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

Good evening or good afternoon, ladies and gentlemen. Thank you for joining us today for Michelin 2026 9 months revenue presentation. So let me start with a word about revenue growth. If we look at revenue growth at [ iso-FX ], it was up by 1% over the first 9 months. And this growth rate increased in Q3 year-on-year, reaching 2.2%. Part of this growth is fueled by targeted acquisitions in Polymer Composite Solutions, our fourth reporting segment, where 3 newly acquired companies are now fully consolidated in the Q3 revenue. Over the 9 months, they bring a positive contribution of 1.2% to the group scope effect. If we focus on organic growth at iso-FX, the same acceleration pattern applies, with 0.1% over the first 9 months and 0.8% in the third quarter. This confirms the resilience of our business model in a very volatile and demanding market environment. Turning now to the tire market overview. Over the first 9 months, demand remained contrasted, with particularly weak conditions in North America despite the ongoing recovery in truck original equipment. This is, of course, a preoccupation for us as this region generates around 40% of the group's revenue, and I will come back to this topic later. If we look at passenger car and light truck, the global market was broadly stable. Original equipment was down 1%, while replacement was up 1%. At OE, the main year-on-year swing occurred in China, down 7%, driven by lower public incentives impacting on domestic demand. In replacement, China was up 6%, supported by the replacement needs from vehicles sold in recent years. Europe and North America decreased primarily due to lower tire imports against a high 2025 comparison base. Looking at miles-driven indicators, the decline in imports was not driven by lower mileage on a year-to-date basis. However, we did see a first inflection in August with miles-driven down 0.5% in the U.S., potentially reflecting the initial impact of higher oil prices. In truck, excluding China, the market was up 1% over 9 months. OE improved and turned positive on a cumulative basis, supported by the long-awaited recovery in North America with Q3 production upswing following strong orders of Class 8 trucks in H1. Replacement was also up 1%, but with major regional differences. There, since we are talking about sell-in markets, imported tire flows are key to understand the high regional swing. Europe and South America faced growing imports. North America compared with a high 2025 reference base. On top of that, the U.S. market faced a long-lasting weak demand for transportation. Now if we look at Beyond Tire activities, OE markets were down, especially the agricultural high-power segment in North America, still at the bottom of the cycle. Replacement, on the other hand, was positive. Mining remained indeed on a positive trend, in line with the structural, healthy demand. After a strong start of the year, the aircraft market slowed down, especially in the Middle East and in North America. Let's now move to the Group's revenue bridge for the 9 months. Group revenue reached EUR 19.2 billion on a reported basis. It grew by 1% at constant exchange rates and organic growth was slightly up as shared in the introduction, plus 0.1%. Scope contributed EUR 179 million or 0.9%, benefiting from the integration of targeted acquisitions in Polymer Composite Solutions, including Tex Tech on July 1, and partially offset by the divestment of compact line activities in 2025. Volumes declined by 0.8%, and this was driven by OE across our businesses, and I will get back to this in a few minutes to provide more color. Price/mix contributed EUR 206 million, which represents plus 1.1%. This was driven primarily by a strong mix effect, reflecting the continued premiumization of our portfolio. In passenger car at the MICHELIN brand, 18-inch and above tires reached 70% of total share. Price effect improved along the year, with indexation clauses gradually turning neutral and pricing actions to deal with increasing input costs and dynamic competition. Last, ForEx had a negative impact of EUR 300 million, minus 1.6%, mainly reflecting the depreciation of several currencies against the euro. Overall, despite a still challenging market environment, particularly in original equipment, we managed to post positive growth at constant exchange rates. And more importantly, this performance improved progressively along the year. And this was particularly evident in the third quarter, which we will now look at in more detail. Q3 revenue grew by 2.2% at constant exchange rates. Organic growth reached plus 0.8%, marking a clear acceleration compared with the first half of the year. The volume effect remained slightly negative at minus 0.3% due to persistent low original equipment markets across several activities, and we did not reach the growth we expected in Q3 despite an improving trend along the quarter. As for price-mix, it was the main driver of organic growth, contributing plus 1.5%. Mix remained strong at plus 1.1% and the price effect turned positive, benefiting from the targeted price increase implemented during the second quarter to offset raw material cost inflation. Then scope contributed plus 1.4%, mainly reflecting the contribution of recent acquisition within Polymer Composite Solutions into the Tex Tech July 1. Last, currency became a tailwind in the quarter, contributing plus 1.7%, primarily due to the appreciation of the U.S. dollar against the euro. So what does this mean overall? Q3 marks a clear step-up versus the first half with organic growth back in positive territory and all major growth drivers, except volumes, moving in a favorable direction. Now turning to tire sales volumes. Let's now have a look at how they develop over the 9 months. Over the period, the volumes -- tire volumes declined by 0.8% as continued weakness in original equipment more than offset the solid growth in replacement. Original equipment reduced volumes by 1.4 points, reflecting weak demand across most businesses. In passenger car, demand remained negative, and we were affected by an unfavorable customer and vehicle mix in certain regions, particularly Europe and North America. On the positive side, in China, where the market contracted by 7%, we overperformed and posted volume growth. In truck, market conditions were weak in H1, mostly in North America, and Q3 only partially offset it. And in agricultural, OE remained stuck at the bottom of its prolonged market downturn. As regards to replacement sales, it did grow by 0.6 points. This was primarily fueled by the MICHELIN brand with sales up 4% over the period. So what are the key drivers behind this performance? First, our strong premium product offering with the right competitive positioning. Then we can also mention the success of recent product launches such as MICHELIN Primacy 5 Energy. We also continued to see solid growth in high-value dimensions, particularly 18-inch and above. In addition, momentum remained favorable in China and North America and resilient position in Europe despite a more volatile import environment. This contrasts with Tier 2 and Tier 3 brands, which continue to face intense competition from low-cost Asian imports, particularly in Europe and North America. In summary, while original equipment markets remain challenging, replacement continued to demonstrate the strength of our premium positioning. The MICHELIN brand once again outperformed its market, confirming its role as a key driver of resilience, market share gains, and value creation. If we look at now our 4 reporting segments, first comment is that all of them delivered revenue growth at constant exchange rates, except Transportation. And I will get back to Transportation topic in a few minutes. As to Specialties, reported revenue was down 0.9%, but excluding the Compact line activities divested in 2025, the segment grew by 0.1% on a like-for-like basis. Last, Polymer Composite Solutions revenue increased by 21.9%, driven by M&A with the successful integration of Cooley and Flexitallic in H1 and Tex Tech in July. Organic development was slightly negative, as in H1, due to conveyors, which masked growth across all other categories. Let's now take a closer look at this segment performance. I will start with the only category still going down, conveyors. It represented 36% of PCS revenue over the period to be compared with 40% in 2025. The market environment continued to be unfavorable in the wake of H1. Australia remains impacted by weak demand linked to construction, especially linked with iron ore demand facing a weak Chinese construction destination market. On the other side, North American continued to be affected by tight customer cash management. However, the situation is trending upwards with Q3 sequentially better than Q2, and the evolution of the order book gives us confidence that the trend will continue in Q4. Turning to Sealing, revenue continued to grow, supported by strong demand in hydraulic systems, particularly in infrastructure and construction. The integration of Flexitallic is contributing positively. As to coated fabrics and film, they maintained a favorable momentum. Growth was driven by the diversification of applications beyond traditional markets, notably in marine, space, or defense. The integration of Cooley Group and Tex Tech reinforced our position in high-performance composite materials. Finally, Belting continued to develop, supported by healthy industrial end markets, notably logistics and energy, as well as applications linked to rail and fleet management. Overall, Polymer Composite Solutions continues to progress and is becoming a more meaningful contributor to Group growth with a broader and more balanced portfolio following recent acquisition. So as promised, let me spend a few minutes on the North American situation. As mentioned earlier, market conditions in the region remained difficult over the first 9 months with an economy that remains sluggish and increasingly polarized. Growth is largely driven by technology-related sectors, while other parts of the economy are facing more pressure. Consumer sentiment remains low and freight indicators continue to point to a difficult environment for transport fleets. Despite this context, our Q3 sales grew in both volume and mix. In replacement, the performance was positive. In passenger cars, the MICHELIN brand continued to outperform the market. This is particularly encouraging in a market where sell-out remains resilient with miles driven growing year-on-year despite slight negative inflation in the month of August. It has helped us to overcompensate weak sales in Uniroyal brand due to strong competition of budget tires. In mining, the group posted a strong Q3, overperforming in the large-dimension tires. And in truck, the group is holding its position year-to-date, but on a very negative market, where fleets remained under pressure from weak freight demand, a driver shortage, and rising operating costs. In original equipment, the situation was contrasted. In passenger cars, the market remained low and Michelin faced an unfavorable mix of brands and model. In truck, the long-expected recovery of the market finally materialized in Q3. With exposure to truck makers now stabilized at the right level, Michelin was able to benefit from the rebound. And in agriculture, the market remains stuck in a down cycle, especially on the high-power segment to which the group is overexposed. Now let's take a closer look at our truck business worldwide. Our Transportation segment is the only one that is not growing at constant exchange rates over the period. However, it is growing organically in Q3, both volume and value. So I want to take a minute to explain the situation. The key message is that the OE replacement trend reversed in Q3. Indeed, in Original Equipment, the market is recovering. You can see on the slide the 10-year evolution of the tire market in North America, Europe, and South America, the 3 main regions in which we operate. The down cycle of the OE market has been really long, and we are only starting to get out. This is thanks to the recovery in North America, and we anticipate that this positive trend should continue at least in the first half of next year. The group was able to capitalize on this upswing to go from double-digit negative sales in H1 to positive sales in Q3. In replacement, the picture is also contrasted, but in a different direction. In H1, our sales were up low-single digits, supported by Europe, but penalized by the Americas. In Q3, replacement sales declined mid-single digits, reflecting the slowdown in Europe and continued soft demand in North and South America. In South America, the strong growth of the sell-in market actually reflects the high imports of tires to the region. Despite these challenges, sales momentum is improving in Q3. Combined with the actions the group has taken over the past few years, including rightsizing its capacity and deploying its product plan, this should support a more positive outlook. Now on a very different topic, let me spend a few minutes on the electrification of passenger cars, a major transformation that is a powerful tailwind for Michelin. As you know, electrification is expanding securely, and higher fuel price have boosted it further in 2026, particularly in China and Europe, where electrified vehicles here, meaning all of them, BEV and hybrid altogether are expected to represent nearly 2/3 of all vehicles produced. Electrification is especially favorable for Michelin because we are uniquely positioned. First, in original equipment, we have a strong exposure to premium EV segment, more than twice our total market share at OE. This reflects the ability of our technologies to meet the demanding requirements of electric vehicles. Then, all MICHELIN tires are EV-ready. They have been designed to meet the performance requirements of both internal combustion and electrified vehicles. This allow us to capture the value of EV transition across our entire range. In addition, EVs are typically fitted with larger and higher value-added tires. This supports the premiumization of our portfolio and contributes positively to the mix. Last, these original equipment fitments create a powerful replacement pull-through effect. Faster wear leads to shorter tire life with most brands, and Michelin stands out in terms of our customer experience, thousands of certified drivers reduced testified for that. All of this is supported by Michelin's ability to leverage its unique know-how in materials science. When it comes to tire performance, Michelin differentiates itself by an exceptional combination of energy efficiency and tire longevity, not to mention other key performance. EV make it hard for tires, and we love it. The tougher the game, the better for Michelin. In short, electrification is a powerful value creation driver for Michelin, supported by our strong EV fitment position, EV-ready product range, and differentiated performance. So I will now turn to our outlook for 2026. Starting with tire markets for the full year, we have reduced the ranges of our full-year forecast, even though the environment remains volatile. For passenger car and light truck, the full-year market should land between minus 1% and plus 1%. The OE market proved more resilient than we thought after the Middle East crisis broke out. However, we anticipate them to become slightly more negative in the fourth quarter. The replacement market should also be slightly negative in Q4, notably due to a high reference base of imported flows to Europe. For truck, excluding China, we expect the full-year market to be between 0% and plus 2%. The main variation in Q4 versus year-to-date has to do with OE in North America in the wake of Q3 and ahead of EPA regulation in the U.S. early next year. Replacement is expected to remain soft. And for Specialties, we also expect the full-year market to land between 0% and plus 2%. At this stage, we look at year-to-go as pretty similar to year-to-date. Mining should remain supportive. Aircraft will depend on geopolitical development and fuel cost. Beyond Road remains contrasted, with OE still down overall, with agriculture still stuck in North America and with no short-term signs of recovery. Eventually, Beyond Road replacement will be more resilient. Before moving to guidance, let me come back to a slide that many of you remember, dealing with the impact of the Middle East conflict. Back in April on the Q1 release, we presented a scenario based on a prolonged conflict with Brent oil around $100 per barrel for the rest of the year and the related impact on raw material, energy, and logistics costs. 6 months later, we are in the same landscape with a single change dealing with economic context. Demand across businesses and regions was damaged here and there. It has not collapsed, but we see slower demand in many markets. Supply chains, mainly upstream supply, which was the main identified risk in terms of business continuity, held fast. There, the quality of our relationship with long-standing suppliers did help a lot. As to cost inflators, our assumptions were correct as well as the impact on our P&L and free cash flow. So how do we navigate this uncertain environment? In a nutshell, with a nice combination of discipline and agility in the hands of experienced and empowered teams. And this applies to most operations such as managing crisis sales, routing flow of goods, adjusting prices dynamically based on input costs and competitive situation, steering our production based on customer demand to drive year-end inventory, or managing expenses and CapEx with precision. This leads me to our financial guidance for 2026. Based on our performance over the first 9 months and the ability of our teams to navigate in highly uncertain conditions, we are confirming our 2026 guidance on both SOI and free cash flow before M&A. On shareholder returns, just an update on our EUR 750 million share buyback program. We inform you that over 80% has already been executed. So we are well on track, and we confirm our willingness to maintain a strong balance sheet and to return cash to shareholders. This balanced approach reflects our confidence in the Group's fundamentals. We already know that 2027 will remain highly uncertain, both geopolitically and economically. We plan to accelerate our investment in our brands, in digital, in innovation, and competitiveness to sustain Michelin performance. So before we move to Q&A, let me briefly highlight one important date in our financial calendar, our Capital Markets Day on May 28, 2027. So this brings me to the end of my presentation. Thank you very much for your attention, and I will now be happy to take your questions.

[Operator Instructions] The first question is from Harry Martin with Bernstein.

So the first one, I'll just ask on the volumes in Q3. It looks like European replacement volumes on the passenger tire side turned negative. Market growth for 18-inch and above has remained double digits. And the latest data I've seen is the imports have moved slightly lower after the new tariffs. So could you just reflect on what's happening with market share in Europe and whether that turns around in the final quarter of the year? And then the second question I have just to help understand the EBIT guidance reiteration. So on pricing, historically, you've been able to pass on cost inflation. But is there any sort of contingency planning being done this time around with a potentially weaker consumer for a percentage that might not be absorbed? Or if you still fully assuming that? And then if I can just sneak in on that as well, are there any tariff refunds or any other boosts to the second-half margin outside of the core bridge items that we need to just be aware of?

So thank you, Harry. I will start with your first question related to volume in Q3 with market 18-inch plus growing. First element that you need to have in mind is the fact that in Europe, we had the strong imports before anti-dumping measures that have been put in place in July, meaning that high inventories in the distribution sector with a lot of pressure on Tier 2, Tier 3 brands. In this context, I think we did a good performance regarding MICHELIN brands in Europe in the replacement market in Q3 with a very positive performance there. Regarding now Tier 2 and Tier 3 brands, at Kleber brand, it was quite good again in Europe, but it was much more difficult on Tier 3 brands. And here it is where we can see a fierce competition with all the import tires that have been entered in Europe in 2025 in anticipation of anti-dumping. Looking at now your question about pricing. You mentioned, so, our capacity historically to pass on inflation. It's exactly what we did in Q2 and Q3. And as you know, it is important for us to do what we call and to manage our pricing with what we call precision pricing. So it was important for us to calibrate our price increase in Q2 and Q3, both in Asia, Europe, and North America, to have the right, I would say, balance between price increase to cover our inflation, while in the same time, preserving our position in the market in terms of market share. So I consider we have done quite well this year with this very good balance in terms of volume, price, margin to cover our fixed-cost absorption. Last element about it, what we have announced, and it's still the case today, with the price increase we have done, we will consider we will cover 80% of the inflators, the remaining 20% being covered in H1 2027 due to indexation of our contracts. So regarding now the tariff refunds, as you remember probably that in H1, we received EUR 20 million. So we received additional around EUR 80 million in Q3. And we don't expect all the refunds to come in the year to go. So all in all, we have received between H1 and Q3 EUR 100 million tariff refund.

The next question comes from Monica Bosio with Intesa Sanpaolo.

The first one is on the Transportation. The segment operating margin for the Transportation business set at 5.9% in the first half. We are seeing a swing in the original equipment market, still a difficult situation in the replacement market. I'm just wondering if you can give us an update on the capacity utilization rate in the Transportation area. And if you would see it reasonable to expect a sequential improvement in the Transportation segment operating margins in the second half of 2026. And the second question, maybe it's too early to ask, but the company confirmed the EUR 400 million headwind from raw materials. Now 2027 maybe could be worse. But can we project this number or maybe a material higher number for 2027 as for the raw mat?

Thank you, Monica. I will start with your first question related to the transportation segment. So regarding our capacity utilization rate, the rate is around 77% to 78% for passenger car and truck, both -- so as you know, we do not comment H2 operating margin by segment. But overall, at Group level, we expect a seasonality close to 2025, which means with H2 below H1 due to the negative raw mat impact in H2. It's what I can say to you for this first question. Regarding now the update on raw material and other cost items for H2, do you still confirm the previous indication? And what do we see for 2027? So it's -- we are exactly in the same landscape than what we explained regarding the inflation. We are in the context of raw material, we said in last April additional EUR 400 million inflation, EUR 300 million on raw material, we are exactly at this and EUR 100 million to cover logistics and energy. So we are in the same range as what we have communicated in H1. And at the end, for raw material, it will end with a tailwind between EUR 50 million and EUR 100 million full year. For 2027, it's a bit early to say. But what we can say regarding raw mat, we expect negative raw mat in the H1 semester for 2027. But it's a bit too early to quantify it precisely.

The next question comes from Stephen Benhamou with Bank of America.

The first one is on volumes. So what makes you confident about potential rebound in Q4 in the context of a challenging environment, as you mentioned, the weaker passenger demand and also a tougher comparison basis in Q4? And my second question is just to confirm the numbers that you've provided right now. It's about the breakdown of those cost inflation/raw mat. If I'm not mistaken, at the last conference call in July, you were anticipating EUR 80 million to EUR 100 million of raw mat tailwind. Now it's between EUR 50 million to EUR 100 million. And in terms of manufacturing and logistics costs, you were anticipating a net impact of around EUR 230 million. Can you please confirm or not those numbers?

Thank you, Stephen. So starting with your question on the volume and the potential rebound in Q4. So you understood that we won't see this rebound as expected in Q4, and we expect now slightly negative Q4 and slight negative for full year. It's fully linked to the economic global situation of our markets, both economic situation and with, in addition, all the import flows coming from here and there in many regions in the world, which creates a difficult situation in many of our markets. So no more rebound expected in Q4, slight negative in Q4 and for full year. Regarding our cost inflation, so no change on raw material. Yes, we -- I have given just before the range between EUR 50 million to EUR 100 million positive element regarding raw mat. You mentioned EUR 80 million. So it is in the range, if I may say. And the other factors, we are exactly in the range that what we have said in H1 regarding energy and logistic costs. So no change at all compared to what we have announced in H1.

The next question comes from Martino De Ambroggi with Equita.

My question is on the BEV. Since you showed a slide specifically on this, could you quantify the amount of volumes or sales maybe this year, expected this year or maybe in the 9 months? And if you have any target in the next couple of years? And am I right in assuming that this business is detrimental for your profitability since it's mainly original equipment so far? And when the aftermarket will become prevalent on the volume side?

So thank you, Martino. Regarding your first question about BEV sales. So as you know, we are overexposed at OE premium on EV, especially in China, where we are doing very well. It's a bit difficult to forecast, I would say, the growth in this segment. But what we can see is the fact that we expect around 5 million units, 2028, BEV. And for sure, it will depend part of it of the situation that we have regarding duties right now. You take the example of Europe. Now we can see BEV decreasing, hybrids going up. So it is changing a bit. But yes, we are overexposed. 80% of our sales at OE in China are with Chinese OEMs. And we are not only accompanying them in China Mainland, but we are accompanying them in their exports too, which is an important element. So what we can say regarding sales, EV sales, I think we have -- regarding BEV in China, it is around 35% of the total vehicle and around 25% in Europe. So it is growing. And due to the situation with the oil price increase, we can see now that BEV sales are accelerating at least in Europe and they continue to in China, even if this year, we have a decrease in market due to less incentive from the Chinese government. So it is an important tailwind for us. And then after, we consider that the overexposure that we have will benefit in the future for ourselves.

Okay. But if I take 100% of your car segment sales, is it much less than 10% or?