Michelin Cie Gen Unsp/Adr

Ladies and gentlemen, welcome to the Michelin First Half 2021 results conference call. I now hand over to Mr. Florent Menegosio, the Shop Managerial Group Manager CFO. Gentlemen, please go ahead.

Hello, ladies and gentlemen. Good morning and good evening to all of you. Thank you for being with us for this half-year results. I am currently with Yves Chapeau, and we will be with you for this next one hour and a half. Before everything, I would like to remind us with the strategic context in which we are operating. In the slide that we are projecting to you, I just want to remind our strategy very quickly. and our 2023 targets. Our strategy is based on growing with tires, around tires, and beyond tires. The numbers that you see in the bubbles are from 2023, and I want to reemphasize the fact that we are still in a crisis mode. And that's why we have said that from 2023, we should be exiting this crisis mode and we should be operating in more normal conditions. We anticipate from 2023 a CAGR of 5% in terms of sales growth, a return on capital employed in excess of 10.5%, and a segment operating income at around 13.5%. and you have the split between RS1, RS2, and RS3 as the main elements of the composition of this 13.5%. We thought it was important to remind ourselves of our strategic horizon because it gives you a good insight about where our performance is compared with this strategic objective. If we move to the first semester, our results have been, and our performance has been robust in a robust market recovery. However, tampered by a major disruption in the global supply chain, plus the fact that the COVID-19 is still there and with various variants around the world, and it's creating a lot of perturbation in our operations. In this context, the Michelin team's commitment helped deliver a 19.6% increase in sales and a solid SOI of 1.4 billion euro for the period. And I want to pay tribute to the Michelin teams because really not only they have to face this COVID-19, but also major disruption in the upstream supply chain. So this performance has been with some details. So we had a 20.8% increase in tire volume, which has added around 1.2 billion euro to the segment operating income. And that's reflecting the market share gains in every segment, especially in 18-inch and larger tires. and a sharp 4.6% increase in the non-tire activity sales. It also shows an excess of $126 million increase from positive net price mix raw materials effect and a 1.4% gain from responsive price management and a 1% increase from favorable mix offsetting the rise in raw material procurement costs. So not only we have disruption in the supply chain, but we are operating in a very strong inflationary environment. And as we have always expressed to all of you, we will offset this inflationary with prices in due times. And we have had for this period an unfavorable currency effect stemming primarily from the U.S. dollar weakness against the euro, which has impacted the SOI by 150 million euros negatively. Our free cash flow, excluding M&A, came to a positive number despite the seasonality effect on our normal free cash flow, reflecting the SOI increase low level of inventory, and Yves will explain to you what we did in terms of capex expenses. The gearing stood at 27%, attesting the group financial position strength, and as confirmed by the rating agencies. All of this led us to decide to raise our 2021 full year guidance. with an soi segment operating income at constant exchange rate in excess of 2.8 billion euro and a structural free cash flow in excess of 1 billion euro now eve will induce you to more details good evening and good morning ladies and gentlemen so

Starting with the overall picture, Florent has of course shared with you some key strategic indicators relating to the profit dimension of our business model. I would like also to share with you how do we perform from a people and planet standpoint. In terms of diversity, we maintain a rate of 28.2% of women among managers and supervisors. So we are stable versus end of 2020. Related to safety, we have an indicator which has worsened, and TCR has worsened probably because our activities have been disrupted by the COVID-19 crisis and the way we are obliged to operate in such a very volatile and difficult context. I will come back afterwards in detail about the financial KPIs. Now I move to the planet KPIs. We have here retained two of them. The quantity of CO2 emitted on the Scope 1 and Scope 2 at 2.8 million tons. It's rolling 12-month figures, which is 27% below the 2010 figures, which is a reference figure. for the science-based target. And the last one is the IMAP, which is the compounded KPI of our environmental performance in our factories, which includes, of course, CO2 emissions, but also water consumptions or solvent emissions. And this indicator, which was at 100 in 2019, stands at 93.1 at the end of the first semester. So before entering into the comment about ourselves, some element of context. Of course, the first half of the year, we have seen a very strong demand compared to the first half of 2020. And you see on the graph on the left side, Of course, the blue line is far above the green line, which was 2020 figures. But you also see that this favorable comparison will disappear the further we go toward the end of the year. PCLT market has been overall growing at 26%, when truck tire market has grown by 24%. And all that has been achieved. This market has evolved in such a direction in a very volatile and disruptive environment. We have mentioned the fact that the sanitary situation is far to be stabilized. At the time we are speaking, Southeast Asia is really in the middle of the storm with a strong outbreak of the pandemic there. We have been through... maritime shipping crisis, container crisis, the ever given crisis, you know, the container boat who was stuck in the Suez Channel. We have truck driver shortage in North America. Of course, the inflationary context regarding raw material energy and some labor shortage in a lot of regions. Looking more precisely at our three main segments of activity, so you have the sequences of the market month by month for the first semester, because obviously 2020 and 2021 shows a very contrasted pattern. Maybe the most important figure here is that PCLT market finally land at 4% below 2019. So we have not yet for passenger car tire and light track business at the 2019 level. When truck tire market have been, let's say, have already catch up with the 2019 level, probably strongly pulled by the China OE market during the first quarter. because of the China 6 norms. So in this context, our sales have grown by 19.6% or 25.5 if we exclude the currency exchange rate. Currency has been highly negative. Florent mentioned U.S. dollar, but Brazilian real, Argentinian money, and Turkish lira has been also negative. The scope of consolidation has been neutral. Volume effects or tire volume has grown by 22.8%, and price mix is positive at 2.4%, with the mix at 1%, so price has been positive at 1.4%. Non-tire activities has grown close to 5%, but their contribution to the overall group net sales is 0.3 point. So regarding the segment operating income, so a very sharp improvement, mostly driven, of course, by the volume effect, which is close to 1.2 billion euro. You see a positive raw material price mix effect of 126 million. The price effect is at $133 million, which covers the effect of raw material, taking into account that we have also some inflationary tendencies in other areas. And the next one, the first one I've already mentioned, is manufacturing and logistics performance, which is here negative by 24%, which includes $45 million of manufacturing increase in transportation cost and mostly the shipping cost of our, not only our product, but also our raw material. Which means that our overall manufacturing logistic performance has improved by 20 million over the semester, taking also into account that there is 12 million of saving from our industrial competitiveness program in the volumes. SG&A have, of course, increased versus first half of 2020, but are still far below 2019. Non-tire has produced non-tire activities, have contributed positively to the SOI, despite the fact that our experience activity, which are related to tourism and restoration, have been severely impacted. by the different measure restricting these activities. And we have also some miscellaneous positive effect for 56 million. So at the end, we land at 1.4 billion Euro of segment operating income. Looking at these figures segment per segment, you will observe, of course, strong and sharp recovery of RS1 and RS2, which have been pulled by, let's say, favorable volume effect, more favorable than RS3. RS1 has also benefits from market share gains in 20-inch and above. 20-inch and above sales represent in volume today 50% of our Michelin brand sales over the first semester, which is an increase of three to four point versus last year. And of course, RS1 has also benefits from a positive mix of OERT linked to the fact that our OEL cells has been penalized by the semiconductors shortage. RS2 performance has also sharply improved. with an operating margin at 9.9%. And this is mostly driven by the upturn in demand, the very responsive pricing management, and the sustained expansion in our fleet management solutions. RS3 has a less favorable basis of comparison As in 2020, in fact, on the first semester, RS3 has been the main contributor to our segment operating income. Our first half volumes were lifted by the sales in construction and agricultural tires, leading to a negative mix of activities. And the fact that our mining activities have been penalized by negative impact of raw material clauses in the first half. From the second half of the year, these clauses will turn favorable and this segment should deliver better performance during the second half. free cash flow is probably one of the most robust performance that the group has never done in his history at least in his recent history that the first time that we record a positive free cash flow at the end of the first semester of course strongly helped by the ebtda improvement we have of course an an increase in the trade working capital, which include this close to 600 million of trade working capital, include 200 million of price effect in the working capital. And you also see that capital expenditures as a positive effect, mostly because we started to break down on the CapEx during the month of March, April last year. And at the same time, you will see afterwards, but our GB started to have a positive impact on our free cash flow and our debt. At the end of the semester, we are holding nearly €4 billion in cash and cash equivalent. And we still have €2.5 billion of confirmed and drawn lines of credit. And we have reduced, of course, the volume of commercial paper during the first half of the year. So having said that, our debt has slightly increased over the semester, mostly because of the effect of the dividend. You will observe that our joint venture has a positive effect on our debt. because of the positive contribution of some of our GVs. And we land at 27% of gearing ratio, which is a one-point improvement versus the end of the year, of last year. Our rating has been confirmed by all rating agencies, both solicited and unsolicited. Moving now to the guidance, I will start by the market scenario we have retained for 2021. We have decided to narrow down the span of our forecast for all our segments. Previously, our PCLT market forecast was in a range of 6% to 10%, so we we believe that the market will land in the upper part of the range, between 8 and 10. We have a similar situation for truck and buses, where we believe that the market should land between 6 to 8 percent, or 9 to 11 percent if we exclude China, where we have far less exposure than the market weight of China. And the speciality over the year between 10% to 12%. In the schemes, in the second part of the slide, you will see that for the second half of the year, we have put a range of evolution of the markets. As it was mentioned by Florent, we are still, the crisis is not finished. We have seen a lot of disruption in the supply chain, in the global supply chain, and not only in semiconductors for automotive industries. So that's why we maintain this range of evolution of the market. And you see that versus 2020, which is a green line, in some months 2021 market might be below 2020. So in this market scenarios, we believe that our market should land slightly above market as we have gained market share during the first half. We are strongly believing that we should be able to maintain our position in this market. Price, we also expect a net mix price raw material effect positive. knowing that most of the increase of the raw material should impact our group during the second half of the year. And we have anticipated this situation with two price increase, one already done in 1st of March and one that 3rd of March or 1st of April, and the second one that was implemented from 1st of July. The cost impact of raw material, custom duties, and transportation costs should be strongly negative. We also believe that currency should still be strongly negative, although most of the way has been done during the first half of the year, as the comparison will be more favorable for the second half. And having said that, we have decided to upgrade our guidance from a segment operating income at constant exchange rate above 2.5 billion euros to SOI at constant exchange rate above 2.8 billion euros. We also have upgraded our structural free cash flow guidance from around 1 billion euros to above 1 billion euros. So now I give the floor to Florent to open the Q&A session.

Thank you, Yves. And now we can receive all your questions.

Thank you. Ladies and gentlemen, if you wish to ask your question by phone, you have to press 01 on your telephone keypad, 0 and 1 on your telephone keypad. Your first question from Tom Narayan from RBC. Please go ahead.

Tom Narayan, RBC. Thank you for taking the questions. In regards to the strong mix in the replacement market in H1 at SR1, just curious how sustainable this is. Should we see some margin pressure in H2 as OEM volumes come back? In other words, should SR1 margins of H2 come in below H1's level? And then if I could ask, could you discuss the raw materials dynamic at SR3 and why H2 is better? I think you've talked about mining there. It seems like the opposite dynamic at SR1. Thank you.

Okay, thank you. I will take the first part of the question, and then Yves will answer the second part. So about the strong mix in passenger car light track and replacement, yes, we think it will be sustainable because the content of these cells of 18 inch and above in our cells is continuously increasing for the past decade. So I don't see why it should diminish. And there is still a very strong demand for Michelin tires. And actually, right now, we have difficulties to supply all the demand. And when OE will restart further, this should have no impact, because actually, it may increase the shortage on replacement. So far, we are preparing for the rebound in OE. we are replenishing as much as possible our inventories in order to face the rebound. So I touch wood, but it should be okay.

As far as pricing dynamics and raw material dynamics in SR3, particularly the mining segment, You have to know that around 80-85% of our mining business is made of long-term contracts, which means that these contracts include raw material closes adjustments. We believe that during the first half, these closes have a negative effect. because it was based on the raw material prices of the second half of 2020. Of course, prices have started to rise at the beginning of the year, and this rise has accelerated along the semester. So we'll start to have a positive effect of these raw material prices closes during the second half. We already know that these indexations will represent around 6.2% on our prices for just the mining segment from 1st of July.

Okay, thank you.

I'm sorry, go ahead.

I just wanted to confirm, so we shouldn't anticipate H2... SR1 margins to come down. It sounds like you're saying that those trends, the replacement margin strength, et cetera, could continue in H2, just confirming that.

It could, provided we are able to supply. The uncertainty comes with our ability to operate our production facilities correctly. And back to our original comments, It is still very difficult. We are still in a crisis mode, and COVID is still impairing our ability to run our capacities at the appropriate speed, plus the fact that in upstream supply chain, we constantly have disruptions.

Okay.

Thank you. Next question.

Thank you. Next question from Gabriel Adler from Civic Group.

Good evening. It's Gabriel from Citi. Thanks for taking my question. My first question is also on price mix and raw materials. Could you please help us understand your guidance for neutral price mix formats in the second half? Because I understand that the raw material headwind will rise at a group level. But has Michelin not been increasing prices in Q2 in anticipation of this? And is the company capable of continuing to raise prices in Q3 to try and maintain this positive price mix or match that we saw in the first half? And then my second question is on volumes in the second half. Could you elaborate, please, on slide 14, you show second half volume range in SL1 could be below 20-20 levels in the second half. Would you say this is just reflecting some caution because of limited visibility, or are you seeing any signs of a weaker volume environment in the second half that you're trying to convey in that slide? Thank you.

Okay. I'll take the first part of your question and then even the second part. On the first part of the price mix and raw material effect, what you need to understand is the wave of increase in raw materials is still to come in our accounts. So we have quote unquote enjoyed some increase in the first semester, but nothing to compare in the second semester. So of course we are constantly adjusting our prices to match this increase, but in the second semester it will be less favorable than in the first semester. So that's the main effect, plus the fact that as Yves mentioned, On the index contract, we still have a timing difference between the time we can recognize in our pricing the raw material increases and the time we can have price increases. So that's why in the second semester, it will be already a very strong achievement if we are able to pass this strong wave of cost increase in raw materials.

Maybe just to complete what Florent said on the first question, on the first half, the raw material effect on our segment operating income was minus 100 million. We are expecting several hundred millions of raw material effect on the second half. And that's why we have implemented the price increase the 1st of July for all of our activities. And if necessary, we will implement additional price increase at the beginning of the fall. As far as the volume effect on the SR1, in fact, first the comparison basis versus the The second half of last year is completely different. You remember that last year, one of the markets which rebounded sharply was the SR1 market, both original equipment and replacement. Of course, original equipment is extremely volatile. We are making forecasts very closely with our teams, are working very closely with OEM teams, But we are seeing from one week to another some OEMs canceling production because of a shortage in raw material, and particularly in the semiconductor chips. And on our side, we are also experiencing a lot of disruptions in the upstream supply chain. Our supply chain teams are managing multiple crises simultaneously. We have recently experimented crisis in the procurement of some textiles product. That's where land, let's say, the gap between different scenarios we have built for the second half for this market.

Okay, understood. Could I just follow up on the volume point? Because you also listed your guidance on growing volumes above the markets rather than in line. Could you maybe just comment on which areas of the business or which regions maybe in particular you're seeing that opportunity to win market share?

Okay, we don't disclose market share by regions. However, we have a good dynamic due to the strong pool we have for the demand in Michelin tires, plus the fact that we have renewed our product portfolio as well in 2021. We have good launches, so that's why we still think we have good dynamics. Plus the fact that there is also, if you remember in 2020, there was a shortage in Michelin, there was a strong reduction in the inventory of our dealers, and now they are replenishing their inventory, which is adding some share gains.

Got it. Brilliant. Thank you very much. Thank you very much.

Okay, next question. Next question from Victoria Greer from Morgan Stanley. Please go ahead.

Good evening. Two questions, please. Firstly, could you just talk a bit about what you're seeing in the dealer inventories? My sort of rough guesses on where sell-out versus sell-in makes it look as if maybe the last very strong few months we've had in North America maybe mean that the dealer inventories are a bit closer to rebuilt there, but probably still quite low in Europe. So could you comment a bit on that, please, and also talk about the dynamic for imports in both regions. The second thing, could you talk a bit about where your production is? You mentioned earlier that it's a bit constrained by a number of things right now. Could you maybe give us some numbers around that, you know, maybe versus 2019 or versus a normal level? And in talking about that production level, could you help us think about a drop through for volumes for the second half?

Thanks. Okay. I will start and then Yves will complement. So as far as dealer inventories are concerned, what we see is that Europe has caught the level of inventory. So we are almost back to where they should be. The dealers have not replenished their inventory. It's in North America, basically. In other parts of the world, the level of inventory are okay compared to what we think they should be. So in North America, it's still lagging behind. The imports, again, they are also touched by the upstream supply chain issues. So we see here and there a strange situation as far as imports are concerned. So it's very difficult to read at this stage. that thing. As far as production is concerned, and if you take a 100% base for 2019, we are still below in passenger car and light truck in segment one, segment two, and segment three, compared to 100 production in 2019. I think that's the bulk. And then, Yves, if you want to complement.

Just to complement on the drop through, we expect the drop through in the second half to be in, let's say, similar range than during the first half, so between 100 and 110 million per point of growth.

Great. Thank you.

Thank you. Next question from .

Thank you very much. I have three quick questions. Firstly, could you confirm that the pricing environment remains very strong in this region at this point? Second question. your net financial chart was unusually low in H1. Is this something that we can anticipate to continue or was it just linked with a few gains that are not going to repeat? And finally, I'd like to come back to a potential M&A opportunity and to have a comment on where you stand on the potential opportunities that you've during the capital market day and your ambition to grow your mental activities. Are there any operations that we should anticipate for 2021? Thank you.

Thank you. So I will take the pricing environment and I will let Yves reply to you on the question two and question three. So the pricing environment is so far So it means that every price increase we have passed have been followed by competition in every segment, with the exception of China. In China, we've passed the first price increase, and the second one we did not pass it because our competitivity was not adequate there. So now, as far as the rest of the year, our competition should see the inflationary pressure the same way as us. What they will do is down to them, but as I told you, we will pursue the price increases required by the cost of raw materials, whether it's through the index closures contract or we would push the price increase to offset raw materials.

Regarding your second question about the net financial cost, it's very positive on the first half. It will remain normally positive on the second half, maybe in a less favorable way than in the first half. Mostly because thanks to particularly the bonds that we issue during the second half of last year, we have lowered down our interest costs. If we look, our overall interest costs have been going down from 3.4% during the first half of 2020 to 2.4% during the first half of 2021. Keep in mind also that in 2020, after the outbreak of the COVID-19, there was a sharp rise in the spread, including for short-term debt. So it should be favorable, but probably less favorable during the second half. Regarding merger and acquisition, of course, we are looking actively and particularly in the area where we intend to grow. at different opportunities keep in mind that due to the let's say movement restriction some deals are probably more difficult to implement than before the crisis so may take a bit more time and we are also very cautious about the quality of the asset that we might acquire and the price we might pay for. As Florent has mentioned to you at the beginning of the presentation, in our 2030 roadmap, we have set a growth target. We have also set a return of capital employee target above 10.5 percent, which is in average three points above our weighted average cost of capital.

Great. Thank you very much.

Next question. Thank you. Next question from Jose Asomendi from JP Morgan.

Thank you. Thank you very much, Jose Asomendi, JP Morgan. Just a couple of questions, please. The first one, can you comment a little bit more around the SF3 dynamics and compare first half and second half, how do you expect the individual divisions within SF3 to perform, and should we expect higher margins in the second half versus the first half, or similar margins when you compare the second half versus the first half within SF3? That'd be the first question. Second question, please, if you could comment a little bit more around cash flow for the second half, a little bit the dynamics that you're seeing on working capital and CAPEX for the second half as well.

Thank you. Thank you. I will start and then Yves will finish the question. So the first one is comparison. So if you remember the first semester 2020, the SR3 was still very active. So we are comparing against an activity that did not slow down in the same way as the other activities. So that's why in the first semester of 2021, you look at a volume growth that is lower than what has happened in SR1 or SR2. Then again, in terms of the pricing environment, especially if you look at mining, most of the contracts are indexed, and therefore there is a lag between the time you recognize the cost of raw materials in your prices. And that explains that also why in the beginning of the year we had to decrease prices because we were comparing with raw materials that were decreasing in the same period on the indexed contract. So yes, we also had in the first semester a mix amongst SR3 where beyond road activities were growing at a faster pace in comparison than the mining activities. That also explains why we had a mixed effect in SR3 that has impacted the margin. But we expect in the second semester to have higher margins in SR3 in the second semester.

I will take the question regarding the free cash flow. So let's first come back to the H1. I mentioned it's the first time in the recent history of the group that we generate a positive free cash flow in H1 for different reasons. one being that of course our inventories working capital has increased but not at the pace we are expected particularly because we are living in a very disrupted environment from a supply chain standpoint in the second half of the year so generally and you know the group has a And you have seen through the curve about the market evolution for SR1 and SR2 that we share with you for the first time. You see that we have a pretty seasonalized business with a strong month of sales, let's say, between July, August in North America till October, November, depending on the regions. So we are cashing out. a lot during the last month of the year. There is nevertheless two, let's say, unknown factors, which will be our ability to rebuild our inventory at a normative level if the pandemic or other supply chain disruptions occur during the second half. And for sure, we know also that in the working capital, we'll have a stronger price effect knowing that we have already 200 million of price effect in our working capital at the end of June. So mechanically, mathematically, it should be higher at the end of the year. The second unknown factor is also our ability to spend the capital expenditure that we have We mentioned the disruption of supply chain. It's not only occurring in our production activity, but also in our investment activities. We are struggling even sometimes to procure some basic materials. And our team, both in procurement purchasing, are really striving to make sure that our factories will get the necessary items to deliver their investment plan. So that's basically the two unknown factors. Besides that, we believe that our joint venture will continue to positively contribute to our free cash flow during the second half. Some joint GVs are, let's say, consuming cash, and it's normal because they are, let's say, in a growing phase. Some are delivering cash thanks to the maturity of their business and the work that has been done by the team of these companies in recent years.

Thank you, Yves. Maybe one add-on I forgot to mention in SR3 is that the mining volumes should increase in the second semester compared to the first semester.

That's super helpful. Thank you. I have just one quick follow-up. Did you really see a big, strong operating leverage in the business in the first half, or are you expecting that to accelerate in the second half? as a result of having taken out capacity in the European business in the last 12, 18 months, and then finally seeing volumes rebounding stronger in the second half of the year. Is it the right assumption? I have the impression that maybe that operating leverage was not as strong as what I was expecting initially.

Okay. No, the drop-through was in line with our forecast. We knew very well what will be the impact of the positive consequences of the measures we took to improve our overall competitivity, both for manufacturing and G&A. And regarding manufacturing, we have always said that we'll have a drop-through in the range of 100% to 110% per point of growth, and we were in line with this figure during the first half.

And we will be in line for the full year.

Thank you, General. Thank you.

Thank you. Next question from Christophe from Deutsche Bank.

Hi, good evening. It's Christopher from Deutsche. Thank you for taking my question. It's really only two follow-ups to other questions that have already been asked. The first one will be on pricing. You said you will be ready to implement further price hikes in fall. Due to the inventory situation and the overall market dynamics, has the ability to essentially decreased the time from the announcements to the enforcement been improving, so a shorter time from when you announce it to when you see it in the P&L, and also the gross versus net impact. Could you share a comment on that? Is the net potentially higher now in this environment than it was previously? The second question would be more on the supply chain. Obviously, we see the increasing cost from logistics. Are there any issues inside the supply chain where you have challenges to source material as well, or is it really only shipping the stuff to where it's needed? Thank you.

Okay. I would start on the pricing. The delay in the price increase between the announcement and the time it's effective depends on the commercial terms of our contract with dealers. So it varies from region to region, but believe me, we have set instruction to everyone to be at the maximum speed possible everywhere. So we look at... the evolution of raw material prices and the logistic cost. But we also have energy inflation. So we have many inputs to inflationary costs right now. So we are watching this. And when our price increase or preceding price increases are not sufficient to cover the coming forecast cost, then we trigger new price increases. So that's the – and we have zero price cover allowed anymore. So when the debt is effective, it goes into the market. So between the growth and the net impact, we are striving to get as much as possible a positive net impact – But there is a time delay in this inflationary period between our ability overall to pass the price increases and the rise in the cost of raw materials. And all the inputs of cost increases, again, energy, transportation, and logistic costs, et cetera. So that's the bulk in terms of supply chain.

So in terms of supply chain, we have experimented mostly first shipping challenges, so shortage in boats, in containers. That has led us to lead our teams to imagine a different way to source, to ship some goods, some goods that we have. some raw materials that we historically ship by containers. We try to ship it by bulk. So it requires a lot of agility from our teams, both in the central supply chain teams, in the factories, to find some raw materials. And from time to time, in some categories of raw materials, as let's say the overall industries are impacted by the crisis, by these disruptions our teams has been obliged to find a different sourcing of course respecting our internal qualification requirements from the quality standpoint thank you but the supply chain didn't cause you to stop production because parts or orbits haven't been where they they should be at this point in time or did you see minor stoppages We had some stop of production during the first quarter, particularly because of the supply of natural rubber, but it was limited to a few days, mostly in Europe. We did not experiment stop of production during the second quarter.

So far. So far. So far. Because, again, the upstream supply chain is really in difficulty. So, so far, our teams have done an outstanding job. But we have crisis cells everywhere. So far, so good.

Very clear. Thanks a lot.

Thank you. Next question from Eduardo Gospina from HSBC. Please go ahead.

Good afternoon. Thank you for taking my two questions. The first is on the effect of, let's say, the COVID inefficiencies. I think looking back at last year, there was about more than half a billion of net cost in your EBIT. So I was wondering if you already recovered part of this headwind or if you still expect this to become a tailwind at some point in the future. And the other question is on the dealer inventory. Thank you for your updates. I wanted to ask if you already factor in future price increases in case the material price keeps growing. Do you think that may convince dealers to increase the inventory level further? And with that, if I may ask a comment about the sell-out rate to complete the picture for SR1 and SR2.

Thank you very much. Okay. As far as COVID inefficiencies and potential tailwinds, we still have some COVID inefficiencies in terms of production rate, in terms of productivity, in terms of additional costs. We still have some additional costs in running our operations. These additional costs will stop at some point, but today it's very difficult to forecast when this crisis is going to end. As far as dealer inventory and the pricing, again, I think we are in an inflationary period in front of us. And as I told you, we are going to raise our prices significantly. So we are not trying to pull a sell-in effect with the dealers. That's not what we are trying to achieve. We are just trying to offset systematically the cost of raw materials and all the inflationary costs that we have by raising our prices. So to make sure that we pass on to the market those cost increases. So that's the strategy. Now, whether this has a selling effect at the dealers, so far we have not seen, especially because we are still trying to replenish the inventory to the appropriate level. So we have not yet reached a situation where dealers will take inventory just for playing price increases.

Thank you.

Maybe we can add the fact that we speak about dealers' inventory, but vehicle inventory at OEMs is in some regions at a very low rate. I think we are close to 25 days, 24 days for SR1, for passenger car OEMs, when it was at 60 days before the crisis. As Florent mentioned in the presentation, we have a very contrasted situation with basically Asia, where we are already at, let's say, normative level of inventories. Europe, which is also catching up, but in some segment, probably in SR2, we have not yet completely recovered. And North America, where we are still below the normal rate of inventories.

Thank you, next question.

Thank you, and last question from Michael Jacks from Bank of America. Please go ahead.

Hi, good evening. Thanks for taking my questions and congratulations on the strong first half results. I've got three quick questions, if I may. The first one, and I apologize if you've touched on this already, relates to sales and marketing expenses, which came in quite a lot lower versus the pre-COVID levels by around 131 million in the first half. Can you please comment on the key driver here and on the sustainability of this level going forward? That's the first question. The second question, just going back on cash flow generation, can you please comment on the low levels of capex, which seems to be around the lowest levels we've seen in the last decade, and perhaps also flow through into the lower depreciation and amortization charge? You alluded to procurement constraints on capital items. So can you please give us a sense for how much capex you would have spent, absent the shortages, and what we should expect for next year? And then finally, more of a sort of longer-term structural question, we've seen the EU bringing forward its ambitions for carbon neutrality with its Fit for 55 proposals, which will likely result in faster EV penetration. Now, the upside here is clearly better replacement market growth, but I guess the flip side, I suppose, could be higher tire emissions. Can you comment on what sort of level of focus is going into the latter dynamic at the moment, and whether you see any potential regulatory risks on the horizon in the near term?

Thank you. Okay. I will start with your question on cash generation and the capex levels, and then I will leave Yves to answer sales and marketing, and then on carbon neutrality, we'll both give you some insights. On the cash generation and the capex, we had set the level entering 2021 and as eve mentioned we we have we are right now experiencing difficulties in supplying some basic elements to be able to spend the necessary capex so so this is not structural this is more linked to the situation therefore we should return to the expected level as soon as it is possible. So it means that every diminution arriving in 2021 will be put back in 2022 because we need those investments. Those investments are necessary to support our growth.

So regarding marketing and, let's say, commercial expenses, they have slightly increased versus 2020. You have probably noticed that we are now live with our new brand campaign probably in most of the regions in the world. When last year, the campaign was limited to, let's say, a limited number of countries. Keep in mind that some activities are still penalized by the restriction of mobility during the first half. Of course, motor sport activities have resumed, but not exactly at the same pace that 2019. So on the long run, of course, Some of these savings will be kept because we have learned, for example, to visit customers, to have a mix of both physical and virtual visits. But of course, we expect to resume some activities that are currently penalized by the sanitary situation.

If I look at carbon neutrality ambition.

OK, yeah, so so regarding carbon neutrality and EV expansion. So we have always said that we believe that. A tire for an electric vehicle is a Michelin tire. We have a market share for regional equipment with electric vehicle. which is higher than for internal combustion engine vehicles. And the range is going from 1.5 times if you include all EV vehicles, so including hybrid, to three times higher if you speak only of purely BEV, battery electric vehicles. And we are expecting this to continue to be favorable on the on the replacement market as these vehicles are heavier and have a higher torque than internal combustion engine and are more demanding as far as some other performance such as interior noise and, of course, range, so rolling resistance are concerned.

And just to add on what Iza just mentioned, our commitment is on scope one, scope two, and the upstream of scope three, which means all the transportation costs of our product, but not on the usage of our product because of the reasons you mentioned. There's no way we can, if the vehicles change, we cannot offset this. So that's why our commitment is scope one, scope two, and upstream scope three. And of course, we have low running resistance tires, and as you mentioned, for the world, it's much better to have electric vehicles on machine tires than on any other tires.

Okay, clear. Thank you very much.

Thank you. That was the last question.

There is no more questions. So... Yves and I would like to thank you for participating in this first half semester results. And the next meeting is for the next quarter sales. And we wish you all the best. And stay safe. And see you soon. Thank you very much. Bye-bye.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.