Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome.

Mesdames et messieurs, bienvenue à cette conference call. Nous allons maintenant passer la parole à M. Florent Menego, président de la gérance, et à M. Yves Chapeau, directeur financier. Bonsoir, mesdames et messieurs.

Je suis très heureux de vous souhaiter la bienvenue pour cette présentation des résultats. Je voudrais tout simplement démarrer en... exprimant le fait que le changement dans l'environnement que nous avons pu voir en 2020, vous savez qu'en 2019, on a réellement vu un changement dans les marchés à travers le monde. Et cela par rapport à plusieurs points. Tout d'abord, il y a la question du changement climatique. Il est clair que quelque chose se passe et on a pu le voir avec les... Sandy, in California, in Australia, the hurricanes, the storms, the storms, the tsunamis, etc. So what we have been able to see is that it is not that there has not been any in the past, it is just that their frequency today has an important impact everywhere. The second thing that we have been able to notice in 2019 is that from a social point of view, there is a lot of tension. That is to say that throughout the world, whether in Chile, in Hong Kong, elsewhere, the Yellow Vests demonstrations in France, we see very clearly that there is actually a fraction of the population who today does not feel at ease with the direction that the world is taking. So why do I start with that? Well, because we think that 2019 has been a very high year, in fact, a year where there is more and more awareness about these issues. And in this environment, of course, Michelin did not wait until 2019 to act. We are the precursors in these events, of the game for fair competition around the world based on usage rather than being based on tax burden at the borders.

We have also pushed innovation and we have our latest baby here with Optis. which may mean a revolution for autonomous vehicle and urban mobility of fleet activities. We have also inaugurated our first zero-emission plant in very close to Clermont-Ferrand, Les Graves-Ranges, which is the first of its kind around the world in the tire manufacturing space. And we are also pushing our innovation in the hydrogen space. We are absolutely convinced that hydrogen is an energy of the future, and hydrogen fuel cell should resolve a lot of the issue related to full battery autonomy of electric cars. And at the same time, we are very active in developing biosource materials, very active in developing new kind of glue, and you have the example of a very new type of adhesive resin that not only glues but without any side effect in terms of volatile substance that the glue today emits. So why are we saying that? It's because in this ever-changing world, there is something that doesn't change in Michelin is we are constantly innovating and constantly anticipating what will happen in the future. So in this context, of markets very turbulent, very degraded in 2019, Michelin has shown historical results. We have been able to have operating income, segment operating income in excess of 3 billion euro, exactly according to what the guidance we gave last year. An increase of 179 million, one-third of which is organic, two-thirds of which is due to acquisitions at constant exchange rate, and we have been also able to generate a structural cash flow in excess of 1.6 billion euros. So in this turbulent environment with shrinking markets, especially in the second half of the year, the group has improved its performance, and we have been one of... one of our kind in our industry, making sure that we have a very rigorous steering of our operations, especially on price. In this type of environment, you have to be very rigorous on how you manage your prices in this environment. And we have demonstrated that in 2019. The SOE at constant exchange rate rose by 180 million, and our Margin held firm at twelve point five percent with the slight dilution effect due to the acquisitions, but very Exactly where we were expecting it expecting it to be The integration of the main acquisitions Fener, Camso, but also Multistrada and Masternode are going very nicely we are extracting the synergies we want we want to extract and the integration is in line with all our expectations. Our structural cash flow is strong. This cash flow, and Yves will come back to the detail on it, includes the new IFRS 16 regulation, but there's still a strong progress in our cash flow this year, especially in the steering of our inventories. And that's why we are recommending a dividend in increase of 3.85 euro per share, which is a nice increase. And that demonstrates our confidence in the future of Michelin in the years to come. And of course, we are continuing aligning our group to stay modern. And there is a big difference between being modern and being fashion. Michelin is not fashion. Michelin is modern, which means that we are in sync with our time and we are constantly managing and steering operations to make sure that Michelin has a sustainable future. And without being longer, I would leave the floor to Yves, who is going to present you more details on our results.

Good evening, ladies and gentlemen. So I will walk through... our 2019 performance and, of course, the 2020 guidance. So the performance starts, of course, with the markets. We have operated in 2019 in market that has been weaker than expected at the beginning of the year. And if you look through all our business segments, they are all characterized by a weak OE pattern. We knew already at the beginning of the year that the automotive original equipment market will be degraded, and it has been confirmed with a decrease of the market of 6% over the year. And it has been confirmed in Q4, despite the Chinese market has started to improve in Q4. On the replacement side, the demand has been trending upward in North America. but we have also seen some signs, other signs in Europe, weak winter market, both in Europe and in Europe, for example, when at the same time, the replacement market in China has hold quite pretty firm. So overall, we estimate that the passenger car and light rail market has been decreasing by 2% over 2019. The truck market has seen a switch during the year, particularly on the original equipment, which has seen a downturn during the second half of the year. The demand has fell with a fast drop during the Q4 in North America, when the replacement market has been a little bit more resilient, but not extremely well-oriented. So we estimate that the truck and bus market has been decreasing overall by 3% during 2019. As far as specialty markets are concerned, we consider that they have been already overall flat. Mining was increasing by 3%, but the momentum showing some slowing down during the Q4. The off-road tires, off-highway transportation division, have seen a sharp decrease in the OE demand, particularly in construction and agriculture. That's a sign that we have already mentioned during our half-year and third-quarter presentations. And the two other markets that are two wheels and aircraft have pursued their growth trend. In this context, the result that Florent just disclosed has been achieved thanks to our pretty well-balanced business model, both from a geographical standpoint, and you will observe that Now, in terms of sales, North America has an equal weight than Europe in our turnover, and that our different businesses are relying on very different underlying growth drivers. Original equipment for passenger car account for 11% of our overall turnover. The market that are driven, let's say, by constructions represent around 40% of our sales. And the B2B markets that are characterized either by, let's say, manufacturing GDP through transportation or commodities represent the other half of our sales. So our sales overall in 2019 has been growing by 9.6%. If we take out the exchange rate effect, the growth was 7.8%. And basically, 6.8% was coming from the acquisition, the acquisition made in 2019 and 2018, and 1% due to our organic growth. Our volume has been decreasing by 1.2%, but it has been compensated by a very strong price and mix effect of 2.2 point. You will observe that if you look at these figures per quarter, you see that the fourth quarter, the volumes, the activity has been weaker, but we have delivered a constant price mix effect, and it has been even stronger during the second half of the year than during the first half. So how do we deliver this improvement in our segment operating income by 179 million euros? Basically, the activities have produced a negative output of 86 million, which is 127 million coming from the acquisition, positive, and a negative volume effect of 213 million. I just want to draw your attention to the fact that half of this volume effect is due to the under-absorption of the fixed cost, and you will understand later when you will see the free cash flow and the way we manage our inventory, part of the reason why we have such effect. Regarding the price mix raw material effect, it has been extremely positive, 324 million euro. We consider that raw material has increased overall by 120 million. On top of that, you have to add 30 million of custom duties. So the cost of acquisition of raw material has increased by €153 million. And at the same time, we have delivered €248 million of mix plus close to €230 million of price effect. And last, we have very strong competitiveness actions that have started to produce good effect during the year, €61 million. The three main drivers are all the work we are doing on our AG&A and our structural costs, the improvement of productivity in our factories, and the way we manage the cost of our models and all the work done by the teams to find the best sourcing in terms of raw materials. At the same time, we have an increase in the startup cost due to the startup of mostly two of our factories, synthetic rubber factories in Indonesia and passenger car tire factories in Mexico, plus the increase of amortization. So we end the year with a segment of priority income over 3 billion euros. This performance has first allowed us also to deliver a strong free cash flow. The structural free cash flow where we of course, take out the acquisition effect plus the working capital impact of our raw material, which is very, very tiny in 2019. So we have a structural free cash flow above 1.6 billion euro. So it has been partly helped, of course, by the implementation of IFRS 16. And if you look at the different effect, the improvement year on year, if you take out this IFRS 16 effect, strong work on the inventories. Our inventories at the end of the year has decreased by 147 euro. Some is coming from the cost of raw material, but you have more than 100 million euro of saving on inventories. So there is a strong, let's say, organic effect, plus the contribution of our acquisition to our free cash flow. Regarding the inventories, we have taken several actions regarding sourcing, mostly operational excellence. Working, I was saying earlier, a good supply chain process starts with good forecasts. So we have put a strong pressure on the teams to try to operate with very balanced forecasts. Industrial flexibility, of course, is part of it, and all the work that we are doing on our supply chain model to adapt our supply chain model to the needs of our customers. If you look overall by average, our average inventory has decreased by 0.1 point, which seems not very impressive, but our inventory at the end of the year were at 19.5%. So we have clearly taken action, and particularly in the second half of the year, to monitor and better master inventory. The plan we have started to implement already a few years ago have started to deliver results during the second half of this year. Now, breaking down our operating margin of 12.5% by segment, I will just First, mention that at the group level, we have a dilution effect linked to CAMSO and Multistrada of around 0.3 point. So our operating margin, which has decreased from 12.6 to 12.5, is including this dilution effect. Now, looking per segment, you observe that SR1, has been decreasing by 0.3 points, which is entirely due to multistrada. And if we take out the effect of the ramp-up of the factories that I mentioned, in fact, the segment has improved its performance. Regarding the second segment, it has been strongly hurt, particularly during the second half of the year, by the volume effect, and particularly the original equipment market. The third segment is showing 18.7 operating margin, and here also the decrease of 1.4 point is more than explained by the dilutive effect of CAMSO on this activity, which is close to two points. So in reality, if you take out the CAMSO effect, it means that the organics activities of our third segment has delivered a better operating margin both in volume and in percentage than in 2018. If I now zoom on each of these segments, in automotive, the group is committed to constantly innovate and bring product in the market that will satisfy our customers both on the original equipment and replacement. In 2019, the share of our sales represented by what we call the premium segment or tires above 18-inch is now 43%. It's an improvement of four points versus last year. And you see for the 18-, 19-, and 20-inch segments, the loyalty effect on the first replacement that we have overall in Europe. I can just mention that this percentage is higher in less mature markets such as China than they are in Europe. On the truck market, which is facing some challenges, we believe that on the long run, thanks to particularly the new demanding environmental standard that will be imposed to the fleets and to the OEMs, one side and the need of the customers that are more and more looking at fuel efficiency the facing the risk of shortage of drivers and sometimes fitting michelin tires on our trucks help increase the loyalty of drivers and of course managing as much as they can their assets we believe that the michelin offer that are totally centered on the total cost of ownership so providing the tires that have the best usage, the cost usage, and the innovative solutions that we are providing both on product and services will help us in the coming years. The SR3 market and particularly the mining and OHC market are of course mostly cyclical because they are linked to commodities. But in the long run, they are tied to very strong megatrends, urbanization and population growth. So in this market, Michelin is committed to continuously improve our product and services. And when I mention services, it's MEMS, which is a system which allows the monitoring of the tires and big mining facilities, or Zenatera, which is a system that we provide to farmers to monitor their tire pressure when they are either on the road or in the fields. So our commitment is to offer to this segment of the market the solutions that will help them to improve their operations and to make their operations more sustainable. Last, looking at our different segment of activities, I would like to make a zoom on our high-tech material that are basically addressing two huge transformations. The transformation of manufacturing through our GV ADOP, which is specialized in additive manufacturing or 3D printing for metallic products, and the transformation of mobility with the GV that we have announced last year regarding hydrogen fuel cells with Foresia. So these two ventures are really the answer we are providing to the transformation to these two industries. On the other side, we continue to invest in our flexible composite activities, which include the rubber goods of Fener, but also the investment that the group is doing in order to improve the biosourcing of its raw materials. up to now the main renewable product that we are using in the tire are natural rubber, but we are making great efforts to find new solutions in order to bio-source some of the raw materials we are using beside natural rubber. And I should also mention the effort we are making in order to reuse the tires, not only collect, but also recycle and reuse the tires in the production of new tires. CAMSO and FENER are integrating pretty well and we have today with FENER very strong synergies of the conveyor belt activities of FENER with our mining offers. Regarding the advanced engineers product of FENER that are mostly belt and silt. We are working very closely with them and there is a lot of cross-fertilization in R&D. And the CAMSO has merged with our off-highway transportation division, which is now headquartered between Clermont-Ferrand and Magog, close to Montreal, in order to form the leader in the off-highway transportation market. We have started in 2019 to see the emergence of synergies between these activities and the group. And we consider that at the end of 2019, we have achieved 93% of the synergies that we were looking to achieve in 2019, which is a good rate given the fact that these acquisitions were pretty recent. Regarding competitivity, you know that between 2017 and 2020, the group is looking to achieve €1.2 billion of savings. And at the end of 2019, we are very close. We are on the roadmap with €891 million of gains, taking into account that if you look at this period, the inflation had the tendency to decrease versus the previous year. And looking specifically at 2019, we have achieved 61 million of saving at the end of the year. This saving, I mentioned it, are partially due to our manufacturing organization. And it's just a reminder to say that When we look on a long run, improvement in manufacturing are, of course, linked to our footprint, but mostly due to continuous improvement and process standardization, the deployment of empowerment in our factories, the Simplexity project in order to differentiate our product at the latest stage in the production process, and digital manufacturing are also very strong driver for our productivity improvement. Regarding our capex, we end the year with a capex of 1.8 billion euro, which is, let's say, similar to last year, taking into account that we have around 120, a bit more than 120 million euro coming from the capex of the new, companies that we have acquired during 2018 and early 2019. The key message here is to understand that we are shifting our priority from capacity CapEx oriented toward more productivity CapEx. And that will translate in further gain in the future of productivity in our factories. At the end of December, our net financial debt was around 5.2 billion euro, which is an increase of close to 1.5 billion euro versus the figure we published at the end of 2018. You have to remember that at the end of 2018, we closed the acquisition of Camso on the 18th of December 2018, so Camso was consolidated in 2018. just one line in our balance sheet. So we reopen the year and we split all the elements of CAMSO balance sheet. So we have an increase of debt of 337 million due to the CAMSO price purchasing allocation. If you look now at the remaining increase, which is 1.1 billion euro, you will see that most of it is coming from non-cash items. and particularly the effect of IFRS 16, which translates in an increase of our debt of more than 830 million euros. Structural free cash flow has also contributed to decrease our debt by 1.6 billion. We have spent 500 million in M&A, plus I should add the 249 million of the debt of the company we acquired. So altogether, M&A has contributed to increase our debt by 771 million euros. And we have, of course, the effect of the dividend, 676 million euros, and of the share buyback, 141 million euros. So overall, we have a debt of 5.1 billion euros, which means a gearing of 39%, and a net debt on EBITDA ratio of 1.09, which is very close to the one we had last year. In this context, our long-term rating has been confirmed at the end of last year by all the three rating agencies, with A- at SNP, A3 at Moniz, and A- at Fitch. So, as was already mentioned by Florent, we will propose to our next shareholder meeting the payment of a dividend of 3.85 euros per share, which represents a payout ratio of 37.6%, which is in line with the commitment we have taken, an increase of 4% versus last year, which is in line with the increase of our net results, The group net consolidated result was 1.73 billion euro, which is 9.69 euro per share. So that's all for 2019, and now I would like to share with you our guidance for 2020. Regarding the market, We consider that the market will remain oriented relatively downwards, particularly because we consider that original equipment market should not recover in 2020. So looking segment per segment. We believe that the automotive original equipment market should be down around 3%. and in most of the geographies. The replacement market will remain stable. Of course, with a shift both in OE and replacement between, let's say, standard versus premium tires. So we consider that 18-inch and above tire demand should remain steady at plus 10%. So we'll continue to benefit from this mixed effect. But overall, we believe that... consolidating regional equipment and replacement, the automotive market should be flat or slightly decreasing. The truck market is characterized by, as I say, the decline that we have observed during the second half of the year. Just to remind you, at the end of June last year, truck market was growing in north america and it has completely flipped down during the second half so we expect further decline both in europe and north america and a market that will be probably slightly growing in emerging regions the replacement market will be up slightly uh lift by the the fact that there will be less new truck on the market and the freight is not, let's say, declining at the pace of the original Cuban market, of course. So we consider that the replacement market should be overall slightly up in most of the regions. I just want also to remind you that we will have in this segment a geomix that will be probably unfavorable, as we are mostly exposed to the European and the American, both north, central, and south markets. As the specialities are concerned, regarding mining, what we observe is that mine output is pretty stable. So we consider that the consumption of tires in the mine will remain stable. But as the, let's say, the economy is not overall well-oriented, we consider that most of the actors will look very closely to their inventories. And we believe that we might have to deal with a decrease of inventories of a couple of weeks or a bit less than one month at the mine, which will lead to a slight decrease of the mining tires demand. Regarding off-road, although we believe that replacement market will be slightly up, we consider that both agricultural and construction markets will continue in original equipment to show a downward pattern. And we believe that both two-wheel commuting and aircraft segments will continue to grow. So overall, we bet on the specialities market demand declining by 3%, strongly pulled down by the off-highway transportation, but with, let's say, a timid evolution of the mining segment. So our guidance will be based on the following scenario. We believe that the cost of raw material, price, and custom duty should have a positive effect on our bottom line, but at the same time, and I put apart the effect of the currency effect. At the same time, we consider that price and raw material should be overall neutral. We have part of our business that are based on long-term contract that are indexed. And of course, this indexation clause will apply. And in this case, the selling price will decrease. But we are betting overall on a price mix, price, raw material effect, which will be neutral. But, of course, we will do our best to retain all the mix effect that we are expecting, both from the market. You observe, let's say, a positive effect between original equipment and replacement, and, of course, the product mix, particularly on the SR1. And regarding the competitiveness plan, we are committed to continue to deliver what we have delivered in the previous year, which will lead us to the 1.2 billion savings over four years, and it should translate into a positive effect to probably at least 50 million euro in 2020. So in this context, I'm sure that you will have a question about the small asterisks, which is on the title of this document. It's extremely difficult to assess what could be systemic or potential systemic effect of the coronavirus crisis in China. But in this context, if we put that apart, we should have our volume evolving in line with our with the markets to the volume will have a negative effect. And thanks to the action on the competitivity, the mix, the synergies that we are starting to extract from our acquisition, we bet on a very slight decrease of our segment operating income at constant exchange rate in 2020 versus 2019. While we will continue to deliver a very strong structural free cash flow, which will be at least 1.5 billion euro, keeping in mind that in 2020, we'll have to build the cash out of the restructuration that we have announced during the last second half of 2019. So that's for the guidance for 2020. And Florent, if you want to make a conclusion,

Yes, thank you. Thank you, Yves. So what we have seen is that very much in line with the purpose of our company, we have still our business in a very tough environment in 2019, and we project to do the same in 2020. Of course, our sector is still highly competitive. We still have customers behaviors that may change over the time. So what we need to remember in this environment is the capacity of Michelin to deliver very strong results in a very volatile environment, which I think is the testimony to the quality of our teams and the quality of our offers and thanks also to the commitment of our customers. We are able to do that. So now we are open to all the questions you may have and So we can proceed. Unfortunately, I don't see because I have things on the right. A question from Thomas Besson.

Can you give a mic?

Okay.

Hello, Thomas Besson, Kepler Chevrolet. Three questions, please. I'd like to start with restructuring. You've announced three plant shutdowns over the last 18 months. First, could you tell us if you're happy with the setup of the organization after this or whether we could believe there may be more given that end markets continue to be complicated in 2020? And can you just help us understanding the sequence of cash outflows between 2019, 2020 and 2021 for the three plans that have been announced? That's the first question. Shall I give you the other ones? The second, you've mentioned pricing being sometimes complicated. I think it's been a factor for all passenger tar makers, notably in Europe. Can you tell us what are your assumptions for European passenger tar pricing in 2020? Is there any chance it improves with inventories still high in most segments? And third and last questions, please, on guidance. I know you always like to be cautious, but if you've just said we expect a very slight decrease in operating profits, I think most companies would have said we expect flat earnings. Is that what you really mean? And then the midterm guidance, I think when should we expect that to come out? Is that going to be in Q4? And what format is it going to be, an investor day, or is it going to be just new targets? Thank you.

Thank you. So the first question about restructuring, we are never happy with restructuring. It's always one of the most difficult decisions we have to make. However, as an industrial company, We constantly have to adapt to our environment, and sometimes when we come to the conclusion that a site may not be in a position to readapt to new markets or where the cost of restructuring this site or transforming this site is more expensive than building a new plant, we take the conclusion that we may have to close it down. The closures decisions have been made on a few sides. We don't have a plan, but we are constantly monitoring the efficiency of our industrial setup. We have a very clear target in terms of competitivity that we share with you. And to achieve this competitivity, we not only have to close sites, but also, as Yves mentioned it, to really put more emphasis on the infrastructure productivity investments. And we have made clearly a shift last year towards putting more emphasis on productivity investment rather than new capacity buildup. Now, as far as new plans, we are constantly monitoring what we do and we will not disclose plans. But I must say also to end up on before leaving the cash flow projection for the three sites to Eve. We have negotiated for the three sites, Dundee, Bamberg, and La Roche-sur-Yon. We have really negotiated very responsible deals with the people that have been affected by those plant closures. And we have finalized the negotiation at La Roche-sur-Yon 96% of the people involved in the site have voted for the plan we are proposing, which is a very cumbersome plan for everybody. At Dundee, already half the people concerned by the closure have already found a new job, either better paid or equal to what they had at Michelin. And we have an extremely good relationship with the Scottish Government about the... the way we handle how we are going to recreate new additional jobs in the place where we are living. So I must say that we handle this in a very responsible manner.

As far as the cash flow projection, most of the negative cash flow effect is due to occur in 2020 because it's linked to... we try to offer systematically, for example in France, a position to each employee, but we know that some people will not necessarily accept to move to another city, so either the cost to help them to move to another Michelin site, or the cost to prepare themselves to find another job. So most of this cost will occur in 2020.

As far as the pricing assumption of As far as the pricing assumptions are concerned, we do not price according to our competition. If that were the case, we would not have seen the price gap between our main competitors increase over the past years. What we have demonstrated in 2019 in this, even though the price gap has increased, we have not lost market share, which demonstrate the power and the willingness of our customers to pay for a differentiated offer of Mishnah. We, sometimes in our industry, we think it's not very mature as far as pricing is concerned. So we try to be more mature on this aspect. Now, as far as what will happen during the year, I don't have a crystal ball, so I don't know. I don't know. In this environment, we have said to all our teams, this is not a time where you want to discount prices to obtain marginal shares. The only thing you do is you destroy your margin and you don't get any additional volume. So we have said that to all our teams. So it is very clear. As far as what the rest of our environment will do, I don't know. As far as the guidance is concerned, of course, very slight or slight is always a question of appreciation. And yes, of course, behind every word you may put any imagination you may have. And I leave now the floor to Yves, who is going to give you what it means.

We consider that we should face a slight decrease in our operating margin. We are in January, in February, and honestly, with the trend of the original equipment market volume during the Q4, particularly in B2B, we consider that our role is to be prudent regarding 2020. We will do our best to deliver what is in our hand, but we are not mastering the market. Unfortunately. And the second question is that for the midterm guidance, I would like you to be a bit patient. You'll have to wait until the 8th of December of this year. 2020. So we'll invite you for Capital Market Day at the end of the year. to share with you the long-term group strategy and our, let's say, relatively more mid-term targets.

Thank you.

I want to come back on Thomas' question on this restructuring. What is the order of magnitude of the saving we should expect this year and next year? I think this year we should have mostly the UK plant payback and next year, France and Germany. Can you give us an idea of the savings or the magnitude?

We don't disclose precise numbers. So, yes, in 2020, we get the benefit of the Banymena plant closure. Dandy benefit will come in 2021. And you're going to see the benefit of Banymena. between 2021 and 2022, 2023. That's where you get the full benefits of this restructuring. But we don't disclose the precise amount of how much we gain per plant closure.

I have a second question regarding the volume effect. If I understood well, last year you had two negative impacts. Number one, the volume, and number two, the destocking impact, which cost you more than $200 million overall. In this current weak volume environment, should we expect non-absorption of fixed costs on top of the negative volume, or you consider that the decline of volume will be good enough not to make an effort on the stocking on top of?

I will leave you, Yves, to answer. But some of the – we have ended the year at an appropriate level of inventory. Like what Yves mentioned, we have – released here in the second semester are inventory down because we knew the year 2020 would be difficult. So if the market environment does not move too much from the assumptions we've made, I think we would have better industrial performance versus this year.

So if understood well, the Production should not be too far away since the stocking of last year is non-recurrent.

Yes. We are also driving our inventory down structurally. As we've mentioned, we have this target to extract 500 million out of our inventory. So apart from that, which is the normal saving we would do out of the continuous progress on reducing structural inventory, yes, your assumption is right.

Okay, perfect. Last question, on the others, where you have depreciation increase last year, where you have the start-up cost, this bucket this year should be what? A small negative? Can you help us? Thank you.

We should have less start-up cost. We'll have a bit of remaining start-up cost in Mexico and in Thailand, but we should have less start-up cost. And we will still continue to have a slight increase in the depreciation. because the depreciation is not yet at the level of the capex. But we are nearby, let's say, closing the gap between the two, but not yet in 2020. That's why we'll have a slight increase in depreciation.

Maybe we can take a question on the Internet.

Thank you very much for taking my question.

The first one would be on your free cash flow. Obviously, you are quite confident also going into 2020 again on your above $1.5 billion. I'm just trying to understand a little bit, you're still guiding a capex level of $1.8 billion despite your acquisition of Multistrada, which should give you some savings. What is that that you're still investing so heavily in, i.e. flat year over year, despite obviously that weaker volume backdrop? Is there no chance to reduce that or what leeway do you have on that as the first one? Second one on your scope, you're obviously guiding for the EBIT slightly down Xscope XFX. How much scope should we still expect from Multistrada and your other acquisition that should be coming in this year, which is the Masternode? And then as a third question, just to sort of square it up, I think it follows up from the previous ones, but you obviously target positive price mix versus raw material. You said you want to get about $50 million of competitiveness savings as well. At the same time, you guide EBIT down. So following up, again, from Gaetan as well, is would we expect on the weaker volumes, again, a very significantly negative drop-through, or should you normalize that to the more normal volume drop-through you've shown in the previous years?

Thank you for those questions. So I will take the first one, and then Yves, if you want to take number two and number three. About the free cash flow and our level of investment. In our investment, as was brightly mentioned by Yves, we also now have the investment due to our new activities. And in those new activities, the growth is good. So we have overall reduced sharply our investment in the, I would say, the traditional perimeter. As far as further effort are concerned, we have we are reducing to the minimum any capacity investment. However, you need to factor into your computation the fact that when we make restructuring, we also have to displace production and we have to re-industrialize production in other places. Plus, the mix effect is not for free. The mix, you also have to readapt your production capacity. And that's why the level of investment has been set at 1.8 billion, which is a reduction on the historical perimeter, taking those three factors into consideration. But we are confident in our capacity-generated cash flow, like we did in the previous years, with our structural savings we're doing, tight steering of accounts payable, accounts receivable, and inventory. We are improving every year on this, and level of investment is necessary to be able to achieve our competitivity gains, and also to nurture our new businesses. As far as the scope, Yves, you want to take?

Maybe I can just add the investment in percentage of our sales has decreased in 2019. Regarding the scope, Multistrada has been acquired the 3rd of March, or 5th of March 2019, and a master note at the end of May, So the scope effect will be very minimum. We don't expect a huge scope effect during the year. Regarding the different elements of the margin, we expect a positive price micromaterial effect. Competitivity should deliver, we believe, at least 15 million euros. We are aiming for 15 million euros. we are relatively prudent regarding the volumes as we said earlier particularly the B2B original equipment markets were not very well oriented during the last quarter of the year so there is some prudence if I take the SR2 we mentioned market overall going between minus 2 and minus 3 but we know that we have a geomix which is unfavorable So you can guess that on SR2, our volumes will be less than these figures.

And is it fair to say that the drop-throughs, basically, if you think about how you have an issue on the fixed cost absorption, we should expect some of that also in 2020, as you outlined for 2019?

It will depend on the level of inventory at the end of the year. already asked the question we have we end the year with an inventory level which is at 19.5% of our sales so we have made an acceleration if I say during the second half but we know that we have constantly to work on the structural measures in order to improve our supply chain and have a healthier inventory level okay fantastic thank you very much

Thank you. Next question on the Internet.

Thank you. Next question from Gabriel Adler from Citigroup. Please go ahead.

Hi. Thanks for taking my question. Just one question on working capital. You discussed the improvement that you're seeing on inventories in great detail, but there's also clearly scope for improvement on payables. The increase in reverse factoring in 2019 was very, very modest at about 5 million euros. Is there scope to increase your reverse factoring program further in 2020, and is this another way that you'll look to optimize working capital in the future? Thank you.

You're referring to a factoring program? We hardly use factoring programs.

We have some reverse factoring programs. If you look for our payables, we have that program. In terms of days, we are close to 71 days, so we consider that we are at a very healthy level. Our receivables are, let's say, well in the benchmark. We have made very specific efforts to monitor overdues during 2019. It has been translated in the in the free cash flow that we deliver in 2019. And so we consider that our main focus is on inventories.

I think we have made a very strong improvement in accounts payable, and we think we are at the appropriate level now overall.

Okay, thank you. That's clear. Thank you. Next question from Martino D'Ambroghi from Equita. Please go ahead.

Thank you. Good evening, everybody. The first is on the mix effect, which was particularly strong in 2019 and particularly in the second half. Could you elaborate a little bit more breaking down the main drivers for this performance and also expanding these expectations for the current year? on mix specifically standalone. Thank you.

In fact, there is three kinds of mix effect. The first is a product mix within a given business segment. We have historically very strong mix effect in the SR1, both in OE and replacement because of the increasing share of 18-inch and above, the increasing share of tires for electric vehicles. that are favorable for our margin. The second mix effect is the mix effect between markets. So when original equipment market is growing or decreasing, when replacement market is growing ever faster or stabilizing, we have a structural mix effect, which is also improving our margin. And the third one is a mix between the different business units. Behind our three segments, we operate today 19 different business units. And, of course, they have different profitability level. And, of course, we can have, for example, if I take the SR3 in 2019, we have a strong mix effect within the SR3 thanks to the growth of mining versus the decrease of OHC in volumes.

Could you tell me what is the prevailing among these three effects, just briefly?

I'm not sure there is one which is prevailing. There is one that we try to master, which is the first one, which is the product mix. Because we tend, as I said, our mission is to help our customers to improve their performance, to sell tires that might be slightly more expensive, but that are delivering the best total cost of ownership. So this one is the one that is in our hand. The mix between the business segments of the mix between regional equipment and replacement is a bit out of our control.

Very clear. On this issue for the 18 inches and above, some of our competitors are talking about price pressure in specific segments and so on. On the contrary, you are projecting 10% growth in the next few years, which is unchanged compared with the past indication, despite a worsening environment. And two, the price pressure in some segments probably is creating issues or for you is totally neutral?

I think as far as your comment is concerned, I don't know what the competition has said, but it's a kind of self-fulfilling prophecy. They complain about the prices being down, but if we don't move, they must be doing something. So somebody must be doing something there. So we are not active in this segment. However, we need also to recognize over long term that when you have a Renault Scenic that is equipped with 20-inch, 21-inch tires, it's different than a 20-inch, 21-inch tire on a Porsche. your capacity to extract value is different for this kind of vehicle. So we are constantly monitoring this, and we are always on the edge. Now, what is for sure is that when people are buying bigger tires, they spend more time making sure that they buy the right brand. And Michelin has, we are lucky and fortunate enough that customers recognize the value we bring in this segment.

Okay, thank you.

Thank you. Next question from Sasha Gomen from Jefferies. Please go ahead. Yes, good evening.

Thank you for taking my questions. The first one would actually be on the Fintire situation. The German subsidiary, I think, went into bankruptcy. I have two questions related to that. Firstly, can you kind of elaborate on the impact, and then secondly, more in general, What happens and what are your measures when tire dealers go bankrupt? Are you buying back your stock from them, or is there a risk that the inventory from the dealer gets dumped into the market? And then my final question would be, can you comment on the inventory situation at the dealer level? Are you destocked? But given the mild winter weather, I would be interested to hear a bit your comments about winter, but also summer tire inventories at the dealership level. Thank you.

The first part of the question about FinTire, Yves will take, and I will take the one on inventory at dealer level.

Okay. So we did not expect a huge impact for us regarding the bankruptcy of the German part of FinTire. as most of our exposure is covered by an insurance. So at this stage, we believe it will have practically no impact on our activity, on our balance sheet. Regarding the measure that we are taking, first, we have a credit management team which is monitoring very closely the situation of dealers when they are facing troubles. And second, we are... It's a really case-by-case approach, depending, of course, on the legal frameworks, which is different from one country to another, and, of course, the relationship we have with these dealers. So it can go up to taking back inventory eventually or finding, let's say, the appropriate measure to help them to go through this kind of difficult period.

The competitive pressure in... Wholesaling and retailing in Europe is very, very intense. That's why corporations that do not manage very tightly their businesses, especially in terms of prices and margins, et cetera, may get into trouble. Now, what is the level of inventory, our level of inventory at dealer level? We monitor that as well very tightly, and we have not seen excessive dealer inventory at the end of the year. We are not pushing tire on inventory of our dealers because we know we will have rippling effect a few months later. As far as winter is concerned, in Europe, which is a different situation, as you've noticed, the winter in Europe did not occur, and so therefore the winter season has been somewhat strange for that reason. But we have been cautious in making sure that our dealers were not overstocking our tires. So we think the situation is better than what it was two or three years ago, as far as we are concerned. I cannot judge about the overall industry, but I can only tell you about our inventory with our dealers.

Thank you. And a quick follow-up. Do you think that there could be more dealers that go into financial trouble given the weakness of the market, or do you think that was just an isolated case?

There is structurally in Europe an overcapacity of dealership. So now the consequence of that is there is bound to be restructuring in this industry in the overall market.

Appreciate it. Thank you very much.

Thank you. Next question from from J.P. Morgan. Please go ahead. Hello. Your microphone is open. From J.P. Morgan.

Thanks very much. It's Jose from J.P. Morgan. Just a couple of questions, please. On SG&A, as we think about the reduction of SG&A as percentage of sales, can you comment a bit about the timeframe of the reduction of this cost category? And also, out of the three categories SG&A, which one will have the greatest benefit behind the measures you have outlined? And second, if you could maybe please comment a little bit more around pricing dynamics in passenger car tire in Europe and the difference between original equipment and replacement, please. That would be much appreciated. Thank you.

Okay. So, Yves, maybe you take the SG&A question. I will take the branding dynamics.

Regarding the SG&A, we have announced that our target was within five years to close part of the gap with our competitors. And I say part of the gap because we consider that we have also a price premium which is justified by our R&Ds and our overall structure. So it's a five years program that we have started to implement in 2019. Regarding the category of SG&A that will be mostly impacted, I will say all three, but mostly general and administrative cost. Of course, before, we are not looking to sacrifice the innovation potential of the group or our ability to improve the quality of the relationship we have with our customers. So it's mostly general and administrative costs that we are going to tackle.

Branding dynamics in the Your question is in Europe or worldwide?

In Europe, if you could provide any other color by region, it would be appreciated, but I guess the focus is a lot on price dynamics.

In Europe, what we see is that the premium brands more or less keep their market share, while there is a fierce battle between Tier 2, Tier 3, Tier 4 brands. where there is a very intense battle. If we can say these are brand dynamics, what we see is that tier two brands are trying to move into tier one, but they experience a lot of difficulties. They have to invest in , they have to invest in racing, they have to invest in branding, and it takes a long, long time. And some of our competitors are trying, and they have a huge difficulty to be able to do that. And as far as the Tier 3, the brands almost do not exist in the market. Now, as far as your question about OE, there is still a strong loyalty derived from OE, especially the Michelin brand. The Michelin brand always has a higher loyalty rate than any other brand in every market, and it's also true in Europe. Now, when we talk, that's in general, but there are some vehicles where the loyalty is higher than other vehicles within the same OE brand. So it depends on the type of vehicle. So the loyalty on the Polo is different from, or let's take a Renault Clio is different from a Renault Scenic, for example. So, or a Peugeot 207 is different from a Peugeot 107. These kind of differences. actually 208 now, 208 versus 108. So I'm getting older. So branding dynamics have not really changed and we don't see changes arising, major changes to be noticed at this stage. Thank you. Questions on internet? Any questions here? Another question from Tomar.

Yeah, sorry, I'll ask one more question. Your net gearing ratio is north of 1 times EV EBITDA. Do you consider it's a level that you could go through and eventually make more acquisitions, or is it more a time to digest these acquisitions and go through the cash flow for restructuring and take down your debt a little bit before making more moves?

First, it's considered by the rating agency as a bearable ratio. That's why we have been keeping the rating we have as of today. We are at a level when we can eventually afford further acquisition if needed, but we have also to consolidate and deliver all the synergies from the acquisition we made. So it will be, we want to keep a solid rating, and that's our priority. The ratio, of course, can evolve, and you know that the ratios are sometimes appreciated differently from one rating agency to the other. But we want to be able to grow the size of the group, which means both organic and potentially

acquisition while keeping a strong balance sheet so it takes a long time to conclude negotiation and to achieve an acquisition so we have a constant deal flow and sometimes it's we are able to conclude and in 2018 was a very strong year where we've been able to conclude many deals. But we started many, many years before to get to that point. And we have a constant deal flow. When it will eventually materialize, we cannot say. But as he rightly mentioned, we pay a lot of attention to the strength of our balance sheet, and we won't do anything crazy. Let me remind everybody that I am personally liable indefinitely on all the debt of the company. And I can tell you that gives you a very tight sense of responsibility there. So we won't do anything stupid because I need to take care of my family. So if we don't have any more questions, so thank you for coming. to our results and looking forward to our next meeting. Thank you.