Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin Conference Call. The Conference Call will be conducted by Mr. Florent Ménégaud, CEO, and Mr. Yves Chappot, General Manager and Group CFO. You are able to download the presentation from Michelin Corporate website. I now hand over to Mr. Florent Ménégaud. Gentlemen, please go ahead.

Good afternoon to everyone. Thank you for joining us for this semester's results. Let me start by saying that I am very proud to confirm the resilience of Michelin, weathering one of the strongest and most intense crises in its history. And I want to take this opportunity to thank and to express all my gratitude to all our teams around the world that have done an outstanding job during this very difficult period. So let me tell you that during the crisis we had one priority which was to protect our people and then we expressed also to everyone that we had to make sure that we will ensure the business continuity and conserve our cash to make sure that we could weather the storm in good condition. So despite collapsing markets and a 20.6 contraction in sales, what you can see is that Nishna ensured a segment operating income of 310 million positive, which I want to stress, which is better than what we we anticipated when we entered into the crisis. We have had a robust financial position that is recognized by the rating agencies and we've made strategic choices that are validated during the first half. Our global presence and diversified business base has contributed heavily in making sure that we would have a portfolio of activities that can help any other activity to weather difficulties in every market. And I want to stress the resilience of our specialty business with a very strong operating income at 15%, which I think is very good in such a period. The key to recovery will for sure be conditioned by the fact that businesses that will survive in the future will have to have a positive contribution to the ecological transition. And the CO2 reduction pathways and objectives have been approved, the Michelin objective of course, have been approved by the Science Based Target Initiative. And we have, in terms of governance, created a CSR governance within the supervisory board of Michelin. During the crisis, we took specific measures to make sure that our people could operate safely. So we were one of the first ones to close our operations where we were not in capacity to maintain the safety of our people. but we were one of the first to restart production because we had the experience of what happened in China and we have been very quick at implementing many different initiatives to make sure that our people will stay safe. During this period, we've also demonstrated a strong support to communities. We gave masks, tires, different type of initiatives, but we also supported our weakest suppliers and our weakest customers that had difficulties, and I'm very proud of that. And you probably noticed as well that we have produced extensively a lot of healthcare products. Lastly, Michelin sees its CO2 emissions reduction targets as introduced during precedently, and I want to stress two things. The first one is We have a path towards zero net emission in 2050, and you see on your screen what would be the different steps that are going to ensure that we reach the 2050 targets on the scope one and two. And the second thing is, as I told you, we've introduced a new CSR committee to make sure that we fulfill all our commitments in that matter. And I want to leave now the floor to Yves, who is going to detail you our results for the first half.

So good evening, ladies and gentlemen. Let me walk you through our first half results and our full year guidance, starting, of course, with the results and the market environment. So we have decided to present you the sequence, month by month, at least for the two first segments of the global market and the market of three regions, Europe, North America, and China. you see that, of course, the market has been impacted by the coronavirus crisis, first in China during the month of Feb and March, and then later on in Europe and North America, starting end of March and then expanding in April and May. Overall, the global passenger car and light truck tire market, both original equipment and replacement, have been impacted, really, minus 24%. We can spread it between minus 34% for regional equipment and minus 21% for replacement markets worldwide. On the truck and bus side, markets have been overall down by 18%, but you will immediately recognize that the Chinese market has recovered pretty well during the second quarter and as it is the biggest market in this segment, it has also an overall positive impact on the market mix. Zooming between original equipment and replacement, OE has been down worldwide by minus 15% when replacement was negative by minus 19%. The specialty tire market has shown very contrasted trends, of course, according to the different business segments, agriculture, replacement, mining, and in some respects, two wheels. And the conveyor belt market has been pretty resilient, showing a slight decrease of the global market, but still resilient. On the whole, some markets, such of course the aircraft business, the agriculture, regional equipment and the construction, have been heavily impacted by the crisis. In that very tough environment, we are relying on a portfolio of activity which is pretty well diversified, both from a geographical standpoint and from the business drivers that are behind our different activities, reminding that construction-driven activities represent around 41% of our activity. Manufacturing, so let's say GDP-based businesses, 27%, commodities, 21%, and the pure Original equipment, automotive, 11%. Our sales, as Florent has already mentioned, have been declining by 20.6% during the semester with a slight currency effect, minus 0.5. But mostly, of course, the volume effect, which is minus 22.4%. a little bit compensated by the price mix effect plus 1.9%. And we still have a little bit of scope of consolidation effect for 51 million plus 0.4%. Quarter by quarter, you see very clearly the heavy impact of the COVID-19 crisis on the Q2. which where the volume were minus 32.5 percent as our global presence is stronger in europe and north america it was during this period and these regions have been under a lockdown measures from the different governments and you see a pretty stable price mix effect at 1.7 percent for q2 and the currency effect that is coming negative, mostly due to emerging market currencies. So in this context, we have been able to generate still a positive segment operating income at €310 million, and the waterfall from the 2019 first half segment operating income and 2020 figures are mostly impacted by the volume effect, which is 1.5 billion euro, of which you have, of course, the direct impact of the volume, the margin of the volume decline, but also our inability to absorb the fixed cost from our manufacturing organization. These amounts are partly offset by €124 million in furo grants from the different governments. We have a pretty resilient price mix raw material effect at €261 million, of which €217 million is price mix. Cost reduction is representing 192 million. And we have isolated in our PLL the specific COVID-19 cost measures, which are mostly the supply and the manufacturer of all the protection we have implemented during the semester, mostly masks and hydroalcoholic gel for 77 million. currency effect and other effects are pretty marginal at this stage. If now we look at the way this segment operating income has been generated by a business segment, so you will see obviously that both SR1 and SR2 has seen a similar sales declined around 22-23% and their operating margin has been slightly negative, but let's say very close to zero. Most of the contribution of the group is coming from the third segment, which is obviously generating a 40.7% operating margin. with a strong contribution, of course, from the mining activities, the conveyor belt activities, and in some aspect also, our specialty polymer businesses and our two-wheel business and the agriculture replacement segment. Now, if I just want to take a little bit of step back for each of the segments, some key elements of performance and, let's say, more long-term drivers of the performance of each of these segments. In SR1, what we want to highlight is the fact that we are strengthening our position in the electric vehicle segment because these products are much more demanding and are, let's say, raising the bar in terms of product performance by the question of the range. the reduction of the cockpit noise and of course the torque generated by the electric engine and the heaviness of the batteries. We estimate that including hybrid and full electric vehicles this market will represent around 12% of the market this year and should represent 30% of the global market in 2025 And Michelin is a leader in EV tires, and we are present in all the key segments of this market. Regarding SR2, we are deploying our strategy centered on the value segment. And our purpose is to provide the same services in terms of ton kilometers transported with less raw material, or another way to maximize the usage of material And for that purpose, we are launching the Michelin Agilis 3, which is generating the same performance with one kilogram less of material. And on the traditional truck and buses activities, I would like to highlight the importance of retrading, which is a way both to use and reduce the materials we are putting on the road. By retreading tire, you are saving 50 kilogram of material. And regarding the specialty businesses, I just would like to highlight the segment that has been the most resilient during the semester. Overall, this segment has absorbed a 14% decline in sales. and we were able to maintain a pretty good level of operating margin at 15%. Of course, as Florent has mentioned in his introduction, one of our priorities during the crisis was to protect the liquidity of the group and our financial position. We have been able, through our pre-cash flow for the semester, is a slightly negative at 351 million euro and we have been able to partially offset the volume impact which is behind the change in EVTDA by the effort done on the trade working capital with a strong monitoring of our inventory thanks to a weekly sales and operation process and of course the The measures that we have taken in other areas, such as the reduction, of course, of our EG&A, but the change in our capital expenditure, the program to decrease our capex by around 30% for the full year, which are starting already to generate 120 million of savings during the first half. and the fact that we have put on hold our merger and acquisition program versus what we have done in 2019. At the end of June 2020, we had a pretty solid cash position. We are holding 2.8 billion euros in cash and cash equivalent, of which 1.4 billion is coming from our issuance of commercial paper out of a maximum program of 3.1 billion and we have not been obliged to withdraw on our confirmed credit line. I remind you that we don't have any significant bond failing due before the first half of 2022 and that we have updated at the end of the semester the stress test that we have initiated at the end of March, and we are pretty confident that the group has the financial means to pass the stress test conducted for the next 18 months. In that context, our net debt had increased by $326 million, mostly due to the free cash flow generation. And we are ending the semester with a 5.5 billion euro net debt, which represents a gearing ratio of 45%. I just want to remind you that at the same period last year, this gearing ratio was at 54%. And during the semester, particularly during the month of May, all the rating agencies have confirmed our rating, both for short and long-term debt. So now let me introduce you our 2020 guidance. Starting with the market, we have entered with this COVID-19 crisis in a period where markets are characterized by high volatility and very low visibility. So in this, let's say, unpredictable environment, our reason of visibility, our firm visibility reason is now reduced to the couple of months ahead of us. That's why we are issuing guidance based on the range of growth for the different markets. For the passenger car and light truck, business both OE and RT we are betting on the range between minus 15 to minus 20 percent for the full year after a minus 24 percent for the first half so it gives you approximately a minus 10 for the second half of 2020. we are betting on a pretty similar evolution of the market during the second semester for truck with a range between minus 13 to minus 17 percent. We continue to decline in global demand within a very uncertain environment and we are seeing replacement market still depressed in every market maybe The specialty markets are also showing a very contrasted picture with between minus 13 to minus 17 percent. Mining is impacted by a lower demand in the global economy. Some mines in some countries are closed or the activity is impacted by the resurgence of the pandemic. The off-road side, the agriculture replacement market are still very resilient but are sharply down in OE and in infrastructure tires. Tools is improving and, of course, the aircraft demand, particularly for commercial and regional airlines, is collapsing. Our 2020 scenario is basically we are aiming to follow globally the market. So in terms of volume, our volume should be in line with the market, excluding, of course, the geomix effect, which is particularly important for SR2. We expect to have a cost impact of raw material prices and custom duties are positive and the impact on the second half should be higher than the impact we have known in the first half. Currency effect should be negative if we are based on the June 2020 rate. And we are expecting an overall net price mix raw material effect, positive, probably in the same range than the first half effect, but with the different components, probably a higher raw material tailwind and a mix effect that should be probably less strong in the second half mostly due to the market mix, particularly between replacement and original equipment. So in that context, we are expecting to generate for the full year a segment operating income at constant exchange rates above 1.2 billion euro and structural free cash flow above 500 million euro. Of course, this guidance is based on the hypothesis that there will be no major new systemic effect from the COVID-19. So having guide you for this, our first half results and our full year guidance, we are now opening the Q&A session and Florent will take the question and we share the