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.