So this market has been severely impacted by the original equipment sales. At the same time, we have seen material handling also a little bit soft when aircraft tires has continued to grow. Two-wheel market now has recovered after 2 years of overstocking and destocking. And the Polymer Composite Solution has been overall slightly smooth in 2024. So in that context, our sales were down by 3.1% at ISO exchange rates with an important volume decreased by 5.1%. Price/mix at plus 2% with a very strong mix effect of 1.9% over the year, both coming from the enrichment of our product mix, but as well from the different evolution between replacement and original equipment market. Non-tire market has been overall stable if we consider that the scope effect is coming from FCG. And we have been impacted negatively by the currency of minus 1 point, which lead us to end the year with sales of EUR 27.2 billion. I want now to zoom on the third segment, the specialties segment sales. And if you look, passenger car tires have been -- our sales have been -- volumes have been minus 1.7%; truck, minus 6% and the specialties segment, the RS3 minus 9%. From these 9 points of decrease, 7 are coming from our Beyond Road activity, construction, material handling, agriculture, of which 3/4 is basically coming from original equipment, and the remaining 1/4 from the replacement, particularly in construction. On the mining side, which represent around 25% of the overall specialty business volume decrease. In fact, if we isolate our growth in South America, North America and Asia, particularly Australia, Indonesia, in fact, most of the volume loss are coming mostly from destocking from some customers, such as Anglo American in South Africa. The stop of mining operations in Panama copper mining and the implementation of more stringent export control measures towards particularly Central Asian countries. In terms of operating margin. So the group at ISO exchange rate succeed despite the very important volume lost to stabilize its operating margin at 12.6%, with a EUR 70 million currency effect. At current ForEx, it's 12.4%. And looking at the different effect of this bridge. So the EUR 28 million of the scope contribution is mostly coming from FCG. It's [3/4] of the year, basically. The volume, the huge effect of volume is basically 2/3 coming from the loss of volume in margin and 1/3 coming from the under-absorption of fixed cost in the factories. We have a very strong price/mix of plus EUR 438 million, of which most is coming from the second half of the year around EUR 350 million. At the end of the first half, this effect was plus 84%. Raw material cost has positively contributed to this bridge with a very positive effect in the first half and a negative effect in the second half as well as manufacturing and low cost, which are nearly neutral over the year, but we are strongly positive during the first half with the decrease of energy and logistics costs. And for example, the maritime shipping cost in the first half, when in the second half, the impact of inflation has hurted our manufacturing operations. SG&A grew basically according to the pace of inflation with slower growth in the second half of the year than in the first half. Non-tire contribution is slightly negative due to very high 2023 basis. And in the other, you will mostly find the effect of variable bonus from 1 year to another. So this year, it's positive because we will have less bonuses than in 2023. Looking at this performance by business segment, I would like first to mention that we have reclassified the 2-wheel business which is more B2C. So consumer business, how long with the passenger car business. So the first segment now includes both passenger car and 2-wheel. And overall, this segment has been able to maintain its operating margin at 13.1% versus 13.2% in 2023. The main improvement is coming from the second segment, the transportation business, which despite very strong negative volume, I've seen mostly coming from the original equipment sales and the fact that they have repositioned their priorities on areas where we can really create value. So they have benefited from a very strong and positive pricing policy as well with the contribution of Michelin connected mobilities, which is positively contributing to this activity. Last, our SR3 performance, we see this operating margin decreasing by 2.7 points have been penalized by the performance of our mining and Beyond Road activities and particularly the Beyond Road activities, which has been impacted severely by the original equipment market impact. So facing this situation, I would just like to remind that the group in the past 18 months since basically October 2023, we have announced 9 capacity adjustments plus the disposal of our Compact Line businesses, in construction businesses -- bias construction businesses in Sri Lanka. Altogether, these 9 operations are contributing to withdrawal of 10% of our standard passenger car tire capacity and 15% of our truck tire -- radial truck tire capacity in the world. And in parallel, the group is, of course, continuing to accelerate on the digitalization and its artificial intelligence road map, particularly in manufacturing, where we are now starting to get very concrete contribution from these projects. As we might expect a question about tariff and our situation, particularly in North America and in the U.S., I just would like to remind that Michelin started its manufacturing implementation in the U.S.A. 50 years ago in 1974. And we operate now 35 manufacturing sites in the U.S., of which 20 are tire-related sites and 15 coming from the Composite Polymer Solutions division. We employ 20,000 people in U.S., and Michelin has been awarded several awards related to the way we are managing and our people management system, the last 1 coming from Forbes in 2024. U.S.A. represents 1/3 of the group sales, and this 1/3 of group sales are procured by 70% of local production so U.S. production servicing U.S. market. At the same time, we will not forget that, for example, our mining facility in South Carolina is exporting more than 80% of its production everywhere in the world in Americas but as well in South North America and Asia. That's basically a way to share with you that we have a very strong local to local strategy. And it's a concrete example of the way we are operating in the largest market for the group. Now moving towards more, let's say, cash consideration. Our free cash flow performance is the second best performance in the group history after 2023 as we land with a EUR 2.2 billion free cash flow at the end of '24, mostly coming from a very strong EBITDA at 19.7%, EUR 5.3 billion -- nearly EUR 5.4 billion. And thanks to a very good management of our working capital with despite inflation in inventories at the end of the year with UDR implementation, natural rubber and butadiene price inflation, we have been able to decrease the overall value of our inventory by EUR 165 million. At the same time, we have seen a decrease in our financial costs and some improvement in the way we are managing our capital expenditure along the year. So overall, we are very satisfied with this free cash flow contribution which represent cash conversion ratio above 40%. Our ROCE, despite the impact of segment operating income decrease and a lower contribution from JV and associates versus 2023, as in 2023, we recalled the sales of half of our stake in Symbio and these investments by our TBC joint venture in North America of its retail company-owned division. We have been able to maintain our free cash flow above -- our ROCE above the 10.5% threshold defined in 2020. So all that allow us to keep a very strong balance sheet with a very slight decrease of our net financial debt by nearly EUR 170 million and gearing at 16.7%. All our ratings have been confirmed and maintained by the rating agencies. Now let's look at 2025 and our guidance. Our 2025 markets are plagued with a lot of uncertainties. And looking at both passenger car and truck tire market overall, we consider that this market will be either flattish or slightly positive but with 2 very different patterns versus 2024. First, we are expecting a different seasonality between the first half and the second half. We consider that the first half both for passenger car tires and truck tires, original equipment market will continue to be depressed during the first half of the year. And we are expecting at least for truck tire and probably as well for passenger car tire a rebound during the second half of the year. When at the same time, we should record a slight growth in replacement market. So that will be, let's say, the 2 different pattern versus 2024. We are also expecting 2-wheel market, mining, aircraft and Polymer Composite Solution to record slight growth. In our Beyond Tire activity, agricultural, construction, we think that original equipment will continue to be depressed during most of the year. We might record a rebound but in the very last month of 2025. When we look at, let's say, past cycle, we consider that we should recover volume growth in OE, for example, in agriculture and construction, but most probably end of 2025 or early 2026. So in this very uncertain context market that will remain volatile, we intend to hold on our 2030 cap. And on the strength and the key assets that Florent mentioned in his third slide, the quality of our team, the strength of our brand, our innovation potential, and the quality and the performance of our products and services. Therefore, we will continue to grow -- to try to grow on the area where we can create value and where it matters. So that very -- we'll continue on this journey, while at the same time, accelerating our product renewal and product innovation. We have a lot of new launch -- new product launch planned in 2025. Primacy -- the new Primacy 5 range has been already announced in passenger car, but there will be other announcements later on. In truck tires, we have new REMIX retrading offer in Europe, new ranges planned both in Europe and North America and as well in construction and agriculture. We have new products that are going to be launched in 2025. We will pursue, of course, the growth of our Michelin-connected mobility activities and Polymer Composite Solutions. And we want to continue to achieve our industrial footprint road map that has been following the announcement made in 2023 and 2024. So with all these cards in hand, we are looking, as Florent mentioned, to deliver a higher segment operating income at ISO ForEx versus 2024. And we are as well aiming to improve -- to deliver our free cash flow above EUR 1.7 billion before any merger and acquisition transaction. So thank you for listening to this presentation, and I think now that we can open the Q&A session.

[Operator Instructions] The first question is from Martino De Ambroggi of Equita.

My first question is on the Specialty, which in the Specialty division, which in the second half recorded 11.6% return on sales. Just to understand what is your expectation for the current year? And if I do the math correctly, including the motto which I should -- correct me if I'm wrong, EUR 0.5 billion of sales with low single-digit return on sales profitability, including moto would have been lower than 10%. So this is my first question.

On 2-wheel, I think you probably need to revise your calculation because actually 2024 has been a record year for 2-wheel activities. And then for the segment 3, what we -- Yves more detailed the situation. Mining, we had a lot of one-off in 2024, and we expect 2025 not to have those one-off and therefore, the structural underlying activity in mining should be much better in 2025. In Beyond Road, we have some restructuring to do and the OE market, as Yves mentioned, shouldn't recover towards the -- at best at the end of 2025, presumably early 2026. So that's why we don't forecast what segment 3 is going to be, but we expect mining to be much better, aircraft to be very strong, and we expect Beyond Road to recover slightly. However, we would not be completely in safe place before 2026.

Back to the motor. I was looking at last year adjustment compared to the last year results and now restated. And at least last year seemed to be quite a lot of profitability for the motor. May I ask you, more or less, what could be taken into account for this division?

When you said last year, you're talking 2023? 2023, yes, it was a difficult year for 2-wheel because of the reason -- we had a lot of destocking. Right after COVID, you had a lot of stocking happening everywhere, and it took 2 years to purge that. So it started in 2021 and it took 2 years to purge. So in 2023, you had a lot of destocking and the performance was not strong. In 2024, the performance has been much better. And actually, for this activity, 2024 has been a record year.

Okay. And just a very follow-up on the guidance. The steel tariffs and these kind of things are at least what is already effective is included in your guidance?

What is already effective but implemented is in the guidance. The rest is we have to wait for what will happen.

The next question is from Harry Martin of Bernstein.

So the first 1, I really just want to try and understand what is built into the floor of the guidance and what the potential upsides are. So I mean, on the scenarios next year in terms of volumes where passenger car, truck, end the year in a negative. That's the kind of the lower end. Does that already include some expected disruption from tariffs? And then similarly in the Specialty part, given how easy the comp is for it to be negative, would that be a further step down in absolute values rather than simply stabilizing at the current levels?

The question about conservatism in the guide, we -- our aim with our team is to over-deliver on what we commit to, so I'll leave you to judge whether it's conservatism or not. Now about the tariff and Michelin over the past 5 years has weathered many different storms. And we've always come -- came with solid results. So we have to wait and see what is the real happening in terms of tariffs before we can make any forecast. Today, we don't know so at this stage, we just put in the guidance what we know for sure. And the rest is speculation particularly.

Okay. My second question, Florent, I listened to your appearance in the Senate Committee. And the interesting disclosure, I think, was that the production costs that you have today in Europe is almost twice that there is in Asia. Even if you aren't directly competing with the Chinese brands and a lot of the premium markets, does that impact the pricing power of the business in Europe if we have cost inflation and natural rubber prices going up? Or is there still ability to price? And also, I guess, do you have capacity in the right types of tire production in Southeast Asia to potentially export into Europe, even if those are just done as a temporary measure?

So in your -- to summarize on a worldwide basis, we were net exporter out of Europe and net importer in the rest of the world. Right now, what I've said is because of the cost structure in Europe, we cannot be in that position anymore. Hence, what we have done in restructuring, reshaping the production capacities. Are we done with all of it? I think we have done a substantial portion of it. And the effect will be seen, it takes a while before this. We will get the full benefit and we will start to see some benefit next year and in the following years, that will improve our cost structure in Europe, and therefore, our competitive activity. The pricing power is a different subject. Today, our brand is very strong. Our customers believe in our product. They trust our brand, they trust -- they like the performance of our product. And that dictates the pricing ability we have. So I don't relate directly the cost to the pricing because we have been building a very strong consumer and customer relationship, whether it's in Europe or in any other part of the world.

The next question is from Thomas Besson of Kepler Cheuvreux.

I would start with a question on your anticipation for volume recovery for specialty tires in 2026. As I noted your confidence in meeting your 2026 targets where consensus seems to have lost that confidence, the first question.

Yves, you want to answer? I have a lot of confidence in 2026, but if some details with you.

Yes, I mentioned that in Specialty, we have really 2 very different situations. We have the mining activity where in 2024, we're impacted by, let's say, one-off effect. And there is no reason that this activity does not recover even starting in 2025. It's a volume -- it's previous volume. On the Beyond Road activity, keep in mind that for the agriculture or construction, infrastructure business, nearly half of the business is coming from original equipment and the other half from replacement. Given the cyclicality of the original equipment market, which is due, for example, linked for agriculture to farmers' revenues. And farmers' revenues were very high, partly after the war in Ukraine, which inflated a lot of agricultural commodities, are down since in the past 2 years and it's impacted this market. But when you look overall, the past 15 years, you have this kind of cycle of every 18 months, 2 years. So we expect that normally, specialty original equipment market should be supportive in either very last of 2025 or in 2026.

Now overall, I take every bond on Yves answer on Specialty to 2024 has been really unusual with a very sharp decline in OE in almost every market we operate in tires: passenger car, truck, Beyond Road, agricultural, material handling, et cetera. If I take passenger car, the mileage driven in the world is very stable, slightly increasing. Therefore, as we have seen a very sharp OE drop in volume, it means that replacement has been somewhat slightly boosted but it means that the vehicle part is aging, and it cannot age forever. So that's why we say -- we think there is a lot of confusion in the buyers of cars right now. And we think that what -- we anticipate that will be the case in the first semester in 2025 still and we should expect a recovery in the second half of 2025. When we look at truck, in truck, the situation is we think there has been -- we have seen a massive destocking across all industries around the world in 2024. As this destocking has happened, we think in 2025, if the economy behaves almost the same way as 2024, we are going to see some better activities for truck tires. And therefore, we anticipate that the truck, especially in North America, the truck OEM will recover in the second semester and therefore, we will benefit from that.

Can I ask you what we should assume for 2025 and 2026 in terms of cost savings or restructuring benefits of the various actions you mentioned in terms of the capacity reduction in standard passenger tires, in trucks, and the sale of your Construction Equipment business?

So restructuring, basically, we believe that we should get to the full benefits within, let's say, between 2 and 3 years. So you will have nearly half in 2025 and another half between 2026 and early 2027. So if I look in terms of -- in 2025, it should be around EUR 120 million-plus. Regarding the transaction related to Sri Lanka, it will be a transaction in 3 steps. When we will have the closing, we'll get, let's say, 3/4 of the amount that we are expecting. Then you'll have a 3-year period where we will lease the brand Camso to the buyer, and there will be a lump sum at the end of these 3 years. And in the meantime, we have also some inventories that we have to sell to the buyer. So basically, you will have, I think on a transaction of around EUR 225 million, you will have EUR 150 million of cash coming in 2025 and the rest in the following years. And of course, in terms of improvement in operating margin, it will follow this pace because as we have the inventory destocking for the, let's say, probably the next 12 to 18 months, we'll have the full effect by probably mid-2026 or end of 2026.

Last question, please. You've executed half of your share buyback in '24. I think the message initially was that it was a plan for '24, '25, '26. Given the strong cash generation we've had again in '24, is it fair to assume that you may finalize this buyback in '25? And is it fair to assume that you may announce more of this if no acquisition comes out during 2025?

So right now, as we speak, we stick to the plan. We said EUR 1 billion in 3 years and we have already done EUR 500 million. But at this stage, it's too early to say something else.

The next question is from Monica Bosio of Intesa Sanpaolo.

I will ask one at a time. The first question is on the restructuring. So the net cash impact on the free cash flow from the restructuring actions. So you have indicated that for the savings, EUR 120 million-plus for 2025. I'm just wondering if you can give us some indication on the free cash flow side in terms of net cash impact.

The net cash impact is in the range of EUR 350 million to EUR 400 million in 2025. Most of the cash impact is in 2025 and 2026. There was already some cash impact around EUR 170 million in 2024, but most of it is coming next year.

So EUR 350 million in -- EUR 400 million in 2020 -- sorry, can you repeat, please?

Yes, EUR 350 million to EUR 400 million of cash out related to restructuration in 2025.

Okay, perfect. And my second question is on the UDR. So UDR has been postponed by 1 year. Maybe I'm wrong, but this could provide the Asian players with a still competitive cost advantage. I'm just wondering if you share my view. And if you can give us some highlights on your market shares evolution in SR1 and SR2 going forward. And that's the second question.

So UDR has been postponed at the end of November, and it was supposed to be enforced for the first of January. So of course, we were ready. So now we have a 100% UDR-compliant way of sourcing our natural rubber. Now Asian competitors, we don't know what they will be doing. We don't really compete in the same league, so we don't anticipate this to have a major effect on them nor us, this difference. Market share evolution in SR1. If you look at SR1, basically in OE, it's been tough on us because we are on platforms that were -- that we have chosen some platforms and those are the ones that are not really selling right now. But we are confident that they will be selling. So right now, in OE and segment 1, we are -- our share has temporarily suffered. In replacement, where it matters, our share has been okay.

Perfect. And very last is on just housekeeping. If you can give us some rough indication on the raw material headwinds for 2025 and the potential guess on the ForEx.

Yes. So the overall raw material headwinds, we are today assessing it at around EUR 250 million, of which EUR 100 million is coming from UDR. As we have decided not to come back on our UDR policy because we have started to supply our factories in September with UDR-certified natural rubber. Fortunately, the European authority decided to postpone the regulation but we were ready. And we considered it doesn't make sense to stop to buy UDR and to restart next September. So we stick to what we have decided. And we consider that it's also a question of accountability versus the -- all the value chain because you have to imagine that upstream, a lot of people have worked in order to be ready to comply with this regulation. So basically, around EUR 100 million, about EUR 250 million of overall raw material headwind.

Perfect. I can imagine that on ForEx, it's a little bit more challenging, too?

Yes. But the ForEx, we have -- as I mentioned earlier, we have 1/3 of our sales in U.S.A., nearly 40% of our sales in USD. So generally, when the -- our overall structural position related to U.S. dollar is long as -- of course, there is an impact on, for example, European or Asian operations, we are purchasing raw materials that are underlying on USD. But at the same time, we have very strong revenues in U.S. dollars. So we don't make a lot of -- of course, we are making some forecast assumptions related to the ForEx, but the ForEx basically, the footprint we have is the footprint we have. Our customers are not going to move. So what we generally communicate is that EUR 0.01 variation of dollar versus euro represents roughly EUR 30 million in operating margin.

[Operator Instructions] The next question is from José Asumendi of JPMorgan.

A couple of topics, please. The first one on capacity, very impressive all the work you're doing there to take down capacity in the different subsegments. Do you foresee to take additional capacity cut beyond what you have already announced, strategically if they need to take down capacity more in the different subsegments? And related to this, please, what is the year-on-year net cost savings you are targeting in 2025 on this capacity work? And then second, for me, what stands out on Michelin versus other tire companies is obviously SR3, and you have been describing the different moving parts within SR3. When do you expect this division to start finally turning the corner? I know it's difficult because there are so many end markets. Is there a point in time you think in the year, we will start seeing that growth coming back? And very briefly, if you could just simply point what are the biggest levers to get to that 18%-plus margin? I guess it's volume, obviously. But anything you can highlight?

So I think in terms of capacity, additional cuts, it's -- we have done, as you mentioned, a lot. I think we just have to make sure that those go to completion. And after that, of course, we are constantly reassessing our capacity, and we look at structural capacity versus what is happening right now. And the year-on-year cost saving, I think...

I mentioned it, it's around EUR 120 million for 2025.

And then on SR3, the levers to -- I think mining really is performing very well. And the one-off should stay one-off, and therefore, 2025 should be much better. And we don't have a growth issue in mining, provided there is no additional war because we -- remember that the war in Ukraine has cut a lot of our growth in mining. And now in Beyond Road, as we say, the restructuring, we have reshaped where we want to play through the sale of some of our Compact Line Bias activities. And the rest of the restructuring in Beyond Road will take slightly more time, and we should see the effect more in 2026 than in 2025. And then aircraft is very strong.

The next question is from George Galliers of Goldman Sachs.

I really just had 1 question which was around CapEx. Firstly, could you just clarify what you're assuming for CapEx in your free cash flow guidance for 2025? And then in light of yesterday's interview, which was published in the Financial Times, should we think about any incremental investments in North America or specifically the U.S. being in lieu or substitution of investments in other parts of the world? Or could these investments actually be incremental relative to your previous planning assumptions?

So I will answer the second part of your question, and then Yves will give you some answers on the CapEx for 2025. So what I said in the Financial Times is looking at the evolution of tariffs across the world, of course, we have a structural investment plan for the decade to come. So we can -- based on what we see happening and whether it becomes structural, we can -- these are modular investments. So we can reallocate investments in order to optimize the return on that investment. So that's what I said. We have not said that because of the supposed tariff, we are going to massively shift our investment towards the U.S. We have said we have an investment plan for the next decade. Based on that, we can reallocate priorities according to what we see happening structurally, not announced.

To complement, we have a CapEx strategy which is based on a 3- to 5-year plan. We are in a heavy industry where we cannot just move CapEx from 1 site to another or 1 country to another like that. So it should abate to a long-term strategy. And we have announced during our last CMD that we are intending to spend around EUR 2.2 billion in the next years, of which, by the way, 18% for example in 2024, and this proportion will probably be the same for the coming years, is linked to sustainability targets, either linked to the employees' well-being or decarbonation road map, such electrification of our clearing workshops or other, let's say, water withdrawal or road map, including the rate -- the improvement in the rate of recycle and renewable material. So EUR 2.2 billion is a range that we take in as an hypothesis for our free cash flow guidance for 2025.

The next question is from Michael Jacks of Bank of America.

I'll try to get straight to the point. My first question, should we expect Michelin to continue to underperform the broader SR1 and SR2 tire markets in 2025 or market get to a point of stabilization? My second question is just on the SOI guidance. If we annualize the run rate for H2, it came in somewhere around EUR 3.1 billion to EUR 3.2 billion if you were to annualize that. And so the '25 guidance implies at least a EUR 200 million improvement on that level. Could you please give us a sense for the main building blocks that you're looking at to help achieve that? Because it doesn't appear at first glance that it would be coming from volumes. And so the only thing I can kind of surmise is that it's going to come from better mining volumes. And so can you confirm that the margin in mining is stronger than the underlying margin in the other businesses in SR3? And then maybe just one final question just to add to that, how do you see the phasing of segment operating income in 2025 between H1 and H2?

Okay. So underperforming markets. Again, I consider there is nothing truly structural in our share loss in segment 1. We had some platform that did not perform well, but those platforms, we are sure will perform well in the future. So we see those things as temporary and not structural. And in replacement now, as 65% of our volume in the segment 1 are in 18-inch-plus and that's a growing segment and we are growing at the pace or faster than the market pace, we anticipate that this -- what we have seen for the past few years will not be the case in the next few years. And maybe even for the...

So regarding the guidance, the guidance have been built on the hypothesis that we should have some rebounds in volume in the second half coming from original equipment for SR2, SR1. And at the same time, we have a reference versus 2024, which is completely reversed. So basically, we expect 45% -- around 45% of the segment operating income to come from the first half and 55% on the second half, which is, by the way, if you look at our historical results, the normal patterns of a normal year, if I can use this terminology, but we should have the complete reverse seasonality between H1 and H2 than in 2024.

And then maybe just very broadly speaking, the implied growth of around EUR 200 million in the guide for this year, is that driven by better mining expectation of volume growth on a full year basis? Or is there something else that's going to contribute to that?

It's a mix of -- we have when -- in the CMD, we expressed very clearly that we have 4 levers for operating margin improvement. The first one is a mix effect that is -- will continue and we should not forget that we're at 65% of 18-inch and above tires at the Michelin brand in 2024, plus 4 points versus 2023. And there is no reason that this trend will not continue. The second 1 is the competitivity measure that we already mentioned. The third one is the contribution of the mining and the SR3 turnaround. And the fourth one is, of course, the contribution of non-tire activity, both Michelin-connected mobility and composite solution -- Polymer Composite Solutions.

The next question is from Michael Aspinall of Jefferies.

Just one for me. If I think back to the bridge you just talked about to the '26 SOI target, mix was clearly the largest driver. Can you help us just think about the phasing of mix benefits in '25 and '26 to get to that EUR 4.2 billion number? And then also maybe more qualitative kind of thought, just how we can think about that mix as being within your control?

We can show -- I'm not sure I rightly pick up the first part of your question, but there is several mix. The ones that are under control are the product mix, the mix related to our brands, our different brands. Probably the one which is a little bit less on a short term under our control is the one between markets or business lines. So it has been varied mix effect, for example, between original equipment and replacement was very strong positively in 2024. Of course, it's also a composition of the huge impact on the volume we had negatively on the OE side. So definitively, the mix which is related to our offers is in our hand. The mix related to, let's say, short-term market variation is less under our control.

And amongst those mix, the segment mix, we expect to continue to grow our segment 3 versus the rest of the segments, and the segment 3 is by far the most profitable one so that explains why we are confident in our 2026 commitment.

The next question is from Christoph Laskawi of Deutsche Bank.

Maybe just to follow up on the volume answers that you gave already. Considering the statements that you made also on product rollout and market distortions in '24, and your comment that the market share loss are nothing structural, should we consider your volumes in '25 already to be far closer aligned with the market again than it was in '24? So a decent step-up in that regard? Or are you unwilling to quantify this for now?

We expect in 2025 not to have all the unfortunate effects that we had in 2024. At OE, we -- as the volume sold by the OEMs gets back to a more better level, we expect the platform on which we are to be performing. And on replacement, in segment 1, it's okay, and in segment 2, we think what has happened and are refocusing on markets where we want to play, I think, has been done. And in segment 3, back to what we were saying, we expect the things to normalize better. So we expect in 2025 not to have all the "surprises" that we had in 2024. Now something that Yves mentioned and that is sometimes not well sufficiently understood, you had a lot of movement in inventories due to anticipation of movements in tariffs or things like that, of regulation or penalties on -- and therefore, we have seen, especially in the Tier 3 volumes, a lot of movement of inventory around the world. We anticipate that in 2025, it will be -- we will have a better vision of what things -- what is the state of tariffs, penalties, regulation, et cetera. And therefore, those flows that artificially boosted the market will be less a factor in 2025. So interesting is if you look at our global worldwide competitor, they have a similar pattern to us in 2024 when we look at volumes and the market.

The last question is from Stephen Benhamou of BNP Paribas Exane.

Just a follow-up on the free cash flow guidance. I would assume that based on your CapEx guidance, which is broadly in line with 2024 level, this would imply a working capital -- headwind in terms of working capital in 2025. I would assume that the volume recovery would translate into maybe a higher inventories. Am I right?

In some way, you are right. But at the same time, in -- during the last CMD, we announced also that we have ambition to improve our overall working capital. We are at quite a good level in terms of payables and receivables, but we consider that we can probably run our business with lower inventory. So we have proven that in 2023 and 2024. So we have still, let's say, inventory reduction or improvement or better management of our inventory in 2025. And it should compensate the volume recovery that you were mentioning.

And maybe to add to Yves' comments, Michelin is making structural progress. And unfortunately in 2024, you cannot see it because we have done -- we have had a lot of headwinds in front of us. But those structural progress are there. As soon as the market conditions ease, you're going to see the effect, both on cash flow and results.

Gentlemen, this was the last question. Back to you for any closing remarks you may have.

Well, thank you very much, and we wish all of us a nice 2025.

Thank you very much. Bye-bye.

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